Category Archives: Business & Civil Litigation

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:

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? >>

The blog entry is a little difficult to write, because the topic makes laymen cringe, and think that lawyers deal in a parallel reality.  But our job is not to justify why Courts and lawyers look at issues a certain way, but to simply report “as it is.”

The proposition of law we share today is:

We don’t actually mean the deadlines set forth in contracts unless we use the magic words “Time is of the essence.”  

Mays v. Hartman, 81 Ohio App. 40877 N.E.2d 93 (1st Dist, 1947).

Let’s re-visit that proposition again.  When a contract sets forth dates for the performance of obligations of parties to the contract, we don’t mean those dates — but rather “on or about those dates” — unless the contract expressly states, using these magic words, that “time is of the essence.”

So, extending this principle to both residential and commercial real estate contracts, if we say the seller will close on June 30, we mean “on a date reasonably close to June 30.”  If we say that a buyer has 90 days to complete his due diligence inspections of real estate, we mean “a date roughly in proximity to 90 days from contract signing.”

Now, as to the standard Cincinnati Area Board of Realtors purchase contract form in general use for residential transactions in the greater Cincinnati marketplace today (read your own form to be sure), time is NOT generally of the essence, as to closing date and certain other deadlines, but it IS of the essence as to (i) the inspection contingency deadline (Section 13) and (ii) surrender of possession of the real estate (Section 20).

Contrary to much of contract law, which generally applies a practical common sense interpretation to contract language, as to deadlines in contracts, “time is not of the essence,” unless the contract expressly says it is.

These words, “time is of the essence,” are some of the few “magic words” to which courts give special meaning.

An axiom frequently taught to real estate agents and investors is “It takes one to buy and two to sell.”  And that is in part true, but in part not true.  As with many axioms, “it’s just not that simple.”

First, what does the axiom mean?  In contract negotiations, one might have married couples, or even business partners, involved as buyers or sellers,  The question this saying attempts to answer is “who has authority to sell” the real estate; “who has authority to buy” the real estate?

The seller’s side of the equation

As a general proposition, if a property is owned by two parties (spouses or tenants in common), it takes the signature of both of them to effectuate a sale.  If we are going to legally enforce a contract for the sale of 1234 Main Street, you can only do that if both or all of the owners have signed the purchase contract.  Thus, the shorthand saying “it takes two to sell.”

That begs a different question, however, which is if one person makes a promise that he is unable to keep (e.g., a husband promises to sell a house, but the wife refuses to consent to sell her half and won’t sign the deed), what is liability for the party who made the promise?  In short, even though the buyer cannot succeed in vesting full title in himself in an action for Specific Performance, the buyer could still sue the seller for beaching his promise to deliver good title to the property.  In other words, the single seller who cannot perform could still be on the hook for money damages for his failure to perform on the contract.

This concept is enhanced by two specific provisions of the Cincinnati Area Board of Realtors standard form of residential purchase contract:

• Section 6 has this: “Seller also represents that those signing this Contract constitute all of the owners of the title to the real property and other items as listed in Section 5, together with their respective spouses.”
• Section 19 has this: “Seller…shall convey marketable title to the Real Estate by deed of general warranty or fiduciary deed, if applicable, in fee simple absolute, with release of dower.”

Section 6 is frankly confusing in its wording.  Does the contract require the signature of the spouses to be enforceable?  It seems to lend itself to both interpretations.

Section 19 on the other hand says clear that the person signing the contract as seller commits to deliver a good deed “with release of dower.”  To me that means that the seller is promising that if his wife or her husband’s signature is required, they will obtain it.  It is not the buyer’s problem to obtain a second signature to secure that promise or performance.

Further, while we point out that the incomplete seller (only one-half of a married couple, for example) could be on the hook for money damages in the event of his failure to perform on his promises, it is equally true that the non-signing seller cannot be forced to execute a deed just because their spouse promised that performance.

As a practical matter, what does that mean?  Well, several things:

• Only money damages are available for the signing seller’s breach.
• The remedy of “specific performance,” i.e., forcing a non-signing and recalcitrant seller to convey legal title to the property cannot be obtained in that circumstance.
• However, a buyer could still “foul the title” to the property by filing an affidavit of matters relating to title or a lis pendens lawsuit claiming in interest in the real estate due to the seller’s breach.  Thus, even though the buyer cannot judicially force the seller’s performance, he also can prevent the seller from conveying clear title to anyone else.  In that circumstance, we end up with an old-fashioned standoff.

The buyer’s side of the equation

We then have the buyer’s side of the equation.  Can a buyer, married or not, buy property on his own?  Certainly.  A single buyer — without his spouse’s  or business partner’s consent can, in his own name, buy real property.  Thus, the saying “it takes one to buy.”

This means that if a married buyer signs a contract to purchase real estate and later has his wings clipped by a recalcitrant wife who refuses to sign, he still can legally be held to that contract either in an action for specific performance or for monetary damages. And it does not excuse his performance that his wife will not sign.

Then, this begs yet another question: Can the buyer finance that purchase?  Well, for a married person to borrow money to buy real property requires the spouse’s signature on the mortgage for purposes of releasing her dower interest.  So, contrary to the axiom, it may take “two to buy.”  Now, if the buyer can pay cash or obtain a loan that is not secured by a mortgage, then he can buy on his own. But, otherwise, “it also takes two to buy.”

Finally, a buyer may be able to avoid his obligations under a contract if his spouse refuses to participate in the mortgage application process, but that is a more complicated legal analysis.  It will depend on the contract language and the facts.

 

Occasionally we have a client either pursuing or defending against the payment of a fee for professional services rendered in conjunction with the sale of a piece of real property in Ohio, essentially a real estate commission.

One prerequisite that is not always met by the claimant, however, is licensure as a real estate broker.  It may be an accountant, attorney, or other individual who has assisted — or claims to have assisted — in the sale of real property.  But that person is not licensed as a real estate broker in Ohio.   Still, they want to be paid just as a Realtor would have been.  And they may even have an express agreement — even a written agreement — for payment of those sums.

But it is a defense — perhaps an absolute defense — under Ohio law against the payment of those sums if the party claiming payment does not allege and prove in a court action that they are a licensed real estate broker.  O.R.C §4735.21 provides, in pertinent part:

No right of action shall accrue to any person, partnership, association, or corporation for the collection of compensation for the performance of the acts mentioned in section 4735.01 of the Revised Code, without alleging and proving that such person, partnership, association, or corporation was licensed as a real estate broker or foreign real estate dealer.

The Wisconsin Appellate Law report has this entry about a recent Seventh Circuit decision that shows the precarious position lenders are in in recovering their losses arising from their loans.  As that article recites, in BB Syndication Services, INc. v. First American Title Insurance the Federal Seventh Circuit Court of Appeals ruled that a construction lender does not have a claim against the title insurer for liens that arose as a result of their cutting off funds to the project.

The Seventh Circuit relied upon a provision in the title insurance policy excluding coverage for liens “created, suffered, assumed or agreed to” by the insured lender.

The Court found that because the liens arose as a result of the  lender cutting off funds to the project (thus causing the borrower to default in his obligations to subcontractors and material men, and then liens to be filed against the project), coverage did not lie.