Commercial leases in Ohio must
be in writing and signed (See Ohio’s
“Statute of Frauds”- ORC Section
1335.04), and, they must be acknowledged (e.g., notarized) when their
terms (duration) exceed three (3) years (See
ORC Section 5301.08; ORC
Section 5301.01). If these “technicalities” are not followed, is there real
harm as a result of the foul? Absolutely. The general law in Ohio is such that
when a tenant takes possession under a defectively executed lease (and pays
rent…), only a periodic (e.g., month to month) tenancy will be implied to
exist, in spite of the lease’s stated duration. In other words, in Ohio, if a
commercial real estate lease with a ten (10) year stated term is not notarized,
and payments are made monthly, only a month-to-month tenancy legally exists.
This result is markedly different from the effect of improperly
executed/acknowledged deeds. With regards to such “improper” deeds, the Ohio
Supreme Court has held that a deed is still valid despite a defective
acknowledgment, but only as between the grantor and grantee.
There is (as
with most case law) an exception to the aforesaid general rule with respect to
improperly executed/acknowledged leases; the equitable doctrine of “part
performance”. This contract law doctrine basically dictates (based upon
fairness/equity) that a lease (or other contract) should not be rendered
unenforceable due to technical failures when much of the contract has been
performed, and other equitable factors are present such as “detrimental
reliance” (changing of a party’s position to its detriment, in reliance upon an act
[e.g., making substantial improvements to a premises in reliance upon what a
tenant thought was a validly executed/acknowledged, 20 year lease]).
What about an improperly executed/acknowledged lease whose term is longer than three
years, only if you count the optional renewal term? Or, an “improper” lease
whose term has just started? Would such a lease violate the statute? If so,
would the doctrine of part performance apply?
The recent
decision of Chen v.
Hwang, 2014-Ohio-5863 (10thDistrict Court of Appeals, Franklin County) answers both of these questions. The
Chen case involved a lease agreement
executed on August 3, 2012 between Dr. Chen, the tenant-appellee, and Dr.
Hwang, the landlord-appellant. The lease provided for a three-year term with an
option to renew for an additional three years.
According to the lease, the term was to commence on October 1, 2012, and
certain remodeling work was to be completed by the landlord by such date. The lease was executed, but was not notarized.
On November 30, 2012, the tenant rescinded
the lease agreement and filed a complaint, seeking a declaration that its
recession was justified because the lease agreement was in effect, a six year
lease (including the option) and therefore not acknowledged in accordance with the
Ohio Revised Code (and thus, unenforceable), and alternatively, that the appellant
did not deliver the premises with the remodeling work completed as and when required
by the lease. In addition, the tenant
sought repayment of approximately $24,000, which was comprised of payment for
the first month's rent, payment of the security deposit, and money loaned to the
appellant for purposes of remodeling the premises.
The landlord claimed (1) it was the tenant who
breached the lease, by not securing certain permits required for the work, (2)
that accordingly, the option would not be exercisable (with tenant in default),
and (3) therefore, the lease was only three years and complied with the
lease-execution requirements set forth in R.C.
5301.01.
The trial court concluded that as a three-year lease
with an option to renew, the lease was subject to the execution requirements of
R.C. 5301.01(A). Because the lease failed to comply with R.C.
5301.01(A), the trial court decided that tenant was entitled to damages for the amounts paid to the landlord.
The landlord appealed, but the Tenth
District Court of Appeals upheld the ruling of the trial court.
In justifying its ruling, the appellate court simply
applied the law to the facts. To accomplish the same, it looked first to the
applicable statutes.
“As is relevant here, R.C. 5301.01(A) provides: A deed, mortgage, land contract …. or lease
of any interest in real property … shall be signed by the grantor, mortgagor,
vendor, or lessor in the case of a deed, mortgage, land contract, or lease or
shall be signed by the trustee in the case of a memorandum of trust. The
signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor, or
by the trustee, before a judge or clerk of a court of record in this state, or
a county auditor, county engineer, notary public, or mayor, who shall certify
the acknowledgement and subscribe the official's name to the certificate of the
acknowledgement.”
The so called “3+ year rule” exception to R.C. 5301.01(A), which only applies to
leases is found in R.C. 5301.08,
which provides: "Sections 5301.01 to
5301.45 of the Revised Code do not affect the validity of any lease * * *
of any other lands for any term not exceeding three years or require that lease
to be acknowledged or recorded."
The appellant did not dispute that its lease did not
comply with R.C. 5301.01, but argued
that the formalities of R.C. 5301.08
exempts the lease from the formal execution requirements. Appellant polished its original trial court
argument and claimed to the court of appeals that the lease did not exceed three
years, because its original term was for three years, and its option term was
nullified by not only the tenant’s default, but tenant’s declaration that it
would not move into the premises. The court of appeals was not swayed by the
“pro se” appellant’s “good college try argument.” According to the court, “Appellant has
not provided, nor
has this court's
research revealed, any
authority to support such a
position.”
To the contrary, the court cited “precedent” (i.e., prior
decisions of 380 E. Town Assoc. v.
Mangus, 10th Dist. No. 91AP-92 (June 20, 1991) and Gelman v. Holland Furnace, 59 Ohio Law Abs.539 (1948))
that established "[u]nder Ohio law, option periods are added to the
initial term of the lease in order to determine the length of the lease for the
purposes of complying with R.C. 5301.01
and 5301.08."
Does the doctrine of part performance apply? Should the
appellant be entitled to one month’s rent? The easy answers here are no, and
no. First of all, while the landlord did come up with a cogent argument
regarding R.C. 5301.01 and 5301.08,
it did not file a counterclaim, nor did it allege any equitable defenses. And second,
it is hard to argue “part performance” unless much of the contract or lease in
question has been performed. This lease did not even get “out of the gate.”
What is the moral of this story? When in doubt, take the notary route. Notarization, when not required
will result in “no harm, no foul”. On the other hand, odds are that failing to
notarize when required will cause, at the least, time and attorneys fees, and at
most, it can render your lease unenforceable.
Any commercial lease of three
years or more (including option terms) must be in writing, signed
and notarized. While performance under a lease may remove it from the requirements of R.C. 5301.01(a), it will not protect a landlord who seeks to enforce an improperly executed lease when performance has not commenced.
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