Special Declarant Rights in North Carolina

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While the North Carolina General Assembly was finishing its two-year legislative session this past summer, House Bill 330 was signed into law. The bill, sponsored by Representative Rob Bryan (R-Mecklenburg) and Representative Paul Stam (R-Wake), was filed on March 3, 2013.  It passed its first reading the very next day and reached the Senate floor on May 7, 2013.  The bill was then sent to the Committee on Rules and Operations of the Senate, where it sat for over a year until it was withdrawn from that committee on May 16, 2014 and referred to the Senate Judiciary I Committee.  The Judiciary I Committee adopted a committee substitute which was quickly passed by both chambers. The bill was ratified on June 2, 2014 and became law when it was signed by Governor McCrory five days later.

It was unclear what special declarant rights could be transferred upon foreclosure, bankruptcy, or a voluntary transfer.

The long story of how House Bill 330 became a law makes the bill sounds like a complex piece of legislation, but in reality it simply clarifies the way in which special declarant rights can be transferred.  Its long road to ratification was created by a need for clarification regarding which special declarant rights could be transferred upon foreclosure, bankruptcy, or a voluntary transfer, and what obligations came with those transfers.

To begin, special declarant rights are rights that exist when a condominium, planned community, or common interest community is created.  The creation of a planned community requires a document called a declaration.  A declaration states the covenants and restrictions that run with the land on which the planned community is located.  The declarant is the one who creates the declaration and is typically the developer of the property.  The special rights given to the declarant can be found in North Carolina’s Planned Community Act, codified in N.C. Gen. Stat. 47F, and also North Carolina’s Condominium Act, codified in  N.C. Gen. Stat. 47C.

Special declarant rights are defined in N.C. Gen. Stat. 47F-1-103(28) as rights kept for the declarant’s benefit, which includes any right:

(i)                    to complete improvements indicated on plats and plans filed with the declaration;

(ii)                   to exercise any development right (HB 330 defined this to mean “any right or combination of rights reserved by a declarant in the declaration (i) to add real estate to a condominium; (ii) to create units, common elements, or limited common elements within a condominium; (iii) to subdivide units or convert units into common elements; or (iv) to withdraw real estate from a condominium”;

(iii)                  to maintain sales offices, management offices, signs advertising the planned community, and models;

(iv)                 to use easements through the common elements for the purpose of making improvements within the planned community or within real estate which may be added to the planned community;

(v)                  to make the planned community part of a larger planned community or group of planned communities;

(vi)                 to make the planned community subject to a master association; or

(vii)                to appoint or remove any officer or executive board member of the association or any master association during any period of declarant control.

The declarant can transfer these rights to another person or entity, whereby the transferee of all or any portion of the special declarant rights would become, by definition, the declarant.  Thus, a single planned community can have multiple declarants.

Originally, N.C. Gen. Stat. 47F-3-104 only allowed special declarant rights to be transferred by recorded instrument.

As evident by reading the rights, special declarant rights are rather powerful and in the right hands can be profitable.  Thus, it is important to know who has these rights, and who can obtain these rights.  House Bill 330 was created to answer these questions.

Originally, N.C. Gen. Stat. 47F-3-104 was a short statute that, barring a foreclosure on the planned community, only allowed special declarant rights to be transferred by a recorded instrument in the county in which the planned community is located.  Although it was concise, the original language governing the transfer of special declarant rights raised a lot of questions.

The legislature created House Bill 330 in an effort to resolve these issues.  First, the general rule is still in place, which is that any transfer of special declarant rights must recorded in the county in which the planned community is located.  However, several exceptions exist in order to accommodate a failing planned community.

One such exception is found in N.C. Gen. Stat. 47F-3-104-(c), which automatically includes within a deed of trust or mortgage instrument “the special declarant rights as part of the right, title, and interest” that the deed or instrument encumbers.  The practical effect is that deeds of trust will no longer be required to contain a separate provisions dealing with the special declarant rights or the assignability of these rights upon foreclosure, bankruptcy, or judicial sale.  However, these rights are not automatically obtained because subsection (c) requires the purchasing entity to formally request the rights that the entity wishes to obtain.

A purchaser of a planned community can now maximize the purchase by choosing the special declarant rights that are the most valuable.

As a result of House Bill 330, any purchaser of a planned community at a foreclosure sale, judicial sale, or bankruptcy can now maximize the purchase of the planned community by choosing the rights that are the most valuable.  This is important because these rights come with obligations, and depending on whether or not the successor is considered an affiliate of the declarant, these obligations can be avoided to a degree.

The new law enforces all obligations on anyone who is deemed to be an affiliate of the declarant, which is newly defined in N.C. Gen. Stat. 47F-1-103 as “any person who succeeds to any special declarant rights or who controls, is controlled by, or is under common control with a declarant.”  Thus, any successor who is an affiliate of a declarant is subject to all the rights and obligations as the declarant.

However, if the successor is not deemed to be an affiliate of the declarant, then all obligations may be avoided if the successor chooses to only succeed to the right to maintain sales offices, management offices, signs advertising the planned community, and models.  If the successor is not an affiliate of the declarant and chooses to accept any additional special declarant rights, then the successor is subject to any obligation within the declaration as well as the obligations imposed by Chapter 47F, but the successor will not be responsible for any misrepresentations by the transferor or for any obligations or breach of obligations made by the transferor or previous declarant not listed in the declaration.

Lastly, any person who succeeds to special declarant rights under subsection (c) and intends to hold these rights solely for the purposes of transferring them may do so, so long as this intention is recorded.  The purpose behind recording this intention is to benefit the entity intending to transfer those rights because that entity will not have any obligations during the period that it holds the special declarant rights for the purpose of transferring them.  Essentially, a purchaser of a planned community at a foreclosure sale who intends to quickly sell the planned community may hold the property without liability concerns other than liability for any acts or omissions.

House Bill 330 passed in order to clarify the rights, obligations, and recording requirements for parties involved in transferring special declarant rights.  Although this bill accomplishes very little on a practical basis, the clarifications contained in this new law will help those who live in a planned community, who interact with a planned community, or who intend to purchase a planned community.