NC Case Law: RP Restraints on Alienation -or- Can Mom Rent the House?

NC Case Law: Davis v Davis and Restraints on Alienation: -or- Can Mom Rent the House? (NC COA16-400, 11/01/2016)

In Davis v Davis, the Court recently invalidated a deed provision that attempted to restrict the owner’s ability to rent a house, again affirming North Carolina’s commitment to the idea that owning real estate means you own real estate—and you can do with it as you see fit.

Okay…there are a million exceptions to this. But one of them is not renting—attempts to give someone a life estate and then to prevent them from renting the property to someone else will probably not work.

The facts in Davis interesting: Mom and Dad bought a beach house in Dare County. They later decided to gift the property to three of their children* (they had paid off debt for a fourth child) retaining a life estate in the house for themselves. They placed a clumsily-worded restriction in the deed that they signed attempting to restrict use of the house to ONLY Mom and Dad, a fair reading of which would seem to preclude Mom and Dad from renting the property. Testimony from the attorney that drafted the deed confirmed that this was the intent of the provision. Nevertheless, Mom and Dad would, on occasion, rent the beach house for short periods of time to offset the cost of owning the house. When Dad died, the kids lovingly sent their dear Mother a letter communicating their intention to enforce the deed restriction. Mom rented the house anyway, as was the custom while Dad was alive, and her wonderful kids took her to court. Ain’t family great?

One of the issues, and the one we are interested in, is this: Could Mom own a life estate in the house that she could not turn around and rent?

There is a common and widespread misconception about a property owner’s ability to rent the owner’s property. All too often these days, that ability is considered a mere “privilege” (especially by over-zealous POAs). But our law (both NC and US) takes property ownership very seriously, and one of the key “incidents” of ownership is the ability of an owner to sell or rent what she or he owns to another. The ability of a property owner to use the owner’s property as the owner sees fit, including renting its use to someone else, has historically been one of our nation’s most fundamental and legally protected rights. Here, the court said reasonable restrictions in deeds may be enforceable, but noted in passing that “unlimited restraints” are “per se unreasonable” and hence will not be enforced.

This all sorts of implications, but we are concerned with only two here. Number one, as in the case at hand, deed restrictions that purport to “restrict alienation”—meaning that the owner can’t rent the property to another, will usually be unenforceable. Secondly, and related, provisions in a will that purport to devise real estate to an heir with limitations imposed by the will (“I leave the house to Mary so long as she lives in it” or “so long as she does not rent it out”) may well also be unenforceable. The will scenario is a little more complicated. It depends on what the restrictions are and how the provisions are drafted; but a gift of real property to Susan that says Susan can’t rent the property to Dave probably won’t stand. (POAs and Condo Associations are a different matter that we are not discussing here.)

If the Davis’ had formed a trust, conveyed the beach house to the trust, and had a provision in the Trust Agreement prohibiting the rental of the property, that would have worked (had they really wanted to do that) for this purpose, though we don’t know what other purposes they may have had (Medicaid planning anyone?). If you want to control property (such as prohibiting rental) after you pass away, or after you give the property away, trusts are often the way to go. Deed restrictions can work for many things, but not all. Hammers are great tools, but they don’t do all things well. Knowing which tool to use for a specific job is important, and is one of the reasons why there is no such thing as “simple estate planning”.

*The gift was actually made to an LLC that was owned by the three children, but that is not relevant to any point we are discussing. In legal vernacular, the LLC was a remainderman; the children had no ownership of the house until both of Mom and Dad had passed away. During the lifetime of each of Mom and Dad, they own the house.