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Despite a decade of litigation by lot owners….

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Two Surfside golf courses are being redeveloped into residential lots

The North and South courses at Deer Track Golf Resort in Deerfield Plantation have been closed for more than ten years and are finally being redeveloped as residential lots. Adjacent lot owners waged class actions in Horry County seeking to have the use of the properties in question restricted to golf courses or open spaces. While these battles were being waged in court, nature attempted to reclaim the properties. One property owner testified that his views changed from overlooking a manicured golf course to overlooking a “sea of weeds”.

Similar battles have been successful in other parts of the country. The cases are fact intensive and turn on the law of implied easements, which, of course, varies widely from state to state. Plats showing golf courses may provide rights in adjacent lot owners, depending on the recorded documents, the sales program and the law of implied easements in the location.

golf course

Let’s look at how the Deerfield Plantation cases were decided. First, the facts:  The golf courses and surrounding residential subdivisions were originally developed beginning in the late 1970’s. The plats contained notes to the effect that the streets were dedicated for public use but the golf courses were to be maintained privately and were specifically not dedicated to public use.

The covenants gave the lot owners no rights, property, contractual, or otherwise, in the golf courses. A Property Report that was delivered to all prospective lot purchasers described the costs of golf memberships, which were not included in lot prices, and stated that to be allowed to use the golf courses, members would be required to pay initial dues and annual dues and fees. The real estate agents made it clear during the sales program that the mere purchase of a lot did not give a lot owner any right or entitlement to use the golf courses. The deeds of the lots did not convey any easements or other interests in the golf courses.

One plaintiff, who was also a real estate agent, testified that he was never told the golf courses would operate in perpetuity and that the real estate agents never told other potential purchasers that the golf courses would always exist on the properties.

What caused the golf courses to fail? When the golf courses opened, there were 30 – 40 golf courses in the Myrtle Beach area. By the time the golf courses closed, there were nearly 125 courses. Property taxes in the golf courses increased from $7,800 per year to $90,000 per year.  And then the economy tanked. These three factors have occurred across the country to varying extents.

Now, let’s look at South Carolina law. In one of the cases, a 38-page Order of Thomas J. Wills, Special Referee, examined the law of implied easements in South Carolina. I’m summarizing and eliminating the citations for this brief discussion.

The Order states that implied easements are not favored by the courts in South Carolina and must be strictly construed. The intent of the parties controls the existence and scope of implied easements, and the best evidence of that intent is the recorded documents. While case law in South Carolina is clear that lot owners in subdivisions hold easements in streets shown on plats by which their lots are sold, the order states that this rule does not extend beyond access, which is necessary and expected for residential purposes. Finally, the order states that no implied easements in views, breezes, light or air exist in this state.

Finally, these golf courses will be redeveloped into new residential subdivisions. Will we see more of this litigation in South Carolina? Probably. While the law in South Carolina appears generally to favor redevelopment in these cases, there is no doubt that the facts in some of the situations may give rise to implied easements in adjacent lot owners, even in the face of our law.

Dirt lawyers: Did you know some County boundary lines in South Carolina are changing?

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For your reading pleasure, here is a repost of an excellent blog (with maps!) by my friend Josh Lonon of The Wyche Firm in Greenville. We will have to pay particular attention as this un-folds. Some of us who have been involved in the practice of real estate law for many years will remember confusion and extra work for title examiners and practitioners when other county boundary lines changed. Thanks, Josh, for the great information!

HOA foreclosures are being challenged on multiple levels in SC

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The HOA won in a recent Court of Appeals case

In January, I blogged about a Federal class action lawsuit filed in Charleston seeking to invalidate non-condo foreclosures by owners’ associations. You can read that blog here but the short version is that the suit challenges foreclosures on the grounds that these non-profit corporations don’t have the power to create liens for unpaid assessments prior to obtaining judicial judgments. Condominium associations established through the Horizontal Property Regime Act have statutory authority to create liens, but the power of non-condo projects is created by restrictive covenants. We’ll have to wait and see how that suit turns out, but if the plaintiffs there are successful, foreclosure practice will change drastically in South Carolina.

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Our Court of Appeals decided a case* on April 4th that could have made drastic changes in another way. In fact, Richland County’s Master-in-Equity, Joseph Strickland, stated in his order that “the practice of homeowners’ association foreclosures would effectively be eradicated if (the Plaintiffs’) position came to bear.”

This appeal was handled by the law office of my friend, Brian Boger, a Columbia lawyer and well-known champion of consumers’ rights. The appeal argued that the $3,036 successful bid “shocked the conscience” and violated equitable principles. The parties agreed that the home was valued at $128,000. There was a mortgage balance of $66,004, leaving equity of $61,996. The Hales did not argue that there were irregularities in foreclosure process, but instead argued that the low bid should have encouraged the Master to use his gavel to “do equity”.

Comparing the successful bid to their equity using the “Equity Method”, the Hales argued that the bid amounted to 4.8% of the fair market value of the property. The HOA argued, using the “Debt Method”, that the bid must be added to the senior mortgage balance to judge its sufficiency because the successful bidder would have to pay the senior mortgage to have good title. In this case, using the Debt Method, the bid amounted to 54.94% of the fair market value. The Court of Appeals agreed that the Debt Method was the proper method for considering a senior encumbrance in a foreclosure.

The Court found no South Carolina cases that expressly weighed the two methods of judging a bid, but pointed to prior cases that considered the amount of a senior mortgage in the determination and found a 3.15% bid sufficient. One reason the Court of Appeals prefers the Debt Method is that it will result in “fewer set asides”.  In other words, the Court of Appeals is not interested in upsetting the foreclosure practice applecart at this point.

Justice Lockemy dissented, stating that he thought it improper to give a judicial sale buyer credit for assuming a debt it is not legally required to pay. He said the Court’s decision could create a perverse circumstance where a judicial sale bidder purchases property for a de minimis amount simply to capitalize on rental revenue until the senior lienholder forecloses. The majority called this argument a solution in search of a problem because there was no evidence that the successful bidder in this case was engaged in such a scheme and because the successful bidder must satisfy the mortgage to obtain clear title.

Foreclosure practice in South Carolina remains the same…for now.

* Winrose Homeowners’ Association, Inc. v. Hale, South Carolina Court of Appeals Opinion 5549 (April 4, 2018)

Scary telephone identity compromise story from one of our own

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Our company distributes a great publication, Fraud Insights, which tells scary fraud stories every month. Lisa Tyler, National Escrow Administrator, edits this publication and does a great job keeping us informed about new scams. A Fraud Insights story in March came from one of our company employees who told her personal identity compromise story to prevent it happening to the rest of us. I’m going to translate the story to South Carolina terms and call the victim Pam Paralegal.

Pam Paralegal was working on a messy residential purchase file in her office in Charleston and was not focusing on the telephone call on her cell phone that she received purportedly from her personal bank. The caller ID was indeed Pam’s bank’s name. When Pam answered, the caller identified herself as Jill Jones and said she was with the fraud department of the bank. Ms. Jones said she was going to text a code to Pam to confirm Pam’s identity.

scammer calling

Pam received the text code and read it back to Ms. Jones.  Ms. Jones then asked if Pam had authorized a $1,000 transfer from her account that morning. Pam said that she had not made that transfer. Pam told Ms. Jones that she would log into her online account to determine whether that transfer was showing up, but Ms. Jones told Pam the bank had already shut down her ability to access her account via the Internet. Ms. Jones told Pam that she needed her to read off an additional text code to authorize the shutdown. When Pam read the second text code back, the phone line went dead.

Pam immediately started receiving emails from her real bank. The first email confirmed a change in Pam’s password. The second email confirmed Pam had authorized a $1,000 withdrawal via electronic funds transfer. Pam called her bank to report the incident and later received a call back from the real fraud department. Pam was informed that the thieves had stolen $1,000 by using her Social Security number, and that they really had shut down her account.

Pam purchased a credit monitoring service, filed a police report, and contacted all three credit bureaus to make them aware of the incident. And she is still missing $1,000.

Here are seven tips from the Better Business Bureau ® (BBB) offers to protect against telephone scams:

  1. Do not trust caller ID: Victims fall for telephone scams because they assume the number on their caller ID is the correct person. Scammers can easily spoof numbers to make it look like a certain person is calling you, when in reality they are not. Some scammers will use your own telephone number for the caller ID. Others will use your prefix with a different last four digits to make you assume you’re being contacted by a neighbor.
  2. Do not give out personal information: Any legitimate person or business who reaches out to you will already have your information on hand. If they do not, or if you receive a call out of the blue asking for personal information, just hang up.
  3. Scammers usually pose as a trusted source: Like the story from Pam who was called from someone posing as an employee in the fraud department of her bank, scammers will pose as a trusted source to attempt to obtain information from you. Hang up immediately.
  4. Do not press buttons: Many “robocallers” will prompt you to “press 9” to be taken off their call list. Pressing 9 will only do the opposite and flood your phone with even more calls. Pressing a number on the keypad alerts the scammers that they have reached an active telephone number.
  5. Beware of big name companies calling: Scammers impersonate big name companies, charities and legitimate businesses, hoping that you will be more inclined to give personal information to them. If you receive such a call, hang up immediately, find the appropriate number and call the business to verify.
  6. Sign up for the Do Not Call Registry: To cut down on the amount of calls you receive, you can register your phone number for free through the Federal Trade Commission (FTC) Do Not Call Registry. This registry prohibits calls, informational calls, telephone survey calls and calls from companies you have recently done business with.
  7. Do not answer: If you receive a call from a number you don’t recognize, let it go to voicemail. Any legitimate person or business will leave a message. If a scammer decides to leave voicemail, you will have time to think about what is being asked by them, instead of being pressured on the spot to give up your personal information.

That last tactic is the one used in our household and with my business cellphone. If I don’t recognize the number, I don’t answer the call. It makes more sense to return the call of a legitimate caller than to become involved with a scammer or telemarketer. That’s my plan and I’m sticking to it!

Another settlement agent sued for failing to protect buyer in email diversion

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My first blog of 2018 discussed a novel lawsuit (at least novel to me) brought in York County against a residential closing law firm. A home purchaser had lost $50,000 in closing funds that were diverted by a third-party criminal posing as the transaction’s real estate agent. Did you hear that? The real estate agent was hacked. The law firm was not hacked and was only involved in the loss because it was the settlement agent. 

The law firm’s paralegal and the purchaser had discussed the funds necessary to close by telephone, but no mention was made in that conversation of the wiring instructions. The complaint stated causes of action in negligence and legal malpractice and listed the following breaches of duty:

  • Requiring the purchaser to wire funds without counseling the purchaser about methods by which the secure delivery of wired funds could be compromised;
  • Failing to counsel the purchaser about the risks and insecurity of email communications, particularly of private, sensitive and financial closing information; and
  • Failing to be alerted by the circumstances of the purchaser’s telephone call to the firm’s paralegal.

email fish hook

American Land Title Association’s ALTA News, dated March 9, reports on a similar lawsuit filed in Wisconsin. The original news story was written by Brian Huber and reported by gmtoday on March 8. 

In the Wisconsin lawsuit, the email of the settlement agent, Merit Title, was apparently compromised. According to the complaint, a Merit Title employee used an unsecured system to email the closing statement and wiring instructions to the purchaser. The following month, the purchaser received an email purportedly from Merit Title, but with a missing “T” in the domain name (merititle instead of merittitle). The second email provided wiring instructions that were similar in format, structure and design to the ones sent by Merit, according to the complaint. The purchaser lost $82,000 in the scam.

The lawsuit claims Merit “had knowledge or should have had knowledge of a cybercriminal epidemic whereby hackers target title companies to learn about real estate transactions occurring and the hackers then send fraudulent wire instructions to the buyers prior to the closing.” Merit Title should have known of preventive steps to protect the buyers, the complaint stated.

My guess is that we are about to see numerous suits like this, seeking payment from the deepest pockets involved in real estate transactions. As I asked in the earlier blog, would the processes established by your law firm for the protection of your clients defend against this type of fraud?  If not, get busy and make changes.

ALTA has a list of resources that can be used to provide the appropriate safeguards, and your title insurance company should be able to assist you in implementing the appropriate resources in your office. Most of the protective procedures involve making sure your own systems are secure. But these lawsuits seems to indicate that consumers must also be advised of the dangers of dealing with others involved in closings who do not use secure systems. You don’t want to be left holding the bag for a comprised email system of a real estate agent!

Thirty-year fixed-rate mortgages

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Are they still the most logical choice for all buyers?

Is the mortgage industry due for a facelift?

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I recently saw an interesting article from MReport via American Land Title’s Newsletter dated February 26, entitled, “A Mortgage Best Fit; Lenders are bypassing the 30-year fixed-rate mortgage in favor of loans that are tailored to specific borrower niches”. I recommend that all dirt lawyers read this article to understand that the mortgages you may be closing in the future may not be the same as the mortgages you closed in the past. You can read the article in its entirety here.

My husband and I built a house and closed a mortgage loan in 2011, and, although we told the lender and real estate agent we intended to pay the loan off quickly, both insisted on the old-fashioned 30-year fixed rate mortgage with a twenty-percent down payment. The lender didn’t even offer alternatives. In 2011, the housing market was just returning from the financial debacle that began in 2007, so everyone was being extremely careful. (I remember being questioned about why our income tax picture had changed in the years leading up to 2011 and having to write a letter explaining that children grow up and leave home.) I’m not sure we would be approached in the same way today, based on this article.

First-time buyers often choose 30-year mortgages because no one explains other options and because it’s the product their parents understand and recommend. The traditional mortgage is generally the safest option because of its reliable, consistent monthly payment. Interest rates have been low for many years now, and this fact also supports the wide-spread use of the traditional mortgage. Why risk a variable rate when the fixed rate is low?

This article suggests, however, that millennials and other first-time buyers may now be more inclined to select shorter-term and adjustable-rate options. Someone who is just entering into the housing market may envision living in their starter home for only a few years and may prefer an adjustable rate mortgage to take advantage of the low interest rate up front. This article suggests that millennials may be saddled with student debt and may be a more transient group, so they don’t want to commit to anything that lasts thirty years. Few envision themselves working for a single company for any length of time. They believe they must change jobs to increase their incomes. This article also suggests that millennials may not be loyal to a geographic area.

In addition to variable rate mortgages, this article suggests the concept of the equity-sharing mortgage, where an investor shares in the appreciation in the home value in exchange for down payment assistance or lower payments. These new-fangled products may enable low- and moderate- income borrowers to enter the housing market.

Some lenders are recognizing that these trends mean that the entire underwriting process needs to be reexamined to accommodate the millennial market. And they also recognize that veterans may have difficulty getting the service and products they need to buy homes because VA loans are a little more expensive for lenders to close. More education for veterans and training for loan officers may be needed to accommodate the veteran population. Online and mobile-friendly mortgages are also likely to change the face of the mortgage industry in the future.

Department of Insurance files data security bill in SC legislature

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Bill is similar to model data security law adopted by NAIC

If you are a SC title agent, this bill will likely affect you if it passes!

The National Association of Insurance Commissioners (NAIC) adopted the Insurance Data Security Model Law, intending to promote rigorous cyber risk management practices, in October. And the South Carolina Department of Insurance (SCDOI) has introduced a similar bill in the South Carolina legislature. The South Carolina version, the South Carolina Insurance Data Security Act, is now in committee, and can be read here.

The model law creates data security standards for insurers and agents. The rules would apply to the real estate lawyers in South Carolina who are also title insurance agents. The rules require overseeing third-party providers, investigating data breaches and notifying consumers and regulators of data breaches.

security unlocked data breach

Insurers and agents will be required to have a written information security program for protecting sensitive date. Incident response plans and data recovery plans will also be required. Compliance certifications to the DOI will be required annually.

One important exemption applies to licensees with ten or fewer employees. This exemption will benefit small South Carolina law firms. Cyber security insurance may become a hotter commodity in South Carolina if this law passes, but the law is not intended to create a private cause of action.

We will watch this legislation and keep everyone posted on how it proceeds through the legislative process in South Carolina.

SC dirt lawyers sued for email funds diversion by a third-party criminal

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This is the first suit of this type I’ve seen. I’m confident it won’t be the last!

A dirt lawyer friend sent a copy to me of a hot-off-presses lawsuit filed in a circuit court in South Carolina against a closing law firm because the purchaser’s $50,000 in closing funds were diverted by a third-party criminal posing in an email exchange as the transaction’s real estate agent. My friend said he sent the case for my information. I think he sent it so I wouldn’t sleep!

Here are the facts as recited in the complaint. The names are being changed to protect all parties.

Paul and Penny Purchaser signed an Attorney Preference Form on March 28, 2017, selecting Ready and Able, LLC as their legal counsel for the purchase of a residential home and the closing of a purchase money mortgage with Remedy Mortgage, LLC.

On April 10, Paul and Penny Purchaser received Ready and Able, LLC’s “Purchaser’s Information Sheet” which required Paul and Penny to pay all closing funds over $500 to Ready and Able, LLC by wire transfer. The complaint states that these were silent as to the security of wire transfers, the security of private information to be conveyed between the purchasers and the law firm, and the security or lack of security of the use of email for closing information.

Also on April 10, Penny Purchaser telephoned the law firm and spoke with paralegal, Candy Competent, providing her with the purchasers’ Social Security numbers. The complaint states that Ms. Competent accepted the information and provided no wiring information or warnings.

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The complaint states that on April 14, Paul Purchaser received what purported and reasonably appeared to be an email from Regina Realtor, their real estate agent for the transaction, asking Mr. and Mrs. Purchaser to wire closing funds in the amount of $48,490.31 that day so that the closing scheduled for April 21 would not be delayed. Penny Purchaser replied to the email requesting wiring instructions. An attachment purporting to be wiring instructions for Ready and Able, LLC. was sent via reply email.  The complaint states that the wiring instructions reasonably appeared to be the correct wiring instructions for the law firm and appeared to be printed on law firm letterhead. This email exchange was actually with a third-party criminal.

Later on April 14, Penny Purchaser telephoned Candy Competent and requested the amount needed to close. Ms. Competent discussed the amount needed to close despite the fact, according to the complaint, that she knew or should have known that the law firm had not sent wiring instructions to the purchasers or the real estate agent.

On April 17, Ms. Competent sent an email to Mrs. Purchaser advising her to add $550 to the funds due to close to cover a survey bill that came in on April 14. No mention was made of wiring instructions in that email. The email also did not discuss the fact that the law firm had not yet provided an amount to close to the purchasers or to the real estate agent. Mrs. Purchaser wired $49,015.31 using the wiring instructions provided by the third-party criminal.

On April 21, Paul and Penny Purchaser learned for the first time that the wiring instructions were the work of a criminal third party, who received the funds and has failed to return the funds.

The complaint states two causes of action, negligence and legal malpractice, and lists the following breaches of duty committed by the law firm:

  • Requiring the plaintiffs to use wire closing funds to defendant, without counseling the plaintiffs about the methods by which the secure delivery of such funds could be compromised;
  • Failing to counsel the plaintiffs about the risks and insecurity of email communications, particularly of private, sensitive, or financial closing information; and
  • Failing to be alerted by the circumstances of Mrs. Purchaser’s telephone call on April 14, and therefore to warn her that no communication had been sent by the law firm.

Is this, in fact, negligence or legal malpractice?  We will have to wait to see.  Would the processes established by your law firm for the protection of your clients’ funds prevent this type of crime? That is the question of the day. Please discuss among yourselves!

Airbnb in Sea Pines?

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Court of Appeals says “yes” under some circumstances

I wouldn’t have predicted it, based on the history of exclusive Sea Pines Plantation in Hilton Head, its extensive set of restrictive covenants and the aggressive efforts to enforce those restrictive covenants over the years. But our Court of Appeals approved an owner’s rental through Airbnb of a portion of a residence in a December 6, 2017 case*.

Mr. and Mrs. Wall bought their residence at 48 Planters Wood Drive in 1998. The second story of the home consists of a guest suite that is accessible only by an outside staircase. In 2012, the Walls began renting a room through Airbnb, an online rental broker. The Airbnb listing was titled “Hilton Head Organic B&B, Sea Pines”. The Walls cooked breakfast for their renters.

AirBnB

Community Services Associates, Inc. (CSA), the property owners’ association in power to enforce Sea Pines’ restrictive covenants, expressed concern about the Airbnb listing, and the Walls changed the listing to the “Whole House” category and began renting out the entire first floor of their home while living in the second-story guest suite. They also dropped the “Hilton Head Organic B&B, Sea Pines” title and stopped cooking breakfast for their renters.

CSA filed suit seeking temporary and permanent injunctions against the Walls because of their alleged operation of a “bed and breakfast” in their home and the rental of less than the entire residence.

Here are the operative provisions of the restrictions:

  1. All lots in said Residential Areas shall be used for residential purposes exclusively, No structure, except as hereinafter provided, shall be erected, altered, placed or permitted to remain on any lot other than one (1) detached single dwelling not to exceed two (2) stories in height and one small one-story building that may include a detached private garage and/or servant’s quarters, provided the use of such dwelling or accessory building does not overcrowd the site and provided further that such building is not used for any activity normally conducted as a business. Such assessor building may not be constructed prior to the main building.

  2. A guest suite or like facility without a kitchen may be included as part of the main dwelling or accessory building, but such suite may not be rented or leased except as part of the entire premises, including the main dwelling, and provided, however, that such guest suite would not result in over-crowding of the site.

CSA took the position that the restrictions authorized the short-term rental of the entire residence but not part of the residence, that the Walls were operating an offending bed and breakfast, and that the guest suite included a second kitchen.

At a hearing before the master-in-equity, Mr. Wall testified that the couple kept an induction plate, a toaster oven, and a mini-refrigerator in the guest suite, and they occasionally prepared their food and washed their dishes in the suite.

The master denied the motion for injunctive relief and dismissed CSA’s complaint.

The Court of Appeals affirmed, stating that the dorm-style portable appliances used by the Walls did not create a kitchen. The Court held that the express terms of paragraph 6 require a residence with a guest suite to be rented in its entirety when the guest suite is rented out, but paragraphs 5 and 6 do not, by their express terms or by plain and unmistakable implication, require a residence with a guest suite to be rented in its entirety in every circumstance.

At best, according to the Court, paragraphs 5 and 6 are capable of two reasonable interpretations: (1) a residence with a guest suite must be rented in its entirety in every circumstance, or (2) the owners of a single family dwelling with a guest suite may stay in the guest suite themselves while renting out the remaining space. Because the latter interpretation least restrict the use of the property, the Court adopted that interpretation.

Understanding a little about the culture of Sea Pines, I will be surprised if we don’t hear more about this Airbnb issue in the future.

Does Facebook’s move into real estate signify the end of the Realtor?

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Social media has long been involved in real state. Aren’t all your real estate agent contacts your “friends” on Facebook? Aren’t you connected with them on LinkedIn? Don’t you regularly see their listings on all your social media outlets?  But the plot thickens!

According to a November 13 story in HousingWire, Facebook announced last week that it is significantly expanding the real estate listings section on its Marketplace, which is Facebook’s attempt to take on Zillow, Trulia, Realtor.com, Redfin, Craigslist, eBay and other e-commerce platforms.

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The HousingWire story, which you can read here, reports that Facebook currently allows individual homeowners to list their homes for sale on Marketplace. The new development is that Facebook is significantly expanding the real estate listings section on Marketplace. The new feature is said to be “rolling out gradually” and is currently only available via the mobile app in the United States.

And, according to the same report, Facebook is going full force into rental listings via partnerships with Apartment List and Zumper.

Facebook plans to upgrade its platform to include custom filters for location, price, numbers of bedrooms and bathrooms, rental type, square footage and pet friendly designations. Also included will be the ability to upload 360-degree photos for individual rental listings. When the potential renter selects a property, he or she will complete s contact form on Marketplace, and the property manager or agent will contact him or her directly.

Facebook says it will not participate in any transactions. It will simply connect the parties. Real estate agents are probably safe for now, but it’s a brave new world out there as social media infiltrates all aspects of our professional and personal lives! Dirt lawyers who fail to embrace social media may be left behind sooner rather than later.