A Guarantor's Waiver of Defenses Doesn't Protect a Bank From Its Own Misconduct


A recent decision was issued by a California appellate court that, while not controlling in the State of Ohio, is worth mentioning as it could prove useful to guarantors in other jurisdictions in similar straits. In California Bank & Trust v Thomas Del Ponti, the trial and appellate courts refused to deem the waiver of statutory defenses that are typical in loan and guaranty agreements as waiving ALL defenses, particularly equitable defenses, if the result of enforcing the guarantee would be the unjust enrichment of the bank.
The above case involved a construction loan by California Bank & Trust’s predecessor-in-interest, Vineyard Bank. The loan was for the construction of townhome project in two phases, and was guaranteed by two principals of the developer.  About the time the first phase was nearly complete, the bank stopped funding the construction draws, which prevented the construction on the first phase from being completed, and obviously resulted in a developer default under the loan.
The bank eventually reached a deal with the developer and required the general contractor to complete phase one so it could sell completed townhome units at auction. However, the bank wanted the subcontractors to take a haircut on their invoices and release their mechanics liens. The general contractor instead paid the subcontractors out of its own funds so the units could proceed to auction lien-free. Despite all of this, the bank proceeded to foreclose on the developer and sold the units through a trustee sale. It then sued both the developer and guarantors through California Bank & Trust, as its assignee, to seek payment on the deficiency balance. The general contractor joined the fun and sued both the bank and the developer due to breach of contract and seeing restitution the losses it suffered.
The court consolidated the bank and contractor cases and found against the bank on both holding that the bank breached the assigned construction contract AND breached the loan agreement with the developer, absolving the guarantors of liability.
The bank appealed claiming that the guarantors’ waived of all of their defenses in the guaranty agreements. The appellate court disagreed. The guaranty agreements did not expressly waive the bank’s own misconduct and the court was not about to read that into the agreement.  The court held that to enforce such a sweeping interpretation would violate public policy as it would result in the guarantors’ being forced to pay the deficiency balance on the note to the bank when it was the bank who willfully breached the loan agreement causing the default.
This action would likely play out the same way in most courts in Ohio or elsewhere in the Midwest. The courts expect all parties in a transaction to act in good faith, and absent an express language the states otherwise, typically won’t stand for a party to be unjustly enriched by its own misconduct.
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The Shrinking Due Diligence Window in Commercial Real Estate Purchases

February 11, 2015


By: Arnon Wiener, Esq.- CEO, Real Diligence and LeaseProbe, divisions of Madison Commercial Real Estate Services

The revival of the real estate market is presenting new opportunities for commercial real estate owners and investors across the U.S. Improved lending conditions and the increase of capital availability are driving market growth on its forward momentum. After hunkering down to wait out the storm of the recession, the commercial real estate market is resurging with an influx of deals.

This is good news for real estate owners and investors. However there is a consequence to the increasing demand for properties: fierce competition. While competition is beneficial to the marketplace, investors should be aware of a secondary effect which may have a negative repercussion on the decision making process; namely the shrinking due diligence window.

Due diligence is the research conducted ahead of purchasing a property. In real estate, the due diligence process should include a thorough review of the financial history and cash flow projection for the property. The buyer should analyze all the financial information which is pertinent to the property, including historical financial statements, projected budget income, reimbursable income and methodology, operating expenses, taxes, insurance and more.

Conducting a comprehensive due diligence review takes time. The prospective buyer needs to carry out a thorough and accurate assessment in order to determine the financial and physical state of the property.
The due diligence period usually begins when the prospective purchaser has made an offer that the seller has accepted. The buyer then places a down payment in an escrow account to be applied towards the purchase. Once the due diligence deadline has passed, the deal goes hard.

Both parties in the transaction want it to move along at a reasonable pace. It used to be that typical due diligence periods ranged from 40 to 45 to 60 days. This was considered a practical amount of time to make an informed decision.

However, because of the increasing competition, due diligence time periods are shrinking significantly. Buyers are now being offered a due diligence window as small as 28 or even 21 days. Tighter due diligence windows of three or four weeks can pose a risk to investors.

With the pressure of a tight deadline, investors may be tempted to rush through the due diligence process in order to snap up a property. There is no denying the importance of speedy and assertive decision making when purchasing real estate. At the same time, it is as essential to have the knowledge to make a decision that is not just quick- but correct as well.

Buyers are now positioned between a rock and hard place, in which they are pressured to meet the impeding due diligence deadline, while still conducting thorough research of the potential property. The increased strain on the buyer may put him or her at risk to make hasty decisions, and then repent later.
Despite the shrinking window of stipulated due diligence periods, real estate owners and investors should still remain conscious of the need to make informed and measured decisions.
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Among the many services offered by Madison Commercial Real Estate Services and its affiliates are: Title Insurance and Closing Services (via Madison Title Agency, a full-service title agency); 1031 exchanges (via Madison Exchange, LLC, one of the industry's premier §1031 specialists and Qualified Intermediaries); cost segregation studies and analysis (via Madison SPECS); Lease abstracting and administration (via LEASEPROBE Abstracting Services); and comprehensive, accurate and timely financial due diligence for commercial real estate acquisitions (via REAL DILIGENCE Financial Valuation and Analysis).

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The State of Homes Sales in Northeast Ohio


I was curious about how home sales are progressing in Ohio. The economy in NE Ohio where I am based has struggled for a while, although it’s been looking up, and some realtors have told me that single family homes are moving much quicker now.

Below are monthly statistics for home sales in NE Ohio, based by county, for December 2014.
 

County

Total Homes Sold
Avg Market Time
Avg Sales Price
Ashtabula
480
121
$92,862
Cuyahoga
6,583
94
$143,207
Geauga
549
129
$226,513
Lake
1,487
99
$140,519
Lorain
408
98
$153,863
Medina
1,255
104
$184,825
Summit
3,495
78
$138,597

 

Three bedrooms accounted for the largest portion of sales in all of the counties listed above. However, in Geauga, Lorain and Medina counties, 4+ bedrooms ran a close second.

Thank you to Jeanine Visage for providing me with the information in this post.

If any reader has access to statistics for sales in other regions of Ohio and would be willing to share the information, please let me know.

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Ohio Snow and Ice; to Remove or not to Remove, that is the Question

(assuming you can get out of your drive)

As we dig out from under our latest snowfalls, it seems appropriate to summarize the relatively recent Franklin County Court of Appeals decision in Cain v. McKee Door Sales, 2013-Ohio-4217, and other cases dealing with premises liability for injuries due to accumulation of ice and snow.

As aptly pointed out by the Court in Cain, “the Supreme Court of Ohio has made liability [in snow and ice cases] very hard to establish.” In Brinkman v. Ross, 68 Ohio St.3d 82 (1993; the leading case on this issue), the Ohio Supreme Court held: the “homeowner has no common-law duty to remove or make less hazardous natural accumulation of ice and snow on private sidewalks or walkways on homeowner's premises, or to warn those who enter upon premises of inherent dangers presented by natural accumulations of ice and snow, regardless of whether the entrant is a social guest or business invitee.”

In the Brinkman case, the Brinkmans were invited to the Ross home during the winter. The Rosses knew that the sidewalk into the house was covered by a sheet of ice, which in turn was covered by snow, but never warned the Brinkmans. While walking on the sidewalk between the driveway and the Ross home, Carol Brinkman slipped on the snow-covered ice and fell, sustaining serious injuries. Ms. Brinkman sued and lost at the trial court stage, but appealed that decision. The court of appeals in Brinkman agreed with the plaintiff who admitted the snow/ice had accumulated naturally, but claimed the Rosses had a duty to disclose the dangerous situation that they knew about. 

The Ohio Supreme Court in Brinkman reversed the decision of the appellate court on the basis of law, and common sense, as if to say: “Who does not know that snow and ice are slippery?”  Actually, the Ohio Supreme Court put it more eloquently, by stating: “As a matter of law, the guest is charged with sufficient knowledge of the hazards to be required to protect herself against falls."

The facts of the case in Cain are a little more involved. Betty Cain fell on snow and ice in the parking lot at the office of her eye doctor. She was seriously injured, and as a result, she sued various entities affiliated with the office building. In her affidavit, Ms. Cain stated that she approached her car from the rear, and as she was reaching for her door, she slipped and fell on the snow and ice that had accumulated in the drainage swale of the parking lot.  While the basic facts in Cain are somewhat similar to the basic facts in Brinkman, counsel for Ms. Cain argued that the construction of the parking lot was improper or improperly designed, resulting in a trough (or swale) in the parking lot which accumulated snow, ice and water in what constituted an unnatural accumulation. Experts testified to this “unnatural phenomenon”. The trial court relied on Brinkman, and granted summary judgment in favor of the defendants. Ms. Cain then appealed.

In reversing the trial court’s summary judgment, the Franklin County Court of Appeals held that there was a genuine issue of material fact as to whether or not Ms. Cain fell on an unnatural accumulation of ice which resulted from the design of the parking lot, and accordingly remanded (sent back) the case to the trial court for further appropriate proceedings. In other words, the court of appeals simply recognized that there is an exception to the rule (for “unnatural accumulations”) and awarded the defendants their day in court to try and prove it.

Would these cases have come out any different in a landlord-tenant situation? Based on Ohio case law, probably not, with two exceptions.  One, if the landlord has promised in its lease to clear snow and ice from the premises, then yes, the landlord can be sued if he fails to live up to his contractual obligations. Two, if a landlord decides to remove ice and snow, without an obligation in the lease to do so, he then has a duty to use ordinary care not to create a hazard or to aggravate an existing hazard. Such a hazard would constitute an unnatural accumulation.

Actually, whether or not in a landlord tenant situation, anyone that undertakes to remove snow/ice can be liable for a slip and fall if they have done so negligently, or in a way that makes the area more hazardous than it had been without the efforts at snow removal.

What is the moral of this story? Never shovel or “de-ice”? There are some who subscribe to that theory. However, before you decide to take such an approach, you should note:1) A lease or other contract may create the duty/obligation to remove ice and snow; 2) your applicable municipality may have snow removal ordinances. If your city or township has such an ordinance that requires you to keep walkways free of snow and ice, then you have a responsibility to maintain the same. In fact, some Ohio cities with snow removal ordinances levy fines for not removing snow in a timely manner; and 3) if you have a good insurance policy, why not listen to your mother and be nice to your neighbors.




Supreme Court Clarifies Rescission Right Under the Truth in Lending Act

On January 13, 2015, the U.S. Supreme Court issued its decision in Jesinoski et us. V. Countrywide Home Loans, Inc., et al. (No. 13-684) addressing a split in the appeals courts regarding what a borrower must do to rescind a home mortgage by the three-year deadline provided under the Truth in Lending Act (“TILA”).

Under TILA, the lender on certain home mortgage refinancings or home equity lines of credit must provide certain disclosures to the borrower. The borrower then has three days after receiving these disclosures to rescind the loan, and then give the money back.  However, if the lender fails to provide the required disclosures or the disclosures are found to be inaccurate, the borrower has up to three years to notify the lender that he or she wants to rescind the mortgage.

The issue has been what is borrowers must do to exercise their rescission right. Some courts have held that a written notice is all that is required within the three year deadline, while other courts have held that a lawsuit seeking rescission must be filed within the three years.

The U. S. Supreme Court unanimously held in its ruling that the statute states the borrower can rescind the mortgage simply by notifying the lender, and there is no requirement in the law that a lawsuit has to be filed within that time frame. This decision is a blow to lenders who are seeking ways to stem the bleeding from foreclosures that drag out for years.

The purpose of a rescission right under consumer protection laws is to provide protection for homeowners from deceptive or abusive lending practices. If a homeowner closes on a mortgage loan that is subject to the act only to learn that critical information on the fees or interest charged  as not communicated correctly, if at all, in violation of federal disclosure requirements, then that homeowner would have the right to seek rescission of the mortgage and return the money.

In practice, things are a little murkier. A rescission cannot be completed unless the borrower gives the money back.  However, it is not uncommon for borrowers that do not have the means to repay, to use the rescission process as a stall tactic because it allows them to remain in the home without making payments during this process. Also, a lot of gamesmanship comes into play, as the rescission notice is often filed on the last possible day before the three year deadline expires.  Lenders believe that requiring borrowers to file a lawsuit seeking rescission by the three year deadline would help weed out those who know their claims are frivolous and are using the process merely as a stall tactic.

In 2010, the Federal Reserve Board proposed new rules that would provide clarifications to rescission claims in court proceedings as well as other changes to rules under TILA. However, the proposed changes were never implemented and jurisdiction over TILA regulations has been transferred to the Consumer Financial Protection Bureau.

While lenders have legitimate concerns, it is not up to the courts to rewrite TILA or the TILA regulations. Maybe it is time for Congress to step in and bring some reason into the process.
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Watch Your Language with Restrictive Covenants

(“Say what you mean, precisely, or a judge will decide what you meant” #8)



As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy. Because of this judicial deference to “commercial language”, you must say what you mean, precisely, or a judge will decide what you meant. Saying what you mean, precisely, is even more important in the context of negative covenants that limit the uses that can be made by the owner or occupier of land (aka restrictive covenants).

Why? Because it is well-established that restrictive covenants on the use of property are generally viewed with disfavor in Ohio courts and in other jurisdictions. The free use of land and property rights has occupied an important part of our history, and is rooted in the Constitution. Nonetheless, courts still enforce restrictions when they are clearly and unambiguously used in covenants (unless contrary to law or public policy).  Certainly, restrictive covenants constituting unlawful discrimination in Ohio (and elsewhere) are held to be void (See ORC Section 5309.281) and restrictions on the type of use (e.g. residential, commercial…) are usually upheld. It is between these two extremes where it gets difficult to predict. As a guide, there are five criteria used by courts in Ohio to assist them in analyzing whether an enforceable restriction has been created by a covenant.

First, the restrictions “must be a part of the general subdivision plan and applicable to all lots.” Second, “lot purchasers must be given adequate notice of the restriction.” Third, the restrictions must be in accord with law and public policy. Fourth, the restriction “cannot be implied, but must be express.” Finally, the restriction must “run with the land and, as a result, be inserted in the form of a covenant in the owner’s chain of title.”

What about an amendment to existing restrictions which amendment prevents a landowner from using the property for the purposes for which it was originally purchased? This was the issue before the court in Grace Fellowship Church, Inc. v. Harned, 2013-Ohio-5852(11th Dist. Ct. of App., Trumbull Cty.).


The basic facts of the case are as follows: In 1989, owners of a tract of land recorded “Restrictions Covering All Lots and Parcels of Land in the Meadows Plat, Vienna Township.” These 1989 restrictive covenants established required set-back lines, size of dwellings, construction restrictions, and limitations on items that may be placed or parked on the land. The 1989 restrictions also contained the following language re: effective dates and modification procedures: “The covenants herein shall be construed as covenants running with the land, and shall remain in effect until January 1, 1999, and thereafter, unless and except modified or changed by a vote of 51% or more, of the lot or acreage owners…” In March of 2011, Grace Fellowship purchased land located at Lot 13 in the Meadows Plat. Grace Fellowship also purchased 70 acres of land adjacent to the Meadows Plat. 

Grace Fellowship intended to build a church on the newly purchased land and to construct a driveway or access road upon Lot 13. Grace Fellowship’s plans did not violate the 1989 restrictive covenants. In December of 2011, a majority of the owners in the Meadows Plat signed a document attempting to amend the 1989 restrictive covenants. The amendment created additional restrictions on the usage of the property in the Meadows Plat, providing that: “All lots or acreage contained in the original Meadows Plat shall be used solely for single family residential purposes. No lot or acreage contained therein shall be used for or contain a road, highway, alleyway, driveway, passageway, thoroughfare, avenue, street, route, parkway, byway, trail, lane, path, or parking lot…” By virtue of the 2011 Amendment, Grace Fellowship would not be able to use Lot 13 for a road, and accordingly, it would not be able to operate its church on the adjoining 70 acres. In 2012, Grace Fellowship filed a Complaint for Declaratory Judgment and Other Relief against the owners of the lots located in the Meadows Plat. Grace Fellowship argued that the restrictive covenants had expired on January 1, 1999, and that the 2011 amendment violated Ohio’s Marketable Title Act because it allowed an increased burden to the property upon the amendment of the restrictive covenants. It also argued that the amendment violated its religious freedom, disallowed the church to have ingress and egress across the property, and that a proper vote was not held to modify the covenants.

The Meadows Plat landowners argued that the 1989 covenants had not expired; the landowners could amend the covenants; the amendment applied to existing landowners; and that notice was not required to obtain the votes necessary for the amendment.

The trial court boiled down the definitive issue to be determined as whether or not a “modification clause” in a subdivision’s restrictive covenants gives a purchaser of property notice that future changes may restrict his use of that property, as required by the second criteria used by courts in Ohio to assist them in analyzing whether an enforceable restriction has been created by a covenant.

The trial court (and the appellate court, upon appeal by the Meadows Plat landowners) held that the amendment to the 1989 Meadows Plat restrictions could not be enforced either in law or in equity, and declared the amendment to be void. The court reasoned that “the original restrictions did not mandate that only residential homes be constructed, the amendments added additional burdens to Grace Fellowship without notice,” and that Grace Fellowship purchased the property with reliance on the existing restrictions, which did not prohibit its intended use for the property.”

 The court of appeals bolstered its reasoning by first citing the general rule with respect to construing agreements limiting the use of real estate, which general rule provides that such agreements are to be strictly construed against limitations upon such use, and that all doubts should be resolved against a possible construction thereof which would increase the restriction upon the use of such real estate. Applying such general rule, the court emphasized that the initial (1989) restrictions used specific language that provided only “the covenants herein” could be modified. Those covenants deal with setbacks and building restrictions; not restrictions on use. 

The court of appeals also cited public policy arguments for voiding the Amendment. According to the court, “Applying amendments to existing landowners could completely alter a landowner’s ability to use his property for the purposes for which it was intended. This would be similar to a governmental taking by a private entity and is not an equitable policy. It is also noteworthy, for the purposes of comparison, that in cases dealing with the general application of zoning and usage requirements exercised by local governments, a reasonable policy of “grandfathering in” past owners and uses is applied.”

What is the moral of this story? Clearly, “watch your language with restrictive covenants”. These covenants are not favored by the courts and strictly construed. If the original restrictions in Grace stated that the land owners could (by majority vote) amend the initial restrictions, as well as enact additional restrictions such as limiting the parcels to residential use only, perhaps the result in Grace would have been different. On the other hand, when houses of worship or other “suspect uses” are involved, it seems that attempted “end arounds” can only work on the football field.


Final IRS Repair Regulations Will Impact Many CRE Owners and Tenants


Note: The information below was summarized from an article published by Craig Miller, President of Cost Segregation Services, Inc. in the January 2015 issue of Properties magazine.


Final IRS Repair Regulations that became effective as of January 1, 2014 will impact every commercial real estate owner and commercial tenant that has acquired, constructed, improved or disposed of tangible personal property.

When making improvements to a building or building systems, the cost typically must be capitalized and depreciated over a significant period of time (i.e., 27.5 or 39 years).  However, if the cost can qualify to be expensed instead, then the owner or tenant can realize significant tax savings.


The new IRS regulations:
  • Authorize the write-off of the remaining tax basis of retired or demolished building components and, if handled correctly, will enable commercial property owners to avoid a potential future recapture tax upon the sale of the property;
  • Will result in most businesses having to file one or more Changes in Accounting Method for tax years beginning January 1, 2014, and result in taxpayers losing deductions of the proper forms are not filed with their 2014 tax return; and
  • Provide certain tests for determining whether an expenditure is a capital improvement that must be depreciated over time and certain safe harbors that would qualified an expenditure to be treated as an ordinary deductible expense.  If the expenditure would be considered a “betterment,” “adaptation” or “restoration,” as described in the regulations, then it is a capital improvement, unless the expense qualifies under one of the safe harbors. The safe harbors affect certain routine and ongoing maintenance and repairs, small taxpayers (revenues less than $10 million) and qualifying de minimis expenses.
As a lawyer and not a CPA, my summary of the new IRS regulations is an oversimplification and merely intended to make readers aware of the fact these regulations have been put in place and warrant their attention. Those who might be impacted by these regulations should consult with their CPA or tax advisor before filing their 2014 tax return.


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Craig’s article in Properties magazine provides much more detail than I can provide in a blog post, which by its nature is intended to be brief. Anyone who is or could be affected by the new IRS repair regulations should read Craig’s more detailed discussion in his article or contact him directly for information.

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