For most contracts, an agreement is an agreement: If the parties agreed, orally, on paper, or even just electronically, in an email, text message, or through social media, generally, the agreement can be legally binding.
However, agreements relating to the purchase, sale and leasing of real estate can have special requirements for their enforceability. Here, we explore the Ohio Statute of Frauds (O.R.C § 1335.05), which requires certain agreements (i) be in writing and (ii) signed by “the party to be charged therewith,” i.e., the buyer, seller, landlord or tenant. And for real estate instruments, the Ohio Statute of Frauds has those requirements for contracts for the purchase and sale of real estate and for leases (residential or commercial) extending beyond one year. Many people are familiar with the requirement of the Ohio Statute of Frauds as it relates to real estate.
Less familiar to laymen and even real estate professionals is Ohio’s Statute of Conveyances, which requires deeds, mortgages, land installment contracts and leases with a term in excess of three years to be “acknowledged” before a notary public (i.e., “notarized”). This derives from O.R.C. § 5301.01, which requires these instruments to be notarized and O.R.C. § 5301.08, which then excepts from that requirement leases for less than three years.
But what does the Statute of Conveyances mean? Is it that, if you have a signed lease, residential or commercial, that is not notarized, and (i) a tenant has moved in, (ii) a landlord or tenant has made expensive improvements to a premises, or (iii) a tenant has made a long-term commitment to having its operations at a specific location, the other party can simply terminate the lease due to it not being notarized? Despite this seeming like a harsh outcome, the answer is yes, to a degree.
To bypass such harsh outcome, the Courts have carved out equitable exceptions to the Statute of Conveyances. This blog entry explores the enforceability of non-notarized leases in excess of three years in Ohio under the Statute of Conveyances on the one hand and those common law exceptions on the other.
Enforceability of non-notarized leases in excess of three years in Ohio
Where parties execute a lease without notarizing it, the lease is considered defectively executed. A defectively executed lease is invalid and does not create the exact lease sought to be created. That said, the terms of the defectively executed lease are controlling once the tenant moves in and starts paying rent under said lease, except for duration. The duration is determined by the provision for the payment of rent. For example, a lease with monthly rent payments results in a month-to-month lease, while a lease with annual rent payments results in a year-to-year lease.
Where parties do sign and notarize a lease as required by the Statute of Conveyances, and such lease contains an option to renew, the act of accepting an option to renew does not require a second formal execution. However, where there is not an option to renew, a grant of an additional term is an independent and separate transaction requiring its own compliance with the Statute of Conveyances.
Common law exceptions
The applicable law in a defectively executed lease case depends on the type of the relief pursued. If the party suing seeks to recover damages for breach of the lease, then the applicable route is that of the equitable doctrine of Partial Performance. If the party suing seeks to have the defective lease treated as a contract to make a lease, then the applicable route is that of the equitable doctrine of Specific Performance.
(A) Partial Performance:
A defectively executed lease can be validated through Partial Performance. Partial Performance is based in fairness and is utilized where it would be unfair to permit the Statute of Conveyances to invalidate the defectively executed lease. Partial Performance validates a defectively executed lease where the following four factors are present: (i) unequivocal acts by the party relying on the agreement; (ii) the acts are exclusively referable to the agreement; (iii) the acts change the party’s position to his detriment; and (iv) the acts make it impossible to place the parties in “statu quo”. The party wishing to benefit from Partial Performance must show that the facts of their particular matter meeting the aforementioned four factors are, more likely than not, true.
Generally, the facts of the cases, where the courts allow Partial Performance to validate defectively executed leases from the Statute of Conveyances, include: (i) expending sums of money, (ii) extending credit, (iii) making improvements, and (iv) following what the parties called for in the defectively executed lease. That said, it is important to note that moving in and paying rent is not sufficient to relieve the parties from the Statue of Conveyances.
(B) Specific Performance
Courts may allow for Specific Performance of defectively executed leases where no adequate remedies at law exist. Whether courts will allow for Specific Performance of defectively executed leases is within each respective court’s discretion. As such, Specific Performance is not guaranteed.
Where parties seek to enforce defectively executed leases through, and courts allow for, Specific Performance, the Statute of Conveyances does not impede such enforcing parties’ right to recovery. This is because defectively executed leases are enforceable, as a matter of fairness, as contracts to make a lease between the parties who intended to be bound by them. Courts may order Specific Performance of such contracts.
So, if you are a party to a defectively executed lease, and you are concerned with its enforceability, it is prudent to take some time to call the Finney Law Firm. We can help determine whether your lease is compliant with the Statute of Conveyances, and what you might be able to do if it is not.