Past Due: Liens and Foreclosures, Complying with the Law and the Impact of the Winrose Case?
Many people living in South Carolina do not realize that their homes can be foreclosed on for failure to pay their annual, quarterly, or monthly homeowners (“HOA”) or condominium owners association (“COA”) dues. However, in South Carolina, an HOA or COA does have the power to foreclose when homeowners fail to pay their dues. An HOA or COA can even foreclose for unpaid fines and fees that may owed due to violations of HOA or COA’s rules and regulations.
How does an HOA or POA have this power?
HOAs or COAs are governed by sets of documents called by-laws and covenants that spell out the rules for HOA or COAs. These governing documents often give the COA or HOA the power to foreclose should a homeowner fall behind on payments.
As an HOA or COA, what can we recover if we file a lawsuit and how do we do this?
If a homeowner continues with non-payment, and attempts have been made to notify the homeowner of their failure to pay, the next step is usually turning the issue over to an HOA or COA’s local counsel. Typically, once the unpaid dues reach the point that the HOA or COA seeks to have their attorney handle the matter, the corresponding firm will file a lien on the homeowner’s property. Per current South Carolina HOA law, a lien may be placed on a homeowner’s property for the following:
- Past-due assessments;
- Late charges;
- Collections costs;
- Interest; and
- Attorney’s fees and costs
Depending on the firm handling the matter, the attorney may attempt to notify a homeowner that they are in arrears via a demand letter. However, in some instances, local counsel may choose to go straight to filing a lawsuit against.
What happens once a lawsuit is filed?
Once a lawsuit has been filed, the case is in the hands of a judge (in South Carolina, this judge is typically a Master in Equity) who can foreclose on the property if he or she determines that the homeowner is in fact past due on payments and all proper legal steps have been taken by the HOA or COA to collect on non-payment.
How does the recent Supreme Court case Winrose Homeowners’ Association, Inc. v. Hale, 428 S.C. 563 (2019), affect HOA/ COA foreclosures?
In April 1998, Devery and Tina Hale purchased their home for $104,250.00 and assumed the obligation to pay HOA dues. In April of 2011, the Hales’ HOA filed a lien on their property for failure to pay $250 in HOA dues. After a lawsuit was filed and proper legal steps were taken, the Master in Equity (aka the Judge on this foreclosure action) issued a Judgement of Foreclosure and Sale against the Hales for $2,898.67. This figure included the principal amount due, interest, litigation costs and attorney’s fees. The property was later sold at public auction for $3,036.00.
The case eventually made its way to the Supreme Court. The Hales main argument was the winning bid was so grossly inadequate as to shock the conscious of the court compared to the Property’s fair market value of $128,000.00.
In South Carolina, a judicial sale will not be set aside due to an inadequate sale price unless: 1) the price was so grossly inadequate as to shock the conscience of the court or 2) an inadequate but not grossly inadequate price at the sale is accompanied by other circumstances from which the court may infer fraud has been committed.
South Carolina courts have not established a bright-line rule for what percentage of the sale price must be met with respect to the actual value of the property in order to the shock the conscience of the court. However, the Court of Appeals recently noted in a different case that only when judicial sales are for less than 10% of a property’s actual value have our courts consistently held the discrepancy “shook the conscious of the court”.
There are two methods used to calculate whether a bid price is so inadequate as to shock the conscious of the court. The first method is known as the Debt Method. Under the Debt Method, the outstanding mortgage is considered a debt that must be assumed by the foreclosure purchaser before receiving a free-and clear title, thereby freeing the purchaser to resell the foreclosed property to a third-party. The second method of calculation is known as the Equity Method. Under the Equity Method, the outstanding mortgage is considered a liability that devalues the purchased property, meaning the outstanding mortgage is subtracted from the fair market value of the property rather than added to the winning bid price.
In the case at hand, the Court determined it would be absurd to apply the Debt Method because the Hales continued making mortgage payments on the Property despite being foreclosed on for HOA dues. Applying the Equity Method, the Court determined that the bid price at the sale was approximately 4.9% of the value of the Property, which was far less than the 10% threshold. Therefore, the Court set aside the foreclosure sale and remanded the case back to the Master for further proceedings, including accounting for the pact that the Hales continued to pay the mortgage on the Property.
What does all of this mean for an HOA or COA?
The best way to ensure compliance with South Carolina HOA/COA law is to turn over any legal concerns to legal counsel. If an HOA or COA wishes to pursue foreclosures, this is usually done through the courts and legal counsel is required. Special attention will be required for foreclosure compliance with the holding of the Winrose case.
Our staff of attorneys represent many HOAs, COAs, and property management companies throughout the area and are ready and willing to help you ensure your members are in compliance and work through any legal needs you may have. Call us at 843-839-3210 or contact us online for a free one hour consultation with one of our HOA attorneys today.