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Our firm is frequently called by buyers about claims relating to defects in real property, commercial and residential, after the closing.  They are disappointed that some aspect of the property or another is defective, and demand repairs paid by the seller.  Cracks in a concrete slab, mold, water leaks in plumbing, roofs and basements, and present or past termite infestation and damage are just a few of the common complaints.

The law on this topic is well-developed in Ohio.  Under Layman v. Binns and Traverse v. Long, the Ohio Supreme Court has clearly adopted the doctrine of caveat emptor, or “buyer beware.”  The Court has pronounced that buyers have no cause of action against a seller unless either (a) the defect was not discoverable upon a reasonable inspection and the seller knew about the defect or (b) the seller took steps to actively conceal or lie about the defect.

So, the Layman standard sets up a difficult factual challenge: a plaintiff must show that the damages were not reasonably discoverable by him on inspection, but on the other hand, as of the time of the litigation, the problems are so great that (a) the seller certainly knew about them and (b) they deserve significant recompense by the Court.  This is a vexing problem for every property defects plaintiff, commercial or residential.

The Layman case was decided in 1988, and then only a few years later the Ohio legislature affirmatively mandated for single family homes the use of the Ohio Residential Property Disclosure Form.  The current version of that form is here.

Because either affirmatively covering up a defect or making an affirmative misrepresentation can be the basis for liability under Layman, a misrepresentation on the Residential Property Disclosure Form can form the basis for liability under Ohio law.  Indeed, in our experience on property defects cases for residential properties, a mis-statement on a Residential Property Disclosure Form is the most common basis for these liability claims.

When pursuing a property defects claim, the plaintiff has several legal causes of action (i.e., bases under the law for suit).  These include breach of contact, misrepresentation and fraud.  Of these, only the fraud claim can be the grounds for recovery of attorneys fees and punitive damages, and our experience is that — even under that cause of action — state court judges in Ohio are extremely reluctant to arrive at liability including punitive damages and attorneys fees.  As such, a Plaintiff should enter into the litigation understanding that a “win” involving reimbursement of his fees invested in the case are unlikely.

In the commercial setting, where actual damages arising from the defect may be in the hundreds of thousands and millions of dollars, litigation may yield an economically positive outcome.  However, in the residential setting, buyers must carefully consider the cost-benefit of pursuing this litigation.  Conversely, a seller defending against such a claim may want to consider what he must invest in that defense, versus an early settlement.

Given that our firm’s objective for each matter assigned to us is to “make a difference” for the client, we carefully work with clients in property defects litigation to develop a strategy that is most likely to result in a net positive outcome for the client.

There are almost as many types of covenants against residential subdivisions as there are subdivisions, as covenants are first and foremost a matter of “contract,” and not a function of statute.

That is not to say that there are no statutory constraints on residential subdivision covenants, as Ohio Revised Code Chapter 5312 “Ohio Planned Community Law” does set forth a framework of certain minimum requirements for subdivision documents and does require that bylaws of an association be recorded.  But beyond that framework, that statute does not precisely say what the declaration and bylaws must provide.

As such, the developer decides — in the declaration of covenants  against the subdivision and bylaws of the association — what terms that “contract” will contain.  And then each owner acquiring a lot in that subdivision, whether he knows it or not, becomes a party to that “contract” on the terms set forth in the declaration and bylaws of the association.

The first issue we explore in this article is “homeowners’ association or no homeowners’ association?” for there are subdivisions subject to a declaration and covenants as to the development (minimum square footages, setbacks, design standards, etc.) and use (parking of boats and R.V.s on lots, rental of houses, parking restrictions, etc.) of real estate, that do not have a homeowners’ association and the monthly or annual fees that accompany the same.  Some developers — typically of smaller subdivisions — choose not to create a homeowners’ association because there are no common areas (lakes or detention ponds, entrance monuments, etc.) to maintain.  As such, a there is no reason to assess a fee.  And without a fee being due and owing, there is no need for an association to manage that fund.  In this circumstance, without an association, enforcement of the covenants is then left to the individual lot owners.

Thus, not all subdivision covenants include an association or a fee that accompanies the same.

Then, onto the covenants themselves.  The covenants are a “contract” by and among the lot owners on the terms set forth therein.  Because parties are free to contract except as to those things prohibited by law (e.g., unlawful discrimination), the “contract” can contain such restrictions as the initial developer thinks appropriate.  As such, a buyer should carefully review and consider these restrictions before buying.  Are they too restrictive as to the lifestyle choices of the prospective homeowner?  Are they not sufficiently restrictive on the homeowners’ soon-to-be-neighbors?  These documents make good bedtime reading.

Finally, a note of caution as to covenants that do establish a homeowners association: Be cognizant of the powers vested in that association, as to setting fees, maintaining common areas, enforcing covenants and making new rules, as many times the exercise of those powers by the association can be the source of frustration for homeowners in the subdivision.

We caution clients to be mindful of all of the provisions of covenants for their subdivision, as it typically will the longest, most complicated “contract” they will ever enter into.  And part of that is understanding the powers given to the homeowners association in those documents.

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Read more on this topic: Condominium versus Landominium — What’s the difference under Ohio Law? >>

Ohio Revised Code Chapter 1923 provides a method of judicially acquiring possession of property back from a residential tenant.  This is commonly referred to as an eviction.  Under the Revised Code it is referenced as an action in “forcible entry and detainer.”

But that Chapter does not apply to commercial tenants.  Thus, the question:

May an Ohio landlord for non-residential property lock out a tenant who is in default of his lease obligations (after any contractual notice and right to cure) without a judicial proceeding?  

The short answer: Yes.

Ohio law provides that a commercial landlord may lock out a tenant under the following circumstances:

1. The Tenant clearly is in default (for the landlord would not want to risk damages arising from a lockout if his claim is marginal).
2. The written lease itself allows for such a remedy.
3. All notice and right to cure provisions for the default have been provided and expired.
4. The landlord can accomplish the lock out without “disturbing the peace.”
5. Finally, the landlord by the lock out, may not seize control or ownership of the tenant’s contents — his personal property or trade fixtures.  Thus, he should make accommodations with the tenant to retrieve his contents.

Finally, we advise commercial landlords that despite the fully developed law on this topic, tenants seem to have a proclivity to litigate the occupancy question.

This is a powerful tool for landlords in Ohio, but one that should be used reservedly.

In this prior blog entry, we explore the distinction between escrow deposits and earnest money in Ohio, and the fact that these two things are not a measure of or limitation on damages sustained for a breach of a real estate purchase contact.

This article seeks to bust a common myth about an escrow deposit: That a seller must return the earnest money of a buyer he claims is in breach before selling the home to a second buyer.

Here’s the scenario: Buyer #1 signs a contract to purchase a property with earnest money held in escrow by the Realtor, and then fails to perform.  Sometimes the buyer claims one of his contingencies was not fulfilled (financing, inspection, etc.) and the seller disagrees that buyer attempted in good faith to fulfill that contingency.  Other times, the buyer has just flat-out breached the contract.

In either scenario, seller has refused to consent to the release of the escrowed funds back to the buyer.  Indeed, he intends to hold the buyer responsible for the damages arising from the breach.

Now, Buyer #2 comes along, and the seller desires to sell the property to Buyer #2 free and clear of any claims of Buyer #1.  Does he have to release the escrowed funds to accept the second contract?  Does he have to waive the claims against Buyer #1?  No.

Many times the myth is advanced by an office manager of a realty company, either out of wisdom, to avoid unnecessary conflict and clean up loose ends, or because he is simply mistaken. [Indisputably, it may be advantageous to get a full release from Buyer #1 before proceeding with Buyer #2.]

But it would be entirely possible for a seller to sell to Buyer #2, and retain his claims for monetary damages arising from the breach against Buyer #1.  The seller is not required to release the earnest money to Buyer #1 at the time of signing contract #2.

Buyers are typically asked to place earnest money under a real estate purchase contract, residential and commercial. But who is holding this deposit? Can the buyer ever get it back?  Can the seller ever retrieve it out of escrow?  And is this a measure of or limit on damages on breach of contract by either the buyer or seller?

For contracts negotiated through Realtors for existing housing, the deposit is typically held in the Realtor’s escrow account pending closing. This means that neither the buyer nor the seller have access to those funds until surrendered to the seller at closing or returned to the buyer as a result of the failure of one or more contingencies.

Even though the Realtor is the “agent” of one party in the transaction, when acting as escrow agent, he must follow the escrow instructions – i.e., not surrender the earnest money to his client just because he is ordered to do so.  The escrow instructions are contractual provisions – either in the purchase contract or a separate escrow agreement – detailing how the escrow agent is to deal with the escrowed funds, or other escrowed property and documents.

In contrast, contracts with home builders, and For-Sale-By-Owner sellers (“FSBOs”) typically will call for the earnest money to be paid as a deposit directly to the builder or seller. In that circumstance, the seller has the money, and getting it back – even when the contract requires it – could prove problematic. For example, we have represented buyers in contracts in which the builder was headed into insolvency or bankruptcy.  In that circumstance, the earnest money deposit could be completely at risk if precautions have not been made against that eventuality.

Finally, a common misunderstanding of parties to a purchase contract is that the escrow money is some sort of measure of or limitation on damages for the buyer’s breach, or, conversely, that the return of the earnest money “cures” the seller’s breach and is the limitation on his damages as well. However, unless the real estate purchase contract specifically calls out either of those limitations, neither of those propositions is true.

We will explore in a separate blog entry the damages for which a buyer can be exposed for breach of a purchase contract. But as a general proposition, the seller is to be put in a position that he would be in but for buyer’s breach. That means the buyer is responsible for the reduced purchase price when the house sells to a second buyer, and may be exposed for the holding costs (insurance, taxes and maintenance costs) until the property re-sells. The seller, similarly, cannot just ignore his contractual promise to a buyer, and sell the property to another buyer.  He will be responsible to the original buyer for the lost value above the sale price and perhaps other damages to a buyer. The important point is that the earnest money – unless the contract specifically says otherwise – is not a definition of or limitation or either party’s damages upon breach.

Read more here: Myth busters: Further on earnest money >>