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.

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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.

gavel house

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)

Drafting survivorship deeds continues to be a concern

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Pay attention to tricky South Carolina law!

This blog has addressed the issue of drafting survivorship deeds previously. This issue comes back up today because the South Carolina Bar’s Real Estate Practices Section’s listserv discussed this issue, in part, last week.

The thread began with a question about whether a tenancy in common with a right of survivorship is a recognized estate in South Carolina. I believe that the concern arose from some drafting liberties taken by attorneys with these deeds. In my opinion, to create a survivorship deed in South Carolina, the drafter should follow the case or the statute exactly. And it is my opinion that if the drafter follows the case or statute exactly, then a valid survivorship estate is created, and that estate will avoid probate for the property in question at the first death.

Let’s take a look at the case and the statute.

dee house

More than a decade has elapsed since our Supreme Court surprised dirt lawyers with Smith v. Cutler,* the case that told us there were already in place two survivorship forms of ownership in South Carolina. We apparently missed that day in law school! These two forms of ownership are joint tenancy (which we knew and loved) and tenancy in common with an indestructible right of survivorship (which slipped by us somehow). This is a mini-history lesson about how we got to this state of the law and a reminder for dirt lawyers to carefully draft deeds.

Under the common law in South Carolina, tenancy in common is the favored form of ownership. A deed to George Clooney and Amal Clooney (whether George and Amal are married or not) will result in a tenancy in common. At the death of George or Amal, the deceased’s fifty percent interest in the property will pass by will or intestacy laws. Joint tenancy was not favored in South Carolina, and there was no tenancy by the entirety that would have saved the property from probate (and creditors) for a married couple.

A rather convoluted 1953 case** interpreted a deed that intended to create a tenancy by the entirety as creating a shared interest in property between husband and wife referred to as a tenancy in common with an indestructible right of ownership. This is the case that the Smith v. Cutler Court referred to as creating the form of ownership we missed.

It’s not technically true that all of us missed this form of ownership. Some practitioners did use the language from the 1953 case to create a survivorship form of ownership. The magic language is “to George Clooney and Amal Clooney for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple.”  Other practitioners routinely used the common law language: “to George Clooney and Amal Clooney as joint tenants with rights of survivorship and not as tenants in common.”

Conveying title from a person to himself and another person establishing survivorship was not possible in South Carolina prior to 1996 because the old common law requirement of unities of title could not be met. To create a survivorship form of ownership, the property owner conveyed to a straw party, who would then convey to the husband and wife, complying with the unities of title requirement and establishing survivorship.

A 1996 statutory amendment to §62-2-804 rectified this problem by providing that a deed can create a right of survivorship where one party conveys to himself and another person. The straw party is no longer needed. This statute was given retroactive effect.

In 2000, our legislature added §27-7-40, which provides that a joint tenancy may be created, “in addition to any other method which may exist by law” by the familiar words “as joint tenants with rights of survivorship and not as tenants in common”.  The statute addresses methods for severing joint tenancies which typically results in a tenancy in common. For example, unless the family court decides otherwise, a divorce severs a joint tenancy held by husband and wife, vesting title in them as tenants in common.  A deed from a joint tenant to another severs the joint tenancy. A conveyance of the interest of a joint tenant by a court severs the joint tenancy.

Following the enactment of §27-7-40, most practitioners used the language set out in the statute to create a joint tenancy, “as joint tenants with rights of survivorship and not as tenants in common.” Five years later, Smith v. Cutler required us to examine our drafting practices with fresh eyes. The court held that a joint tenancy with a right of survivorship is capable of being defeated by the unilateral act of one tenant, but a tenancy in common with an indestructible right of survivorship is not capable of being severed by a unilateral act and is also not subject to partition.

Real estate lawyers in the resort areas in our state are often asked to draft survivorship deeds because couples from other states are accustomed to tenancy by the entirety. Until Smith v. Cutler, most practitioners did not believe different estates were created by the different language commonly in use. We believed joint tenancy was created in both cases.

Now, clients should be advised about the different estates and should choose the form of ownership they prefer. I’ve discussed this issue with many lawyers who advise married couples to create the indestructible form of ownership under the case. Others who seek survivorship are often advised to create joint tenancy under the statute.  I see many deeds from the midlands and upstate that use the traditional tenancy in common form of ownership. I’ve heard estate planners prefer tenancy in common so the distribution at death can be directed by will. Lawyers who draft deeds for consumers need to be aware of and need to address the various forms of ownership with their clients.

One final thought on the survivorship issue in South Carolina. Do we now have a form of ownership that protects property from creditors of one of the owners? If a tenancy in common with an indestructible right of survivorship is not subject to partition, then it may not be reachable by the creditors of one of the owners. Let me know if you see a case that makes such a determination. It would be an interesting development.

If anyone on the listserv has different opinions from those stated here, I would love to hear them. The real estate bar in South Carolina would love to hear them, too!

 

 

 

*366 S.C. 546, 623 S.E.2d 644 (2005)

**Davis v. Davis, 223 S.C. 182, 75 S.E.2d 45 (1953)

You learn something new every day!

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Question gives insight into IRS collection procedures against JTROS properties

In August of last year, an excellent South Carolina real estate lawyer raised this issue with Underwriting Counsel in our office:

The property owners are Sally Seller and Samuel Seller, as joint tenants with right of survivorship. Sally Seller died January 7, 2017. A federal tax lien was filed against Sally Single, Mrs. Seller’s maiden name, March 3, 2014. Mr. and Mrs. Seller were married in April 20, 2015. Please confirm that we should either pay off this lien at closing or obtain a release from the IRS.

Title insurance underwriting is all about pre-closing risk prevention and risk management, and I always joke that underwriting is more of an art than a science. This is true, in part, because few issues in the law are black and white. Most lawyers will confirm that a fair amount of gray area exists in most legal questions. But I digress.

The truth is that when a trusted, intelligent real estate lawyer calls her friendly South Carolina title insurance underwriter and says, in effect, “I should deal with this title problem at closing, shouldn’t I?”… that is an easy answer! Unless the Underwriter knows of a magic solution to eliminate the title issue, the friendly title insurance Underwriter will almost always respond, “Yes, please take care of that issue at closing.”  That’s exactly what our Underwriter did in this case last August.

Around Halloween, a follow-up question was raised:

The sellers’ attorney has been working on obtaining a satisfaction for the IRS lien, but the IRS has told him that the lien will not be released or satisfied because the taxpayer is deceased. IRS Agent Arnold Adams (IRS ID#10000797284)* referred me to Notice 2003-60. The IRS agent further said it will not file a release of lien for the convenience of title insurance companies and mortgage lenders**, but that the tax lien upon the death of a joint tenant is extinguished and not collectable on the basis of U.S. vs. Craft*** and its application.

The IRS notice linked above is entitled “Collection Issues Related to Entireties Property”. Every South Carolina dirt lawyer knows that we do not have a tenancy by the entirety form of ownership in South Carolina. If we don’t have that form of ownership, then does this IRS Notice have any application in South Carolina?

Married couples in South Carolina can own properties as tenants in common, joint tenants with right of survivorship or joint tenants with an indestructible right of survivorship under Smith v. Cutler.****

Several years ago, my friend and fellow South Carolina dirt lawyer, Paul Dillingham, called me to twist my arm to write an article with him for the Bar’s South Carolina Lawyer magazine, linked here, about a couple of deed drafting traps that were troubling him. In that article, we questioned whether Smith v. Cutler had created, in effect, a tenancy by the entirety form of ownership. That case dealt with property owned by couple pursuant to a deed with this language:

“for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple”

The case held that property owned pursuant to the quoted language cannot be partitioned. If the property cannot be partitioned by the creditor of one owner, then the IRS Notice would have application in South Carolina. Apparently the IRS agent who was questioned for this closing believes the notice does apply in the Palmetto State, but please note that the question before the IRS agent didn’t deal with the Smith v. Cutler form of ownership. It dealt with a standard joint tenancy with the right of survivorship.

Did the IRS Agent give our South Carolina good advice? Would all IRS agents give the same advice? Can we ignore this IRS lien for the purposes of closing? What do you think?

This is fictitious name and number. Don’t try to contact this IRS agent!

** That wasn’t very friendly!

*** 545 U.S. 274 (2002)

**** 366 S.C. 546, 623 S.E.2d 644 (2005)

Federal class action seeks to invalidate non-condo HOA foreclosures

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Is there authority for these foreclosures under SC law…or not?

On January 9, a lawsuit was filed in the Federal Court in Charleston seeking to certify a class of plaintiffs who have faced foreclosure in situations where the Horizontal Property Regime Act was not involved. In other words, the properties are not condominiums and are not subject to the statutory scheme that establishes lien and foreclosure rights in owners’ associations. The power to foreclose these properties is supported only by restrictive covenants, that is, only by contract.

subdivision

The complaint refers to a good faith estimate that one-third of all South Carolinians own property subject to restrictive covenants establishing owners’ associations, and those associations manage more than $100 billion in assets. Many of the properties are separate lots of land in contrast to “slices of air” in condominium projects.

The defendants in this class action suit include five homeowners’ associations in various counties in South Carolina, four law firms who represent the associations in their foreclosure actions, and five management companies who manage the business of the associations in various counties in South Carolina. All are said to be representative of the associations, law firms and management companies who do business across the state.

The class intends to exclude all associations governed by the Horizontal Property Regime Act. It also excludes employees, owners, officers, partners and management of the law firm and management defendants. The law firm and management defendants are alleged to be agents of the owners’ associations.

The main issue in the suit is whether non-condominium associations have the right to file liens and prosecute foreclosures for unpaid property assessments under South Carolina law. Underlying issues include whether the defendants have violated the Fair Debt Collection Practices Act, whether they have interfered with the plaintiffs’ contracts with their mortgage holders, and whether they have the power to lawfully evict homeowners for unpaid assessments.

The owners’ associations are typically established as non-profit corporations, and the suit questions whether non-profit corporations have the power to create liens for unpaid dues or assessments prior to obtaining judicial judgments.

The suit accuses the defendants of seeking to use the equitable remedy of foreclosure in actions that seek monetary damages for contractual breaches. The inability to use equitable remedies to collect money damages is well established in South Carolina law, according to the complaint. The complaint further states that the remedy of foreclosure is used to frighten the plaintiffs to settle their claims to avoid losing their homes.

The law firm defendants were accused of violating Professional Conduct Rule 3.3 by making deceitful arguments to courts. The law firms were also accused of demanding fees that are not proportionate to the hours devoted to the files in violation of Rule 1.5.

Threatening communications and pressure tactics are allegedly used to settle claims, typically without the advice of counsel because the amounts in controversy are often so small that the homeowners are unable to obtain legal counsel on a cost-effective basis. Typically, according to the complaint, holders of first mortgages are not named in the HOA foreclosures. The homeowners continue to be obligated to make their mortgage payments despite being evicted from their homes by their owners’ associations.

The first cause of action is violation of the Fair Debt Collection Practices Act on the theory that there is no right to use pre-suit liens or the equitable remedy of foreclosure by owners’ associations to collect damages in the form of past due assessments. The use of unjustified liens and foreclosures is alleged to constitute false, deceptive or misleading representations to collect debts.

The second cause of actions seeks a declaratory judgment that the activities of the defendants are unlawful. One point raised in this cause of action is that the homeowners are denied their statutory homestead exemption rights by the defendants’ actions.

The third cause of action is for intentional interference with the contractual relationship with the homeowners’ mortgage companies. The mortgage holders have a right to be named in actions that attempt to impair their interests in the subject properties, according to the complaint.

The complaint seeks actual, compensatory and consequential damages, in addition to punitive damages and attorneys’ fees. I can’t wait to see what happens with this one!

Did you hear the one about Katy Perry and the convent?

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It’s not a joke! It’s a true, real estate story!

Dirt lawyers, you know how your friendly title insurance underwriters are always harping about authority issues?  You have to carefully determine that the individuals with authority to sell or mortgage real estate are the individuals who actually sign the deeds and mortgages involved in your transactions.

katy perry nun

How do you solve a problem like Katy Perry?  (image from dailystar.co.uk)

And you know how the same friendly title insurance lawyers really harp about authority issues involving churches? Hardly a seminar goes by without the mention of a problematic closing or claim involving church property. I always say you should be particularly suspect if anyone, like a preacher, says he or she can act alone to sell or mortgage church property. Church transactions almost always involve multiple signatories.

Lawyers involved in transactions concerning church properties must ascertain whether the church is congregational, meaning it can act alone, or hierarchical, meaning a larger body at a conference, state or even national level must be involved in real estate transactions. In South Carolina, we have seen recent protracted litigation involving the Episcopal Church, making real estate transactions involving some of the loveliest and oldest church properties in our state problematic at best.

Lawyers must also determine, typically by reviewing church formation and authority documents, which individuals have authority to actually sign in behalf of the church. It is not at all unusual to find a church property titles in the names of long-deceased trustees.  It is always advisable to work with local underwriting counsel to resolve these thorny issues.

With that background, let’s dive into this Katy Perry story. The superstar decided to purchase an abandoned convent sitting on 8.5 acres in the beautiful Los Feliz neighborhood of Los Angeles for $14.5 million in 2015. Only five nuns were left in the order, The Sisters of the Most Holy and Immaculate Heart of the Blessed Virgin Mary. This order had previously occupied the convent for around forty years. Two of the nuns searched the web to find Katy Perry’s provocative videos and music and became uncomfortable with the sale. Instead, those two nuns, without proper authority, sold the property to a local businesswoman, Dana Hollister, for only $44,000 plus the promise to pay an additional $9.9 million in three years.

Proper authority for the sale should have involved Archdiocese Jose Gomez and the Vatican. Both were required to approve any sale of property valued at over $7.5 million. The Archdiocese believed Ms. Hollister took advantage of the nuns and brought suit. After a jury trial that lasted almost a month, the church and Ms. Perry were awarded $10 million on December 4. The jury found that that Ms. Hollister acted with malice to interfere with Perry’s purchase. Two thirds of the verdict are designated for the church and one third for Ms. Perry’s entity.

Assuming lawyers were involved in the Hollister closing, you would not want to be in their shoes! Always pay careful attention to authority issues in your real estate transactions. In South Carolina, real estate lawyers are in the best position to avoid problems like the ones in this story.

DOR issues new Revenue Ruling on Deed Recording Fees

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The South Carolina Department of Revenue issued Revenue Ruling #17-5 concerning Deed Recording Fees on August 28, 2017. This advisory ruling supersedes Revenue Ruling #15-3.

The new ruling is 39 pages long and covers the topic comprehensively in a question and answer format. This document is an excellent tool for lawyers with unusual transactions and for lawyers and paralegals who are new to the topic. The statutory scheme is set out in full, and the remainder of the document is stated to “summarize longstanding Department opinion concerning the taxability of these transactions.”

One question addressed how the deed recording fee should be paid when the real estate is located in more than one county. The answer cited Code §12-24-50 which requires an affidavit addressing the proportionate value in each county. The answer contained an example:

“For example, ABC Corporation sells realty, approximately 10 acres, to XYZ Corporation for $1,000,000. The realty is located in two counties, with 3 acres in County A and 7 acres in County B, However, because of the location of the 3 acres in County A (e.g., located at a major intersection, of the waterfront, etc.), the value of the 3 acres in County A is $700,000 while the value of the 7 acres in County B is $300,000.

Based on these values, 70% of the value is assigned to County A and both the state and county portions of the deed recording fee are paid in County A based on $700,000 consideration paid. (Total Fee Paid in County A: $2,590 ($1,820 State Fee and $770 County A Fee)). The remaining 30% of the value is assigned to County B and both the state and county portions of the deed recording fee are paid in County B based on $300,000 consideration paid (Total Fee Paid in County B: $1,110 ($780 State Fee and $330 County B Fee)).”

Another interesting* question addressed the method for correcting the mistake of recording a deed in the wrong county. (No one I know personally has ever had that problem.) Here’s the answer:

“Since the deed recording fee is actually a single fee composed of a state portion and a county portion, the entire fee must be paid when any deed is recorded with the county clerk of court or register of deeds.

Therefore, if a deed is recorded in the wrong county (e.g., a deed for realty in Lexington County is incorrectly recorded in Richland County), then the deed should be recorded in the correct county. The entire fee of “one dollar eighty-five cents for each five hundred dollars, or fractional part of five hundred dollars, of the realty’s value as determined by Section §12-24-30” should be paid in the correct county.

After recording the deed in the correct county, the person legally liable for the deed recording fee should then file a claim for the fee paid in the wrong county in accordance with the refund procedures for the deed recording fee established in SC Revenue Procedure #15-1. In addition to the information and documentation required in SC Revenue Procedure #15-1, the person filing the claim for refund should also provide the Department documentation that the deed has been recorded in the correct county. The Department will refund the state portion and order the county to refund the county portion.”**

Transfers to a spouse are exempt regardless of whether consideration is paid. Transfers to a former spouse are not exempt unless the transfers are made pursuant to the terms of a divorce decree or settlement. Query, why would anyone transfer real estate to a former spouse unless required to do so by a divorce decree or settlement?

This detail is provided to make the point of how comprehensive this document is and how helpful it might be in your practice. Take advantage of this guidance, particularly for lawyers and paralegals you need to train.

*You can measure how much of a dirt law nerd you are by how interesting you find this.

**They didn’t promise to make it easy.