Following the Yellow Brick Road to Real Estate Ownership

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

Becoming the “owner” of real estate is not quite as difficult as acquiring a wicked witch’s broom, but it is somewhat of a labored journey.

The seemingly simple answer to the question of when one becomes the owner of real estate is: when title is transferred by way of a deed. Arriving at a more precise answer to this question is a bit more complicated due to the legal concepts of “equitable title” vs. “legal title”, when a deed is considered “delivered”, and whether or not a deed has been recorded.

Why do these concepts matter? Basically, because pursuant to “Real Estate Law 101”: (i) real property ownership is more like the possession of a bundle of rights (vs. merely the possession of dirt and improvements on the dirt); (ii) a legal title owner has more of these rights to real property than an equitable title owner has; and (iii) a legal title holder whose deed has been recorded, will have greater protection from the possibility of  other parties claiming that they have rights that are superior to those of the legal title holder.

 What is equitable title?

According to Black’s Law Dictionary (7th Ed.), “equitable title” is “… a beneficial interest in property that gives the holder the right to acquire, formal legal tile.” When a buyer enters into a contract to purchase real property, the buyer acquires equitable title. It is the first step on the proverbial journey to Oz. Such equitable title, however consists of a small bundle of rights. In a simple contract for sale, the buyer would merely possess the right to acquire legal title, (and other limited rights granted by contract such as the right to inspect the property); but in a land contract, the buyer would also have the right to use and enjoy the property until enough payments are made to require the seller to transfer legal title to the buyer by delivery of a deed.
   
What is legal title?

When an individual possesses legal title, he or she gets the full bundle of legal rights that come with the property (except to any extent any such rights have been previously granted to others). Among these rights are possession, use and enjoyment, conveyance (i.e., the right to lease, sell, mortgage, transfer equitable title…), access, hypothecation and partition. Legal title also consists of a bundle of “physical” rights to real property such as water rights, mineral rights, timber rights, farming rights, air rights and development rights to erect improvements.

How does one acquire legal title?

Legal title is transferred from one person to another by “delivery” of a deed.

However, actual, physical delivery of the deed from a grantor to grantee is not required. Rather, delivery may be accomplished by words without acts; (such as if the deed is lying upon a table, and the grantor says to the grantee, “take that as my deed”); or it may be by acts without words. “The fact of delivery may be found from the acts of the parties preceding, attending, and subsequent to the signing, sealing, and acknowledgment of the instrument.”
See Goddard v. Goddard, 2011-Ohio-680 (4th Dist. Ct. of App., Scioto Cty.)

Does a deed need to be recorded to legally transfer title?

No. A deed need not be recorded (in the office of the county recorder in the county in which the property is located) to be valid as between grantor and grantee.   However, the filing and recording of same is prima facie evidence of delivery, in the absence of any showing of fraud.

Why record a deed, then?  

Without a recording of the deed, the grantee has little protection from its grantor, or anyone else from recording liens or other encumbrances against the title which would have priority over the unrecorded deed. Moreover, if the grantor transfers the same property by deed to another grantee (and the second grantee has no notice of the first transfer), prior to the first grantee taking possession; the second grantee owns the property and the first grantee owns a lawsuit.


Turney, LLC v. Cuyahoga Cty. Bd. of Revision

As the recent case of Turney, LLC v. Cuyahoga Cty. Bd. of Revision (2015-Ohio4086) illustrates, the terminology and principles surrounding property transfers and real estate ownership can be perplexing, even to attorneys and boards of revision.

The facts of this case are simple enough. Turney, LLC (“Turney”) filed a tax complaint with the Cuyahoga County Board of Revision (“BOR’) on March 28, 2014, seeking a $500,000 reduction in market value for the 2013 tax year on property located on Dunham Road in Maple Heights, Ohio. The complaint for reduction was based upon the purchase price for the property which was sold in a recent, arms-length transaction.

The Maple Heights Board of Education (“BOE”) argued that Turney failed to show that it was the owner of the subject property at the time the complaint was filed, and that the deed was not recorded until after Turney filed its complaint. The complaint was filed on March 28, 2014, and the deed was not recorded until April 21, 2014.

The BOR dismissed the complaint, without considering the merits for reduction in value. It found that Turney was not the owner at the time it filed its complaint according to the recording date of the deed, and that Turney failed to otherwise show that it was the owner. Turney then appealed to the Cuyahoga County Court of Common Pleas which affirmed the dismissal of Turney’s complaint.

According to the Cuyahoga Court of Common Pleas, “in order to have standing to file a complaint challenging the value of real property, the party challenging the valuation must in fact be the owner recorded on the deed [and since] the deed transferring the property to appellant was not recorded until August 21, 2014, nearly five months after the complaint was filed… appellant was without standing at the time the complaint was filed to challenge the property’s tax valuation.”

Turney appealed this determination to the Eighth District Court of Appeals, claiming, as its sole assignment of error that the Cuyahoga County Court of Common Pleas erred when it upheld the decision of the BOR in dismissing Appellant’s tax complaint on the basis that the appellant was not the owner of the Property when the complaint was filed. Turney argued that it sufficiently demonstrated that it was the owner at the time it filed its complaint.

The BOE argued that a party filing a tax valuation complaint as the owner should hold not merely legal title, but record title, and alternatively, if legal (vs record) title is the standard, recording was the only evidence of delivery of the Turney deed, which did not occur until April 2014.

While the Turney deed was not recorded until April, 2014, the evidence showed that the deed was signed and notarized on March 21, 2014, delivered to Turney’s agent between March 21st and March 25th, and on March 25, 2014 funds were exchanged and the property closed (even though the settlement statements were never dated).

In reversing the trial court’s decision, the Eighth District Court of Appeals in Turney first summarized court precentent interpreting the word “owner” (in the statute governing tax complaints [Ohio Revised Code Section 5715.19]) as a holder of legal vs equitable title. The court then summarized the same Real Estate 101 principles that we have summarized, aforesaid, regarding how to achieve the status of “legal title holder”. Basically, the court stated that (1) a deed must be delivered to be operative as a transfer of ownership of land,” (2) “[a]ctual manual delivery of a deed is not always required to effectuate the grantor’s intention to deliver;” and (3) while “recording is prima facie evidence of delivery and acceptance [of a deed], … it is not the only credible evidence of these formalities.”

Applying the facts to the law, the Eighth District Court of Appeals concluded that the delivery of the Turney deed to its agent and the closing of the transaction prior to the filing date demonstrated that Tully was legal owner at the time it filed its valuation complaint; that Turney did not have to be record owner at time of filing; and therefore, “the BOR and common pleas court erred in dismissing Turney’s complaint as jurisdictionally defective.”  The case was then reversed and remanded to the lower court for further proceedings consistent with the court’s opinion.

The moral of this story is simple. Neither a witch’s broom, nor recording is required to establish proof of real estate ownership. But, do it anyway (the deed, not the broom). Record the deed (or confirm your agent has recorded the deed upon, or ASAP after closing. Since all that is legally required to establish a prima facie case of delivery of a valid deed, and hence, ownership of real property is a few dollars a page recording fee to the local county recorder…. record the deed. You also get the positive side effect of being able to claim superior rights in your real property, against all others (subject, of course to any prior encumbrances transferred with title). While the appellant ultimately prevailed in Turney, it could have saved a whole heck of a lot of time and legal fees along its yellow brick road to real estate ownership by helping to ensure that its deed was promptly recorded.


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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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


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

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


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

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


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


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

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


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

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


Q: Is the law only applicable to residential transactions?

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


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

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


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

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

Q: Does it apply to refinances?

A: Yes. It applies to all residential transactions.


Q: Does it apply to cash deals?

A: Yes. It applies to all residential transactions.


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

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


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

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


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

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


Q: Is the law applicable to only residential transactions

A: Yes


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

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


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

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


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

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

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


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. 
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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.