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

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

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 Our single category today is Obsolete Ways of Doing Business.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

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

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

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

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

(Related to ORC §1349.20-§1349.22 and the changes to ORC §1349.21, effective April 6, 2017)

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

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

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

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

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

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

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

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

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

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

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

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

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

Q: Is the law only applicable to residential transactions?

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

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

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

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

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

Q: Does it apply to refinances?

A: Yes. It applies to all residential transactions.

Q: Does it apply to cash deals?

A: Yes. It applies to all residential transactions.

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

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

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

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

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

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

Q: Is the law applicable to only residential transactions

A: Yes

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

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

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

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

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

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

*The Ohio Land Title Association serves to advocate and advance its members’ educational, ethical, and professional interests. OLTA benefits the public by promoting quality and integrity in real estate transactions. OLTA promotes safe and efficient transfer of ownership, provides educational opportunities, and is a legislative advocate.  To learn more about the Ohio Land Title Association, log on to their website at:

In addition to amending Ohio’s Good Funds Law, Ohio HB 463, effective April 6, 2017 also: makes permissive the awarding of actual damages and attorney's fees in housing discrimination cases before the Civil Rights Commission; expedites foreclosures regarding court-certified abandoned properties, bans the use of plywood to secure vacant residential properties and makes certain other modifications to Ohio’s foreclosure laws, housing creditor rights laws and UCC laws.  For a legislative summary of Ohio HB 463, log on to:

Bill Pending in OH Senate Would Enable Limited Home Rule Townships to Adopt Building Codes

On February 9, 2017, Ohio Senator Bacon introduced Senate Bill 43 to remove an exception  under current law that prohibits a limited home rule township from adopting building or other codes if the the county where it’s located has adopted a code on the same subject.

In Ohio, townships are permitted to adopt a limited home rule form of government and as such may adopt building codes and other standards such as plumbing, electrical or fire codes, to name a couple. However, if the county where a limited home rule township is located has also adopted such codes, then the township cannot adopt its own code on that subject mater. Even when the township adopts its own code first, if the county adopts a similar code later, then the township code on that subject is preempted and no longer in force.

S.B. 43 was referred to committee (Local Government, Public Safety and Veterans Affairs) on February 15th.  If the bill ultimately becomes law, it would change the priority regarding whose code would apply. It would amend current law to allow the limited rule townships to pass their own building codes regardless of whether the county has passed a building code or passes such codes in the future. In either case, the two sets of building codes would coexist and if there was a conflict, the township code would prevail within the township’s borders.

It’s too early to know how this bill will proceed in committee. If it becomes law, contractors will need to be aware that different codes may apply to construction projects within limited home rule townships.

Judicial Deference to the Written Word in Commercial Documents, Still Rules, Except When It Is Clear There Has Been a Mutual Mistake

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

(A “Watch Your Language” Series Article)

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. 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. See, e.g. Christiansen v. Schuhart, 2011-Ohio-1199 (5th Dist. Ct. of App.) 2003 [document that used the words “easement” and “license”, and lacked “binding on successors language” was held to be a revocable license instead of a perpetual easement].

 Because of this judicial deference to “commercial language”, and the fact that courts 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.”

Notwithstanding this deference to the written word, as aptly stated by the genie in the Disney film Aladdin, "There are a few provisos, a couple of quid-pro-quos…” While the genie was specifically referring to the rules with regard to granting wishes, there are also a few exceptions with regard to the rules of “commercial contract deference law”. Most notably is the equitable doctrine of “mutual mistake”. Basically, a court may reform (in essence, re-write) a written agreement, if it finds that “the party seeking reformation has proven by clear and convincing evidence that both parties to an agreement were mutually mistaken as to the substance or meaning of the document. Equity will even permit the reformation of a written instrument not only as between the original parties but also as to parties in privity with them [such as the original parties' successors in interest], unless the opposing party can demonstrate that he was a bona fide purchaser without knowledge of an encumbrance on the property.” Mason v. Swartz (1991), 76 Ohio App.3d 43,50.

The appellant (Circle J. LLC) in the recent case of Dysart v. Circle J, L.L.C., 2016-Ohio-869, unfortunately learned about the afore-mentioned proviso, the hard way (with a judgment for the appellee).

The facts of the case are as follows:

In 1996, David and Kathryn Dysart (Plaintiffs-Appellees) acquired 50 acres of a larger property owned by Leslie and Joan Maust in Wooster, Ohio. Being adjoining properties, there were a number of utility easements and one access easement granted at the time of the sale. The easement at issue in Dysart is the access (driveway) easement which grants the Dysarts (and their successors) the right to use a driveway which runs across the Mausts’ property.

In 2008, the Mausts sold their adjoining property to Circle J. LLC (Defendants-Appellees) a holding company owned by Jamie and Jody Snyder. The contract stated that the property was being purchased/sold subject to existing easements, including the driveway easement at issue, and copies of the easements were attached to the purchase agreement as exhibits. Between 2008 and 2011 the driveway was used by the Dysarts, without any issue from Circle J.

In 2011, the Dysarts attempted to sell their 50-acre property without success. They then tried to sell the property by auction in April of 2013. The day before the scheduled auction, however, Mr. Snyder/Circle J told the auctioneer that he was terminating the driveway easement. Circle J claimed that the document’s plain language permitted either party the right to terminate. The relevant provision states: “This Agreement may be amended, or terminated in whole or in part by Grantors or Grantees, or their respective successors in title to Parcel 1 and Parcel 2 without the consent of any tenant, lessee, mortgagee or other person claiming by or through them.” (Emphasis added). As a result of the unilateral termination, the Dysarts canceled the auction and filed a complaint against the Snyders and Circle J, LLC (collectively “Circle J”), seeking reformation of the driveway easement to reflect the original parties’ intent to create a perpetual easement, and seeking damages. The trial court entered judgment in favor of the Dysarts, reforming the easement document by substituting the word “and” between “Grantors” and “Grantees” for the word “or.”

 Circle J appealed, claiming the trial court erred: 1) in finding that the Dysarts were granted an easement vs. a license; and 2) by reforming the purported “easement”. Circle J argued that since easements are assignable, perpetual interests running with the land that cannot be terminated unilaterally by any individual party, the document in question must be a license which is a personal right or privilege, that does not convey a property interest, is not assignable, does not run with the land and can be revoked unilaterally. Alternatively, if the document was to be construed to be an easement, Circle J argued that the courts should honor the plain language of the easement, and allow either party to terminate the same.

The Dysarts argued that the original parties intended to create an easement allowing permanent access to the Dysarts’ property, rather than a mere license that could be unilaterally terminated and to the extent that the easement document indicated that the easement could be terminated, the document contained a mutual mistake as to the parties’ intent. In addition to the testimony of the Mausts and Dysarts which confirmed such intent, the attorney for the Mausts admitted to the mistake in the document (claiming “boilerplate made him do it”) and further testified that the document was a perpetual easement because: 1) in his practice he would never title a document as an “easement” (as the agreements here were titled) if it could be terminated unilaterally by any party; 2) the agreements were recorded, and there would be no reason to publicly record a mere license; and 3) other provisions in the driveway easement (i.e. binding upon successor language) supported the conclusion that a perpetual easement (revocable only upon mutual assent) was intended.

The trial court and the appellate court in Dysart basically upheld the “mutual mistake proviso” to the “deference to actual language in a commercial instrument rule”. Citing precedent (prior court decisions on point), the Ninth District Court of Appeals in Dysart held that a trial court may reform a written agreement if it finds “that the party seeking reformation has proven by clear and convincing evidence that the parties were mutually mistaken as to the substance or meaning of the document.”

Applying the law to the facts, the appellate court had no problem finding clear and convincing evidence. The Dysarts testified that when they bought the subject property, the parties all discussed their intent to create an easement granting permanent access to the home via the existing driveway. Mr. Maust testified that he directed his attorney to draft the document to “guarantee access to the house that’s on that 50 acresfor as long as the house existed.” Finally, the attorney for the Mausts testified that, after conferring with the parties, he intended to draft agreements that could not be terminated unilaterally by either the grantor or grantee.

Circle J’s final argument was that “the exception to the exception” applies, namely that, irrespective of the mutual mistake of the original parties (Mausts and the Dysarts), Circle J was a bona fide purchaser without knowledge of an encumbrance on the property. The court of appeals in Dysart easily shot down this argument. First, the court cited precedent to clarify that while a court may not reform an instrument as against a bona fide purchaser without notice of the encumbrance, notice may be either constructive or arise from actual knowledge, and when an encumbrance has been recorded, a subsequent purchaser is charged with constructive notice.

In Dysart, the court held that the Snyders had at a minimum, constructive notice of the driveway easement when they purchased the Mausts’ property because: 1) the driveway easement was recorded; 2) the real estate purchase contract contained a section captioned “Subject to Existing Easements/Agreements” and a copy of each easement agreement was attached to the contract; 3) the Deed contained the requisite “subject to language”; and 4) Jamie Snyder testified that he was aware of the easements when he bought the Mausts’ property and never believed he had unilateral authority to terminate the driveway easement until April, 2013, after he asked his attorney to review the easement document.

What is the moral of this story?

Don’t hang your hat on the proviso. The general rule re: judicial deference to the written word in commercial documents, still… rules. Courts are reluctant to reform a document w/o clear and convincing evidence, and rarely is the evidence clear or convincing. Cases are turning on the use of seemingly trivial grammar rules such as e.g. vs. i.e., and the insertion, or omission of commas. The Dysart case and the legal fees that both parties incurred could have been avoided by the use of “and” vs “or”.  Most importantly, “watch your language, and say what you mean, precisely, or a judge will tell you what you meant.”

Ohio Appeals Court Uphold Landowners' Request for Detachment from the City of Dublin

On January 31, 2017, the 10th Appellate District of the Ohio Court of Appeals (the Court) issued its decision regarding certain landowners’ petition to remove their land from the City of Dublin (the City).  The Court’s decision (cited as Rewyal Co. Ltd. Partnership Dublin, 2017-Ohio-367) concerns the application of Ohio’s detachment statute found at R.C. 709.41 and 709.42, which provides for detaching unplatted farm land from a municipal corporation.
The Court upheld the trial court’s decision to grant landowners' request for detachment from the City. However, although the landowners requested the land be attached to Washington Township, the trial court held that Perry Township was the most convenient adjacent township.
The landowners owned 3 parcels of real estate, a total of 41 acres of undeveloped land (the Property) that was annexed by the City from Perry Township in 1974. The Property was located in the northeast corner of the City and adjoined Columbus and Perry Township.
Ohio’s detachment statute contains 4 requirements:

1.       5 years shall have elapsed since the parcels were originally annexed by the city;

2.       The parcels must be farm land that was not within the original corporation limits of the city;

3.       The parcels are in or will remain within the city, and the landowners are taxed or will continue to be taxed for municipal purposes in substantial excess of the benefits conferred on them by reason of being in the city; and

4.       The parcels may be detached without materially affecting the best interests or good government of the city.

The burden of proof in detachment cases rest primarily on the landowners seeking detachment to show by competent and credible evidence that they satisfy the requirements of the statute.
R.C. 709.41 states that detachment cannot be sought within 5 years of the annexation. In this case, timing was not an issue, the annexation having occurred in 1974. The remaining 3 requirements are found in R.C. 709.42.

Is the Property ‘Farm Land’?

In this case, as in other detachment actions, the typical controversy with the 2nd requirement is whether or not the unplatted land is ‘farm land.’ Not surprisingly, the landowners and the City had very different opinions on the definition of farm land.  The statute doesn’t define what constitutes farm land, so the City argued for a restrictive approach that the land must be currently cultivated for raising crops or animals for food. The landowners pushed for a broader definition that would include land available for farming even if not currently used as such. The trial court opted for a definition similar to the landowners’ position, taking the common dictionary definition of “land used or suitable for farming.” The only statutory provision in Ohio’s Revised Code to define farm land (R.C. 931.01(c)) also takes a broader approach.

A few takeaways from the determination of whether the property qualifies are farm land:

·         The fact that two of the parcels were not taxed as CAUV property did not defeat a determination that they qualified as farm land.

·         The fact that two of the parcels were zoned residential did not defeat a determination that they qualified as farm land; particularly because these parcels had previously been used as farm land and were currently leased to another property owner for grazing horses and growing hay.

·         The expert opinion of a qualified appraiser that the Property was properly considered farm land was helpful to the landowners’ position.

Are the taxes paid on the Property in substantial excess of the benefits received?

The trial court conducted a comparative analysis of services provided by the City to the Property versus the tax burden and looked at the following:

·         The receipt of police protection was the sole benefit to the Property.

·         The services generally offered by the City were compared to those offered by Perry Township and found to be lacking – Most City services, such as trash collection, snow removal, leaf pick up and sewer, were not available to the Property. Perry Township could provide more services.

·         The City’s parks, recreation and community programs were a benefit but comparable amenities and programs could be accessed in the township as well.

·         Merely comparing the number of city employees devoted to services vis-à-vis the number employed by a township was not helpful so long as the township has sufficient staff to appropriately meet landowners’ needs based on its size and demands.

·         In conducting a cost of services analysis to taxes paid, the court considered only the services actually conferred on the landowners, not general intangibles. In this case, the minimal use of police protection by the landowners over the years was substantially less than what they paid in taxes.

Can the parcels be detached without materially affecting the best interest or good government of the City?

 The trial court placed the burden of proof for this last requirement on both the landowners and the City. It did not want to automatically elevate the City’s interest above those of the landowners.  In doing so, the trial court followed the approach of an earlier 5th appellate court district decision that no preference would be given to the current trend in Ohio of favoring annexation of land into municipalities.

A few takeaways on this 4th requirement:

·         The number of acres to be detached from a city compared to total city acreage and the relative loss of tax dollars caused by the detachment are factors in determining materiality.

·         The location of the parcels within the city limits can be relevant in determining whether or not detachment would change the identities of neighboring communities.

·         The City was concerned about creating a ‘township pocket’ and did not want to encourage zoning shopping, but its concerns did not carry the day with the Court.
 Despite the trend these days in favor of cities annexing township land, this case illustrates that it is possible to buck the trend and detach unplatted land from the city that annexed it. 

If You Walk Away, or Run (from a Lease), the Deal is not Done

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

You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
You never count your money
When you're sittin' at the table 
There'll be time enough for countin'
When the dealin's done-

Don Schlitz, 1976 (sung by Kenny Rogers)

The above lyrics could apply as much to a real estate deal, as they do to a game of poker. However, in terms of a commercial real estate lease (in Ohio, and presumably other jurisdictions), it is important to realize that even if you need to walk away, or even run from a lease, rarely will the dealin’ or the deal be done. This tenet of real estate law is largely based on the fact that leases are interests in land, as well as contractual agreements. Consequently, it stands to reason that the abandonment or termination of a possessory interest in land, does not necessarily extinguish the contract and obligations inherent therein. This lesson was recently learned the hard way by the tenant in Tecumseh Landing, L.L.C. v. Bonetzky, 2015-Ohio-2741.

Background of Tecumseh Landing, L.L.C. v. Bonetzky
In May, 2012, defendant-appellant Paula Bonetzky (“Tenant”) and Tecumseh Landing, LLC (“Landlord”) entered into a one year lease agreement for the lease of a portion of real estate in Huntsville, OH. At lease inception, the Tenant made a nonrefundable payment of $5,000.00 for the first month’s rent and security deposit. However, shortly after receiving the key and possession of the premises, the Tenant returned the key to the Landlord, indicating that she learned of deficiencies in the premises and did not want to rent the property any more. The Tenant testified that she told the Landlord, “he could take whatever course he needed to, but my course was to back out at that point.  And I left the keys with him and left.”  The Tenant never returned to the property after that and made no further payments to the Landlord.

The Landlord testified that he never told the Tenant that she was being released from her obligations under the lease agreement, and in fact indicated the opposite by stating: “I’m not taking these keys, they’re going to sit here.”

For several months, the keys did in fact sit there while the Landlord made calls to the Tenant which went unanswered and sent a demand notice (for payment of past due rent and late fees) which was returned, unclaimed. Then, in January of 2013, the Landlord e-mailed the Tenant, declaring that “Although your lease is still active …, We intend on subleasing the property to protect our interests in the investment.” The Tenant responded, “I thought I made it clear to you that I was not involved in your operation when I returned your keys to you last May.”

In August of 2013, Landlord filed a Complaint for Breach of Contract and Money Damages in the Logan County Court of Common Pleas alleging that the Tenant breached the lease for failure to pay rent.  Tenant, in her answer, denied breaking the lease, and filed a counterclaim alleging that the Landlord had failed to mitigate its damages. Based upon the testimony at trial, the trial court rendered a judgment in favor of the Landlord on its complaint for damages against the Tenant.  The trial court also found in favor of the Landlord on the Tenant’s counterclaim.

Tenant then appealed the judgement to the Logan County Court of Appeals, claiming that the trial court erred by failing to find that Tenant effectively surrendered the premises (and her requisite lease obligations), and by finding that Landlord effectively mitigated its damages.

The Appellate Court’s Decision/Analysis

The Tecumseh court of appeals basically affirmed the trial court’s decision with regard to all claimed assignments of error, except it did reverse the trial court with respect to its calculation of damages (based upon the court’s failure to properly pro-rate certain expenses paid by the Landlord).
Regarding mitigation of damages, the court of appeals concluded that the burden of proof was on the plaintiff, and the Tenant simply did not provide any affirmative evidence to prove failure to use reasonable efforts to mitigate on the part of the Landlord. On the contrary, the evidence showed that Landlord advertised the property in a newspaper, on Craigslist, eBay, and the company’s website, and that the delay in finding a new tenant was due to the seasonal nature of the business, and Tenant’s non-responsiveness to Landlord’s initial attempts to communicate with the Tenant. The trial court determined that Landlord’s efforts to mitigate were not unreasonable in a “niche market”, and the Logan County Court of Appeals agreed, recognizing that the Ohio Supreme Court’s holding in Frenchtown Square Partnership v. Lemstone, Inc.,2003-Ohio-3648 instructs that “[t]he duty to mitigate requires only reasonable efforts.” 

Regarding surrender, the Tenant argued that she surrendered the leasehold when she returned the keys and that this physical surrender put an end to the lease and discharged her from all further obligations under the term of the lease, including rent.

Using “precedent” (prior case decisions on point), the Tecumseh court of appeals basically held that the law does not work that way; that surrender of premises does not automatically mean the surrender of the lease agreement. According to the court of appeals in Tecumseh, “Ohio law recognizes two instances under which a surrender of a leasehold [and contractual lease obligations] can occur.  The first occurs by an agreement of the parties and must be in writing… and the second type of surrender occurs by operation of law.  This [second] kind of surrender must be a surrender in fact, evidenced by the conduct of the parties to the lease, which implies a mutual agreement to the tenant’s surrender of the lease and landlord’s acquiescence thereto…the intent of the lessor to relieve lessee must be clearly shown.

Applying the law to the facts, the court of appeals in Tecumseh easily concluded neither of the afore-mentioned instances had occurred. First, the Tenant did not argue and the record did not disclose any written agreement in which the Landlord expressly accepted Tenant’s surrender of the premises and lease obligations.  Second, according to the court, “nothing in the evidence provided in the instant case shows a clear intent on the part of Tecumseh Landing to relieve Bonetzky from the lease.” The evidence more so indicated the opposite. For example, the Landlord testified that he did not formally accept the keys (and told the Tenant their lease was “still active”).  Even had the Landlord formally accepted the keys, the court cited long standing precedent that barring clear intent otherwise, “[a]n acceptance by the landlord of the key to the premises, his advertising for a new tenant, and renting the premises to another upon its vacation by the old tenant,” are not sufficient to constitute a surrender of a lease.

The Tenant did try to argue case law, based upon the holding (in favor of a tenant) in Renaissance Mgt., Inc. v. Jay-Lor Corp., (8th Dist. Cuyahoga), 2011-Ohio-2792 (“A new lease agreement is a surrender of the old lease, the effect of which is to terminate the former landlord-tenant relationship and to put an end to the old lease”). The court of appeals in Tecumseh, however dismissed the Renaissance case as non-controlling. While the court’s decision did not elaborate upon the case, the facts in the Renaissance case can be easily distinguished from the facts in Tecumseh. In the Renaissance case, the tenant did not relinquish the keys and abandon the premises, and the landlord did not indicate its intent to hold the tenant to its lease. In Renaissance, the landlord approached the tenant, wanting the tenant to change its use. When the tenant found a prospective assignee who would lease the premises in accord with the desired use, the landlord refused to approve the assignment and thereafter, entered into a new lease with tenant’s assignee prospect on widely different terms. That tenant then defaulted, and without notifying the original tenant, the landlord in Renaissance entered into a new lease with a new, subsequent tenant.

The Renaissance case presents one of the few instances where the landlord’s intent indicated acceptance of surrender of the lease, as well as the premises. In fact, it seems that the landlord in Renaissance encouraged, and then acquiesced in the surrender.

The Moral of the Story

What is the moral of this story? For most tenants, neither the dealin’ nor the deal (in the form of contractual lease obligations) will be done by walking away or running from leased premises. Even when there is a forfeiture clause in a lease (declaring the lease to cease or terminate upon the tenant’s failure to pay rent), Ohio courts have interpreted same to indicate Landlord’s intent to render the lease voidable, at landlord’s election vs. automatically void or terminated (See, e.g., Morris Investments v. Sawyer Indian Hill, 63 Ohio Misc. 2d 202 (1993) and cases cited therein).

Consequently, a tenant’s attempts to work out a termination deal with its landlord will most always result in a better deal than walking away and claiming the landlord has accepted the tenant’s surrender of the lease. Negotiating for favorable (to the tenant) assignment and sublease language “couldn’t hoit” either.

For landlords, even though the odds (and the law) are in your favor, why not minimize any doubt by: 1) insisting upon language in the lease to the effect that upon default of the tenant, “no taking or recovering of possession of the Premises shall deprive Landlord of any of its remedies or actions against Tenant, and Tenant shall remain liable for all past or future rent, including all Fixed Rent, Additional Rent, taxes, insurance premiums, and other charges and rent payable by Tenant under this Lease, during the term hereof”, and by 2) reminding tenant of that fact, in writing, prior to, and after landlord’s repossession of the premises.

Ohio Court: Forced Sale Creates Presumption That Sale Price Is Not The Correct Basis For Property Valuation

By Connie Carr, Partner at Kohrman Jackson & Krantz LLP

On December 28, 2016, the Ohio Supreme Court issued another opinion regarding real property valuation in Utt v. Lorain Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-8402. This case involves the valuation of a single-family home in Elyria, Ohio that was recently the subject of a recent sale.

The property owners had purchased the property from the Federal National Mortgage Association (Fannie Mae), who owned the property as a result of foreclosure, having paid $54,000 to acquire it. Fannie Mae sold the property 3 months later to the current property owners for $20,000.

The county auditor valued the real property at $79,700 for tax year 2012 and the property owner challenged the valuation citing their 2011 purchase as a recent arm’s length sale. The Board of Revision (BOR) upheld the county auditor’s valuation and the Board of Tax Appeals (BTA) reversed it and valued the property at the sale price.   This case illustrates the process and burden of proof on each party challenging a valuation when a recent sale has occurred.

1.    The property owner has the initial burden of proof, to provide evidence of a recent arm’s length sale establishing a lower value. In this instance, the property owners provided the auditor’s parcel report, the conveyance fee statement and documentation of the real estate agent’s listing. Note, in some cases, a copy of the recorded deed and the purchase agreement may also be appropriate to show that the sale transaction was recent to the tax lien date and was arm’s length in nature. [Also note that this case was based on the county’s 2012 valuation. State law in 2012 put more emphasis on sale value. Under RC 5713.03 in 2012, if a property owner proved the facts supporting a recent arm’s length sale, and such evidence was unrebutted, then the auditor was required to use such sale price for the valuation n 2012. RC 5713.03 was later amended and currently provides more latitude to the auditor regarding whether to base a valuation on a recent sales price or not.]

2.    The burden then goes to the Board of Education, county auditor, or other parties objecting to a lower valuation, to rebut the property owner’s facts.  The rebuttal must either show the transfer was not recent to the tax lien date or, more typically, that the sale was not an arm’s length transaction. A presumption that the sale was arm’s length may be rebutted is the challenger can show that the sale was a forced sale under RC 5713.04. (“….The price for which such real property would sell at auction or forced sale shall not be taken as the criterion of its value….”) This is not a difficult burden to meet. Previously, the court held that the sale of foreclosed property by HUD “is generally regarded as a transaction that is not a voluntary sale between typically motivated market participants.” See Schwartz v. Cuyahoga Cty. Bd. of Revision, 143 Ohio St.3d 496, 2015-Ohio-3431, 39 N.E.3d 123.

3.    If the property owner’s facts regarding the sale being arm’s length are initially rebutted, then the burden of proof goes back to the property owner.  The property owner will have to prove that despite the property being purchased through a forced sale, it was nevertheless an “arm’s length transaction between typically motivated parties.” See Olentangy Local Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 141 Ohio St.3d 243, 2014-Ohio-4723, 23 N.E.3d 1086.

In this case, the auditor and BOR presented expert testimony regarding Fannie Mae, its ownership of the property as a result of foreclosure, arguing that the property owners did not pay true value for the property. The expert also stated that at the time of the sale to the property owners, Fannie Mae did not act as a ‘typically motivated’ seller because it was insolvent and in conservatorship. The BTA did not accept the expert’s testimony because he did not have firsthand knowledge of the sale and only provided ‘general market commentary.’ Because none of the parties was disputing the sale price, the BTA reversed the BOR’s decision and set the value at the lower sale price of $20,000.
The court disagreed. It held that the expert’s testimony was in fact sufficient to show that the sale was a forced sale. The burden was then on the property owners to show that “the sale was nevertheless an arm’s-length transaction between typically motivated parties”. See Olentangy at 43. The property owners did not participate in the court hearing, nor the BTA hearing, and the documents they previously provided did not meet their burden.  The court reversed the BTA and reinstated the county’s valuation.
Property owners need to be aware that the sale price for real property, while providing some evidence of a property’s value, is not necessarily controlling and the auditor can consider other evidence; particularly when facts and circumstances indicate it may have been a forced sale.

Happy New – Real Estate Laws- Year

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

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

I.                   Am. Sub. SB 257

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

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

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

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

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

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

II.                Am. HB 532

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

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

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

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

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

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

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