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

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz
(A Watch Your Language Series Article)

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

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

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

The facts of the case are as follows:

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

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

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

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

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

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

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

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

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

What is the moral of this story?

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

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

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

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

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

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

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

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

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

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

“Game” (Case) Called on Account of Absurdity

By: Stephen D. Richman, Esq.- Senior Counsel- Kohrman, Jackson & Krantz
(A Watch Your Language Series Article)

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

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

General Rule Re: Commercial Contract Interpretation

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

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

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

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

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

The facts of the case are as follows:

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

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

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

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

The trial court ruling:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Is The Moral Of This Story?

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

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

Posted by Connie Carr

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

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

In 2014, Tenant received notice of a rent increase effective June 1st with the option to accept or provide 30 days’ notice to terminate with a move-out date. Tenant chose the latter option but failed to mail the notice with May’s rent to the correct address. Landlord did not receive the notice until May 19th and had already sent out an eviction notice on May 12th due to nonpayment of rent.  Tenant further exacerbated the situation by assuming the rent check was lost in the mail, stopped payment on the check, and mailed out a second check. Landlord belatedly received both checks plus the delinquent termination notice and returned the 2 checks to Tenant. In a verbal discussion with a Landlord representative, Tenant agreed to move out by June 1st and Landlord agreed to cancel the eviction. Landlord did dismiss the eviction but proceeded with its case for past due rent and late fees.
The magistrate and trial court both found in favor of Landlord on all counts except the amount of late fees. The lease called for $10/day and both parties agreed that the late fees per month were capped at $150. The magistrate found that the monthly late fees were not equitable and reduced to $50 per month (i.e., $10/day for maximum of 5 days). After crediting the security deposit funds held by Landlord, the amount the lower court ordered due by Tenant was $850.

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

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

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

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

The Ohio Supreme Court in Sampson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27, 465
N.E.2d 392 (1984) set out a test to be used to determine whether a contract provision should be considered liquidated damages (i.e., enforceable) or an unenforceable penalty:

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

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

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

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

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

The Government Does Not Always Win

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

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

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

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

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


The subject property in Terraza is a 54,000+SF fitness center (L.A. Fitness) in Franklin County, owned by appellant Terraza 8, L.L.C (“Terraza 8”).
The Franklin County auditor assessed the subject property at $4,850,000 for tax year 2013. Appellee Hilliard City Schools Board of Education (“BOE”) complained to appellee Franklin County Board of Revision (“BOR”) that the property should have been valued at $15.4 Million, based on its sale price in February 2013. Terraza 8 did not defend the complaint, and the BOR increased the valuation to $15.4M for tax years 2013 and 2014. Terraza 8 then appealed both years’ valuations to the BTA.
At the BTA hearing, appellant’s appraiser (Patricia Costello) testified that the sale price did not represent the fee simple market value of the property because the property was encumbered by an above-market lease with rents at $22/SF (when market rents were approximately. $11/SF). The appraiser’s sales comparison valuation of the property, unencumbered by a lease was approximately $7M.
The BOE objected to the BTA evidence presented by Costello, arguing that it was inadmissible because Terraza 8 had not rebutted the recency or arm’s-length nature of the sale. Terraza 8 countered that the evidence was admissible due to a change in Ohio Revised Code Section 5713.03 (R.C. 5713.03), which, it alleged, required the county auditor, the BOR, and the BTA to value the fee-simple estate of the property, unencumbered. The BTA overruled the objection and admitted the evidence, however, it disregarded Costello’s appraisal and determined a value closely approximating the $15.4M purchase price for tax year 2013. The BTA did not reconcile the new statutory language with its conclusion, except to point out that R.C. 5713.03 still permits a property’s recent sale price to be used in determining its value.
Terraza 8 then appealed the BTA’s decision upholding the BOR’s sales price valuation to the Ohio Supreme Court.
The Supreme Court of Ohio in Terraza reversed (and remanded) the BTA decision, basically upholding and applying Ohio’s “real property valuation statute” (R. C. 5713.03), as amended in 2012 as part of Ohio House Bill 487.
R. C. 5713.03
Prior to the 2012 amendments to R.C. 5713.03, Ohio county auditors were essentially obligated to consider the recent sale price of real property to be its true value. You may recall that the plain “mandatory” language of the original statute regarding recent sales prices establishing value was reinforced by the Ohio Supreme Court in Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision (2005), 106 Ohio St.3d. 269. The revised statutory language of R.C. 5713.03 now provides that an auditor "may" (vs. shall) consider the price of a recent sale as value.

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

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

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

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

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

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

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

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

The subject property in W. Carrollton comprises two adjacent parcels of vacant land (as of the tax lien date), totaling approximately 15 acres—which were purchased by CarMax for $5,850,000 in 2008.
Sometime after the sale, the W. Carrollton City Schools Bd. of Edn. (“BOE”) filed a complaint seeking an increase in the value (for tax year 2008) of the subject property from its then $578,100 valuation to the $5.8M sales price. The Montgomery Cty. Bd. of Revision (“BOR”) ordered an increase but not to the full amount of the sale price. The BOE then appealed to the Board of Tax Appeals (“BTA”), and the BTA reversed the BOR’s decision based on the fact that the 2008 sale was a recent arm’s-length transaction.
Between 2008 and 2009, CarMax constructed an approximate 45,000 SF used-car sales facility on the property, spending a total of about $7M.
In 2011 (a triennial update year in Montgomery County), the auditor set the value of the subject property at $4.7M, approximately $1.1M less than the property’s 2008 sales price. Thereafter, the BOE filed a complaint seeking an increase to the 2008 sale price of $5,850,000. The BOR retained the auditor’s valuation of $4.7M for the 2011 tax year, and the BOE appealed to the BTA. The BTA rejected using the sale price to value the land because the sale occurred more than 24 months before the January 1, 2011 update valuation, and thus was not a “recent”, arm’s length sale according to the BTA.  Specifically, to justify its ruling, the BTA cited the proposition set forth in Akron City School Dist. Bd. of Edn. v. Summit Cty. Bd. of Revision, 2014-Ohio-1588, namely that “a sale that occurred more than 24 months before the lien date and that is reflected in the property record maintained by the county auditor or fiscal officer should not be presumed to be recent when a different value has been determined for that lien date as part of the six-year reappraisal.” Finding an absence of competent and probative evidence of value, the BTA retained the auditor’s original value of $4.7M.
The BOE then appealed the BTA’s decision to the Ohio Supreme Court.
The Ohio Supreme Court in W. Carrollton did not need the benefit of the amendments to R.C. 5713.03 as in the Terrazo case (actually, those amendments would not have been applicable as their effective date was after the tax years at issue) in order to affirm the BTA’s decision in favor of the taxpayer. This is because R.C. 5713.03 (in 2008, 2011 and currently) has its own, “built-in” exceptions to the general rule in favor of using a recent, arm’s-length sale price to determine value.

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

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

The second “built-in exception” to R.C. 5713.03 (relevant to and recognized by the BTA and the Ohio Supreme Court in W. Carrollton) is “recency of the sale”. R.C. 5713.03 provides that “the best evidence of the true value in money of real property is an actual, recent [emphasis added] sale of the property in an arm’s-length transaction.” The court in W. Carrollton, citing precedent (prior court decisions on point) explained that “the recency rule of R.C. 5713.03 encompasses all factors that would, by changing with the passage of time, affect the value of the property,” including the improvement exception, which is itself a factor that relates to the recency of the sale.
As an aside, you may be wondering, what is considered “recent”? One year, two years, three years? According to the Supreme Court of Ohio, “[P]roximity is not the sole factor affecting recency.” Worthington City Schs. Bd. of Educ. v. Franklin County Bd. of Revision, 2009-Ohio-5932. “[G]eneral developments in the marketplace are [also] relevant.” Cummins Property Servs. LLC v. Franklin Cty. Bd. of Revision, 2008-Ohio-1473.

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

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

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

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

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

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

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

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

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

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

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

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

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

The Court determined the following:

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

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

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

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

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

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

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.”