North Carolina Real Estate Law

North Carolina Real Estate Law

North Carolina Real Estate Law Third Edition Neal R. Bevans Professor Western Piedmont Community College Carolina Academic Press Durham, North Carolina

Copyright 2015 Neal R. Bevans All Rights Reserved Library of Congress Cataloging-in-Publication Data Bevans, Neal R., 1961- author. North Carolina real estate law / Neal R. Bevans. -- Third Edition. pages cm Includes bibliographical references and index. ISBN 978-1-61163-568-3 (alk. paper) 1. Real property--north Carolina. 2. Real estate business--law and legislation--north Carolina. 3. Vendors and purchasers--north Carolina. I. Title. KFN7512.B48 2014 346.75604'3--dc23 2014032798 Carolina Academic Press 700 Kent Street Durham, North Carolina 27701 Telephone (919) 489-7486 Fax (919) 493-5668 www.cap-press.com Printed in the United States of America

For my parents, Robert and Patricia Bevans

Contents Preface xxi Chapter 1 Introduction to Real Estate 3 Chapter Objectives 3 I. Real Property versus Personal Property 3 A. What Makes Real Property So Unique? 4 B. Physical Characteristics of Land 5 C. Economic Characteristics of Land 5 II. The Real Estate Market 6 III. Classifying Property by Use 7 A. Unimproved Land 8 B. Residential Property 8 1. Single- Family Homes 8 2. Apartments 8 C. Condominiums and Townhouses 8 1. Townhouses 10 2. Cooperatives 10 D. Mobile Homes under North Carolina Law 10 E. Manufactured Housing and Kit Homes 11 F. Commercial Property 11 1. Retail/Wholesale 11 2. Shopping Centers and Malls 12 G. Industrial Property 12 1. Industrial Parks 12 2. Light Industry/Heavy Industry 12 H. Farm and Rural Property 12 I. Recreational Property 12 J. Government- Owned Land 13 IV. Air and Mineral Rights 13 A. Air Rights 13 B. Mineral Rights 14 Chapter Summary 14 Relevant Case 14 Review Questions 17 Assignment 18 Terms and Phrases 18 Chapter 2 Real Estate Professions 19 Chapter Objectives 19 I. Introduction to Real Estate Professions 19 vii

viii CONTENTS II. The Law of Agency 20 A. What Is an Agency Relationship? 20 B. Creating an Agency Relationship 20 C. Agent s Duty to the Principal 21 1. Obedience 21 2. Care 21 3. Loyalty 21 4. Accounting 22 D. Ratification 22 E. Agent s Duty to Third Parties 22 1. The Duty of Honesty and Fair Dealing 22 2. Duty Not to Commit Fraud 23 a. Material Facts 23 i. Salesmanship and Puffing 23 3. Duty to Avoid Negligent Misrepresentation 23 F. Principal s Duty to Agent 24 1. Duty to Compensate the Agent 24 2. Duty Not to Unfairly Injure the Agent s Reputation 24 3. Duty to Cooperate 24 G. Applying Agency Law to Real Estate Transactions 24 1. A Real Estate Agent s Duty of Care 25 2. An Agent s Responsibility to Disclose Information 25 3. Real Estate Brokers Under North Carolina Law 26 a. Provisional Brokers 26 b. Broker 26 c. Broker- in-charge 26 A. Real Estate Brokers 26 1. Different Types of Real Estate Agents 27 a. Seller s Agent 27 b. Buyer s Agent 27 c. Dual Agents 28 d. Rules and Regulations Governing Real Estate Agents 28 4. The North Carolina Real Estate Commission 30 5. Becoming a Broker in North Carolina 30 5. Sanctioning Real Estate Brokers 30 a. Ethical Duties of Real Estate Agents 32 6. Continuing Education Requirements for Real Estate Brokers 32 7. Services Provided by Real Estate Agents 32 a. Multiple Listing Service 32 III. Real Estate Professions 33 A. Real Estate Investors 33 1. Small Investors and Fixer- Uppers 33 2. Real Estate Investment Trusts 33 B. Loan Officers 33 C. Appraisers 34 1. Real Estate Valuation 35 2. Real Estate Appraisal 35 3. Comparative Market Analysis 36 D. Surveyors 36 E. The Legal Team 37

CONTENTS ix F. Contractors 37 G. Property Managers 37 H. Inspectors 37 1. Real Estate Inspections 37 2. Inspectors Duties 38 Relevant Case 38 Chapter Summary 43 Review Questions 43 Assignment 44 Terms and Phrases 44 Chapter 3 Legal Estates in Property in North Carolina 45 Chapter Objectives 45 I. What Is an Estate? 45 II. Fee Simple Estate 46 A. Rights, Obligations and Limitations of Fee Simple Owners 47 B. Conditional Fee Simple Estates 47 1. The Rules Used to Interpret Fee Simple Defeasible Estates 47 2. Fee Simple Determinable 48 a. Court Tests for Fee Simple Determinable 48 3. Fee Simple on a Condition Subsequent 49 III. Life Estates 49 A. Creating a Life Estate 50 1. Elective Share for Spouses 51 a. Waiver of Elective Share 51 B. Remaindermen 51 C. Waste 52 D. Merger 52 E. Rule in Shelley s Case 53 F. Renouncing a Life Estate 53 Relevant Case 53 G. Life Estate Pur Autre Vie 56 IV. Concurrent Ownership in Real Estate 56 A. Tenants in Common 56 B. Joint Tenancy 57 1. The Right of Survivorship 57 C. Tenancy by Entirety 58 D. Tenancy in Partnership 58 E. Partition 59 Chapter Summary 60 Review Questions 60 Assignments 61 Terms and Phrases 61 Chapter 4 Landlord- Tenant Law 63 Chapter Objectives 63 I. Introduction 63 II. Freehold versus Non- Freehold Estates 63 III. Residential Rental Agreements Act 64 A. Landlords and Tenants Have Mutual Obligations 64

x CONTENTS B. Landlord Duties under the Residential Rental Agreements Act 64 1. Tenant Suits under Residential Rental Agreements Act 67 2. Unfair or Deceptive Trade Practices 67 C. The Tenant s Duties to the Landlord 67 1. Ordinary Wear and Tear 68 2. Tenant s Duty to Compensate Landlord for Damages 69 IV. The Tenant Security Deposit Act 69 A. Pet Deposits 70 B. Late Fees 70 V. Discriminatory Practices 70 VI. Lead- Based Disclosure 71 VII. Specific Types of Tenancies 71 A. Tenancy for Years (Estate for a Stated Period) 72 1. Termination of an Estate for a Stated Period of Time 72 2. Notice of Termination 72 B. Estate from Year to Year (Estate from Period to Period) 72 1. Termination of an Estate from Year to Year 73 C. Tenancy at Will 73 1. Termination of a Tenancy at Will 74 D. Tenancy at Sufferance 74 1. Termination of a Tenancy at Sufferance 74 VIII. Real Estate Leases 74 A. Types of Leases 74 1. Fixed Rent Leases 74 2. Percent Leases 74 3. Net Leases 75 4. Ground Leases 75 5. Mineral Leases 75 6. Oil and Gas Leases 75 B. Creating the Landlord- Tenant Relationship 75 1. Required Provisions under North Carolina Law 75 2. Common Lease Clauses and Provisions 76 a. Renewal 76 b. Deposits 76 c. Persons Permitted to Be on the Premises 76 d. Fixtures 76 4. Commercial Leases 79 a. Trade Fixtures 79 C. Lease Assignments and Sub- Letting 80 D. Statute of Frauds Concerns in Leases 80 IX. Eviction 80 A. Eviction Procedures 81 B. Wrongful Eviction 81 C. Act Prohibiting Retaliatory Eviction 82 D. Expedited Evictions 83 Relevant Case 83 Chapter Summary 89 Review Questions 89 Assignment 90 Terms and Phrases 90

CONTENTS xi Chapter 5 Buying, Selling and Transferring Interest in Real Estate 93 Chapter Objectives 93 I. Introduction 93 A. Voluntary Transfers 93 1. By Sale 93 a. A Real Estate Sale Is a Contract 94 i. Offer 94 ii. Acceptance 95 iii. Consideration 95 iv. Capacity 95 v. Legality of Subject 95 b. Other Legal Aspects of a Real Estate Sale 95 2. By Will 96 a. By Intestate Succession 97 3. By Gift 97 B. Involuntary or Unwilling Title Transfers 97 1. By Foreclosure 98 a. Deeds of Trust 98 b. Foreclosing a Deed of Trust 98 i. Requirements of Foreclosure Sales 98 2. By Condemnation (Eminent Domain) 102 a. Inverse Condemnation 102 3. Partition 103 4. Accretion 103 5. Escheat 103 6. Adverse Possession 104 a. What is Color of Title? 105 b. Proving Adverse Possession 106 7. Tax Auctions 107 Relevant Case 108 Chapter Summary 111 Review Questions 112 Assignment 112 Terms and Phrases 113 Chapter 6 Deeds 115 Chapter Objectives 115 I. Introduction to Deeds 115 A. Defining a Deed under North Carolina Law 116 1. Deeds Have a Dual Nature 116 a. Contractual Elements of Deeds 116 b. Statutory Requirements of Deeds 117 B. Types of Deeds 117 1. Gift Deeds 117 2. Quitclaim Deeds 117 3. General Warranty Deeds 118 a. Seizin 118 b. Quiet Enjoyment 118 c. Against Encumbrances 118 d. Further Assurance 118

xii CONTENTS e. Warranty Forever 118 4. Special Warranty Deeds 119 5. Deeds of Trust 119 6. Timber Deeds 119 7. Deed of Correction 119 8. Sheriff s Deed 119 9. Tax Deeds 119 II. Minimum Legal Requirements of Deeds 119 A. Deeds Must Be in Writing 120 B. Contractual Elements 120 C. Clearly Identifiable Parties 120 1. Grantor 120 2. Grantee 120 a. Misnomer 120 D. Description of the Property Conveyed 121 1. Plat Reference 121 2. Reference to Other Public Records 121 E. Signature 122 F. Words of Conveyance 122 G. Deed Must Be Properly Executed 122 H. Delivery and Acceptance 122 1. Proving Delivery 123 2. Delivery in Escrow 123 I. Non- Essential Deed Terms 123 1. Consideration 123 2. Acknowledgment 124 3. Seal 124 4. Witnesses 124 5. Revenue Stamps 124 6. Date 125 III. Specific Deed Clauses 125 A. Granting Clause 125 B. Habendum Clause 125 C. Exceptions and Exclusions 125 IV. Construing the Language in Deeds 126 V. Recording Statutes 127 Relevant Case 128 Chapter Summary 130 Review Questions 131 Assignment 131 Terms and Phrases 132 Chapter 7 Property Descriptions, Boundaries, Rights and Liabilities Arising from Land Ownership 133 Chapter Objectives 133 I. Introduction 133 II. Property Descriptions in Deeds 133 A. Patent Ambiguities 135 1. Parol Evidence Not Allowed to Correct Patently Ambiguous Description 135

CONTENTS xiii B. Latent Ambiguities 136 C. Metes and Bounds Descriptions 136 1. Drawing Metes and Bounds Descriptions 137 D. Other Methods to Describe Property: Government Survey System 139 E. Other Methods to Describe Property: Reference to a Plat 139 F. Other Methods to Describe Property: Torrens Registration 139 III. Water Rights 140 A. Right to Draw Water 140 1. Reasonable Use Test 140 B. Natural Forces That Affect Property Descriptions 140 1. Accretion 141 2. Erosion 141 3. Avulsion 141 4. Reliction 141 C. Determining Water Boundaries 141 1. Navigable Waters 142 a. Boundary Lines along Navigable Bodies of Water 142 2. Non- Navigable Water 142 IV. Lateral Support 143 V. Premises Liability 143 A. Classifying Visitors to the Property 143 1. Trespassers 144 a. Exceptions to the General Rule of No Duty to Trespassers 144 i. The Attractive Nuisance Doctrine 144 2. Licensees 144 3. Invitees 144 4. North Carolina Has Abolished the Distinctions between Invitees and Licensees 145 Relevant Case 145 Chapter Summary 148 Review Questions 149 Assignment 149 Terms and Phrases 150 Chapter 8 Real Estate Contracts 151 Chapter Objectives 151 I. Introduction to Contract Law 151 A. Defining a Contract 151 1. Offer 152 2. Acceptance 153 a. The Power of Acceptance 153 i. Communicating the Acceptance 153 ii. Mailbox Rule 154 b. Counter- Offers 154 3. Mutual Assent 154 4. Consideration 154 5. Legality of Contracts 155 6. Capacity 155 II. The Statute of Frauds 155 III. Formation Issues in Contract Law 156

xiv CONTENTS A. Mistake 156 B. Interpreting Contract Language 157 C. Fraud and Misrepresentation 157 1. Two Types of Fraud Involved in Contracts 157 a. Fraud in the Execution of a Contract 157 b. Fraud in the Inducement 157 2. The Effect of Fraud on a Contract 157 3. Statements That Are Not Fraudulent 157 a. Opinions 158 b. Sales Statements or Puffing 158 D. Duress, Coercion and Undue Influence 158 1. Duress 158 2. Coercion 158 3. Undue Influence 158 E. Unfair and Deceptive Trade Practices 158 IV. Types of Contracts 159 A. Unilateral and Bilateral Contracts 159 1. Bilateral Contracts 159 V. Real Estate Contracts 159 A. Listing Agreement 160 1. Open Listing 160 2. Exclusive Listing 160 3. Multiple Listing 160 B. Offer of Purchase and Contract 160 1. Property Description 161 2. Purchase of Personal Property 161 3. Purchase Price Details 161 4. Due Diligence 161 5. Conditions 162 6. Evidence of Title 162 7. Property Disclosures 162 8. Risk of Loss Provisions 162 9. Closing Provisions 162 10. Signature Provisions 163 11. Particular Clauses: Time Is of the Essence 163 C. Options 164 VI. Breach of Contract 165 A. Remedies for Breach 165 1. Remedies for the Seller 165 2. Remedies for the Buyer 165 3. Remedies for the Broker 165 Relevant Case 166 Chapter Summary 168 Review Questions 168 Assignment 169 Terms and Phrases 170 Chapter 9 Deeds of Trust, Mortgages and Financing Real Estate 171 Chapter Objectives 171 I. Financing the Purchase of Real Estate 171

CONTENTS xv II. Mortgage Markets 171 A. Primary Mortgage Market 172 B. Secondary Mortgage Market 172 1. Federal Agencies in the Secondary Mortgage Market 172 III. Introduction to Mortgages 173 A. The Title Theory of Mortgages in North Carolina 173 B. Mortgages versus Deed of Trust 173 IV. The Basic Components of a Mortgage or Deed of Trust 174 A. Mortgages and Deeds of Trusts Are Recorded Like Deeds 174 B. Priority of Mortgages 174 1. Subordination Agreement 175 V. Deeds of Trust 175 A. Typical Deed of Trust Clauses 176 1. Acceleration Clause 176 2. Due on Sale Clause 176 3. Default Provisions 176 4. The Promissory Note Clause 177 5. Power of Sale Clause 177 VI. Foreclosure 177 A. Foreclosure under Power of Sale 177 1. Procedure to Institute a Foreclosure under Power of Sale 177 B. The Right to Foreclose 178 1. The First Step in a Foreclosure: The Borrower s Default 178 2. The Second Step in a Foreclosure: The Acceleration Clause 178 3. Notice of Hearing 178 4. Hearing before the Clerk of Court 178 5. Advertising the Foreclosure Sale 179 6. The Foreclosure Auction 179 7. Upset Bid 179 C. The Equity of Redemption 179 VII. Types of Mortgages 180 A. Fixed Rate Mortgages 180 B. Adjustable Rate Mortgages 180 Relevant Case 180 Chapter Summary 183 Review Questions 184 Assignment 184 Terms and Phrases 185 Chapter 10 Public and Private Limitations on Real Estate 187 Chapter Objectives 187 I. Introduction to Public and Private Limitations on Real Estate 187 II. Public Restrictions on Land Use 187 A. Zoning 187 1. The Government s Authority to Impose Zoning Regulations 188 2. Zoning Ordinances 188 3. Typical Zoning Districts and Classifications 189 4. Zoning Violations and Exceptions 189 a. Nonconforming Use 189 b. Variance 190

xvi CONTENTS c. Conditional Use Permit 190 5. Unconstitutional Zoning Ordinances 190 a. Spot Zoning 190 B. Designating Subdivisions 191 C. Building Codes 191 D. North Carolina Coastal Area Management Act 191 III. Private Restrictions on Land Use 192 A. Restrictive Covenants 192 1. Defining Restrictive Covenants 193 2. Types of Restrictive Covenants 193 a. Personal Covenants 193 b. Real Covenants 193 i. Touch and Concern the Land 194 c. Equitable Servitude 194 3. Creating a Restrictive Covenant 194 a. Including Restrictive Covenants in a Deed 194 b. Recording a Declaration of Restrictive Covenants 194 c. Recording a Plat with Restrictive Covenants 194 4. Common Features Found in Restrictive Covenants 194 a. Interpreting Restrictive Covenants 195 5. Recording Restrictive Covenants 195 6. Enforcing Restrictive Covenants 195 7. Unconstitutional or Illegal Restrictive Covenant Provisions 195 8. Removing Restrictive Covenants 195 B. Easements 196 1. Appurtenant Easements 196 2. Easements in Gross 197 3. Creating Easements 197 a. Express Grant 197 b. Reservation in a Deed 197 c. By Implication 197 d. By Necessity 198 e. By Prescription 198 f. By Cartway Proceeding 198 g. By Condemnation (Eminent Domain) 199 4. Terminating Easements 199 a. Loss of Purpose 199 b. Merger 199 c. Expiration of a Stated Time Period 199 d. Release 199 e. Abandonment 199 Relevant Case 200 Chapter Summary 203 Review Questions 203 Assignment 204 Terms and Phrases 204 Chapter 11 Title Searches 205 Chapter Objectives 205 I. Introduction to Title Searches 205

CONTENTS xvii A. Why Is a Title Search Necessary? 205 B. Beginning a Title Search 206 1. Attorney Approval 206 2. Information Needed to Begin a Title Search 206 a. Names of the Current Owners 206 b. Description of the Property to Be Conveyed 207 c. Time Period 207 i. The North Carolina Marketable Title Act 207 d. Tax ID Number 208 e. Deed Book and Page Number 208 f. Additional, Helpful Information 209 C. Title Search Banks 209 II. Steps in a Title Search 209 A. Step 1: Establishing the Chain of Title 209 1. The Tax Office 210 a. Tax Maps 210 2. Creating the Links in the Chain of Ownership 211 3. The Grantor/Grantee Index 213 B. Step 2: Establishing the Out Conveyances 214 1. Reviewing Title Documents 215 a. Deed of Trust Issues in Title Searches 216 b. Liens 216 2. UCC Listings 216 3. Index of Vital Statistics (Birth and Death Records) 216 C. Step 3: Checking for Judgments 217 1. The Clerk of Courts Office 217 a. The Index to Special Proceedings 217 D. Step 4: Putting All the Information Together 217 1. Preparing Abstract Title Forms 218 E. Step 5: The Preliminary and Final Title Certificates 219 III. Legal Malpractice Issues in Title Searches 219 A. Tacking 219 B. The Paralegal s Role in Title Searches 220 IV. Common Problems in Title Searches 220 A. Sub- Divided Properties 220 B. Missing Transactions 220 V. Payment for Title Searches 221 Relevant Case 221 Chapter Summary 223 Review Questions 224 Assignment 225 Terms and Phrases 225 Chapter 12 The Closing 227 Chapter Objectives 227 I. Introduction to Loan Closings 227 A. Loan Closings Require Close Attention to Detail 227 II. Preparing for the Closing 227 A. Financing 228 B. Contacting the Attorney 228

xviii CONTENTS C. Setting a Closing Date 228 1. The Fine Art of Scheduling Closings 228 D. Gathering Information Necessary to Complete the Closing 228 1. Loan Payoff Amounts 229 a. The Seller s Attorney 229 2. The Title Search 229 a. Encroachments 229 b. Repairing Title Defects 230 c. The Preliminary Opinion on Title 230 3. Tax Information 230 4. The Legal Description 230 5. Termite and Other Inspections 230 E. Loan Closing Software 231 III. The Closing Procedure 231 A. Preparing the Loan Package 231 B. Verifying Hazard Insurance 232 C. Documents Required at the Closing 232 1. The General Warranty Deed 232 a. Preparing the Deed 232 2. Deed of Trust 232 a. Promissory Note 233 3. Subordination Agreements 233 4. Lien Waiver Affidavits 233 5. IRS Forms 233 a. IRS Form 4506 233 b. W- 9 Form 233 6. HUD- 1 Settlement Closing Form 233 7. Bill of Sale for Personal Property 234 8. Compliance Agreement 234 9. Credit Insurance or Protection Plan Addendum 234 10. Loan Application 234 11. U.S. Patriot Act Requirements 234 12. PMI Disclosure 234 13. Trust Disbursement Records 235 14. Federal Truth- in-lending 235 15. Termite Inspection Letter 235 16. Survey 235 a. Seller s Affidavit 236 IV. Conducting the Closing 236 A. People Normally Present at a Closing 236 1. Attorney 236 2. Paralegal 236 3. The Buyers 237 4. The Sellers 237 5. Real Estate Agent 237 B. Disbursing the Funds 237 1. Lender s Fees 238 a. Escrow Accounts for Insurance and Taxes 238 2. Attorney s Fees 238 3. Recording Fees 238

CONTENTS xix 4. Seller s Profit on the Transaction 238 5. Certified Funds from the Buyer 238 6. Real Estate Agent s Commission 238 7. Tax Payments 239 a. Pro- Rated Taxes 239 V. Other Closing Issues 239 A. Escrow Closings 239 1. The Doctrine of Relation Back 240 B. Dual Representation 240 C. Disclosures 241 D. Refinances 241 E. Title Insurance 241 VI. After the Closing 241 A. Filing Issues 242 Relevant Case 242 Chapter Summary 245 Review Questions 246 Assignment 246 Terms and Phrases 247 Chapter 13 Taxes, Liens and Assessments 249 Chapter Objectives 249 I. Real Property Taxes 249 A. The Power to Levy Taxes 249 B. The Types of Property That Can Be Taxed 249 1. Homestead Exclusion 250 2. Property Excluded from Tax Calculations 250 C. Determining the Value of Real Property for Tax Purposes 250 1. Calculating the Tax Rate 251 D. Reassessment 251 E. Enforcing Tax Regulations 251 1. Tax Liens 251 a. Tax Lien Priorities 252 2. Foreclosing a Tax Lien 252 II. Assessments 252 III. Liens 253 A. What Is a Lien? 253 B. Types of Liens under North Carolina Law 253 1. Statutory Liens (Mechanics and Materialmen s Liens) 253 a. Statutory Liens 254 C. The Importance of Liens 255 D. Judgment Liens 255 E. Perfecting and Enforcing a Lien 255 Relevant Case 256 Chapter Summary 262 Review Questions 262 Assignment 263 Terms and Phrases 263 Index 265

Preface This is a textbook designed to teach the basics of North Carolina real estate law. Designed with both the instructor and paralegal students in mind, this text seeks a balance between two competing interests: theory and practice. The theoretical underpinnings of real estate law are essential for anyone studying the topic, but a student must also have a solid grasp of the practical aspects, from liens to title searches. The text not only includes discussions of the theoretical basics of real estate law, but also places a premium on practical applications, which form the core of a real estate practice. xxi