United States: Developer-Buyer Beware: Calling Assumed Improvement Bonds In North Carolina Can Be Complex

In 2007, Developer Clarion-Reames, LLC ("Clarion") sought to construct a residential housing development in Charlotte, North Carolina. Clarion received final approval from the City to record plats for Phase I section of the development, provided Clarion agreed to complete certain road improvements. In 2008, Clarion-Reames obtained a surety bond (the "Bond") to guarantee construction of the improvements. The Bond listed Clarion-Reames as the principal, IFIC as the obligor, and the City as the obligee. Although Clarion obtained the Bond as a precondition to final plat approval of Phase I, Map I — which was to consist of 10 single-family homes — the bonded improvements covered all of the required public road improvements for the entire Phase 1 development, which was to consist of 184 single-family homes.

The Bond stated that if Clarion was "in default under its obligation to install improvements" pursuant to the Subdivision Final Plat Approval Form it had submitted in connection with final approval of Phase I, Map I, Obligor IFIC "will (a) within fifteen (15) days of determination of such default, take over and assume completion of said improvements, or (b) pay the City of Charlotte in cash the reasonable cost of completion."

In July 2011, Clarion's lender foreclosed on the Property, which was purchased by Brookline Residential, LLC in May 2012. In early 2013, Brookline recorded several new plats in order to combine a number of lots on the Property and filed a rezoning petition to build multi-family housing on the Property (rather than the single-family homes originally entitled and contemplated for the Property). While the rezoning petition was pending, Brookline asked a series of questions of the City about the Bond. In response to one such question, the City responded as follows: "If you make changes to the approved plans upon which the current performance bond was based, you will likely become fully responsible for all roadway improvements specified on the revised plans." This warning is important.

The City granted the rezoning in 2013. After the rezoning, still in 2013, the City also approved Brookline's subdivision plan, which provided for certain road improvements (the "Altered Road Improvements") that included several new improvements along with most of the original road improvements. Brookline committed to making the Altered Road Improvements. But, recall the City's warning?

After the approvals, in 2014, Brookline tried unsuccessfully to convince the City to call the Bond and force IFIC to pay for the portions of the original road improvements that were subject to the Bond but had not yet been completed. The City did not call the Bond, and Brookline sued the City and IFIC seeking declaratory and injunctive relief, as well as damages for the expenses Brookline would incur if it was required to construct the portions of the original road improvements. The trial court granted summary judgment in favor of the City and IFIC, and Brookline appealed.

In Brookline Residential, LLC v. City of Charlotte, the Court of Appeals affirmed the trial court, concluding that Brookline "lacks a legal basis to compel the City to call the Bond or any other legal rights relating to the Bond". Quoting at length to N.C.G.S. 160A-371 and 160A-372, as well as to the Charlotte Code of Ordinances, the Court of Appeals reasoned: "Based upon our careful reading of the above-quoted provisions, we are unable to conclude that Brookline is entitled to an order compelling the City to call the Bond. Neither the statutes nor the ordinance contain language either specifying the circumstances under which the City must enforce a performance guarantee or authorizing a developer to compel the City to take such action. This Court is not at liberty to read into the statutes and ordinance words that simply do not exist therein." The Court rested its analysis entirely and squarely on its interpretation of State and local law, but the Court also went outside North Carolina – to Arizona and Oregon – to find echoing caselaw authority having "addressed similar issues", and noting: "Although decisions from other jurisdictions are not binding on this Court on an issue arising under North Carolina law, we may consider such decisions as persuasive authority."

The fact of the City's warning about "making changes to the approved plans upon which the current performance bond was based" in conjunction with the lack of clear legal authority compelling the City to call the Bond or otherwise entitling Brookline to compel the City to call the Bond, as supported by extra-jurisdictional authority, was enough for the Court of Appeals to find in the City's (and IFIC's) favor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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