This September, the North Carolina Court of Appeals issued its third opinion in a series of cases involving disputes among property owners of Fairfield Harbour, a coastal development in Craven County, NC, and MidSouth Golf, LLC, the owner of two golf courses adjacent to the development. The cases have pitted against one another three distinct sets of parties: owners of timeshares in Fairfield Harbor, owners of residential properties in the same development, and MidSouth Golf.
Owners of both timeshare and residential properties in Fairfield Harbour have access to both golf courses and, until recently, MidSouth had assessed fees to all of the property owners. The disputes were over how MidSouth should assess these fees. Because a disproportionate number of people, usually on vacation, occupy the timeshare properties, these properties account for disproportionate use of the golf courses. Residential property owners therefore believed that the fees assessed to timeshare properties should be proportionately higher. Meanwhile, timeshare property owners believed the fees should be assessed evenly among all of the properties, without regard to their ownership structure.
In 1993, before MidSouth owned the golf courses, a series of restrictive covenants was recorded, requiring the golf courses to be available to Fairfield Harbour residents. The same covenants purported to allow the owner of the golf courses to assess fees to the timeshare units over five times as great as those assessed to the residential property owners. The covenants were not well received by the timeshare owners and a dispute ensued. In 1998, the dispute was settled by an agreement under which the golf course owner could not assess fees to individual timeshare units at a rate any higher than the fees assessed to owners of residential properties. MidSouthGolf purchased the golf courses the following year. Its purchase agreement referred to the 1993 covenants but not to the 1998 settlement. Nevertheless, MidSouth continued to assess fees consistent with the settlement until November 2004.
Perhaps bowing to pressure from still-unhappy residential property owners, and no doubt eager for additional revenue, MidSouth filed a lawsuit against the timeshare owners that month. It sought a declaratory judgment that it was entitled to enforce the 1993 restrictive covenants without regard to the 1998 settlement, as well as a judgment for past-due fees.
MidSouth’s litigation strategy hooked. The Superior Court not only denied MidSouth’s petition, but held that the restrictive covenants could not be enforced to assess any fees against the timeshare owners. This judgment was upheld by the North Carolina Court of Appeals in 2008. The Court of Appeals found that relevant language within the covenants did not provide timeshare owners easement rights, but revocable licenses to use the golf courses. As such, the covenants did not “touch and concern” the land and could not “run with the land”—i.e. bind subsequent owners of the same timeshare properties who were not parties to covenants when signed. In addition to reducing MidSouth’s revenue, the judgment drove a greater burden to maintain the golf courses to the residential unit owners, whose assessments were increased. Several of these owners responded by withholding their fees and boycotting the golf courses. MidSouth responded to this further reduction in revenue by closing one of the courses.
MidSouth’s course-closing strategy sliced. An association of residential property owners filed a lawsuit arguing that MidSouth’s closure of the course breached of one of the 1993 restrictive covenants, which required MidSouth to operate both. Amid a recession, the plaintiffs appeared more interested in increasing their checking account balances than reducing their golf handicaps. The same restrictive covenant would have allowed them to enter the premises and take over care of the golf course. However, the plaintiffs did not seek that remedy or attempt to compel MidSouth to resume management of the golf course. They sued for damages. Following a jury trial, the Craven County Superior Court held that MidSouth had breached the covenant and awarded damages to the residential unit owners.
The North Carolina Court of Appeals sustained the Superior Court’s judgment this summer. The appellate court noted that it is well established that judicial review of restrictive covenants is governed by the intent of the parties. Here, a plain reading of the relevant covenant reveled that MidSouth’s predecessor-in-interest had a duty to maintain both golf courses and gave the homeowners’ association authority to enforce the covenant at law or in equity. MidSouth had argued that the courts should disregard this covenant because “a radical change in circumstances”—the residential property owners’ boycott of the courses—“ha[d] destroyed the essential purpose of the covenant, rendering the covenant unenforceable . . .” The Court of Appeals rejected this argument. It agreed that restrictive covenants may be terminated only “when changes within the covenanted area are so radical as practically to destroy the essential objects and purposes of the agreement.” However, it added that such “radical change” typically involves “physical changes in the covenanted area.” It refused to extend this concept to include “financial hardship.”
MidSouth had also argued that the courts should excuse its failure to operate the golf course because of commercial frustration caused by the Superior Court’s earlier decision excusing the timeshare owners from paying maintenance fees. The Court of Appeals also rejected this argument, on grounds that the risk of this frustration had been anticipated and allocated in a severability clause contained in one of the covenants: “[I]f any of the provisions shall be held to be invalid or to be unenforceable or to lack the quality of running with the land, that holding shall be without effect on the validity, enforceability, or running quality of the other one of the provision thereof.”
If you’re interested in acquiring a golf course (or two), there may soon be a bargain in Craven County, North Carolina. However, be warned; the neighbors can be demanding.
The following links direct to copies of the North Carolina Court of Appeals’ three opinions in these cases:
MidSouth Golf, LLC v. Fairfield Harbourside Condominium Ass’n., Inc., 652 S.E.2d 378 (2007): http://caselaw.findlaw.com/nc-court-of-appeals/1467537.html
Fairfield Harbour Property Owners’ Assn., Inc. v. MidSouth Golf, LLC, Case No. COA10-384 (Aug. 16, 2011): http://caselaw.findlaw.com/nc-court-of-appeals/1577708.html
Watford v. MidSouth Golf, LLC, Case No. COA10-1562 (Sep. 6, 2011): http://www.leagle.com/xmlResult.aspx?xmldoc=In%20NCCO%2020110906331.xml&docbase=CSLWAR3-2007-CURR