tag: North Carolina Land Use Litigator: September 2016

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Tuesday, September 27, 2016, 2:49 PM

Let's Talk North Carolina Leases: The Leased Premises Is Primary

We talked in our last piece about the parties to a lease, and the nuances of that requirement.  Today, as promised in our last post, we discuss the "leased premises".

A lease is a contract.  It is a contract in which the lessor (think, landlord or tenant/sublandlord) grants to another person or entity, called the lessee (think, tenant/sublandlord or subtenant), the right to possess and use a definite portion of land and/or a structure for a definite term in consideration of rental payments, all of which is specified in the lease contract.

A valid lease of real property in North Carolina -- that land, that building on that land, the space in that building on that land -- that exceeds three (3) years in duration from the making must be in writing and signed by the party to be charged in the enforcement of the lease (which can be either lessor or lessee, depending).  This applies to a lease for exactly three years, as well as a lease for a period of less than three (3) years if it can endure for more than three (3) years.  Also, a lease of more than three (3) years in duration must be recorded in order to be effective against purchasers of the property.

Ok, so, generally speaking, a lease in North Carolina should be in writing and should probably be recorded.  But what should the lease say?  Well, there is more discretion between the lessor and lessee in a commercial lease context (see, e.g., Gardner v. Ebenezer, LLC, 190 N.C. App. 432 (2008)) than in a residential context (see, e.g., N.C.G.S. 42-38, et seq.), in terms of what can and cannot be contracted to.  But, any lease in North Carolina must contain the following: (a) the name of the lessor and the name of the lessee, (b) a description of the leased premises, (c) a designation of the term of the lease, and (d) a statement of the rent.  Today, in the second part of this series, we're going to address (b) the description of the leased premises.

As is human nature, "who gets what?" is one of the more important questions in any transaction; leases are no exception.  The lessee has an exclusive right to enter and to have possession of the described premises (sometimes referred to as the "demised premises"), and the lessee has this right against the landlord as well as against third parties.  Note that: any unauthorized entry by the landlord upon the demised premises is as much a trespass to the lessee as it is when the unauthorized entry is by some third party.  Accordingly, the description of the leased premises -- the "who gets what?" -- is critical.

To avoid any confusion (and, of course, to render the lease valid), a lease instrument must identify, and identify correctly and carefully, the leased premises.  A description of the leased premises specifies the boundaries and extent of possession to which the lessee is entitled.  The method of description of the property may be the same as that used in other conveyances, such as deeds, or some other description provided it is sufficient to avoid latent or patent ambiguities.  In other words, as complete a legal description as is possible will minimize confusion or future issues.

This is easier said than done, especially where there are multiple spaces in a single building or multiple buildings on a single parcel, or multiple  In this vein, lessors and lessees should be advised of this legal principle when considering how much or how little to define by the leased premises:
"It is a settled principle of the law of property that a conveyance of land, in the absence of anything in the deed indicating a contrary intention, carries with it everything properly appurtenant to, that is, essential or reasonably necessary to the full beneficial use and enjoyment of the property conveyed, and this principle is equally applicable to a lease of premise. In leases, as in deeds, 'appurtenance’ has a technical signification, and is employed for the purpose of including any easements or servitudes used or enjoyed with the demised premises. When the term is thus used, in order to constitute an appurtenance, there must exist a propriety of relation between the principal or dominant subject and the accessory or adjunct, which is to be ascertained by considering whether they so agree in nature and quality as to be capable of union without incongruity. Moreover as in the case of conveyances, whatever easements and privileges legally appertain to the demised premises and are reasonably necessary to its enjoyment ordinarily pass by a lease of the premises without any additional words. Parol evidence is admissible to show the meaning of the term appurtenances'." 
Rickman Mfg. Co. v. Gable, 246 N.C. 1 (1957).

The takeaway is this: when working with and litigating leases: be clear about what is to be conveyed, perhaps even about what is NOT to be conveyed, and everyone will be better off.

"Lot 42, which is all of northern China on the other side of this wall.  Also, the basement."

Mike Thelen practices in Womble Carlyle's Real Estate Practice Group out of the Firm's Raleigh office. He regularly represents a wide variety of clients, from local governments to businesses, in land use and real estate development litigations and transactions in state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw here.

N.C. Court of Appeals: Absent Notice to the Federal Government, Foreclosure for Unpaid Local Taxes Won't Extinguish Federal Tax Lien

North Carolina is a "pure race" state, for real estate title purposes.  That is, “first to record an interest in land holds an interest superior to all other purchases for value, regardless of actual or constructive notice as to other, unrecorded conveyances.” Rowe v. Walker, 114 N.C. App. 36, 441 S.E. 2d 156 (1994).  As any race, the first to the finish line -- or, in this case, the proper register of deeds -- wins.

That's generally true.  Generally speaking, that's true.  Well, the North Carolina Court of Appeals issued a decision the other day in Henkel v. Triangle Homes, Inc., COA15-1123 (September 20, 2016), in which the Court notes:  "Winning the race to the courthouse does not upset the rules of lien priority established by state and federal law, including federal preemption when those laws conflict."  That is, though you might cross the finish line first, you can't win the race unless you pay by the rules.  In this case, deed to real property obtained at a foreclosure sale without notice to the United States does not extinguish a pre-existing federal tax lien on the property.

The Court of Appeals gives a very effective, straightforward analysis, which we repeat here:
Generally, foreclosure of a senior lien extinguishes all junior liens. Dixieland Realty Co. v. Wysor, 272 N.C. 172, 175, 158 S.E.2d 7, 10 (1967) (“Ordinarily, all encumbrances and liens which the mortgagor or trustor imposed on the property subsequent to the execution and recording of the senior mortgage or deed of trust will be extinguished by sale under foreclosure of the senior instrument.”) (citing St. Louis Union Trust Co. v. Foster, 211 N.C. 331, 190 S.E. 522 (1937)). To ensure a valid foreclosure sale, a senior lien holder must follow certain procedures. N.C. Gen. Stat. § 1-339.1 et seq. governs the procedures for judicial foreclosure sales, however, where property is subject to a federal tax lien, federal law imposes additional procedures. The general rule making federal tax liens inferior to local tax liens applies only when the United States is provided prior notice of a foreclosure sale arising from a local tax liability. 26 U.S.C. § 7425(a) (2012) provides that a senior lien holder foreclosing on property subject to a federal tax lien must provide the United States with notice prior to the foreclosure sale. If the United States has not been provided notice of a judicial foreclosure proceeding, any federal tax lien on the foreclosed property remains undisturbed....  Therefore, a foreclosure proceeding and sale will not disturb or extinguish a previously recorded federal tax lien unless the United States is properly notified and made a party to the proceeding.

***
The undisputed facts further establish that the United States was not made a party to the judicial foreclosure proceedings that followed the Default Judgment. Therefore, the federal tax liens survived the judicial foreclosure sale and Defendant took the Parcel subject to these liens.
Of course, the flip side of the facts in this case is that with proper notice to the federal government, purchase at a foreclosure sale conducted pursuant to unpaid local taxes will extinguish the federal tax lien.  If you paid attention to the facts of the case, the purchase price at the local foreclosure sale was $6,673.73 (a $2,575.16 in local tax lien) while the purchase price at the federal tax lien foreclosure sale was $172,000.00 ($888,765.42 and $877,490.42 in federal tax liens).  It can be safely assumed that federal tax liens will almost always be larger than local tax liens -- oftentimes, significantly larger, as in this case.  So, with notice, you can extinguish some hefty liens for a small amount.

It pays to give notice.

"Did I extinguish the federal tax lien?"
"No, Ms. Ruiz; you didn't."

Mike Thelen practices in Womble Carlyle's Real Estate Practice Group out of the Firm's Raleigh office. He regularly represents a wide variety of clients, from local governments to businesses, in land use and real estate development litigations and transactions in state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw here.

Thursday, September 15, 2016, 3:26 PM

No Good Deed Goes Unpunished


Introduction 
Discovering the origin of the aphorism that “No Good Deed Goes Unpunished” is difficult, but understanding its meaning is instantaneous.  When doing a good act, do not expect a reward.  In fact, the “reward” may be a punishment. 

In the case of Sanchez v. Cobblestone Homeowners Ass’n of Clayton, Inc. 2016WL4598554 (September 6, 2016), the defendant Cobblestone HOA (HOA) informed plaintiff that her property was not included in the HOA declaration.  Accordingly, she was not required to pay association fees and she was not entitled to use of the amenities owned by the HOA, such as a pool and tennis courts.  The HOA offered to incorporate plaintiff’s property into the declaration so she could continue to pay dues and have access to the HOA amenities. 

The plaintiff declined the HOA’s offer and requested a refund of the dues she had paid for the last 12 years.  A divided North Carolina Court of Appeals affirmed the District Court’s judgment that plaintiff was entitled to a refund.  No Good Deed Goes Unpunished.

Sanchez v. Cobblestone Homeowners Ass’n 

The Facts
In 2002, plaintiff purchased her home and was informed that her home was subject to the HOA declaration.  Plaintiff believed that she was required to pay dues to the HOA.  In 2014, the HOA informed plaintiff that, because of an earlier mistake, her home was not subject to the declaration.  The HOA informed plaintiff that if she wanted to enjoy the HOA amenities of a pool and tennis courts, she needed to sign a supplemental declaration.  

Plaintiff stopped paying dues, declined to execute a supplemental declaration and requested reimbursement of the dues she had paid from 2002-2014.  The HOA refused to reimburse plaintiff.  Plaintiff sued the HOA in small claims court and prevailed.  The HOA appealed to District Court. 

After conducting a bench trial, the District Court entered a judgment in favor of the plaintiff.  The District Court found that (1) plaintiff was informed and believed when she purchased her property that her property was subject to the HOA covenants, (2) the HOA rules required plaintiff to pay dues and she paid the dues; (3) plaintiff “rarely, if ever,” used the main amenities offered by the HOA, and (4) plaintiff was not aware of nor “had any reasonable way of knowing” that she had no legal obligation to pay dues.  Accordingly, the District Court concluded that no contract existed between plaintiff and the HOA, the HOA had been unjustly enriched and plaintiff was entitled to the reimbursement she sought.  The HOA appealed the District Court’s Judgment to the North Carolina Court of Appeals. 

The North Carolina Court of Appeals

1.       The Majority’s Opinion
Writing for the North Carolina Court of Appeals, Chief Judge McGee noted that the HOA was not contesting the facts found by the District Court.   Instead, the HOA limited its appeal to its arguments that (1) the facts found by the District Court proved that there was a contract implied in fact between Ms. Sanchez and the HOA and (2) plaintiff was estopped.  The HOA relied upon two prior North Carolina Court of Appeals cases where the Court of Appeals had found a contract implied in fact between a property association and a lot owner.

The Court of Appeals agreed with the HOA that when a contract implied in fact exists, applying the equitable remedy of unjust enrichment is improper, but the Court of Appeals concluded that the facts found by the District Court did not establish a contract implied in fact. 

“A contract implied in fact…arises where the intention of the parties is not expressed, but an agreement, in fact creating the obligation is implied or presumed from their acts.”  p.3 (quoting Lake Toxaway v. RYF, 226 N. C. App. at 488).  Unlike Lake Toxaway or Miles v. Carolina Forest, 167 N.C. App. 28, both of which involved maintaining access roads to lots,  the District Court did not find that plaintiff had benefited directly by the association maintaining recreational amenities.   Further, the Court of Appeals noted that the HOA had stated there was no contract in its communications to the plaintiff and plaintiff immediately stopped paying fees when she learned she did not have an obligation to pay them.   Therefore, the District Court’s findings fell short of showing a contract implied in fact and the majority of the North Carolina Court of Appeals affirmed the District Court.

As for the HOA’s contention that plaintiff was estopped to seek reimbursement, the Court of Appeals noted that equitable estoppel requires acceptance of the benefits.  Here, the District Court found that plaintiff, rarely, if ever used the recreational amenities.  Accordingly, the Court of Appeals concluded that the District Court did not err by entering judgment in plaintiff’s favor.

2.       The Minority’s Opinion

Judge Dillon dissented.  Judge Dillon concluded that the District Court’s findings showed that a contract implied in fact existed and the HOA was not unjustly enriched.  

Judge Dillon reasoned that whether plaintiff had used the HOA amenities was irrelevant.  By paying dues, plaintiff gained access to these amenities.  Even if plaintiff lacked actual notice that her property was not subject to the HOA declaration, she had record notice that her property was not subject to the HOA declaration.  Under the law, plaintiff was charged with record notice.

Judge Dillon noted that the North Carolina Supreme Court’s description of unjust enrichment was that unjust enrichment applied when one party had performed and the other party had not performed an unenforceable contract.  Here, the plaintiff had performed by paying dues and the HOA had performed by providing access to its recreational amenities.  Therefore, the HOA was not unjustly enriched. Accordingly, Judge Dillon believed the District Court’s decision should be reversed.

Comments

  1. From the HOA’s perspective, this case illustrates that “No Good Deed Goes Unpunished.”   According to the District Court, “[p]laintiff was not aware of nor had any reasonable way of knowing that there was no legal obligation to pay periodic fees.” p. 3.  If the HOA had not notified the plaintiff that her property was not subject to the HOA declaration, she would have continued to pay dues.   Of course, this observation does not suggest that the wise or ethical course for the HOA was to remain silent.  In other words, there may have been harsher outcomes to the HOA had it remained silent when it learned plaintiff’s property was not subject to the HOA declaration.

  2. The case highlights the uncertainties and difficulties that a court encounters when asked to “make a contract.” Generally, courts do not make contracts – contracting parties make contacts and courts enforce them.  A difficult aspect of this case is that all of the District Court’s findings suggest that plaintiff would not have formed a contract with the HOA voluntarily because the benefits, from her perspective, were small.  This is a different situation than when lot owners must use roads maintained by an association to access their property. 

   3.  The dissent fairly raises the point – but was the HOA unjustly enriched?  The District Court did not find facts that the HOA knew when receiving dues from the plaintiff that plaintiff had no duty to pay dues or that the HOA had not performed.   An important question is the basis for the District Court’s finding that plaintiff did not have “any reasonable way of knowing that there was no legal obligation to pay periodic dues.”  Lawyers would assume that the record title of plaintiff’s property would have shown that her property was not subject to the HOA’s declaration.  But, as noted by the majority of the Court of Appeals, the HOA did not challenge this finding.


  
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