Contracts Can Be A Real Beach

Never assume that just because a statute seems to cover certain aspects of your transactions or business that your contract will match it.  A vacation rental home owner learned this lesson the hard way in a case decided by the North Carolina Court of Appeals earlier this week.

The Court’s Decision In Shores Realty Servs., Inc. v. Miller

On January 17, 2017, the Court of Appeals held in Shores Realty Servs., Inc. v. Miller that the North Carolina Vacation Rentals Act, N.C. Gen. Stat. § 42A-1 et seq., did not impact the interpretation of a contract for vacation rental management services.

Shores Realty Services sued rental property owner Miller and thirteen separate single-property LLCs for breach of a rental management services agreement.  Shores Realty contended that the agreement allowed Shores to refuse to remit vacation rental deposits for certain properties because Miller had defaulted on the mortgages.  The agreement required Miller to inform Shores Realty if any rental properties were in “foreclosure” and allowed Shores Realty to withhold money deposited by renters for foreclosed properties.

In written correspondence with Shores Realty, Miller admitted that several of the LLCs had defaulted on their mortgages, but explained that they intended to file Chapter 11 bankruptcy, which would allow Miller to continue managing the properties for the foreseeable future.  Miller demanded payment of the vacation rental deposits and expressed his expectation that the LLCs would still be able to provide the rentals.

In the litigation, Miller argued that the Vacation Rentals Act (“VRA”) controlled the parties’ contract and supplemented or altered its plain language.  Defendant pointed out that the VRA requires property buyers to honor previously-executed rental agreements; therefore, Shores Realty’s renters were protected from harm, and the rental deposits should have been paid.  The Court of Appeals held that operation of the VRA did not change the plain meaning and import of the foreclosure paragraph in the parties’ agreement.

Miller also argued that the VRA’s definition of property “transfer” as requiring “recording at the registrar of deeds” impacted the interpretation of the word “foreclosure” as it was used in the agreement.  The Court of Appeals rejected this argument and affirmed the trial court’s use of the Black’s Law Dictionary definition of “foreclosure” to answer a question from the jury during deliberations.  The Court of Appeals reiterated that contract language is normally given its plain and ordinary meaning.

The Verdict

If a party to a contract wants to ensure that all of its terms and provisions are interpreted in harmony with a statute that governs the trade or business that is the subject of the contract, it is important to include express language in the contract that makes that intention clear.