In a June 15 ruling, the state’s second highest court found the state’s statute of repose — which cuts off an injured party’s right to recover damages from the government if the party fails to act within a specified time period — may not apply if the party received a permit to make certain improvements but did not start the improvements until years later.

In 1989, Dudley and Joan Dawson signed a contract to buy two lots in Person County for $120,000. The purchase was contingent on the lots “perking” — being able to support a septic system, a prerequisite for building a house.

On March 1, 1989, Jimmy Clayton, a sanitarian for the Person County Health Department, tested the lots, determined they perked, and issued a site classification letter to that effect to the Dawsons.

The Dawsons bought the lots but didn’t build a house on the site immediately. It would be April 2000 before they applied for improvement permits from the health department for a two-bedroom house with a septic system like the one envisioned in 1989. To their surprise, the health department refused to issue the permit after determining that neither lot could support a septic system.

The Dawsons ultimately were forced to purchase a third lot for $25,000 plus $515 in closing costs to serve as a repair area for a house and its septic system on the original two lots they had purchased.

In June 2003, the couple filed suit under the State Tort Claims Act against the N.C. Department of Environment and Natural Resources, on whose behalf the health department had acted. On Oct. 1, 2008, the North Carolina Industrial Commission awarded the Dawsons $33,000 in damages for costs associated with acquiring the extra lot and lost earnings.

DENR challenged the Industrial Commission’s determination, and brought the matter before the Court of Appeals. On appeal, DENR contended that the state’s statute of repose barred the Dawson’s claim.

N.C. General Statue § 1-50(a)(5)(a) states that:

“No action to recover damages based upon or arising out of the defective or unsafe condition of an improvement to real property shall be brought more than six years from the later of the specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.”

For its part, DENR argued that Clayton’s actions amounted to a negligent design and inspection of a septic system. To buttress its argument, the department claimed that the 1985 N.C. Supreme Court decision in the case of Trustees of Rowan Tech. Coll. v. J. Hyatt Hammond Assocs. held that “[t]he statute covers claims for negligent failure to properly design and construct buildings.” Because the Dawsons didn’t seek compensation from the state until 14 years after Clayton’s faulty inspection, the department contended the statue of repose barred the suit.

The Court of Appeals was not persuaded.

“DENR has cited no case holding or even suggesting that this statute applies even in the absence of the actual construction or repair of an improvement. Nor have we found any such decision,” wrote Judge Martha Geer for the appeals court.

And as the appeals court noted, no construction or repair took place.

“In this case, Clayton was not inspecting an existing septic system to see if it was up to code,” the court ruled. “He was inspecting the lot to determine if it was suitable land on which to construct an improvement. Because DENR has failed to show the existence of an improvement to real property, we hold that N.C. Gen. Stat. § 1-50(a)(5) does not apply to the Dawsons’ action.”

The appeals court allowed the award of damages to the Dawsons stand.

The case is Dawson v. N.C. Department of Environment and Natural Resources (09-109).

Michael Lowrey is an associate editor of Carolina Journal.