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

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

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

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

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

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

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

Is the Property ‘Farm Land’?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A few takeaways on this 4th requirement:

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

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

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

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

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

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

Don Schlitz, 1976 (sung by Kenny Rogers)

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

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

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

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

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

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

The Appellate Court’s Decision/Analysis

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

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

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

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

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

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

The Moral of the Story

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

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

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

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

By Connie Carr, Partner at Kohrman Jackson & Krantz LLP

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

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

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

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

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

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

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

Happy New – Real Estate Laws- Year

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

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

I.                   Am. Sub. SB 257

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

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

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

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

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

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

II.                Am. HB 532

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

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

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

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

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

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

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

Ohio Supreme Court Upholds Valuation of Condominium Development As Separate Units

The Ohio Supreme Court (the Court) recently issued another opinion real property valuations on December 28, 2016 in an appeal of a Board of Tax Appeals (BTA) December.  In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision (Slip Opinion No. 2016-Ohio-8375), the valuation dispute focused on the appropriate valuation of 16 unsold condo units in a 20-unit condominium development for the 2009 tax year.

The county auditor valued the 16 condo units at $5,986,400. The property owner provided an appraisal by an MAI certified appraiser that valued the condo units at $2,900,000.  The auditor valued the units as 16 separate units and the appraiser valued the units as a single economic unit similiar to an apartment complex.  His reasoning was based upon the changing real estate market after the financial meltdown in 2008 that resulted in condo units not selling and rented out instead. He treated the condo complex as a ‘stalled’ condominium development and used an income approach and sales comparisons more in line with an apartment complex. The Board of Revision (BOR) adopted the appraiser’s valuation and the BOE appealed. In the BTA hearing the BOE provided conveyance fee statements for the 4 units that previously sold along with square footage information from the county auditor’s web site.
The BTA overturned the BOR and reinstated the auditor’s higher valuation, resulting in an appeal by the property owner to the Court. The appraiser defended his valuation of the remaining 16 units as ‘one economic unit’ stating that it was the way the market looks at units when sales have stalled at a condo development. The property owner was currently renting out the 16 unsold units. However, only 1 of his 5 sales comparables was a broken condominium complex.
The BTA found that the appraisal was unreliable because it valued the condo units collectively as one would value an apartment complex, which effectively resulted is a discounted value contrary to Ohio law. The BTA also did not consider the appraiser’s sales comparisons to be appropriate to use as comparables because 4 of the 5 were not condo units.  Finally, the BTA found additional fault with the appraisal because the cost approach was not considered in completing the valuation. The property in question was new construction, having been built from 2006-2008, which was less than 12 months prior to the tax lien date.
Stating that ‘common ownership doesn’t transform condominium units into an apartment complex’, particularly when the ‘complex’ doesn’t include all of the units (emphasis added), the BTA held that the evidence was not sufficient to support a lower valuation and reinstated the auditor’s valuation.
The property owner argued to the Court that the BTA erred in characterizing the appraiser’s valuation as an improper ‘bulk discount’ but the Court, referencing R.C. 5311.11, disagreed, finding that the appraiser’s method was a back-door approach to an improper discount.
The property owner also claimed that the BOE did not submit evidence to contradict the BOR’s adoption of the appraiser’s valuation and therefore the BTA was acting unreasonably and unlawfully in restating the auditor’s valuation.  In making this argument the property owner was invoking what is known as the “Bedford” rule, which provides that once a board of revision has reduced the value of a property based on owner’s evidence, that new value eclipses the auditor’s original valuation, and the board of education cannot rely on it as a default valuation. (See Worthington City Schools Bd. of Edn. vFranklin Cty. Bd. of Revision, 140 Ohio St.3d 248, 2014-Ohio-3620, 17 N.E.3d 537; and Dublin City Schools Bd.of Edn. v. Franklin Cty. Bd. of Revision, 147 Ohio St. 3d 38, 2016 Ohio-3025).
The Court held that the Bedford rule does not require adoption of the BOR valuation because there was a legal error in the BOR’s determination.
Finally, the property owner argued that the BOE had a burden to present evidence of value and that it failed to do so, and therefore the BTA should have adopted the appraiser’s valuation. The Court disagreed, finding that the BOE had submitted the conveyance fee information and deeds for the 4 units which previously sold, and this information was sufficient to permit an independent valuation by the BTA.
To finally resolve matters in this dispute, the Court held that the record contained sufficient information to overturn the BOR’s adoption of the appraisal value and contained sufficient information for the BTA to perform an independent valuation of the units. The Court then remanded the case back to the BTA instructing it to determine the value of each individual unit based upon sales price and other evidence in the record.
This decision provides some needed clarity  but is not good news for condo developers who are still struggling to sell units in their developments.

Ohio EPA, DMWM: Two Draft General Permits for Beneficial Use Now Available For Comments

The Ohio EPA, Division of Materials and Waste Management issued the following notice:

“The Division of Materials and Waste Management and is making available for interested party comment two draft general permits for beneficial use — Spend Foundry Sand (used in several applications, including as a soil amendment and as general fill), and Alum Drinking Water Treatment Residuals (used as a soil amendment).  These draft documents may be accessed at http://epa.ohio.gov/dmwm/Home/BeneficialUse.aspx#123635124-permits.

When final, these general permits will be used in conjunction with the recently finalized beneficial use rules contained in Ohio Administrative Code Chapter 3745-599, which will become effective March 31, 2017. 

These new drafts have been significantly revised based upon program development and through public comments received throughout 2015 and 2016.  The advantage to this posting is now you can evaluate the draft general permits alongside the final beneficial use rules under which they are being created.  DMWM will accept public comments on these draft general permits until January 20, 2017.  DMWM is also developing draft general permits for beneficial use of dredged materials from federal shipping channels in Lake Erie and for Biosolids Incinerator Ash.  DMWM will be posting those for public comment in the near future.”

Here are links to other blog articles regarding Ohio’s dredged materials programs:


Liquidated Damages in Residential Leases May Backfire

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

As you may know, Ohio’s Landlord-Tenant Act (Ohio Revised Code [O.R.C.] Chapter 5321) governs the relationship between landlord and tenant for residential property. As you may also know, there are many more tenant protections and landlord obligations for residential property (because of such Act) than for commercial property. For example, while often not advisable, a landlord in Ohio can utilize “self help” to evict a commercial tenant, provided there is no “breach of the peace” (See Northfield Park Associates v. Northeast Ohio Harness, 1987 Ohio App. LEXIS 10461 [8th Dist.]; Tie Bar v. Buffalo Mall, 1979 Ohio App. LEXIS 8786 [7th Dist.]; Carter v. Standard Oil Co. 1978 Ohio App. LEXIS 7861 [8th Dist.]). Pursuant to Ohio Revised Code Section 5321.15, however, a landlord of residential property may only use the court eviction process to recover possession from a defaulting tenant.

Security deposits (and the handling of same) are also treated differently. For example, landlords of residential (vs. commercial) property must pay interest on their tenants’ security deposits greater than $50 (pursuant to O.R.C. 5321.16(A)).

At the end of a lease, if a tenant owes its landlord rent (or has damaged the premises) the standard action of many landlords is to deduct whatever damages the Landlord has incurred and send to tenant any remainder.  When landlords of residential property take this approach, they must follow the procedures of O.R.C. 5321.16 (B), which provides that “Any deduction from the security deposit shall be itemized and identified by the landlord in a written notice delivered to the tenant together with the amount due, within thirty days after termination of the rental agreement and delivery of possession.” According to the Eighth District Court of Appeals in the recent case of Oldendick v Crocker, 2016-Ohio App.LEXIS-5621[8th Dist.], however, residential landlords must be careful with what they deduct from their security deposits, or it may cost them more than their deduction.

The facts of the Oldendick case are as follows:

On September 10, 2013, Elisabeth Oldendick and her boyfriend (“Tenants” and “Appellants”) signed a one-year lease for a Cleveland Heights apartment owned by Mr. and Mrs. Crocker (“Landlords” and “Appellees”). The lease was to commence October 1, 2013 and end September 30, 2014 (the “lease” or the “lease agreement”). Under the lease, a monthly payment of $860 was due on the first day of each month and an $860 security deposit was also required. The lease also included an “early termination” provision, which required Tenants “to pay a fee of one month’s rent in addition to the regular rent until a tenant suitable to [landlord] executes a new lease term” if the Landlords agreed to an early termination (of the lease) request by the Tenants. Three days after Tenants signed the lease, they told Landlords they had changed their minds, and demanded the return of the $1,720 paid when they signed the lease. After just eight showings, and one month later, the Landlords were able to lease the apartment to a new tenant, whose lease commenced on November 1, 2013. The Landlords paid a manager $120 for her time in showing the apartment to the prospective new tenants and an additional $100 in commission for the newly executed lease. The Landlords refused to return the funds Tenants had paid them because they had been unable to re-rent the apartment until November 1, 2013 and, in their opinion, according to the terms of the lease, Tenants were responsible for the October rent and an early termination fee of one month’s rent. 
In November, 2013, Tenants filed a complaint in the Cleveland Heights Municipal Court (“trial court”) against Landlords seeking to recover (1) the $1,720 paid for the first month’s rent and security deposit, (2) “an equal amount as damages” and (3) attorney fees and costs. Tenants also sought to declare the entire lease void, claiming the early termination fee provision was an unconscionable liquidated damages clause which rendered the entire lease unenforceable.

On July 10, 2015, the trial court issued its decision, finding in favor of Appellees. The trial court determined that Tenants had entered into a valid lease and that the parties were “at that point bound by the terms and conditions of the lease agreement.” The trial court further held that the Tenants had breached the lease agreement by repudiating the lease and refusing to take possession of the premises. The trial court then concluded that the early termination provision was enforceable, that it was not an unconscionable penalty and that, as a result of Tenants’ breach of the lease, Landlords were entitled to keep the $1,720 they received from Tenants as the October, 2013 rent and the early termination fee. Some time thereafter, the Tenants then appealed the trial court’s decision to the 8th District Court of Appeals.

At the court of appeals, the Tenants first contended that the trial court should have declared the entire lease unenforceable under O.R.C. 5321.14 because the lease included a provision authorizing the payment of the Landlords’ attorney fees and various self-help provisions.  The court of appeals, however did not find this argument persuasive, largely because the trial court did not award Appellees any attorney fees and because there was no claim that Appellees exercised any of the self-help remedies that Tenants objected to. Even assuming those provisions of the lease were invalid, the appellate court found no error by the trial court in refusing to declare the entire lease unenforceable, because under O.R.C. 5321.14(A), a court “may refuse to enforce the rental agreement or it may enforce the remainder of the rental agreement without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”

Expectedly, Appellants further contended that “even if the lease was not unenforceable in its entirety, at the very least the trial court should have found the early termination provision to be unconscionable and refused to enforce it under R.C. 5321.14(A) and R.C. 5321.16(B).”

Appellees argued that the early termination fee was enforceable because courts have upheld liquidated damages clauses where actual damages may be difficult to prove, the amount of damages is reasonable and proportional to the contract as a whole, and that in this case, the Landlords and Tenants were parties of “equal bargaining power” who “agreed to and freely negotiated” the early termination provision.

Regarding enforceability of the liquidated damages provision, the court of appeals in Oldendick acknowledged Appellants’ argument that (while Chapter 5321 does not specifically prohibit liquidated damages clauses) there are indeed many Ohio courts that have declared such provisions unenforceable in a residential lease. The court in Oldendick stated that some of these courts have performed a penalty analysis in determining whether a fixed fee or charge set forth in a lease could be enforceable, refusing to enforce the same where the landlord failed to present evidence demonstrating that stipulated damages bore a reasonable relationship to actual damages sustained as a result of the breach. Other cases, according to the court have held that a liquidated damages clause in effect permits the landlord to retain a security deposit without itemization of actual damages, and this is inconsistent with O.R.C. 5321.16 (B), which requires itemization of damages. If the liquidated damages provision is inconsistent with O.R.C. 5231.16 (B), these courts have held that such provision may not be included in a rental agreement and is thus not enforceable.

The Court in Oldendick related more with the “inconsistent with O.R.C. 5321.16 and thus unenforceable decisions” (than to the “unenforceable as penalty decisions”), but seemed to want to simplify the analysis of these cases even further by not focusing on enforceability. According to the court in Oldendick, “the issue here is not whether liquidated damages provisions in residential leases are enforceable. The issue here is what a landlord is statutorily permitted to do, under the Landlord-Tenant Act, with a tenant’s security deposit. If deductions from a security deposit are at issue, the provisions of the Landlord-Tenant Act apply, which limits permissible deductions from a security deposit to ‘damages that the landlord has suffered by reason of the tenant’s noncompliance with section 5321.05 of the Revised Code or the rental agreement,’ i.e., actual damages sustained by the landlord as a tenant’s failure to comply with R.C. 5321.05 or the lease.”  

The Oldendick court cited other Ohio appellate courts that came to this same, “simplified” conclusion. ‘See, e.g., Ankney v. Dame, 6th Dist. Lucas No. L-76-307, 1977 Ohio App. LEXIS 10154, *5-8 (Apr. 29, 1977) (“It is not so much a matter of saying that liquidated damages are prohibited in leases, but the issue is whether the deposit put up herein is covered by the Act. * * * Any actual damages are permitted to be obtained by the landlord from the security deposit. * * * [T]he parties may contract for liquidated damages. However, if a deposit is required, then the provisions of the Landlord-Tenant Act must be followed.”)’

Because there was nothing in the record that established that the parties were of “equal bargaining power” and that as a general rule, damages resulting from a breach of a residential lease are not difficult to ascertain and quantify,  the court in Oldendick concluded that “even if we were required to perform a liquidated damages-penalty analysis to determine the appropriateness of Crocker’s deductions from Oldendick’s security deposit, we would find that the early termination fee operated as a penalty.”

So, according to the court in Oldendick, whatever way you look at it, the Landlords were not entitled to deduct the early termination fee from the Tenants’ security deposit. Landlord was, however entitled to deduct the $220 paid to the property manager as legitimate, itemized expenses. The court then concluded that pursuant to O.R.C. 5321.16 (B), the Landlords would need to remit $640.00 to the Tenant (the amount wrongly withheld, over and above the legitimate deductions).

O.R.C. 5321.16 (C) provides, in pertinent part, “If the landlord fails to comply with division (B) of this section, the tenant may recover the property and money due him, together with damages in an amount equal to the amount wrongfully withheld, and reasonable attorneys’ fees.” The Tenants in Oldendick in fact did make O.R.C. 5321.16 (C) claims, and the court awarded the Tenants damages of $640 and attorneys’ fees, on top of the $640 wrongfully withheld by the Landlords.

What is the moral of this story? For residential landlords, the expression “penny wise but pound foolish” comes to mind. While liquidated damages provisions are not per se prohibited in residential leases, the inclusion of same simply is not worth it because of the Ohio Landlord-Tenant Act, specifically, Ohio Revised Code Sections 5321.14 and 5321.16.