Chapter 2 SUMMARY OF MAJOR STATE AND FEDERAL LAWS APPLICABLE TO COMMON INTEREST COMMUNITIES

• Jurisdiction: North Carolina

§ 2.01. In General

Countless state and federal statutes and regulations are applicable to common interest communities in North Carolina. Some are devoted exclusively to planned communities and condominiums. Others incidentally apply by virtue of the location of the community or the amenities it contains. Still others, such as federal and state fair housing laws, may apply because of the nature of the community and its relationship to various real estate transactions. The most fundamental of all statutes in North Carolina governing most planned communities and condominiums are the Nonprofit Act, the PCA and the Condominium Act. Since most common interest communities are incorporated, there are a substantial number of provisions in the Nonprofit Act that serve as "gap fillers" when the PCA or the Condominium Act is silent. It would be impossible to list every statute or regulation that could conceivably relate to common interest communities in North Carolina, but this chapter briefly addresses the major statutes and regulations that impact the manner in which such communities operate on a daily basis.¹

§ 2.02. The Nonprofit Corporation Act

The Nonprofit Corporation Act ("Nonprofit Act"), N.C.G.S. §§ 55A-1-101, et seq, applies to all nonprofit corporations in North Carolina organized under Chapter 55A.² Most common interest communities are formed as nonprofit corporations in the State of North Carolina.³ As such, their governance is controlled, in part, by the Nonprofit Corporation Act.⁴ Since common interest communities are governed by more specific statutes, there are many instances where the Nonprofit Act overlaps or even conflicts with these statutes. Therefore, it is important to consult not only the Nonprofit Act, but these other specific statutes as well. Where the Nonprofit Act and these more specific statutes irreconcilably conflict with one another, the more specific statutes control.⁵

The Nonprofit Act is broken down into 17 articles, only 16 of which are potentially applicable to associations.⁶ The Condominium Act and the PCA both have specific financial recordkeeping requirements,⁷ as does the Nonprofit Act.⁸ Other examples of instances where the PCA and Condominium Act deal with the same subject matter as the Nonprofit Act would include Article 2 (Organization), Article 6 (Members),⁹ Article 8 (Directors and Officers)¹⁰ and Article 12 (Transfer of Assets).¹¹ It is also important to note that many provisions of the PCA are inapplicable to pre-1999 communities. In these instances, the Nonprofit Act (and the legal documents for the association) may provide the only statutory guidance with respect to corporate governance of the association. In cases where the Nonprofit Act conflicts with the PCA or the Condominium Act, the PCA or the Condominium Act (as applicable) would be viewed as an exception to the Nonprofit Act.¹² In this regard, the PCA actually codifies this common law by statute.¹³ Although not as detailed, the Condominium contains a similar provision.¹⁴ In either case, therefore, the Nonprofit Act supplements the PCA and the Condominium Act where it is not inconsistent with these statutes.

In pre-1999 planned communities, the declaration, articles, bylaws and provisions in the PCA applicable to pre-1999 communities provide guidance on corporate governance of planned communities. In pre-1986 condominiums, these documents and the Unit Ownership Act may provide the main guidance for the corporate governance of condominiums. Since half of both of these statutes are inapplicable to these earlier communities and condominiums, the Nonprofit Act would, therefore, be particularly relevant to how these incorporated communities operate. Even in post-1999 communities (and post-1986 condominiums), the Nonprofit Corporation Act must still be consulted because the PCA and the Condominium Act are silent on a number of issues. For instance, the Nonprofit Act provides guidance on the following subject areas that could potentially impact an association and may not be fully addressed in the Condominium Act or the PCA, if at all:

• What articles of incorporation must contain under N.C.G.S. § 55A-2-02¹⁵
• Derivative proceedings pursuant to N.C.G.S. § 55A-7-40
• Creation of committees of the board pursuant to N.C.G.S. § 55A-8-25
• Standards of conduct for board members under N.C.G.S. § 55A-8-30¹⁶
• Standards of conduct for officers under N.C.G.S. § 55A-8-42¹⁷
• Indemnification of directors under N.C.G.S. §§ 55A-8-50, et seq.¹⁸
• Amendment of the articles of incorporation and bylaws under N.C.G.S. §§ 55A-10-01, et seq.¹⁹
• Merger of corporations under N.C.G.S. §§ 55A-11-01, et seq.²⁰
• Recordkeeping requirements under N.C.G.S. § 55A-16-01²¹

The Nonprofit Act defers to the articles of incorporation and bylaws, in many instances. In many cases where the bylaws or articles provide additional procedures for association operations, the bylaws or articles would control over the Nonprofit Act.²²

§ 2.03. The Planned Community Act

The Planned Community Act (PCA), N.C.G.S. §§ 47F-1-101, et seq., applies to all planned communities created in North Carolina on order after January 1, 1999.²³ The PCA is divided into three separate Articles. It is the flagship statute for a substantial majority of all non-condominium common interest communities in North Carolina.

Article 1 of the PCA contains answers to important questions such as what a "planned community" is and what communities are governed by the PCA. As a threshold matter, the PCA applies to a homeowners association that contains at least 21 or more lots.²⁴ The PCA does not apply to communities where all lots are restricted exclusively to non-residential purposes unless the declaration expressly makes the PCA applicable. Article 1 contains the definitions for the words found in the PCA.²⁵ Unless allowed elsewhere in the PCA, the provisions in the PCA may not be changed by the declaration or the bylaws of the association.²⁶

The PCA requires that the declaration be recorded in every county in which a portion of the planned community is located.²⁷ Article 2 of the PCA also contains the procedures and voting requirements for amending the declaration and terminating the planned community,²⁸ as well as the enabling statute for two or more associations to merge or consolidate.²⁹

The vast majority of the PCA is contained in Article 3. The most important and most litigated statutes are in Article 3. For instance, Article 3 contains the powers of the association,³⁰ the powers and duties of the executive board (including how to remove board members)³¹ and the frequently challenged procedures for fines and suspension of privileges.³² Other provisions such as those for insurance,³³ conveyance of common elements³⁴ and association records³⁵ are also found in Article 3. Most importantly, the provisions for assessment liens, which provisions have been amended a number of times since 1999, are found in Article 3.³⁶

§ 2.04. The Condominium Act

The Condominium Act ("Condominium Act"), N.C.G.S. §§ 47C-1-101, et seq., applies to all condominiums created in North Carolina on order after October 1, 1986.³⁷ Unlike the Planned Community Act, the Condominium Act is divided into four separate articles, with an entire article (Article 4) devoted to consumer protections. The Condominium Act is much lengthier than the Planned Community Act because condominiums are much more complex ownership structures than planned communities. Despite its comprehensiveness, it is not the exclusive statute for condominiums because many older condominiums in North Carolina are governed by the Unit Ownership Act.

Article 1 of the Condominium Act contains answers to important questions such as what a "condominium" is and what condominiums the Condominium Act applies. Article 1 contains the definitions for the words found in the Condominium Act.³⁸ The statute is of paramount importance to condominiums because unless allowed elsewhere in the Condominium Act, the provisions in the Condominium Act may not be changed by the declaration or the bylaws of the association.³⁹ This article also requires that units owned by owners other than the declarant, be taxed separately.⁴⁰ Like the PCA, the Condominium Act contains a provision making it clear that supplemental principals of law are applicable to the extent not contradicted by the Condominium Act (although the wording in the Condominium Act is different than that in the PCA).⁴¹

Under Article 2 of the Condominium Act, the declaration has to be recorded in every county in which a portion of the condominium is located.⁴² Further, the declaration cannot be recorded until all the structural components are completed in accordance with the plans.⁴³ This is very different than a planned community, where the declaration is usually recorded before any of the homes are constructed. Unlike the PCA, Article 2 contains a very detailed listing of exactly what the declaration must contain in it.⁴⁴ Complicating the condominium form of ownership is the distinction between units, common elements and limited common elements. Article 2 defines the boundaries of the units, common elements and limited common elements.⁴⁵ Whereas the distinction between the lot and common elements in a planned community is usually quite obvious, the distinction between a unit and common elements can often times be much more complicated. Article 2 also contains an exhaustive list of what the plats and plans for a condominium must have in them.⁴⁶ Article 2 contains the procedures and voting requirements for amending the declaration and terminating the condominium,⁴⁷ as well as the enabling statute for two or more associations to merge or consolidate.⁴⁸

Article 3 of the Condominium Act essentially mirrors Article 3 of the PCA. Article 3 contains the listing of the powers of the association,⁴⁹ the powers and duties of the executive board (including how to remove board members)⁵⁰ and the procedures for fines and suspension of...