Trick or Treat?

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S.C. Supreme Court Affirms Limitation on Developer’s Rights

A family-run bed and breakfast inn and wedding venue on property located along the Great Pee Dee River in Georgetown County sounded like a treat for the community to Levon and Pamela Dunn. Unfortunately for them, their neighbors did not agree (in fact, they felt tricked) and a legal battle began in 2005 between the Dunns and their neighbors culminating in a S.C. Supreme Court case published on October 22, 2014.

AJC Holdings, LLC. v. Dunnpumpkin arose when Levon and Pamela Dunn began renovating an existing guest house on two residential lots subject to restrictive covenants that prohibited commercial use of the property absent the developer’s approval. The neighbors complained, involved the planning and zoning commission, the hazard insurance agent and the U.S. Army Corps of Engineers, and finally brought this action seeking an injunction. The Dunns contacted the developer, Helen Sasser, and obtained a written assignment of any developer’s rights. The Dunns then executed a document asserting that, as the assignee of the developer’s rights, they consented to the commercial use of the property.

Unfortunately for the Dunns, Helen Sasser had sold her last remaining lots in the subdivision in 1991 and retained no remaining rights in the subdivision except, as the Dunns argued, the right to amend the restrictions.

The circuit court found that Sasser no longer retained any developer’s rights to assign to the Dunns, and the Dunns’ execution of the written consent to commercial use was meaningless. The Dunns appealed, and the Court of Appeals affirmed, citing Queen’s Grant II Horizontal Property Regime v. Greenwood Development Corp.,* which set out five conditions that must be met for a developer to reserve the right to amend or impose new restrictive covenants running with the land:

1. the right to amend the covenants or impose new covenants must be unambiguously set forth in the original document;
2. the developer, at the time of the amended or new covenants, must possess a sufficient property interest in the development;
3. the developer must strictly comply with the amendment procedure set forth in the covenants;
4. the developer must provide notice of amended or new covenants in strict accordance with the original document and as otherwise provided by law; and
5. the amended or new covenants must not be unreasonable, indefinite, or contravene public policy.

The Dunns argued that they met the second requirement because, despite the fact that Sasser had sold all the lots, she had reserved developer’s rights. The Court of Appeals said this argument was circular: the developer had a sufficient property interest in the development to allow her to reserve developer’s rights because she reserved to herself developer’s rights.

The Supreme Court agreed, citing, in addition to Queen’s Grant II, McLeod v. Baptiste, * (“[A] grantor lacks standing to enforce a covenant against a remote grantee when the grantor no longer owns real property which would benefit from the enforcement of that restrictive covenant.”

spooky houseThe Court also cited a Georgia case* reasoning that so long as the developer owns an interest in the subdivision, that economic interest will tend to cause the developer to exercise rights in a manner which takes into account potential harm to the other lots. In other words, there is an economic restraint against arbitrary waiver that is lacking after the developer is divested of all interest in the subdivision.

Finally, our Court cited a New York case* holding that a right reserved in a developer cannot be exercised after the developer has conveyed all of the land because that action may be used to ruin the property of others who have bought and improved their land on the faith of the restrictions.

This case is instructive for all South Carolina practitioners whose clients seek to amend or waive restrictive covenants. Always consider whether the amendment would be objectionable to neighbors and what actions those neighbors may take! And definitely follow the guidelines set out in Queen’s Grant II.

*Contact me if you would like the citations.

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Closing Attorney Warriors: Battling Terrorism One Closing at a Time!

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None of us focus on fighting terrorism through our closing procedures, but we do, in a small way, fight terrorism every day. Real estate practitioners should comply with updated (as of 8/8/2014) OFAC policies and procedures. Specifically, the names of the buyers, sellers and borrowers involved in real estate closings should be run through the Specially Designated Nationals (“SDN”) list and the Foreign Sanctions Evaders (“FSE”) List. The link to these lists is: http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx.

If the search reveals a match, consult with the U.S. Department of Treasury’s website and review the FAQs. Keep in mind that it is a criminal violation to reveal to any party to the transaction the results of an OFAC search or that an OFAC search has been completed.

OFAC implements economic sanctions against countries, entities and individuals determined to be threats to national security. OFAC prohibits “U.S. persons”, including organizations, from, in general, dealing with property in which these named individuals or groups have a direct or indirect interest.

Compliance will avoid Federal civil and criminal penalties. Criminal penalties for OFAC violations can include fines of $50,000 to $10,000,000 and imprisonment of 10 to 30 years, and civil penalties of $50,000 – $250,000, or twice the value of the transaction, per violation.

Title insurance company underwriters should be able to assist with questions.

Lions, and Tigers and Seller Financing, Oh My!

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If you are closing seller financed transactions on primary residences including contracts for deed (hereafter referred to as seller financing), or if you have clients who are accepting seller financing, you should take the time to educate yourself and your clients on the current pitfalls.  Please refer to Martha McConnell’s excellent article entitled Seller Financing – the New ‘Jabberwocky’!” in the Summer 2014 issue of Chicago Record Title for a detailed report on what has led to this serious concern.

lions1 Because it is a complicated issue, I am not sure I can express a bottom line in any kind of succinct manner, but I will attempt to do so here.

The CFPB has been given the power to supervise and regulate laws that impact seller financing, including the SAFE Act, TILA, the Ability to Repay and Qualified Mortgage Rule, HOEPA and the Loan Originator Rule.

Under the applicable federal rules, it is possible that sellers engaging in seller financing may have to become licensed as “loan originators” or “mortgage brokers”.  The loans may have to be fully amortized, and it is possible that these seller/lenders may have to make determinations and disclosures that have not previously been required. Certain exclusions are available, but the rules are complex and detailed, and should be handled with care.

Inconsistencies between the federal and state versions of the SAFE Act, both of which require licensing and registration of loan originators, is another area of concern.

Clients who fail to become licensed or to fall into an exclusion may find they are unable to foreclose, and may, along with the attorneys who closed the transactions and the title policies that insured them, be subject to claims and litigation. In addition, the CFPB has broad enforcement powers including the power to impose civil monetary penalties ranging from $5,000 to $1 million per day.

This is an area of the law that is going to require monitoring and thought in the coming months. Legislation in South Carolina to address the inconsistencies in our version of the SAFE Act may be one avenue for improvement. In the meantime, please take great care if you or your clients venture into seller financing.