Watch your Language with Oil and Gas Leases in Ohio (#2)

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

(A Watch Your Language Series Article)

It’s a lease, it’s a contract, it’s a lease and a contract.

Just as Faye Dunaway’s character in the movie Chinatown was both mother and sister to “Katherine”, an oil and gas lease in Ohio (and other jurisdictions) is both a contract and a lease.

An oil and gas lease is a lease, not because of its name, but because it is a transfer of a part of an interest in land for a specific period of time, or “term,” in exchange for the payment of rent, royalties or other standard of value. In other words, it fits the classic definition of, and contains the common characteristics of a lease. In an oil and gas lease, mineral rights/interests of the “dirt” are leased instead of the actual “dirt” itself. Both the dirt and the oil and gas underneath the same are “parts” of real property that can be leased.

As a transfer of property, the lease, like a deed contains certain written and unwritten (implied) covenants. A deed’s covenants, for example include the covenant that the grantee shall have quiet possession, that the grantor is lawfully seized (in fee simple) of the property and a covenant that the grantor will execute such further assurances of the land as may be requisite. A typical lease of real property contains the implied (sometimes express) covenant of quiet enjoyment (or possession); and oil and gas leases are held to contain the implied covenant of reasonable development.

An oil and gas lease is also a contract because it meets the following, legal definition of the same: “an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” For an oil and gas lease to be an enforceable contract, the following general, contractual requirements must be present: (i) meeting of the minds; (ii) consideration; (iii) capacity; (iv) legality; (v) definiteness; and (vi) the lease must be in writing. The significance of an oil and gas lease also being a contract is that the general law of judicial contract interpretation applies. Namely, that courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy (and will not add language to the contract). As the reader may recall from other “Watch Your Language” articles for this Blog, because of this judicial deference to “commercial language”, you must say what you mean, precisely, or a judge will decide what you meant.

Apparently, the plaintiffs in the recent Supreme Court of Ohio case, Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, lost sight of the dual nature of oil and gas leases, the rules of judicial interpretation of contracts, and the failure to say, precisely what they meant to say therein.

 The facts of the case are as follows:

Seven individual landowners (the “Landowners”) hold interests in approximately 74 acres of land in Washington County, Ohio. The land is subject to an oil and gas lease (the “Lease”) entered into in 1980, between the owners of the property at that time and Collins-McGregor Operating Company (later assigned to Winston Oil Company). Collins-McGregor and Winston were the appellees in this case and will be referred to hereinafter as the “Oil and Gas Companies”. According to the Lease, “[T]he sole and only purpose [of the lease is to permit] mining and operating for oil and gas and laying pipe lines, and building tanks, powers, stations, and structures thereon, to produce, save and take care of said products.” In return for permission to mine the land, the Oil and Gas Companies committed to make royalty payments based on the amount of gas produced from the land and to deliver a portion of the oil produced from the land to the Landowners.

The Lease further provides that it “shall remain in force for a term of One (1) years from [the effective] date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.” However, other than the specific term and general purpose, the Lease contains few other material terms. The Lease is conspicuously silent as to details of drilling and production. For example, the Lease contains no requirement or other information re: the specific number of wells or the planned depth of any well. The Lease also does not disclaim any implied covenants (such as the implied covenant of reasonable development).

Pursuant to the Lease, a well was drilled in 1981, and has produced oil and gas in paying quantities since then from a formation called the Gordon Sand. As of the date of the opinion, however there had not been any production from the land at any depths below the Gordon Sand, where the Marcellus and Utica formations are located—(the Oil and Gas Companies claimed that they failed to explore whether production can be obtained from those deep formations because they did not have the equipment or financial resources required to do so).

In November of 2015, the Landowners filed suit against the Oil and Gas Companies alleging that they breached several implied covenants, and improperly failed to explore or drill for oil at depths below the Gordon Sand. The Landowners sought a judgement declaring the portion of the Lease covering depths below the Gordon Sand terminated, so that the Landowners could presumably contract with an alternative oil/gas company willing to drill into the Marcellus and Utica formations.

Among the implied covenants that the Landowners claimed the Oil and Gas Companies breached are the implied covenant of reasonable development and an implied covenant to explore further. The Oil and Gas Companies described the judgement sought by the plaintiffs as “horizontal forfeiture” (i.e., forfeiture of the right to drill to a particular horizontal layer or formation beneath the surface) but moved to dismiss the case, arguing that Ohio law does not recognize the implied covenant to explore further, or the remedy of horizontal forfeiture. The trial court agreed with the Oil and Gas Companies and dismissed the case, holding that under the plain terms of the Lease, the still-productive well drilled in 1981 was “sufficient to hold the Lease across all acres and at all depths.” The Fourth District Court of Appeals affirmed, holding that Ohio law neither recognizes an implied covenant to explore further, nor partial, horizontal forfeiture of oil and gas rights as an available form of relief. The Landowners then applied to the Ohio Supreme Court.

Arguing before the Ohio Supreme Court, the Landowners cited several 5th appellate district decisions that recognized the existence of an implied covenant to explore further. The Oil and Gas Companies countered that while cases from one appellate district in Ohio may have recognized such a covenant, none actually applied the covenant. Moreover, the Oil and Gas Companies argued that there was no need to recognize a new, state-wide implied covenant because the covenant of reasonable development provides sufficient protection for landowners. Furthermore, the Oil and Gas Companies argued that the plain language of the Lease contained no development details, no new covenants and no requirement to partially forfeit the lease, so it was not the court’s job to do any more than interpret the contract as written, and apply the only, universally recognized, implied (oil and gas lease) covenant; the covenant of reasonable development.

The Supreme Court of Ohio agreed with the Oil and Gas Companies and affirmed the ruling of the 4th Appellate District.

In its opinion, the Supreme Court of Ohio first cited precedent, reiterating the dual nature of oil and gas leases. “Oil and gas leases are contracts, and therefore, ‘the rights and remedies of the parties to an oil and gas lease must be determined by the terms of the written instrument’ [however], notwithstanding this principle, we have long held that oil and gas leases are ordinarily subject to an implied covenant to reasonably develop the land.”

The court then explained that while the covenant of reasonable production is generally a protection implied to landowners (lessors), its standard is to only “impose on the lessee the obligation to act as a reasonably prudent operator would as it develops the land under the lease.” Applying the standard to the facts of the case, the court reasoned that since drilling below the Gordon Sand formation would cause the Oil and Gas Companies to lose profits in the venture, limiting production to the Gordon Sand formation only, would be reasonable. Citing the Oklahoma Supreme Court, the Ohio Supreme Court in Alford reasoned that ignoring the profit motive from the “reasonableness equation” “is to ignore the very essence of the contract.

The court also agreed (quite emphatically) with the Oil and Gas Companies’ contract argument; stating, that the proposition of the rights and remedies of the parties to an oil and gas lease being determined by the terms of the written instrument was “uncontroversial” and “what this court has recognized since 1897.” The court reasoned that if the parties intended there to be specific drilling requirements beyond “reasonable development”, they would have specified same in their oil and gas…contract. However, the court noted that “the lease [in Alford]does not contain a disclaimer of implied covenants, nor does it otherwise address whether any specific number of wells must be drilled or the depth to which any wells must be drilled. As such, the lease, according to the Ohio Supreme Court was subject to the implied covenant of reasonable development, but no other covenants, express or implied.

What is the moral of this story?

Watch Your Language with oil and gas leases, and say what you mean, precisely, or a judge will decide what you meant. While oil and gas leases are often convoluted, and written in small font, “standard” forms; they are contracts, not holy tablets of stone, and accordingly, are negotiable. If you are expecting certain formations to be drilled, say so. If you want a minimum of wells drilled on your property, spell that out. Certainly, arguing for these types of clauses does not guarantee they will be included in your lease, but failing to include them before you sign will almost always guarantee that they will not be part of you contract.

To Be or Not to Be (an Enforceable Real Estate Agreement), That Is the Question

While title to real estate cannot transfer without a deed and a closing, the closing merely carries out the provisions of the real estate agreement. Accordingly, it is the agreement in a real estate transaction that is of paramount importance as it creates the interest of the buyer to be conveyed by deed (note, however the “Doctrine of Merger” discussed in our March 31, 2014 post: Don’t Let Your Contract Disappear (Merge) Into Your Deed) and determines the rights and obligations of the parties, some of which may remain in play well past the closing.

What many buyers and sellers lose sight of (including the buyer in the recent Stark County Court of Appeals case- Sabatine BK Dev., L.L.C. v. Fitzpatrick Ents., Inc., 2017-Ohio-805), however is that the physical existence of a real estate contract does not guarantee its legal existence or enforceability.

I. REQUIRED ELEMENTS FOR ENFORCEABILITY: Even before the minutiae within the agreement form is analyzed and such issues as representation and warranty provisions are debated, covenants on how the property is to be operated between signing and closing are discussed and title and survey provisions are negotiated, you must ensure that your real estate contract will be enforceable. A real estate contract, like any contract is generally defined as a binding agreement or promise to do something. Basically, to be a valid, enforceable legal contract, five elements must be present:

A. Meeting of the Minds /Agreement.   Agreement generally occurs when one party to a contract makes an offer or promises to do something and the other party accepts.  For example, suppose a person offers to buy a property you have advertised by virtue of sending you a contract containing the terms upon which they would be willing to buy.  There is no contract until the offer is accepted and signed by both the buyer and the seller.  If the seller should choose to change any of the terms of the offer, a counteroffer has been created, which must then be accepted by the buyer to constitute an agreement.

B. Consideration.     Consideration is anything of value promised to another when making a contract.  It is a detriment incurred by the promisee and/or a benefit to the promisor. The money the buyer gives as a deposit and the terms for payment in the purchase agreement are valuable consideration on the part of the buyer; and the property, as well as the promise to deliver possession of the property upon receipt of the purchase price constitutes valuable consideration on the part of the seller.  Payment, however, does not need to be in the form of money; it may be a trade of other real property or personal property, or a promise to perform an obligation.

C. Capacity.   Capacity means that one is legally able to enter into a contractual agreement.  As a general rule of law, minors, intoxicated persons and mentally incompetent persons cannot legally enter into valid contracts.  If they do make themselves parties to contracts, the agreements are typically voidable.

D. Legality.  For a contract to be enforceable, it must be for a legal purpose.

E. Definiteness. The terms of the contract, especially basic terms such as price, legal description, and closing date must be reasonably certain. A court must be able to look at the agreement and determine the parties' obligations from within the “four corners of the document.”

F. Writing.  All contracts dealing with the purchase or sale of real property must be in writing for a contract to be enforceable.   (Note: contracts for the purchase or sale of personal property must be in writing if for more than $500).


The buyer in Sabatine found out, “the hard way” that all of the above elements must be present in order to constitute an enforceable contract, not just a majority, three out of five.

The facts of the case are as follows:

Plaintiff-appellee Fitzpatrick Enterprises, Inc. (“Fitzpatrick”) owned a number of parcels of land on Dressler Road, in Canton, Ohio, comprising a shopping center commonly known as “Thursday’s Plaza.” In January of 2015, defendant-appellant Sabatine BK Development, LLC (“Sabatine”) made an offer to buy one of those parcels (an out lot), formerly leased to Macaroni Grill.

In order to sell the Macaroni Grill site to Sabatine, the parties understood that Fitzpatrick would have to split off that property from other parcels at Thursday’s Plaza. In Sabatine’s proposed purchase offer, “Property” was defined as follows: “…certain real property and buildings with an address of 4721 Dressler Rd. NW, Canton, OH 44718; situated in Stark County, tax map/parcel number 1620800, consisting of approximately 2.2 acres of land, which shall be subject to a mutually agreeable replat of the property, as depicted on Exhibit A (formerly the Macaroni Grill) attached hereto and made a part hereof, …together with all rights and appurtenances pertaining to such real property…; and all improvements and structures situated thereon (collectively, the ‘Property’).”  Sabatine signed its proposed purchase offer, although “Exhibit A” was not attached to the agreement.  Fitzpatrick, however refused to accept Sabatine’s proposed purchase offer without an “Exhibit A”.

After making significant changes to Sabatine’s proposed purchase offer (including adding a provision for non-exclusive parking at Thursday’s Plaza), and attaching a site plan as “Exhibit A”, Fitzpatrick signed what became its counteroffer (by virtue of the changes to the offer) and sent it to Sabatine’s agent on January 15, 2015.

Approximately four months later, and two days before the end of the purchase agreement’s extended due diligence period, Sabatine submitted a counteroffer to Fitzpatrick’s January counteroffer. Sabatine’s May counteroffer called for exclusive parking (which would reduce the number of parking spaces available to all of the Thursday’s Plaza tenants), access for ingress/egress to the remainder of Thursday’s Plaza, and a split-off of the property from two separate parcels. Fitzpatrick rejected Sabatine’s May counteroffer, which had been offered and summarily rejected a month earlier. In a letter dated May 18, 2015, counsel for Fitzpatrick notified Sabatine that seller’s January 15, 2015 counteroffer was being terminated and withdrawn.

On May 28, 2015, Fitzpatrick filed a complaint for declaratory judgment, requesting the trial court officially declare the agreement between the parties a non- enforceable contract, and accordingly, void so that Fitzpatrick could sell the property to someone else, without worry of any interference from Sabatine. Sabatine filed an answer and counterclaim for breach of contract, promissory estoppel, and breach of fiduciary duty. The trial court granted judgment in favor of Fitzpatrick, holding that there was never an enforceable agreement as there was no meeting of the minds. The trial court also found that Sabatine failed to prove all of the elements of its claim for “promissory estoppel.”
In Ohio (and most other jurisdictions), promissory estoppel is the exception to the general rule of contract enforceability; namely, a “quasi-contractual concept where a court in equity seeks to prevent injustice by effectively creating a contract where none existed.” Stickler v. Keycorp, 8th Dist. No. 80727, 2003-Ohio-283, at ¶ 18.  To establish a claim of promissory estoppel under Ohio law, the plaintiff must prove the following elements: (1) a clear and unambiguous promise; (2) reliance upon the promise by the promisee; (3) reliance by the promisee that is both reasonable and foreseeable; and (4) injury to the promisee as a result of the reliance. Rigby v. Fallsway Equip. Co., Inc., 2002-Ohio-6120. While the Sabatine decision does not elaborate on Sabatine’s failed promissory estoppel claim, presumably, factors (1) and (3), above were not met due to the fact of there being multiple counter offers, without clarity on the subject of exactly what property would be transferred, and what parking and access rights would attach.
The Stark County Court of Appeals in Sabatine, did, however clearly explain why it agreed with the trial court’s decision (declaring the subject purchase agreement, unenforceable). According to the court of appeals, “Like the trial court, we find there was never a meeting of the minds as the parties never agreed on an essential element of the transaction, to wit: the real estate to be transferred.” The court reasoned that while Fitzpatrick finally added an Exhibit A, making the contract definite, it also added new, material terms, effectively creating a counteroffer proposal to the buyer, which was rejected, by virtue of Sabatine’s submittal of a counteroffer (in May) to Fitzpatrick’s January counteroffer. As aptly summarized by the court of appeals, “An acceptance which changes the terms of the contract does not create a binding contract because it constitutes a counteroffer.”

Even assuming, arguendo, that Sabatine established the essential elements of the contract, the court of appeals, nonetheless, found the parties did not have an enforceable agreement because embedded within Exhibit A was an unsatisfied condition precedent (an event that must occur before an obligation in the contract will become effective) calling for a mutually agreeable re-plat, which could never be satisfied since the parties disagreed upon how the property would be split, parking and access rights…

Based upon the foregoing, the court of appeals in Sabatine held that “the trial court did not err in concluding there was never an enforceable agreement between the parties.”

What is the moral of this story?

It is not enough to “say it in writing,” and have a signed document as evidence thereof. Real estate contracts must also be definite, especially with regard to material terms such as what property is being transferred. All too often, buyers and sellers rush to sign an agreement and leave the exhibits until later. This is not illegal or immoral; however, if there is no later agreement on the subject matter of an exhibit, particularly the “description of the property exhibit,” you could be the proud owner of a contract, without the rights that go along with it.

Remember also, that signing an offer, but sending it back with signed or initialed modifications (another common practice) is a counter offer, not an acceptance of the original offer.

In other words, odds are that an unenforceable real estate contract will not generate a purchase or a sale, only scratch paper and a lot of legal fees.

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.