Happy New – Real Estate Laws- Year

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

As you may know, Ohio Governor John Kasich and the Ohio Legislature have been very busy passing laws and putting same into effect at the end of 2016 and the beginning of this year. Among the twenty-eight bills signed by Governor Kasich on January 4th are two real estate related statutes worth noting: 1) Am. Sub. SB 257 (regarding the validity of recorded real property instruments); and 2) Am. H. B. 532 which revises the Ohio Revised Code (“O.R.C.”) relating to real estate brokers and salespersons.

I.                   Am. Sub. SB 257

A.                What does this bill do? Am. Sub. SB 257 first amends O.R.C. Section 5301.07 (B) by establishing two rebuttable presumptions regarding deeds, mortgages, installment contracts, leases, memorandums of trust, powers of attorney, and other instruments accepted by the county for recording. Namely, that 1) the recorded instrument conveys, encumbers, or is enforceable against the interest of the person who signed the instrument and; 2) that the instrument is valid, enforceable, and effective as if the instrument were legally made, executed, acknowledged, and recorded, without any defects. These presumptions can only be rebutted by clear and convincing evidence of fraud, undue influence, duress, forgery, incompetency, or incapacity, and must be rebutted, if at all within four (4) years of recording the defective instrument (See revised O.R.C. Section 5301.07 (C)). The prior version of Sec. 5301.07 (C) allowed a challenger twenty-one (21) years to rebut the validity of a defective instrument. S.B. 257 also provides that the filing of an instrument, albeit defective, is constructive notice to all third parties of the validity of the instrument notwithstanding a defect in the making, execution, or acknowledgment of the instrument (See revised O.R.C. Section 5301.07 (C)). In other words, pursuant to amended Section 5301.07 of the Ohio Revised Code, a recorded instrument is presumed valid when recorded, and deemed valid four years afterwards.

Am. Sub. SB 257 also amends O.R.C. Sec. 5301.07 (C) such that the specific defects enumerated in the statute (instrument not witnessed, not acknowledged [or defectively acknowledged]) and person holding property interest not identified in the granting clause) are now examples of the type of defect covered by the statute vs. the only defects covered.

Finally, Am. Sub. SB 257 amends various sections of Ohio Revised Code Section 5709 to “establish a procedure by which political subdivisions proposing a tax increment financing (TIF) incentive district must notify affected property owners and permit them to exclude their property.”

B.                 When does it become law? Am. Sub. SB 257 was signed by Governor Kasich on January 4, 2017 and becomes effective ninety (90) days thereafter.

C.                 Why is it significant? Basically, deeds and other instruments that would otherwise need to be re-signed or re-recorded to correct defects will automatically be cured by operation of law (by virtue of the language in the revised statute). For example, let’s say you are applying for a loan and the title report shows the deed you received was signed by an individual who forgot to add “Jr.” at the end of his name. You should now be able to convince the bank that the deed does not have to be corrected and re-recorded, as a condition to your loan. Additionally, title companies should now be more willing to remove defectively made/signed/acknowledged instruments from their lists of title exceptions in title commitments.  

Even if banks and title companies don’t rush to relax their practices in accord with this statute, the statutory presumptions and deemed validities inherent in Am. Sub. SB 257 should reduce the risks inherent in completing transactions in spite of these types of title “defects”. This is especially true with regard to defective oil and gas leases which are typically excluded from title insurance coverage.

II.                Am. HB 532

A.                What does this bill do? Am. HB 532 incorporates recommendations stemming from a 2012 special task force created by the Ohio Real Estate Commission including: defining/ categorizing brokers (as “Associate Brokers” or “Principal Brokers”), consolidating the duties of a Principal Broker in one new Ohio Revised Code section (Sec. 4735.081 (C)), allowing a broker to be a Principal Broker at more than one company, allowing prospective licensees the option of completing their pre-licensing education in the classroom or on-line, and increasing post-licensing education requirements.

Re: the “New Broker Categories”- Pursuant to new Section 4735.01 (AA) and (GG) of the Ohio Revised Code, respectively, "Associate Broker" means an “individual licensed as a real estate broker under this chapter [4735] who does not function as the principal broker or a management level licensee”; and "Principal Broker" means an “individual licensed as a real estate broker under this chapter [4735] who oversees and directs the operations of the brokerage.” Pursuant to O.R.C. Section 4735.081 (A), “each brokerage is to designate at least one affiliated broker to act as the principal broker of the brokerage and any affiliated broker not so designated is to be considered an associate broker or management level licensee for that brokerage.” "Management level licensee" means a “licensee who is employed by or affiliated with a real estate broker and who has supervisory responsibility over other licensees employed by or affiliated with that real estate broker.” The supervisory responsibilities are not new, but are packaged nicely in an easy to read format in O.R.C. Sec. 4735.081 (C). Such responsibilities include: overseeing and directing the operations of the brokerage including the licensed activity of affiliated licensees, renewing and maintaining licenses and generating and maintaining company policies (and practices and procedures) and transactional records. The principal broker or brokers of a brokerage may assign to a management level licensee any of the afore-mentioned duties.

Re: Licensing Education- According to Am. HB 532, prospective licensees may now complete the required 120 hours of pre-licensing education “by either classroom instruction or distance education.”  O.R.C. Section 4735.01 (DD) defines “distance education” as instruction “accomplished through use of interactive, electronic media and where the teacher and student are separated by distance or time, or both.” Currently, only brokers have the option of on-line licensing.  All pre-licensing course work must still be taken by an accredited, public or private “Institution of Higher Learning.”

Am. HB 532 also increased from ten (10) to twenty (20) hours the post licensure educational requirements.

B.                 When does it become law? Am. HB 532 was signed by Governor Kasich on January 4, 2017 and becomes effective ninety (90) days thereafter.

C.                 Why is it significant? According to the bill’s sponsor, the new categories of “broker” were created to: 1) better reflect the way brokerage organizations operate; and 2) to hold those who engage in supervisory functions (i.e. Principal Brokers) accountable, while removing such accountability from brokers who do not have oversight responsibility.

Apart from limited opposition, the licensure modifications have been heralded as simply modernizing real estate education. Supporters of the legislation (including the Ohio Board of Realtors) assert that real estate courses and the profession in general can now be made more accessible to those previously hindered by geographic limitations, those looking to real estate as a second career and those who have difficulty learning in a classroom setting.

Ohio Supreme Court Upholds Valuation of Condominium Development As Separate Units

The Ohio Supreme Court (the Court) recently issued another opinion real property valuations on December 28, 2016 in an appeal of a Board of Tax Appeals (BTA) December.  In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision (Slip Opinion No. 2016-Ohio-8375), the valuation dispute focused on the appropriate valuation of 16 unsold condo units in a 20-unit condominium development for the 2009 tax year.

The county auditor valued the 16 condo units at $5,986,400. The property owner provided an appraisal by an MAI certified appraiser that valued the condo units at $2,900,000.  The auditor valued the units as 16 separate units and the appraiser valued the units as a single economic unit similiar to an apartment complex.  His reasoning was based upon the changing real estate market after the financial meltdown in 2008 that resulted in condo units not selling and rented out instead. He treated the condo complex as a ‘stalled’ condominium development and used an income approach and sales comparisons more in line with an apartment complex. The Board of Revision (BOR) adopted the appraiser’s valuation and the BOE appealed. In the BTA hearing the BOE provided conveyance fee statements for the 4 units that previously sold along with square footage information from the county auditor’s web site.
The BTA overturned the BOR and reinstated the auditor’s higher valuation, resulting in an appeal by the property owner to the Court. The appraiser defended his valuation of the remaining 16 units as ‘one economic unit’ stating that it was the way the market looks at units when sales have stalled at a condo development. The property owner was currently renting out the 16 unsold units. However, only 1 of his 5 sales comparables was a broken condominium complex.
The BTA found that the appraisal was unreliable because it valued the condo units collectively as one would value an apartment complex, which effectively resulted is a discounted value contrary to Ohio law. The BTA also did not consider the appraiser’s sales comparisons to be appropriate to use as comparables because 4 of the 5 were not condo units.  Finally, the BTA found additional fault with the appraisal because the cost approach was not considered in completing the valuation. The property in question was new construction, having been built from 2006-2008, which was less than 12 months prior to the tax lien date.
Stating that ‘common ownership doesn’t transform condominium units into an apartment complex’, particularly when the ‘complex’ doesn’t include all of the units (emphasis added), the BTA held that the evidence was not sufficient to support a lower valuation and reinstated the auditor’s valuation.
The property owner argued to the Court that the BTA erred in characterizing the appraiser’s valuation as an improper ‘bulk discount’ but the Court, referencing R.C. 5311.11, disagreed, finding that the appraiser’s method was a back-door approach to an improper discount.
The property owner also claimed that the BOE did not submit evidence to contradict the BOR’s adoption of the appraiser’s valuation and therefore the BTA was acting unreasonably and unlawfully in restating the auditor’s valuation.  In making this argument the property owner was invoking what is known as the “Bedford” rule, which provides that once a board of revision has reduced the value of a property based on owner’s evidence, that new value eclipses the auditor’s original valuation, and the board of education cannot rely on it as a default valuation. (See Worthington City Schools Bd. of Edn. vFranklin Cty. Bd. of Revision, 140 Ohio St.3d 248, 2014-Ohio-3620, 17 N.E.3d 537; and Dublin City Schools Bd.of Edn. v. Franklin Cty. Bd. of Revision, 147 Ohio St. 3d 38, 2016 Ohio-3025).
The Court held that the Bedford rule does not require adoption of the BOR valuation because there was a legal error in the BOR’s determination.
Finally, the property owner argued that the BOE had a burden to present evidence of value and that it failed to do so, and therefore the BTA should have adopted the appraiser’s valuation. The Court disagreed, finding that the BOE had submitted the conveyance fee information and deeds for the 4 units which previously sold, and this information was sufficient to permit an independent valuation by the BTA.
To finally resolve matters in this dispute, the Court held that the record contained sufficient information to overturn the BOR’s adoption of the appraisal value and contained sufficient information for the BTA to perform an independent valuation of the units. The Court then remanded the case back to the BTA instructing it to determine the value of each individual unit based upon sales price and other evidence in the record.
This decision provides some needed clarity  but is not good news for condo developers who are still struggling to sell units in their developments.

Ohio EPA, DMWM: Two Draft General Permits for Beneficial Use Now Available For Comments

The Ohio EPA, Division of Materials and Waste Management issued the following notice:

“The Division of Materials and Waste Management and is making available for interested party comment two draft general permits for beneficial use — Spend Foundry Sand (used in several applications, including as a soil amendment and as general fill), and Alum Drinking Water Treatment Residuals (used as a soil amendment).  These draft documents may be accessed at http://epa.ohio.gov/dmwm/Home/BeneficialUse.aspx#123635124-permits.

When final, these general permits will be used in conjunction with the recently finalized beneficial use rules contained in Ohio Administrative Code Chapter 3745-599, which will become effective March 31, 2017. 

These new drafts have been significantly revised based upon program development and through public comments received throughout 2015 and 2016.  The advantage to this posting is now you can evaluate the draft general permits alongside the final beneficial use rules under which they are being created.  DMWM will accept public comments on these draft general permits until January 20, 2017.  DMWM is also developing draft general permits for beneficial use of dredged materials from federal shipping channels in Lake Erie and for Biosolids Incinerator Ash.  DMWM will be posting those for public comment in the near future.”

Here are links to other blog articles regarding Ohio’s dredged materials programs:


Liquidated Damages in Residential Leases May Backfire

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

As you may know, Ohio’s Landlord-Tenant Act (Ohio Revised Code [O.R.C.] Chapter 5321) governs the relationship between landlord and tenant for residential property. As you may also know, there are many more tenant protections and landlord obligations for residential property (because of such Act) than for commercial property. For example, while often not advisable, a landlord in Ohio can utilize “self help” to evict a commercial tenant, provided there is no “breach of the peace” (See Northfield Park Associates v. Northeast Ohio Harness, 1987 Ohio App. LEXIS 10461 [8th Dist.]; Tie Bar v. Buffalo Mall, 1979 Ohio App. LEXIS 8786 [7th Dist.]; Carter v. Standard Oil Co. 1978 Ohio App. LEXIS 7861 [8th Dist.]). Pursuant to Ohio Revised Code Section 5321.15, however, a landlord of residential property may only use the court eviction process to recover possession from a defaulting tenant.

Security deposits (and the handling of same) are also treated differently. For example, landlords of residential (vs. commercial) property must pay interest on their tenants’ security deposits greater than $50 (pursuant to O.R.C. 5321.16(A)).

At the end of a lease, if a tenant owes its landlord rent (or has damaged the premises) the standard action of many landlords is to deduct whatever damages the Landlord has incurred and send to tenant any remainder.  When landlords of residential property take this approach, they must follow the procedures of O.R.C. 5321.16 (B), which provides that “Any deduction from the security deposit shall be itemized and identified by the landlord in a written notice delivered to the tenant together with the amount due, within thirty days after termination of the rental agreement and delivery of possession.” According to the Eighth District Court of Appeals in the recent case of Oldendick v Crocker, 2016-Ohio App.LEXIS-5621[8th Dist.], however, residential landlords must be careful with what they deduct from their security deposits, or it may cost them more than their deduction.

The facts of the Oldendick case are as follows:

On September 10, 2013, Elisabeth Oldendick and her boyfriend (“Tenants” and “Appellants”) signed a one-year lease for a Cleveland Heights apartment owned by Mr. and Mrs. Crocker (“Landlords” and “Appellees”). The lease was to commence October 1, 2013 and end September 30, 2014 (the “lease” or the “lease agreement”). Under the lease, a monthly payment of $860 was due on the first day of each month and an $860 security deposit was also required. The lease also included an “early termination” provision, which required Tenants “to pay a fee of one month’s rent in addition to the regular rent until a tenant suitable to [landlord] executes a new lease term” if the Landlords agreed to an early termination (of the lease) request by the Tenants. Three days after Tenants signed the lease, they told Landlords they had changed their minds, and demanded the return of the $1,720 paid when they signed the lease. After just eight showings, and one month later, the Landlords were able to lease the apartment to a new tenant, whose lease commenced on November 1, 2013. The Landlords paid a manager $120 for her time in showing the apartment to the prospective new tenants and an additional $100 in commission for the newly executed lease. The Landlords refused to return the funds Tenants had paid them because they had been unable to re-rent the apartment until November 1, 2013 and, in their opinion, according to the terms of the lease, Tenants were responsible for the October rent and an early termination fee of one month’s rent. 
In November, 2013, Tenants filed a complaint in the Cleveland Heights Municipal Court (“trial court”) against Landlords seeking to recover (1) the $1,720 paid for the first month’s rent and security deposit, (2) “an equal amount as damages” and (3) attorney fees and costs. Tenants also sought to declare the entire lease void, claiming the early termination fee provision was an unconscionable liquidated damages clause which rendered the entire lease unenforceable.

On July 10, 2015, the trial court issued its decision, finding in favor of Appellees. The trial court determined that Tenants had entered into a valid lease and that the parties were “at that point bound by the terms and conditions of the lease agreement.” The trial court further held that the Tenants had breached the lease agreement by repudiating the lease and refusing to take possession of the premises. The trial court then concluded that the early termination provision was enforceable, that it was not an unconscionable penalty and that, as a result of Tenants’ breach of the lease, Landlords were entitled to keep the $1,720 they received from Tenants as the October, 2013 rent and the early termination fee. Some time thereafter, the Tenants then appealed the trial court’s decision to the 8th District Court of Appeals.

At the court of appeals, the Tenants first contended that the trial court should have declared the entire lease unenforceable under O.R.C. 5321.14 because the lease included a provision authorizing the payment of the Landlords’ attorney fees and various self-help provisions.  The court of appeals, however did not find this argument persuasive, largely because the trial court did not award Appellees any attorney fees and because there was no claim that Appellees exercised any of the self-help remedies that Tenants objected to. Even assuming those provisions of the lease were invalid, the appellate court found no error by the trial court in refusing to declare the entire lease unenforceable, because under O.R.C. 5321.14(A), a court “may refuse to enforce the rental agreement or it may enforce the remainder of the rental agreement without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”

Expectedly, Appellants further contended that “even if the lease was not unenforceable in its entirety, at the very least the trial court should have found the early termination provision to be unconscionable and refused to enforce it under R.C. 5321.14(A) and R.C. 5321.16(B).”

Appellees argued that the early termination fee was enforceable because courts have upheld liquidated damages clauses where actual damages may be difficult to prove, the amount of damages is reasonable and proportional to the contract as a whole, and that in this case, the Landlords and Tenants were parties of “equal bargaining power” who “agreed to and freely negotiated” the early termination provision.

Regarding enforceability of the liquidated damages provision, the court of appeals in Oldendick acknowledged Appellants’ argument that (while Chapter 5321 does not specifically prohibit liquidated damages clauses) there are indeed many Ohio courts that have declared such provisions unenforceable in a residential lease. The court in Oldendick stated that some of these courts have performed a penalty analysis in determining whether a fixed fee or charge set forth in a lease could be enforceable, refusing to enforce the same where the landlord failed to present evidence demonstrating that stipulated damages bore a reasonable relationship to actual damages sustained as a result of the breach. Other cases, according to the court have held that a liquidated damages clause in effect permits the landlord to retain a security deposit without itemization of actual damages, and this is inconsistent with O.R.C. 5321.16 (B), which requires itemization of damages. If the liquidated damages provision is inconsistent with O.R.C. 5231.16 (B), these courts have held that such provision may not be included in a rental agreement and is thus not enforceable.

The Court in Oldendick related more with the “inconsistent with O.R.C. 5321.16 and thus unenforceable decisions” (than to the “unenforceable as penalty decisions”), but seemed to want to simplify the analysis of these cases even further by not focusing on enforceability. According to the court in Oldendick, “the issue here is not whether liquidated damages provisions in residential leases are enforceable. The issue here is what a landlord is statutorily permitted to do, under the Landlord-Tenant Act, with a tenant’s security deposit. If deductions from a security deposit are at issue, the provisions of the Landlord-Tenant Act apply, which limits permissible deductions from a security deposit to ‘damages that the landlord has suffered by reason of the tenant’s noncompliance with section 5321.05 of the Revised Code or the rental agreement,’ i.e., actual damages sustained by the landlord as a tenant’s failure to comply with R.C. 5321.05 or the lease.”  

The Oldendick court cited other Ohio appellate courts that came to this same, “simplified” conclusion. ‘See, e.g., Ankney v. Dame, 6th Dist. Lucas No. L-76-307, 1977 Ohio App. LEXIS 10154, *5-8 (Apr. 29, 1977) (“It is not so much a matter of saying that liquidated damages are prohibited in leases, but the issue is whether the deposit put up herein is covered by the Act. * * * Any actual damages are permitted to be obtained by the landlord from the security deposit. * * * [T]he parties may contract for liquidated damages. However, if a deposit is required, then the provisions of the Landlord-Tenant Act must be followed.”)’

Because there was nothing in the record that established that the parties were of “equal bargaining power” and that as a general rule, damages resulting from a breach of a residential lease are not difficult to ascertain and quantify,  the court in Oldendick concluded that “even if we were required to perform a liquidated damages-penalty analysis to determine the appropriateness of Crocker’s deductions from Oldendick’s security deposit, we would find that the early termination fee operated as a penalty.”

So, according to the court in Oldendick, whatever way you look at it, the Landlords were not entitled to deduct the early termination fee from the Tenants’ security deposit. Landlord was, however entitled to deduct the $220 paid to the property manager as legitimate, itemized expenses. The court then concluded that pursuant to O.R.C. 5321.16 (B), the Landlords would need to remit $640.00 to the Tenant (the amount wrongly withheld, over and above the legitimate deductions).

O.R.C. 5321.16 (C) provides, in pertinent part, “If the landlord fails to comply with division (B) of this section, the tenant may recover the property and money due him, together with damages in an amount equal to the amount wrongfully withheld, and reasonable attorneys’ fees.” The Tenants in Oldendick in fact did make O.R.C. 5321.16 (C) claims, and the court awarded the Tenants damages of $640 and attorneys’ fees, on top of the $640 wrongfully withheld by the Landlords.

What is the moral of this story? For residential landlords, the expression “penny wise but pound foolish” comes to mind. While liquidated damages provisions are not per se prohibited in residential leases, the inclusion of same simply is not worth it because of the Ohio Landlord-Tenant Act, specifically, Ohio Revised Code Sections 5321.14 and 5321.16.

EPA Issues Strategy for Addressing the Retail Sector under RCRA

When negotiating a commercial lease for a retail store, environmental issues are typically not as high on the priority issues list as they would be if the property was industrial. However, the EPA’s waste generation rules apply to retail stores too.

In a typical retail lease, as in any lease, at a minimum it will include a broad requirement that the tenant must comply with all laws applicable to it and it will also often include a simple covenant to not violate environmental rules and regulations. It may not run on for a page or two but the point will be the same….tenants must comply with environmental regulations applicable to their operations at the leased premises.

The EPA’s rules and regulations with respect to hazardous waste generation are one example of rules drafted a long time ago with industry in mind now apply to retail stores. While it is easy to see how that could be true when talking about an automotive supply store with the typical products that would be sold in such a location, the reach is much broader.

Stores have to deal with slow moving merchandise that takes up valuable shelf space. Items that are obsolete or damaged or otherwise not salable need to be removed to make room for new merchandise. However, the disposal of some of these items can trigger the EPA’s regulations on hazardous waste generation. Think of batteries of all shapes and sizes, aerosol cans and nicotine patches and other medications (including some over the counter products), just to name a few.  Many small retail tenants are probably not even aware that such rules and regulations apply to them, and therefore may be in breach of environmental covenants in their leases without knowing it.

The EPA has finally started to focus on the need to revamp the regulations for application to the retail sector and earlier in the fall issued its Strategy for Addressing the Retail Sector under the Resource Conservation & Recovery Act (RCRA) Regulatory Framework.

Landlords of commercial retail property should take care to ensure that their leases require tenants to comply with all environmental rules and regulations, and indemnify for violation. Retail tenants need to be aware that their operations, particularly when it comes to disposal of merchandise, can be subject to RCRA and similar laws on a state level.

Zoning 101, Grandfathered Uses and Ohio Liquor Control Law vs. Municipal Zoning Ordinances

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

When buying a particular piece of real estate, it is not enough to understand its physical and economic characteristics and constraints. The prospective buyer of realty must also make itself aware (prior to purchase), that there may be controls, or limits on how a particular property can be used. Land use is generally controlled and regulated through public controls (e.g., zoning laws) and private controls via deed restrictions. Generally, zoning ordinances are local laws regulating and controlling the use of land and buildings, within certain zones or districts. Typical zoning ordinances are those which regulate lot size, building heights, setbacks (i.e., minimum distances of structures from streets and other structures) and type of use allowed (e.g., residential, commercial, industrial or agricultural).

The potential real estate buyer can protect itself from zoning surprises by: 1) investigating zoning as part of its due diligence; 2) insisting on a contingency in the purchase agreement that its intended use be permitted under current zoning; and 3) purchasing a zoning endorsement as part of an owner’s title insurance policy. Otherwise, for example, the buyer of a one-half acre lot in Pepper Pike may discover that it cannot build a house on less than an acre; and a buyer of a warehouse building in an area of Mentor zoned “M-2” (manufacturing) may discover it cannot renovate same for a restaurant.

What if a prospective buyer does all of its required diligence and its use complies with zoning at the time of purchase, but a municipality’s zoning laws change after the purchase, rendering the use, now “nonconforming?” A nonconforming use is a use that was legal at the time it was created but which has since become disallowed because of a later modification or adoption of a zoning ordinance.

Generally, zoning ordinances and land use regulations are not supposed to be retroactive; they ordinarily apply only to new or modified uses of land. The Supreme Court of Ohio has held that land-use restrictions may not apply retroactively to prohibit the lawful use of real property, unless such use creates a nuisance affecting the public health, safety, morals or general welfare.  See City of Akron v. Chapman,116 N.E.2d 697(Ohio 1953). Accordingly, when a new zoning law restricts or outlaws existing uses that would otherwise be lawful, these nonconforming uses are “grandfathered” and “may be continued, although such use does not conform with the provisions of such ordinance or amendment…” See O.R.C. § 713.15.

However, this protection is not absolute. There are at least two significant limitations. First, if the use is abandoned, it may be lost. Second, most zoning ordinances provide that while nonconforming uses may continue in their present form and scope, they will not be allowed to expand.

In the recent case of Mentor v. Sines, 2015-Ohio-5546, neither party took issue with the general rule of “grandfathering.” Additionally, both parties agreed upon the theory that a non-conforming use may not be expanded. However, both sides disagreed as to whether or not the store owner’s (Sines’s) sale of alcoholic beverages was an unlawful expansion of the grandfathered use of retail sales (of gasoline, automotive and grocery products) in an area newly zoned residential, or just the addition of a different kind of carry out beverage to inventory.

The facts are as follows: Sines Inc. (“Sines” or “Appellant”) owns a gas station on Johnnycake Ridge Road in Mentor, Ohio. Appellant's station has service bays, a retail sales area, an office, two gas pumps and a second floor apartment. Sines has operated the station since the early 1960s, before the property became a part of the City of Mentor, and before the city enacted a zoning ordinance calling for residential use only in an area that includes the gas station. In 2002, Sines applied for but was denied a variance to enlarge the retail area of the station. In 2012, Sines applied for and was granted a permit (from the Ohio Division of Liquor Control) for the carryout sale of beer, wine and pre-mixed beverages. Mentor appealed the division's decision to the Ohio Liquor Control Commission, which affirmed the division's order. The city thereafter appealed the commission's order to the court of common pleas and that court reversed the commission's order, claiming that the sale of alcoholic beverages was an unlawful extension of Sines' non-conforming use (of a gas station with retail sales of gasoline, automotive and [non-alcoholic] grocery type products). Sines than appealed the trial court’s decision to the Tenth District Court of Appeals of Ohio.

Sines alleged that the sale of alcoholic beverages was not an unlawful extension of its existing, non-conforming use, but merely an extension of inventory; from milk and coke bottles, to milk, coke, beer and wine bottles.  Sines also contended that its “inventory vs. use expansion” would neither increase traffic, nor create any concern for the health, safety or welfare of the community.

Mentor argued that the sale of intoxicating beverages by Sines, pursuant to its Ohio liquor permits, constitutes an expanded use of the property, based on beverages already sold by Sines at that location,  and that the city’s ordinance precludes such an expansion of use. Pursuant to Section 1139.01(b) of the City of Mentor Ordinances, “a non-conforming use shall not be extended or enlarged after passage of this Zoning Code by … the addition of other uses, of a nature which would be prohibited generally in the district involved.” The city also argued that increased activity at the location would create safety concerns.

In arriving at its decision to overturn the trial court’s ruling, the 10th District Court of Appeals first looked to precedent (prior case law on point). Citing cases from the 12th, 2nd and 8th appellate districts, the court concluded: "[a]n increase in the volume of business alone does not constitute an unlawful extension of a nonconforming use where the nature of the land is virtually unchanged," (citing Hunziker v. Grande, 8 Ohio App.3d 87, 89 (8th Dist.1982) and that "Nonconforming use restrictions are meant to apply to the area of the use and not to inventory," (citing State ex rel. Zoning Inspector of Montgomery Cty. v. Honious, 20 Ohio App.2d 210, 212 (2d Dist.1969).

The court of appeals in Sines emphasized, however, that it did not need the benefit of precedent to decide the case, because they were dealing with the sale of  state controlled liquor sales, and in such matters they need only follow “clear instruction from the legislature in O.R.C. 4303.292. “
O.R.C. 4303.292 provides:

(A) The division of liquor control may refuse to issue, transfer the ownership of, or renew, and shall refuse to transfer the location of, any retail permit issued under this chapter if it finds * * *: (2) That the place for which the permit is sought: (a) does not conform to the building, safety, or health requirements of the governing body of the county or municipal corporation in which the place is located. As used in division (A)(2)(a) of this section, "building, safety, or health requirements" does not include local zoning ordinances…”

In other words, according to the court in Sines,“a municipality may not regulate the sale or use of alcoholic beverages at these operations in the guise of zoning.” Or, stated another way, state liquor control law trumps city municipal zoning law. Accordingly, the appellate court in Sines held that the common pleas court impermissibly used Mentor's zoning ordinance as a basis for reversal (of the granting of liquor permits), contrary to R.C. 4303.292(A)(2)(a).

So what is the moral of this story? If you are buying real property, understand and recognize that zoning laws limit use of property, and accordingly, make sure before you buy that your intended use is lawfully permitted. If you own property that is grandfathered, don’t abandon the grandfathered use, and understand that approval of expansion plans may result in an increase in size of your building, but (without consent of the municipality) may not increase the size of your nonconforming use.  Finally, don’t forget that local “grandfathering laws” may be subject to and usurped by the laws of a higher authority (i.e., state and federal governments).

Ohio Supreme Court Upholds Broad Discretion of BTA in the Valuation of Real Property

On October 27, 2016, the Ohio Supreme Court (the court) issued its decision in Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, Slip Opinion no. 2016-Ohio-7466, which stemmed from an appeal of a Board of Tax Appeal (BTA), no. 2011-3590. The court’s decision involved  real property valuation case and concerns the proper valuation of a 240-unit apartment complex in Northeast Franklin County for tax year 2005.
The property at the center of this case was originally valued at $13,600,000 and the property owner sought a reduction in the valuation t $9,720,000. The Board of Revision (BoR) ultimately adopted (in a 2-1 vote) a valuation of $9,338,000 proposed by an MAI certified appraise. The BTA affirmed the BoR decision.
The board of education (BoE) appealed arguing that the absence of market data and other flaws in the appraisal made it unreasonable and unlawful for the BoR and BTA to accept the appraisal.
There are 3 approaches used in appraising property—income, cost and sales comparisons.  For an income producing property, the income stream is critical for determining its value. When a property is new, the cost basis of the property may make more sense. Because the variables affecting each property, such as unit size, floor plans, amenities, access to transportation, etc. differ so much from one property to the next, sale comps may have limited utility.
The appraiser in this case relied primarily (but not exclusively) on the income stream produced by the property. It was a newly constructed property so the appraiser averaged the 2004 and 2005 numbers since the property was leased up by 2005. He reasoned that an arm’s length purchase price would typically be based upon the income stream and therefore a more accurate valuation should rely on the income approach.  The appraiser also looked at 10 sales comparisons, taking into consideration the range of cap rates an price per unit to serve as a check on his estimated value and to determine the best cap rate to use in his income valuation.
The BoE objected and the case advanced to the court where the BoE advanced the following proposition of law: “An appraisal that fails to include relevant market data and the specific adjustments made thereto is inherently unreliable and cannot be used to determine the true value of real property for tax purposes.” It argued that the BTA erred is relying on the appraisal because the report did not include sufficient data under its market and income approaches and further did not include a cost approach, all of which was unlawful. It should be noted that additional data was provided by the appraiser in testimony.
When tax appeals come before the court, it is often held that when the court reviews the BTA’s disposition of the factual issues in a property valuation case, the court “does not sit either as a super BTA or as a trier of fact de novo.” The BTA is given wide discretion in determining the weight to give evidence and the credibility of witnesses before it. The BoE in its appeal must demonstrate that the BTA’s and BoR’s weighing of evidence and the force it applied to such evidence was unreasonable or unlawful, and the standard the BoE must meet is that the BTA and BoR abused their discretion. This is a difficult standard to meet. It means that the BoE must prove that the BTA exhibited an unreasonable, arbitrary or unconscionable attitude.
The court found that while the BoE pointed to matters that definitely relate to the probative force of the appraisal, it failed to establish unlawfulness or an arbitrary or unconscionable attitude on the part of the BTA in adopting the appraisal.
During testimony, the appraiser provided his reasons for using the approach that he did and for why he did not use the cost approach. It was in within the discretion of the trier of fact, i.e., the BoR and the BTA, to credit the appraiser’s testimony and report.
When evaluating the merits of whether to appeal the decision of the BTA in a property valuation, we need to keep in mind that the court will not disturb the BTA’s decision merely because a different expert might have found merit in using another approach.