Appeal by plaintiffs from an order entered 21 June 2006 by
Judge Steven A. Balog in Guilford County Superior Court. Heard in
the Court of Appeals 23 May 2007.
Adams & Osteen, by J. Patrick Adams, for plaintiff-appellants.
B. Douglas Martin for defendant-appellee BRSS, LCC.
Isaacson, Isaacson & Sheridan, LLP, by Jennifer N. Fountain,
for defendant-appellee MCC Outdoor, LLC aka Morris
Communications Corporation Outdoor, LLC dba Fairway Outdoor
Advertising.
HUNTER, Judge.
William Earney Walker and his wife, Jeanne Smith Walker
(“plaintiffs”), appeal the trial court's denial of their motion for
summary judgment and the trial court's granting of BRSS, LLC's
(“BRSS”) and MCC Outdoor, LLC, aka Fairway Outdoor Advertising's
(“Fairway”) motions for summary judgment. Plaintiffs acknowledge
that there are no material issues of fact in dispute in this case,and that the case may be resolved as a matter of law. After
careful consideration, we affirm.
Plaintiffs purchased real property located at Interstate 40
and Boston Road (formerly Patterson Avenue), Greensboro, North
Carolina in January 1985. In April 1986, plaintiffs and Fairway
entered into a lease for a billboard sign to be placed on the
property. The original lease term was for a three (3) year period
with a provision for automatic year-to-year extensions not to
exceed five (5) years. A memorandum of lease is recorded in the
office of the Register of Deeds of Guilford County Book 3506, page
69. Fairway made rental payments to plaintiffs in accordance with
the lease and continued payment after the lease term expired.
In January 1997, plaintiffs sold the real property to a third
party. The conveyance from plaintiffs to the grantee was via a
general warranty deed (“the deed”) and contained language that the
grantors would receive the rental income from the billboard until
2021 or until the sign was removed.
In February 1997, plaintiffs entered into a new lease with
Fairway for the billboard sign.
(See footnote 1)
The lease term was for eight (8)
years beginning 1 June 1997 with automatic extensions for each
subsequent year with the extensions not to exceed ten (10) years.
The extensions were effective unless Fairway cancelled by written
notice. In June 2002, BRSS purchased the property at a foreclosure
sale and a deed was recorded. The deed to BRSS contained the
following language:
Title to the property hereinabove described is
hereby conveyed subject to all valid and
subsisting restrictions, reservations
(including without limitation the Memorandum
of Lease to Naegele Outdoor Advertising
(See footnote 2)
as
recorded in Book 3506, Page 69 of the Guilford
County Registry), covenants, conditions,
rights of ways and easements properly of
record, if any[.]
Guilford County Registry, Book 5543, pages 929-32.
In April 2005, Fairway notified plaintiffs that it was
terminating its lease with plaintiffs at the end of the original
term, which was 31 May 2005. After terminating the lease with
plaintiffs, Fairway entered into a lease with BRSS, the current
owner of the property.
Plaintiffs filed this action claiming the right to “'the
income from the rental of the sign until December 31, 2021'” and
has appealed that issue to this Court. Fairway has acknowledged
that it has an obligation to pay annual rent for the lease but
argues that BRSS is entitled to the payments. BRSS argued to the
trial court that it was entitled to the rent.
“We review a trial court's order for summary judgment de novo
to determine whether there is a 'genuine issue of material fact'
and whether either party is 'entitled to judgment as a matter of
law.'” Robins v. Town of Hillsborough, 361 N.C. 193, 196, 639S.E.2d 421, 423 (2007) (citation omitted). The deed in issue here,
in which plaintiffs conveyed property to a third party not part of
this litigation, follows:
The grantees acknowledge that a sign is
erected on the premises and the area on which
the sign is located is leased to Fairway Sign
Company. The grantors will retain the right
to receive the income from the rental of the
sign until December 31, 2021, or until the
sign is removed, whichever comes first. The
grantees acknowledge that the sign company
will have a right to enter the property to
repair and maintain its sign.
Guilford County Registry, Book 4484, page 1177.
I.
Plaintiffs first argue that the language in the deed created
a “reservation” or “exception” to collect rent monies from the
leasing of the sign and that a “reservation” or an “exception” is
different from a covenant. We disagree. Reservations and
exceptions contained in deeds are merely different versions of a
covenant.
See Raby v. Reeves, 112 N.C. 688, 690, 16 S.E. 760, 760
(1893) (a reservation in an easement requiring the grantee to pay
rent for the easement is a covenant);
see also Amerson v.
Lancaster, 106 N.C. App. 51, 54, 415 S.E.2d 93, 95 (1992)
(explaining how a reservation operates differently from an
exception but the terms are used interchangeably);
Woodward v.
Cloer, 68 N.C. App. 331, 333, 315 S.E.2d 335, 336 (1984)
(characterizing a “reservation” as a “covenant”). Accordingly, we
must determine whether the covenant in the deed is enforceable
against either defendant. One who owns land in fee “has a right to sell his land subject
to any restrictions he may see fit to impose, provided that the
restrictions are not contrary to public policy.”
Runyon v. Paley,
331 N.C. 293, 299, 416 S.E.2d 177, 182 (1992). Covenants in a deed
are classified as either personal covenants or real covenants.
Id.
The distinction between the two is significant. Personal covenants
“create[] a personal obligation or right enforceable at law only
between the original covenanting parties[.]”
Id. On the other
hand, a real covenant creates a servitude upon the land for the
benefit of another parcel and runs with the land and is enforceable
against successors in interest.
Id. at 299, 416 S.E.2d at 182-83.
A covenant is a real covenant only if:
(1) the subject of the covenant touches and
concerns the land, (2) there is privity of
estate between the party enforcing the
covenant and the party against whom the
covenant is being enforced, and (3) the
original covenanting parties intended the
benefits and the burdens of the covenant to
run with the land.
Id. at 299-300, 416 S.E.2d at 183. Additionally, in order for a
covenant to be enforceable against a subsequent purchaser for value
there must be notice of the covenant in the purchaser's chain of
title.
Id. at 313, 416 S.E.2d at 191.
Neither defendant disputes the third element, that the
original covenanting parties intended the benefits and burdens to
run with the land; thus, we do not address that issue. Because
there are two defendants in this case and because their interests
differ, we address them each separately where appropriate and
jointly where appropriate.
A. Defendant Fairway
Defendant Fairway correctly points out that whatever rights
plaintiffs have in the land, if any, are unenforceable against
Fairway because there is a lack of privity between Fairway and
plaintiffs. In North Carolina, “a party seeking to enforce a
covenant as one running with the land at law must show the presence
of both horizontal and vertical privity.”
Id. at 303, 416 S.E.2d
at 184. Horizontal privity only requires that the “party seeking
to enforce the covenant show . . . some 'connection of interest'
between the original covenanting parties[.]”
Id. at 303, 416
S.E.2d at 184-85. Vertical privity, on the other hand, “requires
a showing of succession in interest between the original
covenanting parties and the current owners of the dominant and
servient estates.”
Id. at 302, 416 S.E.2d at 184. Because we find
that plaintiffs and Fairway are not in vertical privity we reach
only that issue.
In the instant case, Fairway did not take title to the
property subject to the language in the deed. Indeed, nothing in
the record indicates that Fairway ever owned the property in
question and it cannot be said that there was any privity of
estate. The record merely indicates that Fairway leased a sign on
the property. Accordingly, there is no vertical privity between
plaintiffs and Fairway, and plaintiffs cannot enforce any right
created in the deed against Fairway.
Id. (vertical privity
requires privity of estate). There being no privity of estate
between plaintiffs and Fairway, we hold that the trial courtproperly denied plaintiffs' summary judgment motion and did not err
in granting Fairway's motion for summary judgment.
B. Defendant BRSS
Defendant BRSS concedes that they are in privity with
plaintiffs but instead argue that plaintiffs' failure to record the
prior lease with Fairway make it unnecessary to determine whether
the covenant touches and concerns the land. Because BRSS did not
have record notice of the lease agreement between plaintiff and
Fairway, we agree.
It is well settled that “actual knowledge, no matter how full
and formal, is not sufficient to bind a purchaser in our state with
notice of the existence of a . . . covenant.”
Runyon, 331 N.C. at
313, 416 S.E.2d at 191. Accordingly, a “covenant is not
enforceable, either at law or in equity, against a subsequent
purchaser of property burdened by the covenant unless notice of the
covenant is contained in an instrument in his chain of title.”
Id.
Under N.C. Gen. Stat. § 47-18 (2005) any lease of real
property with a term more than three (3) years must be recorded in
the county register of deeds office in order to be effective
against subsequent purchasers for value. Plaintiffs failed to
record the 1997 lease with Fairway even though the initial term was
for eight (8) years. Accordingly, when BRSS purchased the property
in 2002 they had no record notice of the lease. Even actual notice
of an unrecorded lease does not bind the subsequent purchaser.
Simmons v. Quick Stop Food Mart, 307 N.C. 33, 42, 296 S.E.2d 275,
281 (1982) (“[b]ecause [plaintiff]'s lease was not recorded priorto the date on which [defendant] recorded her deed, [defendant] did
not take the deed subject to the lease”). Contrary to plaintiffs'
assertion, the presence of the billboard on the property does not
overcome plaintiffs' failure to record and does not establish any
legally binding notice to BRSS. Thus, because plaintiffs failed to
record the lease agreement between themselves and Fairway we hold
that BRSS had no record notice of the covenant and it cannot be
enforced against them. Therefore, it cannot be said that the
covenant can operate against BRSS.
Additionally, plaintiffs' contention that the lease was
referred to in BRSS's deed is similarly without merit. The lease
actually referred to in the deed was the prior recorded lease
between plaintiffs and Fairway which expired in 1994. Thus, the
prior lease had no legal effect and plaintiffs' failure to record
the new lease meant that BRSS took the property free of the lease
interest and is not bound by the lease provisions.
See N.C. Gen.
Stat. § 47-18.
C. Termination of the Lease:
Applicability to both defendants
Alternatively, we also note that Fairway's termination of the
1997 lease in May 2005, which plaintiffs do not argue was improper,
also terminated whatever interests plaintiffs had in the property.
Plaintiffs had merely retained the “'right to receive the income
from the rental of the sign[,]'” but not a leasehold in the
property. Plaintiffs had no right to the income, against either
defendant, once the lease was cancelled by Fairway, and thus, for
this reason we also hold that the trial court properly deniedplaintiffs' motion for summary judgment and did not err in granting
BRSS's and Fariway's motion for summary judgment.
Affirmed.
Judges ELMORE and GEER concur.
Report per Rule 30(e).
Footnote: 1