NC/SC Real Property Case Law Update:

In the first article of this series we discussed North Carolina Court of Appeals opinions published on June 1, 2023. That day the Court of Appeals also published an opinion affirming the reversal of a local Board of Adjustment’s decision involving the application of its short-term rentals ordinance. Additionally, the Supreme Court of the United States recently published an interesting opinion scrutinizing certain provisions of Minnesota’s tax code under the purview of the Takings Clause of the Fifth Amendment to the U.S. Constitution.

1. Frazier v. Town of Blowing Rock^[1] - Vagueness of prior Short-Term Rental Ordinance Permitted Grandfathering of Nonconforming Short-Term Rental Use.

The three-unit property at issue in Frazier is located at 163 Wilmot Circle in the Town of Blowing Rock, North Carolina. After the Petitioner-Appellee Chad Frazier acquired the property in 2016, he began utilizing it for short-term rentals^[2]. The phrase “tourist homes and other temporary residences renting by the day or week” appeared in the Town’s Table of Permissible Uses since 1984, but in 2000 the Town amended its Ordinances to further define “short-term rentals”^[3]. However, at the time of the 2000 Amendment the Town failed to replace the “tourist homes and other temporary residences” use with the newly defined “short-term rentals” use. In 2019, the Town enacted another amendment that cleared up the ambiguity, and subsequently cited Mr. Frazier under the 2019 Ordinance.

Mr. Frazier appealed his citation to the Town’s Board of Adjustment, contending his use of the property amounted to a grandfathered, nonconforming use as a short-term rental. The BOA denied the appeal. Mr. Frazier further appealed the BOA’s decision to Watauga County Superior Court, which reversed the BOA’s decision, holding that a reading of the Town’s 1984 Ordinance as modified by the 2000 Amendment resulted in an ambiguity regarding the regulation of short-term rentals that was not clarified until the 2019 Amendment. The superior court further held that since Mr. Frazier purchased the property in 2016 and began using it for short-term rentals within the required timeframe, the use was a grandfathered and valid non-conforming use under the Town’s Ordinances.

The Court of Appeals affirmed the superior court’s ruling, holding that the superior court did not err in concluding as a matter of law that the Town’s Ordinances prior to the 2019 Amendment did not properly regulate short-term rentals. The Court of Appeals reasoned that the ambiguity of the 1984 Ordinance and the 2000 Ordinance when read together left the Town’s purported regulation of short-term rentals between 2000 and 2019 in a state of uncertainty. The Ordinances attempted to prohibit two distinct land uses: (1) temporary residences renting by the day or week in 1984; and (2) short-term rentals of a dwelling unit in 2000, while only the former was listed on the Town’s Table of Permissible Uses. The Court of Appeals reiterated that when there is ambiguity in a zoning regulation, under North Carolina law the ambiguous language must be construed in favor of the free use of real property. Due to the ambiguity, the Court of Appeals found that the superior court correctly held that the Town did not properly regulate short-term rentals until the 2019 Amendment, and that therefore Mr. Frazier’s use of the property for short-term rentals was a legal non-conforming use.

2. Tyler v. Hennepin County, Minnesota^[4] - “The Taxpayer Must Render unto Caesar What is Caesar’s, but No More.”

In the 1996 Adam Sandler comedy Happy Gilmore, when the IRS seizes Grandma Gilmore’s cherished home and Happy asks her why she didn’t pay her taxes, she explains, “I would have, but I didn’t have any money.” A similar issue befell 94 year-old Geraldine Tyler of Hennepin County, Minnesota, only she didn’t have a sweet but ill-mannered grandson who could win her house back on the pro-golfer’s tour. Instead, after Ms. Tyler’s condominium of more than a decade accumulated $15,000 in unpaid property taxes, interest, and fees Hennepin County sold her home for $40,000, and thereafter kept the $25,000 balance for itself. This was because, pursuant to the Minnesota Tax Code, any proceeds from the County’s sale of real property to pay a tax debt that are in excess of the tax debt remain with the County^[5].

Ms. Tyler felt she was entitled to her $25,000 surplus under the Takings Clause of the Fifth Amendment and the Excessive Fines Clause of the Eight Amendment to the U.S. Constitution. After the Minnesota District Court dismissed Ms. Tyler’s suit for failing to state a claim, and the Eighth Circuit Court of Appeals affirmed, SCOTUS reversed in a 9-0 decision. SCOTUS held that Ms. Tyler had plausibly plead on the face of her complaint that she suffered financial harm under the Takings Clause when the County illegally appropriated the $25,000 surplus beyond her $15,000 tax debt and is entitled to just compensation. As to the question of whether Ms. Tyler has a property interest in the $25,000 surplus protected by the Takings Clause, the Court said that she did. The Court stated that the long-standing principle that the United States government may not take more from a taxpayer than what she owes has roots dating back to Magna Carta. Reviewing the evolution of Federal and States’ tax laws, as well as the Court’s own precedents, the Court noted the requirement and principle that a taxpayer is entitled to the surplus in excess of the debt owed.

Among the County’s arguments in support of the constitutionality of Minnesota’s tax law was that the law was similar to a law the Court upheld in Nelson v. City of New York^[6]. In Nelson, New York City foreclosed on properties for unpaid water bills and was allowed to retain the surplus from the sales if the owners did not apply to receive the surplus back within 20 days of the sale. The Nelson Court held that because the New York City ordinance did not “absolutely preclude[e] an owner from obtaining the surplus proceeds of a judicial sale,” but instead simply defined the process through which the owner could claim the surplus, there was no Takings Clause violation. The Court quickly spotted the distinction between Nelson and Ms. Tyler’s case, noting that Minnesota’s statutory scheme provided no opportunity for the taxpayer to recover the excess value like the one in Nelson.

Finally, among other arguments, the County argued that by neglecting the “reasonable condition” to property ownership of paying property taxes, Ms. Tyler abandoned her property and therefore could not state a plausible takings claim. The County equated the statutory scheme to other States’ statutory schemes taking title to abandoned property. However, the Court did not agree that simply failing to pay property taxes, by itself, is sufficient to constitute abandonment of one’s property interest. The Court distinguished Ms. Tyler’s case from prior Court rulings on the abandonment of property interests where there was no present intention to retain the interest. For example, in Texaco, Inc. v. Short^[7] the Court held that an Indiana statute that automatically reverted a mineral interest to the owner of the land if not used for 20 years did not violate the Takings Clause because the State “has the power to condition the permanent retention of [a] property right on the performance of reasonable conditions that indicate a present intention to retain the interest” without violating the Takings Clause. The statutory scheme in Texaco was focused on abandonment, while Minnesota’s tax forfeiture scheme was not about abandonment at all, evidenced by the fact that Minnesota law allows delinquent taxpayers to remain in their homes for years until the government sells it.

It is safe to say that North Carolina’s foreclosure process for unpaid property taxes will not face scrutiny like Minnesota’s in Tyler. North Carolina’s rules for foreclosing tax liens are akin to mortgage foreclosures, where the surplus from the foreclosure sale less costs and other fees is paid in accordance with the directions of the court, typically to the taxpayer^[8]. It is worth noting, as SCOTUS did in Tyler, that North Carolina was one of ten States that adopted statutes in the Country’s early years that adhered to the principle that the government can only take so much of a tract of land necessary to satisfy the taxes due thereon (although it later amended its laws in 1842 to permit the forfeiture of unregistered “swamp lands”)^[9].

This article is part of a series covering recently published North Carolina and South Carolina cases involving real property issues. 

_{[1] 286 N.C. App. 570.
[2] Maynard Nexsen’s David Pokela represented Mr. Frazier in this case.
[3] The 2000 Amendment defined short-term rentals as the “rental, lease, or use of an attached or detached residential dwelling unit that is less than 28 consecutive days . . . .”
[4] 598 U.S. ____ (2023) (Slip Opinion No. 22-166).
[5] See Minn. Stat. § 282.08.
[6] 352 U.S. 103 (1956).
[7] 454 U.S. 516 (1982).
[8] See N.C.G.S. § 105-374(q).
[9] See 1792 N.C. Sess. Laws p. 23, § 5; and 1842 N.C. Sess. Laws p. 64, § 1.}