This article is the fourth in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

When structuring the contractual relationship between a buyer and a builder, one of the first considerations is: On whose land will the project be built?  For, if the builder is building on land owned by the buyer, we are addressing a pure construction contract, where if we are building on land the builder owns, and he will convey title at the end of the project, we are addressing both a construction contract and a real estate purchase contract. and a different set of issues will need to be addressed.

Building on land owned by the buyer

When building on land owned by the buyer, the buyer will own the improvements throughout the construction process, and ultimately control legal access to the site.  If a falling out occurs between the builder and the buyer, the buyer can remove the builder from the job and complete the project with another builder.

Typically in this instance, the buyer will pay the builder in installments as the improvements are completed.  As a result, the buyer will have to obtain his own financing and his own insurance on the project.  The buyer also needs to assure that he has not paid more for the improvements in place  than they are worth at any point in time, for if the builder walks off the job the buyer must have sufficient funds remaining to complete the project with another builder.  Finally, the buyer needs to make sure all subcontractors and material men are paid with each draw, so that mechanics liens do not attach to the project.

Building on land owned by the builder

In a situation where the builder owns the land, the buyer’s is simply buying land, building and other improvements at the conclusion of the construction project. ¬†In this instance, the builder wants a significant¬†down payment¬†from the buyer both to show the buyer’s bona fides in performing under¬†the contract, and also in some cases to finance the construction project. ¬†But the buyer must realize that this is basically an unsecured loan to the builder, and in the event of the builder’s default of the contract, or a contact dispute, the buyer will have a hard — perhaps impossible time — recovering those funds from the builder.

Under this type of contract, the buyer will not pay installments throughout the construction project, but rather the builder will finance the project himself or with third party funds.  The builder will insure the project through closing.

The issue with this type of contract is that buyer loses control of the project: He can’t speed construction, control the job site, or assume control of the property in the event of the builder non-performance.

Also in this type of contract, the buyer needs to protect himself as to quality of title, closing prorations, and other issues typical in a contract for the conveyance of real estate.

Buyer conveys lot to builder

In some instances, the buyer will own the land at the beginning of the project, but convey title to the builder as a sort of down payment. ¬†At the end of the construction project, title to the property is then conveyed back to the buyer. The issues in this instance are the same as “building on land owned by builder,” set forth above, as throughout the project, the builder will own the land and the improvements.

Know the type of construction you intend to undertake, and use a contract crafted to protect yourself in that circumstance.

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This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of ‚Äúwhat‚ÄĚ is to be built >>

New construction: The ‚Äúwhen‚Ä̬†>>¬†

New Construction: Change orders, allowances, and selections can significantly impact price >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

This article is the third in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

The essence of a real estate contract is that a buyer pays money in exchange for title to real property. ¬†In the case of new construction, as discussed here¬†and here, the added difficulty¬†is describing¬†with precision the improvements to be built — defining what the builder is going to deliver.

But defining what the buyer is going to deliver is also a difficulty, for — because we don’t necessarily know the details of what is to be built at contract signing — we also don’t low the final price.

So, 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.

Change orders

Builders work on tight budgets and tight schedules. ¬†If the buyer decides mid-course to change something about the construction, it involves re-engineering the project, new material orders, and new subcontractor agreements. ¬†The change may well upset the entire construction schedule, which impacts the builders’ costs.

So, it is important that a project be planned well from its inception, and that change orders be kept to a minimum, if the goal is keeping the construction budget under control.

As a result of the variables set forth above, ¬†Builders typically want the right to reject change orders. ¬†In some instances, the contract calls for change orders to be priced at cost increases plus an increment — 10% to 20% – for the builders’ inconvenience in planning the change. ¬†In other circumstances, the builder has the right to price change orders as he sees fit.

Allowances

Allowances are the “hidden” price bombshell in many contracts. ¬†This is so because the builder typically sets the level of allowances, but if they re set too low — below what an average homebuyer would select,¬†then the buyer invariably is going to exceed the allowance, and thus incur a price increase. ¬†As a result, it is critical that allowances be set at a reasonable level, or the buyer should be aware that the contract price will rise through the construction process.

Selections

In addition to allowances, some builders offer selections that do not increase price — as long as the buyer is willing to live within the selections provided, such as for carpet and other flooring¬†and¬†cabinetry. ¬†If the buyer desires to stray from the limited selection offered by the builder, then he exposes himself to additional price increases.

The new construction process can be tricky, and confusion cover change orders, allowances and selections are one key area where costly surprises arise.

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This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of ‚Äúwhat‚ÄĚ is to be built >>

New construction: The “when”¬†>>¬†

New construction: On whose land are you building? >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

A common form of conveyance when selling real estate is the general warranty deed. With a general warranty deed, not only does the seller transfer title to the property, but also promises that she has good, marketable title and will defend any claims against the property otherwise.

For example, if you sell property using a warranty deed and there is an unpaid lien against the property, you must either pay an attorney to defeat the lien, or you must pay off the lien. Failure to do so is a breach of the warranty; and will entitle the buyer to damages, and attorney fees. Read more about types of deeds here.

Hollon v. Abner (1997 WL 602968), a 1997 Hamilton County Court of Appeals case, illustrates the point precisely. The sellers failed to account for tax liens that had attached to the property during the brief time that the property was in their son’s name.

The Abners came to own the property when their son, under contract to purchase the property, was unable to complete the purchase. The Abners stepped in and gave him the money to complete the purchase. Title transferred to the son’s name, and he immediately transferred the property into the parents’ names. But just that one moment during which the property was in the son’s name was enough for IRS liens for the son’s unpaid taxes to attach to the property.

After owning the property for five years, the Abners sold the property to Hollon (by general warranty deed). When Hollon later tried to sell the property, a title report the buyer insisted on revealed the tax liens.

In order to complete the closing, Hollon was forced to place over fifteen thousand dollars in escrow. Despite repeated demands from Hollon, the Abners refused to either defend against or pay off the liens. Eventually, Hollon brought suit against the Abners for breach of warranty, because the title they transferred to him was not free of encumbrances, and the Abners refused to defend or pay off the liens.

Hollon was granted summary judgment against the Abners, and the trial court ordered the Abners to pay damages in the amount of the tax liens, plus the escrow fees, and Hollon’s attorney fees.

While it is generally understood that attorney fees are only awarded in a breach of warranty claim where the buyer incurred attorney fees in defending against the lien, in this case, the Court Appeals ruled that that the trial court’s award of attorney fees was appropriate because Hollon only incurred fees because the Abners both failed to convey marketable title, and refused to defend or pay the liens; that is, it was only because of the Abners’ failure to live up obligations that the lawsuit was necessary.

The lesson being, if you sell real estate via general warranty deed and the buyer later contacts you regarding a lien that had attached before you sold the property, live up to your obligations before the court forces you to.

This article is the second in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

In this blog entry, we discuss the “what” is to be built under a new construction contract, residential or commercial. ¬†The problem is that, unlike with an existing building, in order to properly contract for the construction of a new building, the parties must carefully define “what” is to be built using words and drawings.

I teach¬†continuing education classes on new construction, and there I define this problem of describing the improvements to be built as a 4-dimensional problem, with the first three dimensions being the height, width and depth of a project — the physical description of what is to be built. ¬†The 4th dimension, then, ¬†is “when” the project is to be delivered.

This blog entry addresses that topic — the 4th dimension of a¬†construction project¬†— when will the finished product, or substantially finished product, be delivered to the buyer.

There are a myriad of issues that can impact the “when,” starting with selections to be made by the buyer. ¬†Here are just a few of the issues impacting the timing of completion:

  • The¬†buyer’s inability to make timely design and selection decisions for finish items. ¬†This is the item most frequently cited by builders as to why the buyer has slowed the project and driven up costs.
  • Design changes.
  • Unexpected¬†site conditions, such as bad soil¬†or¬†environmental problems.
  • Regulatory issues,such as zoning and building permits¬†and¬†roadway access..
  • Utility availability at the property line.

The timing issues encountered in a construction contract significantly impact both construction costs and operational issues confronted by both buyer and seller.  Thus, having a realistic understanding of timing issues at the front end of a construction project is important, and deciding how to allocate the risk of timing issues is a critical contract consideration.

This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of “what” is to be built >>

New construction: Change orders, allowances and selections can significantly impact price >>

New construction: On whose land are you building? >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

This article is the first in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

Defining “what” is to be built in a new construction contract can be tricky.

For starters, when buying an existing commercial building or house, you can see, touch, feel and inspect what is there, and based upon those observations decide whether or not to buy. ¬† But in a new construction contract, we must define — using words and drawings — the end product. ¬†And it is an end product with hundreds and thousands of components. ¬†Thus, we must carefully use the¬†contract to describe what the builder will build.

This would include dimensions, construction materials, fixtures, mechanical systems and equipment, appliances, and finish materials, such as millwork (cabinets), countertops, flooring, landscaping, etc.

Some of these items are left out of the contract, and references as “allowances,” which are to be addressed in a later article. ¬†Be cautious with allowances, as they are frequently the basis for price disputes between builders and buyers.

Second is the intangible of “quality.” ¬†The flatness of concrete floors, the waviness of walls, the precision of miter joints, are all exceedingly difficult to describe. ¬†One way to tackle this drafting challenge is to refer to a “model” or “sample” that the builder has held out as the general quality of¬†construction. ¬†For example: “the general quality of construction — to the finishes and selections — will equal or exceed that of the model home shown to buyer by builder located at 1234 Main Street.” ¬†Others try to reference objective standards of¬†quality, but this can be cumbersome to wade through– and be cautious of who drafted these standards as they will invariably be tilted towards the drafter.

So, consider carefully how you define what is to be built, and the quality of the construction.  It can mean the difference between a quality project and a disappointment.

This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The “when” >>

New construction: Change orders, allowances and selections can significantly impact price >>

New construction: On whose land are you building? >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

We discuss here the power of a lis pendens action, which is the combination of a law suit to force a seller to perform combined with a public notice to all prospective purchasers and mortgage lenders that the buyer in the litigation has a claim to the title to the real estate.

In addition¬†to litigation — which always runs the risk of becoming expensive, there is another tool available under Ohio law that should have the effect of preventing a seller from conveying title to a second buyer or mortgage lender free from claims of the buyer number 1: An Affidavit of facts¬†relating to title.

Ohio Revised Code Section 5301.252 sets forth the requirements for an Affidavit of Facts Relating to Title. ¬†Essentially, one includes the legal description of the disputed land, and then ¬†recites the¬†name of the¬†owner and the recording reference for his deed, along with the facts underlying the buyer’s claim. ¬†So, if a buyer has a contract to buy real estate that the seller is breaching, one attaches that contract to the Affidavit, recites that pursuant to that Contract the buyer has the right to buy the subject property and places that claim of record.

A¬†subsequent buyer “should” not buy the land, as long as his title examiner catches the claim (which he should). ¬†(We have seen circumstances where¬†subsequent buyers blow past these claims.)

Thus, the seller of real property is placed in the position of needing to address the buyers’ claims before he can sell the property to another, or mortgage the property.

An Affidavit of Facts Relating to Title can be a powerful tool to force sellers to deal with a title claim from a buyer whom he would rather ignore.

 

In contracts, leases, loan documents and other agreements, we frequently see a request that one party indemnify the other against certain occurrences.

As a simple and general proposition, indemnity provisions¬†are ill-advised for the¬†indemnitor. ¬†They are open-ended access to one’s¬†checkbook for all sorts of claims, and are usually accompanied by a duty to defend against those claims (i.e., pay for¬†an attorney to defend a suit), whether meritorious or frivolous. ¬†Thus, a short indemnity paragraph could lead to hundreds of thousands or millions of dollars of unexpected and unintended liability. ¬†As a rule: Not a good idea.

Taking this concept over into the world of real estate sales, as is explained in this blog entry, Real Estate 101: Types of Deeds in Ohio, when a seller executes and delivers a warranty deed in Ohio (General Warranty Deed or Limited Warranty Deed), he is essentially providing an open-ended indemnification to a buyer of that property — and his successors¬†down the chain of title¬†— against certain title claims. ¬†Among other things, a warranty covenant is a promise to defend against certain¬†claims to the title from a third party.

Ohio Courts have ruled that the failure to provide that defense will mean the grantor must pay the attorneys fees of the grantee to so defend the title.  Hollon v. Abner, 1997 WL 602968 (Ohio App. 1 Dist., 1997).

Thus, although it is “standard operating procedure” in real estate transactions to provide a warranty deed, sellers may want to re-think that (starting with the signing of the contract as that instrument dictates what form of deed is required at the closing) and understand their open-ended exposure from a warranty deed.

We have a 3-part blog series on some fundamentals of protecting personal assets when using a corporate form.  We recommend these for every small business owner and manager.

Pillars of Strength: Formatting a corporate signature to protect the ‚Äúcorporate veil.‚ÄĚ

Pillars of Strength: Three tips for protecting your personal assets when forming and operating a company

Pillars of Strength: Effectively using your corporate form for limited liability protection

Contact Isaac Heintz ([513] 943-6654) for help with forming or growing your small business.

We recently completed a litigation project for a commercial client to extinguish a Land Installment Contract where the buyer was in default and the owner wanted to lease or sell the property to another party¬†by judicially extinguishing the buyer’s rights under the Land Installment Contract.

As a starting point, this article explains, in seller financing situations involving real property, there are several options available to structure and document the transaction.  As we explain, a Land Installment Contract is more difficult to extinguish than a lease with option to purchase, but less involved than a foreclosure action under a note secured by a mortgage against the property to be sold.

Thus, in the specified assignment, we proceeded with an action for¬†“forfeiture” in Common Pleas Court before Hamilton County Judge Beth Myers.

Ohio’s Land Installment Contract statute requires that a foreclosure action be pursued in situations where the buyer has made payments under¬†contract for more than five¬†years¬†or paid more than 20% of the principal portion of the purchase price. ¬†O.R.C. Section 5313.07. ¬†(In such case, the buyer is then entitled¬†to any excess of the sale price from¬†foreclosure sale over the remaining balance of the purchase price¬†under the Land Installment Contract.) ¬†However,¬†Ohio Courts have found that this protection extends only to residential purchasers, and does not protect buyers in commercial real estate transactions. ¬†See, e.g., P.M.D. Land Co. v. Warner Realty, 2009-Ohio-6704¬†(11th Dist., 2009).

Therefore, simple judicial action for “forfeiture” of the rights of the buyer is called for in a commercial setting. ¬†It is not¬†a truncated, expedited proceeding such as an eviction, but it is¬†far less involved than a foreclosure action would be, and vests fewer rights in the buyer.

As it turns out, in our case the buyer defaulted and we then were able to quiet title in the name of our client, the property owner, the Land Installment Contract was judicially extinguished, and the title was thus quieted in favor of our client, freeing him to lease or sell the property to another tenant or buyer.

 

 

 

Lis Pendens, Latin for ‚Äúsuit pending,‚ÄĚ means that any interest in real property acquired while a case is pending relating to that property is subject to the final determination of the case.

As set forth in R.C. 2703.26: ‚ÄúWhen a complaint is filed, the action is pending so as to charge a third person with notice of its pendency. While pending, no interest can be acquired by third persons in the subject of the action, as against the plaintiff’s title.‚ÄĚ ¬†Under this doctrine, the outcome of the litigation applies to, and is binding upon, any person who acquires an interest in the property; whether a party to the lawsuit or not. Indeed the purpose of the doctrine is to bind non-parties.

‚ÄúThe effect of lis pendens is that if a third party acquires an interest in the property while the lawsuit is pending, the third party takes the property subject to the final outcome of the suit.‚ÄĚ Gunlock v. Z.B.P. Partnership, 1997 WL 598394, at *1 (Ohio App. 12 Dist., 1997). Indeed, ‚Äúif the trial court awards the plaintiff rights in the property, the plaintiff takes free of any interest acquired by third parties during the lawsuit.‚ÄĚ Martin, Rochford & Durr v. Lawyer’s Title Ins. Corp., 619 N.E.2d 1130, 1131, 86 Ohio App.3d 20, 22 (Ohio App. 9 Dist., 1993).

‚ÄúIn order for the plaintiff to utilize the doctrine of lis pendens, the property that is described for the purpose of invoking lis pendens must be at the very essence of the controversy between the litigants.‚ÄĚ Levin v. George Fraam & Sons, Inc., 585 N.E.2d 527, 530, 65 Ohio App.3d 841, 846 (Ohio App. 9 Dist., 1990).

If the property is Unregistered Land, and the lawsuit is filed in the same county in which all of the property is located, Lis Pendens attaches upon the initial filing of a complaint relating to the ownership of real property and a description of the property in the complaint. Any interest in the property that is recorded after the filing of the lawsuit is subject to the Judge’s final ruling. If the suit is brought in a county other than that in which the property is located, a certified copy of the complaint must be filed with the Common Pleas Court in which the property is located (this also applies to property that straddles two or more county lines). See Civil Rule 3(F).

In a recent case we represented a buyer in a specific performance case.  Our client was under contract to purchase a parcel of unregistered land in Hamilton County. The seller informed our client that the seller would not complete the sale; rather he would sell to another buyer for a higher price. Our client was insistent on completing the purchase and forcing the sale.

Before the seller recorded the deed transferring the property to the third party, we filed suit for specific performance and included a notice of Lis Pendens in the complaint. After we filed the complaint, not only did the third party record a deed, that third party then sold the property to another third party who also recorded a deed. Bear in mind though, that each of these deeds were recorded after the lawsuit had been initiated, and thus those purchasers’ interests were subject to the outcome of our lawsuit.

Ultimately, we prevailed and the property was re-titled in the name of our client and the interests of the two third party purchasers were extinguished.  The third party purchasers now have to look to the original seller to recoup their money.

For Registered Land, Lis Pendens does not attach until after the complaint is filed with the Court and a Notice of Lis Pendens is filed with the County Recorder. Civil Rule 3(F) also applies where the suit is brought in county other than that in which all of the property is located.  What this means for purchasers of Unregistered Land is that certainty of your interest requires not only that you search the title, but that you also search the court filings for any litigation involving the property.

For a party seeking to invoke Lis Pendens over registered land, the process is slightly more complex. The party must first file the complaint with the court, then present a certified certificate of the pendency of the suit with the county recorder and a memorial of the suit entered on the certificate of title by the county recorder.

While the road to Lis Pendens against registered land is more cumbersome for the plaintiff, the third party buyer can rest easy that he has good title by simply looking at the county recorder’s certificate of title for the property to see if there is a memorial of a lawsuit on the certificate. Simply stated with registered land, the certificate of title tells the whole story.