What is a Right of First Refusal and When Is It Enforceable?

The right of first refusal sounds simple on the surface. A right of first refusal (ROFR) gives the right-holder the opportunity to enter into a business transaction with another party before anyone else. It’s most commonly seen in real estate contracts, such as when a lessor signs a contract giving them the ROFR to put in an offer to purchase the property if it ever comes up for sale.

But as straightforward as it sounds on paper, it’s not always so straightforward in the real world. Contracts that include an ROFR must be clear and detailed in order to be enforceable.

The Supreme Court of South Carolina addressed this issue in the 2023 case Clarke v. Fine Housing, Inc. (here). We’ll look at the factors required for an enforceable right of first refusal in South Carolina and how they played out in this recent case.

The Pros and Cons of a Right of First Refusal

An ROFR can benefit both parties. In the example of a lessor with the ROFR to purchase the property, if and when it comes up for sale, they can be sure not to miss out on the opportunity to put in an offer. There’s no downside for the potential buyer; if they don’t want to buy the property, they simply refuse.

The property owner can benefit by having a potential buyer already lined up when it’s time to sell, which may help them in negotiations with other potential buyers. However, the downside for the property owner is that a ROFR can restrict their power of alienation, which is their ability to dispose of property.

“South Carolina law prohibits enforcement of unreasonable restraints on alienation of real property,” the court says in the Clarke opinion. The key word here is “unreasonable.” Whether a particular ROFR is enforceable depends on whether the restraints on alienation are considered unreasonable.

Unreasonable Restraints on Alienation of Property: What is Unreasonable?

In the Clarke opinion, the SC Supreme Court turns to the Restatement (Third) of Property. The Restatements of the Law (Third) are a comprehensive set of legal treatises widely referenced and relied upon by courts, judges, lawyers, and others across the U.S. On the subject of the ROFR, it says, “Reasonableness is determined by weighing the utility of the restraint against the injurious consequences of enforcing the restraint.”

The Supreme Court of South Carolina uses the factors listed in the Restatement (Third) of Property (Comment f) to determine, on a case-by-case basis, whether a right of first refusal is enforceable. The factors are:

The legitimacy of the purpose of the right,
The price at which the right may be exercised, and
The procedures for exercising the right

These factors are not exclusive.

Let’s look at each one of the factors and how they figure into the Clarke case.

Background of Clarke v Fine Housing (2023)

First, the pertinent background of 2023 Supreme Court of South Carolina case Clarke v. Fine Housing, Inc.: Barry Clarke owned a strip club in Charleston. In 1999, he entered into a lease agreement with the owners of another strip club across the street to use part of their unimproved land for parking. The lease contained the following language:

Section 5.2. Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.

Note that there’s no mention of price, timing, how to exercise the right, or any other specifics – not even which property this right of first refusal applies to.

In 2013, then-owner RRJR conveyed the property in question to Fine Housing, Inc. Clarke learned of the sale in 2014 after it was a done deal, having had no opportunity to exercise what he believed to be his enforceable right of first refusal (Right).

In 2015, Clarke brought this action for specific performance against Fine Housing and RRJR. The case eventually came before the Supreme Court of South Carolina, which agreed with the SC Court of Appeals that the Right was not enforceable because it constituted an unreasonable restraint on alienation.

Factors for an Enforceable Right of First Refusal

Here are the three factors the Supreme Court of South Carolina uses to determine enforceability of a right of first refusal on a case-by-case basis and how they show up in Clarke.

Factor 1: Legitimacy

In Clarke, Fine Housing didn’t challenge the legitimacy of the purpose of the Right, so the court didn’t address the issue.

Factor 2: Price

Price may or may not be an unreasonable restraint on alienation. If, for example, the ROFR were dependent on a fixed price, that could restrain alienation. If the price were to be matched to a third party’s offer, there would be less restraint.

In Clarke, Clarke argued that the Right left the price to be determined entirely by RRJR and required him to match any offer from a third party. He also argued that exercising the Right would have started a bidding war that would have benefitted RRJR.

The court agreed with Fine Housing that the absence of any method for determining the purchase price in the lease constituted an unreasonable restraint on alienation. Absence of specifics on how to determine price may not be as restraining as a fixed price, says the court, but it is still a restraint, and “a right of first refusal should contain some method for determining the price at which it may be exercised.” The lease Clarke signed had no method, and therefore this factor worked against him.

Factor 3: Procedures governing the exercise of the right

Comment f to the Restatement stresses the importance of provisions governing the exercise of the right, stating, “Lack of clarity may cause substantial harm by making it difficult to obtain financing and exposing potential buyers to threats of litigation. Lengthy periods for exercise of rights of first refusal will also substantially affect alienability of the property.”

Time is also an important consideration. How soon after the owner decides to sell does the right holder have to exercise their right? An extended period of time can be a restraint on the property owner, while a “reasonable” time frame does not impose unreasonable restraint and is generally enforceable.

In Clarke, Clarke argued that a ROFR does not require detailed instructions on how to exercise it to be valid, but this directly contradicts the Restatement (Third) of Property. He also argued that the lease provided satisfactory procedures regarding the exercise of the right. The court disagreed “because the Right contains no such procedures whatsoever.”

As for timing, Clarke argued that if there’s no mention of a timeline in the language of the agreement, then it must be done within a “reasonable time.” The court disagreed, saying that the point of the Restatement is to include a predetermined time limit so as to protect the property owner’s power of alienation, rather than having the owner rely on a “judicially implied ‘reasonable time.’”

Because of the total lack of provisions regarding timing and procedures on how to exercise the Right, the court found again in favor of restraint on alienation.

Additionally: Which Property?

The court also addressed a matter specific to Clarke: to which property did the Right ostensibly apply? The entire property that includes the unimproved land Clarke leased for parking, or the unimproved land only?

Clarke argued that the Right applied to the entire property, but the court disagreed because the language in the lease was not clear. That uncertainty constitutes an additional unreasonable restraint on alienation.

Takeaway: Rely on Clear, Specific Contracts

The SC Supreme Court affirmed the appeals court’s decision, finding in favor of Fine Housing and against Clarke, stating “The Right does not identify the property it encumbers, contain price provisions, or contain procedures governing the exercise of the Right. We conclude the Right is an unreasonable restraint on alienation. We therefore affirm the court of appeals’ holding that the Right is unenforceable.”

An important takeaway for anyone entering into a contract with a right of first refusal in South Carolina: Make sure the language in your contact is clear and specific and that it addresses the three factors discussed above. It must contain language on how the price should be determined and how the right should be exercised. Language that unreasonably restrains the property owner’s power of alienation may render it unenforceable, so the right cannot be construed too favorably to the would-be buyer.

Call Gem McDowell for Contracts, Strategic Business Advice, and Commercial Real Estate

Many legal disputes come down to the language in a contract. Is it clear? Is it enforceable? Would the courts side with you if the matter were ultimately litigated? It’s critical to get the contract right before signing it, so you lessen the chances of complications and litigation down the road.

For help with business contracts and commercial real estate, call business attorney Gem McDowell at the Gem McDowell Law Group. Gem has over 30 years of experience working with business owners to help them start, grow, and protect their businesses. He and his team can help you with contracts, corporate governance documents, strategic advice, and more. He also has extensive experience in commercial real estate transactions in South Carolina. Call the Gem McDowell Law Group today to schedule a free consultation at 843-284-1021.

What is Family Malpractice™, and Have You Committed It?

Have you committed Family Malpractice™?

If you’ve neglected your legal responsibilities regarding your family, then yes, you have.

What is Family Malpractice™?

You’ve heard of attorney malpractice, where an attorney’s misconduct causes problems for a client, and you’ve heard of medical malpractice, where a doctor’s error or negligence causes problems for a patient. Similarly, Family Malpractice™ is when an individual causes problems for his/her family members, usually because of failure to take action on a legal matter.

Problems that are created can be legal, financial, and/or familial in nature. I’ve seen a decedent’s heirs have to go through years of expensive and stressful legal battles over how to divide up assets. I’ve seen people take a huge financial hit because of how property was handled after the owner’s death. I’ve seen families torn apart and relationships permanently ruined due to Family Malpractice™.

While it’s not something you can be prosecuted for, Family Malpractice™ is something to avoid. You can easily do so by knowing some of the common pitfalls that put your family in peril legally and financially, and how to avoid these easily avoidable situations yourself.

When You Have Children but Have No Will, That’s Family Malpractice™

Do you know what happens in South Carolina if you die without a will, leaving behind a spouse and children? When I ask this question in consultations or at live, in-person seminars, most people believe that 100% of the deceased’s probate estate goes to the spouse. This is incorrect. By state statute, the deceased’s probate estate is divided evenly between the spouse, who gets 50%, and the children, who share the remaining 50% among themselves.

This sounds reasonable and fair. But, as straightforward as it sounds, this simple arrangement can cause a lot of problems, usually for the spouse. For instance, if a husband and father dies intestate (without a will), his half of the house is divided equally between his surviving wife and children. So his wife now owns 75% of the house and the children own the other 25%. If she’s not able to keep up with the house payments and wants to downsize, she can’t sell unless her children agree. They then have leverage and can demand more than the 25% of the sales price of the home, or else simply refuse to sell.

Who would do this to their own mother, you ask? Plenty of people, unfortunately. I’ve seen scenarios like these play out many times in my 30+ years of being an attorney. Situations like these can ruin a person financially in their later years and destroy family relationships irrevocably.

The situation becomes even more complicated in blended families where one or both spouses have children from a previous marriage. Imagine then, the surviving spouse may own 75% of the house and the children from a previous marriage own the other 25%. The children from the previous marriage are not required to cooperate with the surviving spouse. They can veto a sale, refinance, etc. They essentially control the property. That is not what the decedent wanted, and that decedent committed Family Malpractice™ with regards to the surviving spouse.

In short, the way an estate is passed along and divided up according to South Carolina law may not be what an individual wants, but if they die intestate, they don’t get a choice – and their heirs have to live with the consequences.

The solution: Have a will drawn up. This is vital if you have a family and especially if you have anything other than a small estate. Dying without a will can potentially create a lot of problems for your heirs that could have been avoided with a current estate plan.

When You Don’t Probate Your Deceased Mom or Dad’s Estate, That’s Family Malpractice™

The idea of a family home being passed down from generation to generation is something many people aspire to. Passing on wealth in the form of real property to your children, and to their children in turn, and so on, is a wonderful gift.

At least, it can be. It’s not uncommon for property passed on after death to become “heirs property,” which can cause a lot of problems for the heirs. This can happen when the surviving children of the original, now-deceased homeowner continue to live in the home but don’t go through the proper legal process to put the property in the new owners’ names. That is going through the probate process. If the same situation repeats for a few generations in a row, you can end up with literally dozens of people (typically, the grandchildren or great-grandchildren of the original owner) who all have legal claims to the property, all while the property is still technically in the original owner’s name.

Why is this such a problem? Because it’s very difficult to sell a house like this, when there are so many owners and a cloudy title. A buyer interested in the property risks having the deal fall through if one of the many owners decides they want more than their proportional share of the sales price or refuses to sell altogether. Getting the title cleared takes extra time and money. Meanwhile, the family members who own the house cannot sell and take the equity in the house, and they may be barred from accessing things that require clear title of ownership, like mortgages, loans, and government programs.

The solution: Ensure your deceased parent’s estate goes through probate. The probate process does not happen automatically; it’s something the executor named in the will must carry out. If there is no will, the probate court names an executor, usually a child or close relative of the deceased.

There are a few roadblocks keeping people from ensuring a deceased parent’s estate goes through probate. One is simply not knowing that it’s needed; they may incorrectly assume that the ownership of the house legally passes from the parent to the child(ren) without having to do anything. Another reason is an aversion to having to pay a lot to probate the estate. But in SC, probate fees are not very high. For instance, probate fees on an estate worth $1 million is just $1,845, which is paid out of the estate, as are attorney’s fees. Finally, some people want to avoid dealing with the government altogether. While this may be understandable, it’s not a good reason to avoid probate. Working with an experienced probate attorney you trust can help you and ensure that your estate is handled legally and fairly.

Read more about probate here on our blog.

When You Don’t Take the 1014(e) Step-Up in Basis, That’s Family Malpractice™

A step-up in basis occurs when the cost basis of an asset, like a home, is adjusted from the original cost basis to the current fair market value upon the death of the owner.

Let’s say your parents bought a house 20 years ago for $150,000, and when you inherited it upon their deaths, it was worth $350,000. If you don’t take the step-up in basis and proceed to sell it, you’ll have to pay capital gains tax on the difference, which is $200,000. If instead you do take the step-up in basis, and have the cost basis of the house increased to $350,000 (the fair market value at the time of your parents’ deaths), then you’ll only pay capital gains tax on the difference between $350,000 and whatever you sell it for in the future.

Depending on the value of the house, and how much that value has grown over time, that can mean saving a lot of money in taxes. When someone does not take this step-up in basis, it can lead to very large tax bills when the time comes to sell the property. There are a few reasons a person may fail to do so; they may not even know that the option exists, or they may mistakenly assume that it happens automatically.

The solution: Take the step-up in basis on property in an estate that you are executor of, or ensure that the executor of your parents’ estate does so. The probate attorney handling the estate can help you. As a probate attorney, my goal is to get the largest step-up in basis possible for my clients in order to reduce their tax liability in the future.

Work with Estate Planning Attorney Gem McDowell

Wills, probate, and step-up in basis are things that most people don’t think about because it’s outside the scope of daily life. But failing to take care of these matters is what I call Family Malpractice™, and it can lead to major legal and financial hassles in the future. Even more devastating, it can cause rifts between family members as they fight over assets in and out of court. Fortunately, these issues are completely avoidable. Work with an estate planning attorney and probate attorney to ensure your estate plan is solid and current and that you’re handling your deceased relatives’ estates correctly.

If you have questions about creating or revising your own estate plan in South Carolina, or you want advice or assistance handling the estate of a deceased relative, contact Gem McDowell at the Gem McDowell Law Group today. Gem has over 30 years of experience as an attorney and has helped countless families in South Carolina create estate plans, avoid mistakes, and fix problems. He and his team can help you understand and avoid committing Family Malpractice™ that can harm your family. Call him at his Mount Pleasant office today at 843-284-1021 to schedule a free consultation.

What Happens to Your Estate If You Die During a Divorce in South Carolina? Spousal Elective Share

Imagine this scenario:

Husband and Wife have been married for many years. One day, Wife files for divorce. At a hearing a few months later, the divorce is granted.

Husband dies about a week later.

A few days after that, the final divorce decree is signed by the judge, then filed with the clerk.

The tragic and unlikely timing of Husband’s death brings up some important questions.

Were Husband and Wife still married when he died because the decree wasn’t yet signed and filed?
Or were they already divorced because the divorce had been officially granted by the court?
Would Wife be entitled to part of Husband’s estate as a surviving spouse?

This exact situation happened in South Carolina in the late 90s and ended up before the South Carolina Court of Appeals in the 2000 case Hatchell-Freeman v Freeman. It’s an interesting case to know for anyone contemplating or going through a divorce in South Carolina as it answers the questions above.

Dying Before Divorce Is Finalized: Hatchell-Freeman v. Freeman (2000)

In the Hatchell-Freeman case (read it here), Angela Hatchell-Freeman filed for divorce on June 21, 1996. The divorce was granted at a hearing on September 27, 1996, and ten days later, on October 7, Husband died. The final order granting the divorce was signed on October 10, and the following day the order was filed.

In December, father of the decedent Gilbert Freeman filed a petition to be appointed personal representative of his late son’s estate, which the court granted. He did not list Hatchell-Freeman as an intestate heir or as “a person having a prior or equal right of appointment.”

In January, Hatchell-Freeman filed a notice of election by surviving spouse for her intestate share – aka “elective share,” which is a portion of the decedent’s estate the surviving spouse is entitled to by statute. The probate court ruled that she was entitled to elective share.

She also filed a petition to be appointed personal representative, which would mean removing Gilbert Freeman from the role. The probate court ruled that she had had “adequate” time to file – over three months since her husband’s death – and so denied her petition.

Both parties appealed.

The Circuit Court’s Findings

The circuit court affirmed the probate court’s finding that Hatchell-Freeman was the wife of the decedent at the time of his death and therefore entitled to her elective share.

However, it found that she had a superior right to serve as personal representative. Gilbert Freeman was removed from the role and replaced by Hatchell-Freeman.

Gilbert Freeman then appealed.

The SC Court of Appeals

The appeals court affirmed the circuit court’s findings.

It found that the couple was indeed married at the time of Husband’s death, making Hatchell-Freeman eligible to receive her elective share of the estate. The fact that the divorce had been granted at the final hearing before Husband’s death was irrelevant, as South Carolina Code 62-2-802(c) (1987) is clear: “A divorce or annulment is not final until signed by the court and filed in the office of the clerk of court.”

The court also affirmed the lower court’s decision to replace Gilbert Freeman with Hatchell-Freeman as personal representative. SC Code 62-3-203(a) (1999) lists in order which individual should be given priority for the role of personal representative, and when there is no will naming a personal representative (as in this case, since Husband died intestate), a surviving spouse has priority over other heirs.

Although it may not have been Husband’s intention for the woman he was divorcing to inherit any portion of his estate, that’s what happened. But was there something he could have done to prevent it?

(Technically) Married at Time of Death: Spousal Elective Share in South Carolina

As stated above, a surviving spouse is entitled to spousal elective share, which is a portion of the deceased spouse’s estate. The concept of elective share originates from English common law and is widespread across the US, with different laws governing elective share in different states.

In South Carolina, a surviving spouse may claim one third of the decedent’s probate estate. (“Probate estate” is defined in SC Code Section 62-2-202 as “the decedent’s property passing under the decedent’s will plus the decedent’s property passing by intestacy, reduced by funeral and administration expenses and enforceable claims.”) This is a minimum; the testator or testatrix can of course leave more than one third of their estate to their spouse in their will.

It doesn’t matter whether the decedent had a will or not; whether the couple was separated at the time of decedent’s death, divorce pending; or even whether the decedent had purposely left the surviving spouse out of the will in an attempt to disinherit them. The surviving spouse is legally entitled to their elective share.

In short, if you die before your divorce is signed and filed, your spouse is entitled to claim a portion of your estate under South Carolina law even if that’s not what you want. The only exception is if your spouse has waived their right to elective share, typically via a prenuptial or postnuptial agreement.

Reviewing and Revising Your Estate Plan During or After Life Events – Call Attorney Gem McDowell

If you’ve recently undergone a major life event like divorce, marriage, or birth of a child, you should consider contacting an estate planning attorney to review your last will, powers of attorney, and other estate planning documents. It’s a good opportunity to ensure that your estate plan is in line with your current wishes and life situation.

For help with estate planning, asset protection, and contracts including prenuptial agreements and postnuptial agreements, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help you with your estate planning needs before, during, and after a divorce. Call him at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

What is “Unconsionability” in the Law?

UPDATE 03.04.25: The discussion below centers on the Court of Appeals of South Carolina’s 2022 decision in the Huskins v. Mungo Homes case. Since then, the Supreme Court of South Carolina took up the case and rendered its decision in 2024. It skirted the issue of unconscionability entirely, stating that because the contract terms were found to violate public policy, they were unenforceable and the issue of whether they were unconscionable was moot. Read more about the 2024 Huskins decision and what it means here on our blog.

For a relatively recent Supreme Court of South Carolina case that discusses unconscionability (again in the context of a home builder’s one-sided contract), read the Damico v. Lennar Carolinas, LLC (2022) decision here.

Originally published Jan. 23, 2023:

What is “unconscionability” in the law, and how is it viewed by the high courts in South Carolina? In this blog we’ll look at the definition of unconscionability, its elements, and what unconscionability looks like in real-life cases, including the 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC.

“Unconscionability” in the Law

“Unconscionability” is used by courts most often in the context of contract law. It refers to terms that are so egregiously unjust or one-sided that they are unreasonable and may shock the conscience of the court. Typically, it’s the party with greater bargaining power that creates a contract favoring themselves to the detriment of the other party. When a contract or one of its terms are found unconscionable, it is unenforceable.

“Unconscionable” is also used by courts to describe a party’s grossly unfair conduct. A party that behaves unconscionably may not benefit from their conduct.

Elements of Unconscionability in South Carolina

“Unconscionability has been recognized as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” – South Carolina Court of Appeals quoting the SC Supreme Court decision Carolina Care Plan, Inc. v United HealthCare Servs., Inc. (2004) in the Huskins decision (emphasis added).

From this understanding of unconscionability, South Carolina courts look for two elements to determine whether something is unconscionable or not:

Absence of meaningful choice
Oppressive and one-sided terms

What would constitute a “meaningful choice” in the eyes of the court, and when are contract terms considered “oppressive and one-sided”? Let’s look at unconscionability in some real-life South Carolina cases.

Unconscionability in Real Life: Huskins v Mungo Homes, LLC

We’ve run into the concept of unconscionability in previous blogs:

To describe bad conduct in the context of minority member oppression (squeeze out/freeze out) in Wilson v Gandis (SC Supreme Court, 2019) (blog here)
Whether a prenuptial agreement in Hudson v Hudson (SC Court of Appeals, 2014) was unconscionable (blog here)
Whether an arbitration agreement in Arredondo v SNH SE Ashley River Tenant (SC Supreme Court, 2021) was unconscionable (blog here)

The 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC (read the decision here) also looked at unconscionability in regards to an arbitration clause.

Briefly, a couple (the Huskinses) bought a house from Mungo Homes, LLC (Mungo), entering into a purchase agreement that included an arbitration clause and a limited warranty. Two years later, in July 2017, the Huskinses filed an action against Mungo over issues they had with the purchase agreement. (They did not allege any problem with the home itself.)

Mungo filed a motion to dismiss and to compel arbitration. The Huskinses argued that the arbitration clause was unconscionable and unenforceable. The appeals court looked at the two elements described above to determine unconscionability.

Element 1: Absence of Meaningful Choice

The appeals court found that the Huskinses did have an absence of meaningful choice. It found that the Huskinses:

Were average purchasers of residential real estate
Were not represented by independent counsel
Were not a substantial business concern to Mungo and therefore had no more bargaining power than the average homebuyer

The Huskinses did not have a viable alternative to the arbitration agreement in the purchase agreement; if they wanted Mungo to build their home, they had to sign it and agree to its terms.

Element 2: Oppressive and One-Sided Terms

The Huskinses argued that the arbitration agreement was unconscionable, in part, because of its last two sentences: “Each and every demand for arbitration shall be made within ninety (90) days after the claim, dispute or other matter in question has arisen, except that any claim, dispute or matter in question arising from either party’s termination of this Agreement shall be made within thirty (30) days of the written notice of termination. Any claim, dispute or other matter in question not asserted within said time periods shall be deemed waived and forever barred.”

South Carolina law provides a statutory period of three years for such claims, which is drastically different from 30 or 90 days.

Still, the circuit court found these limited terms were not one-sided and oppressive. The appeals court disagreed, citing SC Code Section 15-3-530(1), which provides a three-year statute of limitations for such claims, and Section 15-3-140, which explicitly states that no contract provision attempting to shorten the statutory period shall bar any such actions from being brought.

Furthermore, the appeals court states that while in theory the clause applies equally to both the Huskinses and Mungo, in reality it would disproportionately affect the Huskinses. The appeals court also found that it was not “geared towards achieving an unbiased decision by a neutral decision-maker,” as the Fourth Circuit Court of Appeals directs courts to consider when it comes to arbitration agreements.

The SC Court of Appeals therefore found that due to an absence of meaningful choice and the presence of oppressive and one-sided terms, this section of the arbitration agreement was unconscionable and unenforceable. (The court also found this section was severable, meaning the rest of the arbitration agreement and purchase agreement stood, and the circuit court’s order compelling arbitration was affirmed.)

Contract Law in South Carolina

Would your contracts hold up to such scrutiny in court? You need to know what’s in every contract you write and sign as a business representative and as an individual and to avoid terms that could be construed as unconscionable.

For help creating and understanding contracts, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help ensure your contracts are clear, fair, honest, enforceable, and don’t violate SC code or public policy. Call Gem at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

Same-Sex Marriage in South Carolina After Obergefell

The US Supreme Court made history with the 2015 decision Obergefell v Hodges, ruling that same-sex couples have a right to marry under the Fourteenth Amendment of the Constitution.

Before the Obergefell decision, states made their own laws regarding same-sex marriage. After the decision, all states were required to allow same-sex couples to marry and to recognize such unions that were performed in other states.

This is the background to the 2021 South Carolina Supreme Court decision in Swicegood v Thompson (read the court’s short decision here) regarding same-sex common law marriages and whether Obergefell applies retroactively.

The SC Court of Appeals Cites SC Law Prohibiting Same-Sex Marriage Post-Obergefell

Swicegood v Thompson first went before a family court in 2014 which ultimately found that the Obergefell decision does apply retroactively, and that that Cathy J. Swicegood and Polly A. Thompson, who were domestic partners for over 13 years, did establish a common-law marriage.

When the case came before the SC Court of Appeals in 2020, it found that Swicegood and Thompson had failed to establish a common law marriage because:

South Carolina Code Section 20-1-15 prohibited same-sex marriage, which prevents the formation of a common law marriage between same-sex couples, and
Swicegood and Thompson did not have the intent and mutual agreement necessary to enter a legally binding common law marriage.

As to the first point, the appeals court did recognize that the Obergerfell decision must be applied retroactively. Still, it found that SC Code Section 20-1-15 constituted a “pre-existing, separate, independent rule of state law, having nothing to do with retroactivity,” which formed an “independent legal basis” for the finding that Swicegood and Thompson didn’t establish a common law marriage.

The appeals court’s decision is significantly longer than the supreme court’s and contains the background of the case and its discussion of the law. You can find that here.

The SC Supreme Court Declares the SC Law Void

Upon appeal, the SC Supreme Court vacated in part and affirmed in part the appeals court’s decision.

It noted that in Obergefell, the US Supreme Court held that “same sex couples may exercise the fundamental right to marry,” and all state laws challenged in that case were “invalid to the extend they exclude same sex couples from civil marriage on the same terms and conditions as opposite sex couples.”

The Obergefell decision rendered SC Code Section 20-1-15 void ab initio (“void from the beginning”) and should be treated like it never existed. That means it cannot serve as an impediment to the recognition of a same-sex marriage predating Obergefell, so that part of the appeals court’s decision was vacated. However, the supreme court did affirm, without further discussion, that no common law marriage was established between Swicegood and Thompson.

The State of Same-Sex Marriage and Common Law Marriage in South Carolina

While the law prohibiting same-sex marriage is still on the books in South Carolina, as of the Obergefell decision by the US Supreme Court and the Swicegood decision discussed here by the SC Supreme Court, the right to same-sex marriage in the state of South Carolina is protected.

Common-law marriage, on the other hand, was abolished in South Carolina in July 2019. Read more about that here.

At-Will Employment in South Carolina: New Supreme Court Rulings

You may know that South Carolina is an at-will employment state. But what does that really mean?

In an at-will employment state, work is presumed to be at-will unless otherwise defined by contract. In an at-will employment arrangement, both the employer and the employee have the right to end the arrangement without notice and for any reason, without incurring liability. (There are a few exceptions to this, mentioned below.)

The South Carolina Supreme Court recently accepted three certified questions asked by the US District Court for the District of South Carolina to clarify state law on at-will employment matters. Here are the three questions put to the SC Supreme Court in Hall v UBS Financial Services Inc, 2021 (find it here) with more discussion on each issue below.

Are terminable at-will employment relationships contractual in nature as a matter of law?
Does the implied covenant of good faith and fair dealing arise in the context of terminable-at-will employment relationships, and can an employer’s termination of an at-will employee constitute a breach of the relationship such that it may give rise to a claim by the former employee against the employer for breach of the implied covenant of good faith and fair dealing?
Can an employer’s termination of an at-will employee, which results from a third-party employee’s report to the employer, constitute a breach of the relationship such that it may give rise to a claim by the former employee against the third-party employee for tortious interference with a contractual relationship?

The SC Supreme Court discusses the law rather than the particular facts of the case, but here’s some quick background before we delve into the court’s legal reasoning behind its answers:

Curt O. Hall sued his former employer, UBS Financial Services Inc., and a former co-worker, Mary Lucy Reid, after he was fired by UBS. Hall was a manager of the Greenville branch of UBS, and in September 2017 he organized a happy hour that a number of employees, including Reid, attended. Reid said she was scared to go home because of issues with her boyfriend, and Hall offered to let her stay at his home for the night. At the end of the night, Reid’s friend drove Hall home after the three of them had gone to dinner, with Hall and Reid sitting in the backseat together. Before getting out of the car, Hall again asked Reid if she was okay, then gave her a “European-style consolatory cheek kiss” (in the words of the district court) before getting out of the car. He texted her later that same night repeating his offer to let her stay, which she ignored. Soon after, Reid reported the incident to the HR department, and HR questioned Hall about his version of events. He was fired a few weeks later.

Hall brought a claim against UBS for breach of implied covenant of good faith and fair dealing and a claim against Reid for tortious interference with contractual relations, among other claims.

Question 1. Are terminable-at-will employment relationships contractual in nature as a matter of law?

The Supreme Court of South Carolina says yes.

The answer lies in general contract law. The court quotes itself in Prescott v Farmers Tel. Coop., Inc., 1999, in which it said “[T]o prove the existence of a definite contract of employment, the employee must establish all of the elements of a contract. The elements are: 1. A specific offer, 2. Communication of the offer to the employee, and 3. Performance of the job duties in reliance on the offer. The court says in Hall, “We agree with the majority of jurisdictions that have addressed this issue, and we hold those elements are present in every at-will employment arrangement.”

However, the court cautions that answering yes doesn’t “light a path” to make valid breach of contract claims when an employee is terminated. “[O]ur recognition that at-will relationships are contractual does not alter the established rule allowing an employer to discharge an at-will employee for any reason without incurring liability. That is because under South Carolina law, the right to fire the employee at any time and for any reason is an integral term of the at-will contract.”

(Note that there are exceptions that can impose liability on the employer for terminating an employee, such as termination in violation of the terms of the employee handbook or in violation of public policy, but here the supreme court answers the district court’s questions on the assumption that there are no exceptions.)

Question 2 Part A. Does the implied covenant of good faith and fair dealing arise in the context of terminable-at-will employment relationships?

The Supreme Court of South Carolina says yes.

“There exists in every contract an implied covenant of good faith and fair dealing,” says the court quoting Adams v. G.J Creel & Sons, Inc., 1995.

The court admits that both the SC Supreme Court and the SC Court of Appeals have previously found on occasion that the covenant doesn’t arise in at-will employment relationships. However, having answered a definitive “yes” to the first question, rationales denying the existence of the covenant in at-will employment relationships are no longer valid. “The implied covenant of good faith and fair dealing exists in all at-will employment contracts,” says the court in Hall.

Question 2 Part B. Can an employer’s termination of an at-will employee give rise to a claim by the former employee against the employer for breach of the implied covenant of good faith and fair dealing?

The South Carolina Supreme Court says no.

This question implies that breach of the implied covenant of good faith and fair dealing could be the basis for a cause of action. The SC Court of Appeals has held that it is not a cause of action separate and distinct from a cause of action for breach of contract. As answered in Part A, because every contract includes this covenant, then if the covenant has been breached then so has the contract, and the cause of action would be breach of contract.

In a separate opinion from the majority, Justice Few further explains the issue well, stating that while contracts have the covenant implied, the law superimposes over that the express provision that the employer may terminate an employee “at any time, for any reason or for no reason at all” (quoting Prescott). “This includes a reason that may not be in good faith,” writes Justice Few. “Stated differently, the implied promise to act in good faith does not protect the employee from being fired – no matter the reason – because the law specifically provides that the contract of employment permits any firing, even if it is not in good faith” (emphasis added).

In the majority opinion, the court answers Question 2 in its entirety as follows: “The implied covenant of good faith and fair dealing exists in an at-will employment contract; however, the employer’s termination of the employee cannot form the basis of a claim that the employer breached the covenant of good faith and fair dealing.”

Question 3. Can an employer’s termination of an at-will employee, which results from a third-party employee’s report to the employer, give rise to a claim by the terminated employee against the third-party employee for tortious interference with a contractual relationship, even when the termination itself was not a breach of the at-will contract?

The SC Supreme Court says yes.

The question the court poses and answers here is different from the one posed by the district court as stated at the top. The court revised the question because, it explains, the viability of a tortious interference claim brought by a terminated employee doesn’t depend on whether the termination was a breach of the at-will contract, but whether the third-party employee, without justification, made a report to the employer which led to the termination.

From Eldeco, Inc. v Charleston Cty. Sch. Dist., 2007, the elements of a claim for tortious interference with contractual relations are: 1. The existence of a contract, 2. Knowledge of the contract, 3. Intentional procurement of its breach, 4. The absence of justification, and 5. Resulting damages.

The court states that the majority of jurisdictions addressing this issue find that there can be a cause of action against a third party for tortious interference, even if there is no underlying breach of contract. It concurs, recognizing the validity of such a claim, and holds that “the absence of an underlying breach by the terminating employer does not shield the third party from liability when she intentionally and unjustifiably procures the termination of an at-will employee.”

Help with Contracts, Employment Matters, and Business in South Carolina

For help with contracts, corporate governance documents, starting or selling a business, and insightful advice from a legal perspective, contact business attorney Gem McDowell of the Gem McDowell Law Group. Gem has over 30 years of experience working with individuals and businesses in South Carolina, and he and his team can help you grow your business and protect your assets. Call the Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

What is Inverse Condemnation? How Is It Different from Eminent Domain?

Let’s say a government agency undertakes a construction project that affects your ability to fully enjoy your property and reduces its value, which constitutes a “taking” on the part of the government. If the government acknowledges this taking before beginning construction and pays you just compensation for the use of your property, it has exercised its powers of eminent domain.

But what if the government doesn’t acknowledge the taking and doesn’t pay just compensation? This is where you might have a claim for inverse condemnation.

The concept of eminent domain – wherein the government has the right to use and take private property for the public good – is widely known. Less well known is the related concept of inverse condemnation. But property owners should be aware of what inverse condemnation is and when they may have a claim for it.

What is Inverse Condemnation? How is Inverse Condemnation Different from Eminent Domain?

“An inverse condemnation occurs when a government agency commits a taking of private property without exercising its formal powers of eminent domain,” in the words of the South Carolina Court of Appeals as quoted by the SC Supreme Court in Ray v City of Rock Hill, the case discussed below. (Find it here.)

In both eminent domain (also called condemnation) and inverse condemnation, the government takes or uses private property for the public good. The difference is that in eminent domain, the government initiates the process and pays the property owner just compensation for the taking. In inverse condemnation cases, the property owner initiates an action against the government agency because it did not declare a taking nor compensate the property owner accordingly.

What Forms the Basis of an Inverse Condemnation Claim? Examples of Inverse Condemnation

The classic example of eminent domain is when the government takes a piece of land in order to build a highway or public utility on it. But the taking doesn’t have to be physical to form the basis for an inverse condemnation claim. In fact, in inverse condemnation claims, it often isn’t.

The two most common broad categories of inverse condemnation claims are physical takings and regulatory takings. Physical takings include physical intrusion, damage to the property, and restriction of access, in addition to outright seizure. Regulatory takings involve government regulations and zoning ordinances that hamper a property owner’s ability to fully use and enjoy their property.

Examples of bases of inverse condemnation claims include:

The city builds a sewage plant on the lot next to the property, reducing its value
Government aircraft regularly flying so low that it disturbs the property
DOT removes the property’s access to a highway it depends on for business
A government project that leads to runoff, contaminating the property
Noise pollution from a freeway built next to the property
Restrictive zoning ordinances that prevent the property’s owner from developing it to its fullest potential

In inverse condemnation claims, the burden of proof is on the property owner. The property owner will sue the government agency and try to prove to the court that a taking did occur. If the court agrees, the property owner can then seek damages.

Inverse Condemnation in South Carolina

Property owners are entitled to just compensation when the government takes private property for public use. This protection is found in the Fifth Amendment of the US Constitution – “nor shall private property be taken for public use, without just compensation” – as well as in Article I, Section 13 of the South Carolina Constitution and in South Carolina Code Title 28.

Previous court cases in the state have established the following criteria for showing inverse condemnation:

An affirmative, positive, aggressive act on the part of the governmental agency;
A taking;
The taking is for public use; and
The taking has some degree of permanence”

The expression “affirmative, positive, aggressive act” is key here. It is not enough for the government to simply not act; it must take action that constitutes a taking of the property.

The issue of whether the City of Rock Hill in South Carolina committed an “affirmative, positive, aggressive act” was central to the case of Ray v City of Rock Hill, which the SC Supreme Court heard in 2021.

Ray v City of Rock Hill Background

In 1985, Lucille H. Ray bought a house and lot in Rock Hill on College Avenue (the Property). Before the house was built in the 1920s, someone installed a 24-inch terra cotta pipe (the Pipe) underground on the Property. In addition, three City of Rock Hill stormwater pipes nearby collect and transport water from the neighborhood and bring it to a catch basin located directly in front of the Property on College Avenue. The Pipe is connected to this catch basin, and it channels stormwater from the catch basin to the back of the Property. It has done this for approximately 100 years since the Pipe was installed.

Unsurprisingly, all of this water has affected the Property over time. Ray reported that she saw her gardener fall into a sinkhole up to the waist in 1992, and later she became aware of bending and movement in her home’s roof frame and hired a contractor to fix the problem in 1995 and again in 2007. In 2008, Ray noticed that her front porch steps were sinking. She contacted the City about it and an employee told her about the Pipe. (The court notes there was no record of an easement for piping water under the Property.)

Did the City Commit an Affirmative, Positive, Aggressive Act?

It wasn’t until November 6, 2012 that Ray sued the City for inverse condemnation. She alleged that the Pipe was deteriorating and the water running through it, which came from the catch basin, was the cause of her home’s foundation problems. Coincidentally, right around this time the City began a sewer maintenance project (the Sewer Project). The City dug up part of College Avenue in front of the Property and severed the three stormwater pipes connected to the catch basin in order to reach a sewer line underneath.

Ray’s attorney then wrote to the City demanding that the City not reconnect the three stormwater pipes it had severed during the Sewer Project. That action would begin bringing water flowing again into the catch basin, which would be funneled to the back of the Property by the Pipe.

But the City did reconnect the three pipes. Ray believes this was an “affirmative, positive, aggressive act” by the City. The SC Supreme Court agreed.

The Twist in This Case

The City argued that Ray missed the three-year statute of limitations to bring a claim. In 2008, she noticed her front porch steps sinking and called the City about it, but it wasn’t until 2012 that she filed suit. The court agree that Ray should have reasonably known in 2008 that she had a claim. That means that she missed the three-year cutoff because she didn’t initiate a claim by 2011.

But here’s the twist in the case, as the court calls it. The Sewer Project happened to commence soon after Ray filed her lawsuit against the City. When it reconnected the three pipes, it began the flow of water from the catch basin via the Pipe onto the Property anew. The court determined that Ray can only recover compensation for damage done to the Property after the City reconnected the three stormwater pipes. The SC Supreme Court remanded the case back to circuit court to determine whether such damage did occur.

Help with Commercial Real Estate

Inverse condemnation claims can be challenging to win. You can see that in the case above, it went all the way to the Supreme Court of South Carolina as each court came to different conclusions about whether the claim was legitimate or not. But sometimes bringing an inverse condemnation claim is the only way to get just compensation for a government’s taking of your property.

Real estate law is complex. For help with legal commercial real estate issues, contact attorney Gem McDowell of the Gem McDowell Law Group. He helps businesses in South Carolina with a variety of legal matters including acquisition and sales, financing, land use planning and development, title search review, and regulatory, zoning, and environmental issues review. (Note that Gem advises on matters of inverse condemnation but does not handle such cases start to finish.) Call Gem and his team at the office in Mt. Pleasant, SC to schedule a free consultation today at 843-284-1021.

Tenants in Common with a Right of Survivorship: A Third Alternative in South Carolina

If you’ve bought property in South Carolina with another person or multiple people, then you might be familiar with the terms “tenants in common” and “joint tenants with rights of survivorship.” These are the two standard alternatives that determine the way multiple parties can own real property together in the state.

But did you know that in South Carolina there’s a third option? It’s so rarely used that not even the SC Court of Appeals knew about it when it heard Smith v Cutler, which then went to the SC Supreme Court in 2005. In its opinion (here), the SC Supreme Court goes into detail about this third option, called “tenants in common with a right of survivorship,” and how it came to be.

Tenants in common with a right of survivorship has elements of both tenants in common and joint tenants with right of survivorship. We’ll look at the latter two (the most common) first, then get into Smith v Cutler.

“Tenants in Common” versus “Joint Tenants with the Right of Survivorship”

What’s the difference between tenants in common and joint tenants with a right of survivorship? In South Carolina, this is what it means to own property with another party or parties:

As tenants in common:

Each party owns a share of the property, and that share can be unequal
When one party dies, their share of the property goes to an heir as directed by their will (or according to state law, if they die intestate)
A party may sell or convey their share of the property without permission of the other party or parties
The property is subject to partition

As joint tenants with rights of survivorship:

All parties own the whole property together (i.e., the property is not divided into shares)
When one party dies, their interest passes automatically to the other party or parties (without going through probate), and the property remains undivided and intact
A party may sell or convey their interest in the property at any time before their death, but at death their interest will still pass to the other party or parties
The property is subject to partition

Married couples in South Carolina most commonly own property together as joint tenants with rights of survivorship. The advantage is that when one spouse dies, the surviving spouse automatically takes ownership of the property without it being subject to probate. When a couple that owns property together as joint tenants divorces, the ownership converts to a tenancy in common.

“Tenants in Common with a Right of Survivorship”

The third and less well-known option combines elements of both of the above. When parties own property together as tenants in common with a right of survivorship:

Each party owns a share of the property, and that share can be unequal
When one party dies, their interest passes automatically to the other party or parties (without going through probate), and the property remains undivided and intact
Parties may not sell or convey their interest in the property without the consent of the other party or parties
The property is not subject to partition

The last two points are what distinguish this type of ownership from the two above. It’s similar to “tenancy by the entirety” which is a way for multiple parties to own property together in some other states but not in South Carolina.

Smith v Cutler Reaffirms Tenancy in Common with a Right of Survivorship

As stated above, this third type of ownership is so rare in South Carolina that even the SC Court of Appeals didn’t seem to know about it. But the SC Supreme Court reaffirmed the validity of the tenancy in common with a right of survivorship in Smith v Cutler.

Ernest J. Smith, Sr. and Joanne Rucker Smith married in June 2000 when he was in his 80s and she was in her 70s. Joanne owned a parcel of land in its entirety until she deeded a 50% share to her husband in August 2000. She wanted to ensure that if she died before him, he would inherit the property.

The language in the deed stated that the property was to be owned “for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple.”

A few years later, family conflict led to the following legal action. Ernest J. Smith, Sr. became incapacitated and his son (the Respondent in this case), as personal representative of his father, brought a partition action to divide the property. If successful, the action would force the sale of the property that Joanne had owned most of her life and that had been her home since 1958. At the time the action was brought, Ernest Sr. and Joanne were still married and there was no evidence that they intended to divorce.

The case went to the master-in-equity who granted the Respondent’s motion for summary judgment allowing the partition, ruling that the deed was consistent with the laws of joint tenants with rights of survivorship. The SC Court of Appeals affirmed the decision.

Joanne’s personal representative, Verne E. Cutler (the Petitioner in this case), appealed, and the case went to the Supreme Court of South Carolina in 2005.

The SC Supreme Court’s Answer to Tenancy by the Entirety

The supreme court found in favor of the Petitioner, meaning that the partition action was denied, and the property would remain intact.

That’s because the deed did not contain language consistent with joint tenants with a right of survivorship. The language was consistent with tenancy in common with a right of survivorship, which the SC Supreme Court “created” (in its own words) in 1953 in the case Davis v Davis (find the opinion here). Property owned in this manner cannot be compelled to partition by the act of one owner – all owners must agree – and when a party dies their interest automatically goes to the survivor. This effectively allows married couples to own property together in a manner similar to tenancy by the entirety which is otherwise not recognized under South Carolina law.

For Complex Matters of Estate Planning, Work with Gem McDowell

Estate planning can be complex, and changing laws can affect the way your estate plan plays out. For help with wills, trusts, powers of attorney, and other estate planning documents, call Gem McDowell of the Gem McDowell Law Group in Mt. Pleasant. He and his team help people in the Charleston area and across South Carolina create an estate plan that will carry out their wishes and reflects current inheritance and tax laws. Gem is a problem solver who can advise you on how to protect your assets, divide your estate, and avoid problems. Call the office today at 843-284-1021 to schedule a free, no obligation consultation.

Accretion and Property Rights on Sullivan’s Island

Imagine you own beachfront property in South Carolina just steps away from the ocean. Now imagine that over time, the distance between your home and the ocean gets larger and larger as the beach grows, putting you further and further from the water.

This was the situation for homeowners on Sullivan’s Island, a small island town just outside Charleston, SC. They sued the town in a case that was heard by the South Carolina Supreme Court in November 2019, Bluestein vs. Town of Sullivan’s Island. At the center of the case was the concept of accretion.

Accretion

South Carolina’s coastline is subject to a number of natural phenomena including erosion and accretion. Erosion occurs when sand, sediment, and other land matter is carried away from the coast, causing the beach to shrink as the high-water line creeps further in. It’s caused by strong waves, storm surge, and coastal flooding.

The contrary of this is accretion, where sand, sediment, and other land matter is deposited on the coast by the waves. Over time, this causes the beach to grow bigger.

Sullivan’s Island experiences both of these forces, with erosion affecting the coastline in the northern part of the island and accretion affecting the southern and central areas.

Suing Over the Town’s Approach to Managing Accretion

Accretion is a natural phenomenon, so what’s the basis for someone to sue over it? While accretion is something that can’t be controlled by humans, the consequences of it can be.

In the case at hand, two couples – Nathan Bluestein and Ettaleah Bluestein, MD, and Theodore Albenesius and Karen Albenesius (collectively, the Petitioners) – brought a suit against the Town of Sullivan’s Island and Sullivan’s Island Town Council (collectively, the Town).

The Petitioners separately bought front-row property on Sullivan’s Island, the Bluesteins around 1980, the Albenesiuses around 2009. Their properties were considered oceanfront when purchased and were a short distance from the shoreline. Today, due to accretion, the shoreline is much further away from their homes, approximately 500 feet or more. (In a footnote in its opinion, the court notes that the rate of accretion is approximately 17 feet per year.)

This does not mean that the Petitioners’ properties have increased – the land between their properties and the shoreline doesn’t belong to them. That property is subject to a 1991 deed, created in the aftermath of Hurricane Hugo, under which the Town has duties to upkeep the land.

How to interpret the deed was the main issue in the case, with the court noting “The parties have cherrypicked language from the 1991 deed which ostensibly supports their respective interpretations of the deed.”

The Town’s Duties to the Land

The Petitioners argue that the 1991 deed means the Town should keep the vegetation on that land between their properties and the shoreline in the same condition as it was in 1991. In 1991, the vegetation was mostly sea oats and wild flowers, no taller than 3 feet high. In contrast, the Town argues that the deed gives it unfettered license to allow the vegetation to grow unchecked, which is what it has done.

Over the years, a maritime forest has grown up on that land. The tall and thick vegetation harbors coyotes, snakes, and other “varmints” (in the word of the court) and is a fire hazard, complain the Petitioners. The Petitioners also complain that their homes are taxed like beachfront property, but they now have no ocean views or ocean breezes due to the vegetation growth and are farther away from the ocean. In the case heard by the Court of Appeals, they claimed their properties have lost more than $1,000,000 in value because of this.

The Court of Appeals affirmed summary judgment for the Town in its decision, which the Supreme Court reversed in its February 2020 decision, remanding the case. The Supreme Court stated that this case can’t be settled as a matter of law, as the 1991 deed is too ambiguous, and there are still issues of material fact that must first be resolved.

Just recently, in October 2020, the parties reached a settlement resolution together, ending further litigation. As described in the settlement, the Town will “implement selective thinning of the Accreted Land” zone by zone using funds from the Town, Plaintiffs, and Homeowners. This should mitigate the effects of accretion on the property in question. Read about the full settlement resolution here.

Caring for Land in the Public Interest

As South Carolina residents, we all have an interest in the health of our coastlines, even if we live far from the beach. Just as we saw in the case covered on this blog about the Public Trust Doctrine, it’s up to the entities in charge of these precious stretches of land to balance the needs of the individuals who live there with the public good, while respecting Mother Nature.

Doing Good While Making Money: Benefit Corporations in South Carolina

You’ve heard of C-corps and S-corps, but what about B Corps?

B Corp is short for benefit corporation, a type of for-profit business entity that is regulated by state law. Currently, 35 states and DC have enacted legislation to create benefit corporations, including South Carolina.

As stated in the 2012 South Carolina Benefit Corporation Act (find it here), “a benefit corporation shall have as one of its corporate purposes the creation of a general public benefit.” Here, “general public benefit” is defined as “a material positive impact on society and the environment taken as a whole.”

Who Benefits from a Benefit Corporation?

Traditionally, corporations are run with the primary driver of making money for their shareholders. High-level decisions are made with this question in mind: How can we maximize profits for the benefit of the shareholders? Though it’s not actually a legal requirement for corporations to make the most money possible, this is often the way it works in the real world. After all, a CEO who doesn’t make enough money for the shareholders can be ousted by the board of directors.

But in a B Corp, making money is not the primary driving force. Instead, business decisions are guided, in part, by the desire to create a particular benefit in the world.

Examples of some benefits that a B Corp might have include:

Donating a portion of income to charitable causes
Operating in a way to reduce environmental impact or actively preserve the environment
Providing goods and services to a specific group of people such as low-income families
Providing employment and economic opportunities for underserved groups
Promoting education or awareness of a certain subject
Advancing the welfare of other groups besides in addition to the shareholders, like the employees, the customers, or particular minority groups

A well-known business that’s also a B Corp is Patagonia, which amended their articles of incorporation in 2012 to include a commitment to sustainability and treating workers well. Ben & Jerry’s also became a B Corp in 2012, with a goal of advancing social change for good.

What It Means to Be a B Corp

The decision to be a B Corp is a big one. It can drastically change the way you approach decisions and run your business. Of course, that’s the exact reason why some people want to run a B Corp.

For instance, let’s say your stated public benefit is to protect the environment. You may choose packing for your product that is biodegradable and more environmentally-friendly but is more expensive to produce. A regular corporation may be bound to sticking with less environmentally-friendly options, because that’s the decision that maximizes profits and increases shareholder value. But as a B Corp with a stated intention of helping the environment, you can choose to forsake some of those profits for the public benefit of a better environment.

Requirements for Becoming and Being a B Corp

Entrepreneurs can incorporate their business as a benefit corporation in South Carolina by including a provision in its articles of incorporation that it is a benefit corporation and specifying its benefit purpose. Existing entities can also become B Corps by changing their status.

In South Carolina, there are some requirements that come along with being a benefit corporation. One is the submission of an annual report to the Secretary of State which must include, among other things, an assessment of the business against a third-party standard. Though the law says that a B Corp need not have an outside party certify them, there are organizations that do that, such as the independent nonprofit B Lab.

Additionally, a director on the board must be the elected and serve as the benefit director, and you may also have an officer designated as the benefit officer. (The same person can fill both roles at the same time.) Their roles and duties are described by law, but in short, both are responsible for making sure that the company is carrying out its mission as a benefit corporation in terms of the benefits it creates.

Advantages and Disadvantages

As with all types of business entities, there are pros and cons of being a B Corp.

Pros of being a B Corp:

Furthering a cause you believe in and making a positive change in the world through your company
Ability to make decisions in your company that align with your values rather than focusing solely on making more money
Attracting and working with talented people who share the same values (especially important to younger workers who increasingly want to work at ethical, mission-driven companies)
Attracting impact investors
Good for public relations and consumer perception of your business
Being part of a values-based global movement
If you change your mind later, you can easily drop your B Corp your status

Cons of being a B Corp:

Additional burdens of paperwork, certification, and maintaining benefit director and benefit officer roles
Converting to a B Corp may be difficult for existing publicly traded companies (which is why Etsy gave up its B Corp status and Warby Parker did, too)
Uncertainty due to how new B Corps are, and the potential increase in liability exposure

Though there many more advantages than disadvantages listed here, the disadvantages still merit consideration.

However, if you are driven to do good via your business and you want more control over how your company can make that happen, a B Corp is something to look into.

Is Becoming a B Corp Right for Your Business?

Changing your status or incorporating as a B Corp is a big step. Before taking that step, speak to an experienced business attorney like Gem McDowell. Gem has over 25 years of experience working with clients, giving them strategic advice on how to start, grow, and protect their businesses. Contact Gem and his associates at the Gem McDowell Law Group in Mt. Pleasant to schedule your free consultation by calling 843-284-1021 today.

Can Your HOA Foreclose on Your Home for Non-Payment of Dues?

Losing your home in a foreclosure because you missed a $250 HOA payment – can that actually happen? Is it even legal?

Yes and yes. This exact situation happened to Tina and Devery Hale. Our past two blogs went into detail on their case, Winrose Homeowners’ Association v Hale (read the opinion here), which went before the South Carolina Supreme Court in 2019. Those blogs are linked here and here.

But we’re not done yet because there’s even more to it. This case exposes bad parties acting in bad faith that every homeowner should be aware of.

Can Your HOA Take Your Home for Non-Payment of Dues?

Did you know that it’s not only the bank that has the power to foreclose on your home? It may seem absurd that your HOA can foreclose on your home because you missed paying your assessment, but it is legal in South Carolina and it does happen.

In the Winrose case, the Hales agreed to the following covenants and restrictions when they bought their house:

“If the [HOA dues] assessment is not paid within thirty (30) days after the delinquency date, the assessment shall bear interest from the date of delinquency at the rate of eight percent per annum, and the [HOA] may bring legal action against the owner personally obligated to pay the same or may enforce or foreclose the lien against the lot or lots […]”

The HOA was within their legal rights to do what they did. However, that doesn’t mean the SC Supreme Court was happy about it.

HOAs Making a Buck Off Unsuspecting Homeowners

Typically, once the court has stated its decision, that’s the end of the opinion. But not here. Writing the opinion for Winrose v Hale, Justice Kittredge had more to say. “We note our concern about this foreclosure proceeding,” he begins.

Recognizing the right of the HOA to pursue a lien and a foreclosure on the Hales’ house, the court characterizes this as a tactic to “capitalize on a small debt.” Though the amount past due was small, the HOA’s attorney went straight to the strongest measures possible as a next step – placing a lien and foreclosing on a house valued at $128,000 for a past due amount of $250.

Why? “The true nature of this foreclosure action is illustrated by the service and filing fees (which are more than double the amount of the principal due) and attorney’s fees (which were eight times the amount of the principal due),” writes the court (emphasis original). “A foreclosure proceeding is a last resort, not a business model to be swiftly invoked for the purpose of exploiting property owners.”

The Hales’ HOA was willing to let them lose their home and their equity in it in order to make some money in fees. Luckily for The Hales, they got their house back in the end, but that’s not always how this scenario plays out. Many people have lost their homes to HOA foreclosures.

Buyers Extorting Homeowners

The HOA was not the only bad actor here; the court was also “especially troubled” by the actions of the party that bought the Hales’ home, Regime Solutions, LLC.

In the majority of judicial sales, like the kind that was used to sell the Hales’ home, the purchaser of the foreclosed home takes on the property’s mortgage and other debts. This is necessary because the house is only free and clear once the associated debts are settled.

But Regime never took on the Hales’ mortgage. Not only that, but their business model appears to be based on not assuming the mortgage of the properties it purchases. After buying a foreclosure at a very low price, Regime either lets the bank foreclose on the property or it negotiates with the homeowners to let them have their house back for a large fee.

Between 2013-2016, Regime bought 38 properties that were later foreclosed on by the bank and 15 properties that it gave back to the original owners through a quitclaim deed for a profit of between $2,911-$13,984 per property. In the present case, the Hales offered to pay Regime $9,000 to settle the matter, but Regime asked for $35,000. The Hales didn’t pay it.

Summing up this section, the court states, “We do not countenance the improper use of foreclosure proceedings by the HOA, its attorney, or Regime” (emphasis original).

Could This Happen to You?

Yes, possibly. Depending on what covenants and restrictions you agreed to with your own HOA or regime, you could potentially find yourself in a similar situation as the Hales.

What can you do to avoid it?

First, make good decisions. Towards the end of its opinion, the court states “Our decision today should not be read as a shift toward providing relief to homeowners despite their own poor choices, in particular here, falling behind on a minimal amount of HOA dues and subsequently failing to respond to the summons and complaint.”

So take action on any and all legal matters that come your way. Fulfill your legal obligations as you promised to do in a timely manner by paying your mortgage and dues on time every month. Don’t assume that there could be no legal ramifications to paying late just because it’s a relatively small amount of money. This thinking can get you in trouble.

Next, review the paperwork you signed with your HOA or regime. It’s common for buyers to skim over these documents during a long real estate closing and therefore have no idea what it is they’re actually agreeing to. But you can take the time now to look at your covenants so you’re aware of the powers your HOA or regime has to charge you interest, place a lien on your property, pursue a foreclosure, and so on.

Finally, contact an attorney if you have any questions, especially if you’ve been served with papers.

Smart Legal Advice

If you need help with estate planning, business documents, commercial real estate, or strategic advice in a legal matter, contact Gem and his associates at the Gem McDowell Law Group in Mt. Pleasant, SC. Gem is a problem solver with over 35 years of experience helping families and business owners alike protect their interests and make smart decisions for peace of mind. Schedule a free consultation by calling 843-284-1021 today.

What Makes a “Grossly Inadequate” Sales Price: The Debt Method vs. the Equity Method

In South Carolina, a judicial sale of a property can be set aside if the sales price is “inadequate.” Either the sales price must be “inadequate” and also involve fraud, or the price must be “so grossly inadequate so as to shock the conscience of the court.”

What makes a sales price “grossly inadequate”? Just how low does it have to be? In South Carolina, there is no set amount or percentage that a court must apply to make that determination. However, looking back at past cases in the state, courts have consistently determined that sales prices of 10% or less of the property’s value are “grossly inadequate.”

Based on this, the 10% threshold was used as a benchmark in Winrose Homeowners’ Association v Hale (read the opinion here) which went before the South Carolina Supreme Court in 2019, and which we discussed in a previous blog.

How to Calculate the Sales Price: Debt Method vs Equity Method

In Winrose, Tina and Devery Hale’s home was sold in a judicial sale after they missed an HOA payment of $250 and their HOA foreclosed. Regime Solutions, LLC, bought it with a high bid of $3,036. The fair market value of the house was $128,000, with an unpaid mortgage balance of $66,004.

Since fraud was not an issue in this case, the question for the court to decide was whether the sales price of the house in question was “so grossly inadequate” that the sale could be set aside. If so, the foreclosure could be vacated and the home returned to the Hales. If not, the judicial sale would stand and Regime would retain the house.

With the 10% benchmark in place, the court needed to determine what the sales price was. There are two methods for determining whether a bid price is so grossly inadequate as to shock the conscience:

The Debt Method. This assumes that the party that purchases the foreclosed property will become responsible for the mortgage and other associated debts. This method focuses on how much the foreclosure purchaser must pay before having a free-and-clear title to the property, so the value of the outstanding mortgage is added to the bid price.

In this case, Regime would have paid ($3,036 bid) + ($66,004 mortgage balance) = $69,040. This is 53.9% of the Property’s fair market value of $128,000.

The Equity Method. This method focuses not on the debt the foreclosure purchaser is taking on, but the equity they would gain through the transaction. Instead of adding the outstanding mortgage balance to the bid, the balance is subtracted from the fair market value and compared to the bid.

In this case, Regime would stand to gain ($128,000 fair market value) – ($66,004 mortgage balance) = $61,996. The amount Regime paid, $3,036, is 4.9% of the equity it would stand to gain.

The majority of the time, the party that purchases the foreclosure does take on the obligations of the mortgage, because associated debts needs to be settled in order to have a free-and-clear title. For these situations, the Debt Method is appropriate.

But in the present case, Regime never took on the Hales’ mortgage and never took any positive steps to do so. As Justice Lockemy pointed out in his dissenting opinion in the Court of Appeals decision, it didn’t make sense to credit Regime with having taken on the mortgage. Furthermore, the Hales continued to pay their mortgage, substantially reducing the outstanding debt on the house over time. Therefore, using the Equity Method in this case is, in the words of the SC Supreme Court decision, “the only logical option.”

Since 4.9% is clearly below the 10% threshold, the court concluded that the bid was, indeed, “so grossly inadequate as to shock the conscience of the court.” The court set aside the foreclosure sale.

Get Strategic Legal Advice

For guidance and legal help on business matters, estate planning, and commercial real estate in South Carolina, call Gem of the Gem McDowell Law Group in Mount Pleasant, SC. Gem and his associates are experienced problem solvers who are here to help you and your family. Call 843-284-1021 today to schedule a free consultation at the Mount Pleasant office.

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