8.09 Business Functions of Associations

• Library: South Carolina Community Association Law: Condominiums and Homeowners Associations (SCBar) (2019 Ed.)

8.09 Business Functions of Associations

A. Assessments

Assessments are critical to the operation of a homeowners association. An "assessment" is a sum of money levied by the association on the members of the association to pay for common expenses.⁵²⁵ Assessments may be "regular" — determined based on the annual budget and typically paid by the members on a monthly, quarterly, or annual basis⁵²⁶ — or "special" meaning levied to meet an unbudgeted expense which could be an emergency repair or an improvement or addition to the common property. The governing documents generally set forth a formula for determining the amount paid. For example, in a community containing single-family homes, the share of the common expenses assessed to each member might be based on the size of his or her lot. In a townhouse community, the share of the common expenses could be based on the size of the homes. Thus, in a community with 50 two-bedroom townhomes of 1,000 square feet and 50 three-bedroom townhomes of 2,000 square feet, the two-bedroom townhomes could be assessed ½% each, and the three-bedroom townhomes 1% each, of the total annual budget.

An association has the authority under the South Carolina Nonprofit Corporation Act to impose assessments on its members.⁵²⁷ Generally, corporate powers have to be exercised by the board of directors.⁵²⁸ Thus, the board typically has the authority to levy assessments.⁵²⁹ Pursuant to the South Carolina Homeowners Association Act, for a homeowners association that is not incorporated under the South Carolina Nonprofit Corporation Act, before the association may take action to increase an annual budget in any single year, it has to provide notice to the homeowners at least 48 hours in advance of the meeting in which a decision to raise the annual budget is made and that notice may be through posting notice in a conspicuous place in a common area in the community, on an Internet website maintained by the association, by electronic mail, or through methods provided in the association's bylaws that ensure actual notice.⁵³⁰

The Covenants, Conditions, and Restrictions (CC&Rs) typically also grant that authority,⁵³¹ but may restrict it as well.⁵³² For example, the CC&Rs might require that: (1) all assessments be approved by a vote of the members; (2) assessments that exceed those of the prior year by a prescribed amount be approved by a vote of the members; (3) or, special assessments be approved by a vote of the members.⁵³³ Not only does an association have the authority to levy assessments, once it does so, it may have a fiduciary duty to collect them from all of its members because if it exempts some members from paying their share of the common expenses, other members will have to make up the difference.

For an assessment provision in the documents to constitute an enforceable power of assessment, it must: "(1) express a sufficiently definite standard by which to measure liability for the assessment; (2) describe with particularity the property to be maintained; and (3) provide an ascertainable standard by which the purpose for which the assessment is levied can be objectively determined."⁵³⁴

The association is bound to follow whatever requirements the CC&Rs impose on the assessment authority.⁵³⁵ For example, in one case, the covenants provided that the association was authorized to collect a maintenance charge — assessment — from each property owner. Each lot in the subdivision was subject to a charge based on the assessed valuation of the premises as fixed each year by the local Tax Assessor. The assessment could be set at a fixed rate. The association chose to assess at a flat rate regardless of the value of the lots. The court said that the association was bound to follow the covenants and its own bylaws.⁵³⁶ A "fixed rate" did not mean a "flat fee" as a "rate" is a proportional charge based on value.⁵³⁷ The board could set one rate for improved property and another for unimproved property, but was not authorized under the governing documents, said the court, to fix the assessment charge on some basis other than assessed value for county tax purposes. Despite finding the assessment to be invalid, the court refused to find that a lot owner was entitled to a refund of prior year assessments paid in excess of what would have been due under a proper method of assessment. Instead, it held the equities favored the association as the charges for those years were assessed in good faith and the lot owner had constructive knowledge that the charges were not being assessed in accordance with the covenants and nevertheless acquiesced in the method of assessment and paid the charges. The association had spent the moneys for purposes authorized in the bylaws and the lot owner, having received the benefit of those expenditures, was estopped to claim a refund.⁵³⁸ In another case, the covenants provided that each lot was subject to an annual maintenance charge. The association levied a special assessment. The court held that action was ultra vires. The documents did not give the association power to levy special assessments. They only authorized an annual maintenance charge.⁵³⁹

In Shipyard Property Owners' Ass'n v. Mangiaracina,⁵⁴⁰ an association sought a declaration from the court granting it authority to change the assessment provisions in the CC&Rs to eliminate fixed annual assessments and equalize the assessment burden on all its members. The association invoked the doctrine of changed conditions under which a covenant can be terminated when the changes are so radical that they practically destroy the essential objectives and purposes of the covenant.⁵⁴¹ The court expressed doubt that the doctrine pertained to an assessment provision and noted it is usually applied to restrictions on the use of land. Even assuming the doctrine was applicable, there may have been a rational basis for the disparity in assessments, but in any event the association had not shown sufficient changed conditions to warrant a declaration that the fixed assessments were unenforceable or should be modified.

Does the individual deed to the member's property have to recite the obligation to pay assessments? It does not. For example, in one case,⁵⁴² the CC&Rs allowed the association to assess fees for the operation of the association and the improvement and maintenance of the common areas. A homeowner's deed did not reference the CC&Rs or assessments, but said the property was subject to restrictions of record. The court said that covenants requiring property owners to pay assessments for improvements, maintenance, or services to an association run with the land where there is an indication that the parties intended for them to do so.⁵⁴³ In this case the assessments paid for maintenance of common areas which enhanced the value of all of the properties in the community. The language of the covenant for assessments clearly showed it was intended to run with the land and was enforceable against a subsequent grantee, even if not in the deed of that grantee, if the grantee has actual or constructive notice of the covenant.⁵⁴⁴ A homeowner, noted the court, is charged with constructive notice of any restriction properly recorded within the chain of title.

The question often that arises about assessments is what remedies are available to the association if a member fails to pay an assessment? First, as the governing documents — in particular the CC&Rs — are contractual, the association can sue the member for breach of contract.⁵⁴⁵ Are assessments then merely a personal obligation of the association member? "Covenants to pay assessments have been held to be merely personal where the assessments were for very limited purposes, and the assessments had no beneficial effect on the value of the homeowners' properties."⁵⁴⁶ Assessments by homeowners associations, however, almost always benefit the property of the association members. Moreover, the CC&Rs typically provide that assessments, along with interest and costs of collection, are a charge on the land and a continuing lien on the property against which the assessment is made.⁵⁴⁷ The lien can be foreclosed in an action in equity.⁵⁴⁸ What is the status of that lien when a delinquent member files for bankruptcy? In a case before a South Carolina Bankruptcy Court, the debtors owed the association outstanding assessments at the time they filed bankruptcy. The association filed a Proof of Claim with the court setting forth a secured claim for pre-petition assessments, costs, and expenses. The court noted that the covenants specifically provided that the remedy for seeking payment of outstanding assessments was to foreclose the lien created by the covenants against the property in the same manner as prescribed by the laws of the South Carolina for the foreclosure of mortgages. There was, said the court, no requirement that the association file a notice of lien prior to foreclosure and, therefore, the outstanding assessments, fees, and costs provided for in the association's claim were perfected liens against the member's property.⁵⁴⁹

Note that under the South Carolina Homeowners Association Act the magistrates court has concurrent jurisdiction to adjudicate monetary disputes arising under the Act provided the dispute meets the jurisdictional requirements of the court.⁵⁵⁰ The maximum jurisdiction of the court is $7,500.⁵⁵¹

Most homes in a homeowners association are subject to a mortgage. What is the relationship between the lender's lien and the association's lien? In First Fed. Sav. & Loan Ass'n v. Bailey,⁵⁵² the association claimed its liens for past due assessments were superior to the mortgage lien. The covenants that authorized assessments were recorded a year before the mortgage. The association later obtained a series of judgments for unpaid assessments that were all recorded after the mortgage. The court said that covenants requiring property owners to pay assessments to a homeowners...