Electronically Signed Email Exchange May Constitute Enforceable Real Estate Contract


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


(Watch your language when creating contracts [and when not intending to create a contract])



As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will typically uphold commercial document provisions unless they are contrary to public policy or statutory law, or the subject of a mutual mistake. Courts traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial transactions, since both parties will usually have attorneys to review their documents. More and more, parties to residential real estate contracts are being held to the same standard governing commercial transactions. Because courts often defer to the specific language of real estate documents, unintended results are often the norm for parties who do not carefully draft their documents.


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

This watch your language precept is just as (if not more) important in cases determining whether or not a contract has been created, than it is in cases determining the meaning of language within a legally created contract. The Court of Appeals for the First Appellate District of Ohio was recently faced with this very issue in Mezher v. Schrand, 2018-Ohio-3787.

Background of Mezher v. Schrand.

This case involves the alleged sale of a high-end residential property in Mt. Adams, Ohio owned by defendants-appellees Karri and Jeff Schrand (“Seller[s]”). Plaintiffs-appellants Joseph and Mike Mezher (“Buyer[s]”) argued that the Sellers agreed by a series of email exchanges (electronically signed) to sell their home to the Buyers and that the Sellers breached that agreement. The Sellers argued that no agreement existed because of the requirements of the Statute of Frauds.

The email exchange between the Buyers and the Sellers in Mezher started with both parties going back and forth on price. These introductory emails contained a general description of the property (address) and clearly identified the parties. The last three emails in the exchange were as follows:

Buyer (Sept 29, 2017): “However, will split it [price difference] again with you because I want to be flexible. I am good at $982,500 for a purchase price. Based on inception [sic] and customary closing, we can get a simple contract drafted Monday and have it signed by us Tuesday with the earnest money cashier check to you upon acceptance of contract by Tuesday. Please let me know, Mike[.]”

Seller (Sept 30, 2017): “We accept.”

Buyer (Sept 30, 2017):  “Great, I agree too.”

When the parties met on October 5, 2017, an argument ensued, and the Sellers refused to sign a written form contract the Buyers brought with them. The Buyers then filed a complaint against Sellers, requesting specific performance of the real estate contract allegedly established by e-mail exchange. The trial court granted summary judgment in favor of the Sellers, finding that the September 29-30 email exchange between the parties did not satisfy the Statute of Frauds, because the emails did not describe the subject property with particularity. The Buyers then appealed to the Hamilton County Court of Appeals.


What is the Statute of Frauds?

In Ohio (and most other jurisdictions), the “Statute of Frauds” (originating from a 1619 Act of Parliament) basically establishes that certain contracts must be memorialized in a signed writing to be enforceable. Specifically, Ohio’s Statute of Frauds (ORC §1335.05) provides, in pertinent part that: “no action shall be brought …upon a contract or sale of lands… or interest in or concerning them,… unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith...”. There are limited, “equitable” exceptions to the rule, such as “part performance”, “unjust enrichment” and “promissory estoppel” that courts have imposed in order to avoid unfair legal remedies. See “An Oral Contract to Buy Real Estate is not Worth the Paper it is not Written on” — Ohio Real Estate Blog, April 30, 2010.

Does an email or other electronic form of writing satisfy the Statute of Frauds?

Yes. While not contemplated in 1619, the “electronic age of contract formation” has been with us in Ohio since the turn of the century. Pursuant to ORC §1306.06 (C)-(D), if a law requires a record and/or signature to be in writing, an electronic record and/or signature satisfies the law. To erase any doubt with respect to contracts, ORC §1306.06 (B) provides: “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

What writing is sufficient to satisfy the Statute of Frauds?

More perplexing than whether or not a writing exists, is the question of what writing is sufficient to satisfy the Statute of Frauds. The general law in Ohio is that in order for a real estate contract to comply with the Statute of Frauds, it is necessary that the signed contract or memorandum: (1) identify the subject matter; (2) establish that a contract has been made (both parties to the contract must assent to its terms and have a “meeting of the minds” as to those terms); and (3) state the essential terms with reasonable certainty.

What are the essential terms of a real estate contract?

In Ohio, courts have identified the essential terms of a real estate contract as: “the identity of the parties to be bound; the subject matter of the contract; consideration; a quantity term and a price term”. What is not essential? According to recent Ohio court decisions, a written contract for the sale of land need not include the character of the deed to the executed, specify who should pay taxes on the sale or state whether a mortgage must be given to secure the purchase money in order for the contract to still comply with the Statute of Frauds. Additionally, the contract does not violate the Statute of Frauds because the writing does not state a specific date of performance (i.e. closing date) or because of the failure to designate the nature of the interest being conveyed.

Analysis of Mezher v. Schrand.

The court of appeals in Mezher reversed the trial court’s decision, easily concluding that the emails at issue did in fact describe the subject property with particularity. While a list of personal property (appliances, window treatments…) was not specified, the address of the real estate was embedded within the subject line of each email in the exchange and all the other essential terms could be found in the body of the emails. According to the appellate court in Mezher, a list of ancillary personal property is clearly a non-essential term in a contract for the sale of real property.

The appellate court, however, also remanded the case back to the trial court on the issue of whether or not a “meeting of the minds” occurred within the emails vs simply a price negotiation to be followed up by a more complete written contract. Recall that the Mezher email exchange contemplated that the parties would sign a formal document shortly after the email exchange.

As explained by the court of appeals in Mezher, “Given the circumstances surrounding the parties’ email exchange and later discussions, including that other terms of the sale had yet to be agreed upon, an issue of fact exists as to whether the parties had a present intention to be bound at the time of the email exchange, or whether the parties did not intend to be bound until execution of the more formal contract.”

The Mezher court did cite precedent establishing that an agreement can be specifically enforced even where the parties contemplated execution of a later, formal written document, so long as the parties (at the time of the “informal contract”) have manifested an intent to be bound and their intentions are sufficiently definite. The determination of intent, however would be a matter for the trier of fact, not the court of appeals.

What is the moral of this story?

First, “say what you mean, precisely, or a judge will tell you what you meant.” The general rule in Ohio is that when the parties have clearly agreed to the “critical terms” of a real estate transaction, the court may determine on its own the meaning of any ambiguous or uncertain terms. While courts will typically factor in to their decisions, what they believe the parties’ mutual understanding to be, more often than not, a court’s determination does not match up with a party's actual understanding and someone goes home from court unhappy.

Second, there is no hard and fast rule or finite list as to what is and what is not an “essential” term of a real estate contract. While we know that price, identification of the parties and property description are essential terms, and that the closing date and description of personal property are non- essential terms, there are limitless provisions that could be deemed essential by a court of law, the absence of which could render the contract unenforceable. In other words, don’t worry about the number of pages in your contracts, worry about what is reflected within the pages.

Third, the enforceability of a real estate contract containing essential terms depends… on whether the parties have manifested an intention to be bound by such terms and whether these intentions are sufficiently definite to be specifically enforced. Unless absolutely clear in the “contract”, however, the intent of the parties will be based on a fact finder’s (judge or jury’s) evaluation of not only the language itself, but the circumstances surrounding the language. The fact finder certainly will not have a better idea of the parties’ intentions than the parties themselves, but will have the power to nonetheless, make the call. In other words, if you don’t want your preliminary negotiation or letter of intent to be construed as a final contract, spell that out, clearly and definitively. It is no guarantee, but a clear statement that the document “is not intended to be binding” will always be evidence of non-intent to create a binding contract.

Finally, get with the times. These days, contracts can be created in cyberspace, as easily as they can be on a written document entitled “contract.” If you don’t want your emails to be binding contracts, don’t sign them, or better yet, don’t write them in the first place.




A Greenhouse Building is not a Building but a Movable Business Fixture according to Ohio Board of Tax Appeals


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

That old adage, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck” holds true for…waterfowl and a host of persons, places and things, but not for greenhouses in the recent Ohio Board of Tax Appeals decision, Viola Associates, LLC v. Lorain County Board of Revision, Case Nos. 2016-1273, 1274 and 1275.                                                                                                                                                          
The facts of the case are simple enough; the law, not so much.

Facts of the Case

Green Circle Growers Inc. and Viola Associates, LLC (collectively, “Green Circle”) own approximately 186 acres of land improved with greenhouses, packing and storage facilities, a residence and barn. Lorain County valued (in 2016) the property for tax purposes at approximately $40 Million. Green Circle filed complaints with the Lorain County Board of Revision (“BOR”) seeking a reduction in value to approximately $22 Million. Shortly thereafter, the appellee, Firelands Local Schools Board of Education (“BOE”) filed a counter complaint in support of maintaining the auditor’s $40 Million value. The primary issue addressed by the BOR (and afterwards, by the Board of Tax Appeals) was whether the greenhouses situated on the property should be treated as real property, and accordingly included in the assessment of the subject property’s total true value; or as personal property that should be excluded from the subject’s value for purposes of real estate taxation.

At the BOR hearing, Green Circle claimed that the greenhouses, while attached to the land, are removable, and therefore constitute personal property that should not be included in the auditor’s valuation. Green Circle presented testimony from several witnesses who testified that “the method by which a greenhouse is affixed to the ground and constructed is similar to an erector set, in that it can be deconstructed and reconstructed with limited damage” and that “there is an active secondary market for the resale of greenhouses, which are deconstructed and then sold to again be used for horticulture.” Green Circle also offered testimony from an appraiser who opined that the greenhouses were personal property and should not be included in the value of the subject real property because they could be removed from the property with relative ease, and would yield little value to anyone other than someone in the horticulture business. The BOE cross-examined Green Circle’s witnesses, but did not offer any independent evidence of value.

In spite of all of the testimony, the BOR ruled that Green Circle presented insufficient evidence to support a reduction in value, and that therefore, the initial assessed valuation of $40 Million was to be maintained. Green Circle then appealed the BOR decision to the Ohio Board of Tax Appeals.

Applicable Law

Distinguishing between personalty and realty is a vexing issue in many real estate and tax related arenas. In landlord-tenant law, for example, the issue usually centers on who is entitled to remove and/or retain the item in question (e.g., a supplemental HVAC system bolted to the roof) at the end of the lease. In a foreclosure, the issue is whether or not the item is realty, and can be foreclosed upon, or personalty, and not part of the property being foreclosed. The distinction in tax law can determine what are qualifying REIT assets, the amount of a taxpayer’s Investment Tax Credit, what gets capitalized and whether or not property qualifies as a 1031 Exchange.

At early common law, the general rule was that everything attached to realty became part of the realty, and therefore was deemed irremovable. Friedman on Leases, Sec. 24.1 at 1414 (2005). In modern times, as is the case with many “general rules,” the exception (removability) seems more general rule than exception. While most would agree that a 20 story office building is realty and a lawn mower is personalty, between the extremes is much more difficult to assess. In other words, how does one classify grain bins, silos, electronic billboards, cold storage cooler rooms, oil tanks and amusement park rides?

Unfortunately, there is no one size fits all definition. In Ohio, the answer for landlord-tenant issues can be found in common law decisions. See, e.g., Perez Bar & Grill v. Schneider, 2012-Ohio-5820; Household Finance Corp. v. The Bank of Ohio, 62 Ohio App. 3d 691, 694 (1989) and Friedman on Leases, Sec. 24.1 at 1414 (2005). The definition of real property for various income tax issues can be found in the U.S. Tax Code and corresponding regulations for the applicable tax issue.

In determining whether a landowner’s real estate should increase in value for real estate tax purposes (or not be affected because the item in question is personal property), county auditors must look to the statutory definitions of real property and personal property in the Ohio Revised Code. 

R.C. 5701.02 defines “real property” (as used in Title LVII of the Revised Code [Taxation]) as follows:

(A) 'Real property,' 'realty,' and 'land' include land itself . . . with all things contained therein, and, unless otherwise specified in this section or 5701.03 of the Revised Code, all buildings, structures, improvements, and fixtures of whatever kind on the land…”

The definitions of “buildings”, “fixtures”, “improvements” and “structures” appear in R.C. 5701.02 (B) - (E), respectively.

R.C. 5701.03 defines “personal property” (as used in Title LVII of the Revised Code [Taxation]) as follows:

“(A) ‘Personal property’ includes every tangible thing that is the subject of ownership . . . including a business fixture, and that does not constitute real property as defined in Section 5701.02 of the Revised Code.

(B) ‘Business fixture’ means an item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure, or improvement, and that primarily benefits the business conducted by the occupant on the premises and not the realty. 'Business fixture' includes, but is not limited to, machinery, equipment, signs, storage bins and tanks, whether above or below ground.  ‘Business fixture’ also means those portions of buildings, structures, and improvements that are specially designed, constructed, and used for the business conducted in the building, structure, or improvement, including, but not limited to, foundations and supports for machinery and equipment…”
It is important to note that in 1992, the Ohio General Assembly amended the definition of “personal property” to include “business fixtures.”

Analysis of the BTA’s Decision in Viola

To reach its conclusion that the Green Circle greenhouses were personal property (and that the BOR decision should be overruled), the Board of Tax Appeals (“BTA”) in Viola first felt it necessary to determine if the subject greenhouses could be classified as buildings, structures or improvements. If so, the analysis would end there, and the greenhouses would be taxed as real property. The BTA reasoned that the definition of these items in R.C. 5701.02 (B) - (E) all shared “an element of permanence in their original fabrication or construction” (vs. a “fixture” or “business fixture” that starts out as an item of tangible personal property, that then becomes attached or affixed to the land or to a building, structure, or improvement). The BTA then determined the greenhouses were not buildings, structures or improvements, based upon the testimony presented by Green Circle’s witnesses that described the greenhouses as temporary, built to be removed and often sold on a secondary market following removal. According to the BTA, the greenhouses were a far cry from permanently constructed buildings built to shelter persons or property, or structures defined by the Ohio Revised Code to include bridges, dams and silos. The BTA was not swayed by the appellee’s argument that the greenhouses were permanent because they were attached to concrete. Although the concrete is incorporated into the real estate, according to the BTA, “that does not transform the item to which it is attached [to real estate], such as an… amusement park ride and its shelter, which retains its character as tangible personal property, albeit permanently affixed to the land.”  Moreover, personal property can include foundations and supports pursuant to R.C. 5701.03.

Once determined not to be structures, buildings or improvements, the next threshold question for the BTA to answer was whether or not the Green Circle greenhouses were “fixtures,” and accordingly, real property; or “business fixtures”, and accordingly, personal property.

According to the BTA, the “statutory test” for items not buildings, structures or improvements boils down to whether the item “primarily benefits” the business or the realty. This makes sense as the statutory definitions of “fixture” and “business fixture” are identical, except for the primary benefit language at the end of each definition. In other words, the greenhouses would be classified as “fixtures” and real property if they primarily benefit the realty; or “business fixtures” and personal property if they primarily benefit the business.

The BTA came to the conclusion that the greenhouses in question primarily benefited the business (vs. the realty), based on the evidence presented to the BOR and the BTA. As stated by the BTA in Viola, “Green Circle presented testimony from multiple individuals to demonstrate that the greenhouses in question were designed especially for growing plants…. primarily benefit Green Circle Growers’ horticulture business and would provide little value, if any, to another occupant of the land who was not engaged in the same or very similar business.” Also important to the BTA was the fact that “the greenhouses are outfitted with computer systems, shade cloths, irrigation systems, retractable roofs, and a number of other components that are specific to the sophisticated operation taking place at the property… that would [not] benefit the land or any other occupant of the property that was not engaged in a commercial horticulture business.”

What about precedent (prior decisions on point)? In fact, the BOE strongly argued that the Supreme Court of Ohio, in Green Circle Growers, Inc. v. Lorain Cty. Bd. Of Revision, 35 Ohio St. 3d 38 (1988) decided that these very same greenhouses were real property and should be taxed as such (for the applicable tax years in question). The BTA in Viola easily distinguished this case, however, because it was decided prior to the 1992 amendment to R.C. 5701.02 and 5701.03 that revised the definitions of real and personal property for taxation purposes, most notably adding the newly defined “business fixture,” which the Ohio General Assembly specifically excluded from the definition of real property. According to the BTA in Viola, “these definition changes demand reconsideration of the issue and lead to a different result.” Namely, that the greenhouses should be deemed personal property and not part of the real estate.

Adding “insult to injury”, the BTA in Viola also described two cases decided after the 1988 Green Circle case (and after the afore-mentioned 1992 amendments), in which the Supreme Court of Ohio held that the items of property in question were business fixtures and not real property fixtures. See Metamora Elevator Co. v. Fulton Cty. Bd. of Revision, 143 Ohio St.3d 359, 2015-Ohio-2807 (Grain Bins were held to be business fixtures and not real property); and Funtime, Inc. v. Wilkins, 105 Ohio St.3d 74, 2004-Ohio-6890 (amusement park rides and their accoutrements were held to be business fixtures and not real property).

Having found that the greenhouses in Viola are business fixtures and, therefore, should not be taxed as real property, the BTA’s final task was to examine the appraisals of the BOE and Green Circle and determine the appropriate value of the real property. Using the appellant’s cost approach for the residential property, and sales comparison approach for the commercial property, the BTA arrived at a total value of $10,200,000.

With an approximate $30 Million difference between the BOE’s opinion of value and the BTA’s determination of value, the appellee, reportedly has petitioned the Ohio Supreme Court to consider the matter. Only then will we know if what looked like a greenhouse building to the Ohio Supreme Court in 1988 is still a greenhouse building in 2018, or a business fixture as determined by the BTA in Viola.


ABOLITION OF DOWER RIGHTS IN OHIO NOW UP TO OHIO SENATE


By: Stephen D. Richman, Esq. – Senior Counsel – Kohrman, Jackson & Krantz
Earlier this summer (June 6, 2018), the Ohio House of Representatives passed HB 407 which would abolish dower rights in Ohio. Since its passage in the House, the bill has been introduced in the Ohio Senate, but according to the Ohio Legislature website, it has yet to be assigned to committee.
How many other states still have dower?
Besides Ohio, there are just two (2) states that still recognize traditional dower rights: Arkansas and Kentucky. A number of states that have abolished dower, however, retain effective spousal protections. For example, while New Jersey formally abolished dower in 1980, each spouse in that state retains a statutory right of possession in their principal residence after the death of the other spouse.
What is dower?
Generally speaking, dower rights are rights in part of a spouse’s estate, provided by law to the surviving spouse for his/her support. Historically, dower rights were limited to a wife’s rights in part of her husband’s estate, but most states over the years extended these rights to apply to a husband upon the death of his wife (sometimes known as “curtesy”); and later, to be gender neutral, redefined dower to apply to spouses, without husband and wife designations.
In Ohio, dower is an estate for life to a surviving spouse in one-third of the real property that the decedent spouse owned at any time during the marriage. In effect, this provision allows the surviving spouse to receive one-third of rents or profits from such real estate for the rest of the surviving spouse’s life.  Currently, the only way to extinguish dower rights in Ohio are: 1) death; 2) divorce and 3) voluntary, written release of dower (at each property transfer transaction).
Why was dower created?
Dower rights date back to the middle ages. Some historians claim dower was created to provide property to widows and widowers who were not part of the royal bloodline.
Others claim that the origin of dower centers around helping women, who years ago were not permitted to own property; and afterwards, as a means to help support the many women who were not part of the workplace due to discrimination, social norms…
 Why the call for dower to be abolished?
Regardless of its origins, most commentators (including title companies, real estate attorneys, real estate trade organizations, legislators and others) agree that dower is a sexist, archaic, superseded and troublesome doctrine that should be abolished.
Succinctly stated by Ohio Representatives Jonathan Dever (R-Madeira) and Bill Seitz (R-Cincinnati), the sponsors of HB 407, dower should be abolished because it is “antiquated and the largest cause of bad title, creating the inability to sell real estate because marital status or release of dower were omitted from a deed or mortgage.”
What often happens, for example, is that “Spouse A” refuses (or is unavailable) to release their dower interest (by a simple “sign off clause” in a deed or mortgage) when “Spouse B” attempts to sell or mortgage property owned by Spouse B. As a result, the title insurance company will not insure title (or will insure, but only with an exception for dower rights), and the grantee or lender will usually walk away from the deal, not wanting to risk “sharing the profits” with Spouse A, after the death of Spouse B.
Moreover, those calling for abolishment of dower are quick to point out that simply, dower is no longer necessary in the current real estate and legal system in Ohio (and other jurisdictions). For example, Ohio and other states now provide spousal protection by virtue of laws such as:
        1) Ohio’s elective share statute (O.R.C. §2106.01) which basically allows the spouse to elect, in lieu of what a will provides, an automobile and support allowance, plus one half of the net estate (unless two or more of the decedent’s children or their lineal descendants survive in which case the surviving spouse would receive one-third of the net estate); 
2) Ohio’s domestic relations law (O.R.C. §3105.171) which basically provides that any property acquired during the marriage is a “marital asset” subject to equitable division during a divorce or dissolution, regardless of which spouse holds title; and
3)  Ohio’s statute of descent and distribution (O.R.C. §2105.06) which basically provides a road map for who gets what in an estate, when there is no will, with the spouse at the top of the chart.
Critics to abolishment of dower (in Ohio) point out that without it, one can totally “disinherit” a spouse in Ohio. This claim is based upon the fact that Ohio’s elective share and descent and distribution statutes can be effectively circumvented with elaborate trust-based estate plans. However, proponents of abolishment counter that maintaining the existence of dower, as a practical matter will not effectively solve this issue. States that have wanted to avoid spousal disinheritance have simply made an exception to their elective share statutes to apply to more than just the “probate estate.” Moreover, non-real estate assets such as stocks, 401K accounts and insurance products exceed more traditional real estate holdings these days, and those that hold real estate usually do so via a limited liability company vs. individual ownership. In other words, very little property is held individually that dower would attach to, and few surviving spouses could live off of a dower interest in such property.
What would happen to dower rights that accrued prior to the date of any abolishment statute?
The repeal of dower would not adversely affect a surviving spouse’s right to dower that was elected or that vested before the effective date of the act.
What are the next steps?
Having passed in the Ohio House, it is now up to the Ohio Senate and the Governor of Ohio. While not yet before a senate committee for testimony, the bill is expected to be passed by the Senate and signed into law before the end of this year. Even though the Ohio House and Ohio Senate are not always on the same page, if the overwhelming support the bill faced in the House is any indication (the bill was passed 66-1, with 25 co-sponsors), this prediction by abolishment proponents is likely to become true.
Bottom Line?
As stated by Charles “Chip” Brigham, Secretary/Treasurer of the Ohio Land Title Association in his testimony to the Ohio House:
“Dower is an archaic reminder of our agrarian past. It has little present substantive value…. It remains a bane to real estate professionals and imposes unnecessary time, cost, and expense on homeowners … It’s time to give dower a well-deserved demise.”
On the other hand, perhaps it is also time to consider filling what some consider a void in Ohio’s spousal protection laws, by modifying the elective share statute to include revocable trusts (as in South Carolina), or by granting each spouse a statutory right of possession in their principal residence (after one spouse dies) without regard as to whether or not such residence is part of the probate estate of the decedent (as in New Jersey).


Caveat Emptor (“Let the Buyer Beware”) Is Still Alive and Well in Ohio


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

The doctrine of caveat emptor (“let the buyer beware”) is still alive and well in Ohio, generally precluding recovery in an action by a purchaser against a seller pertaining to a property’s defective condition if:

1) the condition complained of is open to observation or discoverable upon reasonable inspection;

2) the purchaser had the unimpeded opportunity to examine the premises; and

3) there is no fraud on the part of the vendor. Layman v. Binns (1988), 35 Ohio St.3d 176.

While Ohio’s Seller Disclosure Act (R.C. 5302.30; the “Disclosure Act”) still requires sellers of most types of residential property to disclose known defects, the Disclosure Act does not directly modify the doctrine of caveat emptor by creating a new statutory fraud claim or by eliminating existing common law claims. In fact, Section 5302.30 (L) of the Disclosure Act makes it clear that R.C. 5302.30 is not intended to affect any (common law) remedies available prior to its enactment. Nevertheless, if the seller fails to disclose a material fact on the disclosure form with the intention of misleading the buyer and the buyer relies on the form, the seller [has committed fraud and] is liable for any resulting injury. Pedone v. Demarchi, 8th Dist. [Cuyahoga] No. 88667, 2007-Ohio-6809. However, “[w]hen a plaintiff claiming fraud in the sale of property has had the opportunity to inspect the property, he is charged with knowledge of the conditions that a reasonable inspection would have disclosed.”

The Ninth District Court of Appeals in Petroskey v. Martin, 2018-Ohio-445 (Lorain County) and the Eighth District Court of Appeals in Hendry v. Lupica, 2018-Ohio-291(Cuyahoga County) recently reaffirmed the viability of caveat emptor in Ohio. Since the disgruntled buyer in Petrosky v. Martin (Mr./Mrs. Petroskey) and the disgruntled buyer in Hendry v. Lupica (Mr. Angus Hendry) both claimed fraud on the part of the seller, the following summary should prove helpful before evaluating these cases:

In the context of real estate transactions, there are basically two types of fraud: fraudulent misrepresentation and fraudulent concealment (with “fraudulent nondisclosure” sometimes being referred to as either a third type of fraud, or, a type of fraudulent concealment).  The elements of fraudulent misrepresentation are: (a) a false representation concerning a fact material to the transaction; (b) knowledge of the falsity of the statement or utter disregard for its truth; (c) intent to induce reliance on the misrepresentation; (d) reliance under circumstances manifesting a right to rely and (e) injury resulting from the reliance.  Sanfillipo v. Rarden, 24 Ohio App. 3d 164.

The basic elements of fraudulent concealment are: (a) actual concealment; (b) of a material fact; (c) knowledge of the facts concealed; (d) intent to mislead another into relying upon such conduct; (e) actual reliance; and (f) injury resulting to such person because of such reliance.  

Even without an affirmative misrepresentation or “actual” concealment, an action for fraud, commonly referred to as “fraudulent nondisclosure” is also maintainable in Ohio for failure to fully disclose material facts where there exists a duty to speak.  In such regard, the Supreme Court of Ohio has held that a “vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection.”  Binns, 35 Ohio St.3d at 178

The facts of Hendry v. Lupica are as follows:

In 2015, Mr. Hendry purchased a home in Olmsted Falls, Ohio from the Lupicas (sometimes referred to herein as the “Sellers”). Prior to closing, the Sellers produced a residential property disclosure form that disclosed dampness and previous water damage in the basement. Mr. Hendry also had the home inspected by a professional inspector. The inspector found several issues with the basement, including foundation wall cracks, holes and signs of water infiltration. The inspector’s report also noted that the condition of the foundation was poor and advised Mr. Hendry to seek additional information about these issues prior to purchasing the property. Mr. Hendry did not follow that advice, and instead, negotiated a price reduction with the Sellers. Not to long after the purchase, Mr. Hendry experience water infiltration in the basement when it rained. He hired a waterproofing company to fix these issues, and then filed suit against the Sellers in September 2015, alleging fraud and mutual mistake, and requesting compensatory and punitive damages, or rescission of the contract.

Mr. Hendry contended that the caveat emptor doctrine did not apply because the Sellers fraudulently misrepresented and/or failed to disclose the extent of water intrusion problems in their basement. The Sellers only disclosed some dampness and some water damage that occurred prior to their ownership of the home.  Mr. Hendry further argued fraudulent concealment because the Sellers did not divulge that they had recently painted a wall in the basement. The trial court held for the Sellers and Mr. Hendry appealed.

The Eighth District Court of Appeals upheld the trial court’s ruling for the Sellers, easily coming to the conclusion that there was no fraud or misrepresentation.   The appellate court reasoned that the evidence clearly established that Mr. Hendry had actual knowledge of water infiltration in the basement through his professional home inspection. The inspection reported large cracks and holes in the foundation, and other problems and advised further investigation. Rather than investigate further, Mr. Hendry “bought the defects” by negotiating for a price reduction. There was no misrepresentation because the statements made by the Sellers were all true (there was dampness and prior water issues).  Further, there was no fraudulent non-disclosure because there was no duty for Sellers to disclose everything they knew about its property; only latent, not readily observable or discoverable defects.  According to the court, an open and obvious small defect was notice to the buyer that a larger problem may exist. Finally, the painting of one wall was not deemed concealment by the court because it did not conceal the extent of the problem; the cracks, holes and stains were still evident, and the inspection report backed this up.

Petroskey v. Martin is also a recent, “water infiltration in the basement case”, that includes a “scary” inspection report and a buyer that sought to “buy the defect” vs. learn more about the problem. The facts of this case are as follows:

In August, 2013, David Petroskey (sometimes referred to herein as “Buyer”), and Dee Martin (sometimes referred to herein as “Seller”), entered into a purchase agreement for a home in Lorain, Ohio.

In September, 2013, Buyer had the home inspected. The inspection report noted various water issues and concerns about the premises including: 1) evidence of water leakage and moisture in the crawl spaces; 2) the property’s grading was a “[f]lat [i]mproper soil slope towards [the] foundation;” 3) evidence of past water leakage around the skylights and evidence of past or present water staining on the ceilings in all bedrooms, the family room, and the master bathroom; 4) a “mold like substance” in the attic; and 5) loose and damaged trim wood and damaged wood fascia “from past or present leaks.” As was the case in Hendry v. Lupica, the inspector in Petroskey v. Martin also recommended further investigations and inquiries, including securing “[a] qualified roofing contractor to evaluate and estimate repairs.”

The seller in Petroskey v. Martin also completed an Ohio Residential Property Disclosure Form. However, where the Martin Disclosure Form asked, “Do you know of any previous or current leaks or other material problems with the roof or rain gutters? …. (but no longer than the past 5 years),” Mrs. Martin checked the “No” box. In her deposition, Mrs. Martin testified that, at the time she completed the Disclosure Form, she “thought it was about seven years” since they had the roof replaced.

In October, 2013, Mr. Petroskey and Mrs. Martin amended their purchase agreement. The amendment removed the general home inspection contingency and reduced the sale price. After the amendment, Mr. Petroskey (per his testimony) went through the Home “[m]aybe half a dozen” times before finalizing the purchase.”

Shortly after his purchase, Buyer suffered ice damming on the roof, leaking skylights and a leaking roof. In addition, Mr. Petroskey testified that “the front yard did not drain properly and water entered the crawlspace and collected on the floor.” Mr. Petroskey then sued the Seller alleging misrepresentations in the form of Seller’s Disclosure Form declarations that there were no roof leaks at the property. Whereas the Seller in Hendry v. Lupica failed to disclose the extent of the defects (a distinction without a difference according to the Hendry court), the Seller in Petroskey v. Martin denied there were any problems at all.

Accordingly, the trial court and the appellate court in Petroskey v. Martin aptly agreed with the Buyer’s characterization of the “no” answer on the Disclosure Form as a misrepresentation. The courts noted, however, that only a claim for fraudulent misrepresentation was actionable, and the evidence failed to show that the misrepresentation was made with knowledge of its falsity, or with reckless disregard as to whether these statements were true or false (recall that Mrs. Martin testified that she thought the roof repairs were completed over seven years ago vs. within five years as called for on the Disclosure Form).

Like the seller in Hendry v. Lupica, the seller in Petroskey v. Martin argued that there was no fraudulent-non-disclosure because the seller had no duty to disclose material facts which are not latent, and readily observable or discoverable through a purchaser’s reasonable inspection. Clearly, there was no question of past water leakage and water staining in the Lupica home, as well as in the Martin home. Both homes showed signs of the same, and the inspection reports for both properties clearly identified water leakage and staining.

The buyer in both cases argued that the respective defects in their homes were latent. The buyer in Petroskey v. Martin, however did not argue latency regarding the extent of the defect (as the buyer in Hendry v. Lupica unsuccessfully had), but rather, latency regarding the cause of the defect. Mr. Petroskey testified that he had to pay approximately $50,000 for a new roof and argued that the inspection report did not specifically mention ice damming and roof issues as the cause of the water intrusion and leakage.

Citing precedent from the Ohio Supreme Court as well as from other cases heard by the Ninth District, the court in Petroskey v. Martin was not persuaded that these “lack of causation facts” made any difference. As summarized by the Ninth District Court of Appeals in Petroskey: “The Ohio Supreme Court has found that, when determining whether a defect was ‘open to observation,’ the issue is not the ‘cause of the defect’ or the ‘remedial effectiveness of [a repair],’similarly, this Court has stated that the cause of the defect, the underlying problem, does not have to be open and obvious. If the defects are open and obvious …, the buyer is on notice to make further inquiry as to the underlying condition.”

Applying the law to the facts, the court of appeals in Petroskey concluded that, “Although the home inspector did not identify the cause of the ‘leaks’ as ‘ice damming,’ he did notify the Petroskeys of evidence of ‘past water leakage,’ ‘past or present water staining,’ and damage ‘from past or present leaks’ in various locations throughout the Home. Thus, the defect was not latent and the Petroskeys were on notice to make further inquiry as to the underlying problem.”

What is the moral of this story?  1) Never waive your rights to inspections; 2) don’t rely on the Disclosure Form, which more often than not turns out to be a “non-disclosure form;” 3) if any defect is uncovered in an inspection report, assume it is a big deal and investigate it further with an expert (per the court in Hendry, an open and obvious small defect was deemed notice to the buyer that a larger problem may exist); and 4) if you decide to “buy the defect”, make sure you know the price to repair it.

In other words, in the words of singer/songwriter/philosopher Kenny Rogers: “You got to know when to hold them, know when to fold them, know when to walk away and know when to run.”