The United States District Court for the Southern District of Ohio recently asked itself the same question (as the title to this article asks) in Wellington Resource Group LLC v. Beck Energy Corporation, Case No. 2:12-CC-104 (Sept. 20, 2013). Wellington dealt with a dispute concerning a broker’s right to a commission for the sale of oil and gas leases.
Basically, Wellington argued it was entitled to a commission. Beck filed a motion to dismiss, essentially arguing that there was no contract between Beck and Wellington; and alternatively, that Wellington was not a licensed broker, and since (according to Beck) oil and gas leases are interests in real estate, Wellington would have had to be a licensed real estate broker under Ohio law to collect a commission. In other words; no license, no fee. All agreed that the crux of the case based on licensure would revolve around whether or not oil and gas leases were recognized in Ohio as interests in real estate (if such leases were not real estate, the license requirement would not apply).
Wellington brought suit in federal court based upon “diversity jurisdiction”. This basically means that the federal court has the power to hear a civil case where the persons that are parties to the action are "diverse" in citizenship (citizens of different states) or non-U.S. citizens. (An alternate avenue to the federal courts arises when the subject matter of the case regards a question of federal law). When federal jurisdiction in a case is premised on diversity, the court is to apply the substantive law of the state where the federal court is located (Ohio, in Wellington). This is easy, under Ohio law if there are recent decisions of the Ohio Supreme Court (Ohio’s highest level of state court authority) directly on point. If not, the federal court must make an educated guess to determine how the Supreme Court of Ohio, if presented with the issue, would resolve it.
Finding no recent cases directly on point (regarding the issue of whether or not oil and gas leases are interests in land), the court in Wellington did a thorough job researching Ohio case law, going as far back as 1898. Based upon this research, the court in Wellington disagreed with Beck and refused to grant its motion to dismiss on this issue, concluding that the court’s “thorough survey of Ohio case law leaves this Court convinced that the Ohio Supreme Court, if given the occasion to rule on this issue today, would so hold” that “Oil and gas leases are not ‘real estate’ under Ohio law”.
The court in Wellington reasoned that, in Ohio, "oil and gas leases are not leases as that term is traditionally used; instead, Ohio courts appear to recognize that such leases create a license to enter upon the land for the purpose of exploring and drilling for oil and gas." While there has been some seemingly contrary authority, the Court in Wellington found most persuasive the fact that (i) there was a relatively recent federal case that supported its holding (In re Frederick Petroleum Corp., 98 B.R. 762, 766 (S.D. Ohio 1989), (ii) other states (e.g., Oklahoma, Kansas, New York) have held that oil and gas leases are not real estate; (iii) the Ohio Legislature is currently considering (HB 493) regulating brokerage of oil and gas rights under the auspices of the Ohio Division of Oil and Gas Resources Management (vs. the Ohio Division of Real Estate); and the last word of the Ohio Supreme Court (in Back v. Ohio Fuel Gas Co., 113 N.E. 2nd 865 (Ohio 1953) clearly provided that a grant of “all the oil and gas in and under” a tract of land, as well as “the right and privilege of operating upon said premises…for the obtaining of such oil and gas” was no more than a “license to effect …severance” of oil and gas from land, not an interest in land.
Unless and until the Ohio Supreme Court rules otherwise, it seems safe to say that oil and gas leases are not interests in land (which explains, by the way, why they do not need to be notarized if they are recorded). Nevertheless, even though the leases themselves are not “interests in land”, one’s rights to gas/oil/minerals underneath their land may indeed be sold or “licensed” to others no matter how they are defined.
Residential Short Sales--Time Is Running Out
It's time to readdress the issue of "short sales" as the temporary tax relief provided to homeowners is about to expire.
A "short sale" of real property occurs when the owner sells the property for less than the outstanding indebtedness secured by that real property. Because the foreclosure process is costly and has been moving at a snail's pace, lenders have sometimes accepted a deed in lieu of foreclosure from the property owner and written off any deficiency balance.
Typically under US tax laws, when indebtedness is forgiven, the amount of forgiven indebtedness is is taxable as income to the debtor. Taxable income that doesn't result in actual cash in your pocket is often referred to as "phantom income." For short sales or deeds-in-lieu where the lender has agreed to write off the deficiency balance owed under the loan, debtors would receive a 1099 for the balance amount forgiven and would have to disclose this phantom income on their tax return. For owners of commercial real property, this continues to be the case.
However, in 2007, as a direct result of the meltdown in the mortgage market and the epidemic of pending foreclosures on residential properties that were now worth less than the outstanding balance on the mortgages, Congress passed the Mortgage Forgiveness Debt Relief Act. The result of this law was to relieve homeowners of the taxable income problem that resulted from the short sales and deeds-in-lieu.
This tax break expired at the end of 2012 but was renewed for one year and now expires on December 31, 2013. While it is possible Congress will further extend the tax break for homeowners another year or longer, there is no guaranty.
If you are a homeowner and hope to complete a short sale on your home, time is running out if you want to close before year end and avoid paying ordinary tax rates on phantom income.
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A "short sale" of real property occurs when the owner sells the property for less than the outstanding indebtedness secured by that real property. Because the foreclosure process is costly and has been moving at a snail's pace, lenders have sometimes accepted a deed in lieu of foreclosure from the property owner and written off any deficiency balance.
Typically under US tax laws, when indebtedness is forgiven, the amount of forgiven indebtedness is is taxable as income to the debtor. Taxable income that doesn't result in actual cash in your pocket is often referred to as "phantom income." For short sales or deeds-in-lieu where the lender has agreed to write off the deficiency balance owed under the loan, debtors would receive a 1099 for the balance amount forgiven and would have to disclose this phantom income on their tax return. For owners of commercial real property, this continues to be the case.
However, in 2007, as a direct result of the meltdown in the mortgage market and the epidemic of pending foreclosures on residential properties that were now worth less than the outstanding balance on the mortgages, Congress passed the Mortgage Forgiveness Debt Relief Act. The result of this law was to relieve homeowners of the taxable income problem that resulted from the short sales and deeds-in-lieu.
This tax break expired at the end of 2012 but was renewed for one year and now expires on December 31, 2013. While it is possible Congress will further extend the tax break for homeowners another year or longer, there is no guaranty.
If you are a homeowner and hope to complete a short sale on your home, time is running out if you want to close before year end and avoid paying ordinary tax rates on phantom income.
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“Consumer Guide to Agency Relationships” No Longer Required for Commercial Real Estate Transactions.
Written by (and reprinted with permission from): Peg Ritenour,Ohio Association of Realtors (OAR) Vice President of Legal Services/Administration
Effective Sept. 29, the “Consumer Guide to Agency Relationships” will no longer be required on commercial real estate transactions. This change to Ohio’s agency disclosure requirements was included in as an amendment in the biennial budget that passed at the end of June. This OAR-initiated change — which was advocated for at the behest of our commercial/industrial members — is designed to better reflect the realities of the commercial transaction where the parties are generally more experienced in real estate transactions.
Specifically, the amendment stipulates that use of the Consumer Guide is now only required in the following situations:
• The sale or lease of vacant land (regardless of how it is zoned);
• The sale of a parcel of real estate containing one to four residential units;
• The leasing of residential premises if the rental or lease agreement is for a term of more than 18 months.
In those transactions in which the Consumer Guide is required, the timing for providing it to consumers is unchanged. The “Consumer Guide to Agency Relationships” must be given to a seller by the listing agent before the property is shown or marketed. The most convenient way to comply with this requirement is for it to be included in an agent’s listing packet.
With respect to buyers, the licensee is required to provide them with the “Consumer Guide to Agency Relationships” before the earliest of the following events:
• Pre-qualifying the buyer; • Requesting specific financial information;
• Showing property (other than at an open house);
• Discussing the making of an offer; or
• Submitting an offer
Whichever of the above events occurs first will trigger the licensee’s obligation to provide the Consumer Guide to the buyer.
Formed in 1910, the Ohio Association of Realtors (“OAR”) now counts as the state’s largest professional trade organization, with more than 27,000 members. In addition to protecting private property rights for the public, OAR offers services to its REALTOR members including: lobbying state legislators on industry issues, research development, legal assistance (note: OAR does not offer legal assistance or answer questions of a legal nature to the public. If you have a legal concern or issue, please contact a real estate attorney), current real estate information and member discounts on products and services. To learn more about the Ohio Association of Realtors, log on to:http://ohiorealtors.org/
Effective Sept. 29, the “Consumer Guide to Agency Relationships” will no longer be required on commercial real estate transactions. This change to Ohio’s agency disclosure requirements was included in as an amendment in the biennial budget that passed at the end of June. This OAR-initiated change — which was advocated for at the behest of our commercial/industrial members — is designed to better reflect the realities of the commercial transaction where the parties are generally more experienced in real estate transactions.
Specifically, the amendment stipulates that use of the Consumer Guide is now only required in the following situations:
• The sale or lease of vacant land (regardless of how it is zoned);
• The sale of a parcel of real estate containing one to four residential units;
• The leasing of residential premises if the rental or lease agreement is for a term of more than 18 months.
In those transactions in which the Consumer Guide is required, the timing for providing it to consumers is unchanged. The “Consumer Guide to Agency Relationships” must be given to a seller by the listing agent before the property is shown or marketed. The most convenient way to comply with this requirement is for it to be included in an agent’s listing packet.
With respect to buyers, the licensee is required to provide them with the “Consumer Guide to Agency Relationships” before the earliest of the following events:
• Pre-qualifying the buyer; • Requesting specific financial information;
• Showing property (other than at an open house);
• Discussing the making of an offer; or
• Submitting an offer
Whichever of the above events occurs first will trigger the licensee’s obligation to provide the Consumer Guide to the buyer.
Formed in 1910, the Ohio Association of Realtors (“OAR”) now counts as the state’s largest professional trade organization, with more than 27,000 members. In addition to protecting private property rights for the public, OAR offers services to its REALTOR members including: lobbying state legislators on industry issues, research development, legal assistance (note: OAR does not offer legal assistance or answer questions of a legal nature to the public. If you have a legal concern or issue, please contact a real estate attorney), current real estate information and member discounts on products and services. To learn more about the Ohio Association of Realtors, log on to:http://ohiorealtors.org/
Indemnification Clauses: Think about it now or regret it later
Indemnification clauses may not appear
to be a typical topic for discussion on a real estate law blog, but it's a
provision that we would all benefit from reviewing once in a while.
Indemnification clauses are frequently found in lease agreements, purchase
agreements and other contracts relating to commercial real property.
Many landlords, tenants, property
managers and service vendors pay little attention to the indemnity provision in
their contracts beyond confirming that such a provision is included. However, it is not a one size fits all
provision, or shouldn't be.
Parties to an agreement include
indemnification provisions when there is potential for either party to be sued
on matters for which the other party should be held legal responsible. If a tenant is storing hazardous materials on
the premises, the landlord will want ironclad indemnification from the tenant
to hold the landlord harmless if the EPA comes calling.
Indemnification provisions can be
one paragraph to several pages long. With some exceptions, the length of a
decent indemnification provision is somewhere in the middle of those two
extremes. Here are some questions to answer when adequacy of the indemnity for
a particular contract:
* What is
the level of risk and how it can be allocated between the parties? Some
provisions should be mutual or in some instances the risk is only on one side.
The bigger the exposure then the more comprehensive the provision should be.
* What actions
or inactions should be subject to indemnification? Many contracts include generic provisions
that are too vague about what is covered and some are over broad. Depending on
which side of the equation a party is on, there may be grounds to argue for an
expansion or a narrowing of the matters covered by indemnification.
* How long
should it last? Some risk exposures last beyond the contract. If a property
owner contaminated the ground water and then sells the property, the new owner
would want recourse against the prior owner. The party with the most exposure, such as the
seller of real estate, will want to limit the indemnity as much as possible
while the opposing party will want to extend the indemnity. In more detailed indemnification provisions, indemnified
issues will be separated into categories, some of which will survive indefinitely,
while others will be subject to shorter time frames, such as a period of years
or months or the expiration of the applicable statute of limitations.
*
Who does
it cover? ...just the parties or their officers, directors, managers,
employees, affiliates, agents, successors and assigns?
*
Who
controls the litigation? The party being asked to provide the indemnity may
want to control the litigation to ensure it is being handled appropriately.
However, no party, even the indemnified party, will want litigation to be
settled in any manner where the party not controlling the litigation is being
committed to some action or inaction without its consent. If the indemnifying party is not choosing the
lawyer and controlling the litigation, it will still want to place limits on
how many attorneys are retained for the action, etc. to ensure that it is not
gouged on the cost of the legal defense.
The indemnifying party will also want to ensure it is promptly notified
of the matter requiring indemnification so that it does not lose any defense
options due to lapses of time.
*
What about
other limitations on liability? If a
party suffering the loss or damage is also taking a tax write off or receiving proceeds
from an insurance claim for that loss or damage, should the party be able to
double dip and also claim full indemnity from the other party? Also, some
indemnification provisions (most typically seen in purchase agreements) may
contain a cap on the total exposure or a threshold to be reached before any claim
may be made. Including a threshold, aka
a "basket," prevents a party from being nickel and dimed over small
matters. In some instances the basket will be a "tipping basket" in
which the indemnifying party will be obligated back to the first dollar once
the threshold is reached. If there is a cap, some situations may fall outside
of the cap. Typically indemnification obligations not subject to a cap are
third party actions or fraud or intentional misrepresentation on the part of
the indemnifying party.
As you can see, if these issues
are negotiated into any indemnification provision, it will certainly require
more than a couple of sentences. While
many want to keep their agreements as simple as possible and curse the lawyers
who want to 'overcomplicate' matters, if something goes wrong later, a properly
negotiated indemnity may be exactly what they needed.
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