July 21, 2014

New N.C. Statute Gives Lenders More Options When Developers Default


Lenders now have a bit more to think about when making a loan to a developer of a planned community. 
 
A few days ago, the General Assembly enacted, and the Governor signed into law, important amendments to the Planned Community Act regarding the transfer of the declarant's rights and the liability of the declarant's successor in interest.  The legislation is House Bill 330 / Session Law 2014-57 (titled "An Act Amending the North Carolina Planned Community Act regarding the Transfer of Special Declarant Rights"). 
 
By way of reminder, a "declarant" is almost always a developer of a planned community or condominium who creates restrictions on the use of the property which are described in a "declaration."  That developer has the opportunity to reserve certain rights to itself as the "declarant." Although there is no requirement that a developer reserve declarant rights for itself, it is common to do so, and it would be very unusual for a planned community or condominium developer to not to name itself the declarant.  (For more information on declarants, see this article by my law partner Sam Franck.)
 
So, what happens when a lender must forclose on a developer who is a declarant of a planned community?  Does the lender become the declarant?
 
The new Act says (basically) that unless the deed of trust provides otherwise, a creditor who acquires property through foreclosure acquires all "special declarant rights" related to the property, if the creditor files in the county records an "instrument" that "requests" those rights.  (The deed of trust is not required to state that special declarant rights will be transferred, but the judgment or instrument that conveys the titled must.)  The definition of "special declarant rights" in GS 47F-1-102(28) is as follows:   
"Special declarant rights" means rights reserved for the benefit of a declarant including, without limitation, any right (i) to complete improvements indicated on plats and plans filed with the declaration; (ii) to exercise any development right; (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."
As I read the Act, the creditor is free to assume some--but not all--of the special declarant rights, if it wishes.  Furthermore, the Act says that a creditor can state in the recorded instrument that it intends only to hold special declarant rights to transfer them to a third party, in which case the creditor cannot exercise any special declarant rights, but will avoid the liabilities or obligations of the declarant. 
 
The Act answers a number of questions but will require creditors to give some consideration when the deed of trust is drafted and when the creditor decides to exercise its rights by foreclosure, deed on lieu, or in a bankruptcy proceeding.

The upshot is that lenders now have more control as to which, if any, of the declarant's rights they want to inherit when a developer goes under.
 
You can read the full Act for yourself here.

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