As discussed in a previous post, courts will only enforce contracts for the sale of real estate if the contract is in writing (and signed by the person against whom you seek enforcement). Click here to read that post.

The legal principle that requires certain contracts to be in writing is the Statute of Frauds. In Ohio, the Statute of Frauds is codified in Chapter 1335 of the Ohio Revised Code; and the Statute of Frauds covers more than just real estate contracts (both sales and leases). For example, R.C. 1335.02 requires loan agreements with financial institutions be in a signed writing to be enforced. However, ‚Äúthe use of a credit card results in the person using the card being bound by the card member agreement.‚ÄĚ Citibank, N.A. v. Ebbing, 2013 -Ohio- 4761, ¬∂ 13, 2013 WL 5783722, at *3 (Ohio App. 12 Dist.,2013)

R.C. 1335.05 extends the Statute of Frauds to a promise to pay the debts of another person; an executor’s promise to pay the debts of the estate from her own funds; an agreement made in consideration of marriage; and for contracts that are not to be performed within one year.

R.C. 1335.11 further extends the requirements of the Statute of Frauds to sales commissions.

These same subjects are covered by Kentucky’s the Statute of Frauds at K.R.S. 371.010.

Despite the formal language of the statute, we see these in everyday life: a parent cosigning on a child’s student loans for instance. An agreement made in consideration of marriage includes prenuptial agreements (but not the agreement to marry itself).

When faced with oral agreements that are not to be performed within one year, courts will often engage in detailed analysis to determine if it is possible that the contract could have been performed within one year. For instance, in Jones v. Pouch, 41 Ohio St. 146, 1884 WL 84 (Ohio 1884), the Ohio Supreme Court ruled that an oral contract to construct a section of road in 1 year and 20 days was enforceable, because it was possible to have completed the work within one year, the additional twenty days were merely a precaution against contingencies. This case is still good law and was cited in the 2015 edition of Williston on Contracts despite being 131 years old.

Additionally with respect to agreements that are not to be performed within one year, Ohio’s courts have determined that the statute of frauds will not bar recovery where one party has fully performed their obligations under the contract but has not been fully paid. In another 19th century case, Towsley v. Moore, 30 Ohio St. 184, 1876 WL 176 (Ohio 1876) the mother of Olive Towsley, an 11 year old girl arranged for her to work in the home of Mr. Moore until she turned 18, in exchange for room and board, and, when she turned 18, Moore was to pay Olive the value of her services. The Court rejected Moore’s argument that the statute of frauds prevented Olive from recovering the value of her services. Ultimately, Moore was ordered to pay Olive $300.00 for her nearly 7 years of service.

Even where a contract fails to satisfy the requirements of the Statute of Frauds and a breach of contract claim cannot be brought, a claim for unjust enrichment or other equitable claims may allow you to obtain a just result.

Whether you are the borrower or the lender, employer or employee, you can avoid these questions by getting your contract in writing and signed by all parties.

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 ¬ß 1335.05), which requires certain agreements (i) be in writing and (ii) signed by ‚Äúthe party to be charged therewith,‚ÄĚ 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‚Äôs Statute of Conveyances, which requires deeds, mortgages, land installment contracts and leases with a term in excess of three years to be ‚Äúacknowledged‚ÄĚ before a notary public (i.e., ‚Äúnotarized‚ÄĚ).¬† This derives from O.R.C. ¬ß 5301.01, which requires these instruments to be notarized and O.R.C. ¬ß 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‚Äôs position to his detriment; and (iv) the acts make it impossible to place the parties in ‚Äústatu quo‚ÄĚ. 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.

Conclusion

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.

As first-year law students and many even outside of the legal community know, the ‚Äústatute of frauds,‚ÄĚ codified in Ohio R.C. 1335.04, requires that any interest in land be evidenced by a writing.

Principle of Part Performance

But this general principle is not without exception. One of the more commonly referenced exceptions is part performance. Sites v. Keller, 6 Ohio St. 483, 489-490 (1834) (‚ÄúWhenever an agreement has been partly performed, and the terms of it are satisfactorily found, it will be enforced notwithstanding the statute.‚ÄĚ); Shahan v. Swan, 48 Ohio St. 25, 37, 26 N.E. 222 (1891) (‚Äú[I]f the acts of part performance clearly refer to some contract in relation to the subject matter in dispute; its terms may then be established by parol.‚ÄĚ).

Other exceptions

However, lesser-known exceptions exist, as well, and are frequently neglected in the statute of frauds discussion. This has resulted in a misunderstanding among many as to the scope of the statute of frauds and when it precludes a claimed interest in land. Specifically, there are two types of equitable trusts that effectively circumvent the harsh consequences of requiring strict compliance with the statute of frauds: a constructive trust and a resulting trust.

Ohio Constructive Trust

‚ÄúA constructive trust arises by operation of law against one who through any form of unconscionable conduct holds legal title to property where equity and good conscience demands that he should not hold such title.‚ÄĚ Dixon v. Smith, 119 Ohio App.3d 308, 319, 695 N.E.2d 284 (3d Dist. 1997). Where one ‚Äúwho, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means . . . either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy,‚ÄĚ equity will create a constructive trust. Ferguson v. Owens, 9 Ohio St.3d 223, 225, 459 N.E.2d 1293 (1984).

Additionally, at least one Ohio court has suggested that, ‚Äú[d]espite the above cited language . . . a constructive trust may exist even where there is no evidence that the title to the property was obtained by improper means.‚ÄĚ McGrew v. Popham, 5th Dist. No. 05 CA 129, 2007-Ohio-428. ¬∂¬∂ 17-19, citing Groza-Vance v. Vance, 162 Ohio App. 3d 510, 520 (10th Dist. 2005). The creation of a constructive trust is premised upon the unjust enrichment that would result if the person holding legal title to the property were allowed to retain it. Ferguson, at 226.

Ohio Resulting Trust

The Ohio Supreme Court has also recognized ‚Äúa resulting trust as one that the court of equity declares to exist where the legal estate in property is transferred or acquired by one under circumstances indicating that the beneficial interest is not intended to be enjoyed by the holder of the legal title.‚ÄĚ Univ. Hosps. of Cleveland, Inc. v. Lynch, 96 Ohio St.3d 118, 772 N.E.2d 105, 2002-Ohio-3748, at ¬∂ 56, citing First Natl. Bank of Cincinnati v. Tenney, 165 Ohio St. 513, 515, 138 N.E.2d 15 (1956). This concept is easily understood in the purchase-money context – ‚Äúwhere property is transferred to one person but another pays the purchase price, the law presumes a resulting trust exists in favor of the person paying for the property.‚ÄĚ Hollon v. Abner, 1st Dist. No. C960182, 1997 Ohio App. LEXIS 3814, at *5 (Aug. 29, 1997); Perich-Varie v. Varie, 11th Dist. No. 98-T-0029, 1999 Ohio App. LEXIS 3990, at *7-*8 (Aug. 27, 1999).

For example, in the Perich-Varie case, the court found that where an individual had been making the mortgage payments on property legally held in his former in-laws‚Äô names, he had a full ownership interest in the property. This was true even though the in-laws argued that the mortgage payments were merely ‚Äúrent‚ÄĚ and even though he had only paid $12,000 of the $33,000 mortgage on the property. Perich-Varie, at * 4-5, * 10-11. To eliminate any inequity (after all, that‚Äôs what a resulting trust is all about), the Eleventh District required the lower court to order that the mortgage first be satisfied so that the in-laws were not obligated under a mortgage on a property in which they had no interest. Id., at * 14.

Conclusion

As you can see, constructive and resulting trusts represent some pretty significant departures from the rigid statute of frauds in the name of ‚Äúequity.‚Ä̬† While a lot of confusion, disagreement, and, ultimately, litigation can be avoided by putting matters involving real property in writing, those who find themselves in a situation where their interest has not been reduced to writing are not necessarily without recourse if one of these equitable remedies applies.

 

Certain legal challenges seem to come in waves for me, and lately one of those waves involves difficulties encountered in the termination of the Cincinnati Area Board of Realtors Purchase Contract, either for failure of the inspection contingency or the financing contingency.

Three guideposts should guide real estate practitioners, buyers and sellers in the exercise of contingencies in a purchase contract:

  • Read the contract.

Just because a contract is contingent upon the satisfactory outcome of a a loan application or a house inspection does not mean that termination is automatic just because the buyer says it is so.

  • Follow the steps for termination set forth in the Contract.

The Contract many times lays out a specific procedure for contract termination.  That procedure should be followed.

  • Get it in writing.

As we address here, the statute of frauds requires the contract and every amendment¬†and¬†termination thereof to be in writing. ¬†Stating it most simply, if it in’t in writing, it did not happen.

As an example, the Cincinnati Area Board or Realtors Purchase Contract provides a procedure for termination of a contract for the failure of an inspection contingency:

If Buyer is not satisfied with the¬†condition of the Real Estate, as revealed by the inspection(s) and desires to terminate this Contract, Buyer shall provide written notification to Listing Firm or Seller that Buyer is exercising Buyer’s right to terminate this Contract within the Inspection Period, and this Contract shall be terminated.

That seems really simple, but the Cincinnati Area Board of Realtors also has a series of supplemental forms for use in residential real estate transactions.  Two of those are:

  • Release from Contract to Purchase. ¬†This form is a supplemental¬†agreement between a buyer and a seller to terminate a contract.
  • Notice of Termination of the Contract to Purchase. ¬†This document is a unilateral (i.e., just a notice signed by one party to the other; it does not require a counter signature).
Seller refuses to acknowledge an “offer” to terminate.

I recently experienced a situation in which the¬†buyer signed and tendered a Release from Contract to Purchase to the Seller for the Seller to sign within the inspection contingency period. ¬† The seller claimed that that form did not constitute sufficient notice of the failure of the inspection contingency pursuant to the¬†language set forth above and thus it was merely an “offer” from the buyer to the seller to terminate the contact.

The seller reasoned that¬†because both (i) the buyer failed to notify the seller of the failure of the inspection¬†contingency pursuant to the contract requirements and (ii) the seller refused the tendered “offer” to terminate, that the buyer was still bound to the contract. Further, since the inspection period had since lapsed, it was now too late to provide such notice, the seller claimed.

What we did in that circumstance was to supplement the submittal to the seller with a termination under the financing contingency, and eventually the seller conceded that the contract had been terminated and returned the buyer’s earnest money.

Seller refuses to schedule inspection.

In another recent dust-up between a buyer and a seller, the seller refused to schedule an inspection of the property pursuant to the inspection contingency.  In this instance, the buyer attempted to so schedule using the automated showing system, and the seller simply would not permit or acknowledge the request.

In that circumstance, the buyer sent a termination to the seller, and we await his response. But what is a buyer to do when the seller refuses to allow access for an inspection?  Clearly, the courts will permit the buyer to terminate either pursuant to the inspection contingency or because the seller has breached the contract by refusing to allow the inspection.

Conclusion.

So, even though it should seem to be a clear right of the buyer to terminate the contract, the form that that communication to the seller takes informing him of the termination could well impact the substance of whether the termination was effective.

 

As a real estate attorney, I¬†many times take for granted that experienced real estate professionals ‚ÄĒ Realtors, lenders, and investors¬†‚ÄĒ understand the fundamentals of real estate law. ¬†And many times I am¬†proven wrong¬†in that assumption.

Just a few weeks ago, I again learned this lesson from real-life experience.

In that scenario, the parties signed a document entitled ‚Äúletter of intent‚ÄĚ for a million-dollar-plus property. ¬†The document identified the property in question, the purchase price and the timing for the closing.

Later, the seller obtained another offer on the property and took the position that our “Letter of Intent” was not binding. ¬†We took the opposite position and vigorously acted to enforce the newly-formed contact.

How is that so?

Statute of Frauds

First, we have extensively explored on this site the requirements of every state in the union that contracts for the purchase and sale of real estate (i) must be in writing and (ii) must be signed by the ‚Äúparty to be charged‚ÄĚ therewith (i.e., the party who is to be sued on the contract). Grafton v. Cummings, 99 U.S. 100, 106 (1878); Smith v. Williams, 396 S.W.3d 296, 298 (Ky. 2012); Sanders v. McNutt, 72 N.E.2d 72, 75 (Ohio 1947). You may read more about that¬†here.

What writing constitutes a contract?

Virtually any document that evidences a meeting of the minds between parties on the material terms of a transaction and that complies with the statute of frauds will be a binding contract for the purchase and sale of real estate. McGeorge v. White, 174 S.W.2d 532, 533 (Ky. Ct. App. 1943); Beasley v. ANG, Inc., 10th Dist. Franklin No. 12AP-1050, 2013-Ohio-4882, ¶ 8 (Ohio Ct. App., Nov. 5, 2013).

The title of the document does not matter.  The paper on which the contract is memorialized does not matter.  Whether it is written in pen, pencil, or crayon does not matter.

It simply matters that the material terms are in the document, the document is in writing and the document bears the signature of the ‚Äúparty to be charged therewith.‚ÄĚ

Memoranda of understanding and letters of intent

Certainly, though, a document entitled so innocuously as a ‚Äúletter of intent‚ÄĚ or a ‚Äúmemorandum of understating‚ÄĚ would not in and of itself¬†be¬†a binding agreement, right? ¬†Wrong.

Sometimes the terms of a document ‚ÄĒ such as a letter of intent or memorandum of understanding ‚ÄĒ may say in the text that it is¬†not¬†binding upon the parties unless and until they sign a contract drafted by their attorneys and signed by the parties. ¬†In such instance, by its own terms, the document is not a binding contract. See, e.g., John Wood Group USA, Inc. v. ICO, Inc., 26 S.W.3d 12, 17 (Ct. App. Tx. 2000) (‚Äúthe parties expressly stated that the letter agreement ‚Äėis not binding,‚Äô with the exception of certain enumerated paragraphs‚ÄĚ); Christ v. Brontman, 175 Misc. 2d 474, 477 (S.Ct. N.Y. 1997) (‚ÄúGenerally, if the language in the contract so provides, a real estate sales agreement which is subject to the approval of attorneys is not binding and enforceable until approved by the attorneys.‚ÄĚ).

But in the absence of such ‚Äúsaving‚ÄĚ language, a writing is a binding agreement on the terms set forth in such writing.

Again, the title of a document, or its brevity, could lead a buyer or seller to believe it is intended to be non-binding, and simply preliminary.  Buyers and sellers are lulled into erroneous understanding that the informal nature of the document, the shortened text, and/or the title mean that the document is not binding unless and until further documentation follows, carefully reviewed or drafted by counsel.  This is simply false as a matter of law.

Lot Reservation Agreements

This same logic extends to ‚ÄúLot Reservation Agreements‚Ä̬†in the context of a buyer-builder relationship. ¬†A one-paragraph agreement that seems to be just a quick way to tie up a piece of property for a few weeks or months could in fact give rise to binding obligations assuming the agreements comply with other contract principles.

Principle extends to other agreements

Although the focus of this article is the purchase and sale of real estate, its contents could just as well apply to other legal transactions such as real estate leases, options, easements and license agreements, and to non-real estate transactions such as equipment leases, and the sale of a company or its assets.

The back of an envelope

We learn in law school that a buyer and seller can memorialize a contractual agreement on any type of paper, including the back of a used envelope.

About 20 years ago, to my surprise, I ended up being involved in a “back of the envelope” case. ¬†There, the buyer sat on one side of a table and the¬†seller‚Äôs Realtor¬†was on the other side of a table. ¬†The Realtor wrote out some basic bullet-point contract provisions, being the address of the subject property, the price and the closing date, on the back of a used legal-sized envelope. ¬†The buyer, on the other side of the table, signed the document upside down! ‚ÄĒ he didn‚Äôt even bother turning¬†around the writing and reading it. ¬†A judge found that that crazy-looking instrument¬†constituted a contract binding upon that buyer.

The lesson: It simply does not matter what kind of paper the contract is memorialized upon or even where and how the terms are written on that piece of paper.

Conclusion

As we frequently caution our clients, ‚Äúit‚Äôs a dangerous world out there.‚ÄĚ ¬†You must carefully consider the consequences of your actions and those acting on your behalf.

 

chris_finneyThis article is an in-depth exploration of¬†options to purchase real estate, a powerful tool for real estate developers to¬†“kick the tires” of real estate before committing to buy, and an important right in tenants to purchase their property — rather than continuing to lease.

NOTE: this article exploring the distinction between Options, Obligations and Rights of First Refusal.

An option to purchase real estate typically places the prospective purchaser completely in the driver’s seat of a transaction — giving him the unfettered option to purchase real estate, usually at a fixed price. ¬†So, the operative¬†language for an option to purchase may look like this:

Purchaser [tenant] has the exclusive right and option to purchase the real property described on the attached Exhibit A during the term of this Agreement [Lease] for the price of $__________________.

There are several key considerations to options for both parties and then several components that should be addressed in a written option to purchase agreement.

Variable price

In addition to fixed-price options, the parties could agree upon all sorts of formulas for establishing the price, including:

  • If the option to purchase will extend out over a period of years, a CPI or inflation adjustment may be appropriate;
  • If the building is a multi-tenant facility, it may make sense to base the purchase price on gross or net income divided by a cap rate, or some other formulation;
  • Parties frequently base option prices¬†on an appraisal, or multiple appraisals, to ascertain value at the time of the exercise. ¬†Regardless of how “fair” or “objective” this may seem, appraisals on commercial buildings can vary widely based upon the appraiser and the assignment he has been given. ¬†Appraisals are also very expensive; and
  • Finally, please resist the temptation to agree upon “market value” or “an agreed price” at the time the option is exercised, for “an agreement to agree to something later is no agreement at all.”

Get it in writing

As this article explains, the statute of frauds in each state will govern an option to purchase agreement — and as such it¬†must be in writing and signed by the party against whom you want to enforce it, or as far as the law is concerned, the claimed transaction simply did not happen.

Contracts many times act as options

Most commercial contracts to purchase real estate are really options when you think about it. ¬†What I mean by this is that the contingencies to the buyer’s¬†performance typically are so open-ended in commercial purchase agreement, that the buyer¬†can simply “opt” to buy or not buy before the close of a due diligence period. ¬†Thus, following the line of thinking above, does it make sense for the buyer¬†to have some “hard, forfeited money in the game to obtain this valuable right from a seller? ¬†It’s at least something to consider.

An option is a contract when it has been exercised

Conversely,¬†once a buyer exercises his option to purchase real estate, he is then obligated to purchase the real estate and the seller is bound to sell. ¬†Thus, the instrument — upon its exercise — becomes exactly the same as a contract to purchase. ¬†The question is thus, on what terms?

Because it may be¬†too late to negotiate key contract terms after the exercise of the option, all of the components of a purchase contract should be called out in the option. ¬†These should include, at a minimum: (i) quality of title, (ii) closing date, (iii) date of possession, (iv) tax and rent prorations, etc. ¬†In a lease, many times the “option to purchase” is relegated to a single paragraph or section, but even if so, these contract provisions (along with the other components noted below) should be carefully addressed in that one paragraph.

Free-standing option or part of another instrument?

Often, an option to purchase is a component of another instrument — usually a lease — or it can be its own freestanding “option to purchase agreement.” ¬†In leases, options to purchase¬†is most common in situations in which¬†the tenant is occupying the entirety of the real estate. ¬†Further, an option to purchase¬†can be an important component of sale-leaseback agreements and build-to-suit arrangements, both of which can be viewed as, at least in part, financing vehicles. ¬†Regardless of the genesis and context of the option to purchase, the matters set forth in this¬†blog entry are appropriate for consideration.

As to free-standing option¬†agreements, it is common that the buyer of the option pay the seller a sum of money or other consideration for the option. ¬†First, this is required under the contact principle of “consideration.” ¬†Without something paid for the promise to sell, the contract may fail for lack of consideration. ¬†Further, as the option gives the buyer the open-ended right to sell or lease the property to others once he exercises the option and buys the property, it provides substantial value to a buyer — this is something the seller may¬†not want to just give away.

On the other hand, the seller may not be overly anxious to force a significant price for the option, as it is an effective way of marketing a property through a qualified developer that otherwise might sit unused and unsold for years.

The option period

During the option period, the seller is unable to convey clear title to a third party (because it would be subject to the option in the buyer), and the buyer typically performs his due diligence, markets the property for sale or lease to third parties, obtains zoning and other regulatory approvals, and obtains his financing.

Commonly, an option to purchase is for a fixed period of time.  So, for example, if the option is part of a lease with a three-year term, the option would run concurrent with that three year-term, or perhaps need to be exercised no later than 90 days preceding the lease expiration.  In the case of a term that runs concurrent with a lease, consider (i) options to renew and (ii) holdover periods.  How will the option be handled during such periods as well?  Some proposed language:

The term of this option will run from the execution of this Agreement through December 31, 2020.

– or –

Tenant may exercise this option throughout the term of the Lease and any extension or renewal hereof, provided that it must be exercised no later than 90 days prior to the expiration of this Lease.  The option is not effective during any holdover period.

Other times, the period within which the option must be exercised¬†hinges off of the due diligence period. ¬†So, if a buyer has six months to physically inspect the property and to obtain his zoning and other regulatory approvals for a new intended use, then the option period may run 60 days beyond the close of that¬†due diligence period. ¬†A¬†problem, especially for a seller, with this approach is that if it is not clear that the buyer has to proceed with diligence with his inspections and regulatory approvals and there is no closed-end date for that due diligence period, then the option date never arrives, and title to the property is perpetually clouded until the buyer makes up his mind — which he may not be motivated to do.

We address that issue in this blog entry: Advanced commercial real estate: Seller beware, the contract that doesn’t end.  Typically language that bases the option period on due diligence inspections would not be used within a lease.  So, some proposed language for freestanding option to purchase agreements:

This option may be exercised by buyer up to sixty days following the close of the Due Diligence period as the same is defined in Section 3, above.

In any event, to properly draft an option to purchase, the period of time, or formula for determining the period of time, within which buyer has to exercise the option should be clearly stated.

The exercise

Perhaps where many options “fall down” in the drafting is in clearly explaining what the buyer must do to exercise the option, and that the option is then forfeited if not exercised within that period of time. ¬†When, where and how the option should be exercised and when and how the option expires for non-exercise (or otherwise) are important components of the drafting of an option to purchase instrument. ¬†Again, some proposed language:

This option may be exercised on or before the Expiration Date by buyer delivering to seller written notice of the exercise of the option by hand delivery or certified mail.

Non-exercise

What then happens if the option is not exercised within the option period?  The instrument should make clear that the option then expires and the buyer/tenant has no right to purchase the subject property.  Some model language:

If buyer [tenant] fails to exercise the rights granted by this option as and when provided for herein, then this option will be deemed to have expired, and buyer [tenant] will have no right to purchase the property.  Time is of the essence as to the option period, and the exercise of the option as provided herein.

Special lease provisions

When an option to purchase is contained in a lease, some special matters¬†should also be considered. ¬†For example, what if the tenant falls into default in the payment of his rent? ¬†Landlords frequently want to either revoke option rights completely upon one default, or more likely suspend the tenant’s option rights during the period of any default. ¬†Thus, the grant of the right may be preceded by the language: “So long as tenant is not then in default of any of its obligations hereunder.” ¬†Other things to consider with options built in to leases are:

  • The due diligence inspections usually are not needed as the tenant is familiar with the property, and indeed may be the cause of conditions present at the property; and
  • Tax proration issues can be complicated if the tenant is paying the taxes as a part of his lease payments.

Title and recording

And as is addressed in this article on tenant’s rights in a receivership, the title to the property in which rights are granted by the owner is important. ¬†For, if the property is subject to a pre-existing lease, mortgage, option to purchase or other instrument that precedes the new option to purchase, then the new option to purchase is likely to be subject to the right of the tenant or grantee in that prior instrument.

  • In the case of a mortgage, the mortgagee can wipe out that later-granted option with a foreclosure proceeding.
  • In the case of a tenant, the option to purchase would be subject to the tenant’s rights, which may well be under a long-term lease.
  • In the case of another optionee, the pre-existing option may take priority over the new one, thus defeating the right to purchase in the later instrument.

Now, to be clear, the seller of the option may have liability to the buyer for breaching the agreement, but for a buyer that has paid, say, $100,000 for the “rights” to buy a building, a worthless claim against an insolvent seller will be little consolation.

So, how does a buyer under an option, whether a tenant or a buyer under a free-standing option agreement, proceed with assurance that his option rights will take priority over the claims of others:

  • Perform a title exam and visually inspect the property as to¬†tenants or other occupants (say, a neighbor with an encroachment) who may have pre-existing rights;
  • Get written subordination¬†agreements¬†from those with superior rights to the option to purchase or clarify that they do not have superior rights, such as through an estoppel certificate; and
  • Once priority is established through those first two steps, record the new option to purchase so that the world is placed on notice of the priority of the rights created by that instrument.

Conclusion

An option to purchase can be seen as a casual commitment by both the buyer and the seller, because it may appear¬†preliminary to a transaction actually transpiring. ¬†But, in reality, it usually grants powerful rights to the buyer that, once exercised become a binding contract. ¬†¬†Further, from the buyer’s perspective, before paying significant sums for property optioned or¬†investing monies in due diligence work, it behooves the buyer to¬†carefully consider and then address superior rights of others in¬†the¬†property.

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If you need assistance with properly framing an option to purchase agreement, as buyer or seller, we encourage you to call any member of our real estate transnational team, Chris Finney (513-943-6655), Isaac Heintz (513-943-6655), or Rick Turner ((513-943-5661).  For litigation support regarding a dispute over an option to purchase, contact Brad Gibson (513-943-6661).

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Finally, here are some good articles for additional reading on options to purchase real estate:

Option Contracts for Buying & Selling Real Estate from Lawyers.com >>

Who Really Needs a Real Estate Option Contract? from Realtor.com >>

Consider the Consequences of Your Options from the CCIM Institute >>

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:

No action shall be brought to charge any person:

(6) Upon any contract for the sale of real estate, or any lease thereof for longer than one year;

unless the promise, contract, agreement, representation, assurance, or ratification, or some memorandum or note thereof, be in writing and signed by the party to be charged therewith, or by his authorized agent.

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.

Real Estate Contracts You Will Encounter During a Home Sale or Purchase

Real Estate Contracts You Will Encounter During a Home Sale or Purchase

Definitions used in this article:

Implied Contract: A contract created by actions of the parties involved and is not always in writing.  Courts usually look for a meeting of the minds to determine if an implied contract exists.

Explicit Contract: A contract created by a written document which is signed by all parties involved with the contract.

When buying or selling a home you will come across a number of different contracts that you will sign as part of the process. You may be wondering what all these contracts are and how do they impact you. This post provides a general explanation for the various contracts used in a real estate transaction and the functions they read the fine print in real estate contractsserve in the transaction process.

Buyer Representation Agreement

A Buyer Representation Agreement is an agreement between the home buyer and a real estate agent. The agreement generally states that the real estate agent will get a commission by helping the buyer find a home and assisting in the process of buying the home. The assistance aspects include taking the buyers to homes they want to see or suggesting homes for them to see; preparing the offer in accordance with the buyer instructions; negotiating on the buyers behalf with regards to any matter related to the home purchase; guiding the buyer along the home purchase process and more.

This type of contract should be in writing (explicit contract) to have maximum effect. Sometimes these agreements will also state that the real estate agent is due a commission regardless of whether or not the buyer uses the agent’s services or showed them a particular home. Some agreements may only require the payment of a commission if the real estate agent is the procuring cause of the sale (i.e. the agent showed a particular home to the buyers).

Sometimes a real estate agent may forgo having their buyer sign this type of document in order to not make the buyers feel pressured. Those agents may be proceeding under the assumption that they are under an implied contract with their buyers.  If the buyer who has not signed any agreement happens to purchase a home without the help of their real estate agent or another agent happens to put in an offer for the buyer, the agent may not be entitled to a commission. Whether the agent will get a commission will depend if it can be shown that they are the procuring cause and whether or not their broker will pursue a lawsuit to get the commission.

Seller Representation Agreement

A Seller Representation Agreement is an agreement between a real estate agent and a home seller for the purpose of listing the seller’s home on the market for sale. Generally most real estate brokers want these agreements to be explicit contracts signed by both the seller and the agent representing the broker so as to avoid any confusion as to duties and rights. Many states have laws governing the marketing of real estate by licensed real estate agents and usually do have other forms for the sellers to review and sign in order to indicate their understanding of how the real estate agent they have hired will work when it comes to representing them and other buyers and sellers.

The seller representation agreement usually has a start date, end date, terms regarding what will go and what will stay with the property, language regarding use of advertising signs, forms of advertising (internet), home warranty information and more. It should be noted that while the seller representation agreement may state what items will stay with the home after closing that agreement is not binding upon the seller and buyer since it is only an agreement between the seller and the real estate broker. If a buyer wants certain things to stay with the home those items should be specifically mentioned in the Offer to Purchase contract document talked about below.

Buyer Offer To Purchase

The buyer’s offer to purchase represents merely an offer until it is accepted in writing by the seller. Any counter offer by the seller represents a new offer. If the buyer rejects the seller counter offer the seller cannot go back and decide to accept the offer that was first presented unless the buyer agrees to it. While an offer to purchase or counter offer can be made verbally (implied contract) in order for the offer to be legally enforceable in court it must be in writing (explicit contract) in accordance with the Statute of Frauds. Anything not captured in writing will not be enforced in a court of law. Therefore if there is something from the house (movable kitchen island, curtains or other non-fixed window treatments etc.) that you would like to stay with the home it is best to make sure that item is specifically written in to your offer to purchase.

Generally earnest money is not a requirement of an offer to purchase residential real estate. Earnest money is used to show a good faith desire to enter into a purchase agreement but is not required by law. Earnest money is usually credited towards the buyer upon closing. The earnest money will be returned if the seller and the buyer are unable to come to agreement on an offer. If the seller or the buyer call off the offer to purchase due to some disagreement then usually any claim to the earnest money must be released by the seller in writing before the money can be returned to the buyer. If a seller refuses to release their claim to the money then the parties must go to court to have a judge decide who is entitled to the earnest money.

Just because either the buyer or the seller state they want to back out of the deal does not mean they can back out of the deal without both parties agreeing to cancel the Offer to Purchase. If one of the requirements (contingencies) of the offer of the offer is not met then the offer can be cancelled without consequence to either party. Contingencies such as financing, home inspection, selling another home first are some common contingencies found offers to purchase. If the buyer or seller wants to back out of the purchase offer for the simple fact they changed their mind they could be sued by the other side for breach of contract.

Mortgage Document

When money is borrowed to purchase a home the mortgage document represents an explicit contract between the borrower and the lender. The mortgage document will set out the terms of the payments, due dates, late payment penalties, assignment provisions (the ability to sell the loan to another company) and more. While there are many consumer protection laws designed to keep borrowers from signing documents with illegal or unethical use a professional when dealing with real estate contractsprovisions one should still review the document and understand what is being signed since the commitment is a long term one.

Other Explicit Contracts in Real Estate

Home Warranty:

With a home warranty the buyer or the seller can purchase warranty coverage on the major systems of the house like water heater, HVAC, appliances, etc. Usually the warranty coverage is provided for a one year period and can be renewed yearly. The home warranty company will require the warranty agreement be signed by the person paying for the warranty. Always make sure to read the warranty document to know what is and what is not covered under the policy.

Title Insurance Policy:

The title insurance policy covers the lender and the buyer (if the buyer purchases a policy for themselves) in case there are hidden title defects on the property. In order to set out the terms of coverage for the insurance policy everything is put into writing and is signed by those seeking the coverage. For more information on Title Insurance check out the title insurance section at Ivy Pointe Title.

Other Implied Contracts

Implied contracts during the real estate process can include services provided by a company or individual with the promise of payment upon completion of the work. For instance a cleaning company, home inspector, home stager may agree to do work in your home in exchange for payment after completion. Due to the smaller amounts of money involved both parties agree to do the work without any written contract.

A common example of an implied contract is when you contact a cleaning company and ask them to clean your home prior to your putting it on the market for sale. A cleaning company may agree to perform the work with an unwritten implied promise to pay them for the work after they are done. If the home seller refuses to pay the cleaning company after the work has been done the cleaning company can sue the homeowner in small claims court and attempt to recover the money owed.  The court will look at if there is a written contract (whether language via email or text message) or will look towards what the parties actually said and/or did and make a decision on whether a contract does exist.

Final Thoughts

Many real estate contracts can be confusing with all the legalese in them. If you have any questions or are unsure about terms of a particular requirement in a contract you should ask the person presenting you the contract to explain the language to you. If the answer does not resolve your questions or concerns then you need to find outside expert help from a real estate attorney. It is better to walk away from a contract than to sign something that will bind you to terms or requirements you never intended to.

Do you have a real estate contract you have questions about?

Paul Sian is a licensed attorney in the States of Ohio and Michigan.  If you have any questions about a real estate contract you are being asked to sign feel free to contact me at paul@finneylawfirm.com or via phone at 513-943-5668.  Feel free to connect with me on Twitter and Facebook.

 

Ahhh, the peace that comes with conflict resolution!

Whether at the end of a long and raging litigation battle or at the beginning of a minor dispute, the parties have finally entered into settlement discussions. ¬†This is going to be good, right? ¬†Well, even settlement can be fraught with risks, so let’s be sure to get that one last step right.

Here are some valuable tips about settlement discussions:

1. Oral settlements are binding, unless the parties agree that the settlement agreement must be in writing.

Many of the disputes this firm handles are subject to the Statute of Frauds (such as the purchase and sale of real estate, see here).  As a result, many clients are under the misapprehension that a settlement of a dispute about that transaction is likewise subject to the Statute of Frauds (i.e., that the settlement agreement must be in writing and signed by the parties).  This simply is not true.  If the parties to a dispute reach resolution of the dispute orally, that settlement is binding, at least in Ohio and Kentucky.

Of course, oral agreements can be the source of misunderstanding, fraud in and of themselves (“I never agreed to that!”), being incomplete and being not well-thought-through. ¬† Thus, one should be cautious about entering into oral settlement discussions.

However, many times nothing can get a dispute resolved faster and more commodiously than letting the parties — who many times have a long business relationship — hash things out in person, and even without lawyers. ¬†I don’t want to interfere with those positive interactions, so¬†in such circumstances, I recommend a “letter agreement” between the parties that says that the parties are going to engage in such informal¬†conversations, but¬†that nothing is binding on either of them unless and until they reach a final written agreement, signed by both of them. ¬†The letter agreement should further provide that a waiver of the “written agreement” requirement cannot be amended except in writing.

2.  Be careful who you are releasing or from whom you are getting a release.

To get an effective release, the parties identified in a release can be more important than the release language itself. It goes without saying that a release is only binding upon the parties released and only benefits the released parties.  Make sure the parties with the real claims are the ones subject to the form of release.

Further, we usually include in the releasor class and the releasee class “heirs, successors and assigns” of the parties, as well as their “employees, directors, owners, agents, and attorneys.”

Finally on this point, it is important that the releasor(s) acknowledge and represent that they have not assigned their claim in the litigation.

3.  Be careful what you are releasing or what is being released.

As a general rule, when I am representing a defendant who is paying money to settle a claim, I want a full, complete and final release from the plaintiff. ¬†This is so for several reasons, the biggest one being that the plaintiff now knows the “pain threshold” that will get my client to pay money. ¬†If we leave unreleased some of the claims, we have a plaintiff who may well just come back for more. ¬†Further, by paying a plaintiff money, you just help him finance phase two¬†of the litigation.

One exception to this general rule that I consider when representing a defendant, and insist upon when representing a plaintiff, in a dispute relating to the sale of real property, is preserving the warranty covenants that may be contained in a deed for the property.  To me, these are critically important promises from a seller to a buyer, and usually unrelated to other property defects or contract claims.

Additionally, a plaintiff can release claims that do exist as of the time of the settlement, but what about releasing prospective claims?  Typically, it is inappropriate, and may not be possible, to release claims that may arise in the future.

4.  Clear up all ancillary claims and get the litigation dismissed.

In a matter closely related to the “what” of the release, is the issue of clearing up all ancillary disputes in conjunction with a dispute.

Many times a civil claim is attendant with criminal matters, license law complaints, mechanics liens and other impairments of title to real estate, administrative complaints and a host of other sticky issues. ¬†Now, this article is a broad-brush treatment of this issue, and some tricky¬†ethical and other considerations may¬†require very delicately addressing those matters, but when we have the emotional “high”¬†of a settlement, use that Kumbaya moment to put all the bad feelings (and paperwork and proceedings) behind you.

And, of course, make sure the underlying litigation is dismissed concurrent with the settlement.

5. Something I always (almost) forget — the court costs.

So, the defendant is going to pay money and the plaintiff is going to dismiss the lawsuit, but who is going to pay the court costs of the litigation?

In many instances, the court costs are a small number, but in others they can be tens of thousands of dollars. ¬†In any event, it can be the “final insult” or the “icing on the cake” in a settlement.

And in the euphoria and rush of settlement discussions, it is many times the last thing I think of in terms of dispute resolution.  So, I have to remind myself of this component of a settlement.

In my experience, insurance companies routinely pay the court costs as a part of a settlement, but where the litigants have hard feelings or the expenses are significant, it can be a sticking point to have the court costs paid as a part of a settlement.  Thus, the court costs issue should be addressed at the front end of settlement discussions.

6.  Get a mutual release.

Don’t kid yourself that the person writing you a check for settlement may be carefully plotting his retaliation against the plaintiff in another or perhaps even unrelated matter. ¬†“Paybacks are hell,” so they say.

When resolving the dispute¬†for¬†your plaintiff client, ask for a release from the defendant for any claims he may have against¬†the plaintiff as well. ¬†Now, I have had many a defendant say: “if you want a release from me, then pay me some money,” but it is certainly worth seeking such a release.

7.  Indemnities provide unlimited access to your checkbook.

Frequently, defendants¬†paying money to plaintiffs ¬†to settle a claim want the plaintiff¬†to indemnify, defend or “hold harmless” the defendant¬†from claims that may be made by third parties relating to the same events that are subject to the release.

These are not “throw away” provisions or boilerplate. ¬†Rather, they provide open-ended access to a party’s¬†checkbook. ¬†Thus, such provisions could contain the seeds of financial¬†disaster for the plaintiff. ¬†At a minimum, these requests should be carefully considered. ¬†Occasionally, an limited indemnity of “duty to defend” provision may be appropriate, but in most circumstances, requested indemnities are major “red flags” that I reject when representing a plaintiff releasing claims.

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A settlement is a fine end to a dispute, but make sure through these steps that it in fact really the end and really is fine.

This is the first in a series on the Realtor listing agreements, both commercial and residential.

The relationship between a Realtor and his principal is typically defined by a written agreement.  In Kentucky, the courts require that the agreement be in writing to satisfy the statute of frauds.  Not so in Ohio.  And that writing then determines the rights and responsibilities of the parties to that agreement.

There are, of course, agreements that define the relationship between a buyer and his Realtor. ¬†These “Buyer Broker Agreements” are addressed in another blog entry.

And as to agreements between a seller and his Realtor, what is referred to as a “Listing Agreement,” there are two basic types: (i) Exclusive Right to Sell and (ii) Exclusive Agency. ¬†These sound similar, so what is in fact the difference?

Very simply the distinction is whether a commission is due and owing when the seller finds his own buyer, independent of the efforts of the Realtor. ¬†Under an “Exclusive right to sell” agreement, a commission still is due in such instance. ¬†In an “Exclusive agency agreement” a commission wouldn’t be due.

The exact language and obligations between the parties is not, of course, just in the title to the document, but in the body of the text, so a simple distinction between “Exclusive Right to Sell” and “Exclusive agency” agreements may not lie in the caption of the document. ¬†As with all contracts, one must read the entire document to know what it says.

Now, because almost all listing agreements are signed on a Realtor-drated form, as you might¬†imagine, they are almost all Exclusive Right to Sell Agreements. ¬†The Realtor wants to get paid if he is going to spend time and money on generating buyers for your home, even if the luck of the draw would ultimately yield that buyer from the seller’s own efforts.

For this reason, most Realtors would refuse to enter into a listing agreement on broad “Exclusive agency” terms, but they might be willing to except out from the agreement certain buyers who have expressed an interest or that the seller wants to approach before committing to his Realtor.

Understanding the basic framework of listing agreements is important before signing.

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San Diego Realtor Dan Melson has a nice blog entry of his own exploring types of listing agreements in more detail than this article, here.