Happy New – Real Estate Laws- Year

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

As you may know, Ohio Governor John Kasich and the Ohio Legislature have been very busy passing laws and putting same into effect at the end of 2016 and the beginning of this year. Among the twenty-eight bills signed by Governor Kasich on January 4^th are two real estate related statutes worth noting: 1) Am. Sub. SB 257 (regarding the validity of recorded real property instruments); and 2) Am. H. B. 532 which revises the Ohio Revised Code (“O.R.C.”) relating to real estate brokers and salespersons.

I.                   Am. Sub. SB 257

A.                What does this bill do? Am. Sub. SB 257 first amends O.R.C. Section 5301.07 (B) by establishing two rebuttable presumptions regarding deeds, mortgages, installment contracts, leases, memorandums of trust, powers of attorney, and other instruments accepted by the county for recording. Namely, that 1) the recorded instrument conveys, encumbers, or is enforceable against the interest of the person who signed the instrument and; 2) that the instrument is valid, enforceable, and effective as if the instrument were legally made, executed, acknowledged, and recorded, without any defects. These presumptions can only be rebutted by clear and convincing evidence of fraud, undue influence, duress, forgery, incompetency, or incapacity, and must be rebutted, if at all within four (4) years of recording the defective instrument (See revised O.R.C. Section 5301.07 (C)). The prior version of Sec. 5301.07 (C) allowed a challenger twenty-one (21) years to rebut the validity of a defective instrument. S.B. 257 also provides that the filing of an instrument, albeit defective, is constructive notice to all third parties of the validity of the instrument notwithstanding a defect in the making, execution, or acknowledgment of the instrument (See revised O.R.C. Section 5301.07 (C)). In other words, pursuant to amended Section 5301.07 of the Ohio Revised Code, a recorded instrument is presumed valid when recorded, and deemed valid four years afterwards.

Am. Sub. SB 257 also amends O.R.C. Sec. 5301.07 (C) such that the specific defects enumerated in the statute (instrument not witnessed, not acknowledged [or defectively acknowledged]) and person holding property interest not identified in the granting clause) are now examples of the type of defect covered by the statute vs. the only defects covered.

Finally, Am. Sub. SB 257 amends various sections of Ohio Revised Code Section 5709 to “establish a procedure by which political subdivisions proposing a tax increment financing (TIF) incentive district must notify affected property owners and permit them to exclude their property.”

B.                 When does it become law? Am. Sub. SB 257 was signed by Governor Kasich on January 4, 2017 and becomes effective ninety (90) days thereafter.

C.                 Why is it significant? Basically, deeds and other instruments that would otherwise need to be re-signed or re-recorded to correct defects will automatically be cured by operation of law (by virtue of the language in the revised statute). For example, let’s say you are applying for a loan and the title report shows the deed you received was signed by an individual who forgot to add “Jr.” at the end of his name. You should now be able to convince the bank that the deed does not have to be corrected and re-recorded, as a condition to your loan. Additionally, title companies should now be more willing to remove defectively made/signed/acknowledged instruments from their lists of title exceptions in title commitments.  

Even if banks and title companies don’t rush to relax their practices in accord with this statute, the statutory presumptions and deemed validities inherent in Am. Sub. SB 257 should reduce the risks inherent in completing transactions in spite of these types of title “defects”. This is especially true with regard to defective oil and gas leases which are typically excluded from title insurance coverage.

II.                Am. HB 532

A.                What does this bill do? Am. HB 532 incorporates recommendations stemming from a 2012 special task force created by the Ohio Real Estate Commission including: defining/ categorizing brokers (as “Associate Brokers” or “Principal Brokers”), consolidating the duties of a Principal Broker in one new Ohio Revised Code section (Sec. 4735.081 (C)), allowing a broker to be a Principal Broker at more than one company, allowing prospective licensees the option of completing their pre-licensing education in the classroom or on-line, and increasing post-licensing education requirements.

Re: the “New Broker Categories”- Pursuant to new Section 4735.01 (AA) and (GG) of the Ohio Revised Code, respectively, "Associate Broker" means an “individual licensed as a real estate broker under this chapter [4735] who does not function as the principal broker or a management level licensee”; and "Principal Broker" means an “individual licensed as a real estate broker under this chapter [4735] who oversees and directs the operations of the brokerage.” Pursuant to O.R.C. Section 4735.081 (A), “each brokerage is to designate at least one affiliated broker to act as the principal broker of the brokerage and any affiliated broker not so designated is to be considered an associate broker or management level licensee for that brokerage.” "Management level licensee" means a “licensee who is employed by or affiliated with a real estate broker and who has supervisory responsibility over other licensees employed by or affiliated with that real estate broker.” The supervisory responsibilities are not new, but are packaged nicely in an easy to read format in O.R.C. Sec. 4735.081 (C). Such responsibilities include: overseeing and directing the operations of the brokerage including the licensed activity of affiliated licensees, renewing and maintaining licenses and generating and maintaining company policies (and practices and procedures) and transactional records. The principal broker or brokers of a brokerage may assign to a management level licensee any of the afore-mentioned duties.

Re: Licensing Education- According to Am. HB 532, prospective licensees may now complete the required 120 hours of pre-licensing education “by either classroom instruction or distance education.”  O.R.C. Section 4735.01 (DD) defines “distance education” as instruction “accomplished through use of interactive, electronic media and where the teacher and student are separated by distance or time, or both.” Currently, only brokers have the option of on-line licensing.  All pre-licensing course work must still be taken by an accredited, public or private “Institution of Higher Learning.”

Am. HB 532 also increased from ten (10) to twenty (20) hours the post licensure educational requirements.

B.                 When does it become law? Am. HB 532 was signed by Governor Kasich on January 4, 2017 and becomes effective ninety (90) days thereafter.

C.                 Why is it significant? According to the bill’s sponsor, the new categories of “broker” were created to: 1) better reflect the way brokerage organizations operate; and 2) to hold those who engage in supervisory functions (i.e. Principal Brokers) accountable, while removing such accountability from brokers who do not have oversight responsibility.

Apart from limited opposition, the licensure modifications have been heralded as simply modernizing real estate education. Supporters of the legislation (including the Ohio Board of Realtors) assert that real estate courses and the profession in general can now be made more accessible to those previously hindered by geographic limitations, those looking to real estate as a second career and those who have difficulty learning in a classroom setting.

Ohio UCC Provision Re: Constructive Notice Applies to All Recorded Mortgages, Even With Defective Acknowledgement

On February 16, 2016, the Ohio Supreme Court decided In re Messer, Slip Opinion No 2016-Ohio-510, which addresses the application of ORC 1301.401 to recorded mortgages that were deficiently executed under ORC 5301.01.

This decision was issued at the request of U.S. Bankruptcy Court for the Southern District of Ohio, Eastern Division (the “Bankruptcy Court”), who asked the Ohio Supreme Court (the “Ohio Court”) determine whether ORC 1301.401, which provides that the recording of certain documents provides constructive notice, applies to all mortgages recorded in Ohio and whether 1301.401 provides constructive notice of a recorded mortgage that was deficiently executed under ORC 5301.01.

In this matter, Daren and Angela Messer (the “Messers”) took out a loan in 2007 which was secured by a mortgage. The notary acknowledgement was left blank bringing into doubt whether or not they executed the mortgage in front of a notary. The mortgage containing incomplete notary section was recorded with the Franklin Counter Recorder.  In 2013 the mortgage was assigned to JP Morgan Chase Bank (the “Bank”).

The Messers subsequently filed a Chapter 13 bankruptcy and commenced an adversary proceeding requested that the mortgage be avoided as defectively executed under ORC 5301.01. If successful, the Bank would have lost its secured position.

The Bankruptcy Court in this matter decided that the Ohio Court should make the determination on the application of 1301.401, which is part of Ohio’s Uniform Commercial Code (the “UCC”), to a recorded mortgage that is clearly defectively executed under ORC 5301.01.

ORC 5301,01 provides that a mortgage must be signed by the mortgagor and the execution must be acknowledged by the mortgagor in front of a judge or clerk of court in Ohio, 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.

ORC 1301.401(B) provides that the recording with any county recorder of any document described in ORC 1301.401(A)(1) is constructive notice to the whole world the existence and contents of that document as a public record and of the transaction referred to in that public record. ORC 1301.401(C) further provides that any person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that the record was first tendered to the county recorder for recordation.

The documents described in ORC 1301.401(A)(1) specifically includes documents referenced in ORC 317.08, which expressly references mortgages.

While the Messers argued that 1301.401 only applies to transactions governed by the UCC and shouldn’t apply to mortgages since mortgages are governed by Ohio contract law. The Court disagreed, finding that the statute’s clear language indicated that it applied to any document referenced in ORC 317.08, which included mortgages. Based on the express language in the statute, the Court held that ORC 1301.401 applies to all recorded mortgages.

The Court went on to disagree with the Messers other contentions and further held that the portion of ORC 1301.401 that states the act of recording provides constructive notice to the whole world of the existence and contents of the mortgage document is compatible with provisions of ORC 5301.01 and ORC 5301.23 and the rest of the Ohio Revised Code and the fact that it is part of the UCC and not ORC Chapter 5301 does not prevent it from applying to mortgages.

In conclusion, the Court has clarified that ORC 1301.401 applies to all recorded mortgages, and acts to provide constructive notice to the world of the existence and contents of a recorded mortgage even if it was deficiently executed under ORC 5301.01. This is a win for common sense.

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