•  President’s Message
•  ALTA Endorsements Effective 4/2/12
• CONDOMINIUM DECLARATION AND PLAT: WHAT IS LEGALLY SUFFICIENT TO PASS TITLE?
• 2011 Formal Ethics Opinion 7

President’s Message – Ryan Wainio

 New ALTA Endorsements Effective 4/2/12:

A myriad of “new” ALTA Endorsement forms were adopted, revised or withdrawn, effective 4/2/12, and are now posted on the ALTA website for download, at http://www.alta.org/forms/index.cfm . All of our companies are probably busily branding them with company logos, and NCLTA’s Executive Committee and Executive Director Nicole Shore are probably busily filing with the NC Department of Insurance on behalf of all of us. So below is just a brief overview of the basic coverages and changes, subject to members reading the forms themselves for more detail.

[NOTE: The proposed US policy has been deferred at the request of the U.S. Department of Justice for their continued review. According to ALTA: “Publication of the U.S. Policy Form has been delayed to accommodate the U.S. Department of Justice, which requested a 6-month extension.  The Department will be reviewing the new policy and working to update their regulations to enable acceptance of the new policy in lieu of the 1991 U.S. Policy.  The header has been updated to reflect the new prospective publication date of December 3, 2012, and one other comment has been incorporated.”]

ALTA® Endorsement -- Form 3.2-06 (Zoning – Land Under Development) (4/2/12)

This endorsement expands the coverage given in Form 3-06 to provide coverage to the Insured further against loss or damage that may be sustained by reason of a final judgment requiring the removal or alteration of specific contemplated Improvements to the Land, based on Plans specifically identified in the endorsement, upon compliance with applicable zoning ordinances and amendments. (Note: Review of Severable Improvements coverage under the ALTA® Endorsement Form 31-06, especially for wind farms and power projects, and under the ALTA® Endorsement Series 36 for energy projects should be considered, if applicable.) For issuance of this endorsement, the attorney would need to provide verification (1) of the current zoning classification of the Land; (2) that the Land has been so zoned for at least two months; (3) of the specific Permitted Use for which the Land is currently or intended to be used, cited exactly as set forth in the applicable zoning ordinance or regulation; and (4) that the Improvements on the Land based on the Plans are in compliance with all applicable zoning regulations, including elevation and parking requirements.

 ALTA® Endorsement – Form 9-06 (Restrictions, Encroachments, Minerals – Loan Policy) (Revised 4/2/12)

This endorsement provides a lender an assortment of coverages dealing with violations of restrictions, encroachments by Improvements on the Land or adjoining land and future exercise of a right to use the surface of the Land for the extraction of minerals. It is similar to the CLTA 100 and the Company's Comprehensive Endorsement. Especially in a commercial context, this indicates that a thorough reading and understanding of applicable covenants, conditions, and restrictions, easements, reservations or conveyances of mineral or subsurface rights and plats or surveys regarding the Land is needed. Issuance of this endorsement in North Carolina requires receipt of (1) current and accurate survey of the Land evidencing no violation of any covenants, conditions or restrictions, no violation of any building setback lines, and no encroachment onto Land or easements of improvements appurtenant to adjoining lands (or approval for loan survey coverage without a current survey as that policy is in effect at the time); and (2) certification from attorney through an opinion of title that (a) the covenants, conditions or restrictions do not provide a right of reentry, possibility of reverter or right of forfeiture and have not been violated, to the knowledge of the attorney; and (b) no third party currently has the present or future right to any minerals located on Land, or, if any, that they require repair of any surface damage cause by exercise of those extraction and development of subsurface rights. Owners' association dues and special assessments, if any are applicable, must be paid current through closing.

ALTA® Endorsement – Form 9.1-06 (Covenants, Conditions and Restrictions – Unimproved Land - Owner’s Policy) (Revised 4/2/12)

This endorsement is designed to provide certain frequently requested protections for an owner of unimproved Land concerning private property restrictions or environmental protection liens on the Public Records at Date of Policy, unless exception is taken in Schedule B of the policy. (Coverage in pre-2012 versions of the endorsement for encroachments and minerals were removed; the attorney should review endorsement forms 28.1-06 and the Form 35 series for that coverage, if available.)     Issuance of this endorsement to an owner will require receipt of (1) current and accurate survey of the Land evidencing no violation of any covenants, conditions or restrictions; and (2) certification from attorney that the covenants, conditions or restrictions have not been violated to the best of the attorney’s knowledge. Owners' association dues and special assessments, if any are applicable, must be paid current through closing.

ALTA® Endorsement – Form 9.2-06 (Covenants, Conditions and Restrictions - Improved Land - Owner’s Policy) (Revised 4/2/12)

This endorsement is designed to provide certain frequently requested protections for an owner of improved Land concerning private property restrictions or environmental protection liens on the Public Records at Date of Policy, unless exception is taken in Schedule B of the policy. (Coverage in pre-2012 versions of the endorsement for encroachments and minerals or other subsurface rights was removed; the attorney should review endorsement forms 28.1-06 and the Form 35 series for that coverage, if available.) Issuance of this endorsement to an owner will require receipt of (1) current and accurate survey of the Land evidencing no violation of any covenants, conditions or restrictions, no violation of any building setback lines, and (2) certification from attorney that the covenants, conditions or restrictions have not been violated to the best of the attorney’s knowledge. Owners' association dues and special assessments, if any are applicable, must be paid current through closing.

ALTA® Endorsement – Form 9.3-06 (Covenants, Conditions and Restrictions - Loan Policy) (Revised 4/2/12)

This endorsement to the loan policy includes the coverage under the Form 9 above for Improvements on the Land (only), but deleting coverage for encroachments (for which Forms 28-06 or 28.1-06 may still be applicable) and for mineral or other subsurface rights (for which the 35 series forms may be applicable).

ALTA® Endorsement – Form 9.4-06 (Restrictions, Encroachments, Minerals – Owner’s Policy – Unimproved Land) (Revised 2/3/11)

WITHDRAWN EFFECTIVE 4/2/12: This endorsement to the owner’s policy included the coverage under the Form 9.1 above, and also extended the coverage to “improvements,” extended coverage against exercise of mining rights and expanded the exclusions regarding covenants, conditions or restrictions to maintenance, repair and remediation obligations and environmental protection liens not already reflected in the public records. 

ALTA® Endorsement – Form 9.5-06 (Restrictions, Encroachments, Minerals – Owner’s Policy – Improved Land) (Revised 2/3/11)

WITHDRAWN EFFECTIVE 4/2/12: This endorsement to the owner’s policy was similar to the Form 9.2 above, and also, like the 9.4 above, extended the coverage to “improvements,” extended coverage against exercise of mining rights and expanded the exclusions regarding covenants, conditions or restrictions to maintenance, repair and remediation obligations and environmental protection liens not already reflected in the public records. 

ALTA® Endorsement – Form 9.6-06 (Private Rights – Loan Policy) (4/2/12)

This endorsement provides affirmative coverage to an insured lender against loss or damage in the event that “enforcement of a Private Right in a Covenant affecting the Title at Date of Policy (a) results in the invalidity, unenforceability or lack of priority of the lien of the Mortgage, or (b) causes a loss of the Insured’s Title acquired in satisfaction or partial satisfaction of the Indebtedness.” The term “Private Right” is specifically defined as “(i) a private charge or assessment; (ii) an option to purchase; (iii) a right of first refusal; or (iv) a right of prior approval of a future purchaser or occupant.”   (This coverage had been provided in the earlier Form 9 versions, but has now been segregated solely to this ALTA form endorsement.) Issuance of this endorsement to a lender will require receipt of a certification from attorney that the title examination of the title to the Land does not reveal an option to purchase, right of first refusal or right of prior approval of a future purchaser or occupant, or that any such right has been waived or subordinated of record to the Mortgage. Owners' association dues and special assessments, if any are applicable, must be paid current through closing.

ALTA® Endorsement – Form 9.7-06 (Restrictions, Encroachments, Minerals – Land Under Development - Loan Policy) (4/2/12)

This endorsement to the loan policy includes the coverage under the Form 9 above for Future Improvements in compliance with specified Plans on the Land. Issuance of this endorsement to an lender will require receipt of (1) current and accurate survey of the Land evidencing no violation of any covenants, conditions or restrictions; and (2) certification from attorney that the covenants, conditions or restrictions have not been violated to the best of the attorney’s knowledge and will not be violated by completion of the Future Improvements in compliance with the specified Plans. Owners' association dues and special assessments, if any are applicable, must be paid current through closing.

ALTA® Endorsement – Form 9.8-06 (Covenants, Conditions and Restrictions – Land Under Development – Owner’s Policy) (4/2/12)

This endorsement to the owner’s policy includes the coverage under the Form 9.2 above for Future Improvements in compliance with specified Plans on the Land. Coverage for encroachments and minerals or other subsurface rights are not included; the attorney should review endorsement forms 28.1-06 and the Form 35 series for that coverage, if available.) Issuance of this endorsement to an owner will require receipt of (1) current and accurate survey of the Land evidencing no violation of any covenants, conditions or restrictions; and (2) certification from attorney that the covenants, conditions or restrictions have not been violated to the best of the attorney’s knowledge and will not be violated by completion of the Future Improvements in compliance with the specified Plans. Owners' association dues and special assessments, if any are applicable, must be paid current through closing.

ALTA® Endorsement – Form 13-06 (Leasehold – Owner’s) (Revised 4/2/12) and Form 13.1-06 (Leasehold-Loan (Revised 4/2/12)

These endorsements provide additional tailored coverages for the lessee-owner of a Leasehold Estates. However, the endorsement excludes loss or damage from remediation due to environmental damage or contamination.   2012 revisions to the form made clarifications consistent with the new energy project leasehold endorsements (ALTA® Endorsement Series 36) in defining personal property loss calculations, adding restoration of the Land to loss calculations, clarifying that a loss might be only for a portion of the leasehold and excluding loss for environmental damage or contamination remediation.

ALTA® Endorsement Form 28.1-06 (Encroachments – Boundaries and Easements) (4/2/12)

This endorsement provides coverage against loss or damage to an Insured (owner or lender) due to encroachment of an Improvement on the Land onto adjoining land or an easement, or encroachment of an improvement on adjoining land onto the Land, including enforced removal of existing Improvements on the Land, other than encroachments itemized in specified exceptions on Schedule B. It contains the same preamble language used in the 2012 revisions to the ALTA 9 series, i.e. “The insurance provided by this endorsement is subject to the exclusions in Section 4 of this endorsement [encroachments excepted in Schedule B of the policy]; and the Exclusions from Coverage, the Exceptions from Coverage contained in Schedule B, and the Conditions in the policy.”   Issuance of this endorsement would require review of a survey of the Land and analysis of the significance and possible need for waivers or other curative action regarding any encroachments thereon.

ALTA® Endorsement Form 35-06 (Minerals and Other Subsurface Substances - Buildings) (4/2/12)

This endorsement is available to lenders or owners to provide coverage against loss due to enforced removal or alteration of existing Buildings on the Land resulting from the future exercise of rights to extract and develop subsurface minerals or other substances. Lenders still have some mineral or subsurface rights coverage available in the ALTA® Endorsement Forms 9 and 9.7. Issuance of the endorsement requires verification that no third party currently has the present or future right to any minerals located on Land, or, if any, that they require repair of any surface damage cause by exercise of those extraction and development of subsurface rights. 

ALTA® Endorsement Form 35.1-06 (Minerals and Other Subsurface Substances – Improvements) (4/2/12)

This endorsement provides similar protect as the ALTA® Endorsement Form 35-06, but with regard to Improvements (as defined) on the Land.

ALTA® Endorsement Form 35.2-06 (Minerals and Other Subsurface Substances – Described Improvements) (4/2/12)

This endorsement provides similar protect as the ALTA® Endorsement Form 35-06, but with regard to specifically described Improvements on the Land.

ALTA® Endorsement Form 35.3-06 (Minerals and Other Subsurface Substances – Land Under Development) (4/2/12)

This endorsement provides similar protect as the ALTA® Endorsement Form 35-06, but with regard to specifically Improvements and Future Improvements (as defined) on the Land.

 ALTA® Endorsement Form 36-06 (Energy Project – Leasehold/Easement – Owner’s) (4/2/12)

This endorsement for the owner’s policy (1) includes energy project-specific definitions, (2) includes coverage for insured easement interests (as well as for insured leasehold estates) that are often utilized in lieu of or along with leases to create the rights in the Land for some or all of the project improvements (as well as other more traditional easement purposes), (3) expands the “Valuation of Title” section to make clear that the computation of loss or damage for a covered defect affecting one parcel (or fewer than all parcels) shall include resulting loss or damage to the “integrated project,” (4) builds in coverage pertaining to “Severable Improvements” (as defined) that is also available through the ALTA® Endorsement Form 31-06 (“Severable Improvements”) adopted effective 2/3/11, (5) tailors the “Additional Items of Loss” section as appropriate to the energy project context, and (6) adds a new exclusion addressing costs of remediation resulting from environmental damage or contamination.

 ALTA® Endorsement Form 36.1-06 (Energy Project – Leasehold/Easement – Loan) (4/2/12)

This endorsement is the loan policy counterpart to the ALTA® Endorsement Form 36-06 above.

 ALTA® Endorsement Form 36.2-06 (Energy Project – Leasehold – Owner’s) (4/2/12)

This endorsement for the owner’s policy is substantially similar to the ALTA® Endorsement Form 36-06, but would apply to a leasehold project for which no easement interests are being insured.

ALTA® Endorsement Form 36.3-06 (Energy Project – Leasehold – Loan) (4/2/12)

This endorsement is the loan policy counterpart to the ALTA® Endorsement Form 36.2-06 above, applicable to situations involving a Leasehold Estate only, for which no easement interested are being insured.

ALTA® Endorsement Form 36.4-06 (Energy Project – Covenants, Conditions and Restrictions -- Land Under Development – Owner’s) (4/2/12)

This endorsement is patterned after the ALTA® Endorsement Form 9.8-06, but tailored for providing coverage to an owner regarding new construction in progress on energy projects, to provide coverage for defined Covenants, including violations or enforced removal of any “Electricity Facility” or “Severable Improvement,” as defined on Date of Policy and to be constructed pursuant to specifically identified Plans.

ALTA® Endorsement Form 36.5-06 (Energy Project – Covenants, Conditions and Restrictions – Land Under Development – Loan) (4/2/12)

This endorsement is patterned after the ALTA® Endorsement Form 9.7-06, but tailored for providing coverage to a lender regarding new construction in progress on energy projects, to provide coverage for defined Covenants, including violations or enforced removal of any “Electricity Facility” or “Severable Improvement,” as defined on Date of Policy and to be constructed pursuant to specifically identified Plans. It is the loan policy equivalent of ALTA® Endorsement Form 36.4-06 above.

ALTA® Endorsement Form 36.6-06 (Energy Project - Encroachments) (4/2/12)

This endorsement provides coverage to an owner or lender, similar to the ALTA® Endorsement Form 28.1-06, but tailored for energy projects. The coverage includes loss from encroachments (other than those excepted in Schedule B of the policy) by Improvements on the Land onto adjoining property or easement areas (including enforced removal coverage) or by neighboring improvements onto the Land. This includes coverage against enforced removal of any encroaching “Electricity Facility” or “Severable Improvement,” the definitions of which include those existing at Date of Policy and those affixed later in the locations identified on the set of defined Plans.

CONDOMINIUM DECLARATION AND PLAT: WHAT IS LEGALLY SUFFICIENT TO PASS TITLE?

Joseph M. Ritter

Fidelity National Title Insurance Company

Since the first condominium statute was passed in 1963 there have been many condominium units constructed in North Carolina. That initial statute is in Chapter 47A of the North Carolina General Statutes. In 1985 the second and present act was passed- Chapter 47C. All condominiums created after October 1, 1986 are subject to Chapter 47C. A condominium is a statutory creation. The statute takes precedent over principles of the common law and equity. 47C-1-108. The definition of a condominium appearing in 47C-1-103(7) is:

"Condominium" means real estate, portions of which are designated for separate ownership and the remainder of which is designated for common ownership solely by the owners of those portions. Real estate is not a condominium unless the undivided interests in the common elements are vested in the unit owners.

The concept is one of dividing up air space and was novel in the beginning. Only a limited number of attorneys, developers, architects, engineers and surveyors endeavored to participate in the development of condominium projects. Now many more have become comfortable with the concept. Perhaps that is the cause for a rash of improperly created condominium projects that have created considerable inconvenience and even financial loss for unit owners, lenders and title companies.  

Examples of such flawed condominium developments include the following fact scenarios or misconceptions:

·         “Condominium” and “townhouse” (generally governed by the common law and by Chapter 47F- The North Carolina Planned Community Act) developments are interchangeable terms.

·         “Common area or elements” in a condominium development are owned by the unit owners’ association- not the unit owners themselves.

·          Attorneys drafting condominium documents and representing the developer of a condominium community can defer to and presume the architects, engineers and surveyors providing services for the documents required under the condominium statute know exactly what is required. And the mentioned service providers can even be permitted to record the documentation they provide.

·         Condominium documents do not require the same attention to detail as far as the form of execution and acknowledgement that a deed conveyance does.

·         Attorneys certifying title to a condominium unit can presume the condominium documents including the declaration and plat are sufficient to convey title if recorded, and incur no liability if the instruments are not in compliance with the condominium statute.

The scope of this article is limited. The goal is not to give insight into the best way to organize every aspect of a condominium. The goal is: to examine a condominium project from the title perspective or the perspective of one searching the title, and one specifically examining the condominium documents under the current condominium statute, N.C.G.S. 47C, for legal sufficiency necessary for title to pass from seller to buyer.

The essential documents to a condominium are commonly known as: the declaration of condominium; the condominium plat and plans; the public offering statement; and the articles of incorporation and bylaws of the condominium association.

WHAT SHOULD BE IN THE DECLARATION OF CONDOMINIUM?

The declaration (of condominium) is said to be the foundation piece of the condominium development, especially where, as in North Carolina, the condominium plat is considered to be a part of the declaration. 47C-2-109(a). It is the document that creates the condominium “by definition” under 47C-1-103(10):

"Declaration" means any instruments, however denominated, which create a condominium, and any amendments to those instruments.

The declaration is a constitution for the little community known as the condominium development. It also is important as a way to provide consumer information such as the potential for expansion of the development and related declarant rights reserved.

The crucial statute with regard to the contents of the declaration is 47C-2-105(a). Those items required include:

·         The name of the condominium,;

·         A legally sufficient description of the real estate included;

·         The maximum number of units the declarant reserves the right to create;

·         A description (by reference to the plats or plans described in G.S. 47C‑2‑109) of the boundaries of each unit and unit number;

·         A description of any limited common elements;

·         A description of any real estate (except real estate subject to development rights) which may be allocated subsequently as limited common elements;

·         A description of any development rights reserved by the declarant, together with a legally sufficient description of the subject real estate, and time limit;

·         Explanation and conditions of any other development right;

·         Any other conditions or limitations applicable to development right reserved;

·         An allocation method under 47C-2-107 per unit of common elements ownership, rights and expenses;

·         Any restrictions on use, occupancy, or alienation of the units;

·         The recording data for easements and licenses appurtenant or subject to the condominium by virtue of reservation in the declaration; and

·         All matters required by G.S. 47C‑2‑106 (leasehold condominiums), 47C‑2‑107 (allocation of common elements interests, votes and expense liabilities), 47C‑2‑108 (limited common elements), 47C‑2‑109 (plats and plans), 47C‑2‑115 (use of units for sales like sales or management offices), 47C‑2‑116 (easements through the common elements for the declarant), and 47C‑3‑103(d)(temporary period of declarant control of the association).

Most condominiums are a division of air space and virtually always the living units exist with common walls and are stacked one on another, that is, with horizontal as well as vertical boundaries. However, the condominium may not be stacked ownership units with a division of the air space above the ground. It may only have vertical boundaries. “Real estate” is defined under 47C-1-103(21) as:

 "Real estate" means any leasehold or other estate or interest in, over, or under land, including structures, fixtures, and other improvements and interests which by custom, usage, or law, pass with a conveyance of land though not described in the contract of sale or instrument of conveyance. "Real estate" includes parcels, with or without upper or lower boundaries, and spaces that may be filled with air or water.

Thus, the development can be on water or in the water such as boat slips. It can also be the usual ownership at the ground surface without horizontal boundaries.

Under paragraph (4) of 47C-2-105(a) the declarant must provide the maximum number of units which the declarant reserves the right to create. There is no time limit on the declarant’s ability to do so. The declarant might use this as a way to control the unit owners’ association for an extended period of time. Practically, this is not likely to achieve long-term control and is counter-balanced by other time frames built into the statute such as 47C-3-103(d), which over rules provisions in the declaration.

As to expandable condominium projects, units added are not a part of the condominium development until the amendment to the declaration is recorded. Specifically, under the paragraph (5) (of 47C-2-105(a)) “…boundaries of each unit created by the declaration…” are required in the declaration. Thus, like the original declaration, it is necessary that the amendment to the declaration be recorded and further that until those additional units are created under the declaration they need not be described. 47C-2-105 Comment 5. The condominium plat is a part of the declaration and provides essential details such as ceiling and floor elevations.

Under 47C-2-101(b) when adding units to a condominium the declaration or amendment may not be recorded until all structural components and mechanical systems are “substantially complete” in accord with the plans and such is reflected in a certification of record by licensed architect or registered engineer. 

The boundary of each unit is required. The boundary of each unit can be described by unit number and the statement the unit is bounded by its ceiling, floors and walls. The condominium plat will provide precise detail. Without the declaration to the contrary, the items listed in 47C-2-102 and in 47C-2-109(b)(7) [parking spaces] are limited common elements under control of a given unit.

The importance of careful demarcation of common area and unit is illustrated in Board of Directors of Queens Towers Homeowners’ Association, Inc. v. Rosenstadt, 714 S.E. 2d 765 (N.C. App. 2011). Defendants-Rosenstadt owned two units, each of which had a balcony for the benefit of the unit. The balcony was accessible only through the glass door of the unit. Plaintiff-association voted to purchase awnings and skirts to attach to the balconies of the various units. Defendants refused to allow installation of the awnings and skirts. They denied access to the balconies. The issue was: “…whether the balcony is considered part of the unit, which is under the discretion and control of the unit owner, or part of the common area or limited common area, which falls under the authority of the board [of the homeowners association].” The answer to the question depends on the condominium act, the declaration and the by-laws. The statute here was the old Unit Ownership Act in Chapter 47A.

The definition of “unit” under the old act included accessory spaces such as a balcony “provided it has a direct exit to a thoroughfare or to a given common space leading to a thoroughfare.” However, the definition allowed the declaration could overrule. The declaration had no provisions for discretionary accessory spaces like a balcony. For an accessory space to be a part of the unit the statute required such space to have a direct exit to a common space or thoroughfare. Since the access to the balcony was through the unit (the sliding glass door), the balcony did not qualify for an accessory space within the unit. The balcony was in the common area. Thus, the homeowners association had control of the balconies.

Under the new and present statute in Chapter 47C, the declaration prevails (over the statute) with regard to balconies. But without provision in the declaration, a balcony outside the bounds of the unit and designed to serve a given unit, is a limited common area allocated to that unit. 47C-2-102(4). The limited common area is a part of the common area. Unless expressly provided otherwise in the declaration, the homeowner’s association has the power to regulate the use, maintenance, repair, replacement and modification of common elements. 47C-3-102(6). Whether the Queens Towers case would have been decided differently under 47C is doubtful. 

In paragraph (8) of 47C-2-105(a) reservation of declarant rights and a description of the land subject to those rights must appear in the declaration. The importance of clear designation of those rights and the land is demonstrated in the case Southland Associates, Inc. v. Peach, 61 N.C.App. 676 (1983). There, the plaintiff developer of a condominium project obtained a judgment quieting title to a 2.646 acre portion of the project and “a decree that plaintiff [had] the right to construct additional condominium units on that tract, [the issues considered were] (1) whether the intent of language in the Declaration of Unit Ownership was that the 2.646 acres were to be part of the common area of the existing condominiums, and (2) whether the Declaration of Unit Ownership gave plaintiff the right to construct additional units on the 2.646 acres.”

Further, “Plaintiff instituted this action alleging that pursuant to plans for development of an 11.402 acre tract of land into a condominium complex, plaintiff executed a Declaration of Unit Ownership which was recorded on 22 July 1974. Plaintiff alleges that it mistakenly made the entire 11.402 acre tract subject to the declaration and that it intended for the 2.646 acres in dispute to be reserved for future development. Plaintiff further alleges that the defendants knew that the 2.646 acres were not part of the ‘common area’ of the condominium project. It sought reformation of the Declaration of Unit Ownership, or, alternatively, a judgment quieting title to the 2.646 acre tract in dispute and a decree that it has the right to construct additional units on that tract.” The declaration included language that the declarant could build additional units on land now owned by the declarant (at the time of the declaration) and contiguous to the land now covered by the declaration. Declarant did own such land. The 2.646 acre tract was not a part of that contiguous tract.

Remember that this case was under the old North Carolina condominium statute but even under the new statute the common area is any area of the condominium that is not a unit. 47C-1-103. So, any land submitted to the condominium statute is either a unit or a common element (of which limited common is a subsection). Here, if the court found the 2.646 acres was submitted to the statute, then it could not be used for further units. It was common area.

Though the court considered other matters, the essence of the decision rested on the following analysis of the language in the condominium declaration:

Common areas and facilities are defined in the Declaration of Unit Ownership as follows: ‘The common areas and facilities consist of all parts of the multi-unit buildings and other structures situated on the property described hereinabove, other than the individual dwelling units therein. . . , including, without limitation, the following (except such portions of the following as may be included within an individual unit):

A. The land on which the building is erected and all lands surrounding the buildings as is more fully described in Plat Book 79 at page 79, Durham County Registry.’

      Although no model of grammatical clarity, this definition is clear and unambiguous. Under this definition, the 2.646 acre tract is clearly part of the common area.

The 2.646 acre tract was shown on the recorded plat, thus, it was submitted to the condominium.

Additional units added as in a phased condominium development must be added by recorded amendment to the declaration and compliance with the same 47C-2-109 requirements for a recorded plat.

Under paragraph (12) of 47C-2-105(a) all use, occupancy or alienation restrictions of the units must be included in the declaration. Other places in which to place use restrictions are the bylaws of the unit owners’ association and the rules and regulations for the common elements implemented by the association under 47C-3-102(6). In the case Laurel Park Villas Homeowners Assoc. v. Hodges, 82 N.C.App. 141 (1986) the homeowners association was found without standing to sue to enforce the unrecorded restrictions against a homeowner:

Plaintiff homeowners' association lacked standing under N.C.G.S. § 47A-10 to bring an action in its own name to enforce unrecorded restrictions against a unit owner where plaintiff did not allege that it owned any land; did not argue that the rule of strict construction in Beech Mountain Property Owners' Assoc. v. Current, 35 N.C. App. 135, did not apply; never alleged that the action was maintained by its board of directors or manager; and no aggrieved unit owners were involved. Although there was a provision in the Articles of Incorporation that purported to give the corporation the power to bring such an action, there was nothing in the articles or the bylaws authorizing persons other than the board, its officers, or the membership to act on behalf of the corporation, there was nothing in the record suggesting that any of those groups authorized this action, and the by-laws provided that they were established in accordance with N.C.G.S. Chapter 47A and that in case of conflict the statute should control.

Perhaps more relevant to the requirement that use restrictions appear in the declaration of condominium that must be recorded, the court emphasized the value of recording the restrictions. Under old 47A the bylaws must be recorded. Under the new statute the bylaws of the association are not required to be recorded. It is predictable that use restrictions not appearing of record will be at a minimum treated differently than those recorded and of which purchasers have record notice. In Laurel Park the court said:

While the parties did not reach this question, we note that unrecorded restrictions enacted by homeowners' associations appear to be unenforceable under G.S. Chapter 47A. Throughout the Chapter, the legislature has insisted on due recordation as the proper means of creating a condominium with enforceable mutual covenants. G.S. 47A-13; G.S. 47A-15; G.S. 47A-16; G.S. 47A-18. G.S. 47A-28 makes unit owners subject to the statutory provisions and to the declaration and bylaws, which must be recorded. In particular, G.S. 47A-18 requires that bylaws must be recorded. The bylaws must contain any restrictions, not contained in the declaration, respecting use and maintenance to prevent unreasonable interference with the unit owners' property. G.S. 47A-19(7). Unrecorded regulations of the homeowners' association, especially restrictions as intrusive as those barring minor children and pickup trucks, would appear to lie outside the enforceable scope of the statute.

From this and other cases, it is clear that restrictions appearing in an unrecorded place, such as unrecorded bylaws or rules and regulations promulgated by the association, will be held to a higher standard of reasonableness by the courts than those in the a recorded declaration. Note that 47C does not dictate the method of amendment of the bylaws whereas the method of amendment of the declaration is set. 47C-2-117. The amendment provisions are typically more flexible in the bylaws than the declaration, perhaps making the bylaws more appealing to the draftsman.

Note that allocation of common elements under 47C-2-107 is an important provision since ownership interests, expense share and voting rights are determined according to the allocation method specified in the declaration. The three methods are permitted:

·         Equal ownership share for each unit;

·         Percentage share based on the value of each unit to the value of the whole property (this is most often used in other states); and

·         Percentage based on the size, using area or volume, in relation to the total combined size of all units.

WHAT SHOULD BE SHOWN IN THE CONDOMINIUM PLAT?

Though the declaration is the foundation piece for establishment of a condominium development, the condominium plat is fundamental to the information required to define the area and location that constitute the unit owned in full by the owners and the common elements held in undivided interests by the unit owners. The “plats and plans” are a collection of site maps and condominium plans that describe real estate made subject to the condominium and the units and improvements as they are built.   Though the plat does not have to be a survey of the entire property at the time the plat is recorded, ultimately, it will be supplemented and amended as improvements are made and brought into the condominium regime to the point it will be a survey of the entire project. Under 47C-2-109(b) here are the required parts of the plat and plans:

·         A survey or general schematic map of the entire condominium;

·         The location and dimensions of all real estate not subject to development rights or subject only to the development right to withdraw and the location and dimensions of all existing improvements within that real estate;

·         The location and dimensions of any real estate subject to development rights, labeled to identify the rights applicable to each parcel;

·         The extent of any encroachments by or upon condominium;

·         The location and dimensions of all easements having specific location and dimensions and serving or burdening any portion of the condominium;

·         The verified statement of an architect or an engineer certifying that such plats or plans fully and accurately depict the layout, location, ceiling and floor elevations, unit numbers and dimensions of the units, as built;

·         The certificate by a registered land surveyor stating that the plats accurately depict the legal boundaries and the physical location of the units and other improvements relative to those boundaries;

·         The locations and dimensions of limited common elements except those excluded;

·         A legally sufficient description of any real estate in which the unit owners will own only an estate for years, labeled as "leasehold real estate";

·         The distance between noncontiguous parcels of real estate comprising the condominium;

·         Any unit in which the declarant has reserved the right to create additional units or common elements.

Just as the condominium declaration and as a part of the declaration the condominium the plat must be recorded. It must be separate from the declaration. 47C-2-109(a). The plat is indexed just as a conveyance. It must be in a certain format (size, margin) of reproducible permanent material. 47C-2-109(e). The location and dimension of any improvements not yet built must be clearly labeled as “MUST BE BUILT” or “NEED NOT BE BUILT”. 47-2-109(c).

The original plat need not be a survey of the entire project. It may be a general schematic map as a survey might be too expensive. 47C-2-109 and comments thereto. It is important that the portions of the project for which no further improvements are contemplated, that is, the work is substantially complete, that a true survey is done. So, even if the original plat shows a general schematic of the as yet undeveloped land, as that land is developed or the development rights expire, a survey of the entire developed condominium project will be done. The survey will locate the improvements and show the dimension of the finished buildings. 47C-2-109, Comment 4.

The plat should clearly show the development rights applicable to the different parts of the real estate. 47C-2-109, Comment 5.  

As with the declaration, when new units are added a new condominium plat must be recorded meeting the requirements just like the original plat. 47C-2-109(d).

Note that the plats or plans must reflect the layout, location, ceiling and floor elevations, unit numbers and dimensions of the units- as built. 47C-2-109(b)(6). The architect or engineer who provides the verified statement must clearly be aware of those statements. A surveyor cannot provide that assurance and comply with the statute.

The surveyor does provide the certification that the units and other improvements are accurately depicted as far as the boundaries of the improvements and the physical location of the improvements. 47C-2-109(b)(6)(a).

APPLYING WHAT WE KNOW

Let us reflect on the misunderstandings mentioned at the beginning of this article:

·         “Condominium” and “townhouse” developments are interchangeable.

·         “Common area” in a condominium development is owned by the unit owners’ association- not the unit owners themselves.

·          Attorneys drafting condominium documents can defer to and presume the architects, engineers and surveyors providing services for the documents know exactly what is required.

·         Condominium documents do not require the same attention to detail as far as the form of execution and acknowledgement of the documents that a deed conveyance would.

Suppose one is searching the title to a condominium unit, how would you avoid the pitfalls? What are the consequences of a failure to comply with 47C?

In In Re Williamson, 653 S.E. 2d 900 (NC 2007) the plaintiff-declarant claimed the right to build additional buildings and units. The defendants claimed that the plaintiff failed to properly reserve the right to do so by omitting a provision from the declaration. Under 47C-2-101(a)(8) the declarant must record a declaration of condominium that informs one of the development rights reserved:

 (8)       A description of any development rights and other special declarant rights reserved by the declarant, together with a legally sufficient description of the real estate to which each of those rights applies, and a time limit within which each of those rights must be exercised.

The declaration for the subject condominium did not contain the time limit within which the rights must be exercised. The plaintiff argued that the omission was not fatal to either the declaration itself or the right he wished to exercise to build additional buildings/units. Specifically, the plaintiff cited 47C-1-104(c):

(c)       If a declarant, in good faith, has attempted to comply with the requirements of this chapter and has substantially complied with the chapter, nonmaterial errors or omissions shall not be actionable.

To successfully apply the nonmaterial statute, the plaintiff must show he attempted to comply with 47C-2-105 and substantially complied. Said another way, from North Carolina National Bank v. Burnette, 297 N.C. 524 (1979): to have substantial compliance with the statutory requirements one must “substantially, essentially, in the main, or for the most part, satisf[ies] the [statutory requirements].”

The court analyzed the facts finding that the declarant complied with the other statutory requirements for the declaration: like using the word “condominium” in the name of the development; recording the declaration in the county where the land was; providing an adequate description of the real estate; providing the number of existing units as well as the maximum number of additional possible units; providing the boundary of the units; identifying the units by unit number; listing the common elements and areas; describing the reserved areas and the rights reserved; allocating the common areas, common expenses, and voting rights; providing the use restrictions; listing the easements affecting the land; and recording a proper condominium plat. Other matters not required but optional were too included like rules with regard to unit additions and unit boundary changes. The court found the declaration “essentially, in the main, [and] for the most part, satisfies the [47C] requirements.”

In addition the court felt the omission to be non-material. The timing of the new buildings was never in controversy. However, since the omission was a required provision, did the non-material statute (47C-1-104(c)) apply? Defendants and the dissent opinion relied on a Colorado case Silverview v. Over at Mt. Crested Butte, 97 P.3d 252 (2005). The statutes in North Carolina and Colorado were very similar and the facts were very similar. The N.C. non-material statute foreclosed any cause of action that might arise due to a non-material failure to comply.

The N.C. court cited the Johnson v. Manning, 63 N.C.App. 673 (1983) where there was failure to meet statutory requirements for formation of a limited partnership that were mandated by statutory language using “shall”. Thus, the court’s holding in Johnson and then In re Williamson “was predicated upon a recognition that even where the General Assembly uses mandatory language such as ‘shall’ or ‘must,’ it may still excuse noncompliance with the use of a ‘substantial compliance’ clause. We therefore find that if the General Assembly did not intend for the ‘substantial compliance’ clause in N.C.G.S. 47C-1-104(c) to apply to the declaration content requirements of N.C.G.S. 47C-2-105, it would have excluded that section from its reach. Plaintiff may properly rely on the Act's ‘substantial compliance’ clause to excuse the omission of a development time limit in the Declaration.”      

The dissent adopted the Colorado case. The Colorado court cited certain hypothetical defects such as omitting the word “condominium” in the name of the development or unit owners’ association truly as immaterial. They found certain statutory provisions in the Colorado condominium statute that made the time frame for exercise of the development rights material. Specifically, the non-material statute Colo. Rev. Stat. 38-33-3-210(2) did not extend the time limit for exercise of the rights under the declaration, as required. And paragraph (5) of the Colorado statute provided failure to exercise reserved development rights within the time frame provided in the declaration or alternatively the release of said rights by recorded instrument would cause the rights to expire. Though North Carolina did not have the exact equivalent to Colo. Rev. Stat 38-33-3-210(5), the N.C. dissent was satisfied that Official Comment 1 and 47C-2-210 itself, which indicates the development rights in the original declaration cannot be extended, were sufficient to reflect the serious nature of the time limit. Given the importance of the time limit provision as reflected in those two Colorado statutes, and the comments to the uniform statute (including N.C. 47C-2-105, Comment 9), the dissent found the time limitation material. To find the requirement material thus made 47C-1-104(c), allowing for nonmaterial errors or omissions, not applicable.     

Note, even the dissent did not find the entire declaration void. The dissent found the development rights void from the original recording. Under 47C-2-103(a) the provisions of the declaration are severable. That may have saved the declaration had the dissent prevailed.

What are the answers to the statements or perceptions from page 1:

·         “Condominium” and “townhouse” developments are interchangeable.

Answer: Not so. Condominium is defined in Chapter 47F and 47C as land divided into portions separately owned and portions jointly owned by the separate owners. In other words, the units are separately owned and the common elements are jointly owned by the unit owners. A condominium is statutorily created. Under 47F a condominium is not a planned community (the more formal name for a “townhouse” development).

·         “Common area” in a condominium development is owned by the unit owners’ association- not the unit owners themselves.

Answer: In a planned community or “townhouse” community the common elements are owned by the unit owners’ association. 47F-1-103(4). Under 47C-1-103(7) a condominium is not a condominium unless the undivided interests in the common elements are vested in the unit owners.

·          Attorneys drafting condominium documents and representing the developer of a condominium development can defer to and presume the architects, engineers and surveyors providing services for the documents required under the condominium statute know exactly what is required. And the mentioned service providers can even be permitted to record the documentation required.

Answer: One learned observer opined: “As a practical matter, many surveyors and architects are not familiar with the requirements of the [condominium] act, and it may take several drafts to get the plats and plans into correct format.”

·         Condominium documents do not require the same attention to detail as far as the form of execution and acknowledgement of the documents that a deed conveyance would.

Answer: An attorney doing considerable remedial work on condominium projects volunteered that many times the problem grows from improper execution of documents or execution by the wrong entities.

·         Attorneys certifying title to a condominium unit can presume the condominium documents including the declaration and plat are sufficient to convey title if recorded, and incur no liability if the instruments are not in compliance with the condominium statute.

Answer: Since a condominium unit is a statutory creation, its validity and existence depends on meeting the statutory requirements. Thus, certification of title includes whether a condominium unit is validly formed. Even though 47C provides that insubstantial failure of the declaration to comply with the statute will not make title unmarketable, substantial failure is subject to the other state laws on marketability. Location of the land conveyed is essential to any conveyance. Without proper location of a condominium unit, just like failure to provide the beginning point for a conventional parcel, a substantial defect exists, and marketability may be impaired. The bounds of a condominium unit many times are dependent on locating air space with horizontal and vertical boundaries. The land must be located. The building tie-ins to boundaries must be adequate. And the units themselves must have ceiling and floor elevations to determine where the unit is. The certifying attorney is responsible to her client to be sure a condominium unit is validly formed. 
 

2011 Formal Ethics Opinion 7
January 27, 2012

Using Online Banking to Manage a Trust Account

Opinion rules that a law firm may use online banking to manage its trust accounts provided the firm’s managing lawyers are regularly educated on the security risks and actively maintain end-user security.

Inquiry:

Most banks and savings and loans provide “online banking” which allows customers to access accounts and conduct financial transactions over the internet on a secure website operated by the bank or savings and loan. Transactions that may be conducted via on-line banking include account-to-account transfers, payments to third parties, wire transfers, and applications for loans and new accounts. Online banking permits users to view recent transactions and view and/or download cleared check images and bank statements. Additional services may include account management software.

Financial transactions conducted over the internet are subject to the risk of theft by hackers and other computer criminals. Given the duty to safeguard client property, particularly the funds that a client deposits in a lawyer’s trust account, may a law firm use online banking to manage a trust account?

Opinion:

Yes, provided the lawyers use reasonable care to minimize the risk of loss or theft of client property specifically including the regular education of the firm’s managing lawyers on the ever-changing security risks of online banking and the active maintenance of end-user security.

As noted in [Proposed] 2011 FEO 6, Subscribing to Software as a Service While Fulfilling the Duties of Confidentiality and Preservation of Client Property, the use of the internet to transmit and store client data (or, in this instance, data about client property) presents significant challenges. In this complex and technical environment, a lawyer must be able to fulfill the fiduciary obligations to protect confidential client information and property from risk of disclosure and loss. The lawyer must protect against security weaknesses unique to the internet, particularly “end-user” vulnerabilities found in the lawyer’s own law office. The lawyer must also engage in frequent and regular education about the security risks presented by the internet.

Rule 1.15 requires a lawyer to preserve client property, to deposit client funds entrusted to the lawyer in a separate trust account, and to manage that trust account according to strict recordkeeping and procedural requirements. See also RPC 209 (noting the “general fiduciary duty to safeguard the property of a client”) and 98 FEO 15 (requiring a lawyer to exercise “due care” when selecting depository bank for trust account). The rule is silent, however, about online banking.

Nevertheless, online banking may be used to manage a client trust account if the recordkeeping and fiduciary obligations in Rule 1.15 can be fulfilled. The recordkeeping requirements for trust accounts are set forth in Rule 1.15-3. Rule 1.15-3(b)(3) specifically requires a lawyer to maintain the following records relative to the transfer of funds from the trust account:

all instructions or authorizations to transfer, disburse, or withdraw funds from the trust account (including electronic transfers or debits), or a written or electronic record of any such transfer, disbursement, or withdrawal showing the amount, date, and recipient of the transfer or disbursement, and, in the case of a general trust account, also showing the name of the client or other person to whom the funds belong;

If the online banking software does not provide a method for making an official bank record of the required information when money is transferred from the trust account to another account, such transfers must be handled by a method that provides the required records.

To fulfill the fiduciary obligations in Rule 1.15, a lawyer managing a trust account must use reasonable care to minimize the risks to client funds on deposit in the trust account by remaining educated as to the dynamic risks involved in online banking and insuring that the law firm invests in proper protection and multiple layers of security to address those risks. See [Proposed] 2011 FEO 6.

A lawyer who is managing a trust account has affirmative duties to regularly educate himself as to the security risks of online banking; to actively maintain end-user security at the law firm through safety practices such as strong password policies and procedures, the use of encryption, and security software, and the hiring of an information technology consultant to advise the lawyer or firm employees; and to insure that all staff members who assist with the management of the trust account receive training on and abide by the security measures adopted by the firm. Understanding the contract with the depository bank and the use of the resources and expertise available from the bank are good first steps toward fulfilling the lawyer’s fiduciary obligations.

This opinion does not set forth specific security requirements because mandatory security measures would create a false sense of security in an environment where the risks are continually changing. Instead, due diligence and frequent and regular education are required. A lawyer must fulfill his fiduciary obligation to safeguard client funds by applying the same diligence and competency to manage the risks of on-line banking that a lawyer is required to apply when representing clients.