Watch Your Language with Reservation of Rents/Other Rights in Ohio Deeds

(Supreme Court of Ohio in LRC Realty, Inc. v. B.E.B. Properties, Slip Opinion No. 2020-Ohio-3196 reaffirms time-tested rule that absent an express reservation in a deed, a covenant to pay rent runs with the land)

By: Stephen D. Richman, Esq. - Senior Counsel-Kohrman, Jackson & Krantz

-A Watch Your Language Series Article-

 

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will typically uphold commercial document provisions unless they are contrary to public policy or statutory law, or the subject of a mutual mistake.

Because of this judicial deference to “plain language” within real estate and other documents, and the fact that courts, as a general rule will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous (sometimes referred to as the “Four Corners Rule”), you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.” And, more often than not, what a judge decides in these cases is not what at least one of the parties meant.

The Ohio Supreme Court in LRC Realty, Inc. v. B.E.B. Properties, Slip Opinion No. 2020-Ohio-3196 recently espoused this basic tenet of Ohio law with regard to deeds, when it held that: 1) absent an express reservation in a deed conveying property, a covenant to pay rent runs with the land; and 2) “subject to” language in a deed, without more does not constitute an express reservation.

Background/Facts of LRC Realty, Inc. v. B.E.B. Properties.

As succinctly stated by the Ohio Supreme Court in LRC Realty, “This case concerns the leased land beneath a cell tower and the right to receive rental payments from the tower’s owner following the transfer of the underlying property.”

The specific facts of the case are as follows:

In 1994, B.E.B. Properties (“B.E.B.”) leased a portion of its three-acre commercial property in Chardon, Ohio to Northern Ohio Cellular Telephone Company (now, “New Par”) and also granted New Par an easement on that same property. Both the lease and the easement were subsequently recorded and a cellular tower was later built on the site.

Between 1995 and 2013, there were three (3) successive sales of the property. The third sale, which occurred in 2013 was to appellant, LRC Realty, Inc. (“LRC”).  Not soon after the first sale of the property, two of the partners of appellee B.E.B. (a general partnership) transferred their interest in the partnership to the third partner and his wife, Bruce and Sheila Bird (the “Birds”). The Birds assumed that the rents from the cell tower lease were assigned to them (notwithstanding the sale of the property), and in fact, New Par sent its rents to the Birds, until 2013 when LRC inquired as to its rights to the rents, and initiated litigation seeking a declaratory judgment that it was so entitled to such rent.

The trial court held for the plaintiffs and ordered the Birds to pay the owner of the property prior to LRC, the rents from 2007 to 2013, and to pay LRC the rents the Birds received in 2013, and thereafter. The Birds appealed the trial court’s decision to the 11^th District Court of Appeals of Ohio, and the 11^th District reversed that decision. Thereafter, the appellants appealed to the Ohio Supreme Court.

Analysis of LRC Realty, Inc. v. B.E.B. Properties.

The deed for the first transfer of the property was the key to this case (at all court levels) and provided as follows: “B.E.B. Properties … the said Grantor, does for its self and its successors and assigns, covenant with … Grantees … that it will warrant and defend said premises …against all lawful claims and demands whatsoever, “such premises further to be subject to the specific encumbrances on the premises as set forth above.”

The trial court found for the plaintiffs based on long standing Ohio law, that absent a reservation in a deed conveying property, the right to receive rents runs with the land; and it found no specific words of reservation in the deed in question. The Eleventh District believed that the “specific encumbrances on the premises as set forth above” language was a reference to the previously recorded lease and easement and therefore, such language should be interpreted as a reservation of the right to receive future rental payments under the lease.

The Supreme Court of Ohio in LRC Realty, Inc. v. B.E.B. Properties boiled the case down to two issues: (1) whether the general law in Ohio still provides that absent an express reservation in a deed conveying property, the right to receive rents runs with the land; and (2) whether or not language in a deed indicating that the property being conveyed is “subject to” a recorded lease agreement and easement constitutes such an express reservation.

Citing common law as far back as 1885, and statutory law enacted in 1965 (Ohio Revised Code Section 5302.04), the Ohio Supreme Court answered the first issue in the affirmative, namely that a covenant in a lease to pay rent “runs with the land” (meaning the right to receive rents would ordinarily follow the legal title transferred by deed, and belong to the grantee), absent a specific provision in the deed, reserving in grantor the right to receive such rental payments.

 In answering the second issue in the negative (that the “subject to” language in the deed at issue did not constitute an express reservation of rents), the Ohio Supreme Court simply acknowledged and applied the “Four Corners Rule.”  As explained by the court, “When interpreting a deed, the primary goal of this court is to give effect to the intentions of the parties [and the] best way to do that is to look at the words found within the four corners of the deed itself and to adhere to the plain language used there.”

Applying this rule of law to the deed at issue, the court concluded that “no words of reservation appear on the face of the deed in connection with the words ‘rent’ or ‘rental payments,’ and accordingly, B.E.B. Properties did not reserve the right to receive such rent when it conveyed the property.“  Without such a reservation, the court explained that “B.E.B’s subsequent assignment of that [rental] interest to the Birds was thus ineffective as it is impossible to assign an interest that one does not possess.”

  

What is the moral of this story? Watch your language, and say what you mean precisely, or a judge will tell you what you meant. The general, “Four Corners Rule” re: judicial deference to the written word in commercial documents, still… rules. Consequently, use the “magic” words- “reserve,” “reserving,” or “reservation” (vs. “subject to”) if your intent is to reserve rents or other rights in the grantor.   That way, there is nothing left open to interpretation. Make the plain language, plain as day, and you won’t need your day…in court.