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12.05.2011 Fall 2011 NC Legislative Update – Real Estate Finance
12.05.2011

This year the North Carolina General Assembly made a number of significant changes to real estate law.  The following is a summary of some the new laws that most closely relate to real estate secured lending.  Copies of these laws are available online at the NC General Assembly’s website and via the links below.  Each of the laws discussed below took effect on October 1, 2011.

Session Law 2011-312 (Senate Bill 679)

An Act to Modernize and Enact Certain Provisions Regarding Deeds of Trust, Including Releases, Short Sales, Future Advance Provision Terminations and Satisfactions, Terminations and Satisfactions for Equity Line Liens, Release of Ancillary Documents, Eliminating Trustee of Deed of Trust as Necessary Party for Certain Transactions and Litigation, and Indexing Subsequent Instruments Related Thereto.

Trustee and Beneficiary May Be the Same Party

  • Section 2 of this law implicitly permits the beneficiary and trustee of a deed of trust to be the same party prior to foreclosure.

Rescission of Erroneous Release

  • Existing law permits the rescission of an erroneously recorded satisfaction.  Section 4 modifies N.C.G.S. § 45-36.6 to permit the rescission of an erroneously recorded release.  The new statute provides suggested (but not mandatory) document of rescission forms.

Payoff Statements, Short-Pay Statements and Who May Request Them

  • Existing law permits an “entitled person” to request a formal payoff statement from the beneficiary of a deed of trust.  Section 5 modifies N.C.G.S. § 45-36.7 to provide a method of requesting a short-pay statement for situations where the secured obligation is not being paid in full.  Sections 7 and 8 update the references in the provisions of N.C.G.S. §§ 45-36.8 and 36.9 regarding understated payoffs and lenders’ obligations to satisfy or release liens securing obligations that have been repaid.
  • Current law defines an “entitled person” as “a person liable for payment or performance of the obligation secured by the real property described in a security instrument, or the landowner.”  N.C.G.S. § 45-36.4(5).  Section 3 revises various definitions in N.C.G.S. § 45-36.4 and expands the definition of “entitled person” to include:  a borrower, a landowner, the purchaser under a contract, a purchaser’s lender, a title insurance company, a foreclosing trustee, the high bidder at a foreclosure sale, a qualified lien holder and attorneys, in certain situations.

Credit Suspension Directives

  • Section 6 establishes a procedure for certain parties preparing to sell or refinance real property to direct the lender on an existing line of credit to temporarily suspend further advances pending the sale or refinancing.  This is called a “credit suspension directive.”  This procedure will be codified in a new section, N.C.G.S. § 45-36.7A.

Updates to Satisfaction and Release Documents and Procedures

  • Section 9 authorizes the partial release of some but not all property from the lien of a security instrument, without impacting the lien’s validity and priority as against the remaining property.  A lender, a trustee or both may execute and file a partial release.  The new statute provides a suggested statutory form of partial release.  This provision will be codified in a new section, N.C.G.S. § 45-36.22.
  • Section 10 authorizes a lender to record an “obligation release” declaring that certain obligations are no longer secured by a recorded security instrument.  The new statute provides a suggested statutory form of obligation release.  This provision will be codified in a new section, N.C.G.S. § 45-36.23.

Duration of Security Instrument Liens

  • Sections 11 and 12 revise the law governing the expiration of the liens of recorded security instruments.  Under existing law, the lien of a security instrument will expire fifteen (15) years from the later of:  (i) the date when the conditions of the security instrument were required by its terms to have been performed; or (ii) the date of maturity of the last installment of debt or interest secured thereby.  Under the new law, to be codified at N.C.G.S. § 45-36.24, the lien of a security instrument expires: (i) if a maturity date is stated in the deed of trust, fifteen (15) years from that date; or (ii) if no maturity date is stated, thirty-five (35) years from the date of recording the security instrument.  The lien of security instruments recorded prior to October 1, 2011 will expire on the earlier of:  (i) the time provided under the old rule; and (ii) the time provided under the new rule. 
  • The new rule offers the advantage of being able to determine when the lien of a security instrument expires by reference to the public record alone.
  • Section 11 also provides two methods of extending the life of the lien of a recorded security instrument:  a “lien maturity extension agreement” and a “notice of maturity date.”  The new statute provides suggested forms of these documents.  A lien maturity extension agreement must be signed by the secured creditor and the owner.  If recorded before the current lien expires, it extends the life of the lien to the date stated therein.  A notice of maturity date may be signed by the secured creditor only.  If recorded before the current lien expires, it extends the life of the lien to the earlier of:  (i) fifteen (15) years after the stated maturity of the secured obligation; and (ii) fifty (50) years after the date the security instrument was originally recorded. 
  • Section 13 updates the list of documents that the Register of Deeds is required to record and index under N.C.G.S. § 45-37.2 to include the new documents authorized by this law. 

NOTE – N.C.G.S. § 45-37.2 is also modified by Session Law 2011-246, discussed below.  It is unclear how the legislature intends for the inconsistent modifications to be interpreted.

  • Section 14 provides that the satisfaction, release or expiration of a security instrument will automatically extend to ancillary security instruments such as separate assignments of rents, leases and profits and fixture filings, unless the satisfaction, release, security instrument or ancillary security instrument provides otherwise.  This provision will be codified as a new section, N.C.G.S. § 45-42.3.

Trustee Not Required to Join in Certain Transactions and Lawsuits

  • Section 15 clarifies that a trustee is not a necessary party to a release, a subordination agreement, or a modification of a deed of trust.  This section also provides that a trustee is neither a necessary nor a proper party to most lawsuits involving title to the property other than suits pertaining to the exercise of the trustee’s power of sale.  Each party who improperly joins a trustee to a lawsuit will be jointly and severally liable for the trustee’s costs and expenses in being dismissed from the suit.  These provisions will be codified as N.C.G.S. § 45-45.3.

Changes to Future Advances Statutes

  • Section 16 modifies N.C.G.S. § 45-68 to permit dragnet clauses (i.e., the description of secured obligations by general, rather than specific, reference) in security instruments complying with the future advances statutes.
  • Section 17 modifies N.C.G.S. § 45-69 so that if the obligations secured by an instrument securing future advances exceed the maximum principal amount that may be secured at any one time, those obligations are secured—but without relation back to the date of recording.
  • Section 18 modifies N.C.G.S. § 45-70 to clarify that interest and certain advanced expenses are secured with priority relating back to the time of recording and do not count towards the maximum principal amount that may be secured for future advances purposes.
  • Section 19 modifies N.C.G.S. § 45-74 to clarify that the future advances statutes are not exclusive and do not invalidate any rule of validity or priority applicable to a security instrument that fails to comply with the future advances statutes.

Equity Lines of Credit

  • Section 1 updates the statutory cross-reference in N.C.G.S. § 24-9 to the prohibition on prepayment penalties for equity lines of credit now codified at N.C.G.S. § 45-82.4.
  • Section 20 modifies N.C.G.S. § 45-81 to update definitions relevant to equity lines of credit.  In particular, the term “authorized person” is defined to include any borrower, a borrower’s attorneys and legal representatives, and, in certain circumstances, other attorneys, title companies and financial institutions.
  • Section 21 modifies N.C.G.S. § 45-82 to clarify that interest and certain advanced expenses are secured with priority relating back to the time of recording and do not count towards the maximum principal amount that may be secured for future advances purposes.
  • Section 22 modifies N.C.G.S. § 45-82.1 to adjust the procedure for extending the time within which equity advances may be made.  The new statute provides a suggested form of extension certificate.
  • Section 23 establishes new procedures enabling authorized persons to terminate an equity line of credit.  Several relevant suggested forms are provided.  This provision will be codified as a new section, N.C.G.S. § 45-82.2.
  • Section 24 establishes a new procedure enabling authorized persons to bar lenders from making further advances under an equity line.  Several relevant suggested forms are provided.  This provision will be codified as a new section, N.C.G.S. § 45-82.3.
  • Sections 25 re-codifies the bar on prepayment penalties on equity lines of credit as N.C.G.S. § 45-82.4.  This prohibition previously appeared in N.C.G.S. § 45-81(c).
  • Section 26 makes minor technical changes to N.C.G.S. § 45-83 to specify that instruments subject to the equity line of credit statutes are not also subject to the future advances statutes.
  • Section 27 modifies N.C.G.S. § 45-84 to clarify that the equity line of credit statutes are not exclusive and do not invalidate any rule of validity or priority applicable to a security instrument that fails to comply with the equity line of credit statutes.

Miscellaneous

  • Section 28 modifies N.C.G.S. § 161-14.1 in the chapter governing Registers of Deeds to expand the definition of “subsequent instrument” to include the various new documents authorized by this law.

A copy of SL 2011-312 is available here.

Session Law 2011-296 (House Bill 384)

An Act to Simplify the Fees Charged for Registering Instruments with a Register of Deeds in this State and to Modify the Instrument Page Requirements

  • Effective October 1, 2011, this law revises the fee schedule for recorded real estate instruments set forth in N.C.G.S. § 161-10 as follows:

Type of Document

New Fee

Current Fee

Deeds of Trust and Mortgages

$56 for the first 15 pages

+ $4 for each additional page

$30 for the first page

+ $3 for each additional page

Deeds

$26 for the first 15 pages

+ $4 for each additional page

$19 for the first page

+ $3 for each additional page

Other Instruments

$26 for the first 15 pages

+ $4 for each additional page

$14 for the first page

+ $3 for each additional page

 

  • The aims of the revised fee schedule include reducing the number of documents that require a per-page computation of the recording fee and eliminating the need for the Register of Deeds to determine what constitutes a deed.
  • There is an additional $25 fee for each reference beyond the first in a “subsequent instrument” to an original instrument for which the Register of Deeds has to index the recording data under N.C.G.S. § 161.14.1(b).  For example, if a modification of deed of trust modifies two original deeds of trust, there would be a $25.00 fee for the reference to the second deed of trust, but no additional fee for the reference to the first deed of trust.
  • The new fees are scheduled to expire on July 1, 2013, with the expectation that the legislature will monitor and evaluate the new system and either end or extend it.
  • Recorded instruments may now have one-quarter (¼) inch margins without incurring a $25 non-standard document fee.  The law previously required one-half (½) inch margins.
  • Nine (9) point font is now deemed legible for purposes of determining whether a document is in standard format.  Previously, the law deemed ten (10) point font legible.

    A copy of SL 2011-296 is available here.

    NOTE – There is already significant confusion as to how to interpret and assess the $25 fee for additional references to subsequent instruments.  New legislation addressing the issue is expected to be introduced in the upcoming special session.

    Session Law 2011-246 (House Bill 312)

    An Act Amending the Methods for Recording Satisfaction of a Security Instrument with the Register of Deeds . . .

    • Effective October 1, 2011, security instruments may no longer be satisfied on record by presenting the original security instrument and evidence of indebtedness.  Instead, a satisfaction document or affidavit of satisfaction will need to be recorded.

    NOTE – Section 5 of this law rewrites N.C.G.S. § 45-37.2, which is also rewritten by Session Law 2011-312, discussed above.  It is unclear how the legislature intends for the inconsistent modifications to be interpreted.

    • Many problematic satisfactions have occurred in connection with the repealed methods of presenting the original documents.  This law aims to simplify the satisfaction process and make it more uniform.

    A copy of SL 2011-246 is available here.

    Session Law 2011-165 (House Bill 174)

    An Act to Enact the Commercial Real Estate Broker Lien Act

    • This law allows commercial real estate brokers to claim a lien in the property to secure the payment of the broker’s commission. 
    • A broker’s lien attaches when properly filed with the clerk of superior court where the property in question is located.  The law requires the claimant to serve a copy of the filed lien on the owner.
    • The lien claimant must commence proceedings to serve and enforce the lien within 18 months of filing; however, the lien is extinguished if the claimant does not sue to enforce the lien or answer in a pending suit within 30 days after demand by the owner, lienee or other authorized agent. 
    • The statute provides that lenders should not be made a party to lawsuits to enforce brokers’ liens, unless the lender willfully caused nonpayment of the commission.
    • The law describes in detail the means for satisfying or discharging the lien on record.
    • Brokers’ liens filed pursuant to this statute are subordinate to the statutory liens granted to mechanics and materialmen under Part 1 and Part 2 of Chapter 44A, Article 2.
    • The new provisions will be codified at N.C.G.S. § 44A-24.1 et seq.

    A copy of SL 2011-165 is available here.

    Session Law 2011-204 (House Bill 164)

    An Act to Authorize the Release of Funds Deposited by an Upset Bidder of a High Bidder in a Foreclosure Proceeding When a Bankruptcy Petition Is Filed

    • This law modifies N.C.G.S. § 45-21.22 to authorize the release of a deposit on a foreclosure by the clerk of superior court, trustee or mortgagee holding the funds if the sale is stayed by the Bankruptcy Code prior to completion of the 10-day upset bid period.

    A copy of SL 2011-204 is available here.

    This alert is not a comprehensive summary of all recent North Carolina legislation. There are additional new laws relevant to real estate, lenders and borrowers that may be applicable or of interest to those involved in real estate projects and financings. For more information about this topic, please contact David Dorton at 919.981.4006 or , David Hillman at 919.981.4091 or or any member of the Williams Mullen Financial Services and Real Estate Team.


     
    F.R.E. E-News is a  quarterly publication produced by the attorneys in Williams Mullen's Financial Services & Real Estate Section and the Financial Services Industry Service Group.

     

    Editorial inquiries should be directed to John M. Mercer, 804.420.6443, jmercer@williamsmullen.com or Matthew E. Cheek, 804.420.6923, mcheek@williamsmullen.com.  This information is provided as an educational service and is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.