Wilner v. The Cedars of Chapel Hill, LLC,   (14-380), filed on 6/22/2015

In a surprising ruling from the North Carolina Court of Appeals, a panel of that court has determined that the provisions of an agreement between condominium residents and a continuing care retirement community were not unconscionable, did not violate the prohibition against transfer fees as provided in Chapter 39A of the North Carolina General Statutes, the provisions of the Marketable Title Act, and that the trial court erred in finding the agreements were unenforceable on a hearing for summary judgment. The Court of Appeals also held that where the plaintiffs agreed to the payment of fees in a 'contract', the trial court erred in holding them unenforceable pursuant to an analysis of covenants running with the land.  The issue at the time of this writing in July of 2015 is pending a petition before the North Carolina Supreme Court for discretionary review.

The Cedars of Chapel Hill, LLC (the Cedars) is a continuing care retirement community (CCRC) located in Chapel Hill, North Carolina.  Residents at the Cedars purchase individual condo units within the community and are required to pay an additional membership fee of ten percent of the gross purchase price of a the unit paid at closing in addition to the purchase price. If a unit is inherited or received as a gift, the resident must pay the fee, calculated as ten percent of the unit's fair market value. When a unit is resold, the ten percent fee is deducted from the gross sales price and paid at closing. The payment of this fee is clearly set forth in the membership agreement.  Membership entitles residents to access to the common property of the Cedars, including a clubhouse and health center.  Residents who become incapable of independent living may move into the health center, and remain eligible to use the facilities for the remainder of their lives.

In addition to the initial membership fee, members make monthly payments to  the  Cedars  Club  (the  Club),  which  cover  the  cost  of  various  amenities.  These monthly payments include a payment to the Cedars for overhead expenses, which is described in the membership agreement, disclosure statements, declaration, and bylaws of the condominium association.

The brief filed in support of the petition illustrates a dramatically different view of the nature of the fees at issue in the case from the one set forth in the Court of Appeals opinion. Presented as undisputed facts, they cast the analysis of the court in a different light and we set them out verbatim as follows.

The facts are not disputed. The relevant facts include the terms of Section 14.5(a) of the Declaration setting forth certain affirmative covenants which obligate the Plaintiff Class to pay a 10% "Overhead Payment" each month to the developer, in perpetuity, in an amount

"... equivalent to ten percent (10%) of the actual total annual operating and administrative costs of the Club, or its successors and assigns, and the Condominium, including the Common Facilities, pursuant to the respective budgets of the Club, or its successors and assigns, and of the Condominium (the "Overhead Payment"). (It is noted that this payment is to be considered net and that any expenses incurred by [the developer] or any other management agent in performing any management functions might well be part of the Condominium fee (sic) and/or Service Fee which comprise a part of the Monthly Payment as more particularly defined in the Membership Agreement)"  (R pp 116-17).

The 10% "Membership Fee" is stated in Section 14.5(b) of the Declaration as granting to the developer,

"The right to assess and collect a Membership Fee for all memberships acquired in connection with The Cedars. It is understood that memberships in The Cedars are non-transferable and upon the sale of a Unit by an Owner, as stated in The Cedars of Chapel Hill Membership Agreement, the cost of membership to be paid by the new buyer shall be ten percent (10%) of the purchase price and is payable to the Declarant at closing on the purchase of any unit. Declarant's rights to collect ten (10%) percent (sic) of the purchase price of each Unit shall survive the termination of the Club's management rights and the Club's dissolution." Id. (Emphasis added).

The Bylaws of the COA, which are part of the Declaration, state that:

"In the event any claim is made against [the developer] or any litigation is instituted against the [developer], the [condo association] shall be required to assess the members, other than [the developer] the costs of the claim or litigation, including, without limitation, attorney's fees incurred, and funds from regular assessments shall not be used for any such claim or litigation. ("Litigation Fee")." (R p 155) (Emphases added).  The 10% Overhead Payment, the 10% "Membership Fee," and the Litigation Fee are referred to herein as the "Challenged Fees."  The provisions of the Declaration outlined above are referred to herein as the "Challenged Covenants."

According to other terms of the Declaration, Management Agreements, and written Disclosure Statements on file with the North Carolina Department of Insurance, the developer makes clear that it retains the right to assign, transfer, and/or sell its right to assess and/or collect the 10% Challenged Fees to a third party, demonstrating that such fees constitute a "collateral sum of money" unrelated to any interest in any land at The Cedars.  (R pp 97, 99, and 115-17, Declaration, §§ 1.26, 2.7(f), 14.1, 14.5, and 14.6; R pp 84-87, Management Agreement, §§ 5 and 8.c.; and R p 932, Disclosure Statement of The Cedars filed with the North Carolina Department of Insurance, at Note 2 of the Forecasted Financial Statement ("Disclosure Statement")).

The 10% Challenged Fees at issue in this case are stated by the developer to be a "pre-existing entitlement" which "predate and exist independent" of any management obligations of the developer in connection with the condo and any of the common elements, including the CCRC health care facility.  (R pp 84-87, Management Agreement between the developer and Club, §§ 5 and 8.c.).  In other words, the 10% Challenged Fees are not being paid by the Plaintiffs' Class in exchange for any maintenance, upkeep, management, or other duties and services which may be undertaken by the developer in connection with the condominium, the common elements, and/or the CCRC at The Cedars.  Id.  The developer is compensated separately via other fees paid by condo owners, namely upon payment of the "Condominium Fee" and the "Service Fee" portions of the "Monthly Payment" that the Plaintiff Class is required to pay to The Cedars of Chapel Hill, Club, Inc. (the "Club"). (R pp 62-70, Management Agreement, §§ 3, 4, 5, 6, 8.c.; R pp 77-87, Management Agreement, §§ 3, 4, 5, and 8.c.).

The 10% Challenged Fees, based on the terms of the recorded Declaration and the Affidavit Testimony of Robert Woodruff (the manager and a principal of the developer), are not intended or designed to benefit the Plaintiff Class, the condo units or the Common Facilities located at The Cedars. Rather, according to Mr. Woodruff,

"... The only way to sell the condominiums at a marketable price and to generate cash flow to cover costs, return the initial investment and produce a reasonable profit was to create an on-going revenue stream... .  The revenue stream to pay the financing costs associated with development, to compensate the investors and return their capital with a profit, to cover the high costs of selling the homes and regulatory compliance, and to generate a reasonable compensation for its efforts and risk was designed to come from the payment of an overhead payment each month from each resident and from the Membership Fee."(R p 1097, Affidavit of Robert Woodruff, 26-27) (Emphasis added).

The purported obligation to pay the two 10% Challenged Fees, confirmed by the affidavit testimony of Mr. Woodruff, demonstrates that the revenue from this fee generating scheme is separate and apart from, and thus a "collateral sum of money," to the condo owners' interest in their units and the common elements at The Cedars. Id.

The 10% Challenged Fees are described as "deferred developer entitlements," which "shall survive and in no way be diminished or impacted by the termination" of the developer's role in managing the condominium and/or CCRC. (R pp 116-17, Declaration, § 14.5(b); R pp 84-87, Management Agreement, §§ 5 and 8.c.).  The developer claims to be entitled to the perpetual revenue stream from the 10% Challenged Fees whether or not it is involved in any management of the community, indeed, even if the developer's or the Club's management rights and obligations are terminated. Id.

Section 14.5(a) of the Declaration states that,

[The Overhead Payment] is to be considered net and that any expenses incurred by [the developer] or any other management agent in performing any management functions might well be part of the Condominium fee (sic) and/or Service Fee which comprise a part of the Monthly Payment ..."(R pp 116-17).

Based on this language, any costs or expenses incurred by the developer, or anyone else, related to "management functions" are already part of the "Condominium Fee" and/or "Service Fee" which make up 90% of the overall "Monthly Payment" required to be paid by owners of units at The Cedars. The other portion of the Monthly Payment is the 10% Overhead Payment which is "equivalent to ten percent (10%) of the actual total annual operating and administrative costs of the Club, or its successors and assigns, and the Condominium, including the [clubhouse and CCRC heath care facility] ... ." (R pp 116-17, Declaration, § 14.5(a)).

Plaintiffs sought a declaration that the 10% Challenged Covenants are unenforceable, and in violation of public policy, but Plaintiffs do not challenge the "Condominium Fee" or "Service Fee" portions of the "Monthly Payment."  Thus, no harm will come to any condo owners, residents, or patients at the CCRC (i.e., the entirety of the Plaintiff Class) if the 10% Challenged Covenants are declared unenforceable and in violation of public policy because the revenue generated to manage, maintain, repair, license, and operate the condo units and/or the Common Facilities for the benefit of the members of the Plaintiff Class, including the CCRC health care facility, is not challenged in this case.

The trial court's Order held that the Challenged Covenants were illegal, unconscionable, invalid, and unenforceable under North Carolina law, including the North Carolina Constitution.

If these facts are actually undisputed, there are two major issues raised by the conclusions of the Court of Appeals. Clearly, any contractual claims that may exist, are imposed by covenants. The covenants, as construed by controlling North Carolina doctrine, are purely personal in that they do not touch and concern any land, because they do not benefit either dominant or burdened parcels as they are imposed simply as a monetary exaction. Even if the Court were deemed correct in holding that this is simply a contract issue because the vendees "signed" the contracts in question, the stated facts, if taken as true, clearly establish that there was absolutely no consideration running to the vendees, much less consideration sufficient to get past a summary judgment motion on their enforceability. It is hoped that the North Carolina Supreme Court will address these issues in light of controlling precedent.