Who Is the “Prevailing Party” When Awarding Attorneys’ Fees in Multiple Count, Landlord-Tenant Litigation?

(Watch your Language [with Attorneys’ Fees Provisions] & Say What You Mean, Precisely or a Judge Will Tell You What You Meant #14)

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

Watch Your Language. As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy. They traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial transactions (such as commercial real estate deals), since both parties will usually have attorneys to review their documents. Because of this judicial deference to commercial language, you must, “say what you mean, precisely, or a judge will decide what you meant.” Failure to follow this axiom left the landlord in Simbo Properties, Inc. v. M8 Realty, LLC, 2019-Ohio-3091 (8^th Dist. Ct. of Appeals, Cuyahoga County) with a bill for its tenant’s attorneys’ fees in excess of the landlord’s claims for damages.

Attorneys’ Fees in General.  Ohio courts follow the so-called “American Rule,” which requires that each party involved in litigation pay his or her own attorneys’ fees.  There are, however three well-recognized exceptions to this rule: (1) where statutory provisions specifically provide that a prevailing party may recover attorneys’ fees; (2) where there has been a finding of bad faith; and (3) where the contract between the parties provides for it (sometimes referred to as “fee shifting”).

So called fee shifting or attorneys’ fees provisions are often drafted in general terms, with the parties assuming that their intent is clear. Frequent language calls for “reasonable attorneys’ fees to be awarded to the prevailing party.” Who is the prevailing party, however, when there are multiple counts, with one party prevailing on some counts and the other party prevailing on others? Does an award of “reasonable” fees mean that a prevailing party on one count is only entitled to fees related to that one count? The relatively recent case of Simbo Properties, Inc. v. M8 Realty, LLC reinforces the need to be specific and leave as little as possible to “interpretive chance.”

Simbo Properties, Inc. v. M8 Realty, LLC – (The Facts). The facts of the “Simbo” case are simple enough (the law, not so much). In December, 2012, Simbo Properties, Inc. (“Simbo”) and M8 Realty, LLC (“M8”) entered into a written lease pursuant to which Simbo leased commercial real property to M8.    The initial term of their lease agreement was for eighteen (18) months.   Simbo claimed that M8 violated several provisions of the lease resulting in the filing by Simbo of a lawsuit in the Cuyahoga County Court of Common Pleas (“trial court”).  Simbo filed a four-count complaint against M8 seeking the following:  Count 1 — rent (in excess of $150,000); Count 2 — real estate taxes ($32,158.34); Count 3 — property damage (in excess of $30,000 for flag pole and storm sewer damage); and Count 4 — breach of other pertinent lease provisions. M8 filed a counterclaim for damages claimed by M8. In pre-trial motions, M8 prevailed on Count 4 by virtue of the trial court granting M8’s motion for summary judgement. Of the remaining issues before the trial court, Simbo prevailed on Count 2, on part of Count 3 and on M8’s counterclaim. M8 prevailed upon Count 1 and part of Count 3.

After the judgement was rendered, both parties filed post-trial motions, including claims for attorneys’ fees.  Simbo and M8 based their claims for attorneys’ fees on the fact that they each prevailed upon at least part of the litigation, and their lease agreement contained a fee shifting  provision directing legal fees be awarded to the prevailing party of a lawsuit. Specifically, Section 37 of the Simbo/M8 lease agreement provides:  “If a lawsuit is filed with respect to this Lease, the prevailing party shall be entitled to collect all reasonable attorneys’ fees and costs.”

On the issue of the award of attorneys’ fees under the lease, the trial court determined that M8 was the “prevailing party” since it won the “main issue” in the lawsuit (Count 1) and, as a result was entitled to all of its attorneys’ fees, as provided in the lease agreement.

Simbo then filed an appeal of the $238,335.73 award of attorneys’ fees and expenses to M8 and also challenged other aspects of the trial court’s rulings. Simbo argued that since it prevailed on two counts of the complaint and M8’s counterclaim, it should be considered the “prevailing party”

under the lease agreement’s fee-shifting provision. 

Simbo Properties, Inc. v. M8 Realty, LLC – (Case Analysis). On appeal, the 8^th District Court of Appeals first acknowledged that there were complications inherent in the trial court’s attorneys’ fees award because:  (1) the term “prevailing party” was not defined within the lease agreement; and (2) a determination of whether Simbo or M8 is the “prevailing party” was also complicated by a jury verdict in favor of both parties.

Nonetheless, the 8^th District Court of Appeals in Simbo easily resolved the complications by virtue of precedent (prior court rulings on point) established in the 10^th District Court of Appeals case, EAC Properties LLC v Brightwell (2014-Ohio-2078). EAC Properties was a landlord-tenant case on similar facts as Simbo, whereby the landlord (EAC Properties) brought suit against its tenant, Brightwell re: $30,000 of unpaid, additional rent (deemed the “primary claim” by the EAC court because it was the largest dollar amount claimed) and $3,000 of unpaid utilities. The court in EAC Properties determined that the landlord’s primary claim for additional rent failed, and because the landlord did not prevail on that primary issue, it was not entitled to collect any attorneys’ fees under the lease agreement.

Applying what it termed EAC’s’ “main issue standard,” the court of appeals in Simbo easily determined M8 to be the “prevailing party” because it received a jury verdict on the main issue of the case; the count (Count 1) that represented the largest dollar amount, as well as being the count that counsel for M8 spent the largest percentage of time defending.

The court in Simbo did acknowledge that there is a “some relief” (vs “main issue”) standard that has been applied to define a “prevailing party” in connection with statutory claims for attorneys’ fees such as is authorized in consumer protection and civil rights laws. However, the Simbo court did not find the “some relief standard” applicable in a contractual case like Simbo, reasoning that “While public policy in consumer protection and civil rights litigation supports a broader interpretation of ‘prevailing party’, no similar need exists in negotiated commercial fee-shifting clauses between sophisticated parties… represented by counsel[who] knowingly and willingly negotiated a commercial lease agreement.”

As if to reinforce our moral of the story below, the court of appeals in Simbo also reasoned that: “If the parties had desired to define “prevailing party,” e.g., as the party that prevails on the most counts in the litigation, Simbo and M8 could have drafted that provision into the lease… or [could have] defined the term “prevailing party,” but chose not to do so.  [Accordingly], we must follow the intent of the parties and apply the terms of the lease agreement.” In other words, the parties did not say what they meant, precisely, so the judge told them what they meant.

Since the court of appeals in Simbo determined that the parties intended to define “prevailing party” as the party that prevailed upon the main issue of the case, then such party should only be able to collect its attorneys’ fees with respect to the main issue. Right? That was the landlord’s argument. Simbo argued that M8 should recover only those attorneys’ fees attributable to Count 1, the count on which M8 prevailed at the trial court.  The court of appeals in Simbo, however upheld the trial court’s award of M8’s total legal fees incurred with respect to all of the counts of the litigation, including the counts the landlord prevailed upon. The Simbo court explained that claims that involve common facts or legal theories are too difficult to divide as to the time and hours spent on litigating the individual claims.  Accordingly, the court of appeals in Simbo held that “[W]here multiple claims are rooted in the same allegations, facts, discovery, and legal arguments, a trial court does not abuse its discretion in awarding attorney fees for the time spent on [all of] the claims.”

What is the moral of this story?  “Say what you mean, precisely, or a judge will tell you what you meant.” Clearly, the landlord in Simbo did not intend to pay more in legal fees than it had in claims, especially when it prevailed on some of those claims. Nevertheless, since there was no definition of “prevailing party” in the lease, the court, in effect found one. 

Listen to what judges are saying with regard to interpreting leases and other commercial contracts: “When the language of a written contract is clear, a court may look no further than the writing itself to find the intent of the parties” [So, be clear]. Define “prevailing party” in commercial fee shifting provisions; define “reasonable fees” or consider a “floor” or “ceiling.” Also, be clear as to whether or not your intent is to be reimbursed for legal fees after a default, whether or not it ends up in litigation.

In other words, the “well-known and established principle of contract interpretation is that [c]ontracts are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced or not evidenced by the contract language” [So, evidence your intent in your documents].

Are Oral Modifications of Written Leases Enforceable in Ohio?

As you may know, as a general rule, commercial leases of real property in Ohio must be in writing to be enforceable. Ohio’s “Statute of Frauds” (ORC Section 1335.04) with respect to leases provides in pertinent part that “no lease… of, in, or out of lands, tenements or hereditaments… shall be granted, except…in writing, signed by the party …granting it”. Ohio’s Landlord and Tenant Act (ORC Section 5321, et. seq.) supersedes the foregoing Statute of Frauds rule with regard to residential leases.

Commercial leases of real property in Ohio must also be properly acknowledged (e.g. notarized). ORC Section 5301.01 provides that leases of non-residential real property whose terms exceed three (3) years must be in writing, signed and notarized (or otherwise acknowledged as provided in ORC Section 5301.01) to be enforceable.

What about modifications/amendments to written commercial leases? Must they be in writing to be enforceable? What if there is a clause in the written lease precluding oral modifications of the lease; does that end the inquiry?

The recent Eighth Appellate District Court of Ohio case, 3637 Green Rd. Co., Ltd. v. Specialized Component Sales Co., Inc., 2016-Ohio-5324, presents a good summary of the law in this regard.

The facts of the case are as follows: On April 17, 1981, 3637 Green Road (“landlord”) and Specialized Component Sales (“tenant”), a distributor of industrial electrical components, entered into a lease for warehouse and office space at 3637 Green Road in Beachwood, Ohio. The original lease was for a term of three years (beginning in 1981), with an option to renew the lease for another three year term. The parties executed six written extensions to the original lease. After the expiration of the final, written lease extension, the tenant remained in possession of the premises on a month to month basis for eight years.

The business issue between the parties was, of course, money. The rent during the fifth extension term was $1,824.00/month (the rent for the original term was $1600.00/mo.). The tenant’s principal testified that around late 2003 or early 2004, he had a discussion with the landlord’s representative claiming that business was bad, and accordingly, the tenant would  have to reduce rent or move out. As a result of this discussion (according to the tenant), the monthly rent was reduced to $1,473.75/mo. but no written agreement was executed confirming the rent reduction. Tenant paid this amount for approximately eight years (from 2004-2012) and landlord accepted same without objection. While the exact termination date is in dispute, the tenant vacated the premises in November 2012, after the landlord stated the rent would need to increase by $1800/month (if tenant wanted to stay) because landlord had located a new tenant.  The tenant turned in its keys in the first part of December, 2013, but the landlord claimed it had no notice of the vacation of the premises until March, 2013.

Thereafter, the landlord sued the tenant claiming it was entitled to recover “(1) the difference between the $1,824 monthly rent specified in the fifth lease extension and the $1,473.75 month rent paid by tenant from January, 2011 through October, 2012 and (2) $1,824 in monthly rent for November 2012 through March 2013”, as limited by the court’s $15,000 jurisdictional limit. In response, the tenant asserted that it had paid all the rent due through October 2012 and that the security deposit covered the November 2012 rent.

In August, 2015, the trial court awarded the landlord $1,196.50 in damages, finding that: 1) the parties had orally agreed to reduce the monthly rent due under the lease to $1,473.75, 2) the landlord terminated the month-to-month tenancy as of October 31, 2012, and 3) the tenant vacated the premises on December 3, 2012 when it turned in the keys for the premises. Based on these findings, the court concluded that the tenant owed rent for the months of November and December 2012 (totaling $2,947.50) which, when offset by its $1,751 security deposit, resulted in a net damages award of $1,196.50 to the landlord.

Among the “assignments of error” (claimed mistakes by the trial court) claimed by the landlord at the Cuyahoga County Court of Appeals were: 1)  the trial court erred in upholding a verbal modification of a written lease, barred by the Statute of Frauds; and 2) the trial court erred in failing to enforce a no-oral-modification provision. As to the landlord’s argument that the parties’ oral agreement to reduce the rent was barred by the Statute of Frauds, the court did acknowledge that “a modification or reduction of the rent stated in a written lease cannot generally be proven by evidence of an oral agreement based on the Statute of Frauds.” In fact, the court in 3637 Green Rd. cited several cases subscribing to this general rule.

As with most case law, however, there are exceptions to the “general rule”. The principal exception to the Statute of Frauds is the equitable doctrine of “part performance” (which is not particular solely to leases). This doctrine basically dictates (based upon fairness/equity) that a lease (or other contract) should not be rendered unenforceable due to technical failures or oral modifications when much of the contract has been performed.

The 3637 Green Rd. court cited a number of cases that have established the following “test” to determine whether or not partial performance is sufficient to remove an agreement from the operation of the Statute of Frauds: 1) the performance “must consist of unequivocal acts by the party relying upon the agreement which are exclusively referable to the agreement”; and 2) the party asserting partial performance must have undertaken acts that “changed his position to his detriment which makes it impossible or impractical to place the parties in status quo.”

Applying the law to the facts, the 3637 Green Rd. court easily determined that eight years of lower rent payments without objection from the landlord were clearly “unequivocal acts”. Not only did the landlord not object, but in an October 17, 2012 financial statement attached to the landlord’s complaint, the landlord, in effect “stated” that  no additional amounts were due by virtue of showing a zero balance in tenant’s rent due account.

The landlord also argued that the lease itself  prohibited oral modifications. Section 24 of the lease states, in pertinent part: “No waiver of any … condition or covenant shall be valid unless it be in writing signed by Lessor,” and Section 42 of the lease provides, in pertinent part: “This Lease contains the entire agreement between the parties, and any other agreement hereafter made shall be ineffective to change, modify or discharge it … unless in writing and signed by the party against whom enforcement …. is sought.”

Clearly, the parties specified in the lease that modifications and waivers were not to be enforceable unless set forth in a signed writing. Additionally, there is a “boat load” of case law that provides if the language of a lease (or other contract) is clear and unambiguous, courts must enforce the instrument as written. So, case closed/trial court judgment overruled (in favor of the landlord); correct?

Not so fast. While the appellate court in 3637 Green Rd. did recognize the general law that provides, in effect that the written word, “rules”, it also recognized that there are exceptions to this basic principle of contract law as well. Citing precedent (prior case law on point), the court in 3637 Green Rd  summarized the law in this regard as follows: “If the language of a lease is clear and unambiguous, courts must enforce the instrument as written… However, waiver of a contract term can occur when a party conducts itself in a manner inconsistent with an intention to insist on that term… [and] a no-oral-modification clause can be waived by oral agreement like any other term in a contract.” The court of appeals in 3637 Green Rd. clarified, however, that the waiver must be “clear and unequivocal if it contradicts a written contract provision.” In other words, the same test to determine if partial performance is sufficient to remove an agreement from the operation of the Statute of Frauds can used to determine if a no-oral waiver provision can be waived by unwritten words/actions. According to the court, one could not be much clearer than payment of eight years of a reduced rent, without objection from a landlord, plus a landlord’s accounting entry showing a zero rent balance for the tenant.

While the court in 3637 Green Rd doesn’t present a bright line test as to what is clear and unequivocal, it did cite a couple of examples. One case cited on similar facts as 3637 Green Rd (EAC Properties, LLC v. Brightwell, 2011-Ohio-2373) involved a reduced rent being paid, without objection for thirteen months. Another case cited (200 West Apartments v. Foreman, 8th Dist. 1994 Ohio App. LEXIS 4081) wasn’t as much concerned with the duration of the waiver, but by the detrimental reliance of one party upon the waiver. In the 200 West Apartments case, the written lease was orally modified by the acts of the parties when landlord agreed to accept half the rent in exchange for services provided by tenant.

 3637 Green Rd. is a good example of a court applying principles of equity and fundamental fairness instead of the application of “black letter law” which would otherwise result in an unjust decision, As aptly explained by the 12^th District Court of Appeals of Ohio (in Fields Excavating, Inc. v. McWane, Inc., 2009-Ohio-5925) “if such [no oral modifications] clauses are rigidly enforced, then a party could simply insert the clause into an agreement and would be magically protected in the future no matter what that party said or did. More simply, by including a no-oral-modification clause in a contract, a party could orally induce the opposing party in any way and then hide behind the clause as a defense.”

Is it a Lease or a License?

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

It’s a license, it’s a lease, it’s a license and a lease. Actually, while Faye Dunaway’s character in the movie Chinatown could be both mother and sister to “Katherine”, a transferred right regarding real estate cannot be both a license and a lease.

So, is a kiosk at a shopping mall, for example, a license, or a lease? How about the use of a building roof for a billboard; license or lease? Does it really matter what you call it? Is this the case of a distinction without a difference?

Although the terms are often used interchangeably, in Ohio (and most other jurisdictions) there is a distinct difference. As aptly summarized by the Eighth District of Ohio Court of Appeals in Bewigged By Suzzi, Inc., Appellant, v. Atlantic Dept. Stores, Inc., et al., Appellees, 1976 Ohio App. LEXIS 5803, “The major difference between a license and a lease is a license to do an act upon land involves exclusive occupation of the land by the licensee [only] so far as is necessary to do the act and no further, whereas a lease gives the right of possession of the land and the exclusive occupation of it for all [emphasis provided] purposes not prohibited by its terms. A further distinguishing feature is the difference in the expected duration of a tenancy as opposed to a license. In dealing with a leasehold estate, the estate will be initially terminable only upon the expiration of a specific period of time, unless the parties specifically make an agreement to the contrary. The rule is exactly the opposite in licenses. A license is terminable at will unless the parties specifically provide to the contrary and the licensee holds a license coupled with an interest.”

The difference between license and lease definitely mattered to Tower Place Mall and its property manager in Schloss v. Sachs, 63 Ohio Misc. LEXIS 76 (Ohio Muni. Court, 1993).

In this case, Suzanne Schloss sued the mall’s managing agent (Mr. Sachs) claiming breach of an oral license agreement whereby Sachs allegedly promised to pay one-half of the construction costs of a kiosk that Schloss would build and operate for six months at the mall. Mr. Sachs filed a motion to dismiss, claiming that if there was a verbal agreement, it was a verbal lease, not a license, and since leases of commercial real estate must be in writing to be enforceable, the plaintiff was entitled to no relief whatsoever.

Applying case law and the facts, the court in Schloss basically reasoned that the kiosk use would constitute exclusive use of a small, but distinct part of the mall, and therefore, the use would be characterized as a lease vs a license. The court contrasted these facts with those of a coffee truck vendor who has a license to sell its coffee/food at various places within a property but not, at a specific, exclusive spot for a definite term. Once the court in Schloss established that a lease was created, the plaintiff’s action was summarily dismissed because pursuant to Ohio law (and most other jurisdictions via the “Statute of Frauds”), leases of commercial real estate must be in writing to be enforceable.

The difference between license and lease also mattered to Atlantic Department Stores; the defendant-appellee in the Bewigged By Suzzi case cited above. In this case, the agreement in question gave the appellee-plaintiff the right to establish a wig department in various stores owned by Atlantic. For a couple of years after the stated expiration of the agreement, the wig departments remained and the wig company paid Atlantic based on previous amounts due. In November of 1973, Atlantic seized the wig company’s inventory and removed same from its stores. While the court of appeals in Bewigged reversed the trial court decision and held that the seizure of the goods was wrongful, the wig company wanted the court to apply landlord-tenant “holdover case law” to its case, in effect holding the agreement to be a lease vs a license.

Ohio “holdover law” provides (unless lease language specifically states otherwise) that a tenant holding over past its lease expiration, and paying rent as and when previously paid is deemed to have entered into a new, periodic tenancy based upon how frequently its rent is paid. So, for example, if a tenant paying rent annually, holds over its one year lease, and makes a new annual payment at the beginning of year two, (and same is accepted by the landlord), the lease would be deemed extended for one year. If a tenant holds over after such one year lease, and rent is paid monthly, the tenant’s subsequent payment of monthly rent would establish a new, month to month periodic lease.

The court of appeals in Bewigged easily came to the conclusion that a holdover situation was not in effect because the agreement in question was not a lease, but a license. The court reasoned that while the agreement provided certain square footage requirements for the wig departments, it did not specify specific, exclusive areas of the stores to be used for the sale of wigs. Also, the wig company had other rights with respect to the space, other than to sell wigs. The court also found it easy to refuse to create a “holdover license” rule. The court explained that the very nature of a license is such that it is opposite to that of a lease with regard to term. A license is terminable at will unless the parties specifically provide to the contrary. Leases, on the other hand are typically for fixed terms.

As the aforesaid cases demonstrate, it matters greatly, whether or not a right with regard to property is designated a license or a lease. As Ms. Schloss unfortunately discovered, an aggrieved party will not be able to enforce, in a court of law, an unwritten commercial lease. Verbal licenses, on the other hand are enforceable. As the owner of the wig company in “Bewigged” learned (the hard way), there is no “holdover license law”. Only a lease holdover can result in a new, periodic tenancy.

So what is the moral of this story? Just say “license” when you want a license” and say “lease” when you want a lease? If only it were that easy. As the United States District Court for the Eastern District of California aptly explained in United States of America v. Southern California Edison Company, 2004 U.S. Dist. LEXIS 4545, “Even where a writing exists which categorizes the agreement concerning the property as either a lease, easement or license, that categorization will not control the determination, although the courts will consider the title and language of the document used in deciding the nature of the interest at stake. Generally, courts look to the intent of the parties concerning the property to determine whether the agreement should be interpreted to create a lease, easement or license.”

In synthesizing Ohio cases, the “the key fact in determining whether an agreement constitutes a license or a lease is whether the lessee/licensee has exclusive possession and the power to exclude  the lessor/licensor from a specific area.” (Schloss, HN4). This rule seems to have been correctly applied in the above-mentioned cases. The owner of the wig company in Bewigged had a license because she only had the right to a wig department at several stores, not the wig department at specific locations within such stores. The right to use the kiosk in Schloss was held to be a lease because the kiosk was assigned a specific space, and the landlord could not do anything else with that space. Of course, a kiosk on a different set of facts might be held to be a license vs. a lease. Such was the case with a recent decision in Connecticut.

If the above sounds convoluted, without a “bright line test” to work in all situations, it is. Even the United States District Court in the Southern California Edison Company case admitted that “Distinguishing between a lease, an easement and a license concerning the use of real property can be complicated.” At least we know that a property right can’t be a license and a lease…at least until a judge holds that a “leasance” was created on the facts of a particular case in the future.

Time to Proudly and Statutorily Display our Flags in Ohio

On this 4th of July holiday, in a world of economic uncertainty and cowardly acts of terrorism, it seems more than prudent to be patriotic and proud of displaying our symbols of G-d and country, particularly our flag and the banners that honor the men and women in our armed services. Believe it or not, however, the right to display is not absolute and has been subject to challenge.

Recently, in Columbus, Ohio, an 86-year-old mother of veterans was asked by her rental company to take her flag down. The company claimed the flag mount could damage the structure of the house.  You may also recall the story, several years ago of a 77-year-old U.S. Army veteran who was asked by a Summit County homeowners association to take down a flagpole he installed to display an American flag at his home. The association claimed the flagpole violated its rules that allowed flagpoles installed on homes, but not installed, in-ground. Eventually, the association backed down, but it seems incredulous that our proud veterans should have to fight for their flag, after fighting so hard for our country.  

Nonetheless, these types of challenges are happening all over the country. For example, in Connecticut, recently, an Air Force veteran is facing fines for flying the American flag in the front of his residential unit, and not in the back of the home where it is permitted.

You would think there should be laws protecting our rights to proudly display our flags. And there are; but they don’t go far enough.

At the federal level, The Freedom to Display the American Flag Act of 2005 "prohibits a condominium, cooperative or real estate management association from adopting or enforcing any policy or agreement that would restrict or prevent a member of the association from displaying the flag in accordance with the ‘United States Flag Code’ [a federal law that establishes advisory rules for display and care of the national flag of the United States] on residential property to which the member has a separate ownership interest."

Clearly, the “Flag Act” prohibits condo and similar associations from restricting flag displays. However, what about manufactured home park operators, and landlords? The federal law does not apply to them. What about state flags? I am sure there are law enforcement and other state employees who would like to pledge their allegiance to their state, as well as their country. The federal law, however, does not address the right to display state flags. Finally, the federal law does not address the right to display service banners and the POW/MIA flag.

Ohio also has what is basically a codification and elaboration of the federal law in Ohio Revised Code Section 5311.191. However, it too is silent regarding applicability to landlords, manufactured home park operators, service banners and the state flag.

Fortunately, while many states are still struggling with this issue, our great State of Ohio seems poised to fill the gaps of the Freedom to Display the American Flag Act of 2005 and ORC Section 5311.191. In fact, Ohio has two, alternate versions of a Flag-Banner Display statute: Ohio House Bill 18 and Ohio Senate Bill 84, which are summarized below:

SB84-FLAG-BANNER DISPLAY (COLEY,W) To prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of Ohio flags and blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

Current Status: 4/12/2016 - House Armed Services, Veterans Affairs and Public Safety, (First Hearing)

HB18-FLAG-BANNER DISPLAY (GONZALES, A; GINTER, T) To prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

Current Status: 11/18/2015 - SUBSTITUTE BILL ACCEPTED & REPORTED OUT, Senate State and Local Government, (Third Hearing)

The only real difference between HB18 and SB84 seems to be the right to display the state flag, which is incorporated in the Ohio Senate vs the Ohio House version.

Truly, on this July 4^th, congratulations are in order to the Ohio House and Ohio Senate for recognizing the need to display our banners, our flags, and our patriotic pride. However, “timing is everything”, and in this author’s opinion it is time to bring one of these bills (preferably the senate version) out of committee, to a vote and to the governor to sign.

“30+ Year Tenants” may File for Property Tax Exemption, but Ohio Supreme Court Holds that Tenant’s Charitable Use is not Enough to Establish Exemption when Property Owner is For Profit Entity Leasing Property For Profit

“In this world nothing can be said to be certain, except death and taxes”- Benjamin Franklin

In Ohio (and other jurisdictions) there are exceptions to Mr. Franklin’s general rule.  Certain entities such as corporations and limited liability companies may live on for many years beyond the death of their officers and shareholder-members; and property used exclusively for charitable or public purposes, such as schools, churches, government buildings, hospitals, and public recreation areas may qualify as tax exempt. Colleges and universities, nature preserves, children’s homes and certain homes for the aged may also qualify. Which taxes are exempt? Owners of exempt properties do not pay any real property taxes, however, any special assessments such as sewer maintenance or street lighting must still be paid by the property owner. Tax exempt status will carry into future years, however the owner must re-apply if the use of the property changes or ownership is transferred.

As discussed last week in this Blog by my colleague Connie Carr in her article: Ohio Supreme Court re Analysis of Property Tax Exemption Under RC 5709.121, “when a property tax exemption is being considered based on the owner being a charity, it is not sufficient to show that the property owner is a 501(C)(3) tax exempt charitable institution as defined by the IRS. In Ohio, it must be shown that the ‘core activity’ of the institution qualifies as charitable for property tax purposes.”  Ms. Carr provides that “real property belonging to a charitable institution will be considered as exclusively used for charitable purposes by that institution if it (1) is used by such charitable institution for a charitable purpose or used under a lease, sublease or other contractual arrangement for charitable purposes, or (2) is made available by such institution under its direction and control and furthers or is incidental to its charitable purpose and is not intended to be for-profit.”

Before one can get an opportunity to argue whether or not their property is exclusively used for charitable purposes, however, they must first prove they are one of the parties entitled by statute to file for a tax exemption, and entitled by statute to receive one. This was the issue faced by the Ohio Supreme Court in the recent case of ShadoArt Prods., Inc. v. Testa, Slip Opinion No. 2016-Ohio-511.

In ShadoArt Prods., Inc. v. Testa, 503 South Front Street L.P. was a for-profit company, who leased its 30,000 Sq.Ft. building for a term of 30 years to appellant-tenant ShadoArt Productions, Inc. (“ShadoArt”), a 501 (c)(3) non-profit organization. In 2011, ShadoArt filed an application for exemption under Ohio Revised Code (“O.R.C.”) Sections 5709.12 and 5709.121. The tax commissioner (appellee) denied the request, and in 2014, the Ohio Board of Tax Appeals (“BTA”) affirmed the denial. In 2015, appellant appealed to the Ohio Supreme Court.

Had this case come before the court prior to 2008, it would have ended there with a quick dismissal. In fact, the application would have been rejected as tenants were not then eligible, by statute, to apply for tax exemption. In 2008, however, the Ohio General Assembly amended O.R.C. Section 5715.27 to expand the class of entities that may submit applications for various real-property-tax exemptions. (See 2008 Sub.H.B. 160), including tenants of real property with terms of 30 or more years.

So, because O.R.C. Section 5715.27 was amended to authorize tenants with terms of 30 years or more (and other parties) to file applications for exemption, they must also be entitled to receive exemption under O.R.C. Sections 5709.12 and 5709.121 (if they can prove the property is being exclusively used by them for the exempt purpose). Correct?

That was the appellant’s argument. ShadoArt reasoned that if it has standing to file an application under O.R.C. Section 5715.27, then it also must have the underlying legal right to exemption; otherwise, the 2008 amendment would be meaningless.

The Ohio Supreme Court, however, did not buy the appellant’s argument. It affirmed the BTA’s decision that held the opposite. Namely, while “ShadoArt did have standing to file an application for exemption under R.C. 5715.27… the applicable exemption statutes…. R.C. 5709.12 and R.C. 5709.121 still control a determination of whether the property itself is entitled to exemption,” and that regardless of ShadoArt’s use of the property, an exemption was not appropriate here  because the property “belonged to” 503 South Front Street, LP [a for profit entity, not ShadoArt, the 501(c)(3) tenant].

The operative word here is “belongs”. “O.R.C. Section 5709.121(A) states that if property “belong[s] to a charitable or educational institution,” then it ‘shall be considered as used exclusively for charitable or public purposes by such institution’ if it meets one of several requirements.” Appellant claimed the property belonged to Tenant by virtue of its 30 year lease, and it should then be entitled to prove its use as charitable. The Ohio Supreme Court refuted this argument by citing precedent (prior decisions), stating: “We have long held that “belonging to,” as used in R.C. 5709.12, means “owned by,” and accordingly, “it is the owner’s use of the property, not a lessee’s use that determines whether the property should be exempted.” In other words, “an entity that leases property to another must establish its charitable status based on the range of its own activities and may not rely upon the activities of a particular lessee.”

The result in ShadoArt Prods., Inc. v. Testa seems to carve out an exception from the Ohio Supreme Court’s dictum in Rural Health Collaborative of S. Ohio, Inc. v. Testa (the case discussed in Ms. Carr’s article) regarding lease-like arrangements not always resulting in a denial of a tax exemption application. Based upon the holding of ShadoArt Prods., Inc. v. Testa, a tenant who files a tax exemption application and tries to prove the property’s entitlement to the exemption based upon the tenant’s charitable use only will most certainly be denied.

Perhaps a simpler way to reconcile these cases is to say that generally speaking, (1) “a property may be exempt for charitable purposes, even if the owner is leasing the property, provided that both the lessor and lessee are charitable institutions,” and (2) a for-profit landlord who owns property and leases it to a tenant for profit cannot claim its tenant’s charitable use as its own, simply by virtue of leasing to a tenant who is using the property exclusively for charitable purposes. The only thing seems certain after analyzing all of these decisions is that there is little certainty in tax exemption cases in Ohio.

Caveat (Property) Manager

In the “old days”, when one could get 10%+ in a money market, a real estate management fee of 4-6% on rents did not excite many folks in the real estate industry about jumping into the property management business.

Now that 1% is considered a “high rate of interest”, and the stock market is rather volatile, management fees (and real estate as an investment) are a lot more attractive.

Before you rush to form your “Property Management LLC” company, however, “caveat manager”.

In Ohio, subject to limited exceptions, property management companies must have a real estate broker's license.

While there is no specific Ohio statute governing property managers, Chapter 4735 of the Ohio Revised Code governing Real Estate Brokers is dispositive. Why? Because pursuant to ORC Section 4735.01 (A), there are a list of activities, that if performed for another party, require a real estate license, and a number of these activities (including leasing and renting) are key components of property management.

What property management activities performed for another party require a real estate license?

-Pursuant to ORC Section 4735.01 (A) (1), one who rents or leases, or negotiates the rental or leasing of any real estate must be licensed.

- Pursuant to ORC Section 4735.01 (A) (2), one who “offers, attempts, or agrees to negotiate the …. rental or leasing of any real estate” must be licensed.

-Pursuant to ORC Section 4735.01 (A) (5), one who “operates, manages, or rents, or offers or attempts to operate, manage, or rent, other than as custodian, caretaker, or janitor, any building or portions of buildings to the public as tenants must be licensed.

Also included in the list of activities typically performed by property managers that require a license are: advertising or holding oneself out as in the business of leasing, one who performs any acts directed at procuring tenants for a property and one who collects rental information for purposes of referring prospective tenants to a rental unit.

Are there any exceptions to the requirement that one engaged in property management activities have a broker's license?

- There is no requirement that a community association manager or condo association manager in Ohio hold a real estate broker's license.

- Property owners managing their own properties are exempt. Additionally, receivers or trustees in bankruptcy, or guardians, executors, administrators, trustees, assignees, commissioners, or others  under authority or appointment of, or incident to a proceeding in, any court ;or under any trust agreement, deed of trust, will, or other instrument creating a like bona-fide fiduciary obligation are exempt. Also, public officers while performing the officer's official duties, and attorneys at law in the performance of the attorney's duties are exempt.

- Companies/individuals performing custodial, caretaker, or janitor services only are exempt.

 -While a real estate salesperson cannot manage property in his/her own name, or in the name of a separate management company he/she has formed, generally, a salesperson working under a broker may engage in management activities (See also OAC Section 1301:5-5-07 summarizing what property management activities an unlicensed employee may or may not engage in with respect to residential real estate).

Are there specific property management rules required of brokers to follow?

Yes. The Ohio Association of Realtors “Property Management White Paper” (http://ohiorealtors.org/legal/topics/wpproperty-management-laws/pm-whitepaper/) is one of the best summary guides available, but as a general matter, such rules pertain to:

-Property Management Accounts (OAC Section 1301:5-5-11);

-Security Deposits (OAC Section 1301:5-5-11 (D); and

-Rules governing sales as well as management/leasing activities such as: Agreements (ORC Section 4735.55); Property Records (ORC 4735.18 (A)(24); Consumer Guide to Agency Relationships (ORC Section 4735.56) and Agency Disclosures (ORC Section 4735.58).

Human v Machine-Handwritten vs. Word-Processed Assignment Provision Rules

(Watch Your Language & Say What You Mean, Precisely or a Judge Will Tell You What You Meant #10)

While IBM’s Deep Blue beat Gary Kasparov in their series of chess matches in the late 90’s, in Love v. Beck Energy Corp., 2015-Ohio-1283 (7^th Dist. Ct. of App., Noble Cty), the “human” wins. However, this outcome provided little solace to the defendants-appellants, who wanted to “harmonize” the hand written and word processed provisions in their favor.

The facts in this case were not in dispute. In 1988, Roy Mason, owner of 196 acres in Jefferson Township entered into three separate (but identical) oil and gas leases with Beck Energy. The first lease covered 65 acres, the second lease covered 59 acres and the third lease covered 72 acres. In December, 2002, the Loves acquired all 196 acres of Mr. Mason’s land subject to the leases. In December 2011, without first obtaining the Loves’ permission, Beck Energy assigned part interest in the leases to XTO Energy; namely, its deep drilling rights. In June 2013, the Loves filed a complaint against Beck Energy and XTO Energy seeking, among other things, to have the assignment of the deep drilling rights declared void.

The principal issue of the case is whether the terms of the contract (lease) required the Loves’ consent for Beck Energy to partially assign the lease (deep drilling rights) to XTO Energy. For the answer, we need to first look at the lease itself; particularly the assignment clauses found in paragraphs 13 and 21.

Paragraph 13, which is typed, provides that: “The Lessee shall have the right to assign and transfer the within lease in whole or in part, and Lessor waives notice of any assignment or transfer of the within lease. “ Paragraph 21 is handwritten and states: The Lessee agrees not to assign or transfer this lease without Lessor’s consent.

The plaintiffs argued that the language of paragraph 21 contains a clear restriction on assignment and, accordingly, controls. The defendants (XTO Energy and Beck Energy) both argued that paragraphs 13 and 21 must be “harmonized” with each other giving effect to the letter of the provisions as well as their intent. They asserted that paragraph 21 limits vs. eliminates paragraph 13. The defendants reasoned that paragraph 13 allows for partial assignments without consent while paragraph 21 prohibits a full assignment of the lease without consent. “They argued that the use of ‘this Lease’ in paragraph 21 without a reference to ‘in whole or in part,’ which is used in paragraph 13, means there is only a prohibition on a full assignment of the lease.”

After considering the parties’ arguments, the trial court found in the Loves’ favor. Such court concluded that the handwritten language controlled over the pre-printed language and thus, consent was needed for any assignments. The trial court further found that the consent to assign clause was not an unreasonable restraint on alienation, and that the contract’s 30 day notice of default requirement would have been a vain act and served no purpose (because the assignment had already occurred, and could not be cured within such 30 day period). The defendants then appealed the trial court’s ruling to the 7^th District Court of Appeals.

Applying basic rules of contract construction/interpretation, the appellate court ruled that “the trial court correctly determined that no portion of the lease could be assigned without the Loves’ consent.”

This case fits squarely within our “Watch your language-Say what you mean, precisely, or a judge will tell you what you meant axiom. In fact, the court’s own words simply restate this principle: “When the language of a contract is clear and unambiguous, and not subject to multiple interpretations, the court will not consider extrinsic evidence, i.e., evidence outside the four corners of the document, to re-interpret the contract's terms. (Citing Shifrin v. Forest City Enterprises, Inc., 64 Ohio St.3d 635, 597 N.E.2d 499 (1992).

Of course the court will be the trier of fact as to whether or not a contract is “clear and unambiguous.” To assist in reaching its conclusion, the 7^th District Court of Appeals cited numerous cases that have applied a classic yet seemingly simple rule of construction: “handwritten prevails over typed or pre-printed terms when there is a conflict between the two” or the two are inconsistent with each other.

The appellants had no problem with the classic rule of construction, just the court’s application of the same. They maintained that the two clauses of the contract (paragraphs 13 and 21) were not in conflict with each other, and that the court should apply a tandem rule of construction, namely that “when possible, a court's construction of a contract should attempt to harmonize all the provisions of the document rather than to produce conflict in them.”

The appellate court labeled XTO Energy and Beck Energy’s argument that “this Lease” language in paragraph 21 only means the entire lease and thereby harmonizes the two provisions, as creative, but not dispositive. The court deemed this a failing argument because “it is unlikely that a reasonable person reading paragraphs 13 and 21 would read the language in that manner.” In other words, the court “said what it meant” and declared itself reasonable.

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. If the parties truly intended that assignment of partial lease rights vs. the entire lease was permissible, without notice or consent to the landowner-landlord, the lease should have clearly stated so, in one provision.

When in Doubt, Take the Notary Route-(Don’t be Left at the Alter with an Unenforceable Commercial Lease)

Commercial leases in Ohio must be in writing and signed (See Ohio’s “Statute of Frauds”- ORC Section 1335.04), and, they must be acknowledged (e.g., notarized) when their terms (duration) exceed three (3) years (See ORC Section 5301.08; ORC Section 5301.01). If these “technicalities” are not followed, is there real harm as a result of the foul? Absolutely. The general law in Ohio is such that when a tenant takes possession under a defectively executed lease (and pays rent…), only a periodic (e.g., month to month) tenancy will be implied to exist, in spite of the lease’s stated duration. In other words, in Ohio, if a commercial real estate lease with a ten (10) year stated term is not notarized, and payments are made monthly, only a month-to-month tenancy legally exists. This result is markedly different from the effect of improperly executed/acknowledged deeds. With regards to such “improper” deeds, the Ohio Supreme Court has held that a deed is still valid despite a defective acknowledgment, but only as between the grantor and grantee.

There is (as with most case law) an exception to the aforesaid general rule with respect to improperly executed/acknowledged leases; the equitable doctrine of “part performance”. This contract law doctrine basically dictates (based upon fairness/equity) that a lease (or other contract) should not be rendered unenforceable due to technical failures when much of the contract has been performed, and other equitable factors are present such as “detrimental reliance” (changing of a party’s position to its detriment, in reliance upon an act [e.g., making substantial improvements to a premises in reliance upon what a tenant thought was a validly executed/acknowledged, 20 year lease]).

What about an improperly executed/acknowledged lease whose term is longer than three years, only if you count the optional renewal term? Or, an “improper” lease whose term has just started? Would such a lease violate the statute? If so, would the doctrine of part performance apply?                                                                           

The recent decision of Chen v. Hwang, 2014-Ohio-5863 (10^thDistrict Court of Appeals, Franklin County) answers both of these questions. The Chen case involved a lease agreement executed on August 3, 2012 between Dr. Chen, the tenant-appellee, and Dr. Hwang, the landlord-appellant. The lease provided for a three-year term with an option to renew for an additional three years.  According to the lease, the term was to commence on October 1, 2012, and certain remodeling work was to be completed by the landlord by such date. The lease was executed, but was not notarized.    

On November 30, 2012, the tenant rescinded the lease agreement and filed a complaint, seeking a declaration that its recession was justified because the lease agreement was in effect, a six year lease (including the option) and therefore not acknowledged in accordance with the Ohio Revised Code (and thus, unenforceable), and alternatively, that the appellant did not deliver the premises with the remodeling work completed as and when required by the lease.  In addition, the tenant sought repayment of approximately $24,000, which was comprised of payment for the first month's rent, payment of the security deposit, and money loaned to the appellant for purposes of remodeling the premises.

The landlord claimed (1) it was the tenant who breached the lease, by not securing certain permits required for the work, (2) that accordingly, the option would not be exercisable (with tenant in default), and (3) therefore, the lease was only three years and complied with the lease-execution requirements set forth in R.C. 5301.01.

The trial court concluded that as a three-year lease with an option to renew, the lease was subject to the execution requirements of R.C. 5301.01(A).  Because the lease failed to comply with R.C. 5301.01(A), the trial court decided that tenant was entitled to damages for the amounts paid to the landlord.  

   

The landlord appealed, but the Tenth District Court of Appeals upheld the ruling of the trial court.

In justifying its ruling, the appellate court simply applied the law to the facts. To accomplish the same, it looked first to the applicable statutes.

“As is relevant here, R.C. 5301.01(A) provides: A deed, mortgage, land contract …. or lease of any interest in real property … shall be signed by the grantor, mortgagor, vendor, or lessor in the case of a deed, mortgage, land contract, or lease or shall be signed by the trustee in the case of a memorandum of trust. The signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor, or by the trustee, before a judge or clerk of a court of record in this state, or a county auditor, county engineer, notary public, or mayor, who shall certify the acknowledgement and subscribe the official's name to the certificate of the acknowledgement.”

The so called “3+ year rule” exception to R.C. 5301.01(A), which only applies to leases is found in R.C. 5301.08, which provides: "Sections 5301.01 to 5301.45 of the Revised Code do not affect the validity of any lease * * * of any other lands for any term not exceeding three years or require that lease to be acknowledged or recorded."

The appellant did not dispute that its lease did not comply with R.C. 5301.01, but argued that the formalities of R.C. 5301.08 exempts the lease from the formal execution requirements.  Appellant polished its original trial court argument and claimed to the court of appeals that the lease did not exceed three years, because its original term was for three years, and its option term was nullified by not only the tenant’s default, but tenant’s declaration that it would not move into the premises. The court of appeals was not swayed by the “pro se” appellant’s “good college try argument.” According to the court, “Appellant  has  not  provided,  nor  has  this  court's  research  revealed,  any  authority  to support such a position.”

To the contrary, the court cited “precedent” (i.e., prior decisions of 380 E. Town Assoc. v. Mangus, 10th Dist. No. 91AP-92 (June 20, 1991) and Gelman v. Holland Furnace, 59 Ohio Law Abs.539 (1948)) that established "[u]nder Ohio law, option periods are added to the initial term of the lease in order to determine the length of the lease for the purposes of complying with R.C. 5301.01 and 5301.08."

Does the doctrine of part performance apply? Should the appellant be entitled to one month’s rent? The easy answers here are no, and no. First of all, while the landlord did come up with a cogent argument regarding R.C. 5301.01 and 5301.08, it did not file a counterclaim, nor did it allege any equitable defenses. And second, it is hard to argue “part performance” unless much of the contract or lease in question has been performed. This lease did not even get “out of the gate.”

What is the moral of this story? When in doubt, take the notary route. Notarization, when not required will result in “no harm, no foul”. On the other hand, odds are that failing to notarize when required will cause, at the least, time and attorneys fees, and at most, it can render your lease unenforceable.

Any commercial lease of three years or more (including option terms) must be in writing, signed and notarized.   While performance under a lease may remove it from the requirements of R.C. 5301.01(a), it will not protect a landlord who seeks to enforce an improperly executed lease when performance has not commenced.