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Category Archives: Residential Real Estate

Pins and needles

Author By Christopher P. FinneyPosted on

In pre-litigation and litigation, we frequently have clients who are understandably anxious to resolve their disputes.  They typically are concerned with the open-ended liability that can result from a claimed breach of real estate contract or a business deal gone bad — and the legal fees that inevitably will come from them.  And as a result of that unknown exposure, they want swift finality to the matter.  They are constantly on pins and needles to close this small chapter of their life.

A good settlement versus a quick settlement

Unfortunately, getting a good resolution frequently is inconsistent with the desire for a quick resolution.  Patience, many times, is a virtue that pays good dividends.  This does not mean we typically recommend litigation as a solution.  Litigation is lengthy, unpredictable and terribly expensive, and is accompanied by the same sense of unease until that long course to resolution.  But the other side can sense when you are anxious to put a dispute behind you — attorneys are especially good at dragging things out to achieve a more favorable resolution than the courts would provide to them precisely because of that desire of the opposing party for quick closure.  Showing that insistence on a quick and final settlement can drive up the cost of a resolution exponentially.  So, slow down.  Relax.

Why the anxiety?

The nature of our legal system is that we frequently need to give “lawyerly” answers to what seem to be simple questions:

  • Am I liable?
  • What is the extent of my financial exposure?

These vague answers are so because many times the answer from a review of the documents and a review of the correspondence and oral exchanges leave a conclusion unclear.  Many times — most times — clients don’t tell us the whole story.  Sometimes, we are wrong.  And even if we as attorneys can give a clear anticipated outcome and we are correct in our analysis, the Judge (or Arbitrator) may in the end not agree with us.

We read the documents and do our best to understand the facts, and conclude: “Your exposure should be limited to ‘X,'” but the Judge may later conclude it is “X” times 3.5.  And that is so because we can be wrong or the Judge can decide the case incorrectly (in our opinion).  Further, we conclude “the fees and expenses to get to that conclusion should be ‘Y,'” but opposing counsel and judges can make the odyssey much more expensive.

Perhaps my bedside manner makes clients uneasy because I do have and share “worst case scenario” war stories where liability and legal fees well exceed that which should reasonably be anticipated.  But for every one of those legal calamities, we have 20 or 40 cases that resolve quickly and fairly, if not inexpensively.

So, relax

I recently was consulted by a physician who had contracted to purchase a small investment property, and he had decided he contractually  agreed to pay too much and wanted to back out of the deal.  He was more or less crawling out of his skin to have resolution of the matter — and his total exposure if he was in fact found to be in breach of the contract was on the order of maybe $20,000.  And this was the worst case for him.

But he was anxious, and called me four or five times in a two-day period stressing about this “what if” and that “maybe” scenario.

I asked him: “You are a doctor.  What kind of doctor?”  He responded: “I am an oncologist.”  So I said: “OK, let me understand.  Every day you have to tell someone — and their family — that they or their loved one has cancer.  Is that right?”  He says: “Correct.”  And, I further inquired: “Yet you are stressed about a simple contract claim that might cost you $10,000 or $20,000 if you ultimately are sued, is that right?”  “That’s right,” he responds,  “But I see your point.”

Another case I have my client terminated a residential purchase contract because the strict terms of the financing contingency were not met — the bank had a higher interest rate and a higher down payment than the contingency contemplated. The buyer sent a contract termination letter and the seller responded with a rejection of that — but then just sat and sat and did not place the house back on the market — at least not right away.

I explained to the client that “these almost all work themselves out without litigation.”  Further, he has an appraisal of the property at the purchase price.  If that is the value that would be adopted by a court in litigation, then the seller has no damages anyway.  Further, if they refuse to place the home back on the market, the seller will have violated his duty to “mitigate his damages,” weakening the seller’s claim in court.

Still, the client and his wife are anxious, concerned about the many possible outcomes to the suit.  And we don’t as of this writing know exactly how it will turn out.

Conclusion 

No one has cancer.  No one lost an arm or an eye.  No one is going to die.  You are not going to end up in bankruptcy court as a result of this contract claim.  Be patient and allow the other side to work out their “mad” and realize the cost and time that litigation will take.  It will all be OK.  That does not mean fighting until the last breath and last dollar is the best strategy, but being somewhat patient as a settlement works its way out can be advisable.

Julie M. Gugino

“Perfect” legal solution to getting out of property co-ownership in Ohio

Author By Julie M. GuginoPosted on

Legal disputes are rarely cut-and-dried to the point that the other party is without any legal defense to the action.  It seems there is always something about which to argue (read here, for example).  But it certainly seems to us — by reading the statute and by using it — that a statutory partition action in Ohio (O.R.C. Chapter 5307) is just such a “perfect” solution.

Two or more parties own property; one or more parties wants “out”

In this case, the statute addresses the issue where two or more parties own real property together but cannot agree if or when to sell it.

We are not addressing multiple shareholders in a corporation that owns real property or co-members of an LLC that own real property, but two or more parties named as grantees in a deed who own property together (known in the law as co-tenants).  Those shareholder or member disputes are handled in another manner.

Perfect power of partition

In short, in a partition action, one party can force the judicial sale of the property to the highest bidder with the net proceeds divided among the co-owners (the parties may argue, and this firm has argued about proper adjustments to the distribution of net proceeds).  There is no defense to the action although the process can take time as the Court permits discovery over the course of the partition proceedings.  However, the right to partition of jointly owned property is statutory – if one party brings the action, the property will ultimately be judicially sold.

How to proceed to partition

Thus, if you own property jointly in Ohio and you want to liquidate your interest (for any reason at all or for no real reason at all), but the other party or parties do not wish to sell what are your options?

For this situation, let’s assume two things:

  • The co-owners are not married as that would be handled in Domestic Relations Court.
  • There is no written agreement, what we call a co-tenancy agreement (see here), whereby the parties have established in writing how they will handle disagreements between them as to how the property will be held and disposed.  In that case, the agreement likely will control.

Then, what options do you have to resolve differences over the ownership and disposition of jointly owned real estate? The answer lies in an action in partition.

What is partition?

A real estate partition is a formal legal proceeding through which a joint owner of real estate can ask the court to split the property.   An “action for partition is equitable in nature, but it is controlled by statute.”  McGill v. Roush, 87 Ohio App.3d 66, 79, 621 N.E.2d 865 (2d Dist. 1993). A Partition Action is a lawsuit which existed at the common law for the purpose of passing down family farms.[1] When the heirs could not agree on how to run the farm together, one or more could commence a partition action, asking the court to fairly divide the farm between the heirs. Partition of the property itself is favored over sale and division of proceeds, however a property may be sold if it can be shown that it cannot be divided without manifest injury.[2]

Sale if property cannot reasonably be divided

Thus, a party can ask that the property be sold if it is determined that it cannot be divided. Certainly, this is the usual case for typical residential properties today. In this situation, the Court will appoint a commissioner or commissioners under O.R.C. § 5307.09.  When the commissioner(s) are of the opinion that the estate “cannot be divided without manifest injury to its value” they will provide a “just valuation of the estate” to the Court. One or more of the parties can elect to take the estate at the appraised value and pay to the other parties their proportion of the same. Alternatively, if neither party desires to purchase the property or cannot agree on the proportionate purchase of the same, the property will be sold at auction to the highest bidder.  Often, cases are resolved and settled among the parties prior to this occurring.

Under O.R.C. §5307.07, when partition of more than one tract is demanded, the Court will set off to each interested party its proper proportion in each of the several tracts. Thus, when multiple parcels of land are owned jointly, the separate parcels can be conveyed to separate owners so that each owner will have total control over their now separately owned parcel.

If a property was acquired upon someone’s death, a partition cannot be ordered within one year from the date of the death of the decedent, unless it is proven that either (i) all claims against the estate have been paid, (ii) secured to be paid, or (iii) that the personal property of the deceased is sufficient to pay those claims.

Attorney’s Fees

Under O.R.C. §5307.25, reasonable attorney’s fees can be paid from the proceeds of the sale to Plaintiff’s counsel and may also be paid to “other counsel for services in the case for the common benefit of all the parties” as the Court determines.

Conclusion

Thus, a Partition Action can be used to force the sale of jointly owned property where a recalcitrant party refuses to act.  Partition is a powerful tool to unwind and unstick a longstanding problem with a co-owner that will not budge.

 

______________________________________

[1] The Appellees assert that the “Commissioner made a good faith effort to partition the Property, but there is no way to physically divide this family farm into four sections based on the lack of frontage, the inconsistent and varying nature and uses of the land, and the physical location of the parcels. Simon v. Underwood, 2017-Ohio-2885, ¶ 65 (Ct. App.).

[2] “Since the partition of property is to be favored over the sale of property, when a party objects to a commissioner’s report, that party should have a right to a hearing to contest the commissioner’s findings before the property is appraised and subsequently sold.” Stiles v. Stiles, 3d Dist. Auglaize No. 2-89-3 (May 10, 1991)]. Court must comply with statutory procedures to appoint a commissioner, make an independent valuation and recommendation regarding whether the property could be divided without a manifest injury to the property’s value and providing a joint owner opportunity to elect the property, and no was provided. Thrasher v. Watts, 2011-Ohio-2844, (Ohio Ct. App., Clark County 2011).

Major survey “fails”: They happen

Author By Christopher P. FinneyPosted on

I recently received a plat of survey from a client for a 90-year-old two-family residence he had purchased.  (Survey obtained after the closing.)  It showed several things:

  • The building encroached 8′ onto his neighbor’s property;
  • In addition, there was a walkway and retaining wall the projected even further onto his neighbor’s property; and
  • The home projected 6′ into the public right-of-way (a “right-of-way” is the land owed in “fee simple” or by easement by a governmental entity for roadway and sidewalk purposes (such as through dedication); it is usually much wider than the actual paved area for either).

Now, that’s a hot mess of title and survey issues.  What to do?  What to do?

Get a survey before a purchase

Well, for starters, this is great example of why a buyer needs a survey in addition to a title examination before purchasing real property.  None of these problems would be evidenced by a title examination.  Only a field survey would show these encroachments.  Further, title insurance does not cover these occurrences.

Excuses and justifications

As a side note, we hear over the phone and in the closing room the 25 reasons why a buyer, lender or Realtor does not think title insurance or a survey is needed:

  • The property is “new” (i.e. a new subdivision, with newly-constructed houses);
  • The property is “old,” meaning the homes, garages, driveways and other improvements have existed for a long time.
  • Certainly the seller checked the title and survey, so it is fine.

None of these is a good reason not to get title insurance and a survey.  We can explain further if you like.

Other survey nightmares

In addition to the problems identified above, we have seen other major survey problems:

  • A new house built in violation of a zoning or covenant setback.
  • An entire subdivision where each house was built 5′ onto the neighbor’s property (and thus needs re-platting, deeding the 5′ to the correct owner, a release of the “wrong” mortgage and a re-filing of the correct mortgage).
  • Condominiums where the unit numbering was changed from the time the contract was signed to the time when the condominium documents were file (and thus many units were mis-numbered and every unit needs a new deed, a release of the “wrong” mortgage and a re-filing of the correct mortgage).
  • A complete misunderstanding (or misrepresentation) of the location of property lines.
  • Encroachments (e.g., fences, sheds, utilities) of various improvements onto our client’s property.
  • Encroachments of various improvements from our client’s property onto their neighbor’s property.
  • An easement that runs right where your client intends to build on otherwise “raw land.”

Solutions

For the client noted above, he has several remedies to the problems.

  1. First, did he purchase title insurance?  If he did, he may have a claim — but probably not.  Why not?  For starters, title insurance provides coverage for the insured premises, not for property outside the boundaries of the insured premises.  And by definition, the three problems he called about are outside of the metes and bounds of the property he acquired.  Moreover, the standard title insurance policy specifically excepts coverage of matters that would be disclosed by an accurate survey, and as a rule that exception to coverage is not deleted (and thus coverage provided) without a survey certified to the title company.
  2. Second, did he get a general warranty deed from the seller, the most common form of deed in use in southwest Ohio certainly?  If so, he may (may) have a claim against the seller for breach of the contract and breach of the general warranty covenants.
  3. Third, as to the first two issues (the encroachments onto the neighbor’s property he almost certainly has a strong case for a claim to ownership of the property through “adverse possession.”  You may read a detailed analysis of that here.
  4. Fourth, however, as to the portion of the property in the public right-of-way, the client has a difficult row to hoe.  One may not adversely possess against a governmental entity in Ohio.  The only way to perfect title to the portion of the building in the right-of-way is to seek a deed (or statutory street vacation) from the governmental entity whereby they voluntarily surrender that title to the property owner.

Conclusion

The saying “an ounce of prevention is worth a pound of cure” is appropriate here, as it is with all due diligence investigations before the purchase of real property.  The buyer should have “kicked the tires” with a good surveyor before closing on the sale.  But this is the situation now. So, he can pursue the seller and the neighbor to vindicate his rights to the home and walkway.  As to the governmental entity owning an interest in the right-of-way, he simply needs to work the ropes to see if it will relinquish its interest in his home.

 

 

9 tips for real estate buyers, sellers, landlords and tenants to protect themselves in inflationary times

Author By Christopher P. FinneyPosted on

The business buzzword for 2022 is: Inflation.

The inflation rate in 2021 was 7.5%, a rate that the the Federal Reserve says took them completely by surprise.  And 2022?  Many prognosticators (this author included) believe inflation will hit double digits for the first time in more than 30 years.  This comes after rates of inflation consistently at or below 2% for the past decade.  As a result, many marketplace participants simply are not aware of strategies that will enable them to navigate the shoals of an inflationary environment.

This blog entry may pivot between references to rates of inflation and rates of interest for borrowing.  These two concepts, while different, are addressed interchangeably as (a) inflation is a widely accepted indicator of an over-stimulated economy and (b) the predictable response to inflation is raising interest rates charged to banks by the Fed to dampen that economic activity.  In turn, banks will then raise the rates charged to consumer and commercial borrowers.  So, higher inflation inevitably begets higher interest rates.  The Fed has forecasted both (i) the possibility of front-loaded rate increases, meaning sharp rises in the coming months (as opposed to sequential rate hikes being stretched out over months and years) and (ii) as many as seven rate hikes in 2022 alone.  This means interest rates could rise by a full 2% or more from today’s rates before January of 2023.  How high can rates go? In March of 1980 the prime rate of interest peaked at 19.5%.  Imagine the impact of interest rate adjustments on your business model at those exorbitant rates.

Here are a few things to consider to protect yourself in inflationary times:

  1. Utilize commercial rent adjustments to your advantage.  During low inflationary times, landlords and tenants have commonly avoided complex periodic calculations for rent increases based upon Consumer Price Increases (CPI) increases, in favor of either fixed rent rates during the term of a lease or rent increases only pursuant  to a fixed schedule (say, for example 5% increases every 3 years).  As inflation accelerates and persists at high levels, landlords will hope they had full CPI adjustments built into their leases past and will start demanding then in leases in the future.  Conversely, tenants will cherish fixed-rate, longer-term leases that create a benefit to them of inflation (but the rapidly-changing office and retail markets might cause devaluation of spaces that previous saw decades of stability and strength).  As always, we recommend that tenants consider asking for an early termination provision in all commercial leases.
  2. Anticipate and avoid mortgage interest rate surprises. Many residential mortgages and most commercial mortgages have fixed interest rates only for a few years.  As to residential rates, after the period of the fixed rate, frequently rate increases are capped, but will still be painful.  But for commercial borrowers, when the fixed term expires, the rate increase is typically unlimited.  As a result, commercial borrowers locked into mortgages that might not be paid off for a decade or more could have dramatic, uncapped and unanticipated increases in the interest portion of the mortgage payment that continues to escalate each adjustment period.  To mitigate these impacts, consider refinancing into a new fixed-rate term that gives you breathing room before the impact of higher rates hits with full force.  Also, the sale of parts of your portfolio to pay down debt could lift your P&L from the greatest impacts of interest rate hikes.
  3. Be careful of fixed-rate pricing.  Home builders, contractors and manufacturers are experiencing difficulties fulfilling obligations under fixed-price contracts for matters that have a delivery date well into the future, shrinking their profit margins or turning winning contracts into losers.  Our office then is seeing instances of home builders trying to walk away from contracts and contractors seeking to convert fixed-price contracts into cost-plus agreements, shifting material and subcontractor pricing increases to buyers.  If you are that builder or contractor, consider adding an automatic or negotiated inflation adjustment in the contract and as a buyer, you want to lock in that fixed pricing firmly.
  4. Anticipate suppliers walking away from contracts. Similarly, we have seen manufacturers and distributors of certain products avoiding their obligations to supply certain goods or equipment.  As a buyer, do you have your supply contracts documented correctly and have you diversified your supply pipeline to protect yourself if a supplier lets you down?  Is the party with whom you are contracting sufficiently capitalized to stand behind their contractual obligations?
  5. Consider inflation and interest-rate contingencies.  The Cincinnati Area Board of Realtors/Dayton Area Board of Realtors form residential purchase contract allows a buyer to state the specific terms of the mortgage it is seeking as a contingency to ia buyer’s performance under the contract.  If you specify a “fixed rate loan for 80% of the purchase price at a rate below 3.5% per annum fixed for a period of 30 years,” and interest rates rise before the closing, the buyer has a perfect out.  Similarly, buyers and sellers can include in any contract an “out” for high rates of inflation and higher interest rates.
  6. Be wary of options.  Options to renew leases and options to purchase may seem innocuous and predictable in stable times.  But in a dynamic high-interest rate marketplace, an option acquired today to buy a property at a fixed price three, five or ten years into the future (say under a long-term commercial lease) can unexpectedly enrich the option holder.  Options can be a way a way to leverage dramatic profits to the option holder.
  7. Be prepared to offer seller financing.  A close partner to higher interest rates are tighter lending standards.  Fewer and fewer buyers can afford to buy at inflated interest rates, and lenders also frequently tighten their loan eligibility standards.  As a result, a eligible buyers — abundant today — become frighteningly scarce.  In the worst of the inflationary period at the end of 1977 to 1981, sellers had to offer loan assumptions, land contracts, leases with options (or obligations) to purchase (with the warning noted above) and simple notes with accompanying mortgages to get any property sold.
  8. Be prepared to buy at foreclosure sales.  Foreclosure sales, which have virtually disappeared for the past two years, could come roaring back as commercial and residential owners cannot afford their new, higher mortgage payments, and, of course, mortgage foreclosure moratoria have been lifted.
  9. Be prepared to offer seller financing.  A close partner to higher interest rates are frequently tighter lending standards.  Fewer and fewer buyers can afford to buy at inflated interest rates, and lenders also frequently tighten their loan eligibility standards.  As a result, a eligible buyers — abundant today — become frighteningly scarce.  When lending is loose (as today), it seems readily available to anyone.  And when it tightens, it seems to strangle the marketplaces.  In the worst of the inflationary period at the end of 1977 to 1981, sellers had to offer loan assumptions, land contracts, leases with options (or obligations) to purchase and simple notes with accompanying mortgages to get almost any property sold.

We saw with the rapid deterioration of the real estate market from 2006 to 2010 that buyers many times would willfully breach their contractual obligations to buy or rent.  In this process, they would search for a contingency or loophole — any argument whatsoever — to evade their contractual promises.  And in other instances, they would just outright walk away.  Accompanying these contractual breaches were also insolvency and bankruptcy, making collection impractical or impossible.  Similarly, as the real estate marketplace has heated up over the past five years, we have seen sellers work to evade their contractual obligations so they could retain an appreciating investment or simply realize a higher price from a second buyer.

How can you protect yourself in this type of dynamic market to assure performance by a buyer or seller?

  • Consider escrow deposits, guarantees and other security. Sellers can demand higher earnest money deposits, non-refundable deposits and short contingency periods. Buyers can use tools we have written about here and here of Affidavits of Facts Relating to Title and legal actions for specific performance. Further, consider adding personal guarantees to contractual promises from corporate and LLC buyers or sellers.  Additionally, the performance by buyers and sellers can be further secured with mortgages against real property and secured positions in other assets.
  • Add an attorneys fee provision.  Also, consider adding a contract provision shifting the expense of attorneys fees to the breaching party in a contract.  That can sometimes change the calculus of a prospective breaching party.
  • Tighten your contract language. To lock buyers and sellers into real estate and supply contracts and leases, carefully consider ways the other party might find a contingency or loophole in their performance. Contingencies (commonly for inspection or financing) are the tunnel through which most buyers drive to walk away from a contract.  Ohio law provides that a buyer must “reasonably” attempt to fulfill a contract contingency, but many still attempt to use contingencies to artificially and intentionally avoid their legal obligations.  Fraud on the part of a seller (such as an undisclosed material defect discovered before closing) can also arguably be the basis for a buyer not performing.  Conversely, typically there are no contingencies to a seller’s performance under a contract.  But consider everything in the instrument — the date, the property description, the parties’ names, the “acceptance” language and timing, in considering how the other party might try to squirm away from their promises.

As the economy becomes more unpredictable and more dynamic in terms of pricing, supply shortages and interest rates, market participants would be wise to carefully think about the impact of inflation and interest rate hikes on their contractual obligations and market positioning.

 

 

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

Author By Christopher P. FinneyPosted on

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.

  1. 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).
  2. 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.
  3. 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: Obtain and record “residual” legal descriptions after a partial conveyance or taking

Author By Christopher P. FinneyPosted on

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?

Author By Casey A. JonesPosted on

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.

 

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

Author By Christopher P. FinneyPosted on

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.

New CABR/DABR form residential purchase contract launched October 1

Author By Christopher P. FinneyPosted on

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).

How do private covenants restrict property use versus zoning restrictions

Author By Christopher P. FinneyPosted on

Frequently we are asked by clients whether they are permitted to do “x” on their property: Move lot lines, build above a certain height, use a certain type of siding or trim or modify building setback lines. What rules govern these concerns?

The answer is: Both governmental restrictions and private contracts or covenants.

Let us explain.

Governmental restrictions

Zoning code, building code, fire code, subdivision regulations, engineer rules, and on and on and on, there a host of governmental regulations that dictate the use of, development of and construction on private property. And for each of these restrictions, there is a procedure for altering or “varying” the strict compliance with the restriction. These might include a board of zoning appeals, a board of building appeals,  or even an administrative appeal in Ohio Common Pleas Court or Kentucky Circuit Court.

So, once you jump through the hoops to get governmental approval, you are good to go, right?  Ummm, wrong.

Private covenants

For most modern subdivisions, commercial and residential, and for older ones going back decades, there are a series of private covenants against the land that many times mirror and then exceed the requirements in the governmental regulations. These covenants are recorded in the land records — in Ohio the County Recorder’s Office and in Kentucky in the County Clerk’s office. These covenants — whether the property owner is actually aware of them or not — are binding on each property owner in the subdivision as if the owner himself signed them. They are, in essence, a contract to which each subdivision property owner has expressly agreed.  These covenants may be in a textual document (many exceeding 50-100 pages) and they may be on a plat of subdivision as a graphically-drawn easement or restriction or text on the face of a plat.  Each have equal weight under the law. (Consider: did you understand as a property buyer that you were entering into 100-page contract and were bound to each provision thereof?)

Take for example building setbacks.  Zoning might require a minimum front yard of 25′, but the private covenants may require 50′. As to front entry garages, zoning may allow them, but private covenants may prohibit them.

Under private covenants, the “varying” or waiver could require unanimous approval of all lot owners, could require approval of the homeowners association board or an architectural committee thereof. Some covenants can be waived simply by a signature of the developer. The bottom line is that they are a matter of contract.  What the restrictions are and how they are waivered or varied is a question typically answered in the document itself.

Effect of governmental variance on private covenants (and vice versa)

So, as a property owner, once you go through the entire governmental variance process to allow a front entry garage or a smaller front yard setback, does that then solve the covenant problem?  Absolutely not. These two sets of restrictions each stand alone and must be modified or waived independently.

Similarly, if a property owner were to pursue a variance from requirements from a homeowners’ association, would that “fix” the violation of the governmental restriction? Still, no.

Thus, it will many times require two sets of approvals to get around a restriction that is in both the zoning code and the subdivision covenants.

Conclusion

For assistance with a zoning or covenant issue, please contact Jennings Kleeman (513.797.2858), Eli Krafte-Jacobs (513.797.2853) or Isaac Heintz (513.943.6654).

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