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Real Estate Legal Pro Tip: How to avoid Ohio mechanics liens on construction and renovation projects

By Christopher P. FinneyDecember 18, 2021December 18, 2021 Leave a comment

Buying real estate improved by an existing building is in itself a legally intricate undertaking. However, new construction and renovation introduce a whole new level of complexity, difficulty, legal complication and financial risk.

This blog entry explores just one of those categories of added risk in the construction and renovation arena: mechanics liens. This article also is not the definitive, all-encompassing explanation of the Ohio mechanics lien statute (it has a multitude intricacies). Rather, we provide herein three (or four) simple steps to assure that the extraordinary “muscle” added by mechanics lien claims is not applied against you as a property owner.

General risks of real estate investing

In short, real estate investing is not for amateurs or the faint of heart. Many of the entries on this blog explore how to avoid pitfalls associated with real property acquisitions involving existing improvements, such as issues relating to matters of title, tax, physical defects in the property and improvements (and seller fraud relating to the same), zoning, land use and other regulatory hurdles, and seller fraud in financial misrepresentations, just to name a few.

Additional risks inherent in new construction and building renovation

However, taking raw land or a developed lot (the difference being built roadways, utilities, addressing zoning and full subdivision) and building a new structure, or renovating an existing structure, are fraught with a host of added risks: Proper planning and design, zoning and land use restrictions, utility access, building code permitting and inspections, selecting an honest and qualified contractor who has a corral of qualified subcontractors, materialmen and laborers. The list of added complexities associated with adding improvements to real estate is almost endless. Properly executing a construction project from beginning to end is difficult. That difficulty today is enhanced by the lack of availability of skilled labor and subcontractors, increasing pricing and drawing into the field entirely unqualified, untrained and unsupervised laborers.

The special risks associated with mechanics lien

One of the biggest legal challenges is protecting property owners and lenders against mechanics liens from contractors, subcontractors, materialmen and laborers on the project.

What is a mechanics lien?

Mechanics liens (not at all for what we think of as “mechanics” in normal parlance) are purely creatures of statute, meaning they don’t exist as a matter of contract nor are they common law rights. Rather, R.C. §1311.011 (one- and two-family residential dwellings) (addressed partially in this blog entry) and R.C §1311.02 (commercial properties) provide statutory lien rights to unpaid contractors, subcontractors, laborers and materialmen. All of these rights are strictly limited in time, amount and circumstances allowed by statute.

These statutes provide a tremendously powerful tool for these parties to assure payment from the property owner, secured firmly by the equity in the property, so long as their claim is narrowly allowed under the statute, and those rights will not extend beyond the statute. (The effective date of priority of liens as against mortgages and other lien holders is yet another a matter not addressed in this entry.)

These lien rights can transcend the contractual obligations of the property owner, meaning an owner can in fact owe money to someone with whom he has no contract at all (the owner may never have known their name or that they did work on his job, or supplied materials to his job). An owner can, under some circumstances, owe money to a subcontractor, materialman or laborer even though he already has paid everything he owes to the general contractor (this principle applies to commercial projects only). These can be jarring revelations to an unsuspecting property owner who has not taken the simple steps in this blog entry to protect himself from mechanics liens. In other words, unaddressed, this is dangerous territory for a property owner making improvements to his property.

Three simple steps an owner can employ to protect himself from mechanics liens

Again, the Ohio mechanic’s lien statutes are tremendously involved, and this blog entry is not attempting to explore the many intricacies in that statute. That’s for another day. Rather, this article offers a few simple steps that a property owner undertaking a construction project can employ to avoid the potential of financially and legally catastrophic consequences from liens sinking a project or ruining the finances of a property owner.

Pay no more to the contractor than the true value of work actually completed as of the draw, and perhaps less. In some ways, this step is self-explanatory. As a construction project progresses, the owner should take great care to pay the contractor only for the value to the owner and the project of the work finished at the time of payment. In a reverse analysis, the owner should always have enough money left in his construction budget to finish the job if the contractor walks away after the most recent payment. Now, estimating these two amounts (the value of work completed and remaining cost to complete) is tricky, and the owner should realize that the contractor — knowing the construction costs and business better than him — is in a superior position to estimate this, but relying on the contractor’s “word” is equally risky. So, this step requires the owner to have a good understanding of the real cost of each stage of the work. It also requires assuring the work completed at each stage is code compliant, contract compliant, and of good quality and workmanship. Beyond this step, many owners will require “retainage” of an addition 10-20% from the “actual value of the improvements to date” to assure there is always enough left in the construction budget to complete the project. This retainage is then paid at the end of the project (usually upon issuance of a certificate of occupancy, “substantial completion” as certified by the architect or some other objective metric).
Affidavits of full payment. As each installment (or “draw”) of the construction budget is paid to the general contractor, the general contractor should provide an affidavit — a sworn statement, the falsity of which is a felony and the basis for a civil fraud claim– of what he is owed, and critically, the names of each subcontractor, materialman, and laborer, and the amounts owed at that stage to each. In good practice, that “master affidavit” is then also accompanied by further affidavits from each subcontractor, materialman and laborer as to the amounts they are owed at that point in the project.
Joint checks. Then, the owner should cut joint checks to (a) the contractor and (b) each subcontractor, materialman and laborer, to assure that the amounts they themselves swear are due and owing are in fact paid in full. These joint checks should track the sworn statements in the various affidavits.

If a property owner on a project follows these three simple steps, the risk of a mechanics lien is limited to (a) those subcontractors, materialmen and laborers not listed on the affidavits (falsely) and (b) only those claims for additional work arising from the most recent payment.

Beyond these three simple steps, a one-to-two family residential property owner is also protected from liens of subcontractors, materialmen, and laborers to the extent that he has paid the general contractor in full, or is limited only to the amounts owed under the master contract to the general contractor. That statutory principle is more fully explored here.

Lien waivers. A drastic fourth protection that can be employed by a property owner is to allow no contractor, subcontractor, materialman or laborer to step foot on the job or to supply materials to the job unless they have signed in advance a lien waiver, saying (a) in the case of the contractor, they will look only to the contract (and the courts in a typical collection action) to assure payment and (b) in the case of subcontractors, materialman and laborers, saying they will look only to the general contractor for payment, not to the owner and not to a lien against the property. These lien waivers, heavy-handed and unusual as they may be, are legally effective.

So, there is much much more, legally and business-wise to being successful in the execution of a of residential or commercial construction project, and so much more of a winding path in the Ohio mechanics lien statutes, but these three (or four) simple steps can change the dynamics of a construction project strongly in favor of the property owner.

For assistance with mechanics lien issues or other legal challenges relating to new construction, feel free to contact me at 513.943.6655.

Real Estate Legal Pro Tip: Before signing contract, carefully consider tax proration language when contract price exceeds Auditor’s valuation

By Christopher P. FinneyNovember 26, 2021December 7, 2021 Leave a comment

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 Auditor’s 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 (very roughly about 3.0% of the valuation increase), 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.

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 Jennings D. Kleeman (513.943.6650) of our real estate group.

Real Estate Legal Pro Tip: Obtain and record “residual” legal descriptions after a partial conveyance or taking

By Christopher P. FinneyNovember 23, 2021November 23, 2021 Leave a comment

The real estate legal “pro tip” of the day is carefully assuring your property legal descriptions are updated after each partial conveyance so that the description of the “residue” is property on record with the county offices dealing with real estate matters.

When commercial and residential property owners acquire property, the deed into the buyer or grantee must have a legal description attached that is acceptable in form to the County Engineer, Auditor and Recorder in Ohio. If it is an existing property description (i.e., no change from when the seller took title to the property), there will be a legal description, and an already-created Auditor’s parcel associated with that land. It is thus not an issue that would impair the new closing. For new cut-ups and subdivisions, the developer/seller usually undertakes that process with the County Engineer, Auditor and Recorder before it is time for closing. At least it should.

As we approach a closing, commercial or residential, however, where we occasionally run into problems with getting a deed recorded because of a “new” legal descriptions is a situation in which an owner has conveyed away a part of the property that was originally deeded to him during the seller’s ownership of the property. Because of an eminent domain taking, a property line dispute with a neighbor, a conveyance of a sliver to an adjoining property owner, or a combination with an adjoining parcel, the legal description by which the owner took title is no longer current or accurate, and thus needs to be updated with the County Engineer, Auditor and Recorder.

This “updating” starts with two things: (1) A plat of new survey of the property showing the new boundaries, along with a “closure chart” that shows that the ending point of the legal description meets up with the starting point, and (2) a new legal description of the parcel to be conveyed. Then, it must be processed through the County offices to update the records of each. Finally, the deed should be ready for recording. But until these things are completed a deed is not recordable. Thus, it is hard to close a transaction unless and until the legal descriptions are thusly updated inasmuch as monetary liens and and other interests can slip in during this “gap.”

It is best to take these preliminary steps at the time of the act “cutting up” your parcel (i.e., concurrent with the eminent domain taking, the property line dispute with a neighbor, the conveyance of a sliver to an adjoining property owner, or the combination with an adjoining parcel), rather than waiting for a closing on a sale that might be years later, so that the time needed for a new survey and legal description, and processing with the Engineering, Auditor and Recorder do not delay your closing. Also, it is a smart practice to see if the buyer of the parcel (at the time of the original cutup) will pay the cost and handle the paperwork associated with getting the new plat and legal processed by the County.

Contact Isaac Heintz (513.946.6654), Eli N. Krafte-Jacobs (513.797.2853) or Jennings D. Kleeman (513.797.2858) for help with your real estate legal needs.

Anticipatory Repudiation: What is it and what does it mean for your real estate contract?

By Casey A. JonesNovember 17, 2021 Leave a comment

While the real estate market seems to have slowed slightly, our title company, Ivy Pointe Title, continues to close a record-breaking number of transactions. Perhaps due to challenges that buyers are facing in making competitive offers and having those offers accepted, our firm has also noticed an uptick in the number of (actual or attempted) contract terminations prior to closing – this phenomenon, when unjustified under the terms of the contract, is often referred to as an “anticipatory repudiation.”

An anticipatory repudiation is “‘a repudiation of the promisor’s contractual duty before the time fixed for performance has arrived.’” Sunesis Trucking Co. v. Thistledown Racetrack, L.L.C., 2014-Ohio-3333, ¶ 29 (8th Dist. 2014), quoting McDonald v. Bedford Datsun, 59 Ohio App.3d 38, 40, 570 N.E.2d 299 (8th Dist.1989). For example, if you have a contract to sell your property to a buyer, and the buyer backs out three days before the closing for any reason not justified under the terms of the contract – or for no reason at all – an anticipatory repudiation of the contract has likely occurred. It is akin to a breach of the contract; however, because it occurs before “the time fixed for performance” (i.e., the closing), it is considered “anticipatory.”

Remedies

“If an anticipatory breach of contract is found to occur, the injured party has the option of (1) terminating the contract and suing the breaching party immediately, or (2) continuing the contract and suing the breaching party for damages after the time for performance has passed.” Sunesis, at ¶ 33, citing 18 Ohio Jurisprudence 3d Contracts, Section 238 (2011). It is worth noting that the “repudiation” must be unequivocal. If you are unsure whether a party’s statement amounts to a repudiation or whether they intend to still fulfill their obligations under the contract, you should seek “adequate assurances” as to whether they intend to comply.

An anticipatory repudiation may stem from a buyer submitting offers on multiple listings to increase the odds of one of their offers being accepted (certainly plausible in this market) or a seller receiving a higher back-up offer and having remorse over having accepted a previous, lower offer. In either event, the non-repudiating party has a right to enforce the contract or sue for their damages. For instance, in the above hypothetical, the seller could re-list the property and, if the property sells for lower than the contract price with the original buyer, sue for the difference.

Affidavit of Title

An additional mechanism that is often helpful for a buyer (where the seller repudiates) is an affidavit of title. Pursuant to Ohio R.C. 5301.252, a person having an interest in real estate by virtue of a contract may assert his or her interests via an affidavit recorded in the real property records. This effectively encumbers the real estate such that most title companies will not close a transaction on the property while the affidavit is pending. In other words, it prevents the seller from being able to sell the property to someone else where you have a valid and enforceable contract to purchase that same property – it forces them to “deal with” you and your contractual interest in the property. Importantly, the affidavit of title has various technical requirements and, if containing any untrue statements, could serve as the basis for a slander of title claim. Therefore, it is important to consult with an experienced attorney before utilizing this mechanism to make sure that it is properly prepared and recorded.

If you would like to know more about your rights relative to a real estate contract, please don’t hesitate to contact us. We would be happy to meet with you and explore your options.

Making a difference: Cincinnati alarms tax ruled unconstitutional

By Christopher P. FinneyNovember 15, 2021November 15, 2021 Leave a comment

Today, the First District Court of Appeals for Ohio unanimously (on all counts) ruled in favor of Plaintiffs Andrew White and Vena Jones-Cox that the City of Cincinnati’s charges to property owners with alarm systems are an unconstitutional tax. That decision is linked here. They remanded the matter back to Common Pleas Judge Leslie Ghiz for determination of class certification, refund of illegally-collected fees, and other matters. Judge Ghiz originally had ruled that fee was a constitutional assessment imposed by the City.

Attorneys for the Plaintiffs are Maurice Thompson of the 1851 Center for Constitutional Law and Christopher P. Finney of the Finney Law Firm.

You may contact Christopher P. Finney (513.943.6655) for more information.

Chris Finney and Curt Hartman teach “Using Public Records to Overcome Government Bureaucracy” to Cincinnati Lawyer’s Club

By Christopher P. FinneyNovember 5, 2021 Leave a comment

On Thursday, November 18, 2021, attorneys Chris Finney and Curt Hartman will teach “Using Public Records to Overcome Government Bureaucracy” to Cincinnati Lawyer’s Club. Registration is at 11:30, lunch is at noon, and the 2-hour program starts at 1:15 PM. No reservations are required. CLE and lunch costs $25 for members and $30 for non-members. For more information, call Robert W. Cettel, President 513-325-2279 (cell).

Curt Hartman, in particular, is a leading attorney in Ohio on Sunshine Law, which encompasses Ohio’s Open Meetings statute and Ohio’s Public Records statute. Ohio has some of the strongest Sunshine Laws in the nation, and Finney Law Firm has pursued dozens of cases, including ones all the way to the Ohio Supreme Court, expanding the boundaries of public access to official business. The most famous of such cases was the “Gang of Five” case addressing corruption on Cincinnati City Council that significantly developed and expanded both the Open Meetings and Public Records statutes, but there have been dozens more.

Finney and Hartman will address the statutory and case law rights of the public to official business and regale the audience with important public interest victories (and losses) under those statutes.

For assistance with Ohio public records and open meeting statute matters, contact Chris Finney (513.943.6655) or Curt Hartman (513.379-2923).

Important Changes in Ohio Limited Liability Company Law

By Jennings D. KleemanOctober 21, 2021October 21, 2021 Leave a comment

10,000 Foot View of What You Need to Know

On February 11, 2022, Ohio’s law governing limited liability companies will change from its current form under Ohio Revised Code Chapter (“ORC”) 1705 (the “Old Law”) to its new form under ORC Chapter 1706 (the “New Law”). This means some significant changes for Ohio limited liability companies, which also apply to those organized under the Old Law. To make these changes less painful and reduce confusion, the New Law will use many of the same terms used in the Old Law. This blog is meant to provide an overview of some, but certainly not all, of those changes.

Changes Relevant to Operating Agreements

An operating agreement is a document governing the relations among the members of a limited liability company and the limited liability company. Many of the provisions of the New Law are default provisions, which a limited liability company can alter through its operating agreement. Due to the default nature of the provisions of the New Law, operating agreements existing under the Old Law should not be affected by the New Law.

Provisions That May Not Be Altered

Similar to the Old Law, a limited liability company may not alter certain provisions. For example, a limited liability company may not (i) eliminate the implied covenant of good faith and fair dealing, as discussed below; (ii) enforce promises to make capital contributions, which are not in writing; or (iii) create a situation where a limited liability company is not a separate legal entity. This is not an exhaustive list.

Limitation, Expansion, and Elimination of Fiduciary Duties

A limited liability company may alter certain duties and liabilities through an operating agreement. An example under the New Law is that a limited liability company may limit, expand, or eliminate fiduciary duties (defined by Black’s Law Dictionary as “a duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person”) owed by members, managers, and others. However, this ability for a limited liability company to alter fiduciary duties is not absolute, as a limited liability company may not use an operating agreement to do away with what is referred to as the implied covenant of good faith and fair dealing. The Old Law did not allow for the elimination of fiduciary duties but did allow for the limitation, expansion, and elimination of the duties of loyalty and care.

Penalties For Failure to Comply with an Operating Agreement

Under the New Law, a limited liability company may, also through its operating agreement, impose any penalty or consequence upon a member for failing to comply with its operating agreement. A couple of specific examples enumerated in the New Law include (i) forcing the sale of a member’s membership interest in a limited liability company and (ii) reducing a member’s proportionate interest in a limited liability company. The Old Law did not allow for such penalties.

Third Parties’ Ability to Approve Amendments

Another wrinkle from the New Law dealing with operating agreements is that a limited liability company may vest the authority to approve amendments to its operating agreement in third parties (parties not involved in the limited liability company). The Old Law did not allow for this.

Separate Asset Series

One of the more critical changes in the New Law, which was not allowed under the Old Law, is the allowance for separate asset series in limited liability companies. Through its operating agreement, a limited liability company may establish separate series with separate (i) rights, powers, or duties regarding specified property or obligations of the limited liability company or its profits and losses; or (ii) purposes or investment objectives. Either of the foregoing is possible if each series has at least one member associated with it.

Where there is a separate asset series, the debts, liabilities, obligations, and expenses for that series are only applicable to that series, not any other series or the limited liability company in general, and vice versa.

To benefit from this treatment, a limited liability company must (i) maintain the assets of each series separately from any other series, and the limited liability company in general; and (ii) provide a statement in its operating agreement and its articles of organization (document filed with the Ohio Secretary of State to establish the limited liability company) similar to what is outlined in the preceding paragraph.

Membership Without Membership Interest or Contribution

Under the New Law, a party may become a member of a limited liability company without acquiring a membership interest or contributing to a limited liability company.

The Old Law required that a party be admitted (i) at the time a limited liability company was formed, (ii) by acquiring an interest directly from a limited liability company, or (iii) by acquiring an interest from a member of a limited liability company.

Statement of Authority

The New Law allows a limited liability company to file a statement of authority with the Ohio Secretary of State to state the authority of a specific party in a certain position to conduct business on behalf of a limited liability company. As such, where there is a statement of authority, it is no longer necessary to look to an operating agreement to determine who can conduct business on behalf of a limited liability company. Having a statement of authority will also limit the ability of third parties to enforce members’ and managers’ unauthorized decisions.

The Old Law did not provide for statements of authority but generally required parties transacting with a limited liability company to look to its operating agreement to determine who could conduct business on its behalf.

End of the Member-Managed and Manager-Managed Distinction

The New Law implicitly does away with the distinction between member-managed and manager-managed limited liability companies. A limited liability company no longer needs to make this distinction in its operating agreement, which was necessary under the Old Law.

Under the New Law, a manager is any party authorized to manage the activities of a limited liability company. Such a party does not need to be defined as a manager but can be called a director, officer, or anything else. This may allow for more flexible management structures, which the Old Law did not contemplate.

Mechanism for Barring Certain Claims after Dissolution

Known Creditors

Under the New Law, when dealing with known creditors, a dissolved limited liability company may give notice of its dissolution to known creditors, setting a deadline for them to bring their claims. Such a deadline may not be less than 90 days from the date of the notice. If the known creditors fail to bring their claims within that period, then their claims are effectively barred, protecting the dissolved limited liability company from those claims.

Unknown Creditors

Under the New Law, when dealing with unknown creditors, a dissolved limited liability company may now (i) publish a notice of its dissolution on its then maintained website, if any, and (ii) provide a copy of such notice to the Ohio Secretary of State for it to publish on its own website. If the dissolved limited liability company does so and requests that unknown creditors present their claims in accordance with the notice within two years from the date of publication (or if the statute of limitations runs during the two years), then those claims are effectively barred, protecting the dissolved limited liability company from those claims.

Under the Old Law, the dissolution of a limited liability company did not prevent the commencement of a proceeding against it.

Conclusion

The foregoing changes are only some of those seen under the New Law. If you need help navigating the New Law, it would be prudent to reach out to the Finney Law Firm. We can provide further guidance and a more in-depth explanation of the foregoing changes. Contact Jennings Kleeman (513.797.2858) for assistance with your LLC or corporate affairs.

Is co-ownership of real estate a good idea? At least, get it in writing.

By Christopher P. FinneyOctober 11, 2021 Leave a comment

Today’s Wall Street Journal has an article about creative home buying by friends. Is this a good idea?

Well, economically, it could make sense. A single person may not need a 4-bedroom home, but could easily share the cost of loan principal and interest, taxes, insurance, utilities and maintenance costs with another friend with the same housing needs. But what happens when one friend loses their job? Has a drug or alcohol problem? Has a bad boyfriend (or girlfriend)? Likes to party too much? Gets a job out of town? Gets married? Has a different standard for maintenance and improvements to the home? No longer can afford “their share” of the expenses?

Let us assure you that without documenting the agreement carefully laying out expectations and contingencies of the parties going forward, co-ownership (known as co-tenancy in Ohio law, as counterintuitive as that may sound) could turn out to be expensive and legally problematic.

The bottom line is that co-owners, whether buying as an investment or to live in the property, should have a clear understanding in advance and in writing as to (a) the standard of maintenance and who decides, (b) the division of monthly expenses, and (c) an exit strategy on death, disability, or one co-owner just wanting “out.”

Finney Law Firm has drafted many LLC operating agreements, corporate buy-sell agreements, and co-tenancy agreements. Contact Eli Krafte-Jacobs (513.797.2853) or Jennings Kleeman (513.943.6650) for help with such an agreement.

Ohio’s statute of conveyances: Its application to real estate leases and its exceptions

By Jennings D. KleemanOctober 10, 2021 Leave a comment

For most contracts, an agreement is an agreement: If the parties agreed, orally, on paper, or even just electronically, in an email, text message, or through social media, generally, the agreement can be legally binding.

However, agreements relating to the purchase, sale and leasing of real estate can have special requirements for their enforceability. Here, we explore the Ohio Statute of Frauds (O.R.C § 1335.05), which requires certain agreements (i) be in writing and (ii) signed by “the party to be charged therewith,” i.e., the buyer, seller, landlord or tenant. And for real estate instruments, the Ohio Statute of Frauds has those requirements for contracts for the purchase and sale of real estate and for leases (residential or commercial) extending beyond one year. Many people are familiar with the requirement of the Ohio Statute of Frauds as it relates to real estate.

Less familiar to laymen and even real estate professionals is Ohio’s Statute of Conveyances, which requires deeds, mortgages, land installment contracts and leases with a term in excess of three years to be “acknowledged” before a notary public (i.e., “notarized”). This derives from O.R.C. § 5301.01, which requires these instruments to be notarized and O.R.C. § 5301.08, which then excepts from that requirement leases for less than three years.

But what does the Statute of Conveyances mean? Is it that, if you have a signed lease, residential or commercial, that is not notarized, and (i) a tenant has moved in, (ii) a landlord or tenant has made expensive improvements to a premises, or (iii) a tenant has made a long-term commitment to having its operations at a specific location, the other party can simply terminate the lease due to it not being notarized? Despite this seeming like a harsh outcome, the answer is yes, to a degree.

To bypass such harsh outcome, the Courts have carved out equitable exceptions to the Statute of Conveyances. This blog entry explores the enforceability of non-notarized leases in excess of three years in Ohio under the Statute of Conveyances on the one hand and those common law exceptions on the other.

Enforceability of non-notarized leases in excess of three years in Ohio

Where parties execute a lease without notarizing it, the lease is considered defectively executed. A defectively executed lease is invalid and does not create the exact lease sought to be created. That said, the terms of the defectively executed lease are controlling once the tenant moves in and starts paying rent under said lease, except for duration. The duration is determined by the provision for the payment of rent. For example, a lease with monthly rent payments results in a month-to-month lease, while a lease with annual rent payments results in a year-to-year lease.

Where parties do sign and notarize a lease as required by the Statute of Conveyances, and such lease contains an option to renew, the act of accepting an option to renew does not require a second formal execution. However, where there is not an option to renew, a grant of an additional term is an independent and separate transaction requiring its own compliance with the Statute of Conveyances.

Common law exceptions

The applicable law in a defectively executed lease case depends on the type of the relief pursued. If the party suing seeks to recover damages for breach of the lease, then the applicable route is that of the equitable doctrine of Partial Performance. If the party suing seeks to have the defective lease treated as a contract to make a lease, then the applicable route is that of the equitable doctrine of Specific Performance.

(A) Partial Performance:

A defectively executed lease can be validated through Partial Performance. Partial Performance is based in fairness and is utilized where it would be unfair to permit the Statute of Conveyances to invalidate the defectively executed lease. Partial Performance validates a defectively executed lease where the following four factors are present: (i) unequivocal acts by the party relying on the agreement; (ii) the acts are exclusively referable to the agreement; (iii) the acts change the party’s position to his detriment; and (iv) the acts make it impossible to place the parties in “statu quo”. The party wishing to benefit from Partial Performance must show that the facts of their particular matter meeting the aforementioned four factors are, more likely than not, true.

Generally, the facts of the cases, where the courts allow Partial Performance to validate defectively executed leases from the Statute of Conveyances, include: (i) expending sums of money, (ii) extending credit, (iii) making improvements, and (iv) following what the parties called for in the defectively executed lease. That said, it is important to note that moving in and paying rent is not sufficient to relieve the parties from the Statue of Conveyances.

(B) Specific Performance

Courts may allow for Specific Performance of defectively executed leases where no adequate remedies at law exist. Whether courts will allow for Specific Performance of defectively executed leases is within each respective court’s discretion. As such, Specific Performance is not guaranteed.

Where parties seek to enforce defectively executed leases through, and courts allow for, Specific Performance, the Statute of Conveyances does not impede such enforcing parties’ right to recovery. This is because defectively executed leases are enforceable, as a matter of fairness, as contracts to make a lease between the parties who intended to be bound by them. Courts may order Specific Performance of such contracts.

Conclusion

So, if you are a party to a defectively executed lease, and you are concerned with its enforceability, it is prudent to take some time to call the Finney Law Firm. We can help determine whether your lease is compliant with the Statute of Conveyances, and what you might be able to do if it is not.

New CABR/DABR form residential purchase contract launched October 1

By Christopher P. FinneyOctober 10, 2021 Leave a comment

On October 1, the Cincinnati Area Board of Realtors and Dayton Area Board of Realtors issued a major update to the form residential purchase contract in use by most Realtors in the two marketplaces. This blog entry explores the major changes to the Contract.

Most Realtors in both the Cincinnati and Dayton marketplaces use form contracts prepared by their Board of Realtors. Because of the cross-over of the two marketplaces (West Chester, Springboro, etc.), several years ago, the two Boards started issuing a joint contract form. Both Boards have undertaken extensive training of their members for this most-recent significant set of changes.

The changes include:

The most significant change is a complete re-write of the inspection contingency. In the sizzling residential market of 2020 and 2021, desperate buyers trying to secure a contract on a home — after losing out in multiple multiple-offer situations — would buy a home quickly, maybe rashly, sight-unseen with an inspection contingency. During the previously open-ended contingency period, they would for the first time “decide” if they wanted to buy the home. If they terminated (which came with increasing frequency), the seller lost a crucial 10-20 days at the beginning of the marketing period and ended up with a home back on the market with the stigma of a failed sale. This was frustrating for Realtor and seller. The changes include:
- Requiring that the inspector be licensed in Ohio (or specialists in more narrow fields).
- Allowing access for inspection.
- “Minor, routine maintenance and cosmetic items” cannot be the basis for termination.
- Importantly, if the seller fails to timely respond to buyer’s request for repairs, he is deemed to have agreed to make those repairs.
- In the event of certain undisclosed significant defects, the buyer has the right to skip the repair offer/counteroffer process, and simply terminate the contract. These bases are:
  - Structural
  - The presence of asbestos
  - The presence of lead-based paint
  - The presence of hazardous materials
A converse problem has also emerged due to the unusually active marketplace, which is that a seller would (in my word) scheme to cause a buyer to default under the contract, such as not allowing access for inspections. The requirement for seller cooperation is made explicit.
All timelines in the contract form are “time is of the essence,” except the closing date, which allows for an extension of up to seven days if both parties are “proceeding in good faith performance.”
The buyer is in default if earnest money has not been paid within three days.
Clarification is made as to the authority of the seller to sign in a fiduciary and corporate capacity.
Clarifies that the title agent or closing attorney is representing neither buyer nor seller.
The contract better explains Ohio’s confusing timing of real estate tax payments and prorations, and continues the option to elect the Dayton short proration or Cincinnati’s full proration at closing.
Clarifies that seller is responsible for Home Owner’s Association transfer fees, along with the cost of obtaining HOA documentation.

For help with a residential contract issue, contact Eli Krafte-Jacobs (513.797.2853) or Jennings Kleeman (513.943.6650).

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