Hi, How Can We Help You?

Author Archives: Casey A. Jones

When Limited Liability Isn’t So “Limited”

Author By Casey A. JonesPosted on
Casey Taylor write on Ohio commercial real estate brokerage liens
Casey Taylor, attorney

Our firm has previously written on the creative ways one can shield his or her personal assets through the corporate or limited liability structure. As noted in that entry (Link Here), “Ohio courts and courts throughout the nation have been pretty vigilant in protecting the corporate veil of owners of corporations and limited liability companies.”  However, this general principle is not without a couple of narrowly drawn exceptions, explored below.

Formation of LLCs

The Finney Law Firm deals regularly with clients and other parties that are organized as limited liability companies (“LLCs”) or corporations.  After all, these entities are fairly simple to create – one must simply fill out an online form or two, submit a relatively small fee to the Secretary of State, and they are then able to transact business without fear of personal liability, right? Maybe not.

The powerful “corporate veil” protection of an LLC

Generally, an LLC member cannot be held personally liable for the torts or contractual obligations of the LLC solely by virtue of his or her membership in the LLC. City of Lakewood v. Ramirez, 2014-Ohio-1075, ¶ 11 (8th Dist. 2014). Thus, if an LLC defaults on its obligations under a contract, an adverse party cannot obtain judgment against the LLC members’ or managers’ personal assets.  It is for this reason, along with its ease of formation, that the LLC structure is so desirable to many. And, most of the time, it succeeds in its purpose of precluding judgment against the members’ personal assets.

Narrow exceptions

However, there are two sets of circumstances under which the limited liability structure does not shield members from personal liability.

1.   Piercing the corporate veil

The first is where the court deems it proper to “pierce the corporate veil,” thereby removing that protection of limited liability.

[I]n order to pierce the corporate veil and impose personal liability upon [members or managers], the person seeking to pierce the corporate veil must show that: (1) those to be held liable hold such complete control over the corporation that the corporation has no separate mind, will, or existence of its own; (2) those to be held liable exercise control over the corporation in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.

Stewart v. R.A. Eberts Co., 2009-Ohio-4418, ¶ 16 (4th Dist. 2009), citing Belvedere Condominium Unit Owners’ Ass’n v. R.E. Roark Cos., 67 Ohio St. 3d 274, ¶ 3 of the syllabus, 617 N.E.2d 1075 (1993).  The idea behind piercing the corporate veil is that there is so little separation between the individual and the LLC, that they can almost be considered “alter-egos” such that it is not unreasonable to hold the member or manager of the LLC personally liable for the debts, obligations, and/or liabilities of the LLC.

2.  Member’s own acts, ommisions or fraud

The second instance where a member can be held personally liable notwithstanding the limited liability structure is where the members’ own acts or omissions constitute fraud. R.C. 1705.48; See also Deitrick v. Am. Mortg. Solutions, Inc., 2007-Ohio-839, ¶ 19 (10th Dist. 2007) (finding that a “corporate officer can be individually liable in tort if the promises contained in the contract are fraudulent” and “even if he commits the fraud while in the course of his corporate duties”); Stewart, at ¶ 30 (“[N]either the corporate shield, nor a shield of limited liability insulates a wrongdoer from liability for his or her own tortious acts.”). Additionally, this second instance is not contingent upon the first (i.e., a litigant who seeks to hold an LLC member personally liable for the member’s own fraud need not first pierce the corporate veil in order to do so).  Yo-Can, Inc. v. Yogurt Exch., 149 Ohio App. 3d 513, 527 (7th Dist. 2002) (“[P]laintiffs need not pierce the corporate veil to hold individuals liable who allegedly personally commit fraud.”).

Conclusion

Thus, while the LLC or corporate structure are very successful at providing owners/members with a great deal of protection the overwhelming majority of the time, one shouldn’t make the mistake of thinking his or her personal assets are entirely immune regardless of the circumstances.

Ohio real estate brokerage law: Liens for Realtors in commercial transactions

Author By Casey A. JonesPosted on

How do I obtain an Ohio commercial real estate broker lien?

Attorney Casey Taylor

First, let’s be clear: There is no lien right for real estate brokers for property consisting solely of between one and four residential units. (O.R.C §§1311.85 and .86).

However, licensed real estate brokers do have lien rights in transactions involving commercial properties, i.e., anything other than between one and four residential units.  (O.R.C §§1311.86).

The lien rights extend to brokerage contracts for the provision of services for selling, purchasing, and leasing.  (O.R.C §§1311..86(A) and (B)).  They do not appear to cover the provision of property management services.

What is a lien?

In one sense, a lien does not get you anything more than the contract rights you already have: You have a signed listing agreement, you have earned your commission, you can sue in a court of competent jurisdiction, and you can thus get paid the amount of money you are owed.

But as a practical matter, lien rights are tremendously powerful in “turning the tables” on a property owner, giving quick, inexpensive and powerful leverage to the Realtor to resolve a commission dispute.

Why is a lien important?

Leverage often is the “whole ballgame.”  So often, (a) debtors will avoid debts they clearly owe just because they can, for purposes of the time-value of money (by delaying the payment, they can use your money in the interim) and (b) the reality is that most creditors will not go to the trouble and expense of hiring and paying an attorney to collect the sums owed to them.

Litigation can cost as little as $20,000 per case, up to hundreds of thousands of dollars for a vigorously-contested action.  So, the question for a Realtor claiming a commission is: Can I “check” or “checkmate” a property owner (seller or landlord) into recognizing, dealing with and paying my claim without the two years and tens of thousands of dollars in legal fees needed to vindicate that right?

A lien is a powerful tool — it encumbers real property

A lien is an encumbrance on real property.  In most cases, real property encumbrances have the same priority of the order of filing, i.e., the first-filed is paid first from the sale proceeds, the second, second and so forth.  (Ohio mechanics liens are the major exception to this rule, dating back to the date of first work on a project.)

This gives the lien holder two distinct advantages, many times powerful advantages: (a) their claim is secured against the real estate (i.e., the owner cannot further squander the equity in the property by a sale or mortgage) (b) the claimant has placed a cloud on the title with what may still be a disputed claim, effectively preventing the owner from selling or mortgaging the asset until the earlier of (i) the statutory expiration of the lien or (ii) the judicial disposition of the claim and the lien rights.

Thus, as a practical matter if the property owner wants to sell his property or take out a new mortgage or refinance an existing mortgage, he will have to “deal with” the Realtor’s claims before doing so.

A broker’s lien is unilateral — it does not require the owner’s signature or consent

Contrary to what many clients ask of us in a simple contract or tort claim (“please lien their property”), in most circumstances a lien cannot be placed against real property until either (a) the owner signs a voluntary instrument such as a mortgage or (b) the conclusion of litigation, which usually takes years.  In the meantime, a defendant can sell and mortgage the property, or otherwise encumber it, and then squander the asset without concern for the plaintiff’s claims.  (This is constrained by concerns about fraudulent conveyance issues that will be discussed in another blog entry later.)

The right to place a unilateral lien against real estate is very narrow, being limited to government liens (such as tax liens, assessments, environmental liens, etc.) and mechanics liens (for work done on real property and materials delivered to real property for incorporation therein).

Commercial brokerage lien rights

O.R.C. §1311.86 provides such unilateral lien rights for the collection of a commission in commercial transactions in specific circumstances set forth in the statute.  Being a unilateral filing, means that the Realtor claiming the lien simply signs and files a piece of paper in the Hamilton County Recorder’s office.  It does not require a signature (on the lien filing) of the property owner.

Statutory requirements

Because the lien arises from the statute, strict compliance with the statutory mandates will be required.  F. W. Winstel Co. v. Johnston, 103 Ohio App. 525, Paragraph 1 of the Syllabus (1st Dist. 1957).         These are set forth in O.R.C. §1311.86:

  • It is for written brokerage contracts only (O.R.C. §1311.86(A) and (B)).
  • It is for “for services related to selling, leasing, or conveying any interest in commercial real estate” (O.R.C. §1311.86(A)) and “for services related to purchasing any interest in commercial real estate.” (O.R.C. §1311.86(B)).
  • “The lien is effective only if the contract for services is in writing and is signed by the broker or the broker’s agent and the owner of the lien property or the owner’s agent.”   (O.R.C. §1311.86(A) and (B)).
  • The lien is for the broker only, not his salespersons.  (O.R.C. §1311.86(C)(1).
  • The lien amount is either the brokerage commission due, or if due in installments only that portion due on conveyance.  (O.R.C. §1311.86(C)(2) but in the case of commercial leasing, (O.R.C. §1311.86(C)(3).
  • Only the property subject to the brokerage agreement can be liened.  ((O.R.C §§86(C)(5)).
Lien contents

To perfect a lien, the following steps must be followed:

  • The claimant must prepare, sign and have acknowledged (notarized) an affidavit containing each of the following: (a) name of the broker who has the lien, (b) the name of the owner of the lien property, (c) a legal description of the lien property, (d) the amount for which the lien is claimed, (e) the date and a summary of the written contract on which the lien is based, and the real estate license number of the broker. R.C. 1311.87(B)(2).
  • Additionally, the lien affidavit must state that the information contained in the affidavit is true and accurate to the knowledge of the broker. Id.
Lien deadlines

The timeframes within which a commercial broker’s lien must be filed are:

  • For a sale of liened, the Affidavit must be recorded prior to the conveyance of the property. R.C. 1311.86 (B)(3).
  • For a purchase of liened property the Affidavit must be recorded within ninety days after the conveyance of the property. R.C. 1311.86 (B)(4).
  • For liens based upon a leasing commission, the Affidavit must be recorded within ninety days after a default by the owner in payment. R.C. 1311.86 (B)(5).
Notice to property owner

One other requirement not to overlook:  “On the day the lien affidavit is recorded, the broker shall provide a copy of the lien affidavit to the owner of the lien property and, where a contract for the sale or other conveyance of the lien property has been entered into, to the prospective transferee, where known, either by personal delivery or by certified mail, return receipt requested. O.R.C. 1311.86 (B)(6).

Be careful — “Slander of title” claims can be nasty

If one files a lien against real property that is later determine to have been in bad faith, the lien claimant can find himself the target of a suit for a cause of action known as “slander of title.”  Slander of title is the tort of impairing title to someone’s real estate without a reasonable basis therefor. McClure v. Fischer Attached Homes, 2007-Ohio-7259, ¶ 21, 882 N.E.2d 61 (Clermont Co. C.P. 2007), citing Green v. Lemarr, 139 Ohio App. 3d 414, 433 (2d Dist. 2000).

The really bad part of a slander of title claim is that it can include an award to the property owner of an award of his attorneys fees and a punitive damages amount. Additionally, the commercial brokerage lien statute specifically allows for the prevailing party to recover its attorney’s fees. O.R.C. 1311.88(C) (“[A] court may assess the nonprevailing parties with costs and reasonable attorney’s fees incurred by the prevailing parties.”). However, in cases involving general slander of title claims (i.e., outside of the commercial brokerage lien context), the attorney’s fees have been limited to the those “necessary to counteract a disparaging publication,” and did not include those incurred in prosecuting the slander of title. Cuspide Props. v. Earl Mech. Servs., 2015-Ohio-5019, ¶ 40 (6th Dist. 2015).

Thus, we recommend moving forward with the filing of an affidavit for a commercial broker’s lien cautiously, only where the broker is certain of the merits of his position and even then still willing to withstand the possible claim for slander of title from an owner.

Conclusion

The Finney Law Firm is privileged to have many real estate brokerage clients, including commercial Realtors.  The commercial lien right is a very powerful one, and one that we think is under-utilized in commission disputes.

Consider one of our attorneys to assist you in such a dispute, including the use of the right to a commercial lien.

Ohio real estate law: Duty to protect others from falling trees

Author By Casey A. JonesPosted on

Our firm sometimes receives inquiries about areas of the law that few even consider until they are facing a potential lawsuit. Recently, one of those inquiries was whether one can be responsible for his or her tree falling and harming another or their property.

Generally, land owners do not owe a duty with regard to harm caused to another as a result of some natural condition of the land, provided that the harm occurs outside of the land. Heckert. V. Patrick, 473 N.E.2d 1204, 1206 (Ohio 1984). However, there are some exceptions with regard to injuries resulting from falling trees and/or branches. Id. at 1207.

“[A]n owner of land abutting a highway may be held liable on negligence principles under certain circumstances for injuries or damages resulting from a tree or limb falling onto the highway from such property.” Id. For example, “a possessor of land in an urban area is subject to liability to persons using a public highway for physical harm arising from the condition of trees near the highway.” This duty of an urban landowner includes a duty to inspect the tree to make sure that it is safe. Id. This is because urban landowners are thought to have fewer trees – thus, it is not too great of a burden to do so. See id.

However, for rural landowners, who potentially own entire forests of trees, an affirmative duty to inspect the trees would likely amount to a very heavy burden. Id. Therefore, the Ohio Supreme Court has adopted a distinction between rural and urban landowners in this respect. Id. As such, rural landowners have no duty to inspect trees growing on their property adjacent to rural highways, or to ascertain defects that may result in injury to someone travelling on the highway, but, to the extent a rural landowner has “knowledge, actual or constructive, of a patently defective condition of a tree,” that landowner must exercise reasonable care to prevent harm. Id. Constructive knowledge can result from the appearance of the tree, thereby giving notice to an owner that the tree is not in good shape and could fall. In recognition that the distinction between rural and urban areas may not always be an easy one to make as suburbia continues to grow and expand, the Court also provided a list of factors to be considered when making such determination, including “the location of the highway, its size and type, as well as the number of people utilizing it.” Id. at 1208.

Courts have generally applied the law as it relates to rural landowners to cases involving trees falling onto neighbors’ property (i.e., the landowner will be liable to the neighbor where the landowner has actual or constructive knowledge that the tree is defective. See Johnston v. Filson, 2014-Ohio-4758 (12th Dist. 2014) (granting summary judgment to a landowner upon finding that the landowner did not have actual or constructive notice of the tree’s condition); Motorists Mut. Ins. Co. v. Flynn, 2013-Ohio-1501 (4th Dist. 2013) (finding that photographs of a tree significantly leaning toward the neighbor’s house presented a genuine issue of material fact as to whether a reasonable person should have known that the tree posed a danger); Wertz v. Cooper, 2006-Ohio-6844 (4th Dist. 2006) (granting summary judgment in favor of landowner for damage resulting from the landowner’s tree falling onto its neighbor’s property because the neighbor failed to establish that the landowner had either actual or constructive knowledge of a patent dangerous condition of the tree).

So while, in most cases, you will not have an affirmative duty to go out and inspect every single tree on your property, actual or constructive (visible) notice that the tree is not in good shape could create liability if that tree were to fall and cause harm. The lesson? Don’t ignore unhealthy or potentially problematic trees/limbs.

Ohio real estate law: Limiting liability in home inspection contracts

Author By Casey A. JonesPosted on

When purchasing a home, most buyers take advantage of the common “home inspection contingency,” affording them the opportunity to have the property professionally inspected in order to reveal potential defects before moving forward with the purchase. For their own protection, many home inspectors have begun including clauses limiting their liability to the price paid for the inspection in their contracts. In essence, this means that, if an inspector charges $500 for the inspection but misses a defect that costs the buyer/homeowner $2,000, the inspector is only liable (if at all) up to the $500 amount, not the full cost of remedying the defect. But are these clauses actually enforceable?

Ohio courts seem to say “Yes.” Home buyers have argued that the clauses are unconscionable (or unfair). However, courts have noted that the clauses appear on the face of the contract, that buyers are able to read the contract and ask questions before signing, and that buyers are permitted to decline the clause or the contract or hire another inspector altogether if they do not agree to the clause. See Barto v. Boardman Home Inspection, Inc., 2015-Ohio-5210, ¶19 (11th Dist. 2015).  Therefore, such clauses are generally not considered unconscionable, and courts have continued to enforce them.

In fact, clauses limiting the liability of inspectors have even been enforced where they effectively preclude enforcement of arbitration clauses contained within the same contract. In McDonough v. Thompson, the parties were required under their contract to resolve any disputes through arbitration. 2004-Ohio-6647, ¶¶2-3 (8th Dist. 2004).  However, because the filing fee for arbitration exceeded the inspector’s maximum liability under the contract (i.e., the price of the inspection), the court declined to enforce the arbitration clause, but did enforce the limitation of liability. See generally id. The court found that “an arbitration clause is not enforceable when the clause, in conjunction with a limitation of liability clause, effectively denies a claimant any redress.” Id. at ¶13. Thus, not only are these clauses enforceable, but they seem to be enforceable even to the preclusion of other clauses carrying a general presumption of enforceability (as arbitration clauses do).

In light of the courts’ eagerness to enforce limitation of liability clauses in this context, a buyer’s best remedy might actually be against the seller of the home (to the extent the seller may have concealed or lied about the defect), and those cases can often be tenuous.

Read more here about home defects and residential property disclosure forms:

Taxpayer actions

Author By Casey A. JonesPosted on

We have many dedicated and professional public servants, both elected officials and bureaucrats.  But we also have some who are not so dedicated and not so professional, and even the best can get intoxicated by their power, respond to the mob, or fail to understand the constitutional and statutory limitations on their authority.

Fortunately, in this nation, we have a system of checks and balances, and when an elected official steps over the bounds of his authority, we have the courts to check that abuse of power.

At the Finney Law Firm, we take pride in representing our clients and communities by, when necessary, standing a haughty elected official or appointed bureaucrat before a Judge and making them account for their excesses.  The only thing more satisfying than that is both winning and shifting the fees to the government that forced the action to begin with, for which Ohio law allows.

Under Ohio law, both (i) standing is conferred and (ii) an award of attorney’s fees to a prevailing plaintiff is granted for ultra vires acts (acts beyond their power) by government officials.  This is achieved through taxpayer actions.

Standing

“Standing” is a threshold issue in all litigation.  To have standing, an individual must generally have an actual and concrete injury, caused by the conduct of which the individual complains and capable of being redressed by the court. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).  Because the status of taxpayer is shared by so many, it can sometimes be difficult to establish standing; however, Ohio law has alleviated that problem with statutes such as R.C. 733.59 (for cities/municipalities) and R.C. 309.13 (for counties).

The Ohio taxpayer statutes provide that an individual may request in writing that the city solicitor, village director, or county prosecutor (whichever is applicable), if there is one, initiate an action to hold government actors accountable for their ultra vires acts.  If there is no such solicitor, director, or prosecutor to initiate the action or if they fail to do so upon a taxpayer’s written request, the taxpayer may initiate the suit himself. The action is then brought in his own name on behalf of the municipal corporation or the state, whatever the case may be.  This, in essence, confers standing upon any taxpayer seeking to put a stop to such injustices, regardless of their arguably generalized injury.

In so doing, the taxpayer “volunteers to enforce a right of action on behalf of and for the benefit of the public.” State ex rel. Nimon v. Springdale, 6 Ohio St. 2d 1, ¶ 2 of the syllabus (1966). The only other requirement is that the taxpayer must give a “security” for the cost of the proceeding, presumably to discourage meritless actions.  However, the Ohio First District Court of Appeals, has found that the filing fees satisfy this requirement, although other courts have disagreed and required something more. McQueen v. Dohoney, 1st Dist. Hamilton No. C-130196, 2013-Ohio-2424, at ¶ 21 (June 12, 2013); But see, Bowshier v. Vill. of N. Hampton, 2d Dist. Clark No. 2001 CA 63, 2002-Ohio-2273, at ¶ 27 (May 10, 2002); National Elec. Contrs. Ass’n v. City of Mentor, 108 Ohio App. 3d 373, 381 (11th Dist. 1995).

Attorney’s Fees

 An added benefit for the taxpayers who bring these actions, as well as their attorneys, is that they are entitled to attorney’s fees upon showing that the action resulted in public benefit. State ex rel. White v. Cleveland, 34 Ohio St. 2d 37, ¶ 3 of the syllabus (1973); See also R.C. 733.61 (“If the court hearing a case under section 733.59 of the Revised Code is satisfied that the taxpayer had good cause to believe that his allegations were well founded, or if they are sufficient in law, it shall make such order as the equity of the case demands. In such case the taxpayer shall be allowed his costs, and, if judgment is finally ordered in his favor, he may be allowed, as part of the costs, a reasonable compensation for his attorney.”); R.C. 309.13 likewise provides for reasonable attorney’s fees.  One of Finney Law Firm’s own cases established that “[t]he public benefit need not be monetary in character. That benefit may be of a more intangible character, such as the prevention of illegal government activity.”  City Of Cincinnati ex rel. Smitherman v. City of Cincinnati, 188 Ohio App. 3d 171, 178 (2010), citing Billington v. Cotner, 37 Ohio St.2d 17, 19, 305 N.E.2d 805 (1974).  However, to get attorney’s fees, the taxpayer must produce a contract (fee agreement) showing that he has actually incurred attorney’s fees. Harris v. Carney, 8th Dist. Cuyahoga No. 34733, 1976 Ohio App. LEXIS 8334, *6 (Apr. 8, 1976).

For more information on taxpayer actions, attorney’s fees in such actions, and other fee-shifting provisions, Attorney Chris Finney will be presenting at an NBI seminar in Cincinnati, Ohio titled Local Government Law From Start to Finish on Friday, December 16, 2016.

We’re buying a house!

Author By Casey A. JonesPosted on

In recent years, more and more millennials are pursuing higher education.  This trend has, in many instances, pushed back the age at which we are beginning our careers, starting families, and making big purchases.  Thus, NOW is the time that so many of us are looking into buying our first homes.  Here is one thing you need to know, whether you are a prospective buyer or seller:

The Residential Property Disclosure Form (required for residential real property transfers in Ohio per R.C. 5302.30) is not just a formality, but rather, is an EXTREMELY important component of the transaction.

At Finney Law Firm, we represent both buyers and sellers in real estate transactions that have, arguably, gone awry.  The issue often has to do with a disclosure made (or not made) in the Real Property Disclosure Form.  This form requires sellers to answer questions about the condition of the property they are selling.  It covers the structural integrity of the home, water intrusion issues, plumbing, etc.

Home is a big purchase so contracts will have an effectSellers are required to disclose any problems of which they have knowledge.  Even if the property is being sold “as is,” sellers have a duty to not engage in fraud in executing this form (i.e. to not knowingly make any affirmative misrepresentation or conceal a latent material defect in the property).  For example, if the seller knows that the basement floods but checks the box marked “No” next to the section for water intrusion, the seller has arguably engaged in fraud, and a damaged buyer could pursue those claims against the seller.  It is in the best interest of the seller to disclose all that he knows about the property so as to avoid the risk of future liability.

On the flip side, a buyer has certain obligations as well. If the seller in the aforementioned example had said “ten years ago, there was a flood in the basement, but we caulked some cracks and it is no longer a problem,” the buyer is arguably not entitled to rely on that disclosure in assuming that the problem is fixed and that there are no longer any water intrusion issues.  The Ohio Supreme Court has held:

Once alerted to a possible defect, a purchaser may not simply sit back and then raise his lack of expertise when a problem arises. Aware of a possible problem, the buyer has duty to either (1) make further inquiry of the owner, who is under a duty not to engage in fraud, or (2) seek the advice of someone with sufficient knowledge to appraise the defect.

See Tipton v. Nuzum, 84 Ohio App.3d 33, 38, 616 N.E.2d 265 (1992), citing Layman v. Binns, 35 Ohio St. 3d 176, 177, 519 N.E.2d 642 (1988).  Therefore, the buyer should then make further inquiry, by hiring an inspector or asking follow-up questions of the seller, or both. To this point, this can be such an exciting time and even the most cautious buyers can easily become anxious to close on and move into their new home, but it is in the best interest of the buyer to ask questions and investigate anything that might become an issue down the road.  While the extra time or comparably nominal expense of making such further inquiry can seem frustrating, it could save you tens – if not hundreds – of thousands of dollars in repairs and/or legal fees down the road.

The Sixth Circuit Renders a “Shocking” Decision on the “Shocks the Conscience” Standard

Author By Casey A. JonesPosted on

Earlier this year, the Finney Law Firm obtained a favorable settlement for five special needs children within the Kings Local School District who were severely mistreated by their teacher, and the firm continues to proudly represent its clients in other similar cases.  However, a decision by the Sixth Circuit Court of Appeals may have heightened the burden imposed on plaintiffs bringing substantive due process claims, which was one of several causes of action alleged in the Kings case.

Substantive due process, under the Fifth and Fourteenth Amendments, forbids government actors, including public school teachers, from intruding into the fundamental rights promised to individuals under the U.S. Constitution.  Relevant here are the “rights to be free from physical abuse at the hands of state actors, and to enjoy personal security and bodily integrity in an educational setting.” Webb v. McCullough, 828 F.2d 1151, 1158 (6th Cir. 1987).

In Domingo v. Kowalski, 810 F.3d 403 (6th Cir. 2016), the Court applied the “shocks the conscience” standard used in substantive due process cases in a way that may very well place an insurmountable obstacle in the way of students seeking to hold their teachers accountable for constitutional violations in the classroom.

The plaintiffs in Domingo, special needs students as young as six years old, brought a substantive due process suit against their teacher alleging that she:

abused her students during the 2003-2004 school year by, among other things, gagging one student with a bandana to stop him from spitting, strapping another to a toilet to keep her from falling from the toilet, and forcing yet another to sit with her pants down on a training toilet in full view of her classmates to assist her with toilet-training.

Despite finding that the teacher’s actions were improper, the Sixth Circuit refused to hold the teacher liable, reasoning that her conduct did not “shock the conscience.” In so finding, the Court borrowed the Third Circuit’s “shocks the conscience” test, which ultimately requires that the actor have malicious or sadistic intent, which the Domingo Court did not find.  Requiring such bad intent is an extremely high standard, making it challenging, at best, for many plaintiffs to meet even in cases as egregious as Domingo. In light of the conduct permitted in Domingo, it is difficult to imagine exactly what type of classroom conduct would shock the conscience.

Ohio Death Penalty Case Making National Headlines

Author By Casey A. JonesPosted on

Earlier this month, an Ohio inmate appealed a state Supreme Court decision holding that a second execution attempt would not violate the inmate’s constitutional rights.

Broom, a convicted murderer, was sentenced to death for his crimes.  In 2009, an attempt to execute him was unsuccessful after 18 stabs at finding a viable vein over a span of approximately two hours ultimately failed.  Broom argued all the way up to the Ohio Supreme Court that a second attempt to execute him would amount to cruel and unusual punishment and violate double jeopardy.  The Ohio Supreme Court rejected Broom’s arguments in a split decision.

Broom has appealed this ruling to the Supreme Court of the United States.  The last time the High Court addressed a death penalty case was in 2015 with its Glossip v. Gross decision.  In that case, the Court upheld a method of execution 5-4 over the challenge of several prisoners. The late Justice Scalia was in the majority.

We know from Glossip that at least four Justices have some concerns about the death penalty, with two of them calling for a re-examination of its constitutionality altogether.  As it takes the vote of only four Justices for the Court to hear a case, it is likely that certiorari will be granted on Broom’s appeal.  If the case is heard before Justice Scalia’s vacancy is filled, and the Justices vote as they did in Glossip, it will be 4-4, and the Ohio Supreme Court decision will stand.

However, filling the SCOTUS vacancy is proving to be a hot issue in this year’s presidential election.  This case may go either way, depending on the outcome and who is appointed by our next president to fill Justice Scalia’s seat.  Thus, it could, interestingly, be decided at the polls on November 8th – yet another reason to get out and vote!

Advanced commercial real estate law: Letters of intent, memoranda of understanding, and scribbles on the back of an envelope in Ohio

Author By Casey A. JonesPosted on

 

As a real estate attorney, I many times take for granted that experienced real estate professionals — Realtors, lenders, and investors — understand the fundamentals of real estate law.  And many times I am proven wrong in that assumption.

Just a few weeks ago, I again learned this lesson from real-life experience.

In that scenario, the parties signed a document entitled “letter of intent” for a million-dollar-plus property.  The document identified the property in question, the purchase price and the timing for the closing.

Later, the seller obtained another offer on the property and took the position that our “Letter of Intent” was not binding.  We took the opposite position and vigorously acted to enforce the newly-formed contact.

How is that so?

Statute of Frauds

First, we have extensively explored on this site the requirements of every state in the union that contracts for the purchase and sale of real estate (i) must be in writing and (ii) must be signed by the “party to be charged” therewith (i.e., the party who is to be sued on the contract). Grafton v. Cummings, 99 U.S. 100, 106 (1878); Smith v. Williams, 396 S.W.3d 296, 298 (Ky. 2012); Sanders v. McNutt, 72 N.E.2d 72, 75 (Ohio 1947). You may read more about that here.

What writing constitutes a contract?

Virtually any document that evidences a meeting of the minds between parties on the material terms of a transaction and that complies with the statute of frauds will be a binding contract for the purchase and sale of real estate. McGeorge v. White, 174 S.W.2d 532, 533 (Ky. Ct. App. 1943); Beasley v. ANG, Inc., 10th Dist. Franklin No. 12AP-1050, 2013-Ohio-4882, ¶ 8 (Ohio Ct. App., Nov. 5, 2013).

The title of the document does not matter.  The paper on which the contract is memorialized does not matter.  Whether it is written in pen, pencil, or crayon does not matter.

It simply matters that the material terms are in the document, the document is in writing and the document bears the signature of the “party to be charged therewith.”

Memoranda of understanding and letters of intent

Certainly, though, a document entitled so innocuously as a “letter of intent” or a “memorandum of understating” would not in and of itself be a binding agreement, right?  Wrong.

Sometimes the terms of a document — such as a letter of intent or memorandum of understanding — may say in the text that it is not binding upon the parties unless and until they sign a contract drafted by their attorneys and signed by the parties.  In such instance, by its own terms, the document is not a binding contract. See, e.g., John Wood Group USA, Inc. v. ICO, Inc., 26 S.W.3d 12, 17 (Ct. App. Tx. 2000) (“the parties expressly stated that the letter agreement ‘is not binding,’ with the exception of certain enumerated paragraphs”); Christ v. Brontman, 175 Misc. 2d 474, 477 (S.Ct. N.Y. 1997) (“Generally, if the language in the contract so provides, a real estate sales agreement which is subject to the approval of attorneys is not binding and enforceable until approved by the attorneys.”).

But in the absence of such “saving” language, a writing is a binding agreement on the terms set forth in such writing.

Again, the title of a document, or its brevity, could lead a buyer or seller to believe it is intended to be non-binding, and simply preliminary.  Buyers and sellers are lulled into erroneous understanding that the informal nature of the document, the shortened text, and/or the title mean that the document is not binding unless and until further documentation follows, carefully reviewed or drafted by counsel.  This is simply false as a matter of law.

Lot Reservation Agreements

This same logic extends to “Lot Reservation Agreements” in the context of a buyer-builder relationship.  A one-paragraph agreement that seems to be just a quick way to tie up a piece of property for a few weeks or months could in fact give rise to binding obligations assuming the agreements comply with other contract principles.

Principle extends to other agreements

Although the focus of this article is the purchase and sale of real estate, its contents could just as well apply to other legal transactions such as real estate leases, options, easements and license agreements, and to non-real estate transactions such as equipment leases, and the sale of a company or its assets.

The back of an envelope

We learn in law school that a buyer and seller can memorialize a contractual agreement on any type of paper, including the back of a used envelope.

About 20 years ago, to my surprise, I ended up being involved in a “back of the envelope” case.  There, the buyer sat on one side of a table and the seller’s Realtor was on the other side of a table.  The Realtor wrote out some basic bullet-point contract provisions, being the address of the subject property, the price and the closing date, on the back of a used legal-sized envelope.  The buyer, on the other side of the table, signed the document upside down! — he didn’t even bother turning around the writing and reading it.  A judge found that that crazy-looking instrument constituted a contract binding upon that buyer.

The lesson: It simply does not matter what kind of paper the contract is memorialized upon or even where and how the terms are written on that piece of paper.

Conclusion

As we frequently caution our clients, “it’s a dangerous world out there.”  You must carefully consider the consequences of your actions and those acting on your behalf.

 

Real Estate 101: Legal basics of the real estate contract

Author By Casey A. JonesPosted on

I have been fielding a lot of questions lately from buyers, sellers, and Realtors that deal with contracting at its most fundamental level, so I thought I’d put together an article on the basics of the real estate contract.

Offer and acceptance

The essence of a real estate contract is offer and acceptance. The requirement of offer and acceptance applies to each of the major elements of the transaction, which typically include identity of the property and price.

There can be more terms, such as the personal property that accompanies the sale, who pays for the title insurance, and financing and inspection contingencies, but an offer from one party and an acceptance by another party of the major provisions is the basis of the formation of a contract.

One consideration on the issue of offer and acceptance is whether the offer or counteroffer was in fact accepted before its expiration.  We have seen contracts accepted out-of-sync with the terms of the offer and acceptance process, which could empower a buyer or seller to avoid their obligations under that instrument.

If at the end of the back and forth between buyer and seller there remain differences in these material terms, there is likely no “acceptance” of the last offer (i.e., no “contract”).  But if they in fact have agreed, the contract should be enforceable, subject to the “outs” noted below.

Either you are pregnant or you are not

Being in contract is kind of like being pregnant: either you are or you aren’t.  There is no such thing as “kind of” being under contract.  Courts should apply a fairly black-line test to this subject.  Either you are or you aren’t.

Execution and delivery

“Offer” and “acceptance” typically are handled by the signature of one party physically or electronically delivered to the other party.  In the “good old days” this was handled by one Realtor physically delivering a signed contract to the other Realtor.  Today, delivery is more common via fax and email, both of which are acceptable methods of delivery absent specific instructions in an offer or counteroffer from one party to the other (i.e., if they specify that physical delivery to the Realtor’s office is the only acceptable method of acceptance), in which case whatever method that party specifies will stand as the only acceptable method of acceptance.

Interestingly, I litigated a case once in which only the buyer had signed the contract, and the seller sued, claiming he (the seller) had orally accepted the buyer’s written and signed offer by an oral conversation with the buyer’s Realtor.  The Court agreed, and allowed the suit to proceed!

Finally, as this blog entry explains, electronic signatures are acceptable to the same extent as inked signatures under the law.

A counteroffer is a rejection and a new offer

You can’t “have your cake and eat it too.”  So, a seller who is in receipt of an offer from a buyer can’t at first counteroffer, and if that fails to work, then accept the original offer.  This is so because, by law, a counteroffer is a rejection of the first offer and the making of a new offer.  The old offer from the buyer is rejected and “gone” as of the making of a counteroffer by the seller.

Being under contract (mostly) means you are now bound

This principle seems so obvious that it does not need stating, but when parties sign a contract, they are bound to its terms, and responsible for performance thereunder.  Contrary to mistaken “water-cooler lawyering” (where laymen around a water cooler discuss supposed legal rights and remedies), there is no three-day period within which a buyer is privileged to terminate a contract.

Under a typical commercial and residential form of contract, there are a precious few escape clauses for a seller under the contract.  Typically, the contract is an unconditional promise by the seller to convey title to the buyer upon the buyer’s tender of performance (usually payment of the purchase price).

The buyer on the other hand has several primary ways to avoid his obligations under a purchase contract:

  1. Typically, the buyer’s performance is contingent upon obtaining a satisfactory inspection of the property.  If the buyer desires to terminate the contract during the inspection period, his ability to avoid his obligations under the contract is quite open-ended.
  2. In commercial contracts, many times buyers have similarly open-ended contingencies of acceptable zoning, economic analysis, pre-leasing, and environmental inspections.  During such contingency periods, the buyer may have a significant opportunity to avoid his obligations under the purchase contract.
  3. In both commercial and residential contracts, financing contingencies are also common.  During the period of time allowed for obtaining financing, again, a buyer may be able to terminate if contractually-adequate financing is not obtained.
  4. In the Cincinnati Area Board of Realtors form of residential contract, there is an obligation upon the seller (Section 8) to provide a broad and somewhat open-ended set of documents to the buyer. There is then a period of time (blank in the form contract) for the buyer to terminate the contract based upon his review of those documents.  This right to terminate is discretionary in the buyer.  Further, if the seller never provides the documents, the buyer would arguably then have the right to terminate the contact all the way through the date of closing.
  5. The Cincinnati Area Board of Realtors Contract also contains an appraisal contingency in favor of the buyer that is above and beyond the appraisal obtained by the buyer’s bank in conjunction with his financing.  (NOTE: These two last contingencies are briefly addressed in this blog entry.)
  6. Finally, Ohio Law (O.R.C. Section 5302.30(K)(4)) provides that, in certain residential contracts, if a seller has not provided a residential property disclosure form to the buyer, the buyer will have the right to terminate the contract all the way through the closing date.

Obligation to fulfill contingencies in good faith

Notwithstanding the seemingly open-ended nature of some contingencies, courts have found that parties have an obligation under a contract to attempt to fulfill contingencies in good faith.  See Johnston v. Cochran, (10th District, 2007) 2007-Ohio-4408.

When one of the parties to a contract has direct influence over the fulfillment of a condition precedent, that party bears the burden to show that it made good faith efforts to satisfy the contractual conditions which allegedly excuse its performance.  In other words, a party cannot take advantage of an unfulfilled condition precedent to excuse its performance without first proving that it exercised good faith and diligence in trying to satisfy the condition.

Therefore, refusing to properly and honestly apply for financing that results in a rejection letter from the lender may not be the basis for contract termination under the contingency that allows for the buyer to terminate if he or she cannot obtain financing.  Telling your home inspector to find problems “to kill the deal” would likewise not be the proper fulfillment of an inspection contingency.

How long do I have to wait after someone’s breach?

If a buyer fails to close on the purchase and sale of real property on the date anointed by the contract, may the other party just walk away?  Well, not exactly.   As this blog entry explains, if the contract does not use the magic words “time is of the essence” (in this instance as to the closing date), then time is not of the essence and we don’t really mean for the dates we say in the contract to be strict deadlines.  A buyer or seller would then have to wait a reasonable period (and perhaps a little longer) before they can be assured that a court would find that one party is in breach and that the other party may pursue his remedies for such breach.

Declaration of breach

If one party believes the other party is in breach of a contract, it is appropriate to send a letter formally declaring the other party in breach, and then to act in accordance therewith (i.e,, do not continue to act as if the breaching party has not breached and proceed to prepare for closing, for example).

Remedies for breach

Typically under real estate purchase contracts there are two basic remedies available to both the buyer and the seller for the other party’s breach: (i) monetary damages and (ii) an action for specific performance.

1.  Monetary damages

The monetary damages available in a breach of contract setting are typically the difference between the contract price and what the house was worth at the time of the breach.  That means that if the house or commercial property sold for “about” what it is worth (which it usually does), then the monetary damages one party sustains may not be all that significant.  Further, regardless of the re-sale price, the proper proof of the “actual value” number is appraisal testimony presented by each party at trial.

2,  Holding costs and consequential damages

Now, sellers also want to obtain damages for holding costs, and potentially the loss of their subsequent purchase.  Buyers want their temporary living expenses and the cost of storing their home’s contents, as well as the interest rate they lost because of the delayed closing.

On a theoretical level, the courts are, at best, inconsistent in their awards of “holding costs” damages and will typically not award the consequential damages associated with the loss of another purchase transaction.  (Roesch v. Bray, 545 N.E.2d 1301, 1304 (Ohio Ct. App. 1988) (“[C]ourts have not considered in great detail what additional losses may be compensated for in the way of damages pursuant to a breach of a real estate contract. Generally, damages on a breach-of-contract action are limited to losses that are reasonably to be expected as a probable result of the breach.”). See also Ottenstein v. Western Reserve Academy, 374 N.E.2d 427, 429 (Ohio Ct. App. 1977) (Mahoney, P.J. dissenting) (“I do not believe that those damages should include any ‘loss’ of ‘interest’ on the money as such ‘loss’ is not consequential.”).)

The buyer’s temporary housing and storage may be recoverable, but would the court offset the mortgage payments that would be insured if the sale had gone forward?  Similar to the refusal to award consequential damages to a seller, the higher interest rate paid by a buyer may be difficult to obtain. (Quinn v. Bupp, 955 A.2d 1014, 1021 (Pa. 2008) (citing Rusiski v. Pribonic, 511 Pa. 383, 515 A.2d 507, 512 (Pa. 1986) (declining to award damages to a buyer in a land sales transaction calculated upon an increased mortgage interest rate).)

3.  Practical problems in damage recovery

Beyond the theoretical problems in damage recovery, we have the practical.  The cost and difficulty in obtaining monetary damages beyond the valuation question will be challenging when compared to the attorney’s fees that will be incurred in the pursuit of the same.  In the commercial setting, breach damages can be significant.  In the residential setting, it is rarely worth it to pursue a damages claim.

4.  Specific performance

The other remedy for breach of a real estate contract, available to both buyers and sellers, is an action for specific performance.  In a specific performance action, we ask the judge to order the breaching party to perform his obligations under the contract.  For the breaching seller, it is to give a deed and do other things required at the closing.  For the buyer, it is to pay the purchase price and perform his other contractual obligations.  Because every parcel of real property is considered unique and irreplaceable under the law, this remedy is — as a matter of law — available under each real estate contract.

However, consider the practical difficulties of a specific performance action:

  • For sellers, they need to take their property off the market for the duration of litigation — which can last three years or more in the case of an appeal — in order to force this specific buyer to close on this specific property.  Further, once the seller achieves this victory in court, how does he force the buyer to get a bank loan and acquire the funds to buy the property if he otherwise does not have the cash?
  • For buyers, they should be able, through a specific performance action (read here about lis pendens actions), to tie up the title to the seller’s property, but they too will need to be prepared to pursue the matter through its conclusion in the trial court (18 to 36 months) and potentially through the appellate process as well (another 18 to 24 months).  Further, despite some case law that supports a claim for an award of attorney’s fees at the conclusion of such action, typically the cost of pursuing the claim will fall to the plaintiff.

In short, it is the rare buyer or seller plaintiff who has the wherewithal and fortitude to see a specific performance action through to its conclusion.

Obligation to mitigate damages

Whenever a party breaches a contract, the non-breaching party has a duty to mitigate damages. (30 Oh Jur Damages § 102 (2015) (citing Chicago Title Ins. Corp. v. Magnuson, 487 F.3d 985 (6th Cir. 2007)). See also Reitz v. Giltz & Assocs., 2006 Ohio App. LEXIS 4120, at *19 (Ohio Ct. App., Aug. 11, 2006) (“The duty to mitigate damages, otherwise known as the doctrine of avoidable consequences, requires a plaintiff to avoid those damages resulting from a breach of contract that may be avoided “with reasonable effort and without undue risk or expense.”).)  Let’s give an example unrelated to property sales:

A seller brings a truckload of peaches to a buyer in Cincinnati.  When he goes to deliver them, the buyer refuses the product.  The seller cannot simply allow the peaches to spoil on the truck and escalate his damages, he must go to a produce house and sell them for whatever he reasonably can get, holding the buyer responsible for the difference in price between that which was originally promised versus that which was obtained at the produce house sale.  This is called “mitigation of damages.”

Similarly, when a buyer breaches a real estate contract, a seller is obligated to place the property back on the market and obtain the highest possible price and best possible terms to reduce the damages for which the buyer is responsible.

Conclusion

While the idea of a real estate contract might sound intimidating, the law provides guidance as to how the parties should approach these contracts and is fairly lenient as to their execution aside from a few strict requirements (such as offer and acceptance). However, parties should be aware of the consequences should something go wrong in the process due to the potential difficulties of obtaining relief and shift in responsibilities in the event of a breach by the other party.

________________________________

Additional resources

We recommend for your reading these additional resources:

How to break a real estate contract by Massachusetts Realtor Bill Gassett >>

How to determine what is a breach of contract by New Hampshire law firm of Fojo, Dell’Orfano >>

Can you cancel a real estate contrat by Realtor.com >>

 

 

 

1 2 3