SC Lawyer, January 2012, #3. Homeowners' Associations in South Carolina.

• Author: By Joseph L.V. Johnson

South Carolina BAR Journal

2012.

SC Lawyer, January 2012, #3.

Homeowners' Associations in South Carolina

South Carolina LawyerJanuary 2012Homeowners' Associations in South CarolinaBy Joseph L.V. Johnson Anyone who practices real estate law regularly knows the common pitfalls when he or she steps up to the closing table. Is the HUD-1 filled out correctly? Does the exhibit page for the mortgage actually show the property that is being mortgaged? Has the wire come through prior to disbursement? These are the common tasks that come in any given closing situation, and inevitably there will be issues with any or all of these. In the last few decades, as real estate transactions become more and more complicated, a different question has been added to the checklist: Have the homeowners' dues been paid?

Usually, the failure to pay the dues (or to figure out who is to pay the dues beforehand) is not going to be a deal-breaker when it comes to closing on a piece of property. For the most part, when people are exchanging in excess of $200,000 worth of funds or property, a few hundred dollars at most won't put the brakes on the whole deal. But the implications that come along with those funds can be far-reaching and lead to some complicated legal situations. This article will explore those circumstances and how to avoid putting yourself or your client in an uncomfortable situation.

Homeowners' associations generally

Homeowners' associations are not a novel concept in South Carolina, but in recent years they certainly have gained popularity. In the most general terms, a homeowners' association is an entity, which may or may not be incorporated, that collects funds from its individual members to help benefit all the members. The benefits bestowed upon the members may include road improvements and security, but most likely, improvements to the "common elements." The South Carolina Horizontal Property Act (discussed in more detail infra) contains a laundry list of potential "common elements" such as elevators, garbage incinerators, basements, flat roofs, yards, main walls, roofs, halls, lobbies and stairways. S.C. Code Ann. 27-31-10 to -440 (2005 and Supp. 2010). Basically, anything that anyone who is a member of the homeowners' association may use in common with other members is a "common element."

As stated above, homeowners' associations do not have to be incorporated, but frequently are as non-profit corporations. Regardless if they are incorporated or not, they typically are run like a business. Every member has a specific amount to pay, their "dues" or "assessments," either on a monthly or annual basis. These funds are collected by the homeowners' association and placed in either an operating account or a reserve account. Thereafter, the funds are used to pave new roads, make repairs, build new pools, etc.

Homeowners' associations normally are operated pursuant to some sort of declaration of conditions and restrictions (declaration) or, if incorporated, through its own set of bylaws. For property falling under the South Carolina Horizontal Property Act, the declaration is found in the recorded master deed. Within the declaration, the specific guidelines as they pertain to assessments and restrictions are outlined, as well as the enumeration of the authority of the homeowners' association. Essentially the relationship between the homeowners' association and its members is contractual in nature. Therefore, if either party violates the terms of the declaration, there may be grounds for legal action under basic contract law. Quite often, the declarations, or restrictive covenants, are recorded separately and in fact do not have to be stated within the deed for a prospective buyer. Harbison Cmty. Ass'n v. Mueller, 319 S.C. 99, 459 S.E.2d 860 (Ct. App. 1995). The idea of homeowners' associations seems entrenched under a simple premise, but as referenced earlier, there can always be obstacles. Most conflicts that arise under a homeowners' association regime are normally derived from one of two sources: assessments or restrictions.

Homeowners' assessments

Every property owner within the specific geographical area that falls under the purview of the homeowners' association, whether it is a condominium, subdivision, single-family home or any other real property scheme, must be a member of the homeowners' association. The duty to join the association comes along with acquiring the piece of property. To some buyers this may seem off-putting, but quite literally, it comes with the territory.

The fees that are due from the property owners vary depending on the property itself. Naturally, the more luxurious and expansive the common elements are, the more expensive the fees will be. As stated above, the actual amount due will be enumerated within the declaration. Inevitably there will be a situation in which the property owner disputes the fees due or simply fails to pay them at all. What course of action can the homeowners' association take to recover its damages? Probably the most common sense approach would be to file suit against the property owner alleging a specific breach of the declarations, requesting the court grant a judgment against the property owner, and attaching a lien to the property. In addition, the Horizontal Property Act provides specific guidance for foreclosing on a lien for past due assessments. S.C. Code Ann. 27-31-210 (Supp. 2010). Likewise, a property owner could file a declaratory judgment action seeking to invalid or amend the declarations if they believe the dues are unreasonable.

One of the first major cases to deal with homeowners' association's fees in South Carolina was Seabrook Island Prop.erty Owners Ass'nociation v. Pelzer, 292 S.C. 343, 356 S.E.2d 411 (1987). In this action, the Seabrook Island Property Owners Association filed suit against a property owner to collect unpaid annual assessments for two lots on Seabrook Island. The property owner counterclaimed, arguing that the assessments were invalid and further asking for refunds from previous assessments claiming they too were invalid. The homeowners' association was governed by both protective covenants and bylaws as a non-profit corporation. Both the bylaws and the protective covenants gave the homeowners' association authority to assess and proscribed the method of assessment; both documents relied on the Tax Assessor for Charleston County to base the assessment figures. The homeowners' association was assessing the property owners "on a fixed fee basis without regard to the value of their property. Owners of improved lots are assessed at one uniform fee, regardless of the value of their lots; owners of unimproved lots are assessed at another uniform fee, regardless of the value of their lots." Id. at 346, 356 S.E.2d at 413.

The homeowners' association argued that the language in the bylaws stating that "such maintenance charged may be set at a fixed rate for unimproved property and a fixed rate for improved property" (emphasis added) allowed the Association to assess the properties at a flat fee. Id. at 347, 356 S.E.2d at 413. The Court of Appeals disagreed, stating "[a] 'rate' is proportional charge based on value, not a flat fee. A 'fixed rate' is a fixed amount of assessment per stated amount valuation." Id. In other words, the homeowners' association may have set assessment values differently for improved and unimproved properties, but those values must have been based upon valuations from the Tax Assessor of Charleston County pursuant to their own bylaws and covenants.

The Seabrook case also adjudicated the issue of a property owner seeking refunds for previously paid assessments. Specifically, the property owner requested a refund of payments from 1976 until 1983, claiming the assessments were invalid for the aforementioned reasons. The Court of Appeals disagreed, stating "If a party stands by and sees another dealing with his property in a manner inconsistent with his rights and makes no objection while the other changes his position, his silence is acquiescence and it estops him from later seeking relief" Id. at 348, 356 S.E.2d at 414 (citing Mclintic v. Davis, 228 S.C. 378, 90 S.E.2d 364 (1955)). The downfall for the property owner in this case as it pertained to the refunds of his dues was the fact that he paid them in the first place.

Another appellate case derived from an assessment dispute was The Battery Homeowners Ass'ociation v. Lincoln Fin.ancial Resources., Inc. 309 S.C. 247, 422 S.E.2d 93 (1992). In this case, the homeowners' association filed suit against the property owner for failure to pay assessment fees pursuant to the filed Declaration of Covenants, Conditions and Restrictions. The homeowners' association was formerly an incorporated entity, but was dissolved by the Secretary of State (ironically, for failing to pay its fees). The homeowners' association continued on as an unincorporated homeowners' association. The property owner argued that the declaration only authorized the original incorporated homeowners' association to assess fees, and that the unincorporated homeowners' association was not the same entity, and thus had no authority to assess fees. The Supreme Court disagreed with this argument, finding that the declaration defines the homeowners' association as "the Battery Homeowners Association, Inc., its successors and assigns," and therefore, the unincorporated homeowners' association was a successor to the incorporated version. Id. at 250, 422 S.E.2d at 95.

As referenced above, a question arises when a property owner fails to pay his or her assessments: what exactly can the homeowners' association do to collect? The Court of Appeals tackled one such issue in First Fed. Sav. and Loan Ass'n of Charleston v. Bailey, 316 S.C. 350, 450 S.E.2d 77 (Ct. App. 1994). In this case, the property in question was foreclosed upon by the mortgage holder; the homeowners' association was included as a defendant because it held judgment liens for past due assessments. Although the declarations authorizing assessments were recorded prior to the mortgage, the Court of Appeals determined that the mortgage held priority over the lien for past assessments. The court considered the equitable nature of the claim and determined that the "judgments for assessments constitute liens against the property only from the time the amounts of the respective assessments represented by the judgments were fixed and became due." Id. at 357, 450 S.E.2d at 81. The homeowners' association's assessments could not relate back to the date of the recording of the declarations, and they therefore held a junior lien subject to the mortgage. This case further stands for the proposition that covenants requiring property owners to pay fees to a homeowners' association have been held to run with the land. Id at 354, 450 S.E.2d at 79.

There are, in addition to the above-cited, other practical issues to bear in mind when dealing with homeowners' association assessments. First, remember that the budgetary process for the common areas may be constantly varying. Quite often the amount of the assessment may be altered based upon the amount of units that are actually paying and how much income is needed to maintain the common areas. If there were a decrease in the number of members paying into the homeowners' association and an increase in the amount needed for upkeep, the dues would undoubtedly increase. This scenario also leads to the question of what happens to the members who pay their dues when other members don't pay. If the homeowners' association needs a set amount yearly to cover the common areas expenses, then it's possible that the ones who do pay could be punished. The terms of the declaration may govern this situation; the best case scenario would be that the homeowners' association has a reserve fund that will cover the members who rightly paid their dues. In addition, the Horizontal Property Act (discussed below) contains provisions that state that the unpaid common expenses after a foreclosure sale are deemed to be common expenses collectible from all of the owners. S.C. Code Ann. 27-31-210(b)(Supp. 2010). In other words, the ones who pay are ultimately punished by those who do not via increased assessments. A future property owner should be made aware of the possibility that his/her assessments may be changed by either increases in expenses or failure of others to pay.

Restrictive covenants

As mentioned above, declarations adopted by homeowners' associations not only form the guidelines for assessment, but they very often impose restrictions on the property owners' use of their land. One does not have to form a homeowners' association to enact restrictive covenants-they are often found within simple deeds, or sometimes in subdivisions without formal associations. You will, however, scarcely find a homeowners' association that does not have restrictive covenants.

There are several appellate cases that deal with restrictive covenant disagreements, but one of the more recent cases specifically on topic with homeowners' association covenants is Gibbs v. Kimbrell, 311 S.C. 261, 428 S.E.2d 725 (Ct. App. 1993). In this case, a property owner of a corner lot to the entrance to a subdivision began construction on a garage for the purposes of running a business there. The neighbors filed suit seeking an injunction preventing the operation of the business and additional costs. One issue in the case was determining what constituted the "front of the lot" for purposes of interpretation of the declarations and covenants. The property owner argued that his lot "faced" a certain road, that the declarations and covenants were ambiguous to this issue, and that the front of the lot should be the direction in which his home was to face. The Court of Appeals disagreed with these arguments, stating:

Although we agree with the Kimbrells that the Diamond Point covenants, if considered alone do not define the front of lot 12, we resolve this uncertainty by consideration of the general scheme of development of the subdivision.... Id. at 267, 428 S.E.2d at 729.

Arguably, the more important ruling in the Gibbs case dealt with the issue of seeking relief against one property owner when other property owners within the same scheme are likewise violating the declarations and covenants. The property owner was arguing that the neighbors were estopped from attempting to enforce the covenants because they had permitted violations by other property owners. The Court of Appeals again disagreed: "Regardless the violation of covenants by other residents of the subdivision without objection by the Gibbs' would not affect their right to enforce the covenants against the Kimbrells unless the character of the subdivision has changed so radically as to defeat the purpose of the covenants." Id. at 268, 269, 428 S.E.2d at 730 (citing Circle Square Co., 267 S.C. at 628, 230 S.E.2d at 708 (S.C. 1976)).

Another informative homeowners' association covenant case was issued in 2006, Cedar Cove Homeowners Ass'ociation, Inc. v. DiPietro, 368 S.C. 254, 628 S.E.2d 284 (Ct. App. 2006). In this case, the homeowners' association filed suit against the property owner for violation of the restrictive covenants after the property owner had constructed a patio that encroached on the common areas. The master granted an injunction against the property owner to remove the portion of the patio that encroached onto the common areas. The Court of Appeals reversed the decision of the master by balancing the equitable nature of an injunction. The court emphasized the language of the restrictive covenants that stated "PROVIDED HOWEVER that if approval or disapproval is not submitted, or no suit to enjoin construction is commenced prior to substantial completion thereof, it shall be presumed that the party has fully complied with this restriction." Id at 286. Basically, the court determined that there never was a formal disapproval. The court stated, "The Association, which claims a desire for strict compliance with the covenants, may not escape from its own lack of compliance with the restrictive covenants." Id at 287. In simpler terms, the old adage of "two wrongs don't make a right" still rings true. (Also, there is an interesting take in Judge Anderson's dissent in dealing with the issue of whether a homeowners' association may maintain a trespass action against their residents. Id. at 290. He concludes there was a trespass in this case, emphasizing that even though the property owner may have interest in a common area, the homeowners' association is the owner.) (Further, for a good lengthy discussion about amending restrictive covenants, see Queen's Grant II Horizontal Prop.erty Regimev. Greenwood Dev.elopment Corp.oration, 368 S.C. 342, 628 S.E.2d 902 (Ct. App. 2006)).

Horizontal Property Act

Inevitably, an attorney who practices in the realm of homeowners' associations regularly will encounter the South Carolina Horizontal Property Act during his/her legal career. S.C. Code Ann. 27-31-10 to -440 (2005 and Supp. 2010). Though the title can be construed somewhat as a misnomer (the Act actually more often regulates vertically than horizontally), it still is essential for a real estate attorney to be well versed in its basic premise.

The South Carolina Horizontal Property Act has been in effect in South Carolina for nearly 50 years. The statutory foundation was to regulate the airspace that accompanies property rights, most notably in condominium developments. Within the statute are specific requirements for a property owner to follow in order to be considered falling under the Act, commonly known as being under the regime. One of the first steps is the recording of the master deed, which in and of itself has become a frequently litigated issue. The contents of the master deed include accurate descriptions of the property and apartments. S.C. Code Ann. 27-31-100 (Supp. 2010).

A tale of caution for those drafting master deeds can be found in Richland Horizontal Property Regime Homeowners Association, Inc. v. Sky Green Holdings, Inc., No. 4795 (Ct. App., February 23, 2011) (Shearouse Adv. Sh. No. 7). The master deed recorded in this case contained a cover page, after which, a page stated: "This is the first page of the Master Deed for the Richland Horizontal Property Regime ... This page and this page only shall be deemed the first page of the Master Deed for all legal purposes." Id. The developer filed a motion to compel arbitration that was denied because the notice of arbitration was not included on the first page of the master deed as required by the Uniform Arbitration Act. Id. The Court of Appeals concluded recently that despite that language contained on the second physical page, the first page did not have the necessarily statutory language, and therefore arbitration was not required. Id.

Another interesting Horizontal Property Act case can be found in Council of Co-Owners of Forest Beach Villas v. Smith, 314 S.C. 134, 442 S.E.2d 173 (1994). The Supreme Court determined that a purchaser at a sale of property under a foreclosure on a lien for assessments pursuant to S.C. Code Ann. 27-31-210 was jointly and severally liable with the seller for the past due assessments that accrued up to the time of the conveyance. The statute allows an exemption for the past due assessments for the purchaser if the property was sold under a foreclosure action brought to foreclose a mortgage, rather than an assessment lien. S.C. Code Ann. 27-31-210(b)(Supp. 2010).

With the exception of the Horizontal Property Act, there are sparse statutory provisions dealing with homeowners' associations. Since many homeowners' associations employ their own security forces, there are regulations specific to traffic authority in South Carolina law. S.C. Code Ann. 56-5-6310 (Supp. 2010) and 23-13-15 (Supp. 2010). Further, one section of the Code relates to the ability of a property owner to fly an American flag. S.C. Code Ann. 27-1-60 (Supp. 2010). Save for the aforementioned exceptions, a real estate practitioner must look primarily at case law for any guidance in the realm of homeowners' associations.

Conclusion

Most solutions to homeowners' association problems revolve around the terms of the declarations and whether they have been adequately complied with. If you are hired by a homeowners' association who is in a dispute with a property owner, keep in mind that the terms of the declaration govern practically everything. Far too often the homeowners' association itself has not been compliant with the declarations, but is upset that one of the property owners has not conformed to its regulations. In my view this is rooted in the fact that often the board members who run the homeowners' association live in close proximity to the violating property owner, and every day have to drive by and wonder when John is going to remove that tacky sign from his front yard. In addition, if a homeowners' association approaches you wanting a draft of declarations, remember that so long as you don't violate any constitutional provisions and/or statutory authority, you can principally restrict in any manner necessary. This is important because it is far easier to restrict early in the development process before you have property owners to appease. Though some of the situations that could arise may seem complicated, reverting back to the principles of basic contract law should save you a lot of grief, no matter which party you represent.

Joseph L.V. Johnson practices with Saint-Amand, Thompson and Mathis, LLC in Gaffney.