South Carolina law

SC Supreme Court Warns Closing Attorneys

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Don’t be used as a “rubber stamp” or “rent” your name and status as an attorney!

businessman nametag for rentIn a disciplinary case filed on April 20,* the South Carolina Supreme Court publicly reprimanded an attorney for failing to properly supervise the disbursement aspect of a residential refinance closing. In a three-two decision, the Court pointedly seized the opportunity to warn residential closing lawyers.

The disciplined attorney worked as an independent contractor for Carolina Attorney Network, a management service located in Lexington, that provides its services to, among other entities, Vantage Point Title, Inc.  Vantage Point Title was described as a non-lawyer owned title company based in Florida. The attorney testified that 99.9% of his business comes from Carolina Attorney Network and that he had no direct contact with Vantage Point Title.

The attorney had previously been suspended for thirty days by the Court for failing to properly maintain his trust account. He stated in oral arguments in the current case that the suspension caused him to lose his ability to perform closings in the normal manner because he lost his status as an agent for a title insurance company. As a result, he said he was forced to handle closings through the management service.

The attorney testified that he didn’t recall the closing at issue, but he described the process. He said he receives closing documents via e-mail and reviews the title opinions. He verifies that a South Carolina licensed attorney completed the title opinions. He also reviews the closing instructions and the closing statements. He does not review the title commitments nor verify the loan payoff amounts. He conducts the closings and returns the closing packages with authorizations to disburse. Vantage Point disburses the funds, records the documents and issues the title insurance policies. Vantage Point then sends the lawyer disbursement logs showing how closing funds are disbursed. The lawyer reviews the disbursement logs to ensure they have a zero balance. He or an employee of Carolina Attorney Network reviews the online records of the ROD to verify that the mortgages are properly recorded.

The loan at issue had been “net funded” and the disbursement log did not “zero out”. The log showed a credit of approximately $100,000, and a disbursement of approximately $800. The Court stated that the disbursement log was inaccurate, and that the lawyer did not even know at the time of closing that the loan had been net funded.

The HUD-1 Settlement Statement in the closing at issue showed Vantage Point received approximately $800 for “title services and lender’s title insurance”, but attorney’s fees were not reflected. In fact, Vantage Point paid Carolina Attorney Network $250, and Carolina Attorney Network paid the attorney $150.

Vantage Point maintains a national trust account for all fifty states, but at some point, it opened “for unknown reasons”, according to the Court, a SC IOLTA account. Two checks were written on the IOLTA account for the closing at issue. When those two checks were returned for insufficient funds, the investigation by the Office of Disciplinary Counsel was triggered. Ultimately, all checks cleared, and no one sustained harm.

Doe v. Richardson is the controlling case. In this 2006 seminal case, the S.C. Supreme Court held that disbursement of funds in a residential refinance is an integral step in the closing and constitutes the practice of law. Richardson further held that although the attorney must supervise disbursements in residential closings, the funds do not have to pass through the supervising attorney’s trust account.

The Court stated the current case presents a situation where the lawyer conducted his duty to supervise disbursement in name only. He “rented” his name and status as an attorney to attempt to satisfy the attorney supervision requirement. There is no question, according to the Court, that the lawyer’s cursory review of the disbursement log did not satisfy the duty to supervise disbursement. The Court stated in furtherance of its concern that attorneys are being used as “rubber stamps” to satisfy the attorney supervision requirement in low cost real estate closings, and it took the opportunity in this case to expand upon Richardson.

The Court clarified that an attorney’s duty to oversee the disbursement of loan proceeds in residential closings is nondelegable. To fulfil this duty, the attorney must ensure: (a) that he or she has control over the disbursement of loan proceeds; or (b) at a minimum, that he or she receives detailed verification that the disbursement was correct.

The Court stated that, in practice, an attorney may find that utilizing his or her trust account and personally disbursing funds provides the most effective means to fulfil this duty. The Court stood by the Richardson holding, however, that residential closing funds are not required to pass through the supervising attorney’s trust account. It held that the attorney’s verification of proper disbursement, via sufficient documentation or information received from the appropriate banking institution, in addition to the disbursement log, is acceptable to fulfil this duty.

In essence, according to the Court, the lawyer was used as a “rubber stamp” for a non-lawyer, out-of-state organization with no office in South Carolina, whose involvement was not disclosed to the clients. The Court stated that it has insisted on lawyer-directed real estate closings in order to protect the public. The lawyer’s method of handling his client’s business was stated to provide no real protection and was held to be a “gross abandonment” of his supervisory authority.

Former Chief Justice Toal wrote the opinion for the Court. Justices Kittredge and Moore concurred. Current Chief Justice Pleicones dissented in a separate opinion in which Justice Hearn concurred.

The dissent characterized the case as a situation that through an error by a title company, the ODC became aware of a single closing where the attorney failed to explain the nature of a “net funding” transaction to clients who suffered no harm. Nothing in this single instance justifies a public reprimand, according to the dissent, nor justifies a modification of Richardson, adopting a non-delegable duty to oversee loan disbursements through “detailed verification” or through the receipt of “sufficient documentation or information” in addition to the disbursement log.

The dissent said that the majority neither explains what this means nor how more oversight could have prevented the title company from issuing checks drawn on the wrong account. In a footnote, the dissent accused the majority of imposing a “new, vague requirement on residential real estate closings”.

The real question becomes….what in the world will the next case on this topic hold?

*In the Matter of Breckenridge, S.C. Supreme Court Opinion No. 27625, April 20, 2016.

What’s That Terrible Smell?

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A Midlands landowner is forced to abandon his stinky property, and the SC Court of Appeals says Insurance Reserve Fund doesn’t need to pay.

The South Carolina Court of Appeals held on March 23 that the South Carolina Insurance Reserve Fund (the Fund) has no duty to defend or indemnify East Richland County Public Service District (the District) in connection with a claim by a property owner of inverse condemnation, trespass and negligence resulting from offensive odors*.stinky smell

In 2010, Coley Brown filed a complaint alleging the District had installed a sewage force main and air relief valve which released offensive odors on his property multiple times a day.

A District employee testified that a force main had been installed as a part of a larger project that included two nearby pump stations. The pump stations were designed to pump sewage through the force main when the sewage reached a certain level. Depending on the area’s water usage and weather, the pump stations might turn on as often as ten times per hour. The odor was a result of naturally occurring hydrogen sulfide-which smells like rotten eggs-and methane.

In response to the complaints, the District made several attempts to remedy the odors, including using a chlorine-based chemical, installing charcoal filters, and eventually using a granulated chemical media. When the District failed to cure the problem, Brown moved to a different location but was unable to sell the stinky property.

The District tendered Brown’s complaint to the Fund pursuant to its insurance policy, but the Fund denied coverage. Under the policy, the Fund is obligated to pay damages resulting from property damage caused by an occurrence, defined as an accident, including continuous or repeated exposure to conditions, which result in personal injury or property damage neither expected nor intended. The policy has a “pollution exclusion” that refers to gasses and fumes.

The Circuit Court found that the Fund had no duty to defend or indemnity the District in the underlying case, finding the policy’s policy exclusion to be valid despite the District’s argument that the exclusion conflicts the South Carolina Tort Claims Act. The Court of Appeals reviewed the Tort Claims Act and found no conflict. The Court also reviewed cases from other jurisdictions holding that foul odors are encompassed by such pollution exclusions.

The District then argued that an exception to the pollution exclusion applies if the discharge, dispersal, release or escape of pollutants is sudden and accidental. The Court was not persuaded by this argument, indicating the releases were not accidental and unexpected, but were a necessary function of the District’s normal operations.

* S.C. Insurance Reserve Fund v. East Richland Public Service District, Appellate Case No. 2014-000728, March 23, 2016)

Another Win for MERS.

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South Carolina Supreme Court tosses case against it brought by five Counties

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County administrators in five South Carolina counties were told they have no statutory cause of action against MERS in a case our Supreme Court dismissed on March 30.* Allendale, Beaufort, Colleton, Hampton and Jasper Counties brought suits against MERS and numerous banking institutions claiming their fraudulent practice of recordings disrupted the integrity of the public records.

The Supreme Court consolidated the five suits and assigned them to Business Court Judge Lawton McIntosh. MERS and the banking institutions filed a joint motion to dismiss, arguing the suit was barred by SC Code §30-9-30. The trial court denied the motion to dismiss, indicating dismissal is improper for a novel question of law. The Supreme Court granted cert and dismissed the actions.

MERS is a member-based organization made up of lenders, investors, mortgage banks and others. When a MERS lender takes a promissory note and mortgage, MERS is shown on the face of the mortgage as the nominee for the lender. The mortgage is recorded in the county where the real estate is located, and the loan is registered in the MERS system.

This system allows lenders to retain priority with MERS as nominee. MERS provides convenient framework through which its members can transfer notes and mortgages without having to record each assignment. As a result, the public records may not accurately reflect the true owners of mortgages.

The lawsuits claimed fraud, misrepresentation, unfair trade practices, conversion, and trespass to chattels. It sought a declaratory judgment stating MERS and the lenders had caused damage to the public index system by recording false documents. It requested injunctive relief barring further recordings showing MERS as nominee and requiring corrections to the public records. The prayer demanded direct and consequential damages to remediate deficiencies in the records, as well as compensatory and punitive damages in the event the errors could not be fixed.

The crux of the matter was surely the loss of income for the assignment fees, although that thought is never mentioned in the published opinion.

Sale of a house. Object over whiteThe statute, §30-9-30, allows a recorder to refuse to accept or to remove any document believed to be materially false or fraudulent or a sham legal process. MERS and the lenders argued the statute does not provide the counties authority to bring the lawsuit, and the counties argued that the statute allows them to bring the suit by implication. They suggest that the statute provides, by implication, the power to commence litigation to remediate the public records and to seek guidance from the Court. The Supreme Court declined to imply language into deliberate legislative silence.

The Supreme Court held that the lower court erred in declining to dismiss the suit on the ground that this is a novel issue of law despite the fact that earlier cases had held to the contrary. The Court stated that where the case involves simple statutory construction, the trial court should not deny a meritorious motion simply because the question is one of first impression.

According to the Court, the statute already provides a remedy to government officials by allowing them to remove or reject any fraudulent records. Will the counties attempt to utilize this remedy?  Only time will tell.

*Kubic v. MERSCORP Holdings, Inc. (Appellate Case 2015-001366, March 30, 2016)

Don’t Forget Significant FIRPTA Changes!

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South Carolina real estate practitioners have the pleasure of dealing with two distinct sets of tax withholding laws, one for income of non-residents of South Carolina to be reported to the S.C. Department of Revenue, and the other for the income of “foreign persons” to be reported to the IRS.

FIRPTA frogThe Federal law, Foreign Investors in Real Property Tax Act (FIRPTA), saw some significant changes effective for closings on or after February 16 of this year following President Obama’s signing into law the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”) late last year. New exemptions to FIRPTA codified by the PATH Act may encourage the flow of capital into the United States.

Under the PATH Act, when withholding is required, the amount to be withheld has changed, in most cases, from 10% to 15%.

The following summarizes, in simpler language than the Federal law, the withholding amounts required by FIRPTA as of February 16:

  • If the property will not be used as the buyer’s primary residence, the withholding rate is 15% of the amount realized, and reporting is required.
  • If the property will be used as the buyer’s primary residence and the amount realized is $300,000 or less, no withholding and no reporting are required.
  • house taxIf the property will be used as the buyer’s primary residence and the amount realized exceeds $300,000 but does not exceed $1,000,000, the withholding rate is 10% of the amount realized, and reporting is required.
  • Regardless of the buyer’s use of the property, if the amount realized exceeds $1,000,000, then the withholding rate is 15% of the amount realized, and reporting is required.

Real estate practitioners, sellers, buyers and others with questions concerning FIRPTA compliance should consult tax advisors.

SC Supreme Court Assesses “Sick” Pawleys Island Condo Project

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A 30+-year saga of leaky buildings continues to be litigated

watery apartmentFisher v. Shipyard Village Council of Co-Owners, Inc.,* involves a four-building condominium project in Pawleys Island that experienced leaks as early as 1983. The leaks began around the windows and sliding glass doors, which were defined as a part of each “unit” by the master deed, making the respective owners responsible for repairs rather than the owners’ association.

The bylaws require the Board to act if an owner fails to maintain a unit and that failure adversely affects other units or the common areas. Reducing the facts in this case to one sentence, the issue is whether the owners of units in all four buildings must be responsible for extensive repairs required in two of the buildings.

The cause of the water intrusion is still in question, but the evidence indicates the Board may have known about the leaks for years before it took action.

In 1999, the Board notified owners that they should waterproof balcony thresholds and window frames. In 2002, the Board hired a consultant who found safety issues with the windows and told the Board to pursue legal action. In 2003, the Board hired a construction company that concluded water was leaking through stucco, not windows.

In 2004, Ben and Katie Morrow, owners of a unit in Building B, replaced their windows but continued to experience water intrusion. They engaged an engineer who identified stucco cracks as the source of the problem and stated that Building B was “sick and about to become cancerous” because of the severe moisture intrusion.

And the saga continued.

In 2006, the Board received a $2.4 million proposal to replace windows in Buildings A and B and attempted to amend the Bylaws to designate the windows as common elements, which would have placed the responsibility on the Board. After two attempts to pass the amendment, the Board crafted a letter stating the amendment had passed. The letter did not address the voting procedure and, in fact, incorrectly said a special meeting had been held. The amendment did not address the sliding glass doors.

In 2007, the Board hired a consultant who identified an “open joint” directly under the doors’ thresholds which allowed water to leak to units below.  In 2008, the Board said Buildings A and B required repairs to the tune of $12 – 13 million. The Board hired yet another consultant who identified two primary problems in Buildings A and B: (1) failures in the structural concrete, including corrosion of the reinforcing steel; and (2) the building envelope was not “weather tight”. Another inspection revealed this startling list of defects in Buildings A and B:  roof, façade, edge beam, soffit, concrete, expansion joint, horizontal surface and HVAC anchorage failures, and poor to non-existent flashing in the windows and doors.

In 2008, the owners of units in Buildings C and D hired an attorney, who sent a letter to the Board asserting that a proposed special assessment was invalid because the amendment had not been property adopted, and the cost of repairs should be the responsibility of the owners in Buildings A and B. In 2009, a majority of the owners of units in Buildings C and D brought suit challenging the validity of the amendment. Later that year, the Board notified the owners that the windows and doors in Buildings A and B would be replaced through a special assessment of up to $88,398 per unit. The owners voted against the special assessment, and the Board incorporated the repair costs into the 2010 and 2011 operating budgets.

Later in 2009, the Petitioners (50 owners in Building C and D) filed a new suit, alleging negligence, gross negligence, negligent and gross negligent misrepresentation, breach of fiduciary duty and breach of the master deed and bylaws. This two suits were consolidated, and in May of 2012, the Petitioners moved for summary judgment on their negligence and breach of fiduciary duty causes of action.

The trial court granted summary judgment on the issues of duty and breach, finding the bylaws and master deed imposed affirmative duties on the Board to enforce, investigate and correct known violations, and to investigate evidence of the owners’ neglect of maintenance responsibilities. The trial court also found that the Board was precluded from asserting the business judgment rule because of its ultra vires conduct, as well as its lack of good faith and failure to use reasonable care in discharging its duties.

The Court of Appeals affirmed the trial court’s grant of summary judgment on the existence of a duty to investigate but reversed on the business judgment rule and the issue of breach. The case was remanded for trial, but the Supreme Court granted Certiorari.

The Supreme Court stated that the business judgment rule applies only to intra vires acts. In other words, the rule protects a board that exercises its best judgment within the scope of its authority. The Court held that a corporation that acts within its authority, without corrupt motives and in good faith, is protected by the rule, and remanded the case for jury consideration of whether the Board violated its obligations.

warren buffet quote

As to the issue of summary judgment on breach of duty, the Court found that the record contains at least a scintilla of evidence that the Board did not breach its duty to investigate. The Court stated that the record contains some evidence to support a conclusion that the water leaks occurred because of water intrusion through the common elements.  Thus, the trial court should not have decided the question of whether the Board breached its duty to investigate as a matter of law.

The parties are now free to litigate for years to come!

* S.C. Supreme Court Opinion 27603, January 27, 2016

County May Owe Duty to Lot Owners in Failed Subdivision

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Infrastructure regulations were not followed

scales - blue backgroundOn January 6, the S.C. Court of Appeals reversed the Georgetown County Circuit Court’s directed verdict and remanded a case involving failed West Stewart Subdivision.* The developer, Harmony Holdings, LLC, went belly up in 2007, leaving the lot owners without roads and utilities after the County failed to follow its own regulations that provided a safety net for such catastrophes.

The plaintiff owned two lots in the subdivision, and filed a negligence action, arguing that Georgetown County had a “tort-like” duty to lot owners under the plain language of its development regulations. The County denied that it owed a duty to lot owners.

The County attorney explained the administrative issues at trial. He testified that in South Carolina, a developer is generally not allowed to sell lots that do not have infrastructure (roads, water and sewer). County regulations, however, allow the County to accept cash, bonds, financial guarantees or letters of credit to ensure money is available to complete infrastructure in case a developer fails.

Under the regulations in question, the County had discretion to accept a letter of credit equal to 125% of the cost estimate to complete the infrastructure. In this case, the developer posted a letter of credit on May 23, 2006 in the amount of $1,301,705 based on a cost estimate of $1,040,000.

Also under the regulations, the County had the power to approve reductions in the letter of credit upon receipt of an engineer’s certification that a certain amount of the work had been completed and sufficient funds were available for the remaining work. Other technical procedures were also required. The County allowed for a reduction in the letter of credit on July 20, 2006, October 9, 2006 and November 8, 2006, reducing the letter of credit to $553,370. In December of 2006, the County was advised that the estimated cost to complete the infrastructure was $1,153,205, which was higher than the original estimate. Despite this information, the letter of credit was reduced again on March 9, 2007 to $156,704.

The letter of credit expired in May of 2007, and the developer gave the county a check for $140,000. In August of 2007, the developer informed the County that it no longer had the financial means to complete the construction. Then the developer declared bankruptcy.

Repko described his lot as “woods” accessible by a path but inaccessible by a road. He testified that he believes his property is valued at “zero”. He said he pays property taxes on his lot, but the County will not allow him to build because of the absence of basic utilities.

The trial court directed a verdict in favor of the County on the grounds that the regulations do not create a private duty to lot owners. (Other issues were argued that will not be discussed here.) The Court of Appeals agreed with the lot owner that the County owed a special duty to him with respect to the County’s management of the financial guaranty that allowed the developer to sell lots.

inigo montoya memeThe County had relied on a 1993 Hilton Head case.** In that case, the preamble to the development ordinances stated, “The town council finds that the health, safety and welfare of the public is in actual danger….if development is allowed to continue without limitation.” When the development failed, a lot owner sued the Town, claiming it had negligently administered its ordinances. The Supreme Court held that the ordinances did not create a special duty to lot owners because their essential purpose, according to the preamble, was to protect the public from overdevelopment.

The Court of Appeals in the current case held that, unlike the Hilton Head ordinances, the Georgetown County regulations contained no express language declaring their purpose, but reviewing them as a whole, the purpose is to protect lot owners in the event the developer does not complete infrastructure.

I expect we have not seen the end of this case!

* Repko v. County of Georgetown, Opinion 5374, January 6, 2016.

** Brady Development Co. v. Town of Hilton Head Island, 312 S.C. 73, 439 S.E.2d 266 (1993).

Creative Use of Google AdWords Gets SC Lawyer in Hot Water

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Supreme Court is not amused by timeshare attorney’s advertising technique


yellow card - suitThe South Carolina Supreme Court handed down a public reprimand last year against a Hilton Head lawyer for his resourceful use of Google AdWords.*

According to the Court, Google AdWords is an Internet marketing technique in which the advertiser places bids for “keywords”. When a Google search includes the advertiser’s keywords, the search results list may or may not include the advertiser’s ad. The advertiser pays Google for clicks on the ad from the search results.

The lawyer and his partner (the “law firm”) handled timeshare litigation and had filed numerous lawsuits against a particular timeshare company. The law firm bid on key words including the timeshare company’s name and the names of three lawyers who represented that company. The law firm’s ad appeared in some Internet search results when those names were used. The ad read:

“Timeshare Attorney in SC – Ripped off? Lied to? Scammed” Hilton Head Island, SC Free Consult”

Sometimes the law firm’s ad appeared as the first result and other times, it appeared later in the list. The law firm paid for its advertisement each time an Internet searcher clicked on the firm’s ad.

The Court held that the attorney violated the Lawyer’s Civility Oath by using the names of opposing parties and their counsel in this manner. By taking the oath, a lawyer pledges to opposing parties and their counsel fairness, integrity, and civility in all written communications and to employ only such means consistent with trust, honor and principles of professionalism.

Marketing is now virtually a necessity for successful lawyers. Attorneys are exploring many avenues in their marketing efforts, including numerous Internet marketing techniques. But, beware, this one is not a good idea!

 

*In the Matter of Naert, S.C. Supreme Court Opinion No. 27574, September 30, 2015.

A Short Time Ago in a Revenue Office Not Far Away …

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Check them out in DOR Information Letter #15-20

The South Carolina Department of Revenue (DOR) issued a Revenue Ruling and an Information Letter in 2015 addressing deed recording fees and the affidavits that must accompany deeds.

Revenue Ruling #15-3, issued earlier this year, contains a comprehensive treatment of the subject, and Information Letter #15-20, issued on December 11, creates new affidavit forms, the Affidavit for Taxable or Exempt Transfers and the Affidavit for Exempt Transfers. Former affidavits, created in 1996, and using the term “arm’s length transaction” were decertified.

darth vader

“Luke … I am your lawyer.”

Deed recording fees of $1.35 (state) and $.55 (county) per $500 or any fractional part of $500 of the value of the real estate are imposed by §12-24-10 of the South Carolina Code for the “privilege” of recording a deed. This has not changed. Also unchanged is the list of 15 exemptions, and the statement that deeds of distribution and deeds transferring property from a trust to a trust distributee upon the settlor’s death are not subject to the fees.

One statutory change from 2015 was addressed in the Information Letter. Code §2-59-140 was amended in June to provide in subjection (E) that deductions from “value” include “any lien or encumbrance on realty in the possession of a forfeited land commission which may subsequently be waived or reduced after the transfer under a signed contract or agreement between the lienholder and the buyer existing before the transfer.” This change was added to Item 5 of the Affidavit for Taxable and Exempt Transfers.

Real estate practitioners can find the Revenue Ruling and the Information Letter at www.dor.sc.gov. Be sure to use the new forms!

Paralegal Certification Program Established in SC

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The new program should not disrupt current employment of paralegals.

The South Carolina Supreme Court, acting on the request of the Chief Justice Toal’s Commission on the Profession, adopted a voluntary program for paralegal certification on November 12.

The stated purpose of the program is to assist in the delivery of legal services to the public by identifying individuals who are qualified by education, training and experience and who have demonstrated knowledge, skill and proficiency to perform substantive legal work under the supervision of licensed attorneys.

certified - stampThe program is voluntary in that the Court’s directive makes it clear that no person will be required to be certified as a paralegal to be employed by a lawyer as a paralegal. Thankfully, this program should not disrupt any South Carolina lawyer’s current employment of paralegals.  Dirt lawyers are already in a transition period because of the new CFPB rules. Adding a mandatory paralegal certification may have pushed some of us over the proverbial edge!

At the time of an application to be a “South Carolina Certified Paralegal”, the individual must be designated as a Certified Legal Assistant (CLA)/Certified Paralegal (CP) or PACE-Registered Paralegal (RP).  The designation is valid for a one-year period. To qualify for renewal, an applicant must obtain twelve hours of approved continuing paralegal education (CPE), at least one hour of which shall be devoted to the areas of professional responsibility or professionalism.  Any CLE program approved for lawyers in South Carolina will be acceptable for CPE, but other programs may be approved as well.

The Court’s order establishes a Board of Paralegal Certification which will, among its other duties, prepare and publish applications and other forms to facilitate this program. Regulations for the program may be established by the Court or the board.

SC Court of Appeals Upholds Developer’s Plan for Tailgate Condo Project

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The SPUR avoids kiddie condo status.

In a case decided in the midst of a wretched Carolina football season, the South Carolina Court of Appeals upheld a restriction against rentals to students in a condominium project that was clearly built to accommodate terrific tailgate parties.

williams brice condoLalla v. The SPUR at Williams Brice Owners Association, Inc.* involved a three bedroom condominium in the shadow of Williams Brice stadium purchased in 2007 for $470,000. Mr. and Mrs. Lalla purchased the condo intending to enjoy football games and to allow their daughter and two roommates to live there during college.  However, the great market decline beginning in 2008 spoiled their plans.

The Master Deed contained a prohibition against renting to any student enrolled in a two or four year college. But owners could allow their children or grandchildren to reside in or rent a unit along with rent-paying roommates.

When the market declined, the value of the condominium substantially decreased in value, and the Lallas unsuccessfully attempted to sell it. At the time of the appellate court hearing in 2014, the condo had been on the market for four years.

During the summer of 2010, the Lallas notified the owners’ association of their decision to rent to college students and began to do so. In June of 2010, the board of the association met and considered a comment card from a unit owner complaining that the association was allowing the project to turn into a dormitory.  Following this meeting, the board sent out a notice to each owner indicating the restrictions would be enforced and giving owners until May of 2011 to terminate any violating leases.

When the rules were not followed by Mr. and Mrs. Lalla, the association filed a declaratory judgment action seeking interpretation and enforcement of the master deed. The Lallas answered and counterclaimed, seeking a ruling that the restrictions were null and void because of changed circumstances. The association prevailed in the circuit court, and the Lallas appealed, asserting that the restrictions discriminated against a specific class of individuals (college students) and are unreasonable because the violation caused no damage to other property owners.

football tailgateThe discrimination argument failed because ”college students have not faced a long history of discrimination, are not an insular minority, and have not been classified according to an immutable trait acquired at birth.” In other words “college students” is not an inherently suspect class. The purpose of the restriction, to insure the comfort and safety of the residents and to protect the investment of the property owners by minimizing the risk of creating a dormitory-like atmosphere, was held to be rational.

The Court of Appeals also held that the economic change in circumstances failed to support the termination of the restriction because the declining market had no effect on the association’s need to minimize the risk that the project might develop a dormitory-like atmosphere.

South Carolina dirt lawyers like to see restrictive covenants enforced as written, so this case matches our world view.  And the Carolina fans among us dream of an outstanding replacement for Steve Spurrier so those terrific tailgate parties can resume!