In commercial tenant space, whether office, warehouse, manufacturing or retail, landlords typically want three-, five- or seven-year lease terms.  And this is reasonable given the cost of tenant build-out, Realtor commissions and the demands of their mortgage lenders.  It also is relatively standard in the marketplace.

However, a tenant will rightfully reason that they can’t anticipate their space needs for a year much less over a seven-year period of time.  The company might need to relocate, be bought out or go out of business,  the principal could die or become disabled, or the tenant’s business model could change substantially.

One concession I recommend that tenants request in a commercial lease is an early-termination option.  By having the right to walk away from a lease, it gives enormous flexibility and power to a tenant.  Recently, a landlord explained to me that he is glad to offer this tenant concession.

Typically, a termination option is not free.  Here are typical issues a landlord will want to discuss:

  • The lease termination option might not kick in until some period into the lease, say after the first year.
  • The landlord will want generous advance notice provisions, say three to six months to allow him to advertise and market the premises for re-letting to a new tenant.
  • An early termination fee of anywhere from three months to one year of base rent and CAM charges.
  • A reimbursement of Realtor fees paid (many times paid up front, but calculated on the entire lease term value).
  • A reimbursement of tenant improvement costs.

So often I am consulted after the fact by a tenant who wants “out” of their lease on a document we were not asked to help negotiate, and the tenant is in a real spot.  Sometimes in that circumstance the landlord is digging in his heels wanting the full rent and CAM amounts for the entire lease period — and they may well be entitled to that.

But if only the tenant had asked for this simple concession on the front end — when he had negotiating power — his life would be simpler and his finances richer.

__________

If you want to speak with our commercial leasing attorneys, ask for Issac T. Heintz, Eli N. Krafte-Jacobs or Christopher P. Finney.

Certain legal challenges seem to come in waves for me, and lately one of those waves involves difficulties encountered in the termination of the Cincinnati Area Board of Realtors Purchase Contract, either for failure of the inspection contingency or the financing contingency.

Three guideposts should guide real estate practitioners, buyers and sellers in the exercise of contingencies in a purchase contract:

  • Read the contract.

Just because a contract is contingent upon the satisfactory outcome of a a loan application or a house inspection does not mean that termination is automatic just because the buyer says it is so.

  • Follow the steps for termination set forth in the Contract.

The Contract many times lays out a specific procedure for contract termination.  That procedure should be followed.

  • Get it in writing.

As we address here, the statute of frauds requires the contract and every amendment and termination thereof to be in writing.  Stating it most simply, if it in’t in writing, it did not happen.

As an example, the Cincinnati Area Board or Realtors Purchase Contract provides a procedure for termination of a contract for the failure of an inspection contingency:

If Buyer is not satisfied with the condition of the Real Estate, as revealed by the inspection(s) and desires to terminate this Contract, Buyer shall provide written notification to Listing Firm or Seller that Buyer is exercising Buyer’s right to terminate this Contract within the Inspection Period, and this Contract shall be terminated.

That seems really simple, but the Cincinnati Area Board of Realtors also has a series of supplemental forms for use in residential real estate transactions.  Two of those are:

  • Release from Contract to Purchase.  This form is a supplemental agreement between a buyer and a seller to terminate a contract.
  • Notice of Termination of the Contract to Purchase.  This document is a unilateral (i.e., just a notice signed by one party to the other; it does not require a counter signature).
Seller refuses to acknowledge an “offer” to terminate.

I recently experienced a situation in which the buyer signed and tendered a Release from Contract to Purchase to the Seller for the Seller to sign within the inspection contingency period.   The seller claimed that that form did not constitute sufficient notice of the failure of the inspection contingency pursuant to the language set forth above and thus it was merely an “offer” from the buyer to the seller to terminate the contact.

The seller reasoned that because both (i) the buyer failed to notify the seller of the failure of the inspection contingency pursuant to the contract requirements and (ii) the seller refused the tendered “offer” to terminate, that the buyer was still bound to the contract. Further, since the inspection period had since lapsed, it was now too late to provide such notice, the seller claimed.

What we did in that circumstance was to supplement the submittal to the seller with a termination under the financing contingency, and eventually the seller conceded that the contract had been terminated and returned the buyer’s earnest money.

Seller refuses to schedule inspection.

In another recent dust-up between a buyer and a seller, the seller refused to schedule an inspection of the property pursuant to the inspection contingency.  In this instance, the buyer attempted to so schedule using the automated showing system, and the seller simply would not permit or acknowledge the request.

In that circumstance, the buyer sent a termination to the seller, and we await his response. But what is a buyer to do when the seller refuses to allow access for an inspection?  Clearly, the courts will permit the buyer to terminate either pursuant to the inspection contingency or because the seller has breached the contract by refusing to allow the inspection.

Conclusion.

So, even though it should seem to be a clear right of the buyer to terminate the contract, the form that that communication to the seller takes informing him of the termination could well impact the substance of whether the termination was effective.

Little HouseA seller enters into a listing agreement for the sale of his house with a Realtor and then, for whatever reason, changes his mind.  Does he have the right to unilaterally terminate the listing agreement?

Sometimes sellers think of it this way: Unlike many contracts where there is an exchange of money for services or money for a product, under a listing agreement, neither party has spent anything nor delivered any product or service, so why not?

In the service industry, as Abraham Lincoln famously said, the professional’s “time and advice is his stock and trade.”  (Old Abe said that about attorneys, but the same is true for Realtors and other service professionals).  Thus, a Realtor takes significant time pricing a listing, positioning it for the market, and then exposing it to its network of brokers, buyers and investors.  Many times, Realtors have expended real money on photographers, videographers, marketing materials, electronic and print ads, title work, and other out-of-pocket expenses.

So, one could argue, the Realtor has spent significant effort and in some cases money on that listing even though much of it may not be immediately visible to the seller, and although no results may have been reaped from those efforts.

So, the contract is “for consideration,” and the Realtor could experience a real economic loss from the early termination of a listing agreement.

Now, the seller may further reason that no commission is due unless a further condition is met — that the seller accepts an offer to sell his home.  While this is close to being true, Ohio law further provides that a party must perform under his contract in good faith and cannot through his bad faith cause or trigger non-performance.  So, refusing to show a home or failing to consider an offer presented in good faith could be the basis for a claimed breach of contract by a Realtor.

Still, as a practical matter, if a seller does not want to sell any longer, he does not want to sell, and further Realtor efforts to market the home may be wasted.

Thus, we frequently see that Realtors — as a practical response as well as out of the goodness of their hearts — may cooperate with a seller in taking a home off the market, with little or no cost to the seller for “changing his mind.”  But is should not be thought by the seller as a matter of right once the listing agreement is signed.

The business buzzword for 2022 is: Inflation.

The inflation rate in 2021 was 7.5%, a rate that the the Federal Reserve says took them completely by surprise.  And 2022?  Many prognosticators (this author included) believe inflation will hit double digits for the first time in more than 30 years.  This comes after rates of inflation consistently at or below 2% for the past decade.  As a result, many marketplace participants simply are not aware of strategies that will enable them to navigate the shoals of an inflationary environment.

This blog entry may pivot between references to rates of inflation and rates of interest for borrowing.  These two concepts, while different, are addressed interchangeably as (a) inflation is a widely accepted indicator of an over-stimulated economy and (b) the predictable response to inflation is raising interest rates charged to banks by the Fed to dampen that economic activity.  In turn, banks will then raise the rates charged to consumer and commercial borrowers.  So, higher inflation inevitably begets higher interest rates.  The Fed has forecasted both (i) the possibility of front-loaded rate increases, meaning sharp rises in the coming months (as opposed to sequential rate hikes being stretched out over months and years) and (ii) as many as seven rate hikes in 2022 alone.  This means interest rates could rise by a full 2% or more from today’s rates before January of 2023.  How high can rates go? In March of 1980 the prime rate of interest peaked at 19.5%.  Imagine the impact of interest rate adjustments on your business model at those exorbitant rates.

Here are a few things to consider to protect yourself in inflationary times:

  1. Utilize commercial rent adjustments to your advantage.  During low inflationary times, landlords and tenants have commonly avoided complex periodic calculations for rent increases based upon Consumer Price Increases (CPI) increases, in favor of either fixed rent rates during the term of a lease or rent increases only pursuant  to a fixed schedule (say, for example 5% increases every 3 years).  As inflation accelerates and persists at high levels, landlords will hope they had full CPI adjustments built into their leases past and will start demanding then in leases in the future.  Conversely, tenants will cherish fixed-rate, longer-term leases that create a benefit to them of inflation (but the rapidly-changing office and retail markets might cause devaluation of spaces that previous saw decades of stability and strength).  As always, we recommend that tenants consider asking for an early termination provision in all commercial leases.
  2. Anticipate and avoid mortgage interest rate surprises. Many residential mortgages and most commercial mortgages have fixed interest rates only for a few years.  As to residential rates, after the period of the fixed rate, frequently rate increases are capped, but will still be painful.  But for commercial borrowers, when the fixed term expires, the rate increase is typically unlimited.  As a result, commercial borrowers locked into mortgages that might not be paid off for a decade or more could have dramatic, uncapped and unanticipated increases in the interest portion of the mortgage payment that continues to escalate each adjustment period.  To mitigate these impacts, consider refinancing into a new fixed-rate term that gives you breathing room before the impact of higher rates hits with full force.  Also, the sale of parts of your portfolio to pay down debt could lift your P&L from the greatest impacts of interest rate hikes.
  3. Be careful of fixed-rate pricing.  Home builders, contractors and manufacturers are experiencing difficulties fulfilling obligations under fixed-price contracts for matters that have a delivery date well into the future, shrinking their profit margins or turning winning contracts into losers.  Our office then is seeing instances of home builders trying to walk away from contracts and contractors seeking to convert fixed-price contracts into cost-plus agreements, shifting material and subcontractor pricing increases to buyers.  If you are that builder or contractor, consider adding an automatic or negotiated inflation adjustment in the contract and as a buyer, you want to lock in that fixed pricing firmly.
  4. Anticipate suppliers walking away from contracts. Similarly, we have seen manufacturers and distributors of certain products avoiding their obligations to supply certain goods or equipment.  As a buyer, do you have your supply contracts documented correctly and have you diversified your supply pipeline to protect yourself if a supplier lets you down?  Is the party with whom you are contracting sufficiently capitalized to stand behind their contractual obligations?
  5. Consider inflation and interest-rate contingencies.  The Cincinnati Area Board of Realtors/Dayton Area Board of Realtors form residential purchase contract allows a buyer to state the specific terms of the mortgage it is seeking as a contingency to ia buyer’s performance under the contract.  If you specify a “fixed rate loan for 80% of the purchase price at a rate below 3.5% per annum fixed for a period of 30 years,” and interest rates rise before the closing, the buyer has a perfect out.  Similarly, buyers and sellers can include in any contract an “out” for high rates of inflation and higher interest rates.
  6. Be wary of options.  Options to renew leases and options to purchase may seem innocuous and predictable in stable times.  But in a dynamic high-interest rate marketplace, an option acquired today to buy a property at a fixed price three, five or ten years into the future (say under a long-term commercial lease) can unexpectedly enrich the option holder.  Options can be a way a way to leverage dramatic profits to the option holder.
  7. Be prepared to offer seller financing.  A close partner to higher interest rates are tighter lending standards.  Fewer and fewer buyers can afford to buy at inflated interest rates, and lenders also frequently tighten their loan eligibility standards.  As a result, a eligible buyers — abundant today — become frighteningly scarce.  In the worst of the inflationary period at the end of 1977 to 1981, sellers had to offer loan assumptions, land contracts, leases with options (or obligations) to purchase (with the warning noted above) and simple notes with accompanying mortgages to get any property sold.
  8. Be prepared to buy at foreclosure sales.  Foreclosure sales, which have virtually disappeared for the past two years, could come roaring back as commercial and residential owners cannot afford their new, higher mortgage payments, and, of course, mortgage foreclosure moratoria have been lifted.
  9. Be prepared to offer seller financing.  A close partner to higher interest rates are frequently tighter lending standards.  Fewer and fewer buyers can afford to buy at inflated interest rates, and lenders also frequently tighten their loan eligibility standards.  As a result, a eligible buyers — abundant today — become frighteningly scarce.  When lending is loose (as today), it seems readily available to anyone.  And when it tightens, it seems to strangle the marketplaces.  In the worst of the inflationary period at the end of 1977 to 1981, sellers had to offer loan assumptions, land contracts, leases with options (or obligations) to purchase and simple notes with accompanying mortgages to get almost any property sold.

We saw with the rapid deterioration of the real estate market from 2006 to 2010 that buyers many times would willfully breach their contractual obligations to buy or rent.  In this process, they would search for a contingency or loophole — any argument whatsoever — to evade their contractual promises.  And in other instances, they would just outright walk away.  Accompanying these contractual breaches were also insolvency and bankruptcy, making collection impractical or impossible.  Similarly, as the real estate marketplace has heated up over the past five years, we have seen sellers work to evade their contractual obligations so they could retain an appreciating investment or simply realize a higher price from a second buyer.

How can you protect yourself in this type of dynamic market to assure performance by a buyer or seller?

  • Consider escrow deposits, guarantees and other security. Sellers can demand higher earnest money deposits, non-refundable deposits and short contingency periods. Buyers can use tools we have written about here and here of Affidavits of Facts Relating to Title and legal actions for specific performance. Further, consider adding personal guarantees to contractual promises from corporate and LLC buyers or sellers.  Additionally, the performance by buyers and sellers can be further secured with mortgages against real property and secured positions in other assets.
  • Add an attorneys fee provision.  Also, consider adding a contract provision shifting the expense of attorneys fees to the breaching party in a contract.  That can sometimes change the calculus of a prospective breaching party.
  • Tighten your contract language. To lock buyers and sellers into real estate and supply contracts and leases, carefully consider ways the other party might find a contingency or loophole in their performance. Contingencies (commonly for inspection or financing) are the tunnel through which most buyers drive to walk away from a contract.  Ohio law provides that a buyer must “reasonably” attempt to fulfill a contract contingency, but many still attempt to use contingencies to artificially and intentionally avoid their legal obligations.  Fraud on the part of a seller (such as an undisclosed material defect discovered before closing) can also arguably be the basis for a buyer not performing.  Conversely, typically there are no contingencies to a seller’s performance under a contract.  But consider everything in the instrument — the date, the property description, the parties’ names, the “acceptance” language and timing, in considering how the other party might try to squirm away from their promises.

As the economy becomes more unpredictable and more dynamic in terms of pricing, supply shortages and interest rates, market participants would be wise to carefully think about the impact of inflation and interest rate hikes on their contractual obligations and market positioning.

 

 

It is a violation of Ohio license law, and likely will void Ohio Realtor agency agreements, to fail to include in such instruments a firm expiration date.  There is no limitation as to how long the term of such agreements must be, but simply that they must expire on a date certain.

O.R.C. Section 4535.18(A)(28) provides that it is a violation of Ohio license law for:

Having failed to put definite expiration dates in all written agency agreements to which the broker is a party.

For purposes of this section, an “agency agreement” should be considered any listing agreement (whether for sale or lease and whether exclusive agency agreement or exclusive right to sell/lease), any property management agreement, and any contract for buyer representation.

Our attorneys once handled a case for a client under which he had entered into a settlement agreement with a client upon the early termination by the owner of a listing agreement. As a compromise, the Realtor agreed with the owner that whenever the owner decided to again place the house not he market, it would be with the subject Realtor.  The problem was that the Realtor did not list a definite expiration of the right to list, and thus, arguably, the agreement violated the referenced code section.

So, on standard listing agreements and non-customary agreements to list property for sale or lease, all must have definite expiration dates in them.

 

Make no bones about it: Ohio property taxes are complicated.

And with today’s dramatic upwardly dynamic real estate market, it is more important than ever that buyers and sellers carefully consider the impact of a sales price that exceeds the Auditor’s valuation when writing a purchase contract’s tax proration provision.

Ohio’s complicated property taxation structure

First, taxes in Ohio are billed semi-annually, in roughly January and July of each year.  Those two bills are, respectively, for the first half and second half of the prior calendar year.  So, the January 2022 bill will be for the first half of 2021, and the July bill will be for the second half of 2021.  Thus, when a buyer buys property, the seller owes between seven and thirteen months of taxes in arrears. 

How tax prorations are typically addressed in “form” contracts

Typically, the purchase contract will provide for several things so that the seller credits these accrued but not-yet-due taxes to the buyer:

  • First, there will be a proration of taxes from the seller to the buyer from January 1 of the year of the closing, or July 1 of the year prior to the closing, through the date of closing.
    • (In what I consider to be a weird local custom, in the Dayton marketplace only, a “short proration” is many times utilized for residential and commercial transactions. The “short proration” ignores the first six months of arrearage, and prorates only on the part-half-year immediately prior to the closing. I do not know the logic behind this.)
  • Second, the amount of that proration in a form residential and commercial purchase contact is typically to be “based upon the most recent available tax duplicate.”  Many times the contract (and/or documents signed at the closing) specifies that the tax proration is to be considered “final.”
  • [NOTE: The new Cincinnati Area/Dayton Area Board of Realtors standard form of residential real estate contract issued in the fall of 2021 is emphatic on this topic: Tax prorations are based upon “the most recent available tax rates, assessments and valuations” and “all tax prorations shall be final at Closing.”]

What does “based upon most recent available tax duplicate” mean?

On this, issue of prorating taxes “based upon the most recent available tax duplicate,” consider a few things:

  • In Ohio, the starting point for the Auditor’s value is the actual value, i.e., what a willing buyer would pay a willing seller for the property.  It’s the same number used by buyers, sellers, appraisers and lenders for the property value, i.e., the actual sales price.  There is no other magical number. (Then, we speak in terms of 35% of that value as that is translated in the tax bill, but that number has no practical impact except to confuse people and does not change the analysis set forth in this blog entry.)
  • Secondly, the “most recent available tax duplicate” means the taxes to-be-paid, which is valuation times tax rate on the Auditor’s records as of the date of closing.
  • But both the tax valuation and the tax rate can change — with retroactive effect — all the way through the date the tax bill is issued in January of the following year, meaning well after the closing, or even by August or September of that following year when a tax valuation complaint before the Board of Revision is decided.  Indeed, if a valuation complaint is appealed all the way to the Ohio Supreme Court, taxes could be assessed with retroactive effect two, three or more years after a closing date.
  • (We primarily address valuation issues in this blog entry, but if a levy is on the ballot in May or November of any year, that rate increase also dates back to January 1 of that year, so a large tax levy can result in an inequitable tax proration as well.)

A sale price above Auditor’s value may result in a retroactive tax increase    

In today’s dynamic real estate market in which sales prices of certain properties are galloping upward at an astonishing pace, especially for apartment buildings, single family residences, and industrial and warehouse properties, that standard form language could leave an unsuspecting buyer holding the bag.  Here’s why:

  • First, County Auditors update their valuations once every three years, and the cutoff for those updates is around September 30 of that year. So, for a sale in a “triennial year” (six different triennial cycles for Ohio’s 88 counties) prior to September 30 of that year, the Auditor should, on his own, increase the valuation to the sales price retroactive to January 1 of that first year of the triennial (even if the sale is late in that year), but that increase only becomes reflected on the tax records when the valuation comes out with the January bill of the year subsequent to the applicable tax year.
  • But Auditors typically do not adjust values on their own after that date and in the “off” two years between the triennial valuation cycles.  So, Hamilton, Montgomery, Butler and Clermont Counties most recently updated valuations effective January 1, 2020, and those values came out with the January 2021 tax bills.  The Auditor’s of each of those Counties won’t “catch” a sale made after September 30, 2020 until the 2024 tax bills (values effective January 1, 2023).
  • Ohio law says that — with narrow and rare exceptions — the sale price is the correct property valuation. Thus, property owners have a difficult time arguing that the contract sale price is not the actual value of the property.
  • The contract sale price is reported to the Auditor with an “Real Property Conveyance Fee Statement of Value and Receipt” (“Conveyance Fee Statement”) signed by the purchaser at each closing.  It is a felony to falsify one of these forms.

It’s easy to ascertain if the sale price is above the Auditor’s valuation.  Each County publishes their valuations — current as of the date of contract signing — on its web site.

School districts can and do seek retroactive valuation increases

The biggest beneficiary of property taxes in Ohio is the local school board, which typically receives about two-thirds of the total tax bills into their coffers.

As a result, school districts hire attorneys skilled in property valuation matters to scour the Auditor’s records to find recent sales in their district that exceed Auditor’s valuation.  Then, they file Board of Revision complaints to seek an increase in valuation.  Some points on those complaints:

  • Those complaints are filed, as with property owner complaints seeking a reduction, between January 1 and March 31 of each year.
  • Those complaints by law seek a retroactive increase in taxes to January 1 of the prior year.  So, for example, complaints filed in the first quarter of 2022 will apply retroactively to January 1 of 2021, and the increased taxes are a lien on the property as of that prior year (e.g., January 1, 2021).
  • Almost universally, school districts limit their complaints to sales of a certain minimum variance from Auditor’s valuation (say, $50,000 or $100,000) and usually they ignore single family residential properties.
  • The buyer — the new property owner — should receive notice of the complaint, and could appear to oppose the increase.  But the an arm’s length sales price is, by law, the correct valuation and the Conveyance Fee Statement is usually prima facie evidence of both that contract price and the arm’s length nature of the transaction.

These school board complaints, if successful, have two effects: (i) in the tax year of the Complaint, it puts real cash in the pocket of the school district (the tax hike is very roughly about 3.0% of the valuation increase and the school district gets about two thirds of that one-time cash amount), and (ii) thereafter it ever-so-slightly reduces the burden on other property owners to have each property valued at its correct rate.

A post-closing surprise!

This means that buyers can get a surprise of a tax bill far in excess of the prorated taxes (otherwise by law owed by the seller) well after the closing date.  And typically contract language and perhaps papers signed at the closing make this difference unrecoverable by the buyer as against the seller.

How to address this issue in the contract

From a buyer’s perspective, if he wants to recover a proration that will fully compensate him for taxes due (by seller) accruing prior to closing, he must deviate from the typical contract language that a tax proration is to be “based upon the most recent available tax duplicate” to add “but updated to reflect the sale price in this contract” or something to that effect.  A further possibility with an entirely solvent seller whose operation would continue well after the closing would be to call for a re-proration after the actual taxes are known. But it’s far better to adjust at closing so a post-closing claim (or law suit) is not necessary.

If the issue is not addressed in the contract but brought up before or after closing, it may be difficult to argue to the seller that the contract does not reflect the seller’s actual tax liability as of the closing date.

From a seller’s perspective, it is better use the typical default language of “based upon the most recent available tax duplicate.”

Obviously, if the contract price is lower than the Auditor’s valuation, the default language” of “based upon the most recent available tax duplicate” would disadvantage the seller and benefit the buyer.  This frequently was so in the last (and every) real estate recession, and may be true with isolated sales occurring today, or for certain categories of real estate such as restaurants and hospitality, parking garages, and retail. When this happens, a seller may want to ask to prorate based on the actual sale price rather than the “most recent available tax duplicate” information.  In the alternative, the seller could preserve the right to pursue a reduction in valuation post-closing and receive any refund arising from an over-payment or excess proration.

Ohio courts have addressed this precise question: What happens when, after closing, additional taxes are retroactively assessed for periods prior to closing due to an increase in value? Under the default “based upon the most recent available tax duplicate” language, the answer is that typically these additional taxes become the buyer’s responsibility.

In Lone Star Equities, Inc. v. Dimitrouleas, 2d Dist. Montgomery No. 26321, 2015-Ohio-2294, the seller filed a Board of Revision (“BOR”) complaint seeking a reduction in the value of his property and received such reduction. The local school board then appealed that reduction to the Board of Tax Appeals (“BTA”). While the BTA appeal was pending, the seller sold the property to the buyer for significantly more than the value to which the property was reduced at the BOR level and gave the buyer a general warranty deed disclaiming all encumbrances. The BTA hearing was held approximately one year after the closing, and (because he no longer owned the property) the seller did not attend. The buyer was seemingly unaware of the proceeding and, thus, did not attend the BTA hearing either. The BTA ended up increasing the value to what it was before the BOR reduction (i.e., the value sought by the school board). This created a retroactive tax assessment of nearly $34,000 relative to periods prior to the closing. The buyer paid those taxes and then sued the seller for breach of contract, breach of warranty, and fraud to recoup the same.

The applicable tax provision in the Lone Star case read as follows:

  1. Taxes: All installments of real estate taxes, and any other assessments against the Property, that are due and owing prior to Closing shall be paid by Seller regardless if the tenant reimburses Seller for same. The taxes and any other assessments assessed for the current year shall be prorated between Seller and Purchaser on a calendar year basis as of the closing date.”

(Emphasis added). There was no language to indicate what would happen should a tax be retroactively assessed for periods prior to closing, but the buyer argued that the seller should be responsible for the taxes under the above contract language, and that he knew of the pending BTA matter and knew that the tax proration on the HUD-1 settlement statement wasn’t final and fraudulently misrepresented the same.

As to the breach of contract claim, courts have long held that any contract claims will “merge” with the deed upon closing. “The doctrine of ‘merger by deed’ holds that whenever a deed is delivered and accepted ‘without qualification’ pursuant to a sales contract for real property, the contract becomes merged into the deed and no cause of action upon said prior agreement exists. The purchaser is limited to the express covenants of the deed only.” Id., at ¶ 29, citing 80 Ohio Jurisprudence 3d (1988) 91, 93, Real Property Sales and Exchanges, Sections 58-59; Brumbaugh v. Chapman (1887), 45 Ohio St. 368, 13 N.E. 584; Fuller v. Drenberg (1965), 3 Ohio St.2d 109, 32 O.O.2d 91, 209 N.E.2d 417, paragraph one of the syllabus. Cf. Dillahunty v. Keystone Sav. Ass’n. (1973), 36 Ohio App. 2d 135, 65 O.O.2d 157, 303 N.E.2d 750.

In other words, after closing occurs, the parties no longer have viable claims arising out of the contract – they only have claims arising out of the deed. This largely shifts the burden to the parties, making it incumbent upon them to do their due diligence in making sure all of the respective contractual obligations have been met prior to closing. For example, if a contract addendum calls for the seller to make certain repairs prior to closing, but the seller fails to fulfill this obligation and the closing occurs anyway, the buyer cannot later sue the seller for breach of contract in failing to make the repairs. This is because the contract “merged” with the deed, and the deed did not call for any repairs. The court in Lone Star applied this doctrine of merger by deed to rule in favor of the seller as to the buyer’s breach of contract claim.

Perhaps two of the most common exceptions to the doctrine of merger by deed are (a) explicit contractual language dictating a specific contractual term shall “survive the closing” and/or “survive delivery of the deed” (this defies the doctrine’s “acceptance, without qualification, of the deed” requirement), and (b) fraud. In the Lone Star case, there was no contractual language indicating that the tax provision would survive closing and/or delivery of the deed. Likewise, the court found no fraud on the part of the seller.

One of the required elements to prove a fraud claim is “justifiable reliance.” See Lone Star, at ¶ 59, citing Volbers-Klarich v. Middletown Mgmt., 125 Ohio St.3d 494, 2010-Ohio-2057, 929 N.E.2d 434, ¶ 27; Burr v. Board of County Comm’rs, 23 Ohio St. 3d 69, 73, 23 Ohio B. 200, 491 N.E.2d 1101 (1986). A party cannot justifiably rely on any representation when he or she is on notice to the contrary. Because BOR and BTA proceedings are matters of public record, the buyer was put on constructive notice of the school district’s efforts to have the property’s taxable value increased, even if the seller had a duty to and failed to disclose these proceedings (which was not specifically addressed). Lone Star, at ¶ 65. Because neither of these exceptions applied, the contract merged with the deed at closing, and the buyer could not prevail on its breach of contract claim or its fraud claim.

Finally, the court addressed whether the retroactive tax assessment constituted an encumbrance insofar as it applied relative to periods prior to closing. Answering that question in the negative, the court found that “the tax lien does not attach and become an encumbrance on property until the time that a final determination of valuation is made, and the current property owner, not the former owner, will be responsible for the taxes that have attached.” (i.e., the “‘relation back’ concept in R.C. 5715.19(D) does not mean that the taxes would have attached as a lien prior to the closing.”). Id., at ¶ 53-55. Because the tax assessment did not constitute an encumbrance until after the closing when the BTA made its final determination as to the value of the property, it was not an encumbrance as of the date of closing and, thus, there was no breach of the general warranty deed covenants.

The Lone Star case is a cautionary example of what can happen should the buyer fail to do its diligence in checking for tax appeals and/or insist upon the language discussed in this entry to protect him or her in the event of a post-closing tax assessment. As a firm, we regularly represent both property owners and school districts in BOR and BTA proceedings, and we also have several seasoned real estate attorneys who can help you explore the tax implications of a transaction or post-closing tax assessment.

Conclusion

For help with your commercial or residential real estate contracting matter, including the intricacies of Ohio and Kentucky tax prorations, contact Isaac T. Heintz (513.943.6654), Eli N. Krafte-Jacobs (513.797.2853), or Casey Jones (513.943.5673) of our real estate group.

Most salespeople are compensated at least in part on commission. Some earn a salary in addition to sales commissions, and some are paid solely by commission. Either way, sales commissions are the “lifeblood” of a salesperson. If someone messes with the commissions of a salesperson, they are going to hear about it. It’s how they earn their living and feed their families.

But what happens if the employment relationship ends? Does a salesperson have any right to commissions after they leave or are terminated?

What does the contract say?

This can be a very complicated question. There are a variety of factors that courts will look at in determining whether or not post-termination commissions may be owed to a salesperson who has resigned or been terminated. First and foremost, courts will look at whether or not the parties had a contract that dictated how post-termination commissions were to be handled. Such a contract can exist in an explicit, written form, but it can also arise from the course of dealings between the parties, or by way of commission plans that are clearly communicated to salespeople during their employment.

What if there is no contract?

In the absence of a contract, courts will sometimes look at what is the custom in the industry in order to determine whether, and if so to what extent, post-termination commissions may be owed to a former salesperson.

Was the commission “earned” prior to separation?

Another important factor is the extent to which the commission was “earned” by the salesperson before termination. If the salesperson, prior to separation from employment, had already done everything required of him/her in order to receive the commission, but the payment of the commission just didn’t happen to come due until sometime after separation, courts are more likely to find that the employee is legally  entitled to the commission. There is a saying that “the law abhors a forfeiture.” This means that the law does not like it when, through no fault of their own, someone is forced to “forfeit” money or property that they possess or have earned.

On the other hand, if a salesperson separated from employment when there was still work to be done for an account – for instance, if certain services were still needed from the salesperson after the sale had been made, and such services were not performed because the salesperson’s employment ended in the meantime – courts are less likely to find that the salesperson is legally entitled to the commission, since the commission arguably had not been fully “earned” at the time of separation.

Different treatment of employees versus independent contractors

It is also important to note that the treatment of sales commission issues are handled differently when the salesperson is an independent contractor, rather than an employee. Ohio, for instance, has a specific statute that addresses sales commissions earned by independent contractors. The statute is very favorable to the salesperson, in that it allows him or her to recover significant additional amounts beyond the unpaid commissions themselves. This statute does not apply, however, to employees.

Conclusion

Obviously, this is a very tricky and complex area of the law. Both companies and salespeople need to have knowledgeable legal counsel in their corner when facing issues involving disputed sales commissions.

Contact Stephen Imm (513-943-5678) or Matt Okiishi (513-943-6659) from the Finney Law Firm employment group for answers to any questions you may have on this topic.

Last week, Congress passed and President Trump signed the most sweeping tax reform package in more than two decades.  And one significant provision of that bill as to individuals is the cap on deductibility of state and local taxes at $10,000 in tax year 2018 and going forward.

This led to our “advice” here that Ohio taxpayers may want to pay their entire (both halves) 2018 real estate tax bills before year’s end to attempt to grab that additional (and perhaps final) deduction in 2017.

(Let us emphasize again the word “may.”  Your specific situation may differ.  Consult your tax professional for advice as to your specific circumstance.)

IRS Advisory muddies the waters

Since that advice, the IRS has muddied the waters by issuing this advisory.  In there, they caution that the 2017 deduction (already condition based upon individual circumstances) applies only if taxes are “assessed” and “paid” in 2017.

(OK, this is going to get confusing.  Perhaps we know “too much” about Ohio real estate taxes making this so complicated.)

What does “assessed” mean?

What exactly does “assessed” mean?  In Ohio, taxes are “a lien on the real estate” for the tax year in question on January 1 of that year.  Since the proposed-to-be-pre-paid 2018 taxes in Ohio are in fact the 2017 taxes (confusing we know, but Ohio real estate tax law is intentionally confusing), then they would seem to be “assessed” as of January 1, 2017, at least as to how this author sees things.

But even though taxes are a “lien” and are “assessed” as of January 1, 2017, when they are “determined” as to amount is another matter.

In Ohio, as in most states, property taxes are a product of multiplying the tax rate times the assessed valuation of property.  For every County in southwest Ohio (except Warren) and most major urban counties in Ohio (Hamilton, Butler, Clermont, Montgomery, Franklin, and Cuyahoga), 2017 is a new “re-valuation” year, meaning that the bills coming out in 2018 will have brand new valuations.  Those valuations were only finalized by the various county auditors in September or October of this year.

Then, the rate.  Tax rates are determined in Ohio for the tax year in question only after the November election results have been finalized.  Levies passed in that election apply retroactively to January 1 of that year, here 2017.

Does “assessed” mean “determined”?

Now this is where it gets super-confusing.  From our perspective, taxes have been assessed for 2017 (payable in 2018) as of January 1 of this year, but the amount of the tax bill in some counties was only very recently determined (and as to Warren County as of this writing has not yet been determined).

So, if the IRS means “determined” in terms of amount when saying “assessed,” then it derives the entirely illogical and unfair result that folks who pre-pay their real estate tax bills in 2017 in Hamilton, Butler, and Clermont Counties can deduct those payments, but folks in Warren County, where that determination appears to be lagging for a few days or weeks, cannot.  It makes utterly no sense.

(As we wrote here, In Warren and certain other counties where the amount has not been finally determined, your 2017 tax year payment may be based on the amount you paid for the 2016 tax year payment.)

Conclusion

Given the last-minute scramble that Congress created with the passage of tax reform, it is from our perspective inexcusable that the IRS chose to inject this uncertainty into what otherwise should be a straightforward matter.  But that is the nature of this federal agency.  Why make things simple, when they can be hopelessly complicated?

However, as to prepayment of Ohio taxes, our advice set forth in our original email and blog entry stands: Pay them now.  The worst-case scenario is that you will have paid the taxes, respectively, one month and seven months too early.  No real harm.  But if we are “right” that they are deductible if paid this year, but may not be next year, then it means a 25% to 39% “savings” on that payment for you (because of the deduction).

Thus, pay them now!

Read more

Read more about the last-minute confusion created by the IRS below:

Washington Post: If you prepaid property taxes, will you get the deduction? If not, can you get your money back?

New York Times: Prepaying Your Property Tax? I.R.S. Cautions It Might Not Pay Off

We hope this clarified things, and did not further confuse them for you.

 

Ohio has robust laws in place to ensure that the public business is done in the public and available for public inspection. From protecting citizens’ rights to attend meetings of local government bodies, to newspaper reporters being able to access and report on the financial records of the Cincinnati Streetcar project, or new public works proposals, the Open Meetings Act and Public Records Act, together the Sunshine Laws, provide for citizen oversight of their government.

First, the Open Meetings Act, R.C. 121.22, declares that, “All meetings of any public body are declared to be public meetings open to the public at all times.” This means that, other than those limited exceptions allowing public bodies to go into “executive session,” public bodies (city councils, township trustees, school boards) must conduct their deliberations in meetings open to the public.

Next, the Open Meetings Act requires public bodies to promptly prepare, file, and maintain minutes of all regular and special meetings, and to make those minutes open to public inspection.

Finally, the Open Meetings Act puts teeth to these requirements. Any person can bring suit to enforce these mandates. If you know of a violation or “threatened violation” by your local school board or city council, you can bring suit to force compliance. If successful, the court would enter an injunction against the public body to compel the body to comply with the Open Meeting Act, as well as an award of $500 per violation or threatened violation, and your reasonable attorney fees.

Thus, determination of whether the Open Meetings Act applies requires a multi-step analysis: Is there a “public body” involved? Was there a “meeting”? Was the public excluded from that meeting? And, finally, was such exclusion improper?

In addition to the requirement that public offices and public bodies meet in public and make minutes of those meetings available to the public, Ohio’s Open Records Act, R.C. 149, requires that public offices keep and make available any document, device or item, “created or received by or coming under the jurisdiction of any public office…which serves to document the organization, functions, policies, decisions, procedures, operations, or other activities of the office.”

Again, Ohio law provides for exceptions to the general rule that public records are to be kept and made available to the public (R.C. 149.43 includes both the exceptions and provides for enforcement by the citizenry). Certain confidential records are exempt from disclosure, for instance. If an appropriate request for public records is denied improperly (or ignored), the requester can bring suit to compel the production of the records, and may be entitled to up to $1,000.00 per record, and her reasonable attorney fees.

The analysis of The Open Records Act, also requires multiple steps. Is there a public office involved? Is there a document, device or item (i.e. a “record”)? Was this record created, received or coming under the jurisdiction of the public office? Does this record “document the organization, functions, policies, decisions, procedures, operations, or other activities of the office”? Does the record come under one of the exceptions to the Open Records Act? Was a proper request made?

This area of law has been litigated numerous times, and for every simple proposition of law, there is a court decision that muddies the waters. A recent Court of Claims decision announced that records of court proceedings commenced after July 1, 2009, are not subject to the Open Records Act, and efforts to obtain such records must be brought through a mandamus action pursuant to the Rules of Superintendence under R.C. 2731. This issue will no doubt be further litigated; and ultimately the Ohio Supreme Court will be called upon to clarify this question.

Finney Law Firm currently represents plaintiffs in three cases involving violations of the Open Meetings Act, and has represented both citizen activists and public bodies on questions of the Sunshine Laws. Finney Law Firm’s attorneys have litigated nearly every aspect of Ohio’s Sunshine Laws, and have given presentations on these issues to civic groups, officeholders, and continuing education programs. If you believe a local public body is violating the Open Meetings Act or need assistance obtaining public records, or if your group would like to host a presentation on Ohio’s Sunshine Laws, contact Christopher P. Finney.

A common question I get is whether an employer must pay an employee for their accrued but unused vacation when they leave employment. If an employee has left under difficult circumstances, such as an involuntary discharge, there can easily be a dispute about post-employment issues like this.

Under Ohio law, accrued vacation is considered an earned benefit that the employee has a legal entitlement to. Therefore, an employee’s right to pay for vacation that was not used during employment will normally survive the employee’s termination or resignation, and payment will be owed.

I say “normally” because an employer can change this through a written policy that is clearly communicated to employees, in an employee handbook or otherwise. If the employer promulgates a policy stating that any unused vacation pay is forfeited when employment ends, that policy is legally enforceable, notwithstanding the general rule.

Employers should carefully consider whether to have a blanket policy like that, however, as it can lead to some harsh results. And some employees who are planning to quit, being aware that their vacation pay will be lost when they leave, will simply take their vacation right before they resign – and quit without notice as soon as they return.

For some employers, a sensible middle ground may be to have a policy stating that vacation pay is forfeited only under certain circumstances – such as if an employee is discharged “for cause,” or if she or he leaves without giving two weeks notice.

Please contact us to discuss what makes the most sense for your business, or if you have questions about you right to vacation pay.