The Ohio Real Estate Blog

Watch Your Language with Reservation of Rents/Other Rights in Ohio Deeds

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 03 Aug 2020 23:32:00 +0000

(Supreme Court of Ohio in LRC Realty, Inc. v. B.E.B. Properties, Slip Opinion No. 2020-Ohio-3196 reaffirms time-tested rule that absent an express reservation in a deed, a covenant to pay rent runs with the land)

By: Stephen D. Richman, Esq. - Senior Counsel-Kohrman, Jackson & Krantz

-A Watch Your Language Series Article-

Because of this judicial deference to “plain language” within real estate and other documents, and the fact that courts, as a general rule will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous (sometimes referred to as the “Four Corners Rule”), you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.” And, more often than not, what a judge decides in these cases is not what at least one of the parties meant.

The Ohio Supreme Court in LRC Realty, Inc. v. B.E.B. Properties, Slip Opinion No. 2020-Ohio-3196 recently espoused this basic tenet of Ohio law with regard to deeds, when it held that: 1) absent an express reservation in a deed conveying property, a covenant to pay rent runs with the land; and 2) “subject to” language in a deed, without more does not constitute an express reservation.

Background/Facts of LRC Realty, Inc. v. B.E.B. Properties.

As succinctly stated by the Ohio Supreme Court in LRC Realty, “This case concerns the leased land beneath a cell tower and the right to receive rental payments from the tower’s owner following the transfer of the underlying property.”

The specific facts of the case are as follows:

In 1994, B.E.B. Properties (“B.E.B.”) leased a portion of its three-acre commercial property in Chardon, Ohio to Northern Ohio Cellular Telephone Company (now, “New Par”) and also granted New Par an easement on that same property. Both the lease and the easement were subsequently recorded and a cellular tower was later built on the site.

Between 1995 and 2013, there were three (3) successive sales of the property. The third sale, which occurred in 2013 was to appellant, LRC Realty, Inc. (“LRC”). Not soon after the first sale of the property, two of the partners of appellee B.E.B. (a general partnership) transferred their interest in the partnership to the third partner and his wife, Bruce and Sheila Bird (the “Birds”). The Birds assumed that the rents from the cell tower lease were assigned to them (notwithstanding the sale of the property), and in fact, New Par sent its rents to the Birds, until 2013 when LRC inquired as to its rights to the rents, and initiated litigation seeking a declaratory judgment that it was so entitled to such rent.

The trial court held for the plaintiffs and ordered the Birds to pay the owner of the property prior to LRC, the rents from 2007 to 2013, and to pay LRC the rents the Birds received in 2013, and thereafter. The Birds appealed the trial court’s decision to the 11^th District Court of Appeals of Ohio, and the 11^th District reversed that decision. Thereafter, the appellants appealed to the Ohio Supreme Court.

Analysis of LRC Realty, Inc. v. B.E.B. Properties.

The deed for the first transfer of the property was the key to this case (at all court levels) and provided as follows: “B.E.B. Properties … the said Grantor, does for its self and its successors and assigns, covenant with … Grantees … that it will warrant and defend said premises …against all lawful claims and demands whatsoever, “such premises further to be subject to the specific encumbrances on the premises as set forth above.”

The trial court found for the plaintiffs based on long standing Ohio law, that absent a reservation in a deed conveying property, the right to receive rents runs with the land; and it found no specific words of reservation in the deed in question. The Eleventh District believed that the “specific encumbrances on the premises as set forth above” language was a reference to the previously recorded lease and easement and therefore, such language should be interpreted as a reservation of the right to receive future rental payments under the lease.

The Supreme Court of Ohio in LRC Realty, Inc. v. B.E.B. Properties boiled the case down to two issues: (1) whether the general law in Ohio still provides that absent an express reservation in a deed conveying property, the right to receive rents runs with the land; and (2) whether or not language in a deed indicating that the property being conveyed is “subject to” a recorded lease agreement and easement constitutes such an express reservation.

Citing common law as far back as 1885, and statutory law enacted in 1965 (Ohio Revised Code Section 5302.04), the Ohio Supreme Court answered the first issue in the affirmative, namely that a covenant in a lease to pay rent “runs with the land” (meaning the right to receive rents would ordinarily follow the legal title transferred by deed, and belong to the grantee), absent a specific provision in the deed, reserving in grantor the right to receive such rental payments.

In answering the second issue in the negative (that the “subject to” language in the deed at issue did not constitute an express reservation of rents), the Ohio Supreme Court simply acknowledged and applied the “Four Corners Rule.” As explained by the court, “When interpreting a deed, the primary goal of this court is to give effect to the intentions of the parties [and the] best way to do that is to look at the words found within the four corners of the deed itself and to adhere to the plain language used there.”

Applying this rule of law to the deed at issue, the court concluded that “no words of reservation appear on the face of the deed in connection with the words ‘rent’ or ‘rental payments,’ and accordingly, B.E.B. Properties did not reserve the right to receive such rent when it conveyed the property.“ Without such a reservation, the court explained that “B.E.B’s subsequent assignment of that [rental] interest to the Birds was thus ineffective as it is impossible to assign an interest that one does not possess.”

What is the moral of this story? Watch your language, and say what you mean precisely, or a judge will tell you what you meant. The general, “Four Corners Rule” re: judicial deference to the written word in commercial documents, still… rules. Consequently, use the “magic” words- “reserve,” “reserving,” or “reservation” (vs. “subject to”) if your intent is to reserve rents or other rights in the grantor. That way, there is nothing left open to interpretation. Make the plain language, plain as day, and you won’t need your day…in court.

Several Ohio Counties Extend Real Estate Tax Due Date

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 26 May 2020 13:33:00 +0000

By: Stephen D. Richman, Esq.-Senior Counsel-Kohrman, Jackson & Krantz

Real Estate taxes in Ohio are collected six months in arrears. This means that real estate taxes and assessments for the 2^nd ½ 2019 will be due after the first half of 2020. Most counties in Ohio would ordinarily collect the 2^nd ½ payment between mid-June and mid-July.

However, to provide additional relief to taxpayers (residential and commercial) as a result of COVID-19, many Ohio Counties have extended their second ½ 2019 due dates. The Cuyahoga County 2019 Second Half Real Estate tax deadline, for example has been extended to August 13, 2020. Tax bills are expected to be in hand approximately 20 days prior to the deadline, per state law. Cuyahoga County Taxpayers are encouraged to use regular mail, the county drop boxes at the County Administrative Headquarters and North Olmsted Auto Title, and online resources to make their payments. For more information, click on: https://treasurer.cuyahogacounty.us/.

In an effort to assist Franklin County Residents through the challenges of the COVID-19 Pandemic, the Franklin County Treasurer’s and Auditor’s Office have moved the due date for their 2nd half real estate property tax collection 45 days from June 22, 2020 to August 5, 2020. For more information regarding Franklin County due dates and payment plans, see: https://treasurer.franklincountyohio.gov/About/PropertyTaxDueDate.

The Second Half 2019 Hamilton County Real Estate Tax Bills have been extended until July 17, 2020. For more information regarding Hamilton County real estate taxes, see: https://www.hamiltoncountyohio.gov/government/departments/treasurer.

Other counties have not modified their due dates, but are offering installment payment plans.

For example, Summit County’s Tax Installment Payment (T.I.P.) Plan will be available to property owners who are unable to make payment for second half 2019 real estate taxes due in July. Enrollment in T.I.P. can help property owners avoid late payment penalties.

The program was previously offered only to owners of residential, owner-occupied property. On April 27, 2020, Summit County Fiscal Officer Scalise lifted the occupancy requirement and expanded eligibility to rental properties, agricultural properties, commercial parcels, and manufactured homes. For more information or to establish a payment plan, email summittreas@summitoh.net; or, application forms can be downloaded from their website at https://FiscalOffice.summitoh.net.

To find out if your county has an extended tax due date, payment plan or other relief, contact your county treasurer or fiscal officer. For a directory of Ohio county treasurers, see: .http://www.ohiocountytreasurers.org/aws/CTAO/pt/sp/layout_directory?get_content_from_session=1.

Who Is the “Prevailing Party” When Awarding Attorneys’ Fees in Multiple Count, Landlord-Tenant Litigation?

noreply@blogger.com (Stephen D. Richman, Esq.) — Fri, 31 Jan 2020 18:22:00 +0000

(Watch your Language [with Attorneys’ Fees Provisions] & Say What You Mean, Precisely or a Judge Will Tell You What You Meant #14)

By: Stephen D. Richman, Esq.-Senior Counsel-Kohrman, Jackson & Krantz

Watch Your Language. As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy. They traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial transactions (such as commercial real estate deals), since both parties will usually have attorneys to review their documents. Because of this judicial deference to commercial language, you must, “say what you mean, precisely, or a judge will decide what you meant.” Failure to follow this axiom left the landlord in Simbo Properties, Inc. v. M8 Realty, LLC, 2019-Ohio-3091 (8^th Dist. Ct. of Appeals, Cuyahoga County) with a bill for its tenant’s attorneys’ fees in excess of the landlord’s claims for damages.

Attorneys’ Fees in General. Ohio courts follow the so-called “American Rule,” which requires that each party involved in litigation pay his or her own attorneys’ fees. There are, however three well-recognized exceptions to this rule: (1) where statutory provisions specifically provide that a prevailing party may recover attorneys’ fees; (2) where there has been a finding of bad faith; and (3) where the contract between the parties provides for it (sometimes referred to as “fee shifting”).

So called fee shifting or attorneys’ fees provisions are often drafted in general terms, with the parties assuming that their intent is clear. Frequent language calls for “reasonable attorneys’ fees to be awarded to the prevailing party.” Who is the prevailing party, however, when there are multiple counts, with one party prevailing on some counts and the other party prevailing on others? Does an award of “reasonable” fees mean that a prevailing party on one count is only entitled to fees related to that one count? The relatively recent case of Simbo Properties, Inc. v. M8 Realty, LLC reinforces the need to be specific and leave as little as possible to “interpretive chance.”

Simbo Properties, Inc. v. M8 Realty, LLC – (The Facts). The facts of the “Simbo” case are simple enough (the law, not so much). In December, 2012, Simbo Properties, Inc. (“Simbo”) and M8 Realty, LLC (“M8”) entered into a written lease pursuant to which Simbo leased commercial real property to M8. The initial term of their lease agreement was for eighteen (18) months. Simbo claimed that M8 violated several provisions of the lease resulting in the filing by Simbo of a lawsuit in the Cuyahoga County Court of Common Pleas (“trial court”). Simbo filed a four-count complaint against M8 seeking the following: Count 1 — rent (in excess of $150,000); Count 2 — real estate taxes ($32,158.34); Count 3 — property damage (in excess of $30,000 for flag pole and storm sewer damage); and Count 4 — breach of other pertinent lease provisions. M8 filed a counterclaim for damages claimed by M8. In pre-trial motions, M8 prevailed on Count 4 by virtue of the trial court granting M8’s motion for summary judgement. Of the remaining issues before the trial court, Simbo prevailed on Count 2, on part of Count 3 and on M8’s counterclaim. M8 prevailed upon Count 1 and part of Count 3.

After the judgement was rendered, both parties filed post-trial motions, including claims for attorneys’ fees. Simbo and M8 based their claims for attorneys’ fees on the fact that they each prevailed upon at least part of the litigation, and their lease agreement contained a fee shifting provision directing legal fees be awarded to the prevailing party of a lawsuit. Specifically, Section 37 of the Simbo/M8 lease agreement provides: “If a lawsuit is filed with respect to this Lease, the prevailing party shall be entitled to collect all reasonable attorneys’ fees and costs.”

On the issue of the award of attorneys’ fees under the lease, the trial court determined that M8 was the “prevailing party” since it won the “main issue” in the lawsuit (Count 1) and, as a result was entitled to all of its attorneys’ fees, as provided in the lease agreement.

Simbo then filed an appeal of the $238,335.73 award of attorneys’ fees and expenses to M8 and also challenged other aspects of the trial court’s rulings. Simbo argued that since it prevailed on two counts of the complaint and M8’s counterclaim, it should be considered the “prevailing party”

under the lease agreement’s fee-shifting provision.

Simbo Properties, Inc. v. M8 Realty, LLC – (Case Analysis). On appeal, the 8^th District Court of Appeals first acknowledged that there were complications inherent in the trial court’s attorneys’ fees award because: (1) the term “prevailing party” was not defined within the lease agreement; and (2) a determination of whether Simbo or M8 is the “prevailing party” was also complicated by a jury verdict in favor of both parties.

Nonetheless, the 8^th District Court of Appeals in Simbo easily resolved the complications by virtue of precedent (prior court rulings on point) established in the 10^th District Court of Appeals case, EAC Properties LLC v Brightwell (2014-Ohio-2078). EAC Properties was a landlord-tenant case on similar facts as Simbo, whereby the landlord (EAC Properties) brought suit against its tenant, Brightwell re: $30,000 of unpaid, additional rent (deemed the “primary claim” by the EAC court because it was the largest dollar amount claimed) and $3,000 of unpaid utilities. The court in EAC Properties determined that the landlord’s primary claim for additional rent failed, and because the landlord did not prevail on that primary issue, it was not entitled to collect any attorneys’ fees under the lease agreement.

Applying what it termed EAC’s’ “main issue standard,” the court of appeals in Simbo easily determined M8 to be the “prevailing party” because it received a jury verdict on the main issue of the case; the count (Count 1) that represented the largest dollar amount, as well as being the count that counsel for M8 spent the largest percentage of time defending.

The court in Simbo did acknowledge that there is a “some relief” (vs “main issue”) standard that has been applied to define a “prevailing party” in connection with statutory claims for attorneys’ fees such as is authorized in consumer protection and civil rights laws. However, the Simbo court did not find the “some relief standard” applicable in a contractual case like Simbo, reasoning that “While public policy in consumer protection and civil rights litigation supports a broader interpretation of ‘prevailing party’, no similar need exists in negotiated commercial fee-shifting clauses between sophisticated parties… represented by counsel[who] knowingly and willingly negotiated a commercial lease agreement.”

As if to reinforce our moral of the story below, the court of appeals in Simbo also reasoned that: “If the parties had desired to define “prevailing party,” e.g., as the party that prevails on the most counts in the litigation, Simbo and M8 could have drafted that provision into the lease… or [could have] defined the term “prevailing party,” but chose not to do so. [Accordingly], we must follow the intent of the parties and apply the terms of the lease agreement.” In other words, the parties did not say what they meant, precisely, so the judge told them what they meant.

Since the court of appeals in Simbo determined that the parties intended to define “prevailing party” as the party that prevailed upon the main issue of the case, then such party should only be able to collect its attorneys’ fees with respect to the main issue. Right? That was the landlord’s argument. Simbo argued that M8 should recover only those attorneys’ fees attributable to Count 1, the count on which M8 prevailed at the trial court. The court of appeals in Simbo, however upheld the trial court’s award of M8’s total legal fees incurred with respect to all of the counts of the litigation, including the counts the landlord prevailed upon. The Simbo court explained that claims that involve common facts or legal theories are too difficult to divide as to the time and hours spent on litigating the individual claims. Accordingly, the court of appeals in Simbo held that “[W]here multiple claims are rooted in the same allegations, facts, discovery, and legal arguments, a trial court does not abuse its discretion in awarding attorney fees for the time spent on [all of] the claims.”

What is the moral of this story? “Say what you mean, precisely, or a judge will tell you what you meant.” Clearly, the landlord in Simbo did not intend to pay more in legal fees than it had in claims, especially when it prevailed on some of those claims. Nevertheless, since there was no definition of “prevailing party” in the lease, the court, in effect found one.

Listen to what judges are saying with regard to interpreting leases and other commercial contracts: “When the language of a written contract is clear, a court may look no further than the writing itself to find the intent of the parties” [So, be clear]. Define “prevailing party” in commercial fee shifting provisions; define “reasonable fees” or consider a “floor” or “ceiling.” Also, be clear as to whether or not your intent is to be reimbursed for legal fees after a default, whether or not it ends up in litigation.

In other words, the “well-known and established principle of contract interpretation is that [c]ontracts are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced or not evidenced by the contract language” [So, evidence your intent in your documents].

Ohio’s New Notary Law Definitely Worth Noting

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 24 Sep 2019 21:57:00 +0000

By: Stephen D. Richman, Esq., Senior Counsel-Kohrman, Jackson & Krantz

Effective last Friday, September 20, 2019, a new law (Ohio Senate Bill 263, the Notary Public Modernization Act) went into effect which makes significant changes for Ohio Notaries Public and those who wish to become Notaries. While some may not assign preeminent importance to “notary law”, the Ohio State Bar Association adds notable perspective by stating, “the bill ensures consistent standards across the state and provides for the training and support they need to confidently and accurately witness and authenticate all the affidavits and oaths, property titles, grants, deeds, contracts, adoptions, advanced directives and powers of attorney — the documents, which represent the most important transactions in our lives and for our economy.”

Key provisions of SB 263 include the following changes to Ohio Notary law:

1. Who is in Charge? The Ohio Secretary of State’s office is now in charge and the place to go for anyone applying for a new Notary commission or seeking to renew their commission. Previously, Ohio’s county courts of common pleas governed the process.

2. Non-attorney applicants for new Ohio Notary commissions will be required to obtain a criminal records check, complete a three hour education program and take/pass a test. Those seeking to renew will need a new (not more than six months old) criminal records check and need to complete a one hour “refresher” educational program.

3. New attorney applicants will be required to complete a three hour training program, but will not be required to obtain a criminal records check or take a test.

4. New Fees. Ohio Notaries may now charge up to: (i) $5 for an in-person, paper notarization; (ii) $10 for electronic notarizations that are not performed online; and (iii) $25 for a remote, online notarization.

5. “New” Forms/Rules.

a) Jurats. (where one swears to or affirms the truthfulness of the contents of a document). For jurats, the new law includes a new statutory jurat form; or, you can still draft your own, provided, however that it clearly states that an oath or affirmation was administered.

b) Acknowledgements. (verify the identity of the signer and confirm that the signer signed a document). For acknowledgements, you can use the “statutory short forms of acknowledgment” in the existing statute, or, you can create your own, but the new law requires that the acknowledgement: 1) contain the words “acknowledged before me” or their substantial equivalent; and 2) clearly state that an oath or affirmation was not administered.

6. Online Notaries. Anyone who is a commissioned Ohio Notary may apply to be an online Notary. To become authorized you must: 1) Successfully complete a two hour education program; 2) pass a test; 3) pay an authorized provider a fee of $250; and 4) submit an application to the Secretary of State and pay an application fee of $20.

The Ohio Society of Notaries (http://ohionotaries.org/) has been approved by the Secretary of State as an Authorized Provider of Training & Testing under the new law. To find out more about their training offerings, or to get answers to your questions about notary procedures, signing situations, or best practices; you can call their free helplines at (614) 336-7878, (614) 348-3305, or Email them.

Boilerplate Language Upheld in Ohio Storage Lease

noreply@blogger.com (Stephen D. Richman, Esq.) — Sun, 30 Jun 2019 14:51:00 +0000

By: Stephen D. Richman, Esq.-Senior Counsel-Kohrman, Jackson & Krantz

boil•er•plate (boi l r-pl t ) n.

1. A steel plate used in making the shells of steam boilers.
2. Inconsequential, formulaic, or stereotypical language: The new provisions of the lease renewal were merely boilerplate.

The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved.

The first type of “boilerplate” defined above is pretty tough stuff. It can be up to twelve (12) inches thick and stop arrows, Greek fire and low caliber ammunition. Tough, one-sided contract and lease language is also referred to by many as “boilerplate”. What is amazing to me is how many tenants, landlords, brokers and dictionary writers believe such language is inconsequential or unenforceable, and how many do not worry about such language because they deem it “merely boilerplate.”

Notwithstanding the above definition, this author would like to caution you to worry, if you ever find yourself on the “wrong side of the boilerplate.” Contrary to “Mr. Heritage’s” beliefs, odds are that boilerplate (at least in a commercial lease/contract) will most likely be enforceable unless it is contrary to statutory law or public policy. Judges assume (rightly or wrongly) that commercial tenants and landlords are on equal footing with equal sophistication in business and lease matters. They believe commercial parties say what they mean and mean what they say in their contracts. Ohio court decisions regarding commercial leases are replete with language like the following: “when reviewing lease provisions, a court is to presume that the intent of the parties is in the language they used, and if the contract is clear and unambiguous, then we must follow the contract’s expressed terms and must not go beyond the plain language of the contract.” Langfan v. Carlton Gardens, 2009 Ohio App. LEXIS 2863. Accordingly, self-help provisions, landlord disclaimers of the duty to mitigate damages, warrants of attorney to confess judgement and disclaimers of warranties are just a few examples of boilerplate language upheld in commercial leases in Ohio.

The primary exception to the general enforceability of boilerplate language in Ohio is Ohio’s Landlord-Tenant Act (ORC Chapter 5301 et. seq.), which governs Ohio residential leases. Specifically, Section 5321.13 (d) of such Act provides that “No agreement by a tenant to the exculpation or limitation of any liability of the landlord arising under law or to indemnify the landlord for that liability or its related costs shall be recognized in any rental agreement or in any other agreement between a landlord and tenant.” Awards of attorney fees and warrants of attorney to confess judgment are also prohibited in residential leases. The Ohio Landlord-Tenant Act was enacted to protect residential tenants who are often in an unequal bargaining position from their landlords, and have a lot more to lose (e.g., their homes).

What about boilerplate language in storage unit leases? Often, such units are utilized to store beds, refrigerators and other furniture and appliances typically found in a residence. Do storage unit tenants have the same protection residential tenants have?

What if such boilerplate language in a storage unit lease goes so far as 1) disclaiming landlord liability (for patent and latent defects, failure to repair and express and implied warranties); 2) imposing minimal, liquidated damages; and 3) requiring the tenant to indemnify landlord? That’s just inconsequential boilerplate, right Mr. Heritage?

Not according to the Tenth District Court of Appeals in the recent case of Hopkins v. Car Go Self Storage,2019-Ohio-1793.

In Hopkins, the tenant-appellant entered into a lease agreement with appellee, “Car Go Self Storage” to store her personal belongings, including furniture, in appellee’s storage facility. Appellant testified in court that the facility was dry when the items were moved in, but when such items were retrieved, they were damp and covered with mold. Apparently there was a water leak that allowed water into the unit, causing the mold. Appellant sued appellee for breach of contract, negligence and conversion. The trial court held for appellee on all counts, and appellant appealed.

The court of appeals in Hopkins affirmed the decision of the trial court. The appellate court held that the negligence claim was properly dismissed because it was barred by the two-year statute of limitations. The conversion claim was properly dismissed because appellant admitted she was not prevented from recovering her property.

Regarding the contract claim, appellant claimed that her contract contained an implied warranty that the unit was fit and habitable for storage of property, and that such warranty was breached by the landlord. The 10^th District Court of Appeals apparently agreed with appellant that the elements establishing an implied warranty had been met. However, according to the court, such warranty was disclaimed by the landlord’s exculpatory clause that included a broad, but unambiguous release of liability for damage to property; and a clear, express waiver of implied warranties. Citing precedent (similar cases on point), the court in Hopkins simply applied the “general rule,” namely, that “exculpatory causes in lease agreements are generally valid absent a showing of ambiguity or unconscionability” and “if the court can determine intent from the plain [albeit exculpatory] language of the contract, then the court must apply that language as written and refrain from further contract interpretation.”

It is important to note that the Hopkins court did not preclude future challenges to a storage lease, as unconscionable. Since appellant did not challenge her lease as unconscionability, however, the court in Hopkins simply concluded that “the court cannot address an argument that was not raised.”

So, what is the moral of this story? All language in a lease is of consequence; boilerplate or not. The best weapon against boilerplate language is the delete key. Negotiate away boilerplate language before signing the lease. Afterwards, odds are you will be no more successful shooting holes through boilerplate language in court, as you would be shooting holes through the 12- inch- thick steel kind of boilerplate.

Recent Real Estate Legislation Introduced in the Ohio Legislature (133rd General Assembly)

noreply@blogger.com (Stephen D. Richman, Esq.) — Wed, 08 May 2019 14:01:00 +0000

By: Stephen D. Richman, Esq.- Senior Counsel-Kohrman, Jackson & Krantz

Recent bills of the 133rd General Assembly (See https://www.legislature.ohio.gov/) pending in the Ohio House and Ohio Senate related to real property include the following:

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Senate Bill 8

General Assembly: 133

Short Title: Authorize tax credit for investment in opportunity zone.

Long Title: To amend Sections 107.036, 122.86, 5747.02, and 5747.98 and to enact Section 122.84 of the Revised Code to authorize a tax credit for investments in an Ohio Opportunity Zone.

Primary Sponsor: Senator Kirk Schuring-District 29

Version/Status: Passed by Senate-4-3-19; Referred to House Workforce and Economic Development Committee-4-16-19

Legislation Text: View Current Version

House Bill 20

General Assembly: 133

Short Title: Prohibit homeowner associations placing limits on solar panels.

Long Title: To enact Sections 5301.073 and 5311.192 of the Revised Code to prohibit condominium, homeowners, and neighborhood associations from imposing unreasonable limitations on the installation of solar collector systems on the roof or exterior walls of improvements.

Primary Sponsor: Rep. Louis W. Blessing III-District 29

Version/Status: Referred to State and Local Government Committee-2-13-19

Legislation Text: View Current Version

Senate Bill 36

General Assembly: 133

Short Title: Prescribe valuation of certain rental property for tax purposes.

Long Title: To amend Sections 5713.03 and 5715.01 of the Revised Code to prescribe how federally subsidized residential rental property must be valued for property tax purposes.

Primary Sponsor: Senator Matt Huffman-District 12

Version/Status: Referred to Ways and Means Committee-2-20-19

Legislation Text: View Current Version

House Bill 47

General Assembly: 133

Short Title: Revise time to decide property tax complaint; rename Legal Assistance.

Long Title: To amend Section 5715.19 of the Revised Code to increase the time within which property tax complaints must be decided. Primary Sponsor: Rep. Dave Greenspan-District 16

Version/Status: Referred to Ways and Means Comm.-2-13-2019; reported/amended-5-1-19

Legislation Text: View Current Version

Senate Bill 96

General Assembly: 133

Short Title: Grant Cleveland Housing Ct-review of health/safety code cases.

Long Title: To amend Section 1901.181 of the Revised Code to grant the

Cleveland Housing Court jurisdiction in any review or appeal of a final order of an

administrative body that relates to a local building, health, or safety code.

Primary Sponsors: Senator Matt Dolan-District 24 and Senator Kenny Yuko-District 25

Version/Status: Referred to Local Govt., Public Safety and Veteran’s Affairs Committee-3-12-19

Legislation Text: View Current Version

House Bill 99

General Assembly: 133

Short Title: Revise homestead exemption income eligibility and tax reduction.

Long Title: To amend Sections 323.152 and 4503.065 of the Revised Code to raise the homestead exemption income eligibility to $60,000 and increase the tax reduction.

Primary Sponsors: Rep. Jack Cera-District 96 and Rep. John M. Rogers-District 60

Version/Status: Referred to Ways and Means Committee-3-5-2019

Legislation Text: View Current Version

House Bill 103

General Assembly: 133

Short Title: Change law relating to land installment contracts.

Long Title: To amend Sections 1343.01, 3781.10, 5313.02, and 5313.04 and to enact Sections 5313.021, 5313.022, 5313.031, and 5313.12 of the Revised Code to make changes to the law relating to land installment contracts.

Primary Sponsors: Rep. Michele Lepore-Hagan-District 58 and Rep. Don Manning-District 59

Version/Status: Referred to Civil Justice Committee-3-5-19

Legislation Text: View Current Version

Senate Bill 139

General Assembly: 133

Short Title: Enact First-time Home Buyer Savings Act-allow tax deductions

Long Title: To amend Section 5747.01 and to enact Sections 193.01, 193.02, 193.03, 193.04, 193.05, 193.06, and 193.07 of the Revised Code to enact the First-time Home Buyer Savings Act, authorizing income tax deductions for contributions to and earnings on savings accounts designated for the purchase of a home.

Primary Sponsors: Senator Theresa Gavarone-District 2 and Senator Bob Peterson-District 19

Version/Status: Introduced 4-30-19

Legislation Text: View Current Version.

House Bill 149

General Assembly: 133

Short Title: Enact Affordable Homebuilding and Housing Act.

Long Title: To enact Section 5709.51 of the Revised Code to enact the "Affordable Homebuilding and Housing Act" to temporarily exempt from property tax the increased value of land subdivided for residential development.

Primary Sponsor: Rep. Derek Merrin-District 47

Version/Status: Referred to Economic and Workforce Development Committee-3-26-19

Legislation Text: View Current Version

House Bill 199

General Assembly: 133

Short Title: Licenses commercial roofing contractors.

Long Title: To amend Sections 715.27, 3781.102, 4740.01, 4740.02, 4740.04, 4740.12, and 4764.03 of the Revised Code to require commercial roofing contractors to have a license.

Primary Sponsor: Rep.Thomas F. Patton-District 7

Version/Status: Referred to Commerce and Labor Committee-4-30-19

Legislation Text: View Current Version

House Bill 209

General Assembly: 133

Short Title: Abolish estate by dower.

Long Title: To amend Sections 2103.02, 2103.09, and 2106.24 of the Revised Code to abolish the estate by dower.

Primary Sponsors: Rep. Sara Carruthers-District 50 and Rep. Darrell Kick-District 70

Version/Status: Referred to Civil Justice Committee-4-30-2019

Legislation Text: View Current Version

House Bill 229

General Assembly: 133

Short Title: Prohibit discrimination in rental housing based on income.

Long Title: To amend Sections 4112.01 and 4112.02 of the Revised

Code to prohibit discrimination in rental housing based on lawful source of income.

Primary Sponsors: Rep. Terrence Upchurch-District 10 and Rep. Adam Miller-District 17

Version/Status: Introduced in House-4-30-2019

Legislation Text: View Current Version

U.S. Supreme Court holds that Enforcers of Security Interests in Nonjudicial Foreclosures are not “Debt Collectors” under Federal Fair Debt Collection Practices Act

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 16 Apr 2019 22:12:00 +0000

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(A Watch Your Language Series Article)

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy. Because of this judicial deference to commercial language, you must “say what you mean, precisely, or a judge will decide what you meant.”

Saying what you mean, precisely, is as important in drafting statutes and ordinances as it is in commercial agreements. As a general rule, courts will also uphold clear and unambiguous statutory language. “Statutes clear in their terms need no interpretation; they simply need application. If the …language of a statute reveals … a meaning which is clear, unequivocal and definite… the statute must be applied accordingly." Provident Bank v. Wood (1973). Alternatively, ambiguous statutes will be interpreted by judges who may or may not uphold the meaning intended by the legislative authority who drafted such statutes.

In the recent case of Obduskey v. McCarthy & Holthus LLP, 138 S. Ct. 2710 (2018), the United States Supreme Court determined that the Fair Debt Collection Practices Act (“FDCPA” or the “Act”) was not clear and unequivocal, and accordingly, the court decided what Congress meant by the term “debt collector.”

The facts of the case are simple enough; the law, not so much.

Facts of the Case

In 2007, Dennis Obduskey (the petitioner) bought a home in Colorado with a $329,940 loan secured by a mortgage on the property. Approximately two years later, Mr. Obduskey defaulted on the loan. In 2014, Wells Fargo Bank, N. A., the servicer for the lender hired a law firm, McCarthy & Holthus LLP (the respondent) to act as its agent in carrying out a nonjudicial foreclosure.

McCarthy first mailed Mr. Obduskey a letter that stated McCarthy had been instructed to commence foreclosure against the property, disclosed the amount past due and outstanding on the loan and identified the creditor. Mr. Obduskey responded with a letter disputing the amount of the debt, and requesting written verification of the debt in accordance with §1692g(b) of the FDCPA. McCarthy did not provide any such verification. Instead, the law firm initiated a nonjudicial foreclosure action in accordance with Colorado state law.

Mr. Obduskey then filed a lawsuit in federal court alleging that the McCarthy law firm had violated the FDCPA by failing to comply with the verification procedure and other provisions and procedures required by the Act. The federal district court dismissed the suit on the ground that the law firm was not a “debt collector” within the meaning of the Act, so the verification procedure and other relevant Act requirements did not apply. On appeal, the Court of Appeals for the Tenth Circuit affirmed the dismissal. Mr. Obduskey then petitioned the United States Supreme Court for certiorari (an order by which a higher court reviews a decision of a lower court).

Applicable Law

To better understand the Obduskey decision, a quick primer on nonjudicial foreclosures and the Act is in order.

Nonjudicial foreclosure. As well explained by the court in Obduskey: “When a person buys a home, he or she usually borrows money from a lending institution, such as a bank. The resulting debt is backed up by a ‘mortgage’—a security interest in the property designed to protect the creditor’s investment… The loan likely requires the homeowner to make monthly payments. And if the homeowner defaults, the mortgage entitles the creditor to pursue foreclosure, which is ‘the process in which property securing a mortgage is sold to pay off the loan balance due’… Every state provides some form of judicial foreclosure: a legal action initiated by a creditor in which a court supervises the sale of the property and distribution of the proceeds. These procedures offer various protections for homeowners, such as the right to notice and to protest the amount a creditor says is owed...About half the States also provide for what is known as nonjudicial foreclosure, where notice to the parties and sale of the property occur outside court supervision.” Ohio is not one of the states that permits nonjudicial foreclosures.

The FDCPA- The Fair Debt Collection Practices Act is the main federal law that governs debt collection practices. Generally, the FDCPA prohibits debt collectors from using abusive, unfair or deceptive practices to collect debts. Specifically, the Act imposes a multitude of requirements on “debt collectors.” For example, pursuant to §1692d of the Act, debt collectors may not use or threaten violence, or make repetitive phone calls. Nor (pursuant to §1692e of the Act) can debt collectors make false, deceptive or misleading representations in connection with a debt, like misstating a debt’s “character, amount, or legal status.” And, pursuant to §1692g(b) of the Act, if a consumer disputes the amount of a debt, a debt collector must cease collection until it “obtains verification of the debt” and mails a copy of such verification to the debtor.

There is also a separate subsection of the Act (§1692f(6)), that prohibits a debt collector from: “Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if— (A) there is no present right to possession of the property . . . ; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement.”

What is a “debt collector” for purposes of the Act? Pursuant to §1692a(6) of the Act , a “debt collector” is “any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” This definition, however, goes on to say that “[f]or the purpose of section 1692f(6)…the term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”

The Issue before the Court: The issue faced by the court in Obduskey was essentially; what did Congress mean by enacting, in effect, a two-part definition of “debt collector” in the Act. In other words, does the “2^nd part of the definition” (the last sentence) mean that one principally involved in the enforcement of security interests is not a debt collector (except regarding section 1692f(6) of the Act)? If so, numerous other provisions of the Act, like the verification requirement would not apply to the McCarthy law firm. Or, does the 2^nd part of the definition simply reinforce the fact that those principally involved in the enforcement of security interests are subject to §1692f(6), in addition to the Act’s other provisions?

Holding/Court Analysis of Obduskey: The United States Supreme Court in Obduskey held that a security interest enforcer engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of §1692f(6) of the Act. In other words, the vast majority of the Act does not apply to nonjudicial foreclosures.

Most decisive and important to the court was the text of the Act itself. The court interpreted the first part of the Act’s definition of debt collector as the Act’s “primary definition,” and the last sentence of the definition as the “limited purpose” part of the definition. The court in Obduskey then reasoned that if security interest enforcers were meant to be included in the primary definition, there would have been no need for the addition of a limited purpose definition that specifically addresses security interest enforcers (in nonjudicial foreclosures).

As explained in the case syllabus, “The limited purpose definition says that “[f]or the purpose of Section 1692f(6)” a debt collector ‘also includes’ a business, like McCarthy, ‘the principal purpose of which is the enforcement of security interests.’ §1692a(6) (emphasis added). This phrase, particularly the word ‘also,’ strongly suggests that security interest enforcers do not fall within the scope of the primary definition. If they did, the limited purpose definition would be superfluous.”

The court also pointed out that its interpretation is supported by legislative history, which suggests that “the Act’s present language was the product of a compromise between competing versions of the bill, one which would have totally excluded security-interest enforcement from the Act, and another which would have treated it like ordinary debt collection.”

Mr. Obduskey made a number of legal arguments which were summarily dismissed by the court. He also expressed a “floodgates argument” claiming that the court’s decision will open a loophole, permitting creditors and their agents to engage in a host of abusive practices. The court seemed concerned enough about this argument to issue a warning, by stating, “This is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices.” However, the Court was not swayed enough to change its decision. In fact, the court countered that it would not be the role of the Supreme Court of the United’s States to curtail any collateral damage from its decision. Rather, “states can…guard against such practices”, and “Congress may choose to expand the reach of the FDCPA.” According to the court, the United States Supreme Court’s only job is to “enforce the statute that Congress enacted.”

Moral of the Story

For legislators, “say what you mean, precisely, or a judge will decide what you meant.” And, remember that judges do not always get it right. Even Justice Sotomayor, in her concurring opinion in Obduskey recognized this adage by stating: “this is a close case, and today’s opinion does not prevent Congress from clarifying this statute if we have gotten it wrong.”

For debt collectors, heed the court’s warning (“enforcing a security interest does not grant an actor blanket immunity from the mandates of the Act”), rather than focus on its holding. Also keep in mind that there is no penalty for adhering to consumer protection statutes that may not be applicable, even if you are an attorney or other security interest enforcer involved in a nonjudicial foreclosure. What would be the harm, for example in using the “verification of the debt language” called for in the Act, when there is no requirement to do so? Remember that debt collection protections are also governed at the state and local level, in spite of a limited loophole in the FDCPA.

If you are an enforcer of a security interest in a judicial foreclosure (required in Ohio and other states), note that the holding of Obduskey v. McCarthy & Holthus LLP does not apply to you. As clearly stated by the court in Obduskey, “Whether those who judicially enforce mortgages fall within the scope of the primary definition [of “debt collector”] is a question we can leave for another day…for here we consider nonjudicial foreclosure.” In other words, since enforcers of security interests in judicial foreclosures were not deemed excluded from the Act’s definition of “debt collector”, to be prudent, you should consider yourself included in the definition, and consequently, subject to all provisions of the Act.

Don’t Get Knocked Out of the Gate before the Race Starts: Ohio Supreme Court Holds that Filing of Tax Complaint by Property Manager is Unauthorized Practice of Law

noreply@blogger.com (Stephen D. Richman, Esq.) — Sat, 02 Mar 2019 05:01:00 +0000

By: Stephen D. Richman, Esq.-Senior Counsel, Kohrman, Jackson & Krantz

Answering the “what, when, where and why questions” relating to real estate tax complaints in Ohio is a lot easier than answering “who” can file real estate tax complaints. The Ohio Supreme Court in Greenway Ohio, Inc. v. Cuyahoga Cty. Bd. of Revision, Slip Op. No. 2018-Ohio-4244, however, recently provided a little guidance as to answering the “who question.”

I. The What/When/Where/Why of Real Estate Tax Complaints in Ohio

What: Property owners, concerned that their real property tax values are too high may file a complaint to reduce the same. Those tax values, multiplied by local tax rates result in the amount that property owners will pay in real estate taxes.

When: Complaints may only be filed between January 1 and March 31 (April 1, 2019 for tax year 2018) to contest the prior year’s tax value. For example, if a complaint is filed in 2019, it relates back to the tax value of the property as of January 1, 2018. Pursuant to Ohio statutory law, as well as Ohio Department of Taxation rules, real property in all Ohio counties is required to be reappraised every six years, and updated every three years. Normally, owners can challenge a county auditor's valuation just one time in each three-year cycle (a “triennial”) unless the property was sold in an arm's length transaction, the property lost value due to a casualty, substantial improvement was added to the property or there was an increase or decrease of at least fifteen per cent in a commercial property's occupancy.

Time is definitely “of the essence” with regard to tax complaints. If a complaint is filed even one day late, it will be dismissed.

Where/How: Property values are challenged via a "Complaint Against Valuation" that is filed with the local Board of Revision (“BOR”). The same complaint form is used statewide. It can be downloaded from county auditor websites as well as from the Ohio Department of Taxation's website. It is important to fill out the form carefully, because incorrect information can result in the dismissal of a case.

Why: Basically, complaints are filed to petition for lower property values, because lower property values means lower property taxes. Common reasons to challenge property values include declining market values, declining rents/increased vacancies for income-producing property, obsolescence and casualty damage. In addition, people who recently purchased a property in an arms-length transaction for less than their county auditor's value, often have a strong basis for filing a tax appeal (due to case law which provides that the sale price in an arm’s length transaction between a willing seller and a willing buyer is usually considered good evidence of value).

What if there is no recent sale involved? Does it still make sense to challenge your property’s increased valuation?

The answer is, of course, it depends. It depends on the amount of additional taxes that will need to be paid, for how long, and the attorney, appraiser and other fees involved with a complaint. For example, let’s say the county increased the value of your property by $20,000. While that number is significant, if your county’s tax rate as a percent of market value is 2%, your taxes would only increase by $400/yr. On the other hand, a $100,000 valuation increase on a commercial property with the same tax rate would result in taxes increasing by $2,000/yr. Since valuation in Ohio is updated every three years, you could be faced with a $6,000 increase (in our commercial example) if the year of increased valuation is the first year of a triennial. If an appraisal costs, say $2,000, and an attorney will take the case on a contingency basis, the challenge would be worth it. You basically need to do a cost/benefit analysis for every situation in order to determine if it makes sense to challenge your property’s increased valuation.

II. . Who may File a Real Estate Tax Complaint in Ohio

§ Property owner;

§ An attorney, licensed to practice law in the State of Ohio, representing any party properly before a BOR; and

§ Any other entity named in Ohio Revised Code Section 5715.19 (A).

Background: At one time, the list of who could file a tax complaint was limited to attorneys and individual property owners, as a result of then current court precedent, most notably, Sharon Village Ltd. v. Licking Cty. Bd. of Revision, 78 Ohio St.3d 479 (1997). In the aftermath of the Sharon Village decision, the General Assembly enacted legislation (H.B. 694, effective March 1999) that (among other things) expressly authorized certain non-attorneys to file tax valuation complaints on behalf of property owners, namely: (1) spouses; (2) appraisers; (3) real estate brokers; (4) accountants; and (5) officers, salaried employees, partners or members of a corporation or other business firm owner of real property (See Ohio Revised Code Section 5715.19(A)).

Two sub-issues (regarding who may file): Two sub issues have arisen, however, after the supposed clarity that H.B. 694 and O.R.C. 5715.19(A) was initially thought to provide. The first sub-issue centers around what a non-attorney agent may do during the tax complaint process, without being guilty of the unauthorized practice of law. While, at first glance, H.B. 694 appeared to provide some practicality and legal cost savings by allowing a number of non-attorney agents to file real estate tax complaints, the Supreme Court of Ohio in Dayton Supply & Tool Co., Inc. v. Montgomery Cty. Bd. of Revision, 2006-Ohio-5852 clarified that while a corporate officer (or other authorized, non-attorney) may prepare and file a complaint with a local board of revision, without engaging in the unauthorized practice of law, the non-attorney cannot do much else. In other words, corporate officers and other authorized, non-attorneys cannot make legal arguments, examine witnesses or undertake any other tasks that can only be performed by an attorney.

The second sub-issue is whether or not O.R.C. 5715.19(A) limits non attorney agents who may file complaints on behalf of an owner to those specifically listed in the statute; and if not, what other, non-attorney agents may tax file complaints.

Greenway Ohio, Inc. v. Cuyahoga Cty. Bd. of Revision: The “second sub-issue” discussed above was recently analyzed in Greenway Ohio, Inc. v. Cuyahoga Cty. Bd. of Revision. Specifically, this case involved whether or not a property manager is among the non-lawyers authorized under O.R.C. 5715.19(A) to file a valuation complaint on behalf of a property owner.

In Greenway, the CEO of real estate management company “Property Advisors” prepared and filed (in January, 2016) a tax complaint seeking to lower the value of the property that Property Advisors managed for the owner (Greenway Ohio, Inc.; “Greenway”). The Orange City School Board of Education (“BOE”) filed a motion to dismiss the complaint on the basis that the Cuyahoga County Board of Revision (“BOR”) had no jurisdiction to hear the matter, since Mr. Sweeney, the CEO of Property Advisors was not a person authorized under O.R.C. 5715.19(A) to file a tax complaint on behalf of the owner. The BOR indicated that Mr. Sweeney was not authorized to file (and accordingly, engaged in the unauthorized practice of law), however, the BOR issued a decision on the merits, upholding the then property value of the Cuyahoga County Fiscal Officer. Greenway then appealed to the Ohio Board of Tax Appeals (“BTA”). Without conducting a hearing, the BTA determined that Mr. Sweeney was not a person authorized under O.R.C. Section 5715.19(A) to file a tax complaint, and that therefore, the BOR had no jurisdiction. The BTA then remanded the case back to the BOR with instructions to dismiss the complaint. Greenway then appealed to the Ohio Supreme Court.

The underlying premise of Greenway’s argument is that the list of persons specified in O.R.C. 5715.19(A) is not an exhaustive list and that a management company, as an authorized agent of the property owner should be able to file a complaint on the owner’s behalf. In support of its argument, Greenway cited a 2010 Ohio Supreme Court case that held for the taxpayer, and also dealt with a real estate management company (Toledo Pub. Schools Bd. of Edn. v. Lucas Cty. Bd. of Revision, 124 Ohio St.3d 490, 2010-Ohio-253). The court in Toledo Pub. Schools even acknowledged that the statute’s “list of persons is not intended as a restriction of those who may file a valuation complaint on behalf of an owner.” In fact, the Toledo Pub. Schools court stated that the statute’s intent is the opposite of limiting. The intent of O.R.C. 5715.19(A), according to the Toledo Pub. Schools court is to “widen the pool [of persons authorized to file tax complaints]by specifying that certain non-lawyers may file on behalf of an owner in spite of considerations relating to the unauthorized practice of law.”

Notwithstanding this seemingly supportive language to Greenway’s argument, the court in Greenway easily distinguished the Toledo Pub. Schools case as not relevant because in Toledo Pub. Schools, an attorney for the owner’s management company filed the complaint, vs. the management company’s non-lawyer CEO (as was the case in Greenway), and the statute certainly did not intend to prevent lawyers from filing complaints. The court in Toledo Pub. Schools came to this same conclusion by stating: “But when, as in the present case, a lawyer has prepared and filed the complaint, the list of persons who may file on behalf of the owner in O.R.C. 5715.19(A) is not relevant.”

If there is any thought left as to whether or not the “window is still open” regarding authorized agent, non-lawyers filing tax complaints who are not listed in O.R.C. 5715.19(A), the court in Greenway seemed to close any window it may have opened by concluding that “non-lawyers who are not specified in RC 5715.19(A) are not authorized to file on behalf of a property owner.”

III. What is the Moral of this Story?

Don’t get “knocked out of the gate before the race starts.” Hire a qualified attorney to file your complaint and do what lawyers are trained to do (i.e., make legal arguments, examine witnesses, file appeals and undertake any other tasks that can be performed only by an attorney).

If a non-lawyer is determined to have engaged in the unauthorized practice of law, because he/she was not authorized to file a tax complaint, or he/she validly filed a tax complaint (pursuant to O.R.C. 5715.19(A), but then crossed the “practicing law line” during the hearing, the complaint can be dismissed, and if dismissed, you won’t be able to file another complaint until the next tax year.

Another Local Point of Sale Ordinance in Ohio Held to be Unconstitutional

noreply@blogger.com (Stephen D. Richman, Esq.) — Wed, 09 Jan 2019 22:39:00 +0000

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(Criminal Penalties and Lack of Warrant Procedure Held to be Key Failings of Bedford, Ohio’s Former Point of Sale Ordinance)

The U.S. District Court for the Northern District of Ohio has held in Pund v. City of Bedford, Case No.1:16-cv-1076 (N.D. Ohio Sept. 10, 2018) that a prior version of the point of sale inspection ordinance of the City of Bedford (suburb of Cleveland), as well as its rental inspection provisions, were unconstitutional, in violation of the Fourth Amendment of the U.S. Constitution.

This is the second Ohio federal court to strike down ordinances of this type. Earlier this year, the U.S. District Court for the Southern District of Ohio in Thompson v. City of Oakwood, Case No. 3:16-cv-169 (S.D. Ohio Feb 9, 2018) ruled that the point of sale ordinance of the City of Oakwood (suburb of Dayton) was unconstitutional.

Point of Sale Ordinances

While this type of ordinance can take many forms, the most common makes it unlawful to transfer ownership of any real estate, or lease to a new tenant, without having obtained a pre-sale inspection of the property under the applicable municipal code. The pre-sale inspection procedure usually requires the property owner to complete an application, schedule and appear for an inspection of the property with a code official, pay an inspection fee, and correct or otherwise address identified violations of the municipality’s fire, zoning, building, and/or property maintenance codes in order to obtain a certificate of occupancy authorizing the property’s sale or rental. The violation of pre-sale inspection requirements in this type of ordinance is usually punishable as a misdemeanor.

Municipalities usually defend their point of sale ordinances as valuable tools to increase the value of properties within their borders and ensure such properties and the residents occupying the same will be and remain safe. While these ordinances often contain a “criminal component”, municipalities rarely enforce the criminal penalties, but deem them necessary to cause compliance.

Notwithstanding the laudable intentions behind this type of point of sale ordinance, and the usual reluctance of municipalities to enforce the criminal penalties associated therewith, the United States District Court for the Northern District of Ohio in Pund has followed the lead of the Southern District of Ohio (in Thompson) in holding point of sale ordinances with criminal penalties, but without warrant procedures (such as those formerly enacted in Oakwood, Ohio and Bedford, Ohio) unconstitutional violations of the Fourth Amendment of the U.S. Constitution.

Bedford’s Former Point of Sale/Rental Inspection Ordinance

Bedford’s former Point of Sale Inspection Ordinance required homeowners to obtain a Certificate of Inspection (“Certificate”) before selling their home. A Certificate, valid for twelve months, was issued after a building official inspected “all structures or premises used for dwelling purposes and all secondary or accessory structures to determine whether such structures or premises conform[ed] to the provisions of th[e] code.” On inspection, the building official could enter the property at any reasonable time and inspect all areas of the home, including basements, bathrooms, electrical equipment, roofing, walks and driveways. Obtaining a Certificate required homeowners to apply for and consent to a warrantless inspection of the home and to pay an inspection fee ranging from $50 to $200. If the home did not pass inspection, either (i) the homeowner was required to perform repairs before the sale, or, (ii) the buyer could deposit money in escrow to ensure payment for repairs to be made after the sale. Homeowners that violated the ordinance or refused an inspection were guilty of a misdemeanor and could be fined and imprisoned.

Similarly, Bedford’s rental inspection ordinance required landlords to schedule a warrantless inspection of their rental units every two years, or each time a new tenant was secured. A landlord was to obtain a Certificate in order to lease its property to a tenant. Landlords paid an inspection fee ranging from $20 to $50 per unit, and failure to comply could result in criminal penalties including fines and imprisonment.

It is important to note that approximately two months after the plaintiffs’ action was filed, the City of Bedford passed an ordinance that repealed the then existing pre-sale inspection ordinance and replaced it with a new one. The new ordinance adds an administrative warrant process for inspections and eliminates criminal penalties.

Background of Pund v. City of Bedford

The plaintiffs filed a legal action against the City of Bedford on behalf of Ken Pund (an area landlord who was forbidden from selling a home he owns to his daughter, in which she resides); John Diezic (a homeowner who was prevented from selling his home in Bedford due to minor cracks in his asphalt driveway); and (1) all other individuals and businesses that have been subjected to Bedford’s point of sale inspections between September 10, 2014 and January 30, 2017 (and paid the requisite inspection fees); and (2) all individuals and businesses that have been subjected to rental inspections between September 10, 2014 and February 14, 2017 (and paid the requisite rental inspection fees).

Basically, the plaintiffs in Pund sought: 1) an injunction against enforcement of the ordinances containing a warrantless inspection requirement; 2) a declaratory judgment that Bedford’s point of sale and rental inspection ordinances were unconstitutional (and that defendant City of Bedford has been/continues to be unjustly enriched as a result therefrom); and 3) restitution of the inspection fees plaintiffs paid pursuant to such ordinances.

Defendant’s Arguments

The City of Bedford put forth two basic arguments: 1) it was entitled to summary judgment on plaintiffs’ claims because its amended ordinance rendered such claims, moot; and 2) it did not commit any constitutional violation because the plaintiffs consented to the inspections.

The Court’s Analysis in Pund V. City of Bedford

As with the court in Thompson, the court in Pund agreed with the defendant’s argument that the amended ordinance rendered the plaintiffs’ injunction claims, moot. Citing precedent (prior cases on point), the court in Pund explained that “[W]hen the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome,” a case (or case issue) becomes moot. And, since Bedford’s amended ordinance provided plaintiffs the injunctive relief they sought; the court in Pund declared the injunction portion of the plaintiffs’ claims no longer live, and therefore, moot. However, further citing precedent, the court clarified that “[W]here a claim for injunctive relief is moot, relief in the form of damages for a past constitutional violation is not affected.” In other words, the Pund court held that plaintiffs retained a “backward-looking right to challenge the original law”; in terms of their claims for a declaratory judgement and monetary damages relating to the prior ordinance. The City of Bedford tried to argue away plaintiffs’ right to a declaratory judgement (leaving simply, a claim for monetary damages), however, the court in Pund disagreed, explaining that “Declaratory relief is part and parcel of [a] claim for monetary relief, which is live.”

To address the defendant’s argument that there was no constitutional violation, and accordingly no damages to be awarded (because plaintiffs consented to the search, and accordingly did not violate the Fourth Amendment), the court in Pund first summarized the general rule of (and quoted precedent with regard to) such amendment, before evaluating whether or not the general exception to the general rule (namely, that consented-to searches do not require a warrant) applied.

The court in Pund stated, as a general rule, that “The Fourth Amendment protects people in the privacy of their homes and against ‘unreasonable searches and seizures’;” and that searches of the home by the government “conducted outside the judicial process, without prior approval by a judge or a magistrate judge [e.g., via a warrant], are per se unreasonable subject only to a few specifically established and well-delineated exceptions.” As you may recall from high school government class, “Plain view”, “search incident to a lawful arrest”, “exigent circumstances” and “voluntary consent” are some of the more common “warrant exceptions,” where a warrantless search or seizure would still be considered reasonable and not run afoul of the Fourth Amendment.

The defendant and its counsel in Pund were certainly aware of the “consent exception,” and in fact used it to justify their argument for summary judgement in their favor. The plaintiffs, however countered that “voluntary consent to inspection, necessary for the City’s compliance with the Fourth Amendment, was impossible for any homeowner to give under the terms of the ordinance because the only alternative to consent was criminal penalty.”

In holding for the plaintiffs, the court in Pund first recognized and agreed that voluntary consent to search is in fact a well-established exception to the Fourth Amendment’s warrant requirement, by simply stating that, “A homeowner’s voluntary consent to a search satisfies the government’s Fourth-Amendment obligations.” However, just as general rules of law always have exceptions, exceptions to exceptions are just as common, and ruled the day in Pund v City of Bedford. Quoting precedent (establishing an exception to the consent exception) by the court in Thompson, and others before it, the court in Pund agreed with the plaintiffs and held that “consent given under threat of criminal penalty can never be deemed voluntary.” Applying the facts to the law, the Pund Court summarized that the Bedford inspection ordinances were unconstitutional because they required a homeowner to obtain a certificate in order to sell a home, which in turn allowed a building inspector to enter and search the property without a warrant, failure to comply was punishable as a misdemeanor of the first degree, and consent to the search could not be considered voluntary because of the criminal penalties which would ensue without such consent.

Would it have made a difference if the City of Bedford never enforced its inspection ordinances against any property owner?

While not discussed in the Pund case, the court in Thompson clearly provided that such facts would make no difference, by stating: “Here, even if Oakwood has never denied a certificate of occupancy or enforced the criminal provisions of its ordinance, the mere possibility of such action is enough to render any consent involuntary as a matter of law.”

Holding of Pund V. City of Bedford

Specifically, the court in Pund ruled as follows: “the City’s Point of Sale Inspection Ordinance and Rental Inspection Ordinance, as they existed on May 4, 2016, are unconstitutional both facially and as applied to Plaintiffs because they violate the Fourth Amendment to the U.S. Constitution. [The Court] further declares that fees resulting from searches under those Ordinances resulted in unjust enrichment and that Plaintiffs are entitled to compensation.”

The case is still moving forward, however on issues involved in determining class action participation and the amount of compensation due.

Moral of the Story

Most municipalities infuse their building and zoning codes with criminal penalties for violation of the same. In their defense, enforcing compliance with ordinances is often difficult without the threat of criminal penalties. Usually, such ordinances provide more “bark than bite” and are only enforced as a last resort.

However, as provided in Pund v City of Bedford (and Thompson V. City of Oakwood), it seems that Ohio point of sale ordinances that call for criminal penalties (whether or not actually enforced) will most likely be held unconstitutional, at least where no administrative warrant procedure is provided. In other words, if it was not clear after Thompson, it is definitely advisable now for those municipalities who have not yet done so, to clearly review their point of sale/inspection ordinances and revise them accordingly.

Electronically Signed Email Exchange May Constitute Enforceable Real Estate Contract

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 30 Oct 2018 04:01:00 +0000

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(A Watch Your Language Series Article)

(Watch your language when creating contracts [and when not intending to create a contract])

Because of this judicial deference to “plain language” within real estate and other documents, and the fact that courts, as a general rule will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

This watch your language precept is just as (if not more) important in cases determining whether or not a contract has been created, than it is in cases determining the meaning of language within a legally created contract. The Court of Appeals for the First Appellate District of Ohio was recently faced with this very issue in Mezher v. Schrand, 2018-Ohio-3787.

Background of Mezher v. Schrand.

This case involves the alleged sale of a high-end residential property in Mt. Adams, Ohio owned by defendants-appellees Karri and Jeff Schrand (“Seller[s]”). Plaintiffs-appellants Joseph and Mike Mezher (“Buyer[s]”) argued that the Sellers agreed by a series of email exchanges (electronically signed) to sell their home to the Buyers and that the Sellers breached that agreement. The Sellers argued that no agreement existed because of the requirements of the Statute of Frauds.

The email exchange between the Buyers and the Sellers in Mezher started with both parties going back and forth on price. These introductory emails contained a general description of the property (address) and clearly identified the parties. The last three emails in the exchange were as follows:

Buyer (Sept 29, 2017): “However, will split it [price difference] again with you because I want to be flexible. I am good at $982,500 for a purchase price. Based on inception [sic] and customary closing, we can get a simple contract drafted Monday and have it signed by us Tuesday with the earnest money cashier check to you upon acceptance of contract by Tuesday. Please let me know, Mike[.]”

Seller (Sept 30, 2017): “We accept.”

Buyer (Sept 30, 2017): “Great, I agree too.”

When the parties met on October 5, 2017, an argument ensued, and the Sellers refused to sign a written form contract the Buyers brought with them. The Buyers then filed a complaint against Sellers, requesting specific performance of the real estate contract allegedly established by e-mail exchange. The trial court granted summary judgment in favor of the Sellers, finding that the September 29-30 email exchange between the parties did not satisfy the Statute of Frauds, because the emails did not describe the subject property with particularity. The Buyers then appealed to the Hamilton County Court of Appeals.

What is the Statute of Frauds?

In Ohio (and most other jurisdictions), the “Statute of Frauds” (originating from a 1619 Act of Parliament) basically establishes that certain contracts must be memorialized in a signed writing to be enforceable. Specifically, Ohio’s Statute of Frauds (ORC §1335.05) provides, in pertinent part that: “no action shall be brought …upon a contract or sale of lands… or interest in or concerning them,… unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith...”. There are limited, “equitable” exceptions to the rule, such as “part performance”, “unjust enrichment” and “promissory estoppel” that courts have imposed in order to avoid unfair legal remedies. See “An Oral Contract to Buy Real Estate is not Worth the Paper it is not Written on” — Ohio Real Estate Blog, April 30, 2010.

Does an email or other electronic form of writing satisfy the Statute of Frauds?

Yes. While not contemplated in 1619, the “electronic age of contract formation” has been with us in Ohio since the turn of the century. Pursuant to ORC §1306.06 (C)-(D), if a law requires a record and/or signature to be in writing, an electronic record and/or signature satisfies the law. To erase any doubt with respect to contracts, ORC §1306.06 (B) provides: “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

What writing is sufficient to satisfy the Statute of Frauds?

More perplexing than whether or not a writing exists, is the question of what writing is sufficient to satisfy the Statute of Frauds. The general law in Ohio is that in order for a real estate contract to comply with the Statute of Frauds, it is necessary that the signed contract or memorandum: (1) identify the subject matter; (2) establish that a contract has been made (both parties to the contract must assent to its terms and have a “meeting of the minds” as to those terms); and (3) state the essential terms with reasonable certainty.

What are the essential terms of a real estate contract?

In Ohio, courts have identified the essential terms of a real estate contract as: “the identity of the parties to be bound; the subject matter of the contract; consideration; a quantity term and a price term”. What is not essential? According to recent Ohio court decisions, a written contract for the sale of land need not include the character of the deed to the executed, specify who should pay taxes on the sale or state whether a mortgage must be given to secure the purchase money in order for the contract to still comply with the Statute of Frauds. Additionally, the contract does not violate the Statute of Frauds because the writing does not state a specific date of performance (i.e. closing date) or because of the failure to designate the nature of the interest being conveyed.

Analysis of Mezher v. Schrand.

The court of appeals in Mezher reversed the trial court’s decision, easily concluding that the emails at issue did in fact describe the subject property with particularity. While a list of personal property (appliances, window treatments…) was not specified, the address of the real estate was embedded within the subject line of each email in the exchange and all the other essential terms could be found in the body of the emails. According to the appellate court in Mezher, a list of ancillary personal property is clearly a non-essential term in a contract for the sale of real property.

The appellate court, however, also remanded the case back to the trial court on the issue of whether or not a “meeting of the minds” occurred within the emails vs simply a price negotiation to be followed up by a more complete written contract. Recall that the Mezher email exchange contemplated that the parties would sign a formal document shortly after the email exchange.

As explained by the court of appeals in Mezher, “Given the circumstances surrounding the parties’ email exchange and later discussions, including that other terms of the sale had yet to be agreed upon, an issue of fact exists as to whether the parties had a present intention to be bound at the time of the email exchange, or whether the parties did not intend to be bound until execution of the more formal contract.”

The Mezher court did cite precedent establishing that an agreement can be specifically enforced even where the parties contemplated execution of a later, formal written document, so long as the parties (at the time of the “informal contract”) have manifested an intent to be bound and their intentions are sufficiently definite. The determination of intent, however would be a matter for the trier of fact, not the court of appeals.

What is the moral of this story?

First, “say what you mean, precisely, or a judge will tell you what you meant.” The general rule in Ohio is that when the parties have clearly agreed to the “critical terms” of a real estate transaction, the court may determine on its own the meaning of any ambiguous or uncertain terms. While courts will typically factor in to their decisions, what they believe the parties’ mutual understanding to be, more often than not, a court’s determination does not match up with a party's actual understanding and someone goes home from court unhappy.

Second, there is no hard and fast rule or finite list as to what is and what is not an “essential” term of a real estate contract. While we know that price, identification of the parties and property description are essential terms, and that the closing date and description of personal property are non- essential terms, there are limitless provisions that could be deemed essential by a court of law, the absence of which could render the contract unenforceable. In other words, don’t worry about the number of pages in your contracts, worry about what is reflected within the pages.

Third, the enforceability of a real estate contract containing essential terms depends… on whether the parties have manifested an intention to be bound by such terms and whether these intentions are sufficiently definite to be specifically enforced. Unless absolutely clear in the “contract”, however, the intent of the parties will be based on a fact finder’s (judge or jury’s) evaluation of not only the language itself, but the circumstances surrounding the language. The fact finder certainly will not have a better idea of the parties’ intentions than the parties themselves, but will have the power to nonetheless, make the call. In other words, if you don’t want your preliminary negotiation or letter of intent to be construed as a final contract, spell that out, clearly and definitively. It is no guarantee, but a clear statement that the document “is not intended to be binding” will always be evidence of non-intent to create a binding contract.

Finally, get with the times. These days, contracts can be created in cyberspace, as easily as they can be on a written document entitled “contract.” If you don’t want your emails to be binding contracts, don’t sign them, or better yet, don’t write them in the first place.

A Greenhouse Building is not a Building but a Movable Business Fixture according to Ohio Board of Tax Appeals

noreply@blogger.com (Stephen D. Richman, Esq.) — Wed, 26 Sep 2018 17:48:00 +0000

By: Stephen D. Richman, Esq. – Senior Counsel, Kohrman, Jackson & Krantz

That old adage, “if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck” holds true for…waterfowl and a host of persons, places and things, but not for greenhouses in the recent Ohio Board of Tax Appeals decision, Viola Associates, LLC v. Lorain County Board of Revision, Case Nos. 2016-1273, 1274 and 1275.

The facts of the case are simple enough; the law, not so much.

Facts of the Case

Green Circle Growers Inc. and Viola Associates, LLC (collectively, “Green Circle”) own approximately 186 acres of land improved with greenhouses, packing and storage facilities, a residence and barn. Lorain County valued (in 2016) the property for tax purposes at approximately $40 Million. Green Circle filed complaints with the Lorain County Board of Revision (“BOR”) seeking a reduction in value to approximately $22 Million. Shortly thereafter, the appellee, Firelands Local Schools Board of Education (“BOE”) filed a counter complaint in support of maintaining the auditor’s $40 Million value. The primary issue addressed by the BOR (and afterwards, by the Board of Tax Appeals) was whether the greenhouses situated on the property should be treated as real property, and accordingly included in the assessment of the subject property’s total true value; or as personal property that should be excluded from the subject’s value for purposes of real estate taxation.

At the BOR hearing, Green Circle claimed that the greenhouses, while attached to the land, are removable, and therefore constitute personal property that should not be included in the auditor’s valuation. Green Circle presented testimony from several witnesses who testified that “the method by which a greenhouse is affixed to the ground and constructed is similar to an erector set, in that it can be deconstructed and reconstructed with limited damage” and that “there is an active secondary market for the resale of greenhouses, which are deconstructed and then sold to again be used for horticulture.” Green Circle also offered testimony from an appraiser who opined that the greenhouses were personal property and should not be included in the value of the subject real property because they could be removed from the property with relative ease, and would yield little value to anyone other than someone in the horticulture business. The BOE cross-examined Green Circle’s witnesses, but did not offer any independent evidence of value.

In spite of all of the testimony, the BOR ruled that Green Circle presented insufficient evidence to support a reduction in value, and that therefore, the initial assessed valuation of $40 Million was to be maintained. Green Circle then appealed the BOR decision to the Ohio Board of Tax Appeals.

Applicable Law

Distinguishing between personalty and realty is a vexing issue in many real estate and tax related arenas. In landlord-tenant law, for example, the issue usually centers on who is entitled to remove and/or retain the item in question (e.g., a supplemental HVAC system bolted to the roof) at the end of the lease. In a foreclosure, the issue is whether or not the item is realty, and can be foreclosed upon, or personalty, and not part of the property being foreclosed. The distinction in tax law can determine what are qualifying REIT assets, the amount of a taxpayer’s Investment Tax Credit, what gets capitalized and whether or not property qualifies as a 1031 Exchange.

At early common law, the general rule was that everything attached to realty became part of the realty, and therefore was deemed irremovable. Friedman on Leases, Sec. 24.1 at 1414 (2005). In modern times, as is the case with many “general rules,” the exception (removability) seems more general rule than exception. While most would agree that a 20 story office building is realty and a lawn mower is personalty, between the extremes is much more difficult to assess. In other words, how does one classify grain bins, silos, electronic billboards, cold storage cooler rooms, oil tanks and amusement park rides?

Unfortunately, there is no one size fits all definition. In Ohio, the answer for landlord-tenant issues can be found in common law decisions. See, e.g., Perez Bar & Grill v. Schneider, 2012-Ohio-5820; Household Finance Corp. v. The Bank of Ohio, 62 Ohio App. 3d 691, 694 (1989) and Friedman on Leases, Sec. 24.1 at 1414 (2005). The definition of real property for various income tax issues can be found in the U.S. Tax Code and corresponding regulations for the applicable tax issue.

In determining whether a landowner’s real estate should increase in value for real estate tax purposes (or not be affected because the item in question is personal property), county auditors must look to the statutory definitions of real property and personal property in the Ohio Revised Code.

R.C. 5701.02 defines “real property” (as used in Title LVII of the Revised Code [Taxation]) as follows:

“(A) 'Real property,' 'realty,' and 'land' include land itself . . . with all things contained therein, and, unless otherwise specified in this section or 5701.03 of the Revised Code, all buildings, structures, improvements, and fixtures of whatever kind on the land…”

The definitions of “buildings”, “fixtures”, “improvements” and “structures” appear in R.C. 5701.02 (B) - (E), respectively.

R.C. 5701.03 defines “personal property” (as used in Title LVII of the Revised Code [Taxation]) as follows:

“(A) ‘Personal property’ includes every tangible thing that is the subject of ownership . . . including a business fixture, and that does not constitute real property as defined in Section 5701.02 of the Revised Code.

(B) ‘Business fixture’ means an item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure, or improvement, and that primarily benefits the business conducted by the occupant on the premises and not the realty. 'Business fixture' includes, but is not limited to, machinery, equipment, signs, storage bins and tanks, whether above or below ground. ‘Business fixture’ also means those portions of buildings, structures, and improvements that are specially designed, constructed, and used for the business conducted in the building, structure, or improvement, including, but not limited to, foundations and supports for machinery and equipment…”

It is important to note that in 1992, the Ohio General Assembly amended the definition of “personal property” to include “business fixtures.”

Analysis of the BTA’s Decision in Viola

To reach its conclusion that the Green Circle greenhouses were personal property (and that the BOR decision should be overruled), the Board of Tax Appeals (“BTA”) in Viola first felt it necessary to determine if the subject greenhouses could be classified as buildings, structures or improvements. If so, the analysis would end there, and the greenhouses would be taxed as real property. The BTA reasoned that the definition of these items in R.C. 5701.02 (B) - (E) all shared “an element of permanence in their original fabrication or construction” (vs. a “fixture” or “business fixture” that starts out as an item of tangible personal property, that then becomes attached or affixed to the land or to a building, structure, or improvement). The BTA then determined the greenhouses were not buildings, structures or improvements, based upon the testimony presented by Green Circle’s witnesses that described the greenhouses as temporary, built to be removed and often sold on a secondary market following removal. According to the BTA, the greenhouses were a far cry from permanently constructed buildings built to shelter persons or property, or structures defined by the Ohio Revised Code to include bridges, dams and silos. The BTA was not swayed by the appellee’s argument that the greenhouses were permanent because they were attached to concrete. Although the concrete is incorporated into the real estate, according to the BTA, “that does not transform the item to which it is attached [to real estate], such as an… amusement park ride and its shelter, which retains its character as tangible personal property, albeit permanently affixed to the land.” Moreover, personal property can include foundations and supports pursuant to R.C. 5701.03.

Once determined not to be structures, buildings or improvements, the next threshold question for the BTA to answer was whether or not the Green Circle greenhouses were “fixtures,” and accordingly, real property; or “business fixtures”, and accordingly, personal property.

According to the BTA, the “statutory test” for items not buildings, structures or improvements boils down to whether the item “primarily benefits” the business or the realty. This makes sense as the statutory definitions of “fixture” and “business fixture” are identical, except for the primary benefit language at the end of each definition. In other words, the greenhouses would be classified as “fixtures” and real property if they primarily benefit the realty; or “business fixtures” and personal property if they primarily benefit the business.

The BTA came to the conclusion that the greenhouses in question primarily benefited the business (vs. the realty), based on the evidence presented to the BOR and the BTA. As stated by the BTA in Viola, “Green Circle presented testimony from multiple individuals to demonstrate that the greenhouses in question were designed especially for growing plants…. primarily benefit Green Circle Growers’ horticulture business and would provide little value, if any, to another occupant of the land who was not engaged in the same or very similar business.” Also important to the BTA was the fact that “the greenhouses are outfitted with computer systems, shade cloths, irrigation systems, retractable roofs, and a number of other components that are specific to the sophisticated operation taking place at the property… that would [not] benefit the land or any other occupant of the property that was not engaged in a commercial horticulture business.”

What about precedent (prior decisions on point)? In fact, the BOE strongly argued that the Supreme Court of Ohio, in Green Circle Growers, Inc. v. Lorain Cty. Bd. Of Revision, 35 Ohio St. 3d 38 (1988) decided that these very same greenhouses were real property and should be taxed as such (for the applicable tax years in question). The BTA in Viola easily distinguished this case, however, because it was decided prior to the 1992 amendment to R.C. 5701.02 and 5701.03 that revised the definitions of real and personal property for taxation purposes, most notably adding the newly defined “business fixture,” which the Ohio General Assembly specifically excluded from the definition of real property. According to the BTA in Viola, “these definition changes demand reconsideration of the issue and lead to a different result.” Namely, that the greenhouses should be deemed personal property and not part of the real estate.

Adding “insult to injury”, the BTA in Viola also described two cases decided after the 1988 Green Circle case (and after the afore-mentioned 1992 amendments), in which the Supreme Court of Ohio held that the items of property in question were business fixtures and not real property fixtures. See Metamora Elevator Co. v. Fulton Cty. Bd. of Revision, 143 Ohio St.3d 359, 2015-Ohio-2807 (Grain Bins were held to be business fixtures and not real property); and Funtime, Inc. v. Wilkins, 105 Ohio St.3d 74, 2004-Ohio-6890 (amusement park rides and their accoutrements were held to be business fixtures and not real property).

Having found that the greenhouses in Viola are business fixtures and, therefore, should not be taxed as real property, the BTA’s final task was to examine the appraisals of the BOE and Green Circle and determine the appropriate value of the real property. Using the appellant’s cost approach for the residential property, and sales comparison approach for the commercial property, the BTA arrived at a total value of $10,200,000.

With an approximate $30 Million difference between the BOE’s opinion of value and the BTA’s determination of value, the appellee, reportedly has petitioned the Ohio Supreme Court to consider the matter. Only then will we know if what looked like a greenhouse building to the Ohio Supreme Court in 1988 is still a greenhouse building in 2018, or a business fixture as determined by the BTA in Viola.

ABOLITION OF DOWER RIGHTS IN OHIO NOW UP TO OHIO SENATE

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 27 Aug 2018 13:44:00 +0000

By: Stephen D. Richman, Esq. – Senior Counsel – Kohrman, Jackson & Krantz

Earlier this summer (June 6, 2018), the Ohio House of Representatives passed HB 407 which would abolish dower rights in Ohio. Since its passage in the House, the bill has been introduced in the Ohio Senate, but according to the Ohio Legislature website, it has yet to be assigned to committee.

How many other states still have dower?

Besides Ohio, there are just two (2) states that still recognize traditional dower rights: Arkansas and Kentucky. A number of states that have abolished dower, however, retain effective spousal protections. For example, while New Jersey formally abolished dower in 1980, each spouse in that state retains a statutory right of possession in their principal residence after the death of the other spouse.

What is dower?

Generally speaking, dower rights are rights in part of a spouse’s estate, provided by law to the surviving spouse for his/her support. Historically, dower rights were limited to a wife’s rights in part of her husband’s estate, but most states over the years extended these rights to apply to a husband upon the death of his wife (sometimes known as “curtesy”); and later, to be gender neutral, redefined dower to apply to spouses, without husband and wife designations.

In Ohio, dower is an estate for life to a surviving spouse in one-third of the real property that the decedent spouse owned at any time during the marriage. In effect, this provision allows the surviving spouse to receive one-third of rents or profits from such real estate for the rest of the surviving spouse’s life. Currently, the only way to extinguish dower rights in Ohio are: 1) death; 2) divorce and 3) voluntary, written release of dower (at each property transfer transaction).

Why was dower created?

Dower rights date back to the middle ages. Some historians claim dower was created to provide property to widows and widowers who were not part of the royal bloodline.

Others claim that the origin of dower centers around helping women, who years ago were not permitted to own property; and afterwards, as a means to help support the many women who were not part of the workplace due to discrimination, social norms…

Why the call for dower to be abolished?

Regardless of its origins, most commentators (including title companies, real estate attorneys, real estate trade organizations, legislators and others) agree that dower is a sexist, archaic, superseded and troublesome doctrine that should be abolished.

Succinctly stated by Ohio Representatives Jonathan Dever (R-Madeira) and Bill Seitz (R-Cincinnati), the sponsors of HB 407, dower should be abolished because it is “antiquated and the largest cause of bad title, creating the inability to sell real estate because marital status or release of dower were omitted from a deed or mortgage.”

What often happens, for example, is that “Spouse A” refuses (or is unavailable) to release their dower interest (by a simple “sign off clause” in a deed or mortgage) when “Spouse B” attempts to sell or mortgage property owned by Spouse B. As a result, the title insurance company will not insure title (or will insure, but only with an exception for dower rights), and the grantee or lender will usually walk away from the deal, not wanting to risk “sharing the profits” with Spouse A, after the death of Spouse B.

Moreover, those calling for abolishment of dower are quick to point out that simply, dower is no longer necessary in the current real estate and legal system in Ohio (and other jurisdictions). For example, Ohio and other states now provide spousal protection by virtue of laws such as:

1) Ohio’s elective share statute (O.R.C. §2106.01) which basically allows the spouse to elect, in lieu of what a will provides, an automobile and support allowance, plus one half of the net estate (unless two or more of the decedent’s children or their lineal descendants survive in which case the surviving spouse would receive one-third of the net estate);

2) Ohio’s domestic relations law (O.R.C. §3105.171) which basically provides that any property acquired during the marriage is a “marital asset” subject to equitable division during a divorce or dissolution, regardless of which spouse holds title; and

3) Ohio’s statute of descent and distribution (O.R.C. §2105.06) which basically provides a road map for who gets what in an estate, when there is no will, with the spouse at the top of the chart.

Critics to abolishment of dower (in Ohio) point out that without it, one can totally “disinherit” a spouse in Ohio. This claim is based upon the fact that Ohio’s elective share and descent and distribution statutes can be effectively circumvented with elaborate trust-based estate plans. However, proponents of abolishment counter that maintaining the existence of dower, as a practical matter will not effectively solve this issue. States that have wanted to avoid spousal disinheritance have simply made an exception to their elective share statutes to apply to more than just the “probate estate.” Moreover, non-real estate assets such as stocks, 401K accounts and insurance products exceed more traditional real estate holdings these days, and those that hold real estate usually do so via a limited liability company vs. individual ownership. In other words, very little property is held individually that dower would attach to, and few surviving spouses could live off of a dower interest in such property.

What would happen to dower rights that accrued prior to the date of any abolishment statute?

The repeal of dower would not adversely affect a surviving spouse’s right to dower that was elected or that vested before the effective date of the act.

What are the next steps?

Having passed in the Ohio House, it is now up to the Ohio Senate and the Governor of Ohio. While not yet before a senate committee for testimony, the bill is expected to be passed by the Senate and signed into law before the end of this year. Even though the Ohio House and Ohio Senate are not always on the same page, if the overwhelming support the bill faced in the House is any indication (the bill was passed 66-1, with 25 co-sponsors), this prediction by abolishment proponents is likely to become true.

Bottom Line?

As stated by Charles “Chip” Brigham, Secretary/Treasurer of the Ohio Land Title Association in his testimony to the Ohio House:

“Dower is an archaic reminder of our agrarian past. It has little present substantive value…. It remains a bane to real estate professionals and imposes unnecessary time, cost, and expense on homeowners … It’s time to give dower a well-deserved demise.”

On the other hand, perhaps it is also time to consider filling what some consider a void in Ohio’s spousal protection laws, by modifying the elective share statute to include revocable trusts (as in South Carolina), or by granting each spouse a statutory right of possession in their principal residence (after one spouse dies) without regard as to whether or not such residence is part of the probate estate of the decedent (as in New Jersey).

Caveat Emptor (“Let the Buyer Beware”) Is Still Alive and Well in Ohio

noreply@blogger.com (Stephen D. Richman, Esq.) — Wed, 25 Jul 2018 14:55:00 +0000

By: Stephen D. Richman, Senior Counsel, Kohrman, Jackson & Krantz

The doctrine of caveat emptor (“let the buyer beware”) is still alive and well in Ohio, generally precluding recovery in an action by a purchaser against a seller pertaining to a property’s defective condition if:

1) the condition complained of is open to observation or discoverable upon reasonable inspection;

2) the purchaser had the unimpeded opportunity to examine the premises; and

3) there is no fraud on the part of the vendor. Layman v. Binns (1988), 35 Ohio St.3d 176.

While Ohio’s Seller Disclosure Act (R.C. 5302.30; the “Disclosure Act”) still requires sellers of most types of residential property to disclose known defects, the Disclosure Act does not directly modify the doctrine of caveat emptor by creating a new statutory fraud claim or by eliminating existing common law claims. In fact, Section 5302.30 (L) of the Disclosure Act makes it clear that R.C. 5302.30 is not intended to affect any (common law) remedies available prior to its enactment. Nevertheless, if the seller fails to disclose a material fact on the disclosure form with the intention of misleading the buyer and the buyer relies on the form, the seller [has committed fraud and] is liable for any resulting injury. Pedone v. Demarchi, 8th Dist. [Cuyahoga] No. 88667, 2007-Ohio-6809. However, “[w]hen a plaintiff claiming fraud in the sale of property has had the opportunity to inspect the property, he is charged with knowledge of the conditions that a reasonable inspection would have disclosed.”

The Ninth District Court of Appeals in Petroskey v. Martin, 2018-Ohio-445 (Lorain County) and the Eighth District Court of Appeals in Hendry v. Lupica, 2018-Ohio-291(Cuyahoga County) recently reaffirmed the viability of caveat emptor in Ohio. Since the disgruntled buyer in Petrosky v. Martin (Mr./Mrs. Petroskey) and the disgruntled buyer in Hendry v. Lupica (Mr. Angus Hendry) both claimed fraud on the part of the seller, the following summary should prove helpful before evaluating these cases:

In the context of real estate transactions, there are basically two types of fraud: fraudulent misrepresentation and fraudulent concealment (with “fraudulent nondisclosure” sometimes being referred to as either a third type of fraud, or, a type of fraudulent concealment). The elements of fraudulent misrepresentation are: (a) a false representation concerning a fact material to the transaction; (b) knowledge of the falsity of the statement or utter disregard for its truth; (c) intent to induce reliance on the misrepresentation; (d) reliance under circumstances manifesting a right to rely and (e) injury resulting from the reliance. Sanfillipo v. Rarden, 24 Ohio App. 3d 164.

The basic elements of fraudulent concealment are: (a) actual concealment; (b) of a material fact; (c) knowledge of the facts concealed; (d) intent to mislead another into relying upon such conduct; (e) actual reliance; and (f) injury resulting to such person because of such reliance.

Even without an affirmative misrepresentation or “actual” concealment, an action for fraud, commonly referred to as “fraudulent nondisclosure” is also maintainable in Ohio for failure to fully disclose material facts where there exists a duty to speak. In such regard, the Supreme Court of Ohio has held that a “vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection.” Binns, 35 Ohio St.3d at 178.

The facts of Hendry v. Lupica are as follows:

In 2015, Mr. Hendry purchased a home in Olmsted Falls, Ohio from the Lupicas (sometimes referred to herein as the “Sellers”). Prior to closing, the Sellers produced a residential property disclosure form that disclosed dampness and previous water damage in the basement. Mr. Hendry also had the home inspected by a professional inspector. The inspector found several issues with the basement, including foundation wall cracks, holes and signs of water infiltration. The inspector’s report also noted that the condition of the foundation was poor and advised Mr. Hendry to seek additional information about these issues prior to purchasing the property. Mr. Hendry did not follow that advice, and instead, negotiated a price reduction with the Sellers. Not to long after the purchase, Mr. Hendry experience water infiltration in the basement when it rained. He hired a waterproofing company to fix these issues, and then filed suit against the Sellers in September 2015, alleging fraud and mutual mistake, and requesting compensatory and punitive damages, or rescission of the contract.

Mr. Hendry contended that the caveat emptor doctrine did not apply because the Sellers fraudulently misrepresented and/or failed to disclose the extent of water intrusion problems in their basement. The Sellers only disclosed some dampness and some water damage that occurred prior to their ownership of the home. Mr. Hendry further argued fraudulent concealment because the Sellers did not divulge that they had recently painted a wall in the basement. The trial court held for the Sellers and Mr. Hendry appealed.

The Eighth District Court of Appeals upheld the trial court’s ruling for the Sellers, easily coming to the conclusion that there was no fraud or misrepresentation. The appellate court reasoned that the evidence clearly established that Mr. Hendry had actual knowledge of water infiltration in the basement through his professional home inspection. The inspection reported large cracks and holes in the foundation, and other problems and advised further investigation. Rather than investigate further, Mr. Hendry “bought the defects” by negotiating for a price reduction. There was no misrepresentation because the statements made by the Sellers were all true (there was dampness and prior water issues). Further, there was no fraudulent non-disclosure because there was no duty for Sellers to disclose everything they knew about its property; only latent, not readily observable or discoverable defects. According to the court, an open and obvious small defect was notice to the buyer that a larger problem may exist. Finally, the painting of one wall was not deemed concealment by the court because it did not conceal the extent of the problem; the cracks, holes and stains were still evident, and the inspection report backed this up.

Petroskey v. Martin is also a recent, “water infiltration in the basement case”, that includes a “scary” inspection report and a buyer that sought to “buy the defect” vs. learn more about the problem. The facts of this case are as follows:

In August, 2013, David Petroskey (sometimes referred to herein as “Buyer”), and Dee Martin (sometimes referred to herein as “Seller”), entered into a purchase agreement for a home in Lorain, Ohio.

In September, 2013, Buyer had the home inspected. The inspection report noted various water issues and concerns about the premises including: 1) evidence of water leakage and moisture in the crawl spaces; 2) the property’s grading was a “[f]lat [i]mproper soil slope towards [the] foundation;” 3) evidence of past water leakage around the skylights and evidence of past or present water staining on the ceilings in all bedrooms, the family room, and the master bathroom; 4) a “mold like substance” in the attic; and 5) loose and damaged trim wood and damaged wood fascia “from past or present leaks.” As was the case in Hendry v. Lupica, the inspector in Petroskey v. Martin also recommended further investigations and inquiries, including securing “[a] qualified roofing contractor to evaluate and estimate repairs.”

The seller in Petroskey v. Martin also completed an Ohio Residential Property Disclosure Form. However, where the Martin Disclosure Form asked, “Do you know of any previous or current leaks or other material problems with the roof or rain gutters? …. (but no longer than the past 5 years),” Mrs. Martin checked the “No” box. In her deposition, Mrs. Martin testified that, at the time she completed the Disclosure Form, she “thought it was about seven years” since they had the roof replaced.

In October, 2013, Mr. Petroskey and Mrs. Martin amended their purchase agreement. The amendment removed the general home inspection contingency and reduced the sale price. After the amendment, Mr. Petroskey (per his testimony) went through the Home “[m]aybe half a dozen” times before finalizing the purchase.”

Shortly after his purchase, Buyer suffered ice damming on the roof, leaking skylights and a leaking roof. In addition, Mr. Petroskey testified that “the front yard did not drain properly and water entered the crawlspace and collected on the floor.” Mr. Petroskey then sued the Seller alleging misrepresentations in the form of Seller’s Disclosure Form declarations that there were no roof leaks at the property. Whereas the Seller in Hendry v. Lupica failed to disclose the extent of the defects (a distinction without a difference according to the Hendry court), the Seller in Petroskey v. Martin denied there were any problems at all.

Accordingly, the trial court and the appellate court in Petroskey v. Martin aptly agreed with the Buyer’s characterization of the “no” answer on the Disclosure Form as a misrepresentation. The courts noted, however, that only a claim for fraudulent misrepresentation was actionable, and the evidence failed to show that the misrepresentation was made with knowledge of its falsity, or with reckless disregard as to whether these statements were true or false (recall that Mrs. Martin testified that she thought the roof repairs were completed over seven years ago vs. within five years as called for on the Disclosure Form).

Like the seller in Hendry v. Lupica, the seller in Petroskey v. Martin argued that there was no fraudulent-non-disclosure because the seller had no duty to disclose material facts which are not latent, and readily observable or discoverable through a purchaser’s reasonable inspection. Clearly, there was no question of past water leakage and water staining in the Lupica home, as well as in the Martin home. Both homes showed signs of the same, and the inspection reports for both properties clearly identified water leakage and staining.

The buyer in both cases argued that the respective defects in their homes were latent. The buyer in Petroskey v. Martin, however did not argue latency regarding the extent of the defect (as the buyer in Hendry v. Lupica unsuccessfully had), but rather, latency regarding the cause of the defect. Mr. Petroskey testified that he had to pay approximately $50,000 for a new roof and argued that the inspection report did not specifically mention ice damming and roof issues as the cause of the water intrusion and leakage.

Citing precedent from the Ohio Supreme Court as well as from other cases heard by the Ninth District, the court in Petroskey v. Martin was not persuaded that these “lack of causation facts” made any difference. As summarized by the Ninth District Court of Appeals in Petroskey: “The Ohio Supreme Court has found that, when determining whether a defect was ‘open to observation,’ the issue is not the ‘cause of the defect’ or the ‘remedial effectiveness of [a repair],’ …similarly, this Court has stated that the cause of the defect, the underlying problem, does not have to be open and obvious. If the defects are open and obvious …, the buyer is on notice to make further inquiry as to the underlying condition.”

Applying the law to the facts, the court of appeals in Petroskey concluded that, “Although the home inspector did not identify the cause of the ‘leaks’ as ‘ice damming,’ he did notify the Petroskeys of evidence of ‘past water leakage,’ ‘past or present water staining,’ and damage ‘from past or present leaks’ in various locations throughout the Home. Thus, the defect was not latent and the Petroskeys were on notice to make further inquiry as to the underlying problem.”

What is the moral of this story? 1) Never waive your rights to inspections; 2) don’t rely on the Disclosure Form, which more often than not turns out to be a “non-disclosure form;” 3) if any defect is uncovered in an inspection report, assume it is a big deal and investigate it further with an expert (per the court in Hendry, an open and obvious small defect was deemed notice to the buyer that a larger problem may exist); and 4) if you decide to “buy the defect”, make sure you know the price to repair it.

In other words, in the words of singer/songwriter/philosopher Kenny Rogers: “You got to know when to hold them, know when to fold them, know when to walk away and know when to run.”

Agricultural Land May = Wetlands (aka Farmed Wetlands)

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 25 Jun 2018 20:35:00 +0000

Reprinted with permission from Jason McKenney& Ben Latoche of HZW Environmental Consultants, LLC

Over the past three (3) years, acquisition of agriculture properties for commercial and residential development has been on the rise. Most prospective buyers, as well as the property sellers, generally believe that active agricultural fields are clear of regulated surface water features (e.g. wetlands, streams, and/or regulated ponds), however, that is not necessarily the case. The official position taken by the United States Army Corps of Engineers (USACE), the regulatory agency responsible for determining the presence or absence of such features, is that these resources may still be present on such sites despite on-going and successful agricultural activity. These features, primarily known as farmed wetlands, jurisdictional ditches, or palustrine open water systems, are protected under both State and Federal law in Ohio and thus will place a regulatory burden on both the property owner and any potential buyer of the land.

In order to determine whether or not farmed wetlands or any other regulated aquatic resources exist within agricultural land, USACE recommends performing a thorough examination of existing background data before finalizing any waters delineation reports. This background data can be constituted of aerial images (current/historical), soil surveys, topographic maps, and/or photographs of the land to name a few items. Firms like HZW Environmental Consultants, LLC, and their peers can then combine this data with information gathered during a field visit and compile a comprehensive report. A document of this caliber will give both the property owner and any potential buyers some peace of mind about the value of the land they may be exchanging. This type of detailed report will also greatly increase the chances that USACE will concur with the consultant’s work and minimize any regulatory surprises down the road.

It is also important to note that landowners do have the ability to maintain, and potentially increase, the value of their property. Doing so entails decreasing their (or any future purchasers’) regulatory burden by performing simple maintenance. Most agricultural fields in Northern Ohio have some type of sub-surface tile or surface drainage system to shed water away from arable land and into a designated location such as a pond, stream, or off-site outlet. When these systems fall into disrepair (e.g., sediment clogging in tiles or vegetation choking ditches), there is a chance that the fields they serviced can begin to mimic the natural conditions of wetlands and/or streams. Thus, property owners looking to avoid federal or state regulatory headaches should address these issues promptly to ensure the free movement of water through and off of the property. Such actions can include, but are not limited to, clearing ditches of excess vegetation and/or sediment, appropriately sizing/places culverts within ditches, ensuring tile discharge locations are clear of debris, and replacing any collapsed or failing subsurface tiles in a timely manner.

A note of caution, a prospective buyer should be weary of depending on a consultant’s report alone. As stated above, USACE is the regulatory agency that determines the presence or absence of regulated aquatic resources. Even the best consultants cannot always predict how USACE will respond to any given property. Changes in Federal policy on wetland delineation come often, and interpretation of these shifting standards can vary greatly between USACE representatives of the same office. Thus, it is always recommended that a jurisdictional determination be obtained from the Corps before any property changes hands. This document is essentially an ‘official delineation report’ that legally affirms the location, size, amount, and type of jurisdictional resources that exist within a property.

HZW is a women-owned business enterprise and full service environmental and safety consulting firm with offices in Mentor and Akron, Ohio and field offices in Euclid and Canton, Ohio. They are recognized as one of the leading providers of quality environmental and safety consulting services in the State of Ohio, nationwide, Canada and Mexico. Jason McKenney (JMcKenney@hzwenv.com) is Group Leader and Ben Latoche (Blatoche@hzwenv.com) is a Project Manager, in HZW’s Wetlands & Ecology division.

Ohio Supreme Court Confirms Reversion Language No Longer Necessary to Create Fee Simple Determinable Estate

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 15 May 2018 14:14:00 +0000

(Plain language within the four corners of the deed is key-pursuant to Koprivec v. Rails-to-Trails of Wayne County, Slip Opinion No. 2018-Ohio-465)

By: Stephen D. Richman, Esq. - Senior Counsel-Kohrman, Jackson & Krantz

-A Watch Your Language Series Article-

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will typically uphold commercial document provisions unless they are contrary to public policy or statutory law, or the subject of a mutual mistake. Courts traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial transactions, since both parties will usually have attorneys to review their documents. More and more, parties to residential real estate contracts are being held to the same standard governing commercial transactions. Because courts often defer to the specific language of commercial (and other) real estate documents, unintended results are often the norm for parties who do not seek professional advice, and for professionals who do not closely review their documents. Even the failure to follow a seemingly trivial grammar rule (the use of i.e. vs. e.g.) can result in unintended consequences. In a 1995 Connecticut case, despite the tenant’s verbalized intent to the contrary, the court held that the use of “i.e.” [meaning, that is] vs. “e.g.” [meaning, for example] preceding a short list of repair items in a lease served to limit landlord’s structural responsibility to only those items listed in the lease vs. merely providing examples of the same.

Because of this judicial deference to “plain language” within real estate and other documents, and the fact that courts, as a general rule will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

The Ohio Supreme Court in Koprivec v. Rails-to-Trails of Wayne County recently espoused this basic tenet of Ohio law with regard to deeds, specifically, deeds creating “fee simple determinable”, or conditional estates in land.

A Deeds/Estates in Land/Fee Simple Determinable Primer

Like a certificate of title for an automobile, the deed is the document that actually transfers the title of real property from one to another. Unlike a certificate of title for an automobile, however, the deed contains a specific legal description of the property; and may also contain warranties of title; reservations (e.g., right to reserve an easement over the property); and restrictive covenants (e.g., “this property may only be used for residential purposes”).

Also unique to deeds vs. certificates of title (and bills of sale to transfer other personal property) is the nature of the underlying property and the varied rights transferable thereto. While both cars and land can be leased for a specific period of time, a transfer of a “life estate” in land, for example, can transfer real property for a person’s lifetime. (Note: a “fee simple” estate in land, on the other hand gives the grantee the right to own and possess real property forever).

Ownership of real estate can be further, uniquely limited, if a “defeasible” or “conditional” estate is transferred by deed. A defeasible fee or estate in real property is a fee simple interest that can be taken away from the grantee/holder upon the occurrence or non-occurrence of a specified event. For example, when grantor transfers to grantee a parcel of land “for so long as that land is used for summer camp purposes.”

The two main types of defeasible fees are “fee simple determinable” and “fee simple subject to a condition subsequent.” The difference between the two is that a fee simple determinable interest terminates automatically upon the occurrence or non-occurrence of the event (our example above), while the fee simple subject to a condition subsequent estate is not terminated automatically, but can be terminated at the will of a future interest holder upon the occurrence or non-occurrence of the specified event (the magic words for this type of defeasible fee would be “grantor transfers x to grantee, but if …., then grantor retains a right of re-entry”).

After a grantor transfers a fee simple determinable estate, said grantor is deemed to retain a “possibility of reverter,” as the property would revert to the grantor, automatically upon the occurrence or non-occurrence of the condition stated in the deed.

Are there recognized, “magic words” to create a fee simple determinable estate? Dating back to English common law, many courts recognized the establishment of a fee simple determinable estate by use of the words “so long as”, “as long as”, “until”, “during” and “on condition that.”

In Ohio, however, the Supreme Court in In re Petition of Copps Chapel Methodist Episcopal Church, 120 Ohio St. 309, 166 N.E. 218 (1929) held that a deed could not create a fee simple determinable estate without “reverter language” (specific words stating the property would revert back to the grantor, if the applicable condition in the deed is satisfied).

In fact, the trial court, and the court of appeals in Koprive relied on the Copps Chapel case to deny the plaintiffs’ claim of ownership. The main issue for the court in Koprivec would be: 1) whether or not Copps Chapel was still good law in Ohio; and 2) if not, what new “magic words” in Ohio would be required to create a fee simple determinable.

Background/Facts of Koprivec v. Rails to Trails of Wayne Cty.

As well summarized by the court in Koprivec, “[t]his case involves a dispute about ownership of an abandoned rail corridor. It pits a nonprofit organization, Rails-to-Trails of Wayne County (“Rails to-Trails”), which seeks to develop the corridor into a bike trail, against three landowners, who claim ownership of the sections of the corridor adjacent to their properties. We have before us issues of deed construction and adverse possession.” [AUTHOR NOTE: This article only addresses the deed construction issues].

The specific facts of the case are as follows:

In 2009, Rails-to-Trails purchased an old railroad corridor with the intention of converting the land into a public, multi-purpose trail. In 2011, however, three owners of adjacent properties (the “landowners”) filed suit to establish their ownership of the sections of the corridor next to their respective properties. The landowners claimed title (ownership) based upon: 1) an 1882 deed, that they claim served to revert the corridor land to them when the corridor stopped being used as a railroad; and 2) all three claimed adverse possession of those sections of the corridor.

The granting clause (“[t]he words that transfer an interest in a deed,”) of the 1882 deed granted the property to the railroad company “and to its assigns forever.” The habendum clause (“the part of a… deed … that defines the extent of the interest being granted and any conditions affecting the grant”) provided that the grant was “forever for the purpose of constructing and using thereon a Rail Road.”

The plaintiffs in Koprivec construed the deed as creating a fee simple determinable. They argued that when the land stopped being used as a railroad (which was the only purpose of the transfer), the part of the property adjacent to the properties they already owned reverted back to them as the successors-in-interest of the original grantors. Rails-to-Trails sought to establish that it was the valid property owner, based upon a valid, 2009 deed.

The trial court entered summary judgment in favor of Rails-to-Trails on all the landowners’ claims. It easily determined that under Copps Chapel, the 1882 deed did not create a determinable fee because it did not contain the “magic words”; that is, it did not explicitly state that the property would revert to the grantors when it ceased being used for railroad purposes. The Ohio Ninth District Court of Appeals affirmed the trial court’s judgment on the deed issue, holding that the 1882 deed created a fee simple absolute estate because the deed did not contain the magic reversionary language.

Analysis of Koprivec v. Rails to Trails of Wayne Cty.

It would have been easy for the Ohio Supreme Court to have affirmed the Ninth District’s decision on the basis of the Copps Chapel case. No magic reversion language, no fee simple determinable. That is why the Supreme Court of Ohio deemed the appellate court’s holding, “understandable.”

Instead, recognizing lower court decisions “have taken bites out of the Copps Chapel holding” and that the Ohio Supreme Court’s later decision in Hinman v. Barnes acknowledged/applied ‘the modern and prevalent rule for determining estates conveyed by a deed,” the Supreme Court in Koprivec admitted that “there is no longer reason to rely on Copps Chapel, and to do so would be inappropriate.”

The Ohio Supreme Court still affirmed the Ninth Appellate District’s decision (on the issue of deed construction), but not on the basis of Copps Chapel. According to the Ohio Supreme Court in Koprivec, case law of the past seven decades dictates the need to utilize the “‘modern and prevalent rule for determining the estate conveyed by a deed,’ which rule is, ‘that if the intention of the parties is apparent from an examination of the deed ‘from its four corners,’ it will be given effect regardless of technical rules of construction.’” Citing Hinman v. Barnes, 146 Ohio St. 497, 66 N.E.2d 911 (1946). In other words, according to the court in Koprivec,” it is the plain language of the deed that matters.”

The court in Koprivec reconciled the Copps Chanel and Koprivec cases by reasoning that the words of reversion in the Copps Chapel deed were simply the plain language words of the deed that established a fee simple determinable estate.

The court in Koprivec, however, recognized that the prime example of creating a fee simple determinable estate is when a grantor conveys a property to another “for so long as it is used for X;” the magic words being conditional language, not reversion language. The court reasoned that when a grantor uses those [conditional] words, “she means exactly that—that she intends for the property to be held by the grantee for so long as it is used for X; [and] when the property stops being used for X, it reverts to the grantor.” Recognizing this tenet was far from new law, the Koprivec court (citing prior law review articles) admitted that “the phrase so long or as long as ha[d] been recognized as sufficient to create a determinable interest ‘since before the days of [the 16th-century legal commentator Edmund] Plowden.’ “

Applying the “modern law” to the facts of the case, the court in Koprivec found no use of the words “so long as”, or similar conditional phrases. Nor was there any reversion language. Instead, classic fee simple absolute language was utilized; namely, “to grantee and to its assigns forever.” True, the deed also contained the language: “forever for the purpose of constructing and using thereon a Railroad.” However, focusing more on the purpose than the forever language of this clause, this kind of language, according to the court, “simply describes the reason for the conveyance,” and “does not condition the railroad company’s right to hold the estate on its use as a railroad.” Citing classic, “black letter treatise law”, the court in Koprivec concluded that, “Unless a conditional estate is created by the express language of a deed or will, the grantor or testator will be conclusively presumed to have intended a fee simple [estate].”

What is the moral of this story? Watch your language, and say what you mean precisely, or a judge will tell you what you meant. While reversionary language is no longer necessary to establish a fee simple determinable estate in Ohio, “it couldn’t hoit.” Why not use all the magic words-the requisite conditional language (so long as, as long as…) and the reversion language? That way, there is nothing left open to interpretation. Make the plain language, plain as day, and you won’t need your day…in court.

Recent Real Estate Legislation Introduced in the Ohio Legislature

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 23 Apr 2018 04:01:00 +0000

By: Stephen D. Richman, Esq.- Senior Counsel-Kohrman, Jackson & Krantz

Recent bills of the 132nd General Assembly (See https://www.legislature.ohio.gov/) pending in the Ohio House and Ohio Senate related to real property are as follows:

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House Bill 39

General Assembly: 132

Short Title: Require removal of snow and ice from abutting sidewalks.

Long Title: To enact section 505.872 of the Revised Code to authorize certain townships to require the removal of snow and ice from sidewalks abutting property.

Primary Sponsor: Representative Arndt, Representative Gavarone

Version/Status: As Reported by the State and Local Government Committee

Legislation Text: View Current Version

Senate Bill 50

General Assembly: 132

Short Title: Prohibit deep well injection of brine and conversion of wells.

Long Title: To amend sections 1509.01, 1509.02, 1509.03, 1509.05, 1509.06, 1509.08, 1509.21, 1509.22, 1509.222, 1509.223, 1509.224, and 1509.99, to enact section 1509.051, and to repeal section 1509.226 of the Revised Code to prohibit land application and deep well injection of brine, to prohibit the conversion of wells, and to eliminate the injection fee that is levied under the Oil and Gas Law.

Primary Sponsor: Senator Skindell

Version/Status: As Introduced/Referred to the Energy and Natural Resources Committee

Legislation Text: View Current Version

House Bill 52

General Assembly: 132

Short Title: Regulate solicitation of certain deeds.

Long Title: To amend section 1345.99 and to enact section 1345.032 of the Revised Code to regulate the solicitation of certain deeds.

Primary Sponsor: Representative Rezabek

Version/Status: As Enrolled-Effective Date- May 11, 2018

Legislation Text: View Current Version

House Bill 118

General Assembly: 132

Short Title: Prohibit dismissing tax complaint if fails to identify owner.

Long Title: To amend section 5715.19 of the Revised Code to expressly prohibit the dismissal of a property tax complaint for failure to correctly identify the property owner.

Primary Sponsor: Representative Merrin

Version/Status: As Enrolled-Effective Date-February 5, 2018

Legislation Text: View Current Version

Senate Bill 123

General Assembly: 132

Short Title: Limit right to initiate property tax complaints.

Long Title: To amend sections 307.699, 3735.67, 5715.19, 5715.27, and 5717.01 of the Revised Code to limit the right to initiate most types of property tax complaints to the property owner and the county recorder of the county in which the property is located.

Primary Sponsor: Senator Coley

Version/Status: As Introduced/Referred to Ways and Means Committee

Legislation Text: View Current Version

House Bill 123

General Assembly: 132

Short Title: Modify short-term, small, and mortgage loan laws.

Long Title: To amend sections 1321.35, 1321.36, 1321.39, 1321.40, 1321.41, 1321.422, 1321.99, and 4712.99, to enact new section 1321.46 and sections 1321.141, 1321.401, 1321.402, 1321.403, 1321.411, 1321.595, and 4712.071, and to repeal sections 1321.46 and 1321.461 of the Revised Code to modify the Short-Term Loan Act, to specify a minimum duration requirement for loans made under the Small Loan Law and Mortgage Loan Law, and to limit the authority of credit services organizations to broker extensions of credit for buyers.

Primary Sponsor: Representative Koehler, Representative Ashford

Version/Status: As Reported by the House Government Accountability and Oversight Committee

Legislation Text: View Current Version

House Bill 148

General Assembly: 132

Short Title: Register home improvement contractors.

Long Title: To amend sections 109.572, 715.27, 3781.102, 4740.01, 4776.01, and 4776.20 and to enact sections 4785.01, 4785.02, 4785.021, 4785.03, 4785.04, 4785.05, 4785.06, 4785.07, 4785.08, 4785.09, 4785.11, 4785.12, 4785.13, 4785.14, 4785.15, 4785.16, 4785.17, 4785.18, 4785.19, 4785.20, 4785.21, and 4785.99 of the Revised Code to require statewide registration of home improvement contractors, to create the Home Improvement Board, and to make an appropriation.

Primary Sponsor: Representative Patmon

Version/Status: As Introduced/Referred to Finance Committee

Legislation Text: View Current Version

House Bill 175 General Assembly: 132

Short Title: Allow residence owners to keep small livestock on property.

Long Title: To amend sections 303.21 and 519.21 and to enact section 901.60 of the Revised Code to allow an owner of residential property to keep, harbor, breed, or maintain small livestock on the property, and to prohibit zoning authorities from regulating certain agricultural activities conducted on residential property for noncommercial purposes.

Primary Sponsor: Representative Brinkman

Version/Status: As Introduced/Referred to Agricultural and Rural Development Committee

Legislation Text : View Current Version

House Bill 199

General Assembly: 132

Short Title: Enact Ohio Residential Mortgage Lending Act.

Long Title: To… create the Ohio Residential Mortgage Lending Act for the purpose of regulating all non-depository lending secured by residential real estate, to limit the application of the current Mortgage Loan Law to unsecured loans and loans secured by other than residential real estate, and to modify an exemption to the Ohio Consumer Installment Loan Act.

Primary Sponsor: Representative Blessing

Version: As Enrolled-Effective Date-March 23, 2018

Legislation Text : View Current Version

House Bill 343

General Assembly: 132

Short Title: Regards how local governments are to contest property values.

Long Title: To amend section 5715.19 of the Revised Code to require local governments that contest property values to formally pass an authorizing resolution for each contest and to notify property owners.

Primary Sponsor: Representative Merrin

Version: As Passed by the House/Referred to Senate Ways and Means Committee

Legislation Text: View Current Version

House Bill 361

General Assembly: 132

Short Title: Increase time for deciding property tax complaints.

Long Title: To amend section 5715.19 of the Revised Code to increase the time within which boards of revision must decide property tax complaints.

Primary Sponsor: Representative Greenspan

Version/Status: As Reported/Amended by the House Government Accountability and Oversight Committee

Legislation Text: View Current Version

House Bill 390

General Assembly: 132

Short Title: Clarify computation of timelines for forcible entry and detainer.

Long Title: To amend sections 1923.04 and 1923.14 of the Revised Code to clarify how to calculate certain timelines under which a forcible entry and detainer action must occur.

Primary Sponsor: Representative Merrin

Version/Status: As Introduced/Referred to Financial Institution, Housing and Development Committee

Legislation Text: View Current Version

House Bill 407

General Assembly: 132

Short Title: Abolish estate by dower.

Long Title: To amend sections 2103.02, 2103.09, and 2106.24 of the Revised Code to abolish the estate by dower.

Primary Sponsor: Representative Dever, Representative Seitz

Version/Status: As Reported by the House Civil Justice Committee

Legislation Text: View Current Version

House Bill 412

General Assembly: 132

Short Title: Authorize redacting discriminatory covenants from land records.

Long Title: To amend section 109.15 and to enact section 317.115 of the Revised Code to authorize county recorders, at the request of certain persons, to redact discriminatory covenants from real property instruments displayed on the internet, or to record modifications of those instruments.

Primary Sponsor: Representative Craig

Version/Status: As Introduced/Referred to Civil Justice Committee

Legislation Text: View Current Version

House Bill 460

General Assembly: 132

Short Title: Assist creation of riparian buffers and exempt some from taxation.

Long Title: To amend sections 321.24, 5715.27, and 5717.02 and to enact sections 1515.12 and 5709.30 of the Revised Code to exempt qualifying riparian buffers in the Western Basin of Lake Erie from property taxation, to reimburse local taxing units for resulting revenue losses, and to require soil and water conservation districts to assist landowners with the creation and maintenance of riparian buffers.

Primary Sponsor: Representative Patterson, Representative Sheehy

Version/Status: As Introduced/Referred to Energy and Natural Resources Committee

Legislation Text: View Current Version

House Bill 480

General Assembly: 132

Short Title: Establish requirements for multi-parcel auctions. Long Title: To amend sections 4707.01, 4707.023, 4707.15, 4707.20, and 4707.22 of the Revised Code to establish requirements governing multi-parcel auctions.

Primary Sponsor: Representative Hill

Version/Status: As Introduced/Referred to Civil Justice Committee

Legislation Text: View Current Version

House Bill 487

General Assembly: 132

Short Title: Eliminate special school right to school district real property.

Long Title: To amend sections 3313.41, 3318.08, and 5705.10, to enact new section 3313.411, and to repeal sections 3313.411, 3313.412, and 3313.413 of the Revised Code to eliminate the right of first refusal for community schools, college-preparatory boarding schools, and science, technology, engineering, and mathematics schools in the acquisition of school district real property.

Primary Sponsor: Representative Ingram

Version/Status: As Introduced/Referred to Education and Career Readiness Committee

LegislationText: View Current Version

House Bill 513

General Assembly: 132

Short Title: Enhance homestead exemption for spouse of killed first responder.

Long Title: To amend sections 323.151, 323.152, 323.153, 4503.064, 4503.065, and 4503.066 of the Revised Code to enhance the homestead exemption for surviving spouses of peace officers, firefighters, and emergency medical personnel killed in the line of duty.

Primary Sponsor: Representative Brenner, Representative Ginter

Version/Status: As Introduced/Referred to Ways and Means Committee

Legislation Text: View Current Version

House Bill 562

General Assembly: 132

Short Title: Prohibit horizontal well drilling in state and local parks.

Long Title: To amend section 1509.06 of the Revised Code to prohibit the drilling of a horizontal well in various state and local parks.

Primary Sponsor: Representative Leland

Version/Status: As Introduced/Referred to Energy and Natural Resources Committee

Legislation Text: View Current Version

House Bill 586

General Assembly: 132

Short Title: Expand homestead exemption.

Long Title: To amend sections 323.151, 323.152, 323.153, 323.157, 4503.064, 4503.065, and 4503.066 of the Revised Code to remove the income limit that restricts eligibility for the homestead exemption and to increase the exemption amount from $25,000 to $30,000.

Primary Sponsor: Representative Cera, Representative Rogers

Version/Status: As Introduced

Legislation Text: View Current Version

Former Point of Sale Ordinance in Oakwood, Ohio Held Unconstitutional

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 26 Mar 2018 04:01:00 +0000

(Criminal Penalties and Lack of Warrant Procedure Held to be Key Failings of Ordinance)

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

It is not easy being a municipality (such as a city or village) in Ohio these days. With the Ohio estate tax having been repealed several years ago and state funds cut to a trickle, it is difficult to make ends meet; especially in “bedroom communities” without a business tax base. Residents, of course still want the same level of health, safety and welfare services they have enjoyed over the years.

Seemingly, as funds continue to dwindle, so does the power to regulate. Even though Article XVIII of the Ohio Constitution gives municipalities the power of “Home Rule” (special authority to create laws and take action regarding local self-government, exercise of police powers and operation of public utilities, that have not been specifically granted to the State of Ohio), this power is slowly but surely being limited. For example, due to relatively recent legislation, municipalities in Ohio cannot regulate guns in public places, where oil and gas wells are situated, and how taxes are levied and collected.

Municipalities are also subject to more and more United States constitutional challenges. Many of these cases deal with claims that local governments are taking private property for public use without "just compensation,” violating individual rights without “due process” and curtailing free speech in

violation of the First Amendment.

Recently, municipalities in Ohio are facing claims that they have violated the Fourth Amendment via unconstitutional “point of sale” ordinances.

Point of Sale Ordinances

While this type of ordinance can take many forms, the most common makes it unlawful to transfer ownership of any real estate, or lease to a new tenant, without having obtained a pre-sale inspection of the property under the applicable municipal code. The pre-sale inspection procedure usually requires the property owner to complete an application, schedule and appear for an inspection of the property with the code official, pay an inspection fee, and correct or otherwise address identified violations of the municipality’s fire, zoning, building, and property maintenance codes in order to obtain a certificate of occupancy authorizing the property’s sale or rental. The violation of pre-sale inspection requirements in this type of ordinance is usually punishable as a misdemeanor.

Municipalities usually defend their point of sale ordinances as valuable tools to increase the value of properties within their borders, and ensure such properties and the residents occupying the same will be and remain safe. While these ordinances often contain a “criminal component”, municipalities rarely enforce the criminal penalties, but deem them necessary to cause compliance.

Notwithstanding the laudable intentions behind this type of point of sale ordinance, and the usual reluctance of municipalities to enforce the criminal penalties associated therewith, the United States District Court for the Southern District of Ohio in Thompson V. City of Oakwood, Case No. 3:16-cv-169 (S.D. Ohio Feb 9, 2018) has recently held the (former) point of sale ordinance in Oakwood, Ohio (suburb of Dayton) has been an unconstitutional violation of the Fourth Amendment of the U.S. Constitution.

Background/Plaintiffs’ Claims in Thompson V. City of Oakwood

The pertinent facts of the case are as follows:

Plaintiffs Jason Thompson and 2408 Hillview LLC (a company formed by Thompson and a partner to buy and sell homes) own and sell residential homes in Oakwood, Ohio. The LLC engaged an agent of Re/Max to act as the sellers’/plaintiffs’ agent in the sale of their property. The agency agreement required the property owner to apply for any required housing inspections and to furnish a copy of the certificate of occupancy. The agent paid the $60 application fee and scheduled an inspection, which inspection revealed some issues that needed to be addressed to comply with the City of Oakwood Building Code. The issues were promptly addressed and a final inspection was scheduled. During the final inspection, the building inspector asked for permission to inspect the garage, which was inaccessible during the first inspection. Permission was denied, and Ethan Kroger, the building official therefore, did not inspect the garage.

The plaintiffs then brought an action in May, 2016 under 42 U.S.C. § 1983 (a civil action for the deprivation of constitutional/civil rights) against the City of Oakwood and Mr. Kroger, for allegedly infringing the plaintiffs’ constitutional rights by requiring them to submit to warrantless searches or risk criminal punishment before permitting them to sell their homes.

Specifically, the plaintiffs sought: 1) a declaratory judgment that Oakwood’s pre-sale inspection requirement was unconstitutional on its face; 2) an injunction against enforcement of the ordinance containing that requirement; and 3) restitution of the $60 fee that the plaintiffs paid pursuant to the ordinance. Approximately one week after the filing, the plaintiffs amended their complaint, seeking to constitute their action as a “class action suit” on behalf of a class of similarly situated individuals who sold real estate in Oakwood (during the prior six years) and were “coerced into paying pre-sale inspection fees.”

Oakwood Codified Ordinance § 17-107.5

The ordinance at issue (Oakwood Codified Ordinance § 17-107.5) provided that, “it shall be unlawful for the owner of any real estate premises to transfer legal or equitable ownership of that premises, or change tenants, without having obtained a pre-sale inspection of it under this code.” The ordinance further provided that upon completion of the inspection and other requirements, an owner could obtain a “certificate of occupancy”, which was necessary because, it was illegal, per the ordinance for a new owner or tenant to occupy any premises, “without having obtained from the code official or the previous owner a valid certificate of occupancy ...” In addition, under § 17-106.4 of the Oakwood Code, an owner who failed to comply with the pre-sale inspection or occupied a premises without having obtained a certificate of occupancy was guilty of a minor misdemeanor.

It is important to note that approximately two months after the plaintiffs’ action was filed, the City of Oakwood passed an emergency ordinance that repealed the then existing pre-sale inspection ordinance and replaced it with a new one. The new ordinance adds an administrative warrant procedure for residential and business inspections and clarifies that asserting rights under the Fourth Amendment will not trigger criminal penalties.

Defendant’s Arguments

Generally, Oakwood credited its point of sale ordinance with encouraging residents to maintain their homes, increasing home values and decreasing the number of fires and structural failures. The City of Oakwood also pointed out that: a) its property maintenance code contains an administrative appeal procedure for property owners to challenge any decision or order of a code official, and no Oakwood property owner (including plaintiffs), has filed an administrative appeal challenging the point of sale ordinance; b) Oakwood has never denied a property owner an occupancy permit or cited a property owner for failure to comply with the pre-sale inspection requirement, and c) to its knowledge, no other owner has objected to the ordinance. The City of Oakwood did acknowledge, however that it has informed at least two property owners— (the plaintiffs) that failure to have a pre-sale inspection was a misdemeanor.

Specifically, the city argued that: 1) it was entitled to summary judgment on Plaintiffs’ § 1983 claims because its amended ordinance rendered moot, the plaintiffs’ claim; 2) it did not commit any constitutional violation because the plaintiffs consented (through their real estate agent) to the pre-sale inspection; 3) the plaintiffs relied on inadmissible evidence and failed to address the history of the pre-sale inspection ordinance; and 4) Oakwood’s code enforcement officer did not commit any constitutional violation and, even if he did, he would be entitled to qualified immunity.

The Court’s Analysis in Thompson V. City of Oakwood

Before analyzing the crux of the case, the court in Thompson agreed with the defendant’s argument that the amended ordinance rendered the plaintiffs’ injunction claims, moot. As stated by the court, “Since Oakwood’s amended ordinance provided Plaintiffs the injunctive relief they sought; as a result, that portion of Plaintiffs’ claims is indeed moot. Their claims for actual and nominal damages relating to the prior ordinance, however, are not.”

To address the defendant’s claim that no damages should be awarded (because plaintiffs consented to the search, and accordingly did not violate the Fourth Amendment), the court in Thompson first summarized the general rule of (and quoted precedent with regard to) such amendment, before evaluating whether or not the general exception to the general rule (namely, that consented-to searches do not require a warrant) applied.

--the 4^th Amendment (General Rule)-The Fourth Amendment of the U.S. Constitution provides that “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” U.S. Const. amend. IV. The basic purpose of the Fourth Amendment . . . is to “safeguard the privacy and security of individuals against arbitrary invasions by government officials.“ Camara v. Mun. Court, 387 U.S. 523, 527 (1967). The U.S. Supreme Court has repeatedly held that “searches conducted outside the judicial process, without prior approval by a judge or a magistrate judge [e.g., via a warrant], are per se unreasonable subject only to a few specifically established and well-delineated exceptions.”

The court in Thompson then gave two examples of unconstitutional, point of sale ordinances that authorized warrantless, unconsented-to inspections to enforce city codes. Namely, the San Francisco building code ordinance at issue in the Camara case, and the Portsmouth [Ohio] Rental Dwelling Code at issue in Baker v. City of Portsmouth, No. 1: 2015 WL 5822659 (S.D. Ohio Oct. 1, 2015). As in the Oakwood ordinance, the San Francisco and Portsmouth ordinances required applications to the applicable municipal authority for an occupancy permit (in order to sell, with regard to Camara; and to rent with regard to Portsmouth), a fee was charged, a city official approved or denied the permit based on an inspection, and failure to consent to the warrantless inspection was punishable as a criminal offense.

According to the court in Thompson, the United States Supreme Court’s decision in Camara and its progeny establish that a municipality violates the Fourth Amendment of the U.S. Constitution when it requires a property owner to consent to a warrantless inspection of their property or face a criminal penalty, unless a valid exception to the warrant requirement exists.

The court in Thompson then agreed with the reasoning of these “warrantless inspection cases” by quoting the following statement made by the court in Camara: “administrative searches are significant intrusions upon interests protected by the Fourth Amendment and when authorized and conducted without a warrant procedure, lack the traditional safeguards which the Fourth Amendment guarantees to the individual.”

---Consent Exception-If your distant memory of 11th grade history or Con Law is telling you, “wait a second, I remember there being a number of instances or exceptions where a warrant is not necessary, where a warrantless search or seizure would still be considered “reasonable” and not run afoul of the Fourth Amendment”, you would be correct. “Plain view”, “search incident to a lawful arrest”, “exigent circumstances” and “consent” are some of the more common “warrant exceptions.”

The defendant and its counsel in Thompson were certainly aware of the consent exception, and used it to justify their argument for summary judgement in their favor (recall the plaintiffs’ real estate agent consented to the inspection of the plaintiffs’ property; the agent just asked it not include a search of the garage).

As to defendant’s claim that plaintiffs consented to the search, the court in Thomson first recognized and agreed that consent to search is in fact a well-established exception to the Fourth Amendment’s warrant requirement… in general.

Here, however, the court reasoned that the issue was not whether or not consent was an exception, but rather, “whether or not a property owner could voluntarily consent to a pre-sale inspection where the governing ordinance makes it a criminal offense not to do so and refusing an inspection results in the denial of a certificate of occupancy.”

The plaintiffs argued that, “the denial of a certificate of occupancy and criminal penalty that could result from a failure to consent are so coercive that any consent given cannot be deemed voluntary,” and accordingly, the exception should not apply.

The City of Oakwood argued that the ordinance’s criminal penalty was not coercive because Oakwood never enforced it against any property owner and that, “if Oakwood homeowners had objected to the inspection, the inspection would not occur, and any potential defects would simply transfer to the buyer.”

The court in Thomson was not convinced, stating that, “Even if these facts are undisputed, they do not remove the coerciveness of Oakwood’s ordinance.” Quoting precedent (prior court decisions, on point), the court in Thompson provided the test of sorts to constitutionally evaluate the type of point of sale ordinances (that used to be) on the City of Oakwood’s books: “When evaluating the validity of an individual’s consent under the Fourth Amendment…not any type of consent will suffice, but instead, only consent that is unequivocally, specifically, and intelligently given, uncontaminated by any duress and coercion… [and] a person cannot provide such uncontaminated consent when refusal to do so empowers the municipal authority to deny him the right to sell his property (or make it very difficult for him to find a willing buyer and title insurance company) and prosecute him for a criminal misdemeanor.” Applying this so called test to the facts in Thompson, the court basically agreed with the plaintiffs and concluded, “Here, even if Oakwood has never denied a certificate of occupancy or enforced the criminal provisions of its ordinance, the mere possibility of such action is enough to render any consent involuntary as a matter of law.”

--Holding of Thompson V. City of Oakwood-Specifically, the court in Thompson ruled as follows: “1. Plaintiffs are granted summary judgment as to liability on their (a) § 1983 claim under the Fourth Amendment against Oakwood only, (b) § 1983 claim under the unconstitutional conditions doctrine against Oakwood only, and (c) unjust enrichment/restitution claim against Oakwood; 2. Mr. Kroger is granted summary judgment in his favor as he is entitled to qualified immunity on both of Plaintiffs’ § 1983 claims; and 3. The Court certifies the following class under Fed. R. Civ. P. 23(b)(3): All individuals and businesses that have (1) sold houses within the City of Oakwood since May 25, 2010; and (2) paid pre-sale inspection fees to the City of Oakwood in conjunction with the sale of their houses.

Moral of the Story

As provided in Thompson V. City of Oakwood, however, it seems that point of sale ordinances that call for criminal penalties (whether or not actually enforced) will most likely be held unconstitutional, at least where no administrative warrant procedure is provided. In other words, for those municipalities who have not yet done so, it is time to revise. For those municipalities thinking jurisdictionally, think again. The 1851 Center for Constitutional Law (the "Center") has also filed a lawsuit in the Northern District of Ohio against the City of Bedford (outside Cleveland, Ohio) with regard to a similar point of sale ordinance. Stay tuned.

Watch your Language with Oil and Gas Leases in Ohio (#2)

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 22 Jan 2018 20:10:00 +0000

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(A Watch Your Language Series Article)

It’s a lease, it’s a contract, it’s a lease and a contract.

Just as Faye Dunaway’s character in the movie Chinatown was both mother and sister to “Katherine”, an oil and gas lease in Ohio (and other jurisdictions) is both a contract and a lease.

An oil and gas lease is a lease, not because of its name, but because it is a transfer of a part of an interest in land for a specific period of time, or “term,” in exchange for the payment of rent, royalties or other standard of value. In other words, it fits the classic definition of, and contains the common characteristics of a lease. In an oil and gas lease, mineral rights/interests of the “dirt” are leased instead of the actual “dirt” itself. Both the dirt and the oil and gas underneath the same are “parts” of real property that can be leased.

As a transfer of property, the lease, like a deed contains certain written and unwritten (implied) covenants. A deed’s covenants, for example include the covenant that the grantee shall have quiet possession, that the grantor is lawfully seized (in fee simple) of the property and a covenant that the grantor will execute such further assurances of the land as may be requisite. A typical lease of real property contains the implied (sometimes express) covenant of quiet enjoyment (or possession); and oil and gas leases are held to contain the implied covenant of reasonable development.

An oil and gas lease is also a contract because it meets the following, legal definition of the same: “an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” For an oil and gas lease to be an enforceable contract, the following general, contractual requirements must be present: (i) meeting of the minds; (ii) consideration; (iii) capacity; (iv) legality; (v) definiteness; and (vi) the lease must be in writing. The significance of an oil and gas lease also being a contract is that the general law of judicial contract interpretation applies. Namely, that courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy (and will not add language to the contract). As the reader may recall from other “Watch Your Language” articles for this Blog, because of this judicial deference to “commercial language”, you must say what you mean, precisely, or a judge will decide what you meant.

Apparently, the plaintiffs in the recent Supreme Court of Ohio case, Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, lost sight of the dual nature of oil and gas leases, the rules of judicial interpretation of contracts, and the failure to say, precisely what they meant to say therein.

The facts of the case are as follows:

Seven individual landowners (the “Landowners”) hold interests in approximately 74 acres of land in Washington County, Ohio. The land is subject to an oil and gas lease (the “Lease”) entered into in 1980, between the owners of the property at that time and Collins-McGregor Operating Company (later assigned to Winston Oil Company). Collins-McGregor and Winston were the appellees in this case and will be referred to hereinafter as the “Oil and Gas Companies”. According to the Lease, “[T]he sole and only purpose [of the lease is to permit] mining and operating for oil and gas and laying pipe lines, and building tanks, powers, stations, and structures thereon, to produce, save and take care of said products.” In return for permission to mine the land, the Oil and Gas Companies committed to make royalty payments based on the amount of gas produced from the land and to deliver a portion of the oil produced from the land to the Landowners.

The Lease further provides that it “shall remain in force for a term of One (1) years from [the effective] date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.” However, other than the specific term and general purpose, the Lease contains few other material terms. The Lease is conspicuously silent as to details of drilling and production. For example, the Lease contains no requirement or other information re: the specific number of wells or the planned depth of any well. The Lease also does not disclaim any implied covenants (such as the implied covenant of reasonable development).

Pursuant to the Lease, a well was drilled in 1981, and has produced oil and gas in paying quantities since then from a formation called the Gordon Sand. As of the date of the opinion, however there had not been any production from the land at any depths below the Gordon Sand, where the Marcellus and Utica formations are located—(the Oil and Gas Companies claimed that they failed to explore whether production can be obtained from those deep formations because they did not have the equipment or financial resources required to do so).

In November of 2015, the Landowners filed suit against the Oil and Gas Companies alleging that they breached several implied covenants, and improperly failed to explore or drill for oil at depths below the Gordon Sand. The Landowners sought a judgement declaring the portion of the Lease covering depths below the Gordon Sand terminated, so that the Landowners could presumably contract with an alternative oil/gas company willing to drill into the Marcellus and Utica formations.

Among the implied covenants that the Landowners claimed the Oil and Gas Companies breached are the implied covenant of reasonable development and an implied covenant to explore further. The Oil and Gas Companies described the judgement sought by the plaintiffs as “horizontal forfeiture” (i.e., forfeiture of the right to drill to a particular horizontal layer or formation beneath the surface) but moved to dismiss the case, arguing that Ohio law does not recognize the implied covenant to explore further, or the remedy of horizontal forfeiture. The trial court agreed with the Oil and Gas Companies and dismissed the case, holding that under the plain terms of the Lease, the still-productive well drilled in 1981 was “sufficient to hold the Lease across all acres and at all depths.” The Fourth District Court of Appeals affirmed, holding that Ohio law neither recognizes an implied covenant to explore further, nor partial, horizontal forfeiture of oil and gas rights as an available form of relief. The Landowners then applied to the Ohio Supreme Court.

Arguing before the Ohio Supreme Court, the Landowners cited several 5^th appellate district decisions that recognized the existence of an implied covenant to explore further. The Oil and Gas Companies countered that while cases from one appellate district in Ohio may have recognized such a covenant, none actually applied the covenant. Moreover, the Oil and Gas Companies argued that there was no need to recognize a new, state-wide implied covenant because the covenant of reasonable development provides sufficient protection for landowners. Furthermore, the Oil and Gas Companies argued that the plain language of the Lease contained no development details, no new covenants and no requirement to partially forfeit the lease, so it was not the court’s job to do any more than interpret the contract as written, and apply the only, universally recognized, implied (oil and gas lease) covenant; the covenant of reasonable development.

The Supreme Court of Ohio agreed with the Oil and Gas Companies and affirmed the ruling of the 4^th Appellate District.

In its opinion, the Supreme Court of Ohio first cited precedent, reiterating the dual nature of oil and gas leases. “Oil and gas leases are contracts, and therefore, ‘the rights and remedies of the parties to an oil and gas lease must be determined by the terms of the written instrument’ [however], notwithstanding this principle, we have long held that oil and gas leases are ordinarily subject to an implied covenant to reasonably develop the land.”

The court then explained that while the covenant of reasonable production is generally a protection implied to landowners (lessors), its standard is to only “impose on the lessee the obligation to act as a reasonably prudent operator would as it develops the land under the lease.” Applying the standard to the facts of the case, the court reasoned that since drilling below the Gordon Sand formation would cause the Oil and Gas Companies to lose profits in the venture, limiting production to the Gordon Sand formation only, would be reasonable. Citing the Oklahoma Supreme Court, the Ohio Supreme Court in Alford reasoned that ignoring the profit motive from the “reasonableness equation” “is to ignore the very essence of the contract.”

The court also agreed (quite emphatically) with the Oil and Gas Companies’ contract argument; stating, that the proposition of the rights and remedies of the parties to an oil and gas lease being determined by the terms of the written instrument was “uncontroversial” and “what this court has recognized since 1897.” The court reasoned that if the parties intended there to be specific drilling requirements beyond “reasonable development”, they would have specified same in their oil and gas…contract. However, the court noted that “the lease [in Alford]does not contain a disclaimer of implied covenants, nor does it otherwise address whether any specific number of wells must be drilled or the depth to which any wells must be drilled. As such, the lease, according to the Ohio Supreme Court was subject to the implied covenant of reasonable development, but no other covenants, express or implied.

What is the moral of this story?

Watch Your Language with oil and gas leases, and say what you mean, precisely, or a judge will decide what you meant. While oil and gas leases are often convoluted, and written in small font, “standard” forms; they are contracts, not holy tablets of stone, and accordingly, are negotiable. If you are expecting certain formations to be drilled, say so. If you want a minimum of wells drilled on your property, spell that out. Certainly, arguing for these types of clauses does not guarantee they will be included in your lease, but failing to include them before you sign will almost always guarantee that they will not be part of you contract.

To Be or Not to Be (an Enforceable Real Estate Agreement), That Is the Question

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 11 Dec 2017 20:34:00 +0000

While title to real estate cannot transfer without a deed and a closing, the closing merely carries out the provisions of the real estate agreement. Accordingly, it is the agreement in a real estate transaction that is of paramount importance as it creates the interest of the buyer to be conveyed by deed (note, however the “Doctrine of Merger” discussed in our March 31, 2014 post: Don’t Let Your Contract Disappear (Merge) Into Your Deed) and determines the rights and obligations of the parties, some of which may remain in play well past the closing.

What many buyers and sellers lose sight of (including the buyer in the recent Stark County Court of Appeals case- Sabatine BK Dev., L.L.C. v. Fitzpatrick Ents., Inc., 2017-Ohio-805), however is that the physical existence of a real estate contract does not guarantee its legal existence or enforceability.

I. REQUIRED ELEMENTS FOR ENFORCEABILITY: Even before the minutiae within the agreement form is analyzed and such issues as representation and warranty provisions are debated, covenants on how the property is to be operated between signing and closing are discussed and title and survey provisions are negotiated, you must ensure that your real estate contract will be enforceable. A real estate contract, like any contract is generally defined as a binding agreement or promise to do something. Basically, to be a valid, enforceable legal contract, five elements must be present:

A. Meeting of the Minds /Agreement. Agreement generally occurs when one party to a contract makes an offer or promises to do something and the other party accepts. For example, suppose a person offers to buy a property you have advertised by virtue of sending you a contract containing the terms upon which they would be willing to buy. There is no contract until the offer is accepted and signed by both the buyer and the seller. If the seller should choose to change any of the terms of the offer, a counteroffer has been created, which must then be accepted by the buyer to constitute an agreement.

B. Consideration. Consideration is anything of value promised to another when making a contract. It is a detriment incurred by the promisee and/or a benefit to the promisor. The money the buyer gives as a deposit and the terms for payment in the purchase agreement are valuable consideration on the part of the buyer; and the property, as well as the promise to deliver possession of the property upon receipt of the purchase price constitutes valuable consideration on the part of the seller. Payment, however, does not need to be in the form of money; it may be a trade of other real property or personal property, or a promise to perform an obligation.

C. Capacity. Capacity means that one is legally able to enter into a contractual agreement. As a general rule of law, minors, intoxicated persons and mentally incompetent persons cannot legally enter into valid contracts. If they do make themselves parties to contracts, the agreements are typically voidable.

D. Legality. For a contract to be enforceable, it must be for a legal purpose.

E. Definiteness. The terms of the contract, especially basic terms such as price, legal description, and closing date must be reasonably certain. A court must be able to look at the agreement and determine the parties' obligations from within the “four corners of the document.”

F. Writing. All contracts dealing with the purchase or sale of real property must be in writing for a contract to be enforceable. (Note: contracts for the purchase or sale of personal property must be in writing if for more than $500).

II. SABATINE BK DEV., L.L.C. V. FITZPATRICK ENTS., INC., 2017-OHIO-805

The buyer in Sabatine found out, “the hard way” that all of the above elements must be present in order to constitute an enforceable contract, not just a majority, three out of five.

The facts of the case are as follows:

Plaintiff-appellee Fitzpatrick Enterprises, Inc. (“Fitzpatrick”) owned a number of parcels of land on Dressler Road, in Canton, Ohio, comprising a shopping center commonly known as “Thursday’s Plaza.” In January of 2015, defendant-appellant Sabatine BK Development, LLC (“Sabatine”) made an offer to buy one of those parcels (an out lot), formerly leased to Macaroni Grill.

In order to sell the Macaroni Grill site to Sabatine, the parties understood that Fitzpatrick would have to split off that property from other parcels at Thursday’s Plaza. In Sabatine’s proposed purchase offer, “Property” was defined as follows: “…certain real property and buildings with an address of 4721 Dressler Rd. NW, Canton, OH 44718; situated in Stark County, tax map/parcel number 1620800, consisting of approximately 2.2 acres of land, which shall be subject to a mutually agreeable replat of the property, as depicted on Exhibit A (formerly the Macaroni Grill) attached hereto and made a part hereof, …together with all rights and appurtenances pertaining to such real property…; and all improvements and structures situated thereon (collectively, the ‘Property’).” Sabatine signed its proposed purchase offer, although “Exhibit A” was not attached to the agreement. Fitzpatrick, however refused to accept Sabatine’s proposed purchase offer without an “Exhibit A”.

After making significant changes to Sabatine’s proposed purchase offer (including adding a provision for non-exclusive parking at Thursday’s Plaza), and attaching a site plan as “Exhibit A”, Fitzpatrick signed what became its counteroffer (by virtue of the changes to the offer) and sent it to Sabatine’s agent on January 15, 2015.

Approximately four months later, and two days before the end of the purchase agreement’s extended due diligence period, Sabatine submitted a counteroffer to Fitzpatrick’s January counteroffer. Sabatine’s May counteroffer called for exclusive parking (which would reduce the number of parking spaces available to all of the Thursday’s Plaza tenants), access for ingress/egress to the remainder of Thursday’s Plaza, and a split-off of the property from two separate parcels. Fitzpatrick rejected Sabatine’s May counteroffer, which had been offered and summarily rejected a month earlier. In a letter dated May 18, 2015, counsel for Fitzpatrick notified Sabatine that seller’s January 15, 2015 counteroffer was being terminated and withdrawn.

On May 28, 2015, Fitzpatrick filed a complaint for declaratory judgment, requesting the trial court officially declare the agreement between the parties a non- enforceable contract, and accordingly, void so that Fitzpatrick could sell the property to someone else, without worry of any interference from Sabatine. Sabatine filed an answer and counterclaim for breach of contract, promissory estoppel, and breach of fiduciary duty. The trial court granted judgment in favor of Fitzpatrick, holding that there was never an enforceable agreement as there was no meeting of the minds. The trial court also found that Sabatine failed to prove all of the elements of its claim for “promissory estoppel.”

In Ohio (and most other jurisdictions), promissory estoppel is the exception to the general rule of contract enforceability; namely, a “quasi-contractual concept where a court in equity seeks to prevent injustice by effectively creating a contract where none existed.” Stickler v. Keycorp, 8th Dist. No. 80727, 2003-Ohio-283, at ¶ 18. To establish a claim of promissory estoppel under Ohio law, the plaintiff must prove the following elements: (1) a clear and unambiguous promise; (2) reliance upon the promise by the promisee; (3) reliance by the promisee that is both reasonable and foreseeable; and (4) injury to the promisee as a result of the reliance. Rigby v. Fallsway Equip. Co., Inc., 2002-Ohio-6120. While the Sabatine decision does not elaborate on Sabatine’s failed promissory estoppel claim, presumably, factors (1) and (3), above were not met due to the fact of there being multiple counter offers, without clarity on the subject of exactly what property would be transferred, and what parking and access rights would attach.

The Stark County Court of Appeals in Sabatine, did, however clearly explain why it agreed with the trial court’s decision (declaring the subject purchase agreement, unenforceable). According to the court of appeals, “Like the trial court, we find there was never a meeting of the minds as the parties never agreed on an essential element of the transaction, to wit: the real estate to be transferred.” The court reasoned that while Fitzpatrick finally added an Exhibit A, making the contract definite, it also added new, material terms, effectively creating a counteroffer proposal to the buyer, which was rejected, by virtue of Sabatine’s submittal of a counteroffer (in May) to Fitzpatrick’s January counteroffer. As aptly summarized by the court of appeals, “An acceptance which changes the terms of the contract does not create a binding contract because it constitutes a counteroffer.”

Even assuming, arguendo, that Sabatine established the essential elements of the contract, the court of appeals, nonetheless, found the parties did not have an enforceable agreement because embedded within Exhibit A was an unsatisfied condition precedent (an event that must occur before an obligation in the contract will become effective) calling for a mutually agreeable re-plat, which could never be satisfied since the parties disagreed upon how the property would be split, parking and access rights…

Based upon the foregoing, the court of appeals in Sabatine held that “the trial court did not err in concluding there was never an enforceable agreement between the parties.”

What is the moral of this story?

It is not enough to “say it in writing,” and have a signed document as evidence thereof. Real estate contracts must also be definite, especially with regard to material terms such as what property is being transferred. All too often, buyers and sellers rush to sign an agreement and leave the exhibits until later. This is not illegal or immoral; however, if there is no later agreement on the subject matter of an exhibit, particularly the “description of the property exhibit,” you could be the proud owner of a contract, without the rights that go along with it.

Remember also, that signing an offer, but sending it back with signed or initialed modifications (another common practice) is a counter offer, not an acceptance of the original offer.

In other words, odds are that an unenforceable real estate contract will not generate a purchase or a sale, only scratch paper and a lot of legal fees.

Bragdon v. Carter- Life Estate or Unreasonable Restraint on Alienation

noreply@blogger.com (Stephen D. Richman, Esq.) — Wed, 15 Nov 2017 21:02:00 +0000

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(A Watch Your Language Series Article)

As is commonly known, ignorance of the law is no excuse to one who is charged with a crime.

In real estate, however, while ignorance of the law will rarely result in a prison term, it will almost always result in unintended consequences that could have easily been avoided by hiring (at the outset) qualified, legal professionals whose job is to know the law and know it well.

The defendants in the recent case of Bragdon v. Carter, 2017-Ohio-8257 (4th Appellate District) found this out the hard way.

The facts of the case are as follows:

Burl Bragdon, an individual from Scioto County died testate in 1998, and owned a tract of real estate at the time of his death. Bragdon’s will provided in pertinent part: “ITEM IV: I give, bequeath and devise my real estate equally to my children and friend, BELINDA DILES, BRENDA BRAGDON, BURL BRAGDON II, and BETH A NIXON, per stirpes, provided that said real estate not be sold until twenty-one (21) years after the death of my granddaughter, MORGAN MCKENZIE DILES, born April 14, 1996. It is the purpose of this bequest that my children and their heirs shall always have a place to live.”

The executrix, Belinda Diles Carter admitted the will to probate, and thereafter, a certificate of transfer was issued, conveying a one-fourth interest in the real estate to Burl Bragdon’s three children and his friend, as directed under the will. The certificate of transfer noted the following: “Said real estate may not be sold until twenty-one (21) years after the death of Morgan McKenzie Diles.”

While, apparently, Burl Bragdon wanted the property to be a continual homestead for his children and grandchild, the family had other plans. After a series of transfers by the children named in the will, 100% of the interests in the property were held by Corey and Heather Bragdon (who were not named in the will, and whose relation is not explained in the decision) who wanted to then transfer the property outside of the family, without being subject to the restriction against transfer. Accordingly, Corey and Heather Bragdon (plaintiffs/appellants) filed a complaint with the trial court for a declaration that the plaintiffs hold valid title, without the restriction (which plaintiffs claimed was invalid).

Basically, the trial court in Bragdon v. Carter was faced with deciding whether or not the property could be lawfully sold, in light of the restriction in the will and certificate of transfer. On January 23, 2017, the trial court entered judgment in favor of the defendants. In its judgment entry, the trial court found that the restriction on alienation was valid and that the transfer of the property was a clear violation of Burl Bragdon’s wishes, was contrary to Ohio law, and would unfairly and unjustly divest Morgan McKenzie Diles of her future interest in the property. Heather and Corey Bragdon then filed a notice of appeal.

The appellants in Bragdon v. Carter claimed that the trial court erred (made a mistake) as a matter of law in finding the transfer restriction valid. They claimed that Ohio has adopted, from our English common-law heritage, what is known as the “rule against unreasonable restraints on alienation.” This general rule provides that since one of the main incidents of ownership of real property is the right to convey it, the law will not allow the rights of ownership to be limited by imposing restraints by those who seek to convey or dispose of their property, and at the same time maintain control over its alienation or use. This rule stems from the abolishment of the feudal “fee tail” which restricted the transfer of real property to a specific line of male heirs. Our “modern law” frowns upon such restraints since they stifle the free use and development of real property, and consequently, are not in the best interest of society and commerce.

The appellee’s argument (and apparently, the basis of the trial court’s decision) was that only a valid “life estate” was transferred, not a transfer of fee simple absolute title, subject to a restriction against lifetime transfers.

To get a better grasp of the issue faced by the court of appeals in in Bragdon v. Carter, a brief “Real Estate Law 101” lesson on estates (interests) in land is warranted. As a general rule, real property ownership is more like the possession of a bundle of rights (vs. merely the possession of dirt and improvements on the dirt). The basic rights included in such “bundle” are the right to use, the right to sell, the right to mortgage, the right to lease, the right to give away, and right to enter (or the right to refuse to exercise any of these rights). The fullest possible title to real estate (the biggest bundle of rights) is called "fee simple absolute". Examples of lesser estates are leases (right to use, but no right to sell), easements and life estates. Life estates are estates in land where parties measure ownership by the life of the life estate holder. The life estate terminates on the death of the life estate holder, and then the property passes to a future, named owner (known generally as the “remainderman” or the “remainder holder”). While the owner of a life estate can sell its interest, the buyer would be limited to enjoy/use the property until the death of the life estate holder or “life tenant”, at which time all of the rights of ownership would belong to/pass to the reminder holder.

The court of appeals in in Bragdon v. Carter agreed with the appellee’s general conclusion that if a valid life estate (with a remainder interest to the granddaughter) was created, the trial court’s approval of the transfers and declaration of ownership to plaintiff-appellants would unfairly and unjustly divest Morgan McKenzie Diles of her future interest in the property. In reversing the trial court’s finding for defendant-appellees’ however, the court of appeals determined that there was no clear indication that a life estate was intended. Citing precedent to support its holding, the court stated that “[a] devise or bequest of a life estate must be clearly expressed to be effective. “ Analyzing the documents provided, the court found no mention of the term “life estate”, no designation of the granddaughter as the remainder holder, and no other indication of intent to have created a life estate. Moreover, the court cited statutory authority directing the court to not establish a lesser estate without a clear expression of the creation of the same. Pursuant to Ohio Revised Code Section 2107.51, “every devise of an interest in real property in a will shall convey all the estate of the devisor in the property, unless it clearly appears by the will that the devisor intended to convey a less estate.”

In sum, the court of appeals in Bragdon v. Carter concluded that “the real property at issue was transferred in fee simple absolute, and the portion of the devise attempting to restrict the alienability of the property is void and of no effect as being repugnant to the devise and the public policy of this State. Thus, the trial court erred in determining that the restriction was valid.” Based on the foregoing, the court reversed the judgment of the trial court and remanded the cause to that court to enter judgment in favor of plaintiff-appellants Corey and Heather Bragdon.

What is the moral of this story?

Simply, to win at the “game of real estate law”, you have to know the rules. It is against the rules to restrict fee simple absolute transfers of real estate to certain people for certain periods of time. It is absolutely fine, however, to transfer lesser estates such as leases or life estates. Carrying our analogy further to a game of football, a forward pass and a forward lateral both move the ball forward. However, a forward lateral moves the ball forward in such a way that it is against the rules. Lawyers are trained to know the rules, and should always be used in the game of real estate. Penalties in terms of legal fees and unintended consequences are much harder to swallow than the loss of a down, yardage or the outcome of a football game.

Another moral of this story is the following, common thread in many Ohio real estate decisions (and articles re: same in this Blog): “Watch your language, and say what you mean, precisely, or a judge will decide what you meant.” I presume that the use of the following four words in Mr. Bragdon’s will and certificate of transfer would have changed the outcome of this decision and the “law of unintended consequences”: “life estate” and “remainder interest.”

Taxpayers Appealing Board of Tax Appeals Decisions May No Longer Get their Day in Court (in the Supreme Court of Ohio, that is)

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 02 Oct 2017 15:51:00 +0000

By: Stephen D. Richman, Senior Counsel- Kohrman, Jackson & Krantz

As of September 29, 2017, those wishing to appeal Ohio Board of Tax Appeals (“BTA”) decisions no longer have a choice between the Ohio Supreme Court and the court of appeals (for the county in which the taxed property is located or the taxpayer resides). Appeals of BTA decisions must now be filed with the appropriate court of appeals.

The reason is a little known modification of Ohio Revised Code Section 5717.04 (“ORC 5717.04”) that was slipped into the State budget bill for 2018-2019 (Ohio House Bill 49).

Those that believe their case is “supreme court worthy”, however, may still be able to get in the door, one of two ways: by transfer application; or by appeal of the court of appeals decision.

Pursuant to newly revised ORC 5417.04, “within thirty days after a notice of appeal is filed with the appropriate court of appeals, a party to the appeal may file a petition with the supreme court to transfer jurisdiction over the appeal to the supreme court. The supreme court may approve the petition and order that the appeal be taken directly to the supreme court if the appeal involves a substantial constitutional question or a question of great general or public interest. Appeals for which jurisdiction is transferred to the supreme court under this paragraph shall proceed as though the decision of the board of tax appeals had been appealed directly to the supreme court. Appeals for which jurisdiction is not transferred to the supreme court shall proceed in the court of appeals.”

If the transfer petition is denied, and the taxpayer is unhappy with the decision of the court of appeals, it may (as was the case before the amendment to the statute) appeal the appellate court’s decision to the Ohio Supreme Court, which can decide to hear the appeal or allow the appellate court’s decision to stand.

Reportedly, the Ohio Supreme Court lobbied for these changes to lighten its docket because the majority of its tax decisions have dealt with mathematic valuations and calculations vs. matters of statewide importance. Opponents of the amended statute claim it will “erode the uniformity of the tax code in the state of Ohio.” (See “Ohio Taxpayers Lose Right to Take Disputes to High Court”, Julie Carr Smyth/The Associated Press, posted 9/29/17, Ohio Times Reporter.com).

For a complete version of newly amended Ohio Revised Code Section 5717.04, click on the aforesaid highlighted link to the statute.

“Game” (Case) Called on Account of Absurdity

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 29 Aug 2017 15:37:00 +0000

By: Stephen D. Richman, Esq.- Senior Counsel- Kohrman, Jackson & Krantz

(A Watch Your Language Series Article)

“If the law supposes that," said Mr. Bumble, "the law is an ass — an idiot.”

Many laymen (and lawyers) believe, as Mr. Bumble in Charles Dickens’s Oliver Twist does, that the law, as a general rule is absurd. Admittedly, there have been many absurd court decisions over the years that reinforce this quotation. More often than not, however, it is one or more of the parties to a lawsuit that are absurd, and the court just affirms their inherent absurdity.

This is particularly true in commercial contract law, predominantly because of the prevailing judicial deference to the written word in commercial documents, without regard to the consequences of such deference.

General Rule Re: Commercial Contract Interpretation

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will typically uphold commercial document provisions unless they are contrary to public policy or statutory law, or the subject of a mutual mistake. Courts traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial real estate transactions, since both parties will usually have attorneys to review their documents. Because courts often defer to the specific language of a commercial document (or lack thereof), unintended results are often the norm for parties who do not seek professional advice, and for professionals who do not closely review their documents. Even the failure to follow a seemingly trivial grammar rule (the use of i.e. vs. e.g.) can result in unintended consequences. In a 1995 Connecticut case, in spite of the tenant’s verbalized intent to the contrary, the court held that the use of “i.e.” [meaning, that is] vs. e.g. [meaning, for example] preceding a short list of repair items in a lease served to limit landlord’s structural responsibility to only those items listed in the lease vs. merely providing examples of the same.

Because of this judicial deference to “commercial language”, and the fact that courts, as a general rule will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

The “Absurd Result Exception”- Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090 (Eighth District Court of Appeals; See also, prior vacated opinion at 2017-Ohio-2983)

What if the contract language is clear, but affirmation of such language would lead to an “absurdly unfair” result?

Fortunately for the appellant in the recent case of Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090 (See also, prior vacated opinion at 2017-Ohio-2983), the Eighth District Court of Appeals, recognizing that sometimes litigants need to be protected from their own absurdity, confirmed that there is an exception to the general rule of judicial deference to clear contract language, applicable when such clear language would yield a truly absurd result.

The facts of the case are as follows:

On April 29, 2011, Defendant-appellant, 5701 Lombardo, L.L.C (“Lombardo”) and plaintiff-appellee, Beverage Holdings, L.L.C. (“Beverage”) entered into an agreement in which Beverage purchased from Lombardo a preschool/daycare business known as the Goddard School. Lombardo was not able to sell the building at the time of the business sale because of outstanding debt it had on the property (and a large prepayment penalty which would have been due upon a premature payoff of the mortgage). As a result, Lombardo and Beverage, through related entities, entered into a lease agreement which provided that Beverage would lease the property at $12,500/mo. and continue to run the Goddard School until Lombardo was able to sell the real property. Beverage also paid the taxes, assessments, insurance, all utilities and all maintenance and repairs.

Approximately four years later, Beverage sent Lombardo a notice of its intent to purchase the real estate for $1,202,110.09, which included adjustments (credits) for principal payments, a prepayment fee, $462,500 in rent credits, and the security deposit. Lombardo refused to sell at that price and notified Beverage that it was revoking the purchase agreement. Beverage then filed a complaint against Lombardo for declaratory judgement, damages and other legal and equitable relief.

Predominantly at issue was Section 3(a)(ii) of the purchase agreement, which provides that “the purchase price shall be decreased by [credited for]: Rents received by Seller from the tenant of the Premises, prorated to date of closing.” While both parties agreed that there was to be a credit for rents received, they disagreed as to the amount. Beverage claimed the credit should be for all rents received from the date of the agreement. Lombardo claimed the credit should only be for a prorated amount of the rent for the month of closing.

The purchase agreement also provided that at closing, Beverage Holdings would “receive a credit equal to the reduction in principal for the mortgage notes from the date of the execution of this agreement until the closing date.”

The trial court ruling:

The trial court found for Beverage, concluding that “Section 3(ii)(a) of the Agreement provides Beverage a credit for all rents paid from the date of the Agreement until closing.”

To justify its ruling, the trial court first quoted decisions establishing the “two-part general law re: contract interpretation”; namely, that (1) “When parties to a contract dispute the meaning of the contract language, courts must first look to the four corners of the document to determine whether or not ambiguity exists;” and (2) “If the contract terms are clear and precise, the contract is not ambiguous, and must be honored.” The trial court then reasoned that the contract was clear, as it called for a credit of “rents received,” and there was no language in the contract limiting the credit to rents received for the month of closing.

“Beverage Holdings I” (Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-2983- Vacated):

The Eighth District Court of Appeals in Beverage Holdings I, initially agreed and affirmed the trial court’s decision.

In so doing, it reiterated the general law of commercial contract interpretation in Ohio, citing several Ohio Supreme Court and Eighth Appellate District decisions.

According to the court in Beverage Holdings I, “Contracts are to be read, giving effect to every part of the agreement;…the intent of the parties is to be determined from the contract as a whole;” and while “extrinsic or parol evidence is admissible to explain an ambiguity or uncertainty arising out of the terms of a written instrument…[w]hen the terms in a contract are unambiguous, courts will not in effect create a new contract by finding an intent not expressed in the clear language employed by the parties.”

Applying the facts to the law, the court in Beverage Holdings I concluded that, “[r]elying on the four corners of the agreement and giving these terms their ordinary meaning, the agreement provides for all rent paid by Beverage to be deducted from the initial purchase price.”

When Lombardo sought to introduce parol evidence to give full effect to the parties’ intent, the court in Beverage Holdings I disallowed such evidence, determining that since “the terms of the agreement are unambiguous, we find the parol evidence rule inapplicable to the instant case.”

Had the story ended there, this article would have deemed the Beverage Holdings I decision to be just another example of a court adhering to the general rule regarding commercial contract interpretation.

“Beverage Holdings II” (Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090):

However, subsequent to the Beverage Holdings I hearing, a motion for reconsideration was filed, and upon re-review, the Eighth Appellate District in Beverage Holdings II (issued August 3, 2017), reversed the trial court’s holding (and its prior decision issued May 25, 2017).

Consequently, Beverage Holdings now stands for confirmation of another exception to the general rule of contract interpretation; the “absurdity exception.”

In its “about face”, the court in Beverage Holdings II first cited prior Ohio Supreme Court decisions to justify its reversal of Beverage Holdings I, and its confirmation of the absurdity exception. Quoting Alexander v. Buckeye Pipe Line Co., 53 Ohio St.2d 241, 374 N.E.2d 146 (1978), the court in Beverage Holdings II stated: “Common words appearing in a written instrument are to be given their plain and ordinary meaning, unless manifest absurdity results or unless some other meaning is intended from the face or overall contents of the instrument.”

The Supreme Court of Ohio found no absurdity in the contract language of Alexander (giving the grantee the right, in an easement agreement “to lay additional lines of pipe alongside of the first line”), but rather it established the so-called absurdity exception in the negative. The Ohio Supreme Court in Alexander sided with the defendant, concluding that it would not be absurd to interpret the language as allowing for limitless pipeline installations because “the term ‘additional’ has a numerical connotation, and the term ‘alongside of’ has a geographical connotation…[and], when the term ‘alongside of’ is read in conjunction with the preceding phrase ’to lay additional lines of pipe,’ it is apparent that the term ‘alongside of’ does not contain a numerical limitation, but simply indicates that the parties intended that additional lines be laid side by side or adjacent to the first line.”

The court in Beverage Holdings II cited further “absurdity precedent” in several insurance policy decisions, most notably Cincinnati Ins. Co. v. Anders, 2003-Ohio-3048 (2003), whereby the Ohio Supreme Court in Cincinnati held that it would be absurd to consider an insured’s failure to disclose prior property damage as an “occurrence” entitling the insured to coverage for its fraudulent, non-disclosure.

Applying the facts to the law, the court in Beverage Holdings II basically echoed the dissenting opinion of Judge Stewart in Beverage Holdings I, who stated: “Given that the parties understood that Lombardo had issues with its financing prior to entering into the real estate purchase agreement, it would be absurd to conclude that Lombardo intended to deduct from the purchase price both principal payments and all rents received during what could be a lengthy lease term (the parties contemplated a lease term of as much as ten years).” According to the court in Beverage Holdings II, interpreting the rent credit provision as requiring all rents between contract and closing vs rents in the month of closing to be credited, could yield the absurd result that “Beverage would not only acquire the property, but would also be owed money at closing [from the Seller, Lombardo]-all the while enjoying the profits from operating the business.”

Based upon the foregoing, the court in Beverage Holdings II reversed the trial court’s decision and remanded the case back to the trial court to determine what the parties truly intended with their purchase agreement.

What Is The Moral Of This Story?

Don’t hang your hat on the “absurdity exception to the rule.” First of all, we have no guidelines as to what is considered “absurd.” Perhaps judges will know absurdity, like obscenity, when they see it, but we do not have the advantage of “judicial hindsight- x ray specs.” The few “absurdity cases” out there do seem to turn more on equitable principles than on “interpretive absurdity.” For example, the court in Alexander wanted to prevent an insured from benefiting from its own fraudulent, non-disclosure and the court in Beverage Holdings II was concerned with the plaintiff-appellant “taking advantage of errors in drafting.” Nevertheless, despite a few hard to prove exceptions, the general rule re: judicial deference to the written word in commercial documents, still… rules. Commercial real estate and other contract decisions are still yielding absurd results, for example, those turning on the use of seemingly trivial grammar rules such as e.g. vs. i.e., and the insertion, or omission of commas. In other words, you must still “watch your language, and say what you mean, precisely, or a judge will tell you what you meant.”

Ohio Court of Appeals (Hamilton County) Upholds Late Fee Provisions in a Residential Lease

noreply@blogger.com (Connie Carr) — Mon, 14 Aug 2017 10:00:00 +0000

Posted by Connie Carr

On July 26, 2017 the Ohio Court of Appeals, 1^st Appellate District (the Court) issued its opinion in Drake Townhouses L.L.C. v. Woodberry, 2017-Ohio-6968, which relates to a landlord-tenant case appealed from the Hamilton County Municipal Court. The plaintiff landlord is Drake Townhouses L.L.C (Landlord) and the defendant tenants were Daniella Woodberry and Kenneth Williams (Tenant).

Tenant leases a residence from Landlord that was on a month to month lease. Either could terminate upon 30 days written notice, but if the notice was provided at any time after the 1^st of the month, then the 30 days’ notice wasn’t effective until the 1^st of the following month. Whenever Landlord wanted to change a term in the lease, it was required to give Tenant 30 days’ notice of the change and Tenant had 10 days to accept the change or elect to terminate the lease and move out of the residence. A failure to give timely notice results in the lease renewing under the new terms.

In 2014, Tenant received notice of a rent increase effective June 1^st with the option to accept or provide 30 days’ notice to terminate with a move-out date. Tenant chose the latter option but failed to mail the notice with May’s rent to the correct address. Landlord did not receive the notice until May 19^th and had already sent out an eviction notice on May 12^th due to nonpayment of rent. Tenant further exacerbated the situation by assuming the rent check was lost in the mail, stopped payment on the check, and mailed out a second check. Landlord belatedly received both checks plus the delinquent termination notice and returned the 2 checks to Tenant. In a verbal discussion with a Landlord representative, Tenant agreed to move out by June 1^st and Landlord agreed to cancel the eviction. Landlord did dismiss the eviction but proceeded with its case for past due rent and late fees.

The magistrate and trial court both found in favor of Landlord on all counts except the amount of late fees. The lease called for $10/day and both parties agreed that the late fees per month were capped at $150. The magistrate found that the monthly late fees were not equitable and reduced to $50 per month (i.e., $10/day for maximum of 5 days). After crediting the security deposit funds held by Landlord, the amount the lower court ordered due by Tenant was $850.

Tenant appealed to the Court arguing 3 assignments of error under R.C. Chapter 5321.

First, Tenant contended that the eviction filing in May was contrary to R.C. 5321.17(B) which requires a minimum 30 days’ notice to terminate or not renew a lease. However, the Court correctly pointed out that Landlord’s notice was not for the termination or non-renewal of the lease but to change a term of the less (i.e., the rent amount) and therefore did not follow the law. Tenant’s decision to not accept the higher rent did not change the Landlord’s notice to one of termination or non-renewal.

Second, Tenant attempted to use her nonpayment breach as a basis for not being subject to the required 30 days’ notice pursuant to R.C. 5321.17(D). As the Court correctly pointed out, that argument goes against the purpose of the code provision. Tenant cannot use her own breach to get out of an obligation.

Third, Tenant contended that late fees in a lease are an unenforceable penalty under contract law and therefore shouldn’t be recoverable by Landlord without proof of actual damages.

The Ohio Supreme Court in Sampson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27, 465

N.E.2d 392 (1984) set out a test to be used to determine whether a contract provision should be considered liquidated damages (i.e., enforceable) or an unenforceable penalty:

“Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that the damages in the amount stated should follow the breach thereof.”

The Court also pointed out that in 2016, the Ohio Supreme Court further clarified that generally “’per diem measures of damages…is more likely to be an enforceable liquidated damages provision than an unenforceable penalty, and in determining the reasonableness of the amount of liquidated damages, a court must look at the per diem amount, and not to the aggregate amount of liquidated damages in application.” (Boone Coleman Constr., Inc. v. Village of Piketon, 145 Ohio St.3d 450, 2016-Ohio-628, 50 N.E.3d 502)

Based on these prior Ohio Supreme Court decisions, the Court found that late fee provisions in a lease are not a per se unenforceable penalty.

However, the Court did agree with the lower court that, based on R.C. 5321.14(A), the amount of late fees should be reduced to $10/day for the 1^st 5 days (i.e., $50/month). Notably, Landlord had not objected to the lower court’s determination on this point. The Court went on to further hold that a late fee for June was inappropriate since the parties agreed in mid-May that Tenant would move out by June 1^st.

Because of the Court’s ruling, the amount Tenant owed Landlord was reduced from $850 to $800. A whole lot of legal fees spent to save that $50. For landlords, this decision is helpful in establishing precedent that reasonable late fees in a lease should be enforceable.

__________________

The Government Does Not Always Win

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 24 Jul 2017 17:24:00 +0000

(Supreme Court of Ohio Sides with Taxpayers in Two Recent Real Estate Taxation Decisions)

By: Stephen D. Richman, Esq.-Senior Counsel, Kohrman, Jackson & Krantz

I had a law school professor that would often proffer the following two theories to rationalize court decisions (especially ones he seemingly did not understand): 1) the justices did not “get any”…. breakfast that morning; and 2) the government always wins.

I cannot profess to know what the justices of the Ohio Supreme Court had or did not have the morning of their recent real estate tax decisions in Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-4415 and W. Carrollton City Schools Bd. of Edn. v. Montgomery Cty. Bd.of Revision, Slip Opinion No. 2017-Ohio-4328, but can disprove my law professor’s cynical theory of governmental favoritism in these cases.

Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision

Background

The subject property in Terraza is a 54,000+SF fitness center (L.A. Fitness) in Franklin County, owned by appellant Terraza 8, L.L.C (“Terraza 8”).

The Franklin County auditor assessed the subject property at $4,850,000 for tax year 2013. Appellee Hilliard City Schools Board of Education (“BOE”) complained to appellee Franklin County Board of Revision (“BOR”) that the property should have been valued at $15.4 Million, based on its sale price in February 2013. Terraza 8 did not defend the complaint, and the BOR increased the valuation to $15.4M for tax years 2013 and 2014. Terraza 8 then appealed both years’ valuations to the BTA.

At the BTA hearing, appellant’s appraiser (Patricia Costello) testified that the sale price did not represent the fee simple market value of the property because the property was encumbered by an above-market lease with rents at $22/SF (when market rents were approximately. $11/SF). The appraiser’s sales comparison valuation of the property, unencumbered by a lease was approximately $7M.

The BOE objected to the BTA evidence presented by Costello, arguing that it was inadmissible because Terraza 8 had not rebutted the recency or arm’s-length nature of the sale. Terraza 8 countered that the evidence was admissible due to a change in Ohio Revised Code Section 5713.03 (R.C. 5713.03), which, it alleged, required the county auditor, the BOR, and the BTA to value the fee-simple estate of the property, unencumbered. The BTA overruled the objection and admitted the evidence, however, it disregarded Costello’s appraisal and determined a value closely approximating the $15.4M purchase price for tax year 2013. The BTA did not reconcile the new statutory language with its conclusion, except to point out that R.C. 5713.03 still permits a property’s recent sale price to be used in determining its value.

Terraza 8 then appealed the BTA’s decision upholding the BOR’s sales price valuation to the Ohio Supreme Court.

The Supreme Court of Ohio in Terraza reversed (and remanded) the BTA decision, basically upholding and applying Ohio’s “real property valuation statute” (R. C. 5713.03), as amended in 2012 as part of Ohio House Bill 487.

R. C. 5713.03

Prior to the 2012 amendments to R.C. 5713.03, Ohio county auditors were essentially obligated to consider the recent sale price of real property to be its true value. You may recall that the plain “mandatory” language of the original statute regarding recent sales prices establishing value was reinforced by the Ohio Supreme Court in Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision (2005), 106 Ohio St.3d. 269. The revised statutory language of R.C. 5713.03 now provides that an auditor "may" (vs. shall) consider the price of a recent sale as value.

The other major change to the statute (via Am. Sub H.B. 487) regards what type of real property interest is to be valued by Ohio county auditors. Prior to Am. Sub H.B. 487, R.C. 5713.03 provided that each county auditor was to simply determine the “true value” of each real estate parcel. Revised R.C. 5713.03 now provides that county auditors are to determine the true value of real property “as if unencumbered". In other words, leases, mortgages and other encumbrances are not to be taken into consideration when establishing market value for real property taxation.

Analysis

Both major changes of the statute (according to the taxpayer and the Supreme Court of Ohio) were dispositive in Terraza.

The Ohio Supreme Court in Terraza first acknowledged that the amendments to R.C. 5713.03 “did not overrule the best-evidence rule of property valuation, which…provides that …the best evidence of the ‘true value in money’ of real property is an actual, recent sale of the property in an arm’s-length transaction.” The court recognized that the “General Assembly still favors the use of recent arm’s-length sale prices in determining value for taxation purposes.” However, the court in Terraza explained that a recent arm’s-length sale now (after the enactment of the amendments to R.C. 5713.03) creates a rebuttable presumption that the sale price reflects true value, and auditors are no longer required to accept such recent arm’s length sales prices as true value, if such presumption is rebutted.

Applying the law to the facts, the Supreme Court of Ohio in Terraza determined that Terraza 8 did indeed present evidence (Costello’s appraisal and testimony) in an attempt to show that its arm’s-length purchase price did not reflect the value of the unencumbered fee-simple estate, however, the court determined the BTA’s decision to be unreasonable and unlawful because the BTA did not even consider that evidence. In effect, the BTA viewed the sale-price evidence as irrebuttable. The appellees also argued about the effective date of newly amended R.C. 5713.03, however, the court resolved that argument in favor of the taxpayer.

As a result of the foregoing, the court in Terraza vacated the BTA’s decision and remanded this case for the BTA to address and weigh the evidence previously offered to rebut the presumption that the sale price reflected true value.

Moral of the Story.

As predicted in our earlier blog article on the 2012 amendments to R.C. 5713.03, it seems much more likely that compelling appraiser testimony can now trump the recent sales price as a property’s true value, and even result in lower values for commercial properties that have above market rents but are otherwise comparable to surrounding properties. In other words, in “Johnny Cochran speak”, if your valuation is too high, you should now try (to get same lowered). The flip-side of the amendments, however, is that those with below-market rents in affluent neighborhoods may see their values increased, and no longer have a winning sales price argument to combat the increased valuation.

W. Carrollton City Schools Bd. of Edn. v. Montgomery Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-4328

Background

In W. Carrollton, the taxpayer (vs. the government) also won; however, its victory was based upon the interpretation and application of R.C. 5713.03, prior to its 2012 amendments.

The subject property in W. Carrollton comprises two adjacent parcels of vacant land (as of the tax lien date), totaling approximately 15 acres—which were purchased by CarMax for $5,850,000 in 2008.

Sometime after the sale, the W. Carrollton City Schools Bd. of Edn. (“BOE”) filed a complaint seeking an increase in the value (for tax year 2008) of the subject property from its then $578,100 valuation to the $5.8M sales price. The Montgomery Cty. Bd. of Revision (“BOR”) ordered an increase but not to the full amount of the sale price. The BOE then appealed to the Board of Tax Appeals (“BTA”), and the BTA reversed the BOR’s decision based on the fact that the 2008 sale was a recent arm’s-length transaction.

Between 2008 and 2009, CarMax constructed an approximate 45,000 SF used-car sales facility on the property, spending a total of about $7M.

In 2011 (a triennial update year in Montgomery County), the auditor set the value of the subject property at $4.7M, approximately $1.1M less than the property’s 2008 sales price. Thereafter, the BOE filed a complaint seeking an increase to the 2008 sale price of $5,850,000. The BOR retained the auditor’s valuation of $4.7M for the 2011 tax year, and the BOE appealed to the BTA. The BTA rejected using the sale price to value the land because the sale occurred more than 24 months before the January 1, 2011 update valuation, and thus was not a “recent”, arm’s length sale according to the BTA. Specifically, to justify its ruling, the BTA cited the proposition set forth in Akron City School Dist. Bd. of Edn. v. Summit Cty. Bd. of Revision, 2014-Ohio-1588, namely that “a sale that occurred more than 24 months before the lien date and that is reflected in the property record maintained by the county auditor or fiscal officer should not be presumed to be recent when a different value has been determined for that lien date as part of the six-year reappraisal.” Finding an absence of competent and probative evidence of value, the BTA retained the auditor’s original value of $4.7M.

The BOE then appealed the BTA’s decision to the Ohio Supreme Court.

Analysis

The Ohio Supreme Court in W. Carrollton did not need the benefit of the amendments to R.C. 5713.03 as in the Terrazo case (actually, those amendments would not have been applicable as their effective date was after the tax years at issue) in order to affirm the BTA’s decision in favor of the taxpayer. This is because R.C. 5713.03 (in 2008, 2011 and currently) has its own, “built-in” exceptions to the general rule in favor of using a recent, arm’s-length sale price to determine value.

The first, so-called “built-in exception” relevant to this case and recognized by the Ohio Supreme Court in W. Carrollton (and cases cited therein) is the exception providing that a sale price “shall not be considered the true value of the property sold if subsequent to the sale * * * [a]n improvement is added to the property.” R.C. 5713.03(B). Applying this law to the facts, the court in W. Carrollton easily determined that the “improvement exception” applied since between CarMax’s 2008 acquisition of the property and the January 1, 2011 lien date, CarMax spent more than $7 million constructing their used-car facility on the property. Accordingly, the court held that, “Under the statute’s [R.C. 5713.03(B)] plain terms, the 2008 land sale price shall not be considered the property’s value as of 2011.”

For those wondering why improvement costs should not automatically increase a property’s valuation, the court in W. Carrollton explained that, “A buyer might not look to his seller’s actual costs because the seller may have overspent, and the buyer could therefore conclude that a property of equal utility would cost less.” Quoting earlier precedent, the court added that “the prospective purchaser will not rationally pay $15,000 for a house … if, without serious delay, he can build or buy equally satisfactory substitutes for $10,000.”

The second “built-in exception” to R.C. 5713.03 (relevant to and recognized by the BTA and the Ohio Supreme Court in W. Carrollton) is “recency of the sale”. R.C. 5713.03 provides that “the best evidence of the true value in money of real property is an actual, recent [emphasis added] sale of the property in an arm’s-length transaction.” The court in W. Carrollton, citing precedent (prior court decisions on point) explained that “the recency rule of R.C. 5713.03 encompasses all factors that would, by changing with the passage of time, affect the value of the property,” including the improvement exception, which is itself a factor that relates to the recency of the sale.

As an aside, you may be wondering, what is considered “recent”? One year, two years, three years? According to the Supreme Court of Ohio, “[P]roximity is not the sole factor affecting recency.” Worthington City Schs. Bd. of Educ. v. Franklin County Bd. of Revision, 2009-Ohio-5932. “[G]eneral developments in the marketplace are [also] relevant.” Cummins Property Servs. LLC v. Franklin Cty. Bd. of Revision, 2008-Ohio-1473.

Recent decisions of the Ohio Supreme Court cited in the Cummins and Akron City Schools cases cited herein include the following examples of “recent sales”: 1) “13-month gap between sale and tax lien date was prima facie evidence of the recency of the sale”; 2) “Board of Revision correctly adopted purchase price of sale that occurred 22 months after tax lien date as the property’s true value”; and 3) “Because the sale occurred within a year after the tax-lien date, and because [the property owner] offered no evidence of a change in market conditions between the lien date and the filing of the conveyance-fee statement, the sale was ‘recent’ for purposes of R.C. 5713.03.”

According to the court in W. Carrolton, however, it did not have to stretch its analysis to negate recency because the improvement exception of R.C. 5713.03 directly applied. The court explained that, “Because the improvement exception more specifically bars direct use of the sale price to value the property, we need not determine whether the holding of Akron applies here.”

Based upon the foregoing, the court in W. Carrollton rejected the BOE’s contentions on appeal and affirmed the decision of the BTA. In the words of the court: “The 2008 sale price of $5,850,000 for the land does not ‘affirmatively negate’ the auditor’s 2011 valuation of the land and improvements in the aggregate at $4,716,690. For one thing, the land-sale price is not recent, for the reasons discussed already. Second, the actual construction costs that CarMax incurred do not negate the auditor’s valuation. Although CarMax stipulated to having incurred over $7 million in construction costs for its facility, those historical costs do not necessarily establish what the property would have sold for in 2011.”

What is the moral of this story? While the sales price of real property is still the best evidence of the value of real property, it is no longer the only evidence auditors and boards of revision are bound to accept to prove valuation. R.C. 5713.03 contains long-standing “built-in” exceptions, as well as relatively recent amendments which hindsight may prove to have let “John and Jane Q. Citizen “ win a few against the government and require my favorite law professor to revise his theorems.

Ohio Supreme Court: Charitable-Use Exemption from Real Estate Taxes Based on Nondiscrimination, Not Quantum of Charitable Care

noreply@blogger.com (Connie Carr) — Mon, 10 Jul 2017 11:00:00 +0000

On June 15, 2017, the Ohio Supreme Court issued its decision in Dialysis Ctrs. of Dayton, L.L.C. v. Testa,Slip Opinion No. 2017-Ohio-4269, which provided clarity on the basis for granting or denying a charitable-use exemption from real property taxes.

The Dialysis Centers of Dayton, L.L.C. (“DCD”) owned and operated 4 dialysis centers in the Dayton area. For most of 2006, DCD was jointly owned by Miami Valley Hospital, a nonprofit entity, and several physicians. By 2007, the physicians were no longer members of DCD, and it became wholly owned by the hospital. A single member LLC is a disregarded entity for tax purposes and its transactions would appear on the tax returns of the sole member. In some of the centers, DCD rented a percentage of space to physicians to use as offices.

In order for a patient to be treated at one of DCD’s facilities the patient went through an intake process, where an employee of DCD would evaluate the patient’s options for paying for the treatment, with potential sources being Medicare, Medicaid and private insurance coverage. If a patient had no coverage and was indigent, the DCD employee would help the patient investigate whether he or she qualified for Medicare or Medicaid. If the patient was responsible for payment of a portion of the dialysis costs and couldn’t afford to pay that portion, the DCD employee worked with the patient to determine if he or she qualified for charitable care. Although all of the foregoing options for coverage and payment were pursued, the centers treated all patients, regardless of whether he or she could afford the treatment costs.

When the hospital took over 100% of the ownership of DCD, it adopted an operating agreement that provided that DCD’s charitable purpose included “provide services to indigent patients regardless of their ability to pay.”

When a review of DCD’s tax exemption request was conducted by the county tax department, it asked DCD to quantify what portion of its services were ‘uncompensated care’, which excluded write-off’s for bad debts. DCD quantified such treatment at 28%.

The tax commissioner subsequently denied DCD’s exemption application based upon that low percentage of ‘uncompensated care’ and in 3 of the 4 cases, also in part due to the fact that some space was leased to independent contractor physicians.

DCD appealed to the Board of Tax Appeals (“BTA”) who upheld the tax commissioner’s determination based on insufficient evidence of charitable care at the locations (i.e., quantity). DCD then appealed to the Ohio Supreme Court (the “Court”).

The Court’s review was based on whether the BTA’s review was “reasonable and lawful.” While the BTA is responsible for determining factual issues, the Court “will not hesitate to reverse a BTA decision that is based on an incorrect legal conclusion.” (quoting, Gahanna-Jefferson Local School Dist. Bd. of Edn. v Zaino, 93 Ohio St.3d 231, 232, 754 N.E.2d 789 (2001))

The Court determined the following:

· Because the physicians were part owners in DCD in 2006, DCD was not eligible for a charitable-use exemption in 2006.

· In 2007, DCD was entitled to its exemption for that portion of the space at each center that is devoted to dialysis services; i.e., the space leased to the private physicians would not be exempted from real property tax.

· The matter was remanded to the tax commissioner to conduct further proceeding to allocate between the portion leased to the physicians and the portion used for dialysis services and calculate the exemption accordingly.

The Court’s based its determination to grant the exemption on the fact that nondiscrimination, rather than quantum of charitable care, is the criterion for exemption. Proof of unreimbursed care was unnecessary. The Court stated “For purposes of Ohio’s charitable-use property-tax exemption, the provision of medical or ancillary healthcare services qualifies as charitable if those services are provided on a nonprofit basis to those in need, without regard to race, creed or ability to pay.” It further noted that in the era of insurance and governmental health care benefits, care may be paid for by third party payors without destroying charitable status.

The Court went on to state that “A crucial factor in the charitable status of property use is whether a facility is open to serve the general public—or to that part of the general public that has a special need—in order to cater to the needs of that whole segment of the public.”

For the foregoing reasons, the Court found that the excessive focus by the tax commissioner and the BTA on the quantity of charitable care was reversible error, and for tax year 2007 the facilities at issue should have been exempted from real estate taxes except for the portion leased to private physicians.
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