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.


Ohio Supreme Court Issues Two More Decisions Real Estate Tax Valuation Decisions


Here we go again….the Ohio Supreme Court has been busy with more appeals of real estate tax valuations. Two more decisions on this topic have been recently issued by the court.

The first is Johnston Coca-Cola Bottling Co., Inc. v. Hamilton Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-870, which was decided by the court on March 14, 2017.  The property owned by Johnston Coca-Cola Bottling Co., Inc. (“Coke”) was a manufacturing and distribution facility (over 400,000 sq.ft.) located on 34.46 acres in Cincinnati. Coke had filed a complaint seeking the reduction in property value for tax year 2011 and provided an appraisal that set the property value at $6,800,000. The Board of Revisions (the “BOR”) rejected Coke’s complaint and kept the county valuation of $13,571,760. On appeal to the Board of Tax Appeals (the “BTA”), Coke provided a new appraisal in which the property was valued at $8,550,000. The county submitted a new appraisal prepared by its in-house certified general appraiser who valued the property at $14,000,000. The BTA issued its decision increasing the property’s value to the $14,000,000 recommended by the county’s appraiser. It found the county’s appraisal to be more persuasive, in part due to his reliance on more localized sales comparables that were in or closer to Cincinnati. Coke appealed to the Ohio Supreme Court and lost again.

Here’s what we learned from the court’s decision:

·         The BTA decision to adopt one appraisal as more persuasive than the competing appraisal is within its discretion. Absent a clear abuse of that discretion the court is not going to overturn the BTA.

·         The fact that an appraisal was offered by a county employee does not, in and of itself, make the appraisal less credible or probative absent evidence of actual bias.

·         The county appraiser consideration of the property’s ‘present use’ in order to determine which sales comparables were the most appropriate is permitted so long as it’s not the sole measure of value, was used appropriately, and other factors relevant to the property’s ‘exchange value are also considered. (‘Exchange value’ means the amount for which a property would sell on the open market by a willing seller to a willing buyer.)


The second decision was Lutheran Social Servs. of Cent. Ohio Village Hous., Inc. v. Franklin Ct. Bd. of Revision, Slip Opinion No. 2017-Ohio-900, decided by the court on March 16, 2017. The case involved two government-subsidized housing developments for the elderly owned by Lutheran Social Services of Central Ohio Village Housing, Inc. (“Lutheran Services”). Property 1 was a 44-unit apartment complex on 3.339 acres that the county valued at $1,250,000. Property 2 was a 46-unit apartment complex located on 3.938 acres that the county valued at $1,456,400. Lutheran Services filed a complaint challenging the property valuation for tax year 2008 and the South-Western City Schools Board of Education (the “BOE”) filed a counter complaint seeking to retain the county auditor’s values.

The BOR held hearings and Lutheran Services presented appraisal reports and testimony and argued for valuations of Property 1 at $780,000 and for Property 2 at $740,000. The BOR adopted the county auditor’s original valuation in both instances and Lutheran Services appealed to the BTA.  When the BOR record was sent to the BTA the BOR certified compact discs supposedly containing audio recordings of the hearings but the CD for Property 2 was blank.

At the consolidated BTA hearing on the two properties, Lutheran Services relied on the appraisal reports and testimony previously presented to the BOR. The BOE presented testimony of an appraiser to the BTA, who had reviewed the appraisals provided by Lutheran Services and was critical of the appraisals. The BTA issued a brief decision adopting the opinions of value provided by the appraiser for Lutheran Services. However, the decision only provided the BTA conclusion that the appraisals were probative. No mention was made by the BTA regarding the contrary testimony provided at its hearing by the BOE’s witness. Also, when the BTA record was forwarded to the court upon the BOE’s appeal, the CD for the BOR hearing on Property 2 was sent with a note that it was blank, but no mention was made in the BTA decision about the defect in the record. The court vacated the BTA’s decision and remanded the case back to the BTA for further proceedings.

What we learned by the court’s requirement of a ‘do-over’ by the BTA:

·         While the BTA is not obligated to make formal findings of fact and conclusions of law, it must engage in sufficient discussion regarding the evidence presented to it so the court has some ability to determine whether the BTA acted reasonably or lawfully, or not.

·         The BTA cannot adopt one side’s argument without at least addressing the contrary evidence and testimony presented at its hearing by the opposing party. It must explicitly account for the evidence in reaching its decision regarding the value of each property.

·         The BTA cannot adopt one party’s evidence/testimony in the absence of a hearing record certified by the BOR, without exercising its statutory power to recover the missing hearing record or otherwise obtain the pertinent evidence.

·         The BTA is not prevented from readopting the appraisals submitted by Lutheran Services so long as it explains by the critical testimony offered by the BOE’s witness does not impugn the validity of their reliance on such appraisals. Absent an abuse of discretion, the court on a rehearing could very likely uphold the BTA second time around.

·         The appraiser for Lutheran Services appeared to have complied with prior case law that requires valuations of government-subsidized property using market rent and expenses. If the BTA readopts the appraisals and adequately addresses the reasons for not agreeing with the BOE’s offered testimony, Lutheran Services might finally win the day. It will only have taken nearly a decade.


As these decisions show, the court will give significant deference to the BTA’s findings of a question of fact, weighing evidence and assessing credibility of appraisals as such actions are the statutory job of the BTA. However, the court cannot read minds. The BTA’s reasoning needs to be laid out in the record and damaged/missing evidence must be addressed.

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It is Down to the Wire Now in Ohio Residential Real Estate Transactions

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

This… is …. Jeopardy. Our single category today is Obsolete Ways of Doing Business. Here is the clue: On and after April 6, 2017, this form of doing business (in residential real estate transactions in Ohio) will join the Dictaphone, pay phone, typewriters, original documents and carbon copies as a now obsolete way to do business. And the question-answer is? What is paying funds to escrow/title agents in the form of cash, personal checks, money orders and certified checks for amounts exceeding $1,000.

In other words, on and after April 6, 2017 (the effective date of the law), title/escrow agents can only accept wire transfers of funds over $1,000 in “residential transactions” (defined as transactions regarding any real property improved or to be improved with a one-to four-family dwelling) in Ohio. The reason is that Ohio’s “Good Funds Law”, Ohio Revised Code Section 1349.21 was amended as part of Ohio HB 463 signed in December of last year. Prior to the amendment, only personal checks over $1,000 were prohibited methods to transfer funds. For a copy of ORC 1349.21 (prior to and after amendment), see: http://codes.ohio.gov/orc/1349.21.

According to the Ohio Legislature, “The goal of the legislation was and remains (after its amendment) to protect against fraud and to preserve the integrity of consumer funds that are held and disbursed in real estate transactions.”

There are two basic exceptions to the law’s general rule that funds over $1,000 in residential transactions in Ohio must be wired to escrow. The first is regarding funds originating from brokerage trust accounts. Title agents are permitted to accept checks drawn on a broker’s trust account with no dollar limitation. So, for example, if a broker is holding a $15,000 earnest money deposit, a $15,000 check drawn on the broker’s trust account can be accepted by the title company. The second exception is that funds initiated by the United States, State of Ohio, or by an agency, instrumentality or political subdivision of either may be in the form of a check or Electronic ACH.

The Ohio Land Title Association (OLTA)* has published the following (re-printed with permission), FAQ’s summary of the law, as amended:

OLTA OHIO GOOD FUNDS LAW FAQs
(Related to ORC §1349.20-§1349.22 and the changes to ORC §1349.21, effective April 6, 2017)

Q: Does the law only regulate funds collected from the consumer (buyer/borrower/seller)?

A: No. This aspect of the law has not changed, the law regulates any and all funds collected by an escrow or closing agent in connection with an escrow transaction involving residential real property. So, it also regulates the funds collected from a lender as well as from a consumer.


Q: Is it permissible to use cash over $1,000 if it is deposited in the escrow account of the closing agent in advance of closing?

A: No. The law only permits cash if it is in the amount of $1,000 or less AND it is physically received by the escrow agent prior to disbursement AND intended to be deposited no later than the next banking day after the date of disbursement.


Q: Does an “internal transfer” of funds from one account to another at the same institution qualify as “electronically transferred funds” under the law?

A: No. All electronically transferred funds must be sent via the real time gross settlement system provided by the federal reserve banks (i.e. wire transfer) and must be immediately available for withdrawal and disbursement. Electronically transferred funds may also be sent via the automated clearing house (ACH) system only if they are initiated by the United States, State of Ohio, or by an agency, instrumentality or political subdivision of the United States or the State of Ohio.


Q: If the buyer needs to bring $1,200 to close, is it acceptable if they bring a $1,000 cashier’s check and $200 in cash?

A: No. Cash, personal checks, business checks (other than those drawn on a real estate broker’s trust account), certified checks, cashier’s checks, official checks, or money orders must be in an aggregate amount not exceeding $1,000. Any checks or money orders must also be drawn on a federally insured bank, savings bank, savings and loan, or credit union.


Q: If the buyer has given the real estate broker $2,000 in earnest money, and the broker brings these funds to closing, can they be used?
A: Yes. As long as the broker brings these funds in the form of a business check drawn on the broker’s special or trust bank account (as defined under ORC §4735.18(A)(26)) these funds can be presented at closing. There is no limit on the amount of a check from the broker’s account.


Q: Can an escrow or closing agent accept a cashier’s or certified check over $1,000 if it is deposited in time to “clear” the bank before disbursement?

A: No. The law only permits cashier’s or certified checks in an aggregate amount of $1,000 or less.


Q: If the buyer needs to bring $1,500 to closing and has given the real estate broker $1,000 in earnest money, can the buyer use the earnest money and bring the difference in the form of a personal check?

A: Yes. As long as the broker draws the $1,000 on the broker’s special or trust account, the consumer can bring the difference in the form of a personal check. The broker’s trust account check does not count toward the aggregate limitation of $1,000 for cash, personal checks, business checks, certified checks, cashier’s checks, official checks or money orders.


Q: Is the law only applicable to residential transactions?

A: Yes. This aspect of the law has not changed. The law only applies to residential real property transactions which are defined as any real property improved or to be improved with a one-to four-family dwelling.


Q: If all parties to a residential real property transaction agree and instruct that other forms of funds are acceptable in that transaction, can the escrow or closing agent follow this separate instruction?

A: No. The terms of the law must be strictly followed and does not permit the consumer, lender, or escrow or closing agent to alter the types of acceptable funds in a residential real property transaction.


Q: Is a check from another title company for greater than $1,000.00 is exempt from the rule. In other words, can a title company which takes seller’s proceeds for seller to buy new send those funds by check to the new title company. In other words, are title company to title company checks exempt regardless of the amount of the check.

A: The answer was no, we came to the conclusion that the statute is clear that title company checks are not exempt from the rule.

Q: Does it apply to refinances?

A: Yes. It applies to all residential transactions.


Q: Does it apply to cash deals?

A: Yes. It applies to all residential transactions.


Q: What about a bank funding into a bank account? A situation with a lender like Union Savings Bank that funds their refinances into the Escrow Account of the Title Agency that is an IOTA Account set up at the same bank.

A: The lender will not be able to do an ACH into your account. They will have to send the funding by wire via the real-time gross settlement system provided by the Federal Reserve banks, as outlined in the code.


Q: With the increase in wire fraud, doesn’t this make it riskier for the consumer?

A: If the proper procedures are put into place to make sure that any wire instructions are provided in person or verified by the parties prior to being sent, the risk of not having funds available for disbursement or being told they did not clear, post-closing, stop the consumer from being harmed. Fraudulent Certified Checks and Cashier’s Check pose a greater risk to the consumer than a wire.


Q: Bank branches set limits on the amounts that can be wired from a consumer account.

A: It seems like mobile banking limits the amount that can be wired from an account but not an actual branch visit in order to initiate the wire, although this may vary by bank. We have also instructed the agents to let their customers know when the order is opened, that the money needed from all parties will need to be in the form of a wire for any amount over $1,000, so they need to check with their bank to see what that banks policy is on sending wires. If they will only be able to send increments of the total each day, they will need to start the process early, in order to have the full amount of any funds needed on the day of disbursement.


Q: Is the law applicable to only residential transactions

A: Yes


Q: Does the new law apply to escrow funds pertaining to out of state transactions?

A: If the money for this transaction will be received and disbursed from the Ohio IOTA account, then it will have to follow this law. The only exception to this would be for a Commercial transaction, as this does not apply to commercial deals.


Q: Does the statute totally prohibit the taking of all but the enumerated checks or can we take checks as long as no disbursement is made from the escrow account until that check has cleared, in other words, if I [title/escrow agent] get an earnest money deposit of $10,000.00 in check form but my transaction is not closing for 60 days, and there will be no disbursement on that file for 60 days can I accept that check?

A: Unless the funds are for Earnest Money and those funds were sent to us from the Real Estate Broker from the Real Estate Brokers Trust account, all deposits will need to be in the form of a wire. The above scenario is most likely to happen in a commercial transaction though, which would not be covered by this rule.


Q: How does this affect “back-to-back” closings in round-table areas?

A: Back-to-back closings currently come with many challenges and the change to the Good Funds Law will not meaningfully change the structure. For many reasons (title defects, underwriting issues with new loan, slow delivery of documents, delay in delivery of remotely-signed documents, delay in receipt of lender’s funds on day of close, etc.), it can be difficult to synchronize two closings to happen within a few hours on the same day. Such a structure is discouraged because it can lead to additional complications for a seller (soon to be buyer) when a variable on the first transaction causes delay in closing and/or disbursement and impacts their ability to close on the second transaction. For various reasons, many title companies already require that the funds from the first closing be wired for the second closing. For all residential transactions, this will now be required (unless such proceeds are $1,000 or less). Title professionals have already been discussing ways to efficiently verify and securely wire funds from one company to another and closings should be scheduled to allow reasonable time for the funds to be wired from one company to the next.

*The Ohio Land Title Association serves to advocate and advance its members’ educational, ethical, and professional interests. OLTA benefits the public by promoting quality and integrity in real estate transactions. OLTA promotes safe and efficient transfer of ownership, provides educational opportunities, and is a legislative advocate.  To learn more about the Ohio Land Title Association, log on to their website at:  http://www.olta.org/.
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In addition to amending Ohio’s Good Funds Law, Ohio HB 463, effective April 6, 2017 also: makes permissive the awarding of actual damages and attorney's fees in housing discrimination cases before the Civil Rights Commission; expedites foreclosures regarding court-certified abandoned properties, bans the use of plywood to secure vacant residential properties and makes certain other modifications to Ohio’s foreclosure laws, housing creditor rights laws and UCC laws.  For a legislative summary of Ohio HB 463, log on to: https://www.legislature.ohio.gov/download?key=6187&format=pdf.