South Carolina Court of Appeals

SC Dirt lawyers: check your documents

Standard

SC Supreme Court issues opinion that may keep us up at night!

Are the words “developed” and “improved” used interchangeably in your form real estate documents?  You might want to pull your documents to check based on a recent South Carolina Supreme Court case.*

The Supreme Court affirmed a Court of Appeals decision finding property had not been developed into discrete lots entitling them to voting rights under a set of restrictive covenants. While the two courts agreed on that determinative point, the Supreme Court felt the need to clarify the Court of Appeals’ opinion that may be read to “conflate” the terms “developed” and “improved”. (The only word that was unclear to me was “conflate”, which I now know means to combine two or more concepts into one.)

sc-supreme-court

The Supreme Court cited a 2007 Washington state opinion for the definition of “developed”: conversion of raw land into an area suiting for building, residential or business purposes. Improving land is subject to a higher threshold, according to the Court, and would require such actions as installing utilities or buildings.

Chief Justice Pleicones and Justice Few concurred, and the Chief wrote a separate opinion for the sole purpose of expressing concern that dictating the meanings of the terms “developed” and “improved” may inadvertently alter the meaning of documents or create a conflict with legislative enactments. He used a subsection of a statute dealing with mechanics’ liens as an example.

South Carolina Code Section 29-6-10 (2) contains the following definition of “Improve”:

 “Improve means to build, effect, alter, repair, or demolish any improvement upon, connected with, or on or beneath the surface of any real property, or to excavate, clear, grade, fill or landscape any real property, or to construct driveways and roadways, or to furnish materials, including trees and shrubbery, for any of these purposes, or to perform any labor upon these improvements, and also means and includes any design or other professional or skilled services furnished by architects, engineers, land surveyors and landscape architects.”

That definition is written as broadly as possible to protect the interests of any professional who provides labor or services in connection with developing, I mean improving, real estate.

The underlying Court of Appeals opinion** indicated that platting separate lots on paper without further steps did not rise to the level of the term “develop”, which, according to the Supreme Court, is a lower threshold than the term “improve”, which, according to the statute, includes platting. Do you see the Chief’s concern? I certainly do! Good luck with those documents!

*Hanold v. Watson’s Orchard Property Owners Association, Inc, South Carolina Supreme Court Opinion 27702 (February 15, 2017)

**Hanold v. Watson’s Orchard Property Owner’s Association, 412 S.C. 387, 772 S.E.2d 528 (2016)

SC residential tax breaks are “two ships in the night”

Standard
ships passing night.jpg

“Ships that pass in the night, and speak each other in passing, only a signal shown, and a distant voice in the darkness”  – Longfellow

Tax cases can be complicated, but this one seems relatively simple. The South Carolina Court of Appeals held in late December that the homestead exemption and the primary residence (4%) classification are two entirely separate matters*.

The taxpayer, Frank Mead, turned sixty-five in 2004 and received the homestead exemption from 2005 to 2010 on his home located in beautiful Hilton Head Island. In 2011, he had a brilliant idea and rented his home for 138 days during which he traveled part of the time and stayed in a rental apartment the remainder of the time.

The Beaufort County Tax Assessor didn’t approve of Mr. Mead’s brilliant idea. She revoked the homestead exemption for 2011 on the theory that he no longer qualified because he rented his home for more than fourteen days.  Mr. Mead believed the fourteen-day limitation applied only to the primary residence (4%) classification and appealed to the Beaufort County Tax Equalization Board.

He lost in that forum but then appealed to the Administrative Law Court. The ALC found for Mr. Mead and determined that the homestead exemption and the primary residence classification are “two ships in the night” with different requirements. The Tax Assessor appealed to the Court of Appeals.  The issue was whether the homestead exemption under §12-37-250 of the South Carolina Code is available only to property that also qualifies for the preferential residential assessment ration set out in §12-43-220(c).

Section 12-37-250 provides for a homestead exemption for a person sixty-five or older when that person has been a resident of South Carolina for at least one year. Section 12-43-220(c) provides for a special property tax assessment ratio of 4% (as opposed to the normal 6%) for owner occupied legal residences.

To make the matter a little more complicated, but more advantageous to the taxpayer, the assessment ratio statute further provides that the owner-occupant of a legal residence is not disqualified from receiving the 4% classification if the requirements of Internal Revenue Code §280A(f)[2] as defined in section 12-6-40 (A), meaning the property may be rented for less than fifteen days.

The Court of Appeals noted that nothing in the homestead exemption statute makes reference to the primary residence classification statute and that the 14-day rule applies only to the four percent assessment ratio. Simple, right? Not quite so simple: interestingly, the Department of Revenue had taken the same position in a 1997 memorandum that the Tax Assessor in this case took, but withdrew that memorandum two years later.

For now, the rules are separate and distinct, and the taxpayer wins!

Court of Appeals Revises Opinion, but not Result, in Arbitration Case

Standard

It seems the arbitration cases are all over the place in 2016. We’ve discussed three cases so far this year*, and the opinion in one of these cases has been withdrawn, substituted and refiled**, but the result did not change.

The South Carolina Court of Appeals decided to make a few changes in its opinion in One Belle Hall. The earlier opinion, filed June 1, held that an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The trial court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging contained the notation: “Important: Read Carefully before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

knotted-road-sign

In the later opinion, filed September 28, the Court of Appeals addressed the South Carolina Supreme Court’s July 6, 2016 opinion in Smith v. D.R. Horton (cited in the footnote, below). In D.R. Horton, which this blog discussed on July, 14 the Supreme Court held that a national residential company’s contract contained a number of “oppressive and one-sided provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition of awarding money damages of any kind. The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair and replacement.

The difference in the two cases appears to be the location of the offending provisions. The United States Supreme Court has ruled that an arbitration agreement is separable from the contract in which it is embedded, and the issue of its validity is distinct from the substantive validity of the contract as a whole.*** The arbitration provision in D.R. Horton was construed in its entirety because various subparagraphs addressed warranty information and contained cross-references to each other. In addition, the contract did not contain a severability clause.

In the second opinion in One Belle Hall, the Court of Appeals admitted, as the supplier had conceded, that the agreement at issue was a contract of adhesion, but noted that our Supreme Court has stated that adhesion contracts are not per se unconscionable. The Court recognized that the roofing supplier’s contract continuously used language to the effect that any attempted disclaimer or limitation did not apply to purchasers in jurisdictions that disallowed them. The Court also found it significant that the agreement contained a severability clause.

In other words, since the objectionable provisions of the contract were outside the arbitration provision, and the arbitration provision is severable from the objectionable provisions, the arbitration clause is enforceable. The Court repeated its earlier point that the arbitration provision facilitates an unbiased decision by a neutral decision maker in the event of a dispute.

I believe we will see more of these cases, and I caution lawyers to be extremely careful in their drafting endeavors.

 

*  One Belle Hall Property Association v. Trammel Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016); Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27642 (July 6, 2016); and Parsons v. John Wieland Homes, S.C. Supreme Court Opinion 27655 (August 17, 2016).

**  One Belle Hall Property Association v. Trammel Crow Residential Company, S.C. Ct. App. Opinion 5407 (September 28, 2016)

***  Prima Paint Corporation v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967)

Another South Carolina Arbitration Case

Standard

Following these cases is like watching a tennis match!

This is the third blog on this topic this summer! The June 7 blog surrounded a South Carolina Court of Appeals case* that held an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The lower court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were actually contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging for the shingles contained a notation:  “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

SCORE:  15- Love in favor of arbitration

tennis ball court

Let’s Talk Dirt on July 14 addressed a South Carolina Supreme Court case that appeared to take the opposite approach. ** A national residential construction company’s contract contained a number of “oppressive and one-sided provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition on awarding money damages of any kind. The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair or replacement.

SCORE:  15-all.

Note that Justices Kittredge and Pleicones dissented, stating that the contract involves interstate commerce and, as a result, is subject to the Federal Arbitration Act (FAA), “a fact conspicuously absent in the majority opinion”. The dissent stated that federal law requires that unless the claim of unconscionability goes to the arbitration clause itself, the issue of enforceability must be resolved by the arbitrator, not by the courts. The majority construed the Warranties and Dispute Resolution provisions of the contract as comprising the arbitration agreement and thus circumvented controlling federal law, according to the dissent.

Since the property owners raised no challenges to the arbitration clause itself, the dissent would have required that the other challenges be resolved through arbitration.

In a case dated August 17***, the majority decision is written by Chief Justice Pleicones with Justice Kittredge concurring. (Do you see a pattern here?) This case involved a residential subdivision that had been built on property previously used as an industrial site. The developer had demolished and removed all visible evidence of the industrial site and removed underground pipes, valves and tanks.

The plaintiffs bought a “spec” home in the subdivision and later discovered on their property PVC pipes and a metal lined concrete box containing “black sludge”, which tested positive as a hazardous substance. The present lawsuit was brought, alleging the developer failed to disclose the property defects. The developer moved to compel arbitration.

Paragraph 21 of the purchase agreement stated that the purchaser had received and read a copy of the warranty and consented to its terms. The purchasers had been provided with a “Homeowner Handbook” containing the warranty.

The circuit court, which was affirmed by the Court of Appeals, found the arbitration clause was enforceable for two reasons:

  1. it was located within the warranty booklet, making its scope limited to claims under the warranty. The Supreme Court held that the plain and unambiguous language of the arbitration clause provides that all claims, including ones based in warranty, are subject to arbitration.
  2. The alleged outrageous tortious conduct of the developer in failing to disclose concealed contamination made the outrageous torts exception to arbitration enforcement applicable. The Supreme Court overruled all South Carolina cases that applied to outrageous torts exception, making that exception no longer viable in South Carolina.

The Supreme Court discussed the heavy presumption in favor of arbitration by the FAA and in the federal courts and the push to place arbitration agreements on equal footing with other contracts and enforce them in accordance with their terms.

SCORE:  30-15 in favor of arbitration

You won’t be surprised to learn that there was a dissent, this time by Acting Justice Toal, and a concurrence, by Justices Hearn and Beatty.

And remember that the CFPB recently announced a proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits.

SCORE:  30-all

All of these authorities affect matters involving dirt law. So the tennis match involving arbitration clauses in our area is still being played, and we will continue to watch!

*One Belle Hall Property Owners Association v. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016)
** Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27643 (July 6, 2016)
*** Parsons v. John Wieland Homes, S.C. Supreme Court Opinion 27655 (August 17, 2016

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

Standard

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!