It is a Good Time to Borrow Again

“Low” is the operative word of the day.

According to the US Energy Information Administration, U.S. weekly regular gasoline retail prices averaged $2.78/gallon (gal) on December 1, the lowest since October 4, 2010. U.S. regular gasoline retail prices are projected to continue declining for the remainder of the year, and average $2.60/gal in 2015.

But wait, there’s more. Mortgage rates are below 4% again, hovering around their lowest level since June 2013.They started the year a little over 4.5 percent. A 15-year-loan is now averaging 3.1 percent as opposed to 3.9 percent for a 30-year loan, according to today’s averages

And that’s not all. The Federal National Mortgage Association (“FNMA” or “Fannie Mae”), as of December 13, 2014, and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) as of March 23, 2015 will back loans with 3 percent down payments for first-time home buyers. Fannie Mae, Freddie Mac, the National Association of Realtors (“NAR”) and other groups believe the “3% Down Payment Mortgages” could provide a boost to first time home buyers with good credit, but little cash. Industry surveys have shown that 40-45% of those who rent, do so because they cannot afford a down payment.

Critics are concerned that the program will just create more mortgage availability for customers who are more likely to default. In a recent press release, Federal Housing Finance Agency Director Mel Watt disagreed with the critics, stating that the program “provides a responsible approach to improving access to credit while ensuring safe and sound lending practices.”

Among the safeguards and other requirements to qualify for a 3% Down Payment Loan are:

“First Time Home Buyer” (Not having owned a home in the last 3 years)

·         “Primary Residence” (Not for vacation homes or investment property)

·         Minimum Credit Scores (FannieMae-620; Freddie Mac- 660)

·         Documentation of income, assets and employment

·         Credit Counseling

·         Private Mortgage Insurance (but may be canceled once mortgage balance drops below 80% of home’s value)

Whether or not the 3% Down Payment Loan opens the flood gates for first time home buyers, or clutters foreclosure dockets, one thing is clear: It is good time to borrow again. We may not see gasoline prices and mortgage rates this low and incentives this high again, without a time-traveling DeLorean.

Limitations on Bringing Federal Civil Penalty Claims: Federal Agencies Subject to a Stricter Reading

A decision issued last year by the U.S. Supreme Court has ramifications that affect property owners. The case, Gabelli v. Securities and Exchange Commission, No. 11-1274 (“Gabelli”), involved an enforcement action filed by the SEC against two investment advisers for actions that allegedly took place more than five years earlier.  28 U.S.C. Section 2462 applies a 5 year statute of limitations to most federal civil penalties enforcement cases, including the SEC. Because most federal environmental statutes do not contain a statute of limitations clause, they are subject to Section 2462 as well. 

Not surprisingly, disagreements arise as to when the clock starts running on the 5 year statute of limitations. Section 2462 provides that the statute of limitations starts running when the action accrues. However, governmental agencies in the past, including the EPA, have argued that they can’t be expected to know about the actions of the defendants until they uncover the alleged violations during an inspection or investigation, and therefore the 5 years statute of limitations should start running only upon discovery of the alleged conduct, not when it occurred. This is often called the “discovery rule.” 

In the Gabelli case, the SEC argued, and the court of appeals agreed, that the discovery rule should be read into Section 2462 because of the allegations that form the basis of the SEC claims against the defendants were sounded in fraud.  The US Supreme court disagreed, holding that the discovery rule doesn’t apply to civil penalty claims that fall under Section 2462. The court distinguished its decision from fraud actions brought by an injured plaintiff (i.e., not a governmental agency) where the discovery rule might apply. 

This ruling pulls the rug out from under the EPA and other federal agencies that have relied on the discovery rule in the past. Landowners should obtain some protection from the narrower reading of the statute of limitations that the EPA and other federal agencies will have to observe. 

In recent months, as a result of the Supreme Court’s ruling, I’ve encountered purchase agreements where the seller wants to limit all of its environmental representations and warranties to the past 5 years. This is overreach on the part of sellers and buyers need to be aware.  This ruling does not impact private party actions, criminal actions or actions by state or local agencies (Ohio EPA penalty or administrative actions are subject to a more liberal statute of limitations). 

Overall, the effect of the Gabelli decision is good for property owners but needs to be kept in perspective.



Watch Your Language With Commercial Lease Guarantees

 (“Say what you mean, precisely, or a judge will decide what you meant” #7)

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in a commercial lease (and ancillary lease documents such as assignments and guarantees), unless it is contrary to statutory law or public policy. Because of this judicial deference to lease language, you must say what you mean, precisely, or a judge will decide what you meant. Failure to follow this axiom left the landlord in Brogan v. Coughlin Servs., Inc., 2014-Ohio-469 (10th Dist. Ct. of Appeals, Franklin County) without an enforceable guarantee.

In Brogan, SES Realty Co. ("SES"), as landlord, entered into a lease agreement with Coughlin Services, Inc. ("Coughlin Services"), as tenant, for property located on Schrock Road in Columbus, Ohio. Albert and Melody Coughlin, the appellees signed a "guaranty of lease" agreement ("guaranty"). The guaranty was a "continuing guaranty," not to be affected "by reason of any extension of time that may be granted by the Landlord to the Tenant." There were a number of lease extensions (4) between the original landlord and tenant. Thereafter, Coughlin Services (the original tenant) sold its business and assigned its tenant rights under the lease to a company we’ll call “Assignee A”, who subsequently assigned the lease to “Assignee B”. Meanwhile, SES sold the building (and assigned landlord’s rights under the lease to the plaintiff-appellants, Sean and Barbara Brogan. When the Brogan’s tenant (Assignee B) defaulted, the Brogans attempted to collect on the Guaranty originally given by the Coughlins. The Coughlins refused to pay on the Guaranty and the Brogans sued. The trial court found that the Guaranty was unenforceable, at least against the Coughlins, and the Brogans then appealed to the 10th Dist. Ct. of Appeals.

The Coughlin Guaranty, provided, in pertinent part: “[the Coughlins] shall guarantee the performance by Tenant, its personal representatives, successors and assigns, of all covenants and conditions of the Lease Agreement to be performed by Tenant."

The appellants (the Brogans) argued that the personal guaranty of appellee Coughlin remained in full force and effect until the expiration of the term of the lease which, by virtue of amendment, was still a year away (from the filing date of the lawsuit). Even though there were two assignments of the lease, the appellants used prior case law that established the lessee "is still in privity of contract with the original lessor" and the assignment "does not relieve the lessee of its express obligation to pay rent “.

Appellees, on the other hand, argued they had only promised to guarantee the lease obligations of Coughlin Services, as tenant, and such tenant's heirs, personal representatives, successors or assignees, namely, Assignee A. Assignee B was not an assignee of the tenant (Coughlin Services), but an assignee of Assignee A..

The 10th District Court of Appeals upheld the trial court’s decision in favor of the appellees (the Coughlins). In reaching its decision, the court first cited prior case law (including decisions of the Ohio Supreme Court) reinforcing our “Watch Your Language” principle; namely that "[i]n construing the terms of a written contract, the primary objective is to give effect to the intent of the parties, which we presume rests in the language that they have chosen to employ." The court then reasoned since Ohio courts "construe guaranties, and releases thereof, in the same manner as they interpret other contracts,” their job would be simply to interpret the guaranty language.

In considering the terms of the guaranty, both the trial court and the appellate court found the language to be "clear and unambiguous," and that "Coughlin's obligation to [appellants] for delinquent rent is only triggered by his default as the tenant under the original Lease or the default of Coughlin's heirs, personal representatives, successors or assigns." In other words, the guaranty only guaranteed performance of the tenant and the tenant’s assignee (Assignee A), not the assignee of tenant’s assignee (Assignee B). The 10th district further distinguished this case from the case argued by the appellees (Morse & Hamilton Ltd. Partnership v. Gourmet Bagel Co., 10th Dist. No. 99AP-1253 (Sept. 29, 2000). “While Gourmet Bagel addresses the relationship between a lessor and lessee following an assignment under a lease agreement, that case does not deal with a guarantor relationship such as the present.”

What is the moral of this story? Presumably, the original landlord intended for the Coughlins to guaranty the tenant’s performance, as well as the performance of all assignees down the line. Certainly, the Brogans thought their guaranty would be enforceable against all assignees. However, the guaranty, according to the court, did not grant the landlord (and the landlord’s assignees) such rights. In other words, “Say what you mean, precisely, or a judge will tell you want you meant.”  Ohio commercial contract cases are replete with their own warnings to “watch your language.” As aptly stated by the 2nd District Court of Appeals (regarding guarantees) in a recent 2013 decision: "It is well established in Ohio law that a guarantor is only bound by the precise words of his contract." As a result of these cases, guarantees must specifically provide for whose obligations are being guaranteed, not just “the what”.

Retail Leasing: Can The Landlord Force Your Store to Open on Thanksgiving?

With the Thanksgiving holiday only a few days away, we’ve been hearing news stories about which stores will open on Thanksgiving Day and which will remain closed. Every year there seems to be contest as to which stores can get the earliest jump on the shopping frenzy known as “Black Friday,”  while others take the opposite approach and refuse to open on Thanksgiving Day, considering it to be a day best spent at home with one’s family. I happen to subscribe to the latter view. However, one’s personal preference doesn’t always dictate a retail store’s hours of operation.

A standard clause in retail leases deals with the hours the store is expected to be open for business. Typically, it is the landlord who dictates what those store hours will be. In some leases, the days of the week and the hours a store is open each day are negotiated in great detail. Below are three sample lease provisions regarding store hours, starting with a very detailed provision and ending with a very simple provision, all of which keep the landlord primarily in control when it comes to dictating a store’s hours of operation.

Sample 1—

“Tenant shall cause its business to be conducted and operated in good faith and in such manner as shall assure the transaction of a maximum volume of business in and at the Premises.  Unless other hours are designated or approved by Landlord in writing, Tenant shall cause the Premises to be open from 11:00 a.m. until 10:00 p.m. Sunday through Thursday and from 11:00 a.m. until 11:00 p.m. on Friday and Saturday.  The Shopping Center shall be closed for business on Thanksgiving Day and Christmas Day.  Landlord, in its sole discretion, shall have the right to reduce or eliminate operating hours on any or all of New Year’s Eve, New Year’s Day, Easter Sunday, Thanksgiving Eve, Christmas Eve, Labor Day, Memorial Day, and the Fourth of July.  Tenant agrees that during each Rental Year, from Thanksgiving Day through December 31 and on at least five (5) additional days, Landlord shall be permitted to extend Tenant’s operating hours up to an additional three (3) hours per day.  If Tenant shall fail to operate during all such hours, in addition to constituting an Event of Default hereunder, Tenant shall be required to pay, for each hour that Tenant shall fail to be open, liquidated damages equal to the greater of Fifty and 00/100 Dollars ($50.00) or ten percent (10%) of Tenant’s average hourly Gross Sales computed for the month immediately preceding the month in question.  If Tenant shall request Landlord’s approval of the opening of the Premises for business for periods exceeding those specified above and Landlord shall approve such request, which approval may be granted or withheld in Landlord’s sole discretion, Tenant shall pay for any additional costs incurred by Landlord in connection with Tenant’s opening the Premises for business during such additional hours, including but not limited to, any additional amounts of Landlord’s Operating Costs, additional costs of heating, ventilating and air‑conditioning the Common Areas and the Premises, and additional utilities furnished to the Premises by Landlord.” [emphasis added]

This first provision has been more heavily negotiated and provides the tenant with a little more flexibility, but not much. 

Sample 2—

Daily, except for Sunday, the Premises shall be open for business to the public not later than 10:00 A.M., and on Sunday the Premises shall be open for business not later than Noon.  The Premises shall remain open for the conduct of business to the public until at least 9:00 P.M. on Monday through Wednesday, 10:00 P.M. Thursday through Saturday, and 6:00 P.M. on Sunday.  In addition, the Premises shall be open for business on such legal holidays and for such hours as may become the standard as reasonably established by Landlord.” [emphasis added]


The last sentence of Sample 2 is the slippery slope that can trip up a retail tenant who desires to remain closed on a traditional holiday when the standard starts to change. As more and more stores elect to start “Black Friday” shopping hours on Thanksgiving evening or even earlier, a landlord may reasonably argue there is a new standard and it expects all the retail tenants to conform.

Sample 3—


Tenant will keep the Leased Premises open for business during hours designated by Landlord, from time to time, as the Shopping Center’s hours of operation.”


This last sample, while simpler, gives the landlord total control over what the retail tenant’s hours of operation will be.

Retail tenants need to be aware of the store hours required in their leases and the level of discretion afforded to the landlord to change those hours. As more and more retail establishments push the envelope on opening during major holidays, the remaining tenant may find themselves forced to go along regardless of their personal beliefs and preferences, or risk being in breach of their lease and/or subject to substantial financial penalties.

Expense it, or Capitalize it?

New IRS Regulations Detail Standards on How to Categorize Property Repairs

Reprinted from the November 2014 edition of Smart Business Cleveland with permission from Smart Business ( and Skoda Minotti (

New regulations from the IRS and Treasury Department went into effect Jan. 1 relating to the deduction and capitalization of expenditures for tangible property. The regulations affect businesses of all types and sizes.

“These new rules set more guidelines on what can be done and what you have to analyze to get into the proper category,” says Dennis C. Murphy Jr., CPA, Senior Manager with Skoda Minotti. “Basically it’s expense it or capitalize it.”

Smart Business spoke with Murphy about the new rules on how to classify repairs and maintenance on tangible property.

What is the purpose of the new rules?
Based on three standards, the regulations give companies a guideline of whether an expenditure should be treated as an expense or a capital expenditure, which needs to be depreciated in future years. An expenditure just needs to meet one of the three standards to be classified as a capital expense.

Of course, in taxpayers’ eyes, the more that can be expensed, the better, since it lowers the taxable income. The new regulations give a better base to taxpayers for classifying future expenditures as either an expense or capital expenditure.

What requirements do the standards set?
The new regulations set forth three capitalization standards: betterment, restoration or adaptation.

The betterment standard applies to a repair if it is expected to correct a material condition or defect at the time of acquisition or production, results in a material addition to the unit of property, or results in a material increase in the capacity, productivity, strength, efficiency or quality of the unit of property.

The restoration category applies when an expenditure replaces a disposed component, returns the unit of property to its ordinary operating condition after the property has deteriorated to a state of disrepair and is no longer functional, or replaces a major component or substantial structural part of the property.

An expenditure results in capitalization under the adaptation category if the adaptation is not consistent with the taxpayer’s ordinary use of the unit of property when it was placed into service.

What are the major benefits taxpayers might see from the regulations?
The first takes a conceptual approach. The regulations attempt to resolve past discrepancies between the IRS and taxpayers. It sets more guidelines and rules and offers more examples.

The second is a new election in the regulations relating to the partial disposition of assets. This election allows taxpayers to claim a loss on a disposed component or replaced component of a building or any other asset classified as a single unit of property. In addition, the election eliminates the instances where two of the same components or asset must be simultaneously depreciated.

For example, if a company has a building, and in 2014 added to or replaced its roof, the company can make an election on its 2014 tax return to deduct the original cost of the roof. For the 2014 tax year only, taxpayers that disposed of tangible property in prior years through abandonments, renovations and retirements but continue to depreciate these assets will be able to write them off in 2014.

Finally, the third benefit about the new tangible property regulations is a new safe harbor election regarding the de minimis rule. Under this election, taxpayers can expense costs depending upon the level of financial statement assurance the taxpayer produces on an annual basis.

There are typically three levels of financial statement assurance: the audit, the review and a compilation. If a company has an audit performed on its books, those businesses are allowed to deduct all amounts for repair or improvement less than $5,000. For taxpayers without this level of assurance, the threshold is $500.

A written capitalization policy must be in place at the beginning of the year for which the election is made.

To make sure they have all their procedures and information current in order to use the new provisions, companies should talk to a tax adviser.

For over 30 years, Skoda Minotti has provided its clients with a complete business advisory experience that now expands beyond traditional accounting, tax and consulting to include financial services, professional staffing, risk advisory services, strategic marketing and technology solutions. To learn more about this topic and how Skoda Minotti can help your business, contact Dennis Murphy at: (440) 605-7124 and/or visit

For nearly 25 years, Smart Business Magazines, Events and Books has produced high-quality, award-winning periodical content, events and marketing materials for a diverse audience of entrepreneurs and senior executives in major business markets all across the United States. To learn more, log on to: Smart Business Magazine.

Appellate Court Ruling on Oil and Gas Leases Appealed to Ohio Supreme Court

On September 26, 2014, in Hupp v. Beck, the 7th District Court of Appeals in Ohio overturned the trial court’s decision that certain oil and gas leases in Monroe County, Ohio between landowners and Beck Energy Corporation (Beck) were void from their inception.  On Friday, November 7, 2014, the plaintiff landowners filed an appeal with the Ohio Supreme Court.

The leases at issue contained clauses regarding the lease term that are commonly used in oil and gas leases, and therefore the outcome of this litigation can have far reaching effects in Ohio. The lease term was two-tiered, with a 10-year primary term and a secondary term that could continue indefinitely so long as certain conditions were met. During the primary term, if the property wasn’t being drilled, Beck, as the lessee, would be obligated to pay a ‘delay rental’ payment to the landowner.  Landowners challenged Beck’s form lease arguing that this two-tiered term structure rendered the leases “no-term” or “perpetual” leases, which are contrary to public policy and therefore void.

While the trial court agreed with the landowners, the 7th District Court of Appeals disagreed and reaffirmed the viability of leases containing these typical provisions. The 7th District covers the following Ohio counties: Belmont, Carroll, Columbiana, Harrison, Jefferson, Mahoning, Monroe and Noble.  Now that an appeal has been filed with the Ohio Supreme Court, we wait.  The court typically (but not always) announces whether it will accept an appeal approximately 2 to 4 months after the appellee’s memorandum in response is filed. If the Ohio Supreme Court elects to hear the landowners’ appeal and decides in the landowners’ favor, it could trigger a massive scramble by gas and oil companies to rewrite their leases.

Real Estate, Haunted Houses and Ohio.

Written on October 31, 2014

It seems appropriate on “All Hallows Eve” to see what Ohio real estate law and haunted houses have in common.

For example, do you need to disclose the presence of spirits (not the distilled kind) prior to the sale of your "psychologically impacted" or otherwise "stigmatized" property? Depending on the state, owners and real estate agents may or may not be required to inform prospective buyers of properties with such issues. Currently, about twenty-one states have property disclosure laws.  Even in such states, however, there is variability in what must be disclosed. In fact, some states like Florida provide, as a matter of law, what need not be disclosed. Florida specifically provides that it is not a material fact that a homicide occurred within a home, and that a failure to disclose such fact would not be actionable in a court of law. Ohio’s disclosure statute merely deals with physical defects such as roof and drainage issues.

Apart from statutory law, however, there is case law on this issue, most notably the 1991, Stambovsky v. Ackley decision out of New York State. In Stambovsky, a buyer of property claimed such property was haunted, and sued to rescind the contract of sale on the premise that the seller knew it was haunted and fraudulently failed to disclose this fact prior to the sale. The court in Stambovsky admitted that there was no duty to disclose the paranormal activities to the buyer, but, according to the court, it thought it appropriate to make an exception to the doctrine of caveat emptor because the court was “nevertheless moved by the spirit of equity [fairness] to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.”

While no case directly on point in Ohio was uncovered by my research, it is interesting to speculate. Based upon case law to date, however, I think we would get the same outcome in the Buckeye State, on facts similar to the facts in Stambovsky v. Ackley.

Basically, the doctrine of caveat emptor in Ohio precludes a purchaser from recovering for a property’s defective condition if the following conditions are met:  1) the property defect is discoverable upon inspection or open observation; 2) the purchaser has an unimpeded opportunity to examine the property and 3) there is no fraud on the part of the seller. Layman v. Binns, 35 Ohio St.3d 176 (1988). 

 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).  If there is no actual statement, made, there is no fraudulent misrepresentation.

 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. 

In Binns, the Ohio Supreme Court reasoned that a steel bracing supporting a defective wall was readily observable and discoverable; hence no fraud. In a 2013  decision of the Summit County Court of Appeals in Wilfong v. Petrone, 2013-Ohio-2434, the court found that a heater mounted on a ceiling of a lake house supported by stilts in a flood zone (and other observable facts) indicated that water intrusion was observable and discoverable; hence, no fraud was involved.

 In Stambovsky v. Ackley, the haunting of the house was widely known in the area and the house had even received national press attention. Accordingly, it seems that just by talking to the neighbors, and checking with “Mr. Google” online, the buyer could easily have discovered the “stigma”. Based on similar facts, it seems likely the Ohio Supreme Court would say no duty to disclose; hence, no fraud. While the Stambovsky court did not believe the “hauntings” were easily discoverable, the decision is over 20 years old, and the online information age is much more upon us now.

Even though courts have carved out exceptions to the rule, over the years, the moral of this scary story for buyers is still caveat emptor. Don’t pin your hopes on costly litigation and an equitable judge looking to make new law. Certainly hire a broker and a house inspector; but don’t end your due diligence/investigation there. Seek to know exactly what you are buying. Talk to neighbors, go online, don’t be haunted after you buy.