Chapter 5 South Carolina Commercial Real Estate Lending

• Library: Practical Guide to Commercial Real Estate in South Carolina (SCBar) (2024 Ed.)

Chapter 5 South Carolina Commercial Real Estate Lending

Judith L. McInnis

A. Overview

This chapter provides an overview of South Carolina law relating to loans made by institutional lenders which are secured by commercial real estate. Aspects of financing relating to loans secured by traditional commercial real estate collateral such as shopping centers, hotels, apartments and resort properties are covered. This chapter does not address the financing of timeshares, condominiums or apartments.

This chapter deals primarily with South Carolina aspects of commercial real estate financing and does not attempt to provide a treatise on real estate financing in general.

B. Commitment Letter

The first formal step in the lending relationship between a borrower and a lender is often the commitment letter. The commitment letter is the agreement between the borrower and the lender with regard to the terms of the loan, the items required for closing and the timing of the transaction.

C. Loan Documents

The lender's counsel will typically prepare a set of loan documents to evidence the terms and requirements of the loan and to obtain the collateral that will secure the loan.

Although there is some case law providing that the Federal Arbitration Act may preempt South Carolina law in certain situations, South Carolina law requires that all documents which are subject to arbitration contain a notice similar to the following at the top of the first page:¹

THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO THE FEDERAL ARBITRATION ACT AND/OR § 15-48-10 OF THE SOUTH CAROLINA CODE OF LAWS (1976), AS AMENDED.

The loan documents often include the following:

1. Promissory Note

The promissory note states the borrower's obligation to repay the loan to the lender at the agreed interest rate and time.

No usury laws apply to commercial loans in South Carolina so there is no limit on the amount of interest that may be charged. S.C. Code Ann. § 37-10-106. Interest or other fees in the nature of a penalty, such as default rate interest, may not be enforceable. See S.C. Department of Health and Environmental Control v. Kennedy, 344 S.E.2d 859 (Ct. App. 1986). The enforceability of certain prepayment fees, including those triggered by acceleration or actions beyond the borrower's control, is uncertain. See In Re Worldwide Wholesale Lumber, Inc., No. 06-01499-JW, 2007 Bankruptcy LEXIS 1564 (Bankruptcy DSC February 12, 2007).

2. Loan Agreement

The loan agreement typically contains agreements between the borrower and the lender regarding the loan, conditions for loan advances, representations and warranties, affirmative and negative covenants, and events of default.

3. Mortgage

South Carolina is a mortgage state so a lien is granted on all real property collateral when it is mortgaged to the lender. S.C. Code Ann. § 29-3-10. Rather than actually conveying title to the lender, the mortgage grants the lender a lien on the real property until the stated conditions have been satisfied. A mortgage may encumber fee simple interests, easements and/or leasehold interests. S.C. Code Ann. § 30-5-130. A mortgage must contain a description of the secured debt, a granting clause, the borrower's address, the mortgagee's address, the signature of the borrower under seal, two witnesses, a probate or acknowledgement, and a property description that includes a derivation clause and tax map number.

A mortgage must be recorded in order to be effective against subsequent creditors or purchasers for valuable consideration without notice. S.C. Code Ann. § 30-7-10. In order to be in recordable form, the execution of the mortgage must be witnessed by two credible individuals and properly probated or acknowledged. S.C. Code Ann. § 27-7-10 and § 30-5-30. In the past, the probate form was widely used in South Carolina; however, more recently, the statutory acknowledgement form and acknowledgements under the Uniform Recognition of Acknowledgements Act have become commonly used and accepted throughout the...