Monday, September 29, 2014

Vacant Property Registration Ordinances: Understanding the Issues


Since the foreclosure crisis in 2008 – 2009, many communities in the U.S. have enacted “vacant property registration” ordinances (VPR ordinances) as a tool to help them deal with problem properties that are vacant. There are over 80 such ordinance issued or proposed in the state of Ohio alone.



VPR ordinances can take different approaches—some are triggered upon a property becoming ‘vacant’, others upon a foreclosure action being initiated, or use a combination of the preceding two approaches. The problem occurs with the implementation of these ordinances due to vague language and muddled objectives; i.e., the devil is in the details.


Many communities have a serious problem with vacant homes and buildings with owners that do not care (or do not have the resources) to properly maintain the property. Understandably, local communities want to address this problem, and VPR ordinances are often the result.  Because VPR ordinances don’t just apply to the bad actors, but pull in everyone else as well, it is important to look at the language in a draft VPR ordinance to evaluate how it might be unevenly enforced and what might be the unintentional results. Too many of these ordinances inadvertently punish the many for the crimes of a few.



Below are some of the potential issues in VPR ordinances:



How is “owner” defined? — Many VPR ordinances broadly define the “owner” of a property to include mortgagees and loan servicers, and agents of the foregoing, as well as anyone else who directly or indirectly controls the property.  There is often no clear guidance as to what constitutes “directly or indirectly in control of a property”.  With such vague language, any property manager or realtor or other vendor providing similar services could be pulled into the ordinance’s reach if an enterprising public employee chose to interpret it that way. Also, the vast majority of mortgages are owned by the federal government (e.g., FHA, HUD, VA, USDA-RD) or through one of its quasi-governmental entities (e.g., Fannie Mae or Freddie Mac). How does a local community expect to enforce its ordinance against the federal government? The likely result will be uneven enforcement that impacts the local lenders the hardest.



How does the ordinance define “vacant”? — Again, VPR ordinances can define how a structure is determined to be “vacant” in rather broad terms.  An over broad definition of “vacant” can pull in structures that are not in disrepair and therefore not a problem for the community. Definitions of “vacant” in many VPR ordinances include exclusionary terms such as “lawfully occupied” without ever defining what that means. Its use may be intended to appropriately exclude well-tended vacation homes and similar homes. However, vague and over broad language puts significant discretion into the hands of the local government to interpret it however is convenient, and results in arbitrary and unequal applications of the ordinance.


Inspections — Many VPR ordinances require property inspections as part of the registry process. Tightly drafted ordinances will make it clear as to what is being inspected and the precise standards against which the property will be measured. Unfortunately, many ordinances fall short, so property owners and other “owners” are left in the dark as to what will be expected of them. Also, many VPR ordinances fail to clarify what type of inspection will be conducted. Is the inspection only of the exterior grounds or can a municipal employee demand to inspect inside the structure? This latter demand triggers constitutional concerns as the 4th amendment to the Constitution which protects citizens from unreasonable searches.



Cash Bonds — VPR ordinances often include requirements for a cash bond to be paid by the mortgagee prior to pursuing a foreclosure. Smaller local mortgage lenders cannot afford this and are more likely to simply stop making mortgage loans in that community. This reduces options for the residents living there.  Larger lenders might comply with the demand but will simply pass the higher risks and costs of VPR ordinances on to the borrower in the form of higher interest rates and closing costs. This again reduces affordable options for the residents of that community and increases the attractiveness of homes in other communities who have no such requirement. Further, if no problems arise on a particular property, how does the mortgagee obtain a return of the cash bond it provided?  Does the VPR ordinance provide a mechanism for segregating the cash bonds from its operating funds and a return of unused funds to the mortgagee when the property is no longer vacant?



Penalties — VPR ordinances typically charge fines for violations and some even include criminal charges. The issue with many such ordinances is the lack of any provision for waivers or reduced fees when the community has suffered no harm. Based on the language in many VPR ordinances, it is possible for an owner to be subject to criminal charges for a mere paperwork violation. VPR ordinances that provide for both civil penalties and misdemeanor charges often do not provide clear direction as to when a violation can escalate to the more serious criminal penalties.



Enforcement — Given the vague and over broad drafting of many VPR ordinances, owners will likely need to appeal decisions and time frames for filing appeals are often short. Further, the forum to hearing the appeal may or may not appropriate. As communities typically envision vacant dilapidated structures owned by slum lords as the target of the legislation, the appeal board will often be one that deals with that type of structure. With the over broad reach of many VPR ordinances, the appeal forum may be ill suited for its purpose.   Also, VPR ordinances frequently include language to limit the process for further appealing the decisions. While it is good to have clear language as to when administrative orders become final, that should not prevent a final administrative order from then being appealed through the court system. Vague or unduly limiting language on the appeal process can create due process concerns.



Whether these VPR ordinances actually work is open to question. Most communities do not have clear metrics in place to determine this, and they may unintentionally harm their residents in the process.   
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Monday, September 22, 2014

“Reasonable Surface Rights” Can Include Strip-Mining

(So WATCH YOUR LANGUAGE with deeds, contracts and leases; and
“Say what you mean, precisely, or a judge will decide what you meant #6”)

Typically, courts follow a well-known principle of interpreting contract (or deed) language so as to carry out the intent of the parties, when that intent is evidenced by the contract language. 

The problem, of course is that it is the “trier of fact” (judge or jury) that determines the intent of the parties within the four corners of a contract. Courts typically refuse to consider extrinsic evidence of a party’s intent (offered by such party) if the court determines the contract language is clear and unambiguous. Because of this deference to (how a judge or jury interprets) contract language, sellers, buyers, tenants and landlords are strongly advised to “say what they mean, precisely, or a judge will decide what they meant”. Unintended results are often the norm for parties to a contract, lease or deed who could have been a lot clearer with their language.

Failure of a deed to clearly specify what constitutes (or what does not constitute) “reasonable surface right privileges” in a reservation of mineral rights, for example, resulted in a dispute recently decided by the Ohio Supreme Court (in Snyder v. Ohio Dept. of Natural Resources, Slip Opinion No. 2014-Ohio-3942) that could easily have been avoided by language to the effect “excluding strip-mining.”

The basic facts of the case are as follows:  The state of Ohio and the Ohio Department of Natural
Resources (collectively, “ODNR”), bought a certain tract of land comprising approximately 651
acres, located in Brush Creek Township, Jefferson County, Ohio from a seller who reserved all mineral rights to the property, “including rights of ingress and egress and reasonable surface right privileges.” Ronald Snyder later acquired the mineral rights from that seller and then met with ODNR to inform them of his desire to strip-mine the coal from about 10% of the acreage. When ODNR refused to allow strip-mining on the property, Snyder filed a complaint against ODNR seeking a declaratory judgment to the effect that the “reasonable surface right privileges” language in the deed allowed them to strip-mine a reasonable portion (10%) of the property.

ODNR argued, based on prior case law that there must be a clear expression of the intent to reserve the right to strip-mine in a mineral rights reservation. It reasoned that a reasonable person could not construe the deed to allow total destruction of a considerable portion of the surface through strip-mining merely because it permits reasonable surface right privileges incident to mining. In other words, strip-mining could never be a reasonable use of the surface because by its very nature it destroys the surface.

Snyder argued that the deed’s language is ambiguous as to what activity constitutes the exercise of “reasonable” surface right, and accordingly, it should be allowed to present its own evidence beyond the contract to prove that strip-mining the coal from 60 of 650 acres is reasonable.

The trial court ruled in favor of the ODNR, Snyder appealed that decision and the Jefferson County (7th District) Court of Appeals affirmed the trial court’s ruling. The case was then appealed to the Ohio Supreme Court.

In a 6-1 decision, the Ohio Supreme Court concluded that the contract (deed) between the ODNR and the mineral rights holders did not exclude strip-mining as a method to extract coal from 10 percent of the Jefferson County property by use of the language “including…reasonable surface rights”. The case will now be sent back to the trial court to determine the extent of strip-mining that is reasonable, as required by the contract.

In support of its decision, the court explained that it did not rule in prior cases that strip-mining, as a matter of law was not a “reasonable surface right” (in spite of strong language in such prior cases concluding that strip-mining “necessarily and unavoidably causes a total destruction of the surface estate.” Rather, the court reasoned it was merely interpreting the contracts at issue in those cases that contained language “peculiarly applicable to deep-mining techniques.” Citing language from one of such cases, the court stated: “the intent of the parties is controlling, and * * * when deep-mining language is used exclusively, courts must assume that strip-mining was not intended.” While the court did admit that strip-mining is injurious to the surface of a property, it reasoned that “all mining, whether deep-mining or strip-mining, damages the surface, and strip-mining is not inherently more detrimental to the owner of the surface interest, though some of [their] cases might suggest otherwise.”

The court distinguished the contract in Snyder as containing no language that is peculiar to deep mining; therefore, the court concluded that the parties did not intend to preclude strip mining by the use of the term “reasonable surface right privileges.” Facts also important to the court were that strip-mining was well known in Jefferson County when the contract was signed, and in fact, some areas of the property at issue were strip-mined before the ODNR acquired it. Thus, according to the court “there is reason to believe that the signatories to the original contract understood that ‘reasonable surface right privileges’ included the right to strip-mine, and there is no reason to believe that the signatories intended to exclude strip-mining."

In interpreting the ODNR contract (deed), the court refused to acknowledge that the term “reasonable surface right” was ambiguous “merely because different parties interpret the clause differently.” Though the court concluded that strip-mining, in general was a reasonable surface right in this case (based on its interpretation of the contract), it did, however admit that a determination as to the extent, duration and remediation of strip-mining that was reasonable, was non-defined, and therefore the Ohio Supreme Court remanded the case to the trial court for a determination of what is reasonable strip-mining.

What is the moral to this story? Say what you mean, precisely, or a judge will decide what you meant.  The Supreme Court of Ohio even agrees with our moral/philosophy. As stated by the court in Snyder: “We are not persuaded that [the parties] intended the phrase to mean nothing other than customary ingress, egress, and concomitant surface rights. If they had, they would have used contract language that was normal and customary for that purpose” In other words, if you don’t want a party you have given mineral rights to, to strip-mine, clearly state that they cannot extract any such minerals by strip-mining.


Monday, September 15, 2014

CLE Update: Upcoming real estate seminars in Ohio


With the real estate market heating up, continuing education seminars on real estate topics are increasing. Below are links to Sterling Education, NBI and the OSBA for their seminars, webinars, teleconferences, etc. that are being offered between now and year end.

 

Sterling Educational Services – Sterling Education as 2 seminars scheduled.

*Tenant-Landlord Law in Cleveland on September 26, 2014
*Landlord-Tenant Law: Leases, Evictions, Litigation and Settlements in Dayton on October 2, 2014



National Business Institute – NBI has 43 seminars, webinars and teleconferenced scheduled through December 31st that cover real estate law and land use.  Here is the link to their list of real estate related seminar topics, dates and locations.



Ohio State Bar Association – The OSBA’s online calendar for CLE wasn’t working when I was drafting this article. Here is the link to their page to access both a listing of live seminars and self-study CLE (includes online CLE and webcasts). Hopefully it will be functioning properly by the time this publishes.




Monday, September 8, 2014

Pay your Taxes before your Lender Redeems your Property

A mortgage holder has the right to redeem (take back) real property that is the subject of a real estate tax foreclosure when the owner does not pay taxes on the land, according to the recent decision of the Ohio Supreme Court in In re Foreclosure of Liens for Delinquent Land Taxes v. Parcels of Land Encumbered with Delinquent Tax Liens, Slip Opinion No. 2014-Ohio-3656).

The facts of this case are relatively straight forward. In June, 2003, Brandi and Troy Wagner executed a promissory note and mortgage in favor of Vanderbilt Mortgage and Finance to finance their purchase of a mobile home and land in Coshocton County. The Wagners failed to pay taxes on their property, so the county treasurer initiated a tax foreclosure proceeding for delinquent taxes (in the amount of $825.84). Because the Wagners did not respond to the foreclosure complaint, the trial court granted the treasurer’s motion for default judgment and ordered the sheriff to sell the property.

Although not explained in the record, the sheriff held two sales of the property; one at which Vanderbilt purchased the mobile home. At the other sale, James Matchett purchased the property with a winning bid of $15,100 and then deeded the property to Alan and Janette Donaker. Before either sale of the land was confirmed, however, Vanderbilt filed a notice to redeem the property and a motion to vacate the prior sales and foreclosure.

The trial court granted Vanderbilt’s motion, thereby vacating and setting aside the sale and entry of foreclosure. The trial court determined that Vanderbilt (a mortgage holder with a recorded interest in the property) was a “person entitled to redeem” under Ohio Revised Code Section (“R.C.”) 5721.25.

The Donakers and the Coshocton County Treasurer then appealed the trial court’s decision to the Fifth District Court of Appeals. The court of appeals held that Vanderbilt was not entitled to redeem the property, and reversed the judgment of the trial court.

Vanderbilt then appealed to the Ohio Supreme Court which characterized the issue
before the court as whether or not Vanderbilt, as a mortgage holder, qualifies as “any person entitled to redeem the land” under R.C. 5721.25.

Pursuant to the second paragraph of R.C. 5721.25: “any person entitled to redeem the land (emphasis added) may do so by tendering to the county treasurer an amount sufficient, as determined by the court, to pay the taxes, assessments, penalties, interest, and charges then due and unpaid, and the costs incurred in any proceeding instituted against such land under Chapter 323 or this chapter of the Revised Code, and by demonstrating that the property is in compliance with all applicable zoning regulations, land use restrictions, and building, health, and safety codes.”

Appellee Alan Donaker contended that the only reasonable interpretation of the statute is one that precluded anyone but the property owner from being a “person entitled to redeem” under R.C. 5721.25 and that broadly interpreting the phrase “any person” would thwart the intent of sheriff’s sales by allowing mortgage holders to sit and do nothing until after the sheriff’s sale.

Vanderbilt contended that when read in conjunction with R.C. 5721.181, which provides the form of notice required for tax foreclosure proceedings—the phrase “any person entitled to redeem the land” under R.C. 5721.25 includes “any owner, or lienholder of, or other person with an interest in the property” because those exact words are utilized in R.C. 5721.181.

The Supreme Court of Ohio agreed with Vanderbilt, reasoning that when statutes are clear and unambiguous, they must apply the statutes as written. The court cited previous cases holding that: (1) the court must “give effect to the words used, refraining from inserting or deleting words,” and (2) that the meaning of “any” [in a statute] is “every” or “all.”

The court also backed up its decision by contrasting R.C. Chapter 2329 (which governs judicial foreclosure proceedings such as mortgage foreclosure) with the language governing tax foreclosures in R.C. 5721.25. In R.C. 2329.33, the Ohio General Assembly specifically limited the right of redemption to “the debtor.” But in R.C. 5721.25, the legislature instead utilized broader language by granting the right of redemption in a tax foreclosure proceeding to “any person entitled to redeem.”

Acknowledging that their decision might be interpreted as unfair to property owners,
the court justified its holding by concluding that “any perceived inequity caused by our holding to purchasers or property owners like the Wagners must be balanced against the rights of others with competing interests, including those of a mortgagee, or lienholder, to protect its interest in the property where a mortgagor, or property owner, has fallen
delinquent in tax payments.”

What’s the moral of this story? Pay your taxes…at least before your county files a foreclosure action and your lender redeems your property.


Tuesday, September 2, 2014

Understanding Risks Unique to Personal Loan Guarantees


Personal guarantees are commonplace in loans of all types and sizes. However, there are issues that are unique to personal guarantees provided by individuals that need to be taken into consideration when negotiating a loan.

 

The death of an individual guarantor typically triggers an event of default on the loan he or she guaranteed. While a lender might agree to a period of time for the borrower under the loan to provide a suitable substitute guarantor, the grace period will be limited (usually 60-90 days) because if no such substitute guarantor is found, the lender must place the loan into default in order to file a claim against the decedent guarantor’s estate. The claim must be filed within 6 months of the guarantor’s death.

 

To avoid probate (and creditors), a guarantor may transfer his or her assets into a trust.  Even if the intent is solely to avoid probate, it also puts the assets beyond the reach of lenders to whom personal guarantees have been provided, as well as other creditors, including any co-guarantors. A balanced approach needs to be negotiated into the guaranty that protects the lender’s interests while accommodating the guarantor’s desire to put his or her estate in order

 

Too often a guarantor that is also a significant equity owner of the borrower, without giving any thought to whether his or her guaranty agreement permits it, transfers small percentages of equity to a child or grandchild or takes other actions to put his or her estate. The lender would then be entitled to call the loan in default.  When negotiating a personal guarantee, a guarantor needs to negotiate carve-outs in the guaranty agreement to allow for some ability to make minimal transfers of equity that do not affect control of the borrower.

 

Co-guarantors have special concerns as lenders are not obligated to pursue all guarantors equally. Plus, if one guarantor dies, the loan may go into default, causing a problem for all of the guarantors. If the decedent guarantor transferred his or her assets out of everyone’s reach into a trust, the co-guarantor may be out of luck in exercising any common law right to obtain contribution. When there are 2 or more guarantors (or even when there is one guarantor but more than one significant equity owner in the borrower, including the guarantor), then a cross-indemnity or contribution agreement should be considered. Any such agreement should include limitations on the transfer of assets that are not at FMV or to a spouse or into a trust. Each party’s estate should also be bound by the terms of this agreement. Other limitations or special disclosure provisions should be considered to help ensure assets are not transferred out of reach of a co-guarantor seeking contribution.  Finally, if one guarantor is more involved in the operation of the borrower’s business than another guarantor, the non-involved guarantor will want to limit any contribution obligations for defaults directly caused by the action or inaction of the involved guarantor.

 

The issues surrounding individual guarantees require special attention but are not insurmountable. With careful drafting of the covenants and other provisions, the interests of both guarantor and lender, plus any co-guarantor, can be balanced to reasonably protect everyone’s concerns.
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Monday, August 25, 2014

Is it a Covenant, a Condition or a Covenant and a Condition?-Why you need to Care.

Real estate purchase and sale agreements typically contain covenants and conditions.  They both start with “c” and are typically found in real estate agreements, but that is where the similarities end. A covenant is an agreement or promise to do or refrain from doing something.  A condition is a future, uncertain event, the occurrence or non-occurrence of which will determine whether or not contractual obligations (i.e. to buy or sell) must be performed.  You need to care because there is a vital difference between the legal effect of a condition that does not occur vs. a promise that is not performed.  The breach of the promise renders the non-performer liable for damages (or, where proper, specific performance).  On the other hand, the non-occurrence of a condition does not give rise to a cause of action for damages, but typically excuses performance obligations.
a.                  Covenants.  Typical covenants found in a purchase and sales agreement are:  (i) buyer’s promise to pay; (ii) seller’s promise to convey marketable title, deliver the deed and procure title insurance for the buyer; (iii) seller’s obligation to repair defects/remediate environmental problems; and (iv) seller’s promise to convey fixtures and certain items of personalty along with the realty.  Buyers in commercial transactions often require additional covenants to be made by the seller, with regard to operating the property between the signing of the agreement and the closing.  Such customary, commercial covenants include:  (i) a promise to manage and operate the property in the ordinary and usual manner, (ii) keeping in effect all service contracts; (iii) the promise to allow buyer access to the property for diligence; and (iv) the promise not to grant/permit to exist any lien, lease, easement or other action adversely affecting title.
b.                  Conditions.
(i)                 In General.  The fact that a contract is intended to be conditional is generally indicated clearly by use of the words “subject to,” “contingent upon” or “if.”  See generally Scafidi v. Puckett, 578 P. 2d 1018 (1978) (“subject to” indicates a condition to one’s duty to perform and not a promise by the other).  Absent such language, the intention may be doubtful.  See, e.g., Soloman v. Western Hills, 276 N.W. 2d 577 (1979) (closing of sale “when plat is recorded,” held to fix time for purchaser’s performance versus condition the sale).  In addition to the above conditional language, contingencies should also provide:  1) a specific date or time period (for the occurrence/non-occurrence of the event); 2) a statement that the contingency is automatically waived or requires notice, after expiration of the time period; 3) a statement that performance is excused (and the agreement void and of no effect) if the condition occurs/does not occur; 4) statement re:  return of earnest monies (if so negotiated); and 5) a good faith obligation to cause the conditional event to occur. 
(ii)               Typical Contingencies (residential).    
·         Satisfaction with Inspections
·         Financing.  Since buyers rarely can afford to purchase a house without borrowing funds from a lending institution, they need to protect themselves with the right to “call the deal off” if they do not receive a commitment from the bank to loan them the required funds.  A financing contingency clause can provide that right.  Sellers that wish to minimize the risk of buyers “taking easy ways out of the contract,” or having unreasonable expectations of qualifying for a loan, should insist upon limits in the financing contingency such as specifying the percentage of the purchase price to be financed and the maximum interest rate sought by buyer. 
·         Sale of Residence.  Many buyers of a new home will not be able to qualify for a loan, if they still own (and owe money on) their existing house.  Making their purchase obligations conditional on the sale of their existing house can solve the problem.  Sellers are often reluctant to grant this contingency, however, for fear of foregoing a better deal without contingencies.  In such event, the parties may want to consider a seller’s “right to market the property” clause, with a “Put” to buyer to either advance the Closing Date, or allow Seller to make a deal with an alternate buyer. 
·         Title.  Most title provisions contain seller’s covenant to convey marketable title to the property.  Title provisions that permit buyer to terminate the contract if the marketable title promised is not delivered are considered to contain conditions as well as covenants. 
(iii)              Typical Contingencies (Commercial).  In addition to financing, inspection and title contingencies, typical contingencies in a commercial real estate contract generally include: 1) formal approval of the purchase/sale by a board of directors or other governing body; 2) confirmation of zoning conformance or receipt of a zoning variance; 3) receipt of tax abatement; 4) all representation and warranties made by seller/buyer being true and correct as of the date of  signing of the agreement and the closing date; 5) the buyer completing due diligence and having approved of the results of same; 6) the title company issuing the title policy subject only to permitted exceptions; and 7) review and approval of any leases in effect. 


The moral of this story? Know the difference between conditions and covenants. Use “words of condition” when creating a condition. Proper drafting can mean the difference between having a remedy for the other party’s walking away from your contract and having a sad story to tell without any recourse.

Monday, August 18, 2014

Defective Construction Claims: Are They Covered Under the CGL Policy or Not?

One area that is often argued are claims for defective construction under builders' commercial general liability insurance policies. This is an issue that equally affects a builder, a damaged party and the insurer, and how that issue is decided may depend on which state's law will control.

The issue involves whether defective construction constitutes an 'occurrence' under a CGL policy and if so, under what circumstances.

The Ohio Supreme Court addressed the issue in 2012 in Westfield Ins. Co. v. Custom Agri Systems, Inc. (2012 Ohio 4712) and held that faulty workmanship in and of itself is not enough to be considered an 'occurrence' under a CGL policy.  However, damage to property caused by the defective workmanship may be covered.

Ohio's approach is fairly strict compared to recent decisions in other states on this issue. A policyholder in Connecticut, Georgia, North Dakota or West Virginia might have better odds of making a successful claim given the more expansive interpretations that have come out of those state courts.

However, before policyholders start doing their happy dance...in all of these states, Ohio included, the rulings typically just addressed what constitutes an 'occurrence' under a CGL. Other exclusions or policy language may still preclude a claim.
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