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

Posted by Connie Carr

On July 26, 2017 the Ohio Court of Appeals, 1st 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 1st of the month, then the 30 days’ notice wasn’t effective until the 1st 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 1st 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 19th and had already sent out an eviction notice on May 12th 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 1st 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 1st 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 1st.   

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.
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The Government Does Not Always Win

(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. 5713.03did 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

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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Ohio Supreme Court Declines to Terminate Gas and Oil Lease Based on Its Plain Language

By: Connie Carr

A recent decision by the Ohio Supreme Court (the “Court”) highlights once again the importance of clearly stating in your contract what you mean or a court will decide for you.

Bohlen v. Anadarko E&P Onshore L.L.C., Slip Opinion No. 2017-Ohio-4025, involves Ronald and Barbara Bohlen, owners of approximately 500 acres in Washington County, Ohio, who entered into a gas and oil lease (the “Lease”) as lessors with Alliance Petroleum Corporation (Alliance) as the lessee. (Alliance later assigned a portion of the Lease to Anadarko.)

The lease provided for a one year term and would continue after the initial one year term for so long as gas or oil or their constituents are produced or are capable of being produced on the Bohlen’s property in paying quantities, in the sole judgment of the lessees, or are the lessee is conducting operations to search for oil or gas. The Lease also provided that Alliance must pay the Bohlen’s a “delay rental” of $5,500 per year “for the privilege of deferring the commencement of a well”, otherwise the Lease became null and void and the parties’ rights under it would terminate. The Lease stated that a well is commenced “when drilling operations have commenced on the leased premises.”

The parties also entered into an addendum to the Lease (the “Addendum”) that provided for a minimum annual royalty payment. If the royalty payments made by Alliance to the Bohlen’s was less than $5,500 in any calendar year, the it must make up the shortfall between the royalty payments and the minimum royalty payment.

Alliance drilled two wells during the first year of the Lease. The second well drilled was successful and produced gas.  The company paid the Bohlen’s $5,500 for the first year of the Lease. Thereafter, it paid royalty payments based on the gas produced each year from 2008 through and including 2013. The annual royalties paid in those years never reached nor exceeded $5,500.

The Bohlen’s filed a declaratory action against Alliance and Anadarko in the trial court requesting the court issue an order declaring the forfeiture of the Lease. Both sides of the case filed motions of summary judgment asking the court to issue a judgment in favor of their arguments. The Bohlen’s argued that (1) the Lease violated public policy and was void because it allowed Alliance and Anadarko to encumber their property indefinitely by paying delay rental payments, (2) the Lease should be terminated by its terms because Alliance and Anadarko did not pay the minimum annual rental of $5,500 as required by the delay rental clause, and (3) the Lease terminated under its own terms due to the lessees failure of oil and gas production.

The trial court agreed with the Bohlen’s arguments and ordered forfeiture of the Lease. Alliance and Anadarko appealed to the Fourth District Court of Appeals, who reversed the trial court on all three arguments. The Bohlen’s appealed to the Court, who upheld the appeals court.

Since it was the review of a summary judgment ruling, the Court conducted its own full review of the arguments made on both sides. The Court has long maintained that gas and oil leases are contracts to which contract law applies.  One key principle of contract law provides that unless there is an ambiguity in the contract language, a court will not give the contract any meaning other than what the plain language of the contract states.

Using this point of review the Court looked at the delay rental language in the Lease. Leases often provide for a primary term and a secondary term when it comes to the duration of the lease. In the Bohlen’ lease, the primary term was one year. The second term provides for a continued duration for so long as gas or oil or their constituents are produced or are capable of being produced on the Bohlen’s property in paying quantities, in the sole judgment of the lessees, or are the lessee is conducting operations to search for oil or gas.

As noted earlier, the Lease provided that it would be void and all rights of the parties to the Lease would terminate if Alliance failed to pay a delay rental of $5,500 per year for the privilege of deferring the commencement of a well.  Alliance drilled a well during the primary term which met the definition of a commencement of a well as defined in the Lease.

The Bohlen’s argued that the delay rental addressed in the Lease with respect to the primary term should be read in conjunction with the Addendum language regarding minimum annual rent and the termination provision in the delay rental clause should be extended beyond the primary term. However, the plain language doesn’t provide for the termination provision in question to apply beyond the application of the delay rental clause and the obligation for payment of delay rental ceased once drilling was commenced. The Court held that underpayments by the lessees under the minimum annual rental provision in the Addendum did not entitle the Bohlen’s to forfeiture of the Lease under the unrelated delay rental clause.  If the parties wanted the termination provision of the delay rental clause to apply to the minimum rental provision they should have stated that clearly in the Lease.

A no-term, perpetual lease violates public policy. The Bohlen’s argued that the Lease allowed the lessees to delay drilling on the undrilled acreage indefinitely by paying the $5,500 minimum annual rent.  The Court disagreed with the Bohlen’s interpretation of the Lease and Addendum, stating that the plain language of the Addendum does not modify the delay rental clause and therefore does not create a no-term, perpetual lease.

Whether the lessees owe the Bohlen’s money for their underpayment of the annual minimum rental is another issue that was not addressed by the Court since it was not raised by the parties in their appeals. The Court the case to the trial court for further proceedings.

As my colleague, Steve Richman, points out in his series of “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 real estate transactions, since both parties to a commercial transaction 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.”
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General, Unrestricted Access Easement does not Guaranty Unlimited, Unrestricted Use

(Watch your Language [with easements] & Say What You Mean, Precisely or a Judge Will Tell You What You Meant #12)
  
By: Stephen D. Richman, Esq. - Senior Counsel, Kohrman, Jackson & Krantz LLP 
                                           
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 real estate transactions, since both parties to a commercial transaction 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. This principle is just as true with regard to easements, as it is with contracts, leases and other commercial documents.

Easements in General. An “easement” is basically a right to use the property of another for a specific purpose. Most common are drive/access easements and utility easements. While there are limited exceptions, most easements are created by separate written instruments (or are contained within deeds) and are recorded. Some easements are personal in nature and only apply while the burdened landowner owns the property, and others are “perpetual” and burden the land forever. Since forever is a long time, it makes sense to retain legal counsel and not try this at home with a $5.00 Easement from “Forms are Us.”

Easements will either spell out the specific rights to use the property granted to the easement “holder” (e.g. right to use the property to place above-ground or below ground electric lines), or be “blanket” in nature and not be limited as to use. Many easements will also contain 1) restrictions for the benefit of the easement holder which burden the land described as the “easement premises” (e.g., no buildings may be constructed upon the easement area); and 2) obligations imposed upon the easement holder for the benefit of the burdened landowner (e.g., requirements such as maintenance of the easement premises, and relocation of such premises or the facilities within the easement premises).

Easement rights (and easement obligations) are often drafted in general terms, with the parties assuming their intent is clear. The relatively recent case of J.T. Mgt. v Spencer, 2017-Ohio-892 (11th Dist. Ct. of App., Trumbull Cty.) reinforces the need to be specific and leave as little as possible to “interpretive chance.”

J.T. Mgt. v Spencer.  The facts of the “J.T. Mgt.” case are simple enough (the law, not so much). J.T. Mgt., the appellant owns a residential parcel and a commercial parcel that are adjacent to each other in Warren, Ohio. The commercial parcel is a 1.4-acre lot fronting S.R. 46 that the appellant planned to build a commercial structure on.  The residential parcel is known as “Lot 9” in the 9-unit residential subdivision known as Hidden Hills. J.T. Mgt. bought Lot 9 and its ancillary 1/9th interest in the private drive known as Hidden Hills Drive (which traverses the subdivision, connecting it to S.R. 46), after they bought the commercial parcel, presumably, not because of its secluded residential tranquility.


When J.T. bought the commercial parcel, it also “inherited” an easement of record, granting access to/from such parcel to Hidden Hills Drive. The easement in place was established when the area was virtually all residential in character. Even though J.T.’s commercial lot had frontage on S.R.46, it wanted to ensure that its easement rights to/from Hidden Hills Drive, and its 1/9th right as owner of such drive meant it could use the drive for any and all uses, including commercial traffic. This way, J.T. would, in effect be connecting its commercial property directly to the 9-unit residential subdivision. Consequently, On July 11, 2013, appellant filed a complaint for declaratory judgment, which, if successful would have resulted in an enforceable judicial edict of its plans for commercial connectivity. Appellees, the owners of the remaining eight lots in the subdivision and the Hidden Hills Homeowners Association filed an answer (denying the material allegations of the complaint) and a counterclaim/cross claim (demanding judgment declaring that appellant does not have an ownership interest in the private driveway, but only a right of way easement to access S.R. 46 for residential use).

The trial court ruled in favor of the appellant on the issue of ownership, declaring the appellant a one-ninth owner of Hidden Hills Drive by virtue of its ownership of Lot 9. However, on the issue of the use of the easement, the court found in favor of appellees and held that using the private driveway for commercial ingress and egress was impermissible because it would increase the burden on or materially enlarge its right in the easement. Appellant appealed this decision to the 11th District Court of Appeals (and appellees appealed the trial court’s judgment declaring the appellant a 1/9th owner of the drive).

During the appeal, the appellant set forth three “assignments of error” (claimed mistakes with the trial court’s ruling). Appellant first argued that it should be permitted to expand its express easement in the private driveway to use it for commercial purposes because the area has changed from primarily residential to primarily commercial. It cited an older Ohio Supreme Court case (Erie Railroad Co. v. S. H. Kleinman Realty Co., 92 Ohio St. 96 (1915)) that provides that changes in the use of an easement are permitted to the extent that they result from “the normal growth and development of the dominant land”. The 11th District Court in J.T. Mgt., however, citing precedent of its own (Solt v. Walker, 5th Dist. Fairfield No. 95-CA-64, 1996 WL 363438 (May 13, 1996) and cases cited therein) summarized the law regarding changes in the use of an easement that is at odds with the appellant’s argument. Namely, that “While an easement or right-of-way gives a landowner the right to enter and use the land of another, [and some change in use is permitted due to normal growth and development] the owner of a dominant estate may not increase the burden nor materially enlarge his right over the servient estate.” The appellate court in J.T. outlined the following four factors (that it cited from the Fifth District in Sol) to help determine whether a dominant estate has unreasonably expanded the use of an access easement: “1) the amount of increased traffic on the easement; 2) the time of day when vehicles used the easement; 3) the extent that traffic noise increased; and (4) whether vehicles using the easement travelled at excessive speeds.”

Applying the facts to the law, the court of appeals in J.T. easily dismissed appellant’s argument that a commercial use of the easement would be a reasonable and normal increase of use. That is because both parties stipulated (agreed) to a traffic study that showed a fast food restaurant would have an average weekday traffic volume of 2,452 vehicles, resulting in a daily traffic volume increase on the easement of 6,352 per cent over the actual daily traffic count of 38 vehicles under the current residential use. The trial court and court of appeals in J.T. Mgt. also pointed out that: 1) none of the cases cited by appellant held that use of an easement can be expanded from solely residential uses to include commercial uses; 2) commercial use would result in a financial burden to appellees because the driveway is maintained by the homeowner’s association and is insured by the individual property owners via policies that insure them solely for residential use of the driveway; and 3) the increased traffic would inconvenience the property owners and impinge on their beneficial enjoyment of the right to use the driveway. Based on these findings, the courts in J.T. Mgt. concluded that the proposed commercial use of the easement would create an unreasonable burden on the easement.

Appellant’s second main argument was that the language of its express easement is stated in broad and unrestricted terms, and accordingly, it should be interpreted as allowing use of the easement for commercial purposes.

Upon first glance of the easement language, appellant’s argument seems like a good one.

The subject easement provides: “[T]he grantors, in consideration of the sum of One Dollar, paid by the Grantees * * *, do hereby grant ** * unto the grantees, their heirs and assigns forever, a right of way on and over a certain piece of land owned by the Grantors as follows (legal description omitted) * * * [f]or the grantees, their heirs and assigns, * * * to freely pass * * * on foot, or with vehicles of every description, to and from [S.R. 46] to said land of the grantees.”

Clearly, there are no restrictions as to use in the subject easement. Consequently, no restrictions means unlimited use/rights, right? Not in the legal world of contract interpretation.  Silence, or overbroad language usually means the parties’ intent is not clear within the four corners of their documents, and accordingly, surrounding circumstances and extrinsic evidence need to be considered.  In the words of the Ohio Supreme Court, “The language of [an] easement and the surrounding circumstances provide the best indication of the extent and limitations of [an] easement. Apel v. Katz, 83 Ohio St.3d 11, 17 (1998).

The trial and appellate courts in J.T. Mgt. had no problem finding that the surrounding circumstances of the easement at issue favored the appellees and residential use, mainly because the parties to the lawsuit stipulated that the only use ever made of the private driveway from its construction to the present was residential, to provide the property owners access to their homes in the Hidden Hills Subdivision. Additionally, the J.T. Mgt. courts recognized that Hidden Hills Drive remains zoned for residential use only. Accordingly, according to the court of appeals in J.T. Mgt., when the easement was put in writing in 1975, “the parties could not have intended its use for commercial purposes because such use was never made of the driveway and would have been prohibited by law. We therefore hold the trial court did not err in finding that the parties did not intend the driveway to be used for commercial purposes and thus the express easement does not authorize such use.”

Appellant’s “strike three” argument was that as a 1/9th owner of the drive (vs its right as an easement holder) it had the right to use the drive for any ingress/egress; residential or commercial. However, the court of appeals in J.T. held that “while appellant has an ownership interest in the private driveway, it is part of the Hidden Hills Subdivision and is therefore subject to the deed restrictions in the Declaration of Restrictive Covenants. The restrictions forbid ‘trade’ from being carried on upon any lot in the subdivision.”

What is the moral of this story?  Listen to what judges are saying with regard to interpreting your easements, leases, purchase agreements and other 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]. In addition, we will look to the plain and ordinary meaning of the language used in the contract unless another meaning is clearly apparent from the contents of the agreement…” [So, if your meaning cannot be found in a dictionary, define it in the document so it is clearly apparent]. “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 the document].


While I think the court in J.T. Mgt. got this one right, and the appellant did not have a chance to evidence its intent in the easement, because it “inherited it”, this case, and the accompanying time and attorneys’ fees would not have been necessary had the parties limited the easement access rights for residential purposes only.

Another Ohio Court Holds that Real Estate Broker's License Required to Broker Gas and Oil Leases


A recent decision by Ohio’s Seventh District Court of Appeals (the Court) regarding whether a real estate broker’s license is required to be compensated for services related to gas and oil leases has been appealed to the Ohio Supreme Court. On February 17, 2017, the Court issued its decision in Dundics v. Erie Petroleum Corp., 2017-Ohio-640, upholding the Mahoning County Court of Common Pleas’ dismissal of the complaint by the plaintiff-appellants Thomas Dundics and IBIS Land Group, Ltd. (Dundics) against Erie Petroleum Corporation and Bruce Broker (Erie Petroleum).
Dundics alleged that they had an agreement with Erie Petroleum in which Dundics agreed to “find property owners, negotiate gas leases and work with Erie Petroleum to obtain executed gas leases”. Their compensation was alleged to be $10.00 for each acre leased to Appellees plus a 1% working interest in all wells subsequently placed on those leased acres. Dundics contended that they performed such services and received some compensation but not all that they should have received; that Erie Petroleum may have sold some of the gas leases and refused to provide an accounting or pay monies that Dundics felt were still due to them. Dundics also claimed that oil and gas leases are not real estate and that they did not need to be licensed as real estate brokers to perform the services they provided to Erie Petroleum.
Erie Petroleum filed a motion to dismiss Dundics’ complaint for failure to state a claim upon which relief can be granted. One critical basis for the motion filed by Erie Petroleum stems from the fact that Dundics did not allege that they were licensed real estate brokers as required by law. Ohio Revised Code 4735.21 provides that in order for a party to file an action to collect compensation for the services identified in the statute, it must be alleged and proven that such party was licensed as a real estate broker at the time the services were provided. R.C. 4735.01(A) states in part that a

“’Real estate broker’ includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:

(1)   Sells, exchanges, purchases, rents, or leases, or negotiates the sale, exchange, purchase, rental, or leasing of any real estate;

(2)   Offers, attempts, or agrees to negotiate the sale, exchange, purchase, rental, or leasing of any real estate;….

(7) Directs or assists in the procuring of prospects or the negotiation of any transaction, other than mortgage financing, which does or is calculated to result in the sale, exchange, leasing, or renting of any real estate;….”

 R.C. 4735.01(B) defines “real estate” as follows:

"Real estate" includes leaseholds as well as any and every interest or estate in land situated in this state, whether corporeal or incorporeal, whether freehold or nonfreehold, and the improvements on the land, but does not include cemetery interment rights.

Erie Petroleum presented several arguments for dismissal, one critical argument being that the services provided by Dundics fell under R.C. 4735.21 and therefore Dundics didn’t meet its burden by alleging and proving they were licensed real estate brokers; further arguing that oil and gas rights are real estate under Ohio law and that recent decisions (including one by the Ohio Supreme Court in Chesapeake Exploration LLC., v. Buell, 144 Ohio St.3d 490, 2015-Ohio 4551, 45 N.E.3d 185) (the Buell decision) interpreting the nature of these rights support this conclusion. The trial court agreed with Erie Petroleum and dismissed Dundics’ case. Dundics timely appealed to the Court.
In upholding the trial court’s dismissal, the Court acknowledged the existence of two prior decisions by courts in Ohio on the foregoing subject and the courts in each of those decisions reached a different conclusion.
In Binder v. Trinity OG Land Development and Exploration, LLC, N.D. Ohio No. 4:2011-cv-02621, 2012 WL 1970239 (May 31, 2012), the court concluded that “one who engages in the brokering of oil and gas leases is subject to the provisions of R.C. 4735.21.”
In Wellington Resource Group, LLC v. Beck Energy Corp., 975 F.Supp.2d 833 (S.D. Ohio 2013), the court concluded that parties who engage in brokering oil and gas leases are not subject to R.C. 3735.21.
The Court, taking into consideration the Ohio Supreme Court’s reasoning in the Buell decision and the broad definition of ‘real estate’ in R.C. 4735.01(B), determined that “whether described as licenses, leases, fee simple determinable estates, or something else, any instrument affecting oil and gas necessarily affects the surface rights as well, either in terms of the right to access the surface for transportation, drilling, etc., or because it affects the value of the surface rights, it falls under the definition of ‘real estate.’” It concluded that to engage in any of the activities alleged by Dundics in their claim for compensation, they must have a real estate brokers license. Their failure to be so licensed doomed their claim.
We now have two court decisions holding that a real estate broker’s license is required to engage in the brokering of gas and oil leases, and one court that does not agree. Dundics has appealed the Court’s decision to the Ohio Supreme Court. We will have to wait and see if the higher court accepts the appeal.
Stay tuned folks.

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Following the Yellow Brick Road to Real Estate Ownership

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

Becoming the “owner” of real estate is not quite as difficult as acquiring a wicked witch’s broom, but it is somewhat of a labored journey.

The seemingly simple answer to the question of when one becomes the owner of real estate is: when title is transferred by way of a deed. Arriving at a more precise answer to this question is a bit more complicated due to the legal concepts of “equitable title” vs. “legal title”, when a deed is considered “delivered”, and whether or not a deed has been recorded.

Why do these concepts matter? Basically, because pursuant to “Real Estate Law 101”: (i) real property ownership is more like the possession of a bundle of rights (vs. merely the possession of dirt and improvements on the dirt); (ii) a legal title owner has more of these rights to real property than an equitable title owner has; and (iii) a legal title holder whose deed has been recorded, will have greater protection from the possibility of  other parties claiming that they have rights that are superior to those of the legal title holder.

 What is equitable title?

According to Black’s Law Dictionary (7th Ed.), “equitable title” is “… a beneficial interest in property that gives the holder the right to acquire, formal legal tile.” When a buyer enters into a contract to purchase real property, the buyer acquires equitable title. It is the first step on the proverbial journey to Oz. Such equitable title, however consists of a small bundle of rights. In a simple contract for sale, the buyer would merely possess the right to acquire legal title, (and other limited rights granted by contract such as the right to inspect the property); but in a land contract, the buyer would also have the right to use and enjoy the property until enough payments are made to require the seller to transfer legal title to the buyer by delivery of a deed.
   
What is legal title?

When an individual possesses legal title, he or she gets the full bundle of legal rights that come with the property (except to any extent any such rights have been previously granted to others). Among these rights are possession, use and enjoyment, conveyance (i.e., the right to lease, sell, mortgage, transfer equitable title…), access, hypothecation and partition. Legal title also consists of a bundle of “physical” rights to real property such as water rights, mineral rights, timber rights, farming rights, air rights and development rights to erect improvements.

How does one acquire legal title?

Legal title is transferred from one person to another by “delivery” of a deed.

However, actual, physical delivery of the deed from a grantor to grantee is not required. Rather, delivery may be accomplished by words without acts; (such as if the deed is lying upon a table, and the grantor says to the grantee, “take that as my deed”); or it may be by acts without words. “The fact of delivery may be found from the acts of the parties preceding, attending, and subsequent to the signing, sealing, and acknowledgment of the instrument.”
See Goddard v. Goddard, 2011-Ohio-680 (4th Dist. Ct. of App., Scioto Cty.)

Does a deed need to be recorded to legally transfer title?

No. A deed need not be recorded (in the office of the county recorder in the county in which the property is located) to be valid as between grantor and grantee.   However, the filing and recording of same is prima facie evidence of delivery, in the absence of any showing of fraud.

Why record a deed, then?  

Without a recording of the deed, the grantee has little protection from its grantor, or anyone else from recording liens or other encumbrances against the title which would have priority over the unrecorded deed. Moreover, if the grantor transfers the same property by deed to another grantee (and the second grantee has no notice of the first transfer), prior to the first grantee taking possession; the second grantee owns the property and the first grantee owns a lawsuit.


Turney, LLC v. Cuyahoga Cty. Bd. of Revision

As the recent case of Turney, LLC v. Cuyahoga Cty. Bd. of Revision (2015-Ohio4086) illustrates, the terminology and principles surrounding property transfers and real estate ownership can be perplexing, even to attorneys and boards of revision.

The facts of this case are simple enough. Turney, LLC (“Turney”) filed a tax complaint with the Cuyahoga County Board of Revision (“BOR’) on March 28, 2014, seeking a $500,000 reduction in market value for the 2013 tax year on property located on Dunham Road in Maple Heights, Ohio. The complaint for reduction was based upon the purchase price for the property which was sold in a recent, arms-length transaction.

The Maple Heights Board of Education (“BOE”) argued that Turney failed to show that it was the owner of the subject property at the time the complaint was filed, and that the deed was not recorded until after Turney filed its complaint. The complaint was filed on March 28, 2014, and the deed was not recorded until April 21, 2014.

The BOR dismissed the complaint, without considering the merits for reduction in value. It found that Turney was not the owner at the time it filed its complaint according to the recording date of the deed, and that Turney failed to otherwise show that it was the owner. Turney then appealed to the Cuyahoga County Court of Common Pleas which affirmed the dismissal of Turney’s complaint.

According to the Cuyahoga Court of Common Pleas, “in order to have standing to file a complaint challenging the value of real property, the party challenging the valuation must in fact be the owner recorded on the deed [and since] the deed transferring the property to appellant was not recorded until August 21, 2014, nearly five months after the complaint was filed… appellant was without standing at the time the complaint was filed to challenge the property’s tax valuation.”

Turney appealed this determination to the Eighth District Court of Appeals, claiming, as its sole assignment of error that the Cuyahoga County Court of Common Pleas erred when it upheld the decision of the BOR in dismissing Appellant’s tax complaint on the basis that the appellant was not the owner of the Property when the complaint was filed. Turney argued that it sufficiently demonstrated that it was the owner at the time it filed its complaint.

The BOE argued that a party filing a tax valuation complaint as the owner should hold not merely legal title, but record title, and alternatively, if legal (vs record) title is the standard, recording was the only evidence of delivery of the Turney deed, which did not occur until April 2014.

While the Turney deed was not recorded until April, 2014, the evidence showed that the deed was signed and notarized on March 21, 2014, delivered to Turney’s agent between March 21st and March 25th, and on March 25, 2014 funds were exchanged and the property closed (even though the settlement statements were never dated).

In reversing the trial court’s decision, the Eighth District Court of Appeals in Turney first summarized court precentent interpreting the word “owner” (in the statute governing tax complaints [Ohio Revised Code Section 5715.19]) as a holder of legal vs equitable title. The court then summarized the same Real Estate 101 principles that we have summarized, aforesaid, regarding how to achieve the status of “legal title holder”. Basically, the court stated that (1) a deed must be delivered to be operative as a transfer of ownership of land,” (2) “[a]ctual manual delivery of a deed is not always required to effectuate the grantor’s intention to deliver;” and (3) while “recording is prima facie evidence of delivery and acceptance [of a deed], … it is not the only credible evidence of these formalities.”

Applying the facts to the law, the Eighth District Court of Appeals concluded that the delivery of the Turney deed to its agent and the closing of the transaction prior to the filing date demonstrated that Tully was legal owner at the time it filed its valuation complaint; that Turney did not have to be record owner at time of filing; and therefore, “the BOR and common pleas court erred in dismissing Turney’s complaint as jurisdictionally defective.”  The case was then reversed and remanded to the lower court for further proceedings consistent with the court’s opinion.

The moral of this story is simple. Neither a witch’s broom, nor recording is required to establish proof of real estate ownership. But, do it anyway (the deed, not the broom). Record the deed (or confirm your agent has recorded the deed upon, or ASAP after closing. Since all that is legally required to establish a prima facie case of delivery of a valid deed, and hence, ownership of real property is a few dollars a page recording fee to the local county recorder…. record the deed. You also get the positive side effect of being able to claim superior rights in your real property, against all others (subject, of course to any prior encumbrances transferred with title). While the appellant ultimately prevailed in Turney, it could have saved a whole heck of a lot of time and legal fees along its yellow brick road to real estate ownership by helping to ensure that its deed was promptly recorded.