A Welcome Change of Law in NC: A Workable Framework for Transferring Declarant Rights in a Foreclosure or Deed in Lieu
Good news! The murkiness surrounding declarant rights in North Carolina became a little clearer this summer. On July 7, 2014, Governor McCrory signed an amendment
to the Planned Community Act addressing the transfer of declarant rights. This article only addresses lender’s rights or liability surrounding declarant rights if that lender were in acquiring ownership of that collateral in the context of foreclosure or “deed in lieu.” For those of you who have been forced to wade into this morass, you understand why the new law should be a cause of real celebration. Albeit the law still is not perfect, it is a huge improvement because it provides more clarity and certainty.
The prior statutory framework was ambiguous and confusing. There was no clear explanation or blueprint of how declarant rights were to be transferred (either voluntarily or involuntarily) from the declarant to a lender. Under that old framework, we had to “bootstrap” declarant rights by either including specific language in the Trustee Deeds or by making inordinate concessions to the borrower in order to get a deed in lieu from the borrower; the hope being that a deed in lieu assigning declarant rights would be safer and less susceptible to challenge or exception. Regardless, neither solution was ideal because neither provided the bank certainty and one was often expensive because it entailed the lender allowing the borrower better repayment terms in return for the deed in lieu. Now, there is certainty and a framework for transferring declarant rights in a foreclosure.
The amendment clarifies that generally declarant rights are a general right of the grantor. Therefore, the standard NC Deed of Trust will encumber declarant rights, and it will not be necessary to specifically include “Declarant Rights” in a Deed of Trust for those rights to be encumbered by it. This will allow previously executed and recorded deeds of trust to allow for the transfer of declarant rights in a foreclosure. There is no need to amend prior deeds of trust so as to capture declarant rights.
Of course, there are changes that will require a change of procedure and practice. Generally, if the entity, who is acquiring title via the foreclosure process (or deed in lieu), wants to take any of the declarant rights it must be proactive. First the acquiring entity must record a document in the Register of Deeds, in the county where the development is located, that sets forth the specific declarant rights it wants to take. This must be done prior to the Trustee’s Deed or Deed in Lieu. Later, the trustee’s deed (or deed in lieu) must convey in detail those same declarant rights detailed in that previously recorded document. Upon recordation of the Trustee’s Deed (or deed in lieu), those detailed declarant rights are passed. If it is not listed, then those particular declarant rights are most likely terminated (albeit there are some exceptions in the statute to this).
, the lender should take certain steps to limit its liability for declarant rights prior to taking title. The law allows limited liability as to declarant obligations for those acquiring title (such as the bank) including declarant rights for the sole purpose of ultimately transferring those rights to another party. In essence, the law allows for those detailed declarant rights to be “parked” until there is a subsequent purchaser. At that point, these parked rights are activated, and the purchaser can exercise its declarant rights as it continues the development of the property. To accomplish this “parking,” the acquiring entity must include a statement in the document it first records (described in the prior paragraph) that says it is only taking the rights so as to later transfer them. If it does this, then it will not have any declarant liability for its period of ownership or control (absent a couple of exceptions, including its selection and appointment of officers and members of the executive board.) This step does not mean the acquiring entity would be without responsibility or influence. The lender would still be authorized to (and should) appoint persons to the development’s executive board, which would manage the development. But any actions by the acquiring entity outside of the administrative board would be void and potentially open it to declarant liability. In most situations, this is to be avoided. No one wants unnecessary risks in one’s business.
If you are in the process of any foreclosure or acquisition of collateral that includes declarant rights in North Carolina, then you should already be following this law. Please note that the amendment is more detailed and complex than described herein, so please read the amendment and hire competent counsel to assist you.