Terry v. Brothers Investment Co. ( 1985 )

334 S.E.2d 469 (1985)

J. Russell TERRY, Plaintiff Appellant,
v.
BROTHERS INVESTMENT COMPANY, Defendant Appellee and Third Party Plaintiff Appellant,
v.
John Bass BROWN, Mildred B. Montgomery, Sutherland M. Brown, Carrie M. Gilchrist, Dolph M. Young, Sadie Young Holland, Peter M.B. Young, and William P. Young, Third Party Defendant, Appellees.

No. 8426SC1332.

Court of Appeals of North Carolina.

October 1, 1985.

Kenneth W. Parsons, Charlotte, for plaintiff-appellant.

Parker, Poe, Thompson, Bernstein, Gage and Preston by William E. Poe and Irvin W. Hankins, III, Charlotte, for defendant-appellee and third-party plaintiff-appellant.

Murchison, Guthrie and Davis by Alton G. Murchison, III, Charlotte, for third-party defendant-appellees.

EAGLES, Judge.

I

The first issue to be decided here is whether the plaintiff holds the Property subject to the Gallaway lease. We hold that he does.

The plaintiff contends that he holds the Property free and clear of the Gallaway lease because at the time he acquired the Property the lease had not been recorded as required by the Conner Act. G.S. 47-18.

The portion of the Act on which plaintiff relies provides:

(a) No ... (iv) lease of land for more than three years shall be valid to pass any property interest as against lien creditors or purchasers for a valuable consideration from the donor, bargainor or lessor but from the time of registration thereof in the county where the land lies....

The lease at the heart of this controversy was executed on 21 March 1963 with a lease term of 20 years plus a 30 year renewal option. It was not recorded until 9 November 1982. The Property was conveyed to the plaintiff on 26 July 1982 and the deed to plaintiff was recorded on 24 September 1982. Plaintiff properly insists that no notice however full and formal will supply the want of registration. Collins v. Davis, 132 N.C. 106, 43 S.E. 579 (1903). This principle of notice by recordation only is strictly adhered to by our courts, State Trust Co. v. Braznell, 227 N.C. 211, 41 S.E.2d 744 (1947), and the Conner Act would, on its face, give the plaintiff the right to eject Brothers, its lessee, and the sublessees.

However, when a grantee accepts a conveyance of property subject to an outstanding claim or interest evidenced by an unrecorded instrument executed by his grantor, he takes the property burdened by that claim or interest. By accepting such a deed he ratifies the unrecorded instrument and agrees to take the property subject to it and is estopped to deny the unrecorded instrument's validity. State Trust Co. v. Braznell, supra. This principle is not based on notice and does not operate as an "exception" to the pure-race theory of title in North Carolina. It derives from the theory that reference to the unrecorded encumbrance, if made with sufficient certainty, creates a trust or agreement that the property is held subject to the encumbrance. Hardy v. Fryer, 194 N.C. 420, 139 S.E. 833 (1927).

Our Supreme Court in Hardy v. Fryer, supra, specifically addressed the effect of a reference in a recorded instrument to a prior unrecorded encumbrance and under what circumstances it constitutes a valid, enforceable lien by the holder of the prior unrecorded encumbrance. The court listed four requirements or conditions that must be met before a reference to a prior unrecorded encumbrance will constitute a valid lien. They are:

1. The creditor holding the prior unregistered encumbrance must be named and identified with certainty.

2. The property must be conveyed "subject to" or in subordination to such prior encumbrance.

3. The amount of such prior encumbrance must be definitely stated.

4. The reference to the prior unregistered encumbrance must amount to a ratification and adoption thereof.

Id. at 422, 139 S.E. at 834.

From the facts of this case two factual distinctions appear. First, the plaintiff's deed from the Gallaway heirs makes no mention of the prior unrecorded lease and contains none of the requirements as set out in Hardy v. Fryer, supra. Second, the unrecorded lease was not executed by plaintiff's grantors, the Gallaway heirs. The lease was executed by Carrie Marshall Gallaway, ancestor of the Gallaway heirs. However, we do not believe that these factual distinctions prevent the principles announced in State Trust Co. v. Braznell, supra, and Hardy v. Fryer, supra, from applying to this case.

Hardy v. Fryer, supra, involved a question of priority between two mortgages. A brief summary of the pertinent facts may prove helpful. In 1920 J.T. Harris sold certain property to the plaintiff, Hardy, and a deed was immediately recorded. At the time of sale, the plaintiff executed a mortgage to the defendant Farmville Building and Loan Association, but the mortgage was not recorded until three years later. The plaintiff also executed a mortgage in favor of Harris, the seller. This mortgage was recorded first. Harris then transferred the mortgage to Fountain Bank which in turn sold the notes to one Fryer. The deed from Harris to Hardy contained the following reference:

That the [property] is free and clear of all encumbrances except mortgage to the Farmville Building and Loan Association, which is hereby assumed by the party of the second part, which assumption is part of the purchase price hereof.

Hardy v. Fryer, at 421, 139 S.E.2d at 833.

Defendant Fountain Bank argued that it could not be bound by the reference in the deed because it was not a party to the deed and its mortgage contained no reference to the prior encumbrance. Our Supreme Court rejected this argument stating that since the reference occurred in a conveyance which was an essential part of defendant Fountain Bank's chain of title, the Bank was charged with full notice of the provisions contained in that deed. Hardy v. Fryer, supra. Accordingly, under North Carolina law, if there exists an expression of subordination to a prior unrecorded encumbrance in an instrument within a subsequent grantee's chain of title that is sufficient under the requirements of Hardy v. Fryer, supra, then the subsequent grantee, by accepting his deed, ratifies the unrecorded encumbrance and is estopped from asserting the invalidity of the encumbrance. State Trust Co. v. Braznell, supra.

Although Hardy v. Fryer involved a battle for priority between two mortgages and not a leasehold interest, we believe that the same principles should apply here. In order to decide if the lease, unrecorded at the time the property was transferred to the plaintiff, is valid and binding on the plaintiff under the rule of Hardy v. Fryer, we must answer two questions. Is the NCNB deed within the plaintiff's chain of title? If so, is the reference to the prior unrecorded lease contained in the NCNB deed sufficient under the Hardy v. Fryer four-part analysis to constitute a valid lien?

We hold that the NCNB deed is within plaintiff's chain of title. By Item IX, the Gallaway will directed that the remainder of the real estate be placed in trust with NCNB and Gaston G. Gallaway named as trustees. Item IX(a) of the Gallaway will gave the trustees power to hold, manage, invest and re-invest the property. Item IX(b)(2) authorized the Trustees to sell the real property if a sale would be in the best interests of the estate. Item IX(c) provided that the trustees pay over to Gaston G. Gallaway the net income from the rest and residue of the real estate for his lifetime, and

upon his death, said trust, as to such remaining property, shall terminate and the title to said property shall thereupon vest in fee simple, share and share alike, in the children of my sister, Nancy Brown Young, and my brother, John Bass Brown, then living and the issue of such as may then be dead, per stirpes. [Emphasis added.]

Given this language and the trustees' power to sell, a deed from the trustee was necessary to ascertain, for title examination purposes, what property existed for distribution to the surviving Gallaway heirs and the identity of those surviving heirs.

At the death of Gaston Gallaway the trust terminated. At that time, it was the duty of the surviving trustee, NCNB, to distribute the remaining property held in trust to those heirs entitled to take. First Citizens Bank and Trust Co. v. Carr, 279 N.C. 539, 184 S.E.2d 268 (1971). See Bogert, The Law of Trusts and Trustees Section 1010 (rev. 2d ed. 1983). A careful and prudent title examiner having the knowledge that the Gallaway heirs took the Property either by the will of Carrie Marshall Gallaway or by deed would discover the NCNB deed to the Gallaway heirs executed 26 September 1974 and recorded 30 September 1974. An examination of the Gallaway will would reveal the creation of the trust and the grant of power to the trustees to sell the real property. This information would lead the careful and prudent title examiner to check all out conveyances of NCNB as trustee. The NCNB deed would be discovered. Further, even if the examiner began his search instead with the grantee index in the name of the Gallaway heirs, the discovery of the NCNB deed would be inevitable.

Having determined that the NCNB deed is within plaintiff's chain of title, we must now decide whether the reference contained in the deed to the prior unrecorded lease satisfies the four-part analysis of Hardy v. Fryer, supra. We hold that the reference as set out in the NCNB deed sufficiently complies with the Hardy v. Fryer requirements. The pertinent language taken from the NCNB deed dated 26 September 1974 is as follows: "The above described parcel is subject to the rights of tenants in possession pursuant to the terms of a Lease between Carrie Marshall Gallaway and Brothers Investment Company dated March 21, 1963."

In oral argument plaintiff's counsel candidly conceded that requirements one, two and four were met by the above quoted reference. Plaintiff's counsel argued that the third requirement of Hardy v. Fryer —that the amount of the prior encumbrance must be definitely stated—was not satisfied by the above quoted reference. Here we are dealing with a lease and not a mortgage as was the case in Hardy v. Fryer, supra. Plaintiff contends that the omission in the reference that the lease term was for more than three years constitutes a failure to meet this third requirement. We are not persuaded. The date the lease was executed is stated—21 March 1963. The NCNB deed was executed on 26 September 1974. By simple mathematical calculation it can be easily determined that the lease was for a term in excess of three years. We do not find this omission fatal under the four-part analysis of Hardy v. Fryer, supra.

In summary, we find that the NCNB deed to the Gallaway heirs was within plaintiff's chain of title and that it sufficiently described the unrecorded lease as to bring it within the four part analysis of Hardy v. Fryer. Consequently, we hold that the plaintiff took the property subject to the unrecorded lease.

II

The next issue is whether the record supports the trial court's determination that the defendant Brothers validly exercised its option to renew. We hold that it does.

The lease required that defendant Brothers give written notice of its intention to exercise the right to renew "not less than one (1) year prior to the end of the original term of [the] lease." The lease's original term would have expired 31 December 1982. Brothers exercised its right to renew the lease on 23 June 1980 by mailing written notices to Mildred Montgomery and Dolph M. Young. These were the only two of the eight co-tenants that Brothers had dealt with since the execution of the NCNB deed in 1974. Plaintiff does not dispute that the notices were timely, however, he contends that the lease renewal was ineffective because notices were not mailed to all eight co-tenants. Plaintiff offers no support for this contention.

North Carolina courts have recognized that the acts of one co-tenant with relation to the common property may be presumed to have been done with authority and for the benefit of all co-tenants if there are circumstances on which to base that presumption. Hinson v. Shugart, 224 N.C. 207, 29 S.E.2d 694 (1944); see J. Webster, Real Estate Law in North Carolina Section 113 n. 41 (P. Hetrick rev. ed. 1981). In 1974, shortly after the NCNB deed to the Gallaway heirs, Brothers was notified by letter from NCNB that all future rental checks were to be sent to Mildred Montgomery in the amount of $171.42 and to Dolph Young in the amount of $228.58. For the next eight years—up until the time the written notices were mailed—all rental checks were sent as instructed to those two individuals. We find that based on these facts, there are sufficient circumstances on which to base the presumption that the acts of the two co-tenants in accepting notice of the renewal were done with the authority and for the benefit of all eight co-tenants.

The remaining issues and assignments of error deal with defendant Brothers' protective appeal. Since we affirm the trial court's entry of summary judgment in favor of defendant Brothers, we need not address those issues.

Affirmed.

JOHNSON and PARKER, JJ., concur.