Cincinnati Realtor Paul Sian of HER Realtors has an excellent blog on real estate topics here. This month, he put out a podcast with Cincinnati insurance agent Ray Rivera of Allstate Insurance here on property and casualty insurance.
Thanks to Paul for providing this informative audio production on insurance issues.
This article is the eighth in a series on new construction. The contents of this series of articles apply to commercial as well as residential projects.
This blog entry addresses documenting change orders in new construction projects, commercial and residential. But before we get there, let’s re-visit the fundamentals of new construction contracting.
As is set forth in this prior blog entry:
the starting point is a clear starting point. At the time of the signing of the contract, it is important to know what the builder has committed to build — and what he has not committed to — and what the buyer has agreed to pay for that product. Once we have that foundation, we can address the construction changes and price changes from that point.
As a bad foundation of a house will undermine the entire project, a poor starting point for a new construction contract is not a good foundation for the construction process.
Then, once the initial scope, price and timing are clear, as change orders become necessary or appropriate, every single time a change order is agreed upon in a construction project, that change order should be crisply documented. That documentation should be a written change order signed by both parties to the contract, which includes, in each instance, all of the following:
1) The change to the scope of the project. The parties should detail what is being eliminated from the construction and what is being added.
2) The change in the price as a result of the change order.
3) The change in the construction schedule as a result of the change order.
Even if one or more of the foregoing are not changing at all, that should be detailed and documented as well.
I tell clients that the point of a contract is twofold: (i) to flesh out the issues between the parties and eliminate confusion as to what is being agreed upon and (ii) to create a document of the commitment of each party to the other that, yes, can be enforced in a court of law.
What happens when one or more of these issues are left unaddressed is that both issues are at play: (i) the parties may have a misunderstanding of the impact of the change order on timing or price, and (ii) it creates a murky situation when it comes time to enforce that contract.
When a seller acts in the role of financing the sale of real property, residential or commercial, there are significant potential downsides for the seller.
In this article, we explore the three primary vehicles for seller financing in the sale of real property: (i) lease with option or obligation to purchase, (ii) land installment contract, and (iii) deed with note and mortgage back from the buyer. In each of these three vehicles, the seller risks non-payment by the buyer. That blog entry then explores the legal paths to recovering clear title and possession of the property, and collecting on the indebtedness.
But beyond the simple action to collect on the debt, seller financing situations frequently involve further complications for the seller:
1) First, with the seller’s security for payment of the debt being recovering possession of and title to the property, the “security” of the seller is getting the property “back.” But the buyer could in the interim, significantly impair the condition of the property. Commercial buyers could environmentally contaminate the property or make modifications that impair the structure. Residential buyers may make “improvements” to the property that impair its marketability.
2) Second, we have experienced all too-frequently that the buyer tends to assert claims against the seller as a defense to the payment of the seller financing. These claims range from fraud in failure to disclose claimed defects in the real property to misrepresentation as to the rent roll and the P&L statement provided before the closing.
3) Seller can encounter significant legal complications due to unpaid contractors for work on the property (giving rise to mechanics lien claims), unpaid taxes, and unpaid utility bills.
And taking a second mortgage position for a portion of the purchase price (where a deed is exchanged for a portion of the purchase price) can be even more precarious. A second mortgage holds all of the risks set forth above, and in addition, second mortgagees are, obviously, subordinate, to a first mortgage. To the extent that the value of the property to a foreclosure sale is inadequate to pay the first mortgage, the second mortgage is valueless.
Thus, seller should carefully weigh the risks associated with seller financing of real property.
In a case that has received some Internet attention, the Village of West Jefferson, Ohio, learned that commas still matter. You can read the Court of Appeals decision here.
Andrea Cammelleri woke up on Thursday evening, February 13, 2014 (she worked third shift) to find that her pickup truck – that had been parked in front of her home – was missing. She called 911 to report the vehicle stolen, only to be informed that the car wasn’t stolen, it was impounded. It seems that the Ms. Cammelleri had parked her truck in the same spot for more than 24 hours, in violation of a Village Ordinance:
It shall be unlawful for any person, firm or corporation to park or leave standing upon any street, road, thoroughfare or highway in the Village, any motor vehicle camper, trailer, farm implement and/or non-motorized vehicle for a continued period of twenty-four hours except on weekends and holidays, at which the time shall be seventy-two hours.
Ms. Cammelleri and her attorney argued that the ordinance is ambiguous, she parked a pickup truck and the ordinance refers only to “any motor vehicle camper, trailer, farm implement and/or non-motorized vehicle” The trial court, in convicting Ms. Cammelleri, found that it is obvious that a comma is missing between “motor vehicle” and “camper” and everyone understands that the ordinance is intended to apply to “motor vehicles” or “campers,” and that therefore, it is illegal in the Village of West Jefferson to park a pickup truck in the same spot for more than 24 hours.
Ms. Cammelleri, however, refused to accept that the grammar lessons we had all been taught as children no longer mattered. She took her case to the Court of Appeals.
The Twelfth District Court of Appeals determined that (a) because of the missing comma, the statute is ambiguous; and (b) applying the normal rules of statutory interpretation, the statute, as written, does not apply to Ms. Cammelleri’s pickup truck. Her conviction was thus overturned.
While not directly on point, we are hopeful that this case will lead to a resurgence of the Oxford Comma.
There is a creative children’s song called “The song that doesn’t end,” and through its circular lyrics, according to the song, “it just goes on and on my friend.” Listen here.
For some unfortunate sellers of real estate (usually commercial real estate), there are contracts that don’t end, either. They just go on and on, tying up the seller from selling the property to a third party.
There are some unscrupulous buyers who use a form of commercial real estate purchase contract — on retail space, raw land, offices, apartment buildings, warehouses, and various and other sundry commercial properties — that puts the seller in a terrible box. This form of contract, through some creative and circular language — referencing, for example, 180 days from a date that never occurs– never requires buyer to close, but it also never puts an end to his due diligence period, so neither does he have to terminate.
Thus, forever and ever, under this form of contract, the buyer can sit and wait — preventing seller from selling the property to another party. This allows the buyer to both (i) without cost, to wait until the property becomes “hot” and then someday sell it at a profit to a third party or (ii) to extort a payment from the seller to just dry up and blow away.
Now, because the buyer never has to perform and never has to terminate, it is likely the contract could be defeated in litigation as unenforceable for lack of consideration. The problem is that the buyer can tie the matter up in Courts for a year or two even after the seller commits to litigate, at great cost, of course, to the seller.
The net result is the same — the seller can neither shake the buyer nor force him to close.
Thus, seller beware of the contract that doesn’t end. Read every contract thoroughly before signing.
As a litigator, one of my jobs is to ensure that my clients understand the risks and benefits of pursuing or defending a lawsuit. As the saying goes, knowledge is power. Only when my clients understand the economic realities of their case are they empowered to make the right decision for them.
Frequently, a client will assume that if we prevail in the litigation, the opposing party will have to reimburse my client for his or her attorney fees. But, the reality is that attorney fees are awarded only in special circumstances, and even when those circumstances are present, it is far from guaranteed that a court will award attorney fees to the prevailing party.
Ohio follows the “American rule” for the recovery of attorney fees under which a prevailing party in a civil action generally cannot recover attorney fees as part of the costs of litigation. Attorney fees may be awarded to the prevailing party, however, when: (1) a federal or state statute explicitly provides for an award of attorney fees; (2) the prevailing party demonstrates bad faith or malicious conduct on the part of the unsuccessful litigant; or (3) where the dispute involves an enforceable contract that contains an attorney fee provision.
The Fourth District Court of Appeals recently issued a decision discussing whether a prevailing party in a contract dispute may recover its attorney fees as damages from the opposing party. In 2-J Supply, Inc. v. Garret & Parker, LLC, the plaintiff was granted default judgment on its claim for goods sold to the defendant under the terms of a credit account application. The defendants had also personally guaranteed their debts. Both the credit account application and the personal guarantees contained a provision that required the defendants to pay the plaintiff’s attorney fees and litigation costs if the defendants defaulted on their obligations under the contracts. Nevertheless, the trial court determined that the plaintiff was not entitled to an award of its attorney fees because no statute authorized the recovery of those fees.
The plaintiff appealed the trial court’s decision denying its request for attorney fees. On appeal, the Fourth District held that the trial court erred in refusing to award attorney fees. In its decision, the appellate court emphasized that parties have a fundamental right to contract, and as a result, agreements to pay another’s attorney fees are normally enforceable and not void as against public policy. The court explained that where the attorney fee provision is unambiguous, is not the product of compulsion or duress, and did not result from the parties having unequal bargaining power, the provision should be enforced by the courts.
Judge Hoover authored a vigorous dissent, however, stating that the Ohio Supreme Court has previously held that contracts for the payment of attorney fees upon default of a debt obligation are void and unenforceable. Judge Hoover reasoned that the Credit Account Application at issue operated as a penalty to the defaulting party and only benefitted the plaintiff/creditor who provided the form agreement. The dissent further opined that contractual attorney fee provisions should only be enforced where the evidence suggests that the provision was freely negotiated by parties with equal bargaining power.
Despite the clear contractual provision at issue in this case, the dissenting opinion highlights that almost nothing is guaranteed when it comes to seeking a recovery of a litigant’s attorney fees. When contracts provide attorney fees for only one party – as opposed to a provision allowing the successful party to recover its fees – they are less likely to be enforced.
It is important that litigants understand the costs of prosecuting or defending a lawsuit. It is my goal to hold these candid conversations with my clients early and often so we can develop the best strategy going forward for each client on each case. What makes sense for one, may not make sense for another. The potential recovery of attorney fees may help shape these decisions, but clients must understand that courts generally disfavor awarding such fees unless special circumstances exist.
This discussion also highlights the importance of contract drafting for our commercial clients. As a litigator, I typically get involved only after a dispute arises. All too often I find myself in the position of having to inform my clients that if a particular contract term had simply been incorporated into a contract, or drafted more appropriately, they would have allowed themselves a remedy far superior to what is presently available.
Our transactional team is well aware of this conundrum, and strives to ensure that our commercial clients are well-protected in their contractual documents to avoid these potential pitfalls before they arise. A well-drafted contractual provision can be the difference between expensive litigation, and a quick, decisive resolution.
The Finney Law Firm is positioned to serve your litigation and transactional needs. On the front end, we work to provide our commercial clients with contractual documents that will best position them should a dispute later arise. With respect to litigation, we make it our goal to fully inform our clients of all aspects of their case – legal and economic – so that we can empower you to make the best decisions necessary to resolve your disputes.
My law school alma mater, Salmon P. Chase College of Law, is offering a Master of Legal Studies program folks who want to acquire targeted legal knowledge and skills in a year or so, but who don’t want to practice law or commit 3 or 4 years to law school. It’s an interesting and new option.
The idea is that professionals in business, real estate, media and publishing, criminal justice and other disciplines can take focused studies in the law aimed at helping them to better understand our legal and governmental systems.
The statute of frauds exists in some form in all 50 states as a part of the body of real estate law. It says, in essence, that all promises made for the purchase and sale of real property must be in writing to be enforceable.
Ohio’s version, for example, is in O.R.C. Section 1305.05:
No action shall be brought whereby to charge the defendant … upon a contract or sale of lands, tenements, or hereditaments, or interest in or concerning them, or upon an agreement that is not to be performed within one year from the making thereof; unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him or her lawfully authorized.
In Kentucky, it looks like this at K.R.S. Section 371.010:
No action shall be brought to charge any person:
(6) Upon any contract for the sale of real estate, or any lease thereof for longer than one year;
unless the promise, contract, agreement, representation, assurance, or ratification, or some memorandum or note thereof, be in writing and signed by the party to be charged therewith, or by his authorized agent.
Those are two mouthsful, but they in essence say that if you are going to go to Court to enforce a contract for the sale of real estate, or for a tenancy in excess of one year, the promise(s) you want to enforce simply must be in writing and signed by the other party.
In practice, this means at least several things:
1) First, it does not matter if you have it on video tape, audio recording, unsigned emails, or ten witnesses to an oral conversation. If you do not have the promise in writing, it simply — as far as the Court will be concerned — did not happen.
2) Second, it means that every single promise — not just the core promise to sell and buy — must be in writing and signed by the party against whom you want to enforce the contract. So, if a seller makes “side” promises to replace the HVAC system or to give the buyer a credit at the closing, or if the buyer is going to pay extra for early occupancy of the property, these additional promises — all of them — should be memorialized in a written agreement signed by both parties. So, even after a contract is signed, the later agreements — to extend closing dates, make property repairs, or make price concessions at the closing, should be put in writing and signed by the parties to the transaction.
3) Third, lease agreements, residential and commercial, that extend beyond 12 months should be reduced to writing as well, and signed by all parties. Again, all promises relative to that agreement should be included in that document.
There are historical reasons for this rule, some of them explored and explained here, but suffice it to say that it is the law and no amount of teeth gnashing and wailing after the fact is going to change that analysis .
Buyers, sellers, Realtors, tenants, and lenders should all internalize this concept and make a habit of memorializing the contract terms accurately, and completely, in writing and with signatures of the parties to the contract in order to see contractual obligations through to their conclusion.
When a commercial tenant occupies a building pursuant to a lease, he wants and expects to stay throughout the lease term. He invests in tenant improvements, and he is growing a business at that location. It would be expensive — indeed sometimes financially catastrophic — for his business to be forced to move.
So, he pays his rent and abides by all of the covenants in the Lease. He should be allowed to stay until the end of the lease term, right?
Well, no, not necessarily. If the landlord defaults in his mortgage payments, then the mortgagee — or a receiver appointed by him — may have the right to eject the tenant from the premises. Ouch!
This is so because a tenant’s rights under a lease are, in an illustration I utilize, like popping a balloon. The balloon represents the landlord’s rights in the property. If the balloon pops, the landlord’s rights are extinguished, then the tenant’s rights in and to the property — which are derived solely from the landlord — immediately and automatically go away as well.
Thus, in addition to getting a lease from the Landlord, there are three additional steps a commercial tenant must take if he wants to assure that he has the absolute right to continue to occupy the leased premises in the case that tenant rights would be superseded by a superior right:
1) The tenant should conduct a title examination to ascertain any mortgagees or other parties (such as the holder of a recorded purchase option) that would have rights superior to those of the tenant under the lease. Any recorded interest that precedes the execution of the lease may have priority over the lease.
2) The tenant should record his lease, or a memorandum memorializing the material terms thereof, signed by the landlord and tenant in the county recorder’s office. This protects him from interests in the real estate arising after the date of recording of his lease.
3) The tenant should obtain “a non-disturbance agreement” with the lender or other party with a superior priority position, stating that should the holder of the mortgage or other rights come into title of the property, the lender will respect the lease that is in place (or “not disturb” the tenant’s occupancy).
Finally, if the tenant wants to insure his right to remain in a premises for the term, he can also purchase a tenant’s title insurance policy, designed specifically for that purpose.
Investments in commercial real estate by a tenant (such as by tenant improvements) and investments in the business inside real estate (such as building the presence of a retail store, restaurant or bar) at a specific location carry significant risks for a tenant unless the tenant first takes the three steps outlined above. A third party may be able to strip away the tenant’s investment overnight.
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Read more Advanced Commercial Real Estate topics below:
Advanced commercial real estate: Can Ohio commercial landlords lock out a tenant in default? >>
Ohio law provides that parties have a fundamental right to contract freely. With limited exceptions, the terms of contracts entered into freely will be enforced – particularly contracts between sophisticated parties (e.g. corporations or other entities). This includes the right to collect attorneys fees.
In 2-J Supply, Inc. v. Garrett & Parker, L.L.C., 2015-Ohio-2757, Ohio’s Fourth District Court of Appeal reversed a local court’s ruling denying attorney fees to the successful Plaintiff. The trial court failed to enforce the contract provision calling for the defendant to pay the plaintiff’s attorney fees as part of the terms of a credit account for the purchase of goods, finding, erroneously that the trial court did not have the power to enforce this contract provision.
2-J Supply provided materials to Garrett & Parker, LLC under a contract that provided payment terms. Additionally, Garrett & Parker, LLC’s principals signed the contract as personal guarantors. When Garret & Parker, LLC failed to pay the invoices as they became due, 2-J Supply brought suit for the unpaid invoices (approximately $16,000.00) and sought attorney fees of approximately $4,000.00. Neither Garrett & Parker, LLC nor its principals responded to the suit, resulting in a default judgment for 2-J Supply in the amount of the unpaid invoices, but not the attorney fees.
Ohio has a statutory prohibition against attorney fee shifting for “contracts of indebtedness” that do not exceed $100,000.00. The trial court relied upon this statute in denying 2-J Supply’s request for attorney fees.
However, the Court of Appeals reasoned that the indebtedness was not realized until the date the payment was due, rather than on the date of the contract. Under this reasoning, the Court of Appeals determined that the contract at issue was not a “contract of indebtedness.” Based upon this analysis and prior case law, the Court of Appeals found that the trial court erred in denying the request for attorney fees.
Before signing any contract, make sure you read and understand the contract.