Goodbye Covenants, Hello Free Use of Land (2023 Update)

By Andrew Atkins, Scott Miskimon and Mark Rothrock

The Supreme Court of North Carolina recently issued a landmark opinion regarding the North Carolina Real Property Marketable Title Act (the "Act") and its effect on covenants that have burdened residential real estate for many decades. The case is C Investments 2, LLC v. Auger et al., 2022-NCSC-119 ("C Investments"). Smith Anderson previously analyzed the North Carolina Court of Appeals’ 2021 decision in the case.

The Act has been on the books for almost 50 years. In general terms, it provides that, when a person, alone or together with prior owners, owns real property for 30 years, certain interests such as restrictive covenants that were created more than 30 years earlier are extinguished. When that happens, the owner receives a marketable record title free of those extinguished interests. Before that happens, however, the beneficiaries of such interests can protect themselves and extend the life of the interests by following the Act’s procedures and re-filing the interests with the register of deeds. Interests affected by the Act include commonly-used restrictive covenants that restrict an owner’s use of his or her real property. These types of restrictive covenants are often found in neighborhoods and include restrictions that limit the property to certain uses, prohibit certain actions like farming, impose setback requirements, or even minutia such as specifying what type of porch can be constructed on the property.

The Act, however, has exceptions that allow some interests to survive longer than 30 years. Of importance in C Investments is the Act’s exception for "[c]ovenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable. The excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use . . . ." The property at issue in C Investments was a collection of seven lots in a residential subdivision. Each lot was made subject to a variety of restrictive covenants including one that limited the property to a residential use.

The question before the Supreme Court was whether only the residential-use covenant survived, or whether all other covenants survived because they were part of a general or uniform scheme of development. Interestingly, in 2017, Smith Anderson argued this same issue before the Court of Appeals; however, the Court of Appeals declined to reach the issue and instead ruled in favor of our clients on other grounds. The Supreme Court finally addressed the issue in C Investments and affirmed the North Carolina Court of Appeals’ decision. In doing so it determined that only the covenant limiting the property to residential use survived. Consequently, all the other covenants were extinguished. The covenants that did not survive included limitations on the number of residences on a particular lot, setback requirements and square footage requirements. Notably, Chief Justice Newby dissented from the majority’s opinion and would have held that the Act’s language was broad enough to preserve all the restrictive covenants at issue in the case.

The Court’s opinion is likely to have a significant impact on real property in North Carolina. The use of restrictive covenants and other impairments on real property is very common. In our experience, restrictive covenants are rarely extended by re-filing with the register of deeds. Therefore, a significant number of restrictive covenants greater than 30 years old are likely extinguished. While this certainly achieves the General Assembly’s stated purpose of favoring free and marketable title, it could fundamentally alter people’s expectations with respect to the use of residential properties.

Moving forward, the defendants in C Investments may petition for rehearing in light of Chief Justice Newby’s dissent in the case and the Supreme Court’s new composition following the 2022 election. Smith Anderson will provide updates in the event of any future developments in this case.

If you have any questions related to this alert, please do not hesitate to contact any member of the Real Estate Development group or your regular Smith Anderson lawyer.