Monday, September 15, 2014

CLE Update: Upcoming real estate seminars in Ohio

With the real estate market heating up, continuing education seminars on real estate topics are increasing. Below are links to Sterling Education, NBI and the OSBA for their seminars, webinars, teleconferences, etc. that are being offered between now and year end.


Sterling Educational Services – Sterling Education as 2 seminars scheduled.

*Tenant-Landlord Law in Cleveland on September 26, 2014
*Landlord-Tenant Law: Leases, Evictions, Litigation and Settlements in Dayton on October 2, 2014

National Business Institute – NBI has 43 seminars, webinars and teleconferenced scheduled through December 31st that cover real estate law and land use.  Here is the link to their list of real estate related seminar topics, dates and locations.

Ohio State Bar Association – The OSBA’s online calendar for CLE wasn’t working when I was drafting this article. Here is the link to their page to access both a listing of live seminars and self-study CLE (includes online CLE and webcasts). Hopefully it will be functioning properly by the time this publishes.

Monday, September 8, 2014

Pay your Taxes before your Lender Redeems your Property

A mortgage holder has the right to redeem (take back) real property that is the subject of a real estate tax foreclosure when the owner does not pay taxes on the land, according to the recent decision of the Ohio Supreme Court in In re Foreclosure of Liens for Delinquent Land Taxes v. Parcels of Land Encumbered with Delinquent Tax Liens, Slip Opinion No. 2014-Ohio-3656).

The facts of this case are relatively straight forward. In June, 2003, Brandi and Troy Wagner executed a promissory note and mortgage in favor of Vanderbilt Mortgage and Finance to finance their purchase of a mobile home and land in Coshocton County. The Wagners failed to pay taxes on their property, so the county treasurer initiated a tax foreclosure proceeding for delinquent taxes (in the amount of $825.84). Because the Wagners did not respond to the foreclosure complaint, the trial court granted the treasurer’s motion for default judgment and ordered the sheriff to sell the property.

Although not explained in the record, the sheriff held two sales of the property; one at which Vanderbilt purchased the mobile home. At the other sale, James Matchett purchased the property with a winning bid of $15,100 and then deeded the property to Alan and Janette Donaker. Before either sale of the land was confirmed, however, Vanderbilt filed a notice to redeem the property and a motion to vacate the prior sales and foreclosure.

The trial court granted Vanderbilt’s motion, thereby vacating and setting aside the sale and entry of foreclosure. The trial court determined that Vanderbilt (a mortgage holder with a recorded interest in the property) was a “person entitled to redeem” under Ohio Revised Code Section (“R.C.”) 5721.25.

The Donakers and the Coshocton County Treasurer then appealed the trial court’s decision to the Fifth District Court of Appeals. The court of appeals held that Vanderbilt was not entitled to redeem the property, and reversed the judgment of the trial court.

Vanderbilt then appealed to the Ohio Supreme Court which characterized the issue
before the court as whether or not Vanderbilt, as a mortgage holder, qualifies as “any person entitled to redeem the land” under R.C. 5721.25.

Pursuant to the second paragraph of R.C. 5721.25: “any person entitled to redeem the land (emphasis added) may do so by tendering to the county treasurer an amount sufficient, as determined by the court, to pay the taxes, assessments, penalties, interest, and charges then due and unpaid, and the costs incurred in any proceeding instituted against such land under Chapter 323 or this chapter of the Revised Code, and by demonstrating that the property is in compliance with all applicable zoning regulations, land use restrictions, and building, health, and safety codes.”

Appellee Alan Donaker contended that the only reasonable interpretation of the statute is one that precluded anyone but the property owner from being a “person entitled to redeem” under R.C. 5721.25 and that broadly interpreting the phrase “any person” would thwart the intent of sheriff’s sales by allowing mortgage holders to sit and do nothing until after the sheriff’s sale.

Vanderbilt contended that when read in conjunction with R.C. 5721.181, which provides the form of notice required for tax foreclosure proceedings—the phrase “any person entitled to redeem the land” under R.C. 5721.25 includes “any owner, or lienholder of, or other person with an interest in the property” because those exact words are utilized in R.C. 5721.181.

The Supreme Court of Ohio agreed with Vanderbilt, reasoning that when statutes are clear and unambiguous, they must apply the statutes as written. The court cited previous cases holding that: (1) the court must “give effect to the words used, refraining from inserting or deleting words,” and (2) that the meaning of “any” [in a statute] is “every” or “all.”

The court also backed up its decision by contrasting R.C. Chapter 2329 (which governs judicial foreclosure proceedings such as mortgage foreclosure) with the language governing tax foreclosures in R.C. 5721.25. In R.C. 2329.33, the Ohio General Assembly specifically limited the right of redemption to “the debtor.” But in R.C. 5721.25, the legislature instead utilized broader language by granting the right of redemption in a tax foreclosure proceeding to “any person entitled to redeem.”

Acknowledging that their decision might be interpreted as unfair to property owners,
the court justified its holding by concluding that “any perceived inequity caused by our holding to purchasers or property owners like the Wagners must be balanced against the rights of others with competing interests, including those of a mortgagee, or lienholder, to protect its interest in the property where a mortgagor, or property owner, has fallen
delinquent in tax payments.”

What’s the moral of this story? Pay your taxes…at least before your county files a foreclosure action and your lender redeems your property.

Tuesday, September 2, 2014

Understanding Risks Unique to Personal Loan Guarantees

Personal guarantees are commonplace in loans of all types and sizes. However, there are issues that are unique to personal guarantees provided by individuals that need to be taken into consideration when negotiating a loan.


The death of an individual guarantor typically triggers an event of default on the loan he or she guaranteed. While a lender might agree to a period of time for the borrower under the loan to provide a suitable substitute guarantor, the grace period will be limited (usually 60-90 days) because if no such substitute guarantor is found, the lender must place the loan into default in order to file a claim against the decedent guarantor’s estate. The claim must be filed within 6 months of the guarantor’s death.


To avoid probate (and creditors), a guarantor may transfer his or her assets into a trust.  Even if the intent is solely to avoid probate, it also puts the assets beyond the reach of lenders to whom personal guarantees have been provided, as well as other creditors, including any co-guarantors. A balanced approach needs to be negotiated into the guaranty that protects the lender’s interests while accommodating the guarantor’s desire to put his or her estate in order


Too often a guarantor that is also a significant equity owner of the borrower, without giving any thought to whether his or her guaranty agreement permits it, transfers small percentages of equity to a child or grandchild or takes other actions to put his or her estate. The lender would then be entitled to call the loan in default.  When negotiating a personal guarantee, a guarantor needs to negotiate carve-outs in the guaranty agreement to allow for some ability to make minimal transfers of equity that do not affect control of the borrower.


Co-guarantors have special concerns as lenders are not obligated to pursue all guarantors equally. Plus, if one guarantor dies, the loan may go into default, causing a problem for all of the guarantors. If the decedent guarantor transferred his or her assets out of everyone’s reach into a trust, the co-guarantor may be out of luck in exercising any common law right to obtain contribution. When there are 2 or more guarantors (or even when there is one guarantor but more than one significant equity owner in the borrower, including the guarantor), then a cross-indemnity or contribution agreement should be considered. Any such agreement should include limitations on the transfer of assets that are not at FMV or to a spouse or into a trust. Each party’s estate should also be bound by the terms of this agreement. Other limitations or special disclosure provisions should be considered to help ensure assets are not transferred out of reach of a co-guarantor seeking contribution.  Finally, if one guarantor is more involved in the operation of the borrower’s business than another guarantor, the non-involved guarantor will want to limit any contribution obligations for defaults directly caused by the action or inaction of the involved guarantor.


The issues surrounding individual guarantees require special attention but are not insurmountable. With careful drafting of the covenants and other provisions, the interests of both guarantor and lender, plus any co-guarantor, can be balanced to reasonably protect everyone’s concerns.

Monday, August 25, 2014

Is it a Covenant, a Condition or a Covenant and a Condition?-Why you need to Care.

Real estate purchase and sale agreements typically contain covenants and conditions.  They both start with “c” and are typically found in real estate agreements, but that is where the similarities end. A covenant is an agreement or promise to do or refrain from doing something.  A condition is a future, uncertain event, the occurrence or non-occurrence of which will determine whether or not contractual obligations (i.e. to buy or sell) must be performed.  You need to care because there is a vital difference between the legal effect of a condition that does not occur vs. a promise that is not performed.  The breach of the promise renders the non-performer liable for damages (or, where proper, specific performance).  On the other hand, the non-occurrence of a condition does not give rise to a cause of action for damages, but typically excuses performance obligations.
a.                  Covenants.  Typical covenants found in a purchase and sales agreement are:  (i) buyer’s promise to pay; (ii) seller’s promise to convey marketable title, deliver the deed and procure title insurance for the buyer; (iii) seller’s obligation to repair defects/remediate environmental problems; and (iv) seller’s promise to convey fixtures and certain items of personalty along with the realty.  Buyers in commercial transactions often require additional covenants to be made by the seller, with regard to operating the property between the signing of the agreement and the closing.  Such customary, commercial covenants include:  (i) a promise to manage and operate the property in the ordinary and usual manner, (ii) keeping in effect all service contracts; (iii) the promise to allow buyer access to the property for diligence; and (iv) the promise not to grant/permit to exist any lien, lease, easement or other action adversely affecting title.
b.                  Conditions.
(i)                 In General.  The fact that a contract is intended to be conditional is generally indicated clearly by use of the words “subject to,” “contingent upon” or “if.”  See generally Scafidi v. Puckett, 578 P. 2d 1018 (1978) (“subject to” indicates a condition to one’s duty to perform and not a promise by the other).  Absent such language, the intention may be doubtful.  See, e.g., Soloman v. Western Hills, 276 N.W. 2d 577 (1979) (closing of sale “when plat is recorded,” held to fix time for purchaser’s performance versus condition the sale).  In addition to the above conditional language, contingencies should also provide:  1) a specific date or time period (for the occurrence/non-occurrence of the event); 2) a statement that the contingency is automatically waived or requires notice, after expiration of the time period; 3) a statement that performance is excused (and the agreement void and of no effect) if the condition occurs/does not occur; 4) statement re:  return of earnest monies (if so negotiated); and 5) a good faith obligation to cause the conditional event to occur. 
(ii)               Typical Contingencies (residential).    
·         Satisfaction with Inspections
·         Financing.  Since buyers rarely can afford to purchase a house without borrowing funds from a lending institution, they need to protect themselves with the right to “call the deal off” if they do not receive a commitment from the bank to loan them the required funds.  A financing contingency clause can provide that right.  Sellers that wish to minimize the risk of buyers “taking easy ways out of the contract,” or having unreasonable expectations of qualifying for a loan, should insist upon limits in the financing contingency such as specifying the percentage of the purchase price to be financed and the maximum interest rate sought by buyer. 
·         Sale of Residence.  Many buyers of a new home will not be able to qualify for a loan, if they still own (and owe money on) their existing house.  Making their purchase obligations conditional on the sale of their existing house can solve the problem.  Sellers are often reluctant to grant this contingency, however, for fear of foregoing a better deal without contingencies.  In such event, the parties may want to consider a seller’s “right to market the property” clause, with a “Put” to buyer to either advance the Closing Date, or allow Seller to make a deal with an alternate buyer. 
·         Title.  Most title provisions contain seller’s covenant to convey marketable title to the property.  Title provisions that permit buyer to terminate the contract if the marketable title promised is not delivered are considered to contain conditions as well as covenants. 
(iii)              Typical Contingencies (Commercial).  In addition to financing, inspection and title contingencies, typical contingencies in a commercial real estate contract generally include: 1) formal approval of the purchase/sale by a board of directors or other governing body; 2) confirmation of zoning conformance or receipt of a zoning variance; 3) receipt of tax abatement; 4) all representation and warranties made by seller/buyer being true and correct as of the date of  signing of the agreement and the closing date; 5) the buyer completing due diligence and having approved of the results of same; 6) the title company issuing the title policy subject only to permitted exceptions; and 7) review and approval of any leases in effect. 

The moral of this story? Know the difference between conditions and covenants. Use “words of condition” when creating a condition. Proper drafting can mean the difference between having a remedy for the other party’s walking away from your contract and having a sad story to tell without any recourse.

Monday, August 18, 2014

Defective Construction Claims: Are They Covered Under the CGL Policy or Not?

One area that is often argued are claims for defective construction under builders' commercial general liability insurance policies. This is an issue that equally affects a builder, a damaged party and the insurer, and how that issue is decided may depend on which state's law will control.

The issue involves whether defective construction constitutes an 'occurrence' under a CGL policy and if so, under what circumstances.

The Ohio Supreme Court addressed the issue in 2012 in Westfield Ins. Co. v. Custom Agri Systems, Inc. (2012 Ohio 4712) and held that faulty workmanship in and of itself is not enough to be considered an 'occurrence' under a CGL policy.  However, damage to property caused by the defective workmanship may be covered.

Ohio's approach is fairly strict compared to recent decisions in other states on this issue. A policyholder in Connecticut, Georgia, North Dakota or West Virginia might have better odds of making a successful claim given the more expansive interpretations that have come out of those state courts.

However, before policyholders start doing their happy all of these states, Ohio included, the rulings typically just addressed what constitutes an 'occurrence' under a CGL. Other exclusions or policy language may still preclude a claim.

Monday, August 11, 2014

Pay Your Lawyer Now, or Pay Your Lawyer (a lot more) Later (to review a residential real estate contract)

Have you heard this one? A man/woman walks into a lawyer’s office (of, course, after he/she signs a contract and closes on a deal) and asks, “Can you help me?”

We hear it a lot, and unfortunately, the “punchline” is often not funny at all. All the old adages hold true- “an ounce of prevention is worth a pound of cure”, “you can pay me now, or pay me (a lot more) later”…In other words, the best time to evaluate your legal rights, responsibilities and potential liability is before you sign on the dotted line. And, by no means let the person on the other side of your transaction (or their broker/agent) convince you a lawyer is not necessary. Odds are they will be little help to you if/when something goes wrong in the deal later on.

The following presents a real life example that happens all too often in the residential real estate arena.

A buyer of a parcel of real estate (improved with a house and other improvements thereon) is presented with a broker form contract from the seller’s agent. The buyer asks, “Do I need a lawyer?” The answer given is, “No, they’ll just add time (theirs) and money (yours) to the equation. Anyway, the contract forms were drafted by lawyers. It is your choice, of course, but if you take all that extra time, you’ll probably lose the deal. There are a lot of interested buyers”.

So, buyer signs, without having a lawyer look over the contract. During the two months prior to Closing, things seem to go well; the inspections don’t reveal any problems and buyer’s financing goes through…Then, on the day of closing there is a stack of forms to sign; “all routine” according to the broker and the banker. Finally, about two weeks after closing, the buyer gets a package of documents from the title company including the deed and title insurance policy. The buyer then puts the documents in his safe, thinking he is.

The trouble begins about six (6) months later.  The neighbor writes the buyer a letter (with a copy of a survey) showing that some of buyer’s landscaping, retaining wall and driveway gate encroach upon the neighbor’s property, and demanding that buyer remove those items or the neighbor will sue. The buyer thinks the neighbor is crazy, but asks us to review everything. The buyer says this should be “a no brainer” because he has a survey, title insurance… everything he was advised to get when he bought the property.

Suffice to say, thing are not always what they seem. The buyer did get a survey, but not because the broker form called for a survey. Most broker forms do not contain survey provisions. Since the buyer got a loan, the bank ordered a “Mortgage Location Survey”.

The Mortgage Location Survey, however, did not show the landscaping, retaining wall (barely visible within the landscaping) or driveway gate. Mortgage Location Surveys in Ohio (and elsewhere) typically just show that the building(s) and/or other permanent improvements of the property are actually located on the land covered by the legal description in the mortgage.

Pursuant to Ohio law (Ohio Administrative Code Section 4733-38), there are minimum standards for a Mortgage Location Survey, but most of the same just require the surveyor to show: the boundary lines as cited in the legal description; major improvements (permanent structures; e.g., residence, garages, outbuildings with foundation); any visible utilities; apparent encroachments and the address posted on the building(s). Our buyer’s landscaping, wall and gate were not deemed permanent structures and were not apparent to the buyer’s surveyor.

Had the buyer procured an ALTA/ASCM Land Title Survey, odds are the surveyor would have noted the encroachments. The ALTA/ASCM Survey is the “Cadillac” of surveys. The Mortgage Location Survey is more like the “Mini Cooper”. An ALTA/ACSM Land Title Survey must adhere to a set of national standards put forth by the American Congress on Surveying and Mapping and adopted by the American Land Title Association. The ALTA/ACSM standards require much more detail than the typical border survey or Mortgage Location Survey including:

•           Easements benefitting or encumbering a property.
•           Encroachments across the boundary or easement.
•           Whether or not there is access to a public road.
•           Zoning setbacks.
•           Flood zones that may impact the property.
•           Evidence of any use by other parties.
•           Water boundaries within the property.
•           The names of the owners of the adjoining property.

The ALTA/ASCM survey is also held to very strict standards of accuracy. The allowable error in linear feet for urban property is approximately 1 foot in just less than 3 miles. In other words, for every 15,000 feet the survey can only be off by as much as 1 foot.

An equally important reason our buyer should have gone with an ALTA/ASCM survey is that the title insurance company would have (if asked) deleted its standard exception for survey matters. Many buyers don’t concern themselves with the “provisos” of title insurance, and believe that if they are getting a title insurance policy before closing, they are protected. They will be protected, but not from survey encroachments and other matters unless they request such protection, and have an ALTA/ASCM performed. Sometimes, in smaller residential deals the title company will even waive its survey exception with a Mortgage Location Survey. All you have to do is ask. With the survey exception deleted, all our buyer would need to do is send the neighbor’s letter to the title company. The title company’s lawyers would then work out a deal with the neighbor, and our buyer wouldn’t need to spend a dime.

Most broker form contracts, by the way do contain provisions for title insurance (to be provided at closing), but few include the right to receive a title commitment, prior to closing. To ensure that buyers get “good, marketable title” to property, as well as enough time to make that determination, buyers should insist upon (in the purchase agreement) a “title commitment” being delivered within a short time after signing the contract. The “title commitment” is a contract by the insurance company to enter into an insurance contract with the buyer, whereby the title insurance company will guarantee good title, subject to exceptions it finds upon a title search of the property (e.g., easements and liens having been filed against the property).

If buyers have an early chance to review these items (via a title commitment), they can evaluate whether or not same will adversely affect the property they are purchasing, and exercise a right to terminate the contract if there are items that will adversely affect the buyer’s use or value of the property.

While a title commitment (and corresponding right to terminate if the commitment shows liens, defects…) would not have helped the buyer on our facts, it will prevent many buyers from being unpleasantly surprised after they close with easements and other recorded rights against their property.

So, to recap, the buyer in our fact pattern has a survey, but is shows no encroachments. Our buyer has title insurance, but no coverage for survey matters.  Our buyer is essentially out of luck. While there may be an action against the surveyor, proving “apparent encroachments” of “permanent improvements” could end up costing more in legal fees than removing the encroachments. Can the buyer at least sue the seller? Sure, but in our fact pattern, the seller would probably prevail as it had a very common clause put in its deed (i.e., “subject to facts an accurate survey would disclose”).

What’s the moral of the story for buyers of real estate (residential and commercial)?
Have a real estate lawyer draft or review your contract, BEFORE you sign it, to ensure that you have: (1) the right to receive/procure a title commitment and survey, (2) the right to have the title insurance standard exceptions removed, (3) the right to review and object to adverse title/survey matters, (4) deed language that won’t effectively prevent an action against the seller; and (5) the right to terminate the contract if the seller won’t cure survey or title matters that adversely affect the use or value of the property you are buying.

Also, if your title company will not remove the survey exception without an ALTA/ASCM survey, make sure you procure the same. Further, for an additional premium, residential buyers can get even more protection with the ALTA Homeowner’s Policy. The ALTA Homeowner’s Policy (vs. the “Owner’s Policy”) provides coverage against losses from zoning violations, subdivision law violations, improvements that encroach into an easement, building permit violations, violations of covenants, conditions and restrictions, lack of vehicular and pedestrian access, supplemental assessments arising as a result of construction or transfer prior to the policy date and damage to the home caused by someone with easement rights.

A few extra “ounces of prevention” will always be worth the “pounds of cure”.

Default of Mortgage Loans Due to Death of a Borrower or Guarantor

While most people prefer not to think about it, the death of a borrower or guarantor on a mortgage loan has been known to occur and there can be significant consequences to the loan.


It is not uncommon, when an individual guarantees repayment of a loan, that the loan documents include a provision that the death of the guarantor results in a default of the loan. On commercial loans, lenders consider the involvement of a key owner/principal of a business borrower critical to the borrower’s ongoing ability to repay the loan. If that key owner/principal dies, the ability of the business borrower to continue operating at the same level and repay the loan is in doubt.  However, it is entirely possible that a suitable substitute guarantor is available; particularly if there are other principals in the business or relatives of the guarantors willing to step up and assume the guaranty.  If the guaranty doesn’t allow time for a suitable guarantor to be provided before the loan is defaulted, then that right needs to be negotiated into the loan documents. Most lenders will consider the inclusion of this provision and 90-120 days is the typical time frame negotiated for providing the new guarantor.


On the borrower side, it gets trickier.  If the borrower is an individual and that individual dies, the lender has a legitimate concern that the loan will not be repaid and may file an action to accelerate the balance due on the note and foreclose on the mortgage. Where it gets trickier is when the note includes both a husband and wife as co-borrowers or the note provides one borrower but the borrower’s spouse also signs the mortgage.  


Under Ohio law, it is not enough to establish that the note and mortgage were valid executed, the mortgage was properly recorded, the default occurred and the amount that is due to lender.  After determining that a default has occurred, the court must also address the equities of the situation to determinate if foreclosure is appropriate under the circumstances.


If the loan documents do not clearly define a payment default to include the death of a borrower, then the lender is pushing its luck to proceed with a foreclosure on that basis alone; particularly if timely payments are being made by the surviving spouse and that surviving spouse also signed the mortgage and is defined as a co-borrower under the mortgage. Just ask Third Federal Savings and Loan who lost its summary judgment and foreclosure order on appeal due to the default language in the note not clearly reflecting its default position and the trial court further failing to consider the equities of the situation. (see Third Fed. Sav. & Loan Assoc. of Cleveland v. Schlegel, 2013 Ohio 1978 (9th Dist. Ct. of App., Summit County)).


Words mean things, and each side needs to review the language in the loan documentation to ensure it correctly reflects the intent of the parties and what will and will not trigger a default and the right of a lender to proceed with foreclosure of the property.