Casualty and Condemnation Provisions in Loan Agreements

Every mortgage loan agreement contains provisions that address casualty and condemnation (i.e., eminent domain) affecting the property.  All such provisions give the lender some degree of control over the proceeds and identifies what happens to the proceeds, and are usually given scant attention. However, these provisions often can be negotiated, at least with respect to how the proceeds are handled for any restoration of the property.

As a borrower, a property owner doesn’t want to be hamstring with red tape if the proceeds are not material, and a lender shouldn’t want that either. However, a lender needs to protect its security interest in the property.  The trick is to determine where to draw the line.

Typically, the loan agreement includes casualty and condemnation provisions that simply provide all proceeds from such events go to the lender, which may be applied to paying down principal on the loan.

Consider the following scenario, a new storm sewer is scheduled for construction along the road where mortgaged property is located. Eminent domain is being utilized to take a tiny sliver of the properties adjacent to the road. The amount of property to be taken has no material impact on the value of the mortgaged property and accounts for maybe 1-2% of the property.  However, if the loan agreement’s condemnation provision does not include a materiality threshold then the borrower will need to notify the lender, pay a few thousand in fees to the lender to cover its legal fees and contend with red tape over the use of the proceeds.

Typical approaches to identifying what condemnation or casualty events are material include a dollar threshold and a percentage of the property that is affected. When such an event does not trigger these thresholds then the borrower will retain all or some level of control over how the insurance or condemnation proceeds are spent.

For example, a restoration threshold will typically be set at around 5% of the outstanding principal balance on the mortgage loan. Therefore, if the proceeds the result from the casualty or condemnation event do not exceed that threshold then the lender is more likely to permit borrower to keep the proceeds.

Additionally, a lender will want to look at how the property is functionally affected by such events. For example, if the land taken by eminent domain is less than 10%, the percentage of leases that remain in full force and effect after a casualty event exceeds 75% or the less than 35% of the improvements were destroyed, then the lender will be more likely to permit the borrower to restore the property and, depending on other criteria, receive the proceeds for restoration.

When negotiating loan agreements, borrowers should give some attention to the casualty and condemnation (eminent domain) provisions, with the goal of obtaining as much flexibility as possible.
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Remembering Kelo v. City of New London -- 10 Years Later

Last week marked the 10^th anniversary of the US Supreme Court’s 5-4 decision known as Kelo v. City of New London.  In that decision the Supreme Court ruled private economic development is a public use under the 5^th amendment to the US Constitution. This decision allows governments at all levels to take people’s private property, including their homes, businesses and farms, and hand that property over to another private party to develop in a way more the that government’s liking with the expectation it will raise more tax revenue or create jobs.

Public reaction against the decision was strong.  I’m letting my own personal opinion show through here, but this cavalier approach to eminent domain shows a tremendous disrespect by governments for its citizens and their property and livelihood, combined with a bit of economic elitism.  This is exacerbated by the need for governmental agencies to obtain a valuation of the property that works within their limited tax dollars.  All around it leads to private citizens losing their property for objectionable reasons and receiving compensation that’s often on the low end of its fair value. If a small business is involved, the compensation for moving that business to a new location is frequently inadequate.

In the first 5 years after Kelo, approximately 43 states passed some level of reform to curb at least the excesses of eminent domain unleashed by Supreme Court’s decision.  Here in Ohio, the Ohio Supreme Court in 2006 issued its decision in City of Norwood v. Horney (110 Ohio St.3d 353) which essentially reversed the application of Kelo in the state of Ohio, and held that economic development, in and of itself, does not satisfy the public use requirement of the Ohio Constitution.

In 2007, Ohio’s legislature passed S.B. 7, which amended Ohio’s eminent domain law. S.B. 7 provided a comprehensive definition of ‘blight’ that narrowed its application and curbed some of the worst abuses of blight studies employed by some local governments.

S.B. 7 also put into place new pre-appropriation requirements and procedures for appropriation proceedings, and provided for additional compensation to landowners, along with provides for their costs and potentially attorney fee awards.

While many property rights groups and others feel that Ohio’s amendments to its eminent domain law were insufficient, these changes, when combined with the Norwood decision, constitute progress in the right direction.

As for the property taken by the City of New London, Connecticut as a result of the Kelo decision, what happened to it?  The houses were torn down except for Ms. Kelo’s house, which was moved at private expense. The land remains vacant and undeveloped, occupied only by some feral cats. The original development plan that triggered the eminent domain action and lawsuit was poorly planned and feel apart. After 10 years, there is finally some development planned for the condemned property--a park is planned for the parcel that was Ms. Kelo’s house.
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Watch Your Language with Condemnation Clauses in Commercial Leases

(“Say what you mean, precisely, or a judge will decide what you meant” #9)

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements (including leases), unless it is contrary to statutory law or public policy. 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 tenant in Rite Aid of Ohio, Inc. v. Monroe/Laskey Ltd. Partnership, 2009-Ohio 519 (6^th Dist. Ct. of App., Lucas Cty.) without a right to terminate its lease after the City of Toledo took a potion of the real property owned by the Landlord, by eminent domain.

In this case, the appellant-tenant, Rite Aid of Ohio, Inc., entered into a commercial lease with appellee-landlord, Monroe/Laskey Limited Partnership ("Monroe/Laskey"), for lease of real property located at 3466 West Sylvania Avenue in Toledo, Ohio.  A number of years later, a portion of the property under the lease was taken by the City of Toledo under eminent domain for use in a road improvement project. Specifically, the City of Toledo took .0861 acres of land from the real property set forth in the legal description exhibit to the lease. This land was a 3,200 square foot strip fronting Sylvania Avenue that resulted in a loss of 5 of 107 parking spaces and a change to a nearby roadway resulting in a limitation of available egress from the site.

In 2007, Rite Aid brought a declaratory judgment action in the Lucas County Court of Common Pleas to declare its right to terminate the lease. The trial court ruled that the terms of the lease did not provide Rite Aid with a right to terminate the lease.

At issue was construction of Article 23 of the Lease, establishing when termination after a condemnation is permitted, and Article 1, establishing the definitions of “Premises” and “Property”.

Article 23 provides, in pertinent part: “In the event that the entire Premises shall at any time after execution of this Lease be taken in public or quasi-public use or condemned under eminent domain, then this Lease shall terminate and expire effective the date of such taking… Tenant shall [also] have the right of termination of this Lease …… if , as a result of such eminent domain proceeding or other governmental or quasi-public action: (i) Any portion of the Premises shall be taken and the remaining portion shall be unsuitable for Tenant's continued business operations, determined in Tenant’s sole business judgments; (ii) The total number of parking spaces established for the Premises shall be reduced by twenty percent (20%) or more, or Tenant, its customers, agents, employees and visitors are for more than thirty (30) days denied reasonable access to the Premises or parking areas."

"Premises" is defined in Article 1 of the lease as "[a] certain free-standing, one story storeroom (hereinafter known as 'Premises') to be constructed at 3450-3466 Sylvania Avenue." Article 1 defines "Property" as the "real property upon which the Premises are located" as described in the legal description attached to the lease and marked Exhibit "A."

The trial court basically held that there was no right to terminate pursuant to Article 23(i), of the lease because such provision expressly provides that the tenant may only elect to terminate the lease based upon a taking of any portion of the "premises," and since no part of the Rite Aid building itself, was taken, no portion of the premises was taken (recall that Article I defines the premises to be the building only). The trial court further held that there was no right to terminate pursuant to Article 23(ii), because the five parking spaces taken represented 5%, not the 20% of parking taken which was required to trigger the Article 23 (ii) termination right.

At the court of appeals, Rite Aid argued that the term "premises" should be interpreted as including the land upon which the building is located. It claimed that limiting the term "premises" to the building was ridiculous and that Rite Aid had a leasehold interest not only in the building but also the surrounding land. It argued that a premises is a “building along with its grounds, as provided in a definition from Black's Law Dictionary.”

The landlord countered that the lease was clear and unambiguous in treating the terms "premises" and "property" differently and that the trial court was correct as to the meaning of the terms. The landlord further argued that the lease consistently distinguished between the word “premises” and “property”, and that if they were intended to mean the same thing, there would have been no reason for an Article 23 (ii) regarding parking spaces and access.

The court of appeals had no problem affirming the trial court’s holding in favor of the appellee-landlord. It cited numerous decisions of established contract law, basically providing that while contracts need to be construed to ascertain and give effect to the intent of the parties to a contract, such intent must be presumed within the language used in the written instrument. In other words, "[w]hen 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.”

Applying the law to the facts, the court of appeals established that the lease (contract) clearly provided that a partial taking of the building (defined as the “premises” under the lease) was necessary under Article 23(i) for the tenant to have a right to terminate the lease, and since the eminent domain did not take any part of the Rite Aid store building (and the requisite 20% of parking spaces was not taken under Article 23(ii), the tenant had no right to terminate pursuant to the lease.

In a second assignment of error, Rite Aid argued that a constructive taking occurred in terms of a non-physical, substantial interference with the leasehold interest. The court of appeals disagreed, stating that considering damage to business operations generally to prove a constructive taking of the building as a basis for a right to terminate under the lease would be inconsistent with the plain meaning of the lease contract, and that where a contract is plain and unambiguous between sophisticated business entities, it does not become ambiguous by reason of the fact that in its operation it may work a hardship upon one of the parties.

What are the morals of this story? Presumably, the tenant intended a greater right of termination in the lease than that interpreted by the Court. Perhaps there would have been a different outcome had the non-discussed termination language in Article 23 (ii) of the lease (i.e. “…denied reasonable access to the Premises or parking areas for more than thirty (30) days”) read “…denied reasonable access to and egress from the Premises”. In other words, “Say what you mean, precisely, or a judge will tell you want you meant.”  Ohio commercial lease and contract cases are replete with these warnings to “watch your language.”

Another moral of this story is “do sweat the (seemingly) small stuff”. Have your entire lease reviewed by a legal professional. While condemnations/eminent domain proceedings may not occur often, if they do, your only protection (or non-protection) will be the applicable lease language that is often ignored at the outset.

 First, clearly spell out when the condemnation provision applies. The “condemnation clause” should apply: to the acquisition of property for any public or quasi public purpose or use under any statute; to the right of eminent domain under any statute; or to the purchase by any governmental authority or public authority in lieu of the exercise of the right of eminent domain.

Second, clearly delineate the circumstances under which the lease can be terminated if only part of the property or premises is taken. Usual standards or termination triggers include determinations of: (i) whether the remaining property not taken is tenantable or still usable for the reasonable operation of tenant’s business, (ii) whether a specific percentage of the leased premises or property (building and/or land area) is taken, (iii) whether ingress/egress has been impaired, and (iv) whether a certain amount of parking has been taken. The condemnation clause should also specify who decides whether the partial taking is sufficient to terminate the lease – landlord, tenant or an independent third party.

Finally, the condemnation clause should (1) specify when the termination becomes effective and the date through which rent must be paid; and (2) address the respective rights of the landlord and tenant in the event the taking of part of the property does not result in the termination of the lease (e.g., apportionment of rent, restoration of premises, apportionment of the condemnation award).

Many disgruntled tenants having to live with lower sales volume due to partial takings, and many disgruntled landlords abating rent and restoring tenant improvements have one thing in common; they forgot to watch their language with condemnation clauses in commercial leases.

Controversial Plan to Use Eminent Domain to Seize Underwater Mortgages Advances in California

The following article was written by Laura Englehart, Law Clerk at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

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In an attempt to keep residents in their homes and prevent foreclosures, municipal leaders in Richmond, California are advancing a plan that allows the city to use its eminent domain powers to seize and refinance underwater mortgages.  While Richmond is still far from actually executing it, the controversial plan could have far-reaching effects if it continues to move forward.  Because Ohio is similarly struggling with an abundance of underwater mortgages, Ohio’s local lawmakers, lawyers, realtors, and other interested parties should take note of how the debate and implementation proceed.

The power of eminent domain allows a government to take private property for public use, but Richmond would be the first to use this power to seize underwater mortgages.  A mortgage is underwater when a homeowner owes more on the home than it is worth.  According to Zillow, 45% of homes in Richmond were underwater in the second quarter of 2013.  

In July, the City of Richmond sent letters to mortgage servicers and trustees offering to buy 624 underwater mortgages at considerable discounts and has indicated that it can otherwise use eminent domain to forcibly take the mortgages.  Upon seizing these kinds of mortgages, the city intends to compensate the banks at fair market value and would then refinance the mortgages to make them more-affordable for homeowners.

 

Housing and community advocates who support using eminent domain in this way believe it is a mechanism that can help stop the housing crisis that is devastating local communities by lowering principal balances and enabling more homeowners to stay in their homes.  Those in opposition argue that it will create a chilling effect by making banks unwilling to enter into future mortgage agreements in Richmond. The Federal Housing Finance Agency has already stated that Fannie Mae and Freddie Mac should stop doing business in places that approve the use of eminent domain to seize and refinance underwater mortgages, effectively eliminating mortgage financing.

 

Investors holding the mortgages in Richmond sued the city through their Mortgage-bond trustees Wells Fargo, Deutsche Bank, and The Bank of New York Mellon and sought an injunction to halt the plan.  Last week, however, U.S. District Court Judge Charles Breyer dismissed the case on grounds that the lawsuit was premature, as Richmond City Council has not yet voted to approve the use of eminent domain. Regardless of the ruling, whether this is a legitimate use of eminent domain remains undecided, and further lawsuits are expected as Richmond continues to move forward. 

 

Lawyers and stakeholders in Ohio should stay abreast of this ongoing controversy because Ohio is also struggling with the magnitude of the housing crisis and has a similarly high percentage of underwater mortgages. According to Zillow, in Ohio 35% homes in Lucas County (Toledo); 32% of homes in Montgomery County (Dayton), 30% of homes in Franklin County (Columbus) and Cuyahoga County (Cleveland), and 28% of homes in Hamilton County (Cincinnati) are underwater.  Other jurisdictions across the nation are already exploring whether eminent domain can or should be used as a new tool to seize and refinance underwater mortgages to stop such homes from going into foreclosure. The eventual outcome in Richmond will have widespread influence.

Unreasonable Conditions on Land Use Permits — Lack of Remedies for Ohio Landowners

The following article was written by Laura Englehart, Summer Associate at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

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Earlier this month, we posted an article outlining the U.S. Supreme Court decision in Koontz v. St. Johns River Water Management issued on June 25, 2013.  The Court concluded that it is unconstitutional for the government to attach unreasonable conditions to land use permits, even when a permit is denied.  However, the Court also articulated a difference between denying a permit and a consummated taking, and it left open the question as to what is the appropriate remedy for a landowner harmed by an unconstitutional conditions violation. 

Though an unreasonable condition to a permit burdens a constitutional right, the Court stated in Koontz that if the permit is denied and the condition never imposed, then there is no actual taking and the remedy of just compensation is not available.  Rather, remedies and damages are available based on the particular cause of action.  Koontz was brought under a Florida law expressly allowing landowners to sue for monetary damages when conditions on permits are unreasonable and constitute a taking without just compensation. Ohio law does not clearly provide for remedies with respect to a permit at all.

Ohio has seen significant legislative and judicial action on regulatory takings and eminent domain in the past eight years.  Following the 2005 U.S. Supreme Court decision Kelo v. New London, which allowed takings of non-blighted private land for purposes of economic development, the State of Ohio enacted a one-year moratorium on such takings and created a task force to study eminent domain restrictions.  At the same time, the Ohio Supreme Court in Norwood v. Horney imposed limits that prohibit eminent domain for economic benefit alone, require heightened scrutiny review of eminent domain, and prevent government from condemning a non-blighted property simply because the property may be deteriorating.  In 2007, based on the recommendations of the task force, Ohio enacted legislation that defines blight, requires notice to property owners before government can initiate appropriation proceedings to effect a regulatory taking, and sets forth procedures for determining compensation. 

Under Ohio law today, to allege an involuntary taking of private property, the appropriate action is for a landowner to file a writ of mandamus to compel government to commence appropriation proceedings. See State ex rel. Shelly Materials v. Clark County Bd. of Comm'rs, 115 Ohio St. 3d 337, 340 (Ohio 2007).  According to Ohio’s appropriation proceedings, the government must first file a petition for appropriation of property in the proper court, the landowner then must file an answer, and a jury must assess compensation for the property appropriated as well as for damages, including relocation expenses and interest. 

However, these appropriation proceedings assume a consummated taking and do not delineate a separate procedure or remedy for disputes over unreasonably conditioned permits.  Because no actual taking occurs when government imposes unreasonable conditions on a permit, the process set forth in Ohio’s appropriation proceedings are unlikely to be available as a remedy.  Therefore, even if the Koontz decision allows landowners to better challenge unreasonable conditions on permits, with the remedies of just compensation and statutory appropriation proceedings unavailable, it’s unclear what remedies, if any, would be available to Ohio landowners.

CLE Update: Eminent Domain and Land Valuation Litigation; and Condemnation 101

The American Law Institute-Continuing Legal Education (ALI-CLE) is sponsoring a couple of seminars on land use and real estate topics in Miami Beach on January 24 - 26, 2013 (Thursday through Saturday).

The first is titled "Eminent Domain and Land Valuation Litigation" and the second is "Condemnation 101: How to Prepare and Present an Eminent Domain Case."

Click here for information on the first seminar.
Click here for information on the second seminar.
Click here for hotel information.
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Ohio Supreme Court Rules that Next Door Neighbor in Next Door Town has Standing to Challenge the Constitutionality of the Neighboring Town’s Re-Zoning

Moore v. Middletown, Slip Opinion No. 2012-Ohio -3897

For those paying close attention to the articles in this Blog, you may recall my March 12, 2012 post entitled “Ohio Supreme Court Rules Next Door Neighbor in Next Door Town Lacks Standing to Pursue Regulatory Taking Claim.” Did the Ohio Supreme Court reverse itself in Moore v. Middletown? The short answer is no; instead, it took the opening it left itself in Clifton v. Blanchester, 131 Ohio St. 3d, 287, 2012-Ohio-780. The long answer is as follows:

In Clifton, 23 acres of land were annexed by the Village of Blanchester and then rezoned for industrial use, leaving the adjoining 97 acre farm owner in the adjacent city unhappy and claiming an adverse economic effect on his land. The court in Clifton concluded that “aside from acquiring property to operate a public utility that serves its own residents, a municipality has no authority to exercise its eminent domain powers beyond its corporate limits”. Therefore, the Village of Blanchester had no authority to “take” Mr. Clifton’s land, and accordingly, the next door neighbor (Mr. Clifton) from the next door town (Clinton County) did not have standing to initiate a claim for compensation based on a regulatory taking.

The court in Clifton, however, left its door open for future claims of standing by stating “we emphasize that we do not hold that an adjoining property owner may never have standing. Instead, we hold that a property owner lacks standing under the facts and circumstances presented here”.

Moore v. Middletown presents similar facts to the Clifton case. The Moore case arose from two ordinances enacted by the Middletown City Council. The first of those ordinances rezoned a 157 acre parcel of land from low density residential to general industrial use. The second ordinance amended a setback provision that previously required all industrial activities to be at least 600 feet from a property line. The Moores, like the Cliftons, owned adjacent property that was in an adjoining town. The Moores claimed that the rezoning was not for the benefit of the public but for the private benefit of the city’s largest employer, AK Steel Corporation (to allow for an industrial plant that would convert coal into coke for its steelmaking).

Moore brought suit against the city based on two different kinds of relief. Moore first asked that Middletown be ordered to appropriate Moore’s land and compensate the Moores for loss of value that they expected as a result of the rezoning. The second type of relief requested was a judgment calling for the rezoning ordinances to be held unconstitutional under the due process and equal protection clauses of the Ohio and U.S. Constitution. It is this two pronged approach in Moore that separates the two cases. Mr. Clifton did not challenge the constitutionality of the City of Blanchester’s rezoing.

The Court in Moore, consistent with its decision in Clifton, struck down the appropriation claim on the same basis that it struck down the Clifton claim. The court in Moore, however (overruling the 12th District Court of Appeals) held that the plaintiff does have standing to assert constitutional due process and equal protection claims. Citing U.S. Supreme Court decisions, the court in Moore summarized that to succeed in establishing standing for constitutional claims, plaintiffs must need only show that they 1) suffered an injury, 2) that the injury is fairly traceable to the defendant’s allegedly unlawful conduct, and 3) that the injury is likely to be redressed by the requested relief sought.

Justifying its decision, the court in Moore reminds us that Ohio expressly incorporated individual property rights into the Ohio Constitution in terms that re-enforced the important nature of an individual’s “inalienable” property rights, which ought to be held forever, “inviolate” (Ohio Constitution §19, Article 1). Since zoning ordinances can directly affect and often limit property rights, the court in Moore reasoned that property owners in Ohio (even neighboring landowners of the municipality that enacted the zoning) have the right to bring cases testing the constitutionality of zoning ordinances, including claims that the government action is arbitrary and unreasonable and bears no substantial relation to public health or safety.

The court in Moore also cautions us that the overall resolution of the case is far from over. In that regard, the Court stated: “the question before us in this appeal is whether they have a standing to do so, not whether they will succeed in their efforts”. Accordingly, the case was remanded to the trial court to determine the constitutionality of the municipality’s rezoning.

For those wondering why their attorneys draft fifty (50) page “briefs” and complaints to include multiple causes of action and alternative theories of recovery, Moore v. Middletown provides the answer. “Throwing everything at them and hoping something sticks” can be an effective strategy, especially when dealing with constitutional issues. It seems that Mr. Moore and his attorney have an uphill battle to have the rezoning declared unconstitutional, but at least their day in court continues. Stay tuned.

Ohio Supreme Court Rules Next Door Neighbor in Next Door Town Lacks Standing to Pursue Regulatory Taking Claim

Clifton v. Blanchester, Slip Opinion No. 2012-Ohio-780

When we think of a “taking” of private property by a public entity, what typically comes to mind is a physical act to condemn and demolish, such as leveling a home in the way of a new highway. However, the law also recognizes that a taking can occur in cases where there is no physical invasion, but a regulation deprives property of less than 100% of its economically viable use. These are sometimes referred to as “partial takings”. See Penn Cent. Trans. Co. v. New York City, 438 U.S. 104 (1978).

The Supreme Court of the United States in Penn established that the following factors must be evaluated to determine if property is taken without physical means: 1) the economic impact of the regulation on the claimant; 2) the extent to which the regulation interfered with distinct, investment-backed expectations and 3) the character of the government action. This “factors test” was recently recognized by the Ohio Supreme Court in State ex rel. Gilmore Realty, Inc. v. Mayfield Hts., 119 Ohio St. 3d 11 (2008); State ex. rel. Shelly Materials, Inc. v. Clark Cty. Bd. of Commrs., 115 Ohio St. 3d 337 (2007); and in the December 4, 2008 case of State ex. rel. v Middlefield, 120 Ohio St. 3d. 313 (2008). Often, the regulation in question is a rezoning which is so burdensome to a subject property it can result in a partial or total taking of the regulated/rezoned property.

What about the neighbor (in a neighboring city) to a burdensome rezoning? Let’s say 23 acres of land are annexed by a city and then rezoned for “general industrial use”, and the adjoining 97 acre farm owner in the adjacent city is not happy and alleges an adverse economic impact to his/her land?

The above fact pattern describes the case recently decided by the Ohio Supreme Court in Clifton v. Blanchester, Slip Opinion No. 2012-Ohio-780.

The Court in Clifton recognized the body of law allowing “partial takings”, but concluded: “we can find no authority for the proposition that the zoning of a property is so burdensome on an adjacent property that is not the subject of the zoning that it results in the taking of the adjacent property. Instead, we have found some precedent [in Michigan] that indicates that a government’s regulation of property does not constitute a taking of an adjacent property.” The Court further bolstered its holding that the plaintiff had no standing (i.e., legal authority to initiate a claim) on these facts by recognizing that the City of Blanchester had no authority to pay Clifton’s claim, even if it wanted to. Justice Stratton, writing for the majority stated: “aside from acquiring property to operate a public utility that serves its own residents, a municipality has no authority to exercise its eminent domain powers beyond its corporate limits”. In other words, the next door neighbor from the next door town is out of luck.

Will the next door neighbor always be out of luck, without an opportunity for his/her “day in Court”? According to the Court in Clifton, that answer is no. The Ohio Supreme Court specifically provided: “… we emphasize that we do not hold that an adjoining property owner may never have standing. Instead, we hold that a property owner lacks standing under the facts and circumstances presented here”.

The three facts most important to the Court were: 1) the zoning at issue applied to the subject property, not the neighboring property, so the zoning imposed no limitation on the adjacent property owner’s use of his property; 2) the alleged diminution in value of the adjacent property was not a direct result of the village’s zoning, but instead caused by the subject property owner’s use of its property, as allowed by the rezoning; and 3) the rezoning that changed part of the subject property from “business industrial” to “general industrial” merely expanded a similar, existing, permitted use.

At first glance, it seems that the first two facts highlighted by the Court will always be present in “adjacent owner, partial takings claims”. The adjacent owner next door to a change from one zoning classification to another (e.g. residential to industrial) vs. within a classification (e.g. business industrial vs. general industrial), however, may still be allowed “through the courtroom door to get his/her day in court”.

Where Does Your Ohio Lakefront Property End and the Lake Begin?

Where does your Ohio lakefront property end and the lake begin? Or, in other words, how much of the lakeshore belongs to the public? The answers to these questions were recently provided by the Ohio Supreme Court in State ex rel. Merrill v. Ohio Dept. of Natural Resources, Slip Opinion No. 2011-Ohio- 4612.

Merrill and other property owners of Lake Erie lakeshore property filed a class action suit seeking a declaratory judgment regarding the extent of the State of Ohio’s property rights with regard to the lakeshore. Ohio Department of Natural Resources (ODNR) claimed that land extending inward from the lake to a “high water mark” established in 1985 by the Army Corps of Engineers falls under the State’s public trust authority. Based on this position of the ODNR, Merrill, trustee of the Ohio Lakeshore Group claimed the State of Ohio would, in effect be taking non-submerged lands of property owners without compensation (contrary to the Ohio Constitution). Some lakefront property owners had to lease land that was not under water, but under the artificial “high water mark setting”. ODNR claimed that any ruling other than one based on the “high water mark” would make it extremely difficult to maintain Ohio’s authority over narrow strips of land abutting the lake.

The trial court concluded that the public trust neither extended to the ordinary high-water mark nor terminated at a low-water mark argued by some property owners; rather, the trial court determined that the boundary of the public-trust territory is “a moveable boundary consisting of the water’s edge, which means the most landward place where the lake water actually touches the land at any given time.”

The Eleventh District Court of Appeals affirmed the trial court’s determination regarding a moveable water’s edge as the boundary, and also implied that artificial fill could modify that boundary.

In a unanimous decision, the Ohio Supreme Court held that “the territory of Lake Erie held in trust by the State of Ohio for the people of Ohio extends to the ‘natural shoreline,’ which is the line at which the water usually stands when free from disturbing causes” (such as storms or droughts). It reversed the Court of Appeals’ notion of a moving shoreline, and also reversed the appellate court’s implication regarding fill.

Most property owners were pleased with the decision, as well as the Court’s dicta regarding the need to continue its precedent of protecting individual property rights.

CLE Update: Titles to Real Estate and Eminent Domain

The Ohio State Bar Association has a couple of CLE seminars scheduled in March that address real estate areas of law.

The first seminar is titled Real Estate Law in Ohio and will be held in Columbus on March 3, 2011. The seminar will also be webcast and live simulcasts will be provided in Akron, Cleveland, Fairfield and Perrysburg, Ohio.

The seminar starts with registration at 8:00 am and ends around 4:30pm. It provides credit for 6 CLE hours and 3.0 specialization hours. Also pending are continuing education credit for title insurance and real estate.

The second seminar is titled Eminent Domain: Processes and Pitfalls and will be held in Columbus on March 9, 2011. The seminar will be webcast at the same time.

The seminar starts with registration at 8:00 am and ends around 11:45 am. It provides credit for 3 CLE hours.

For more information on either seminar call 1-800-232-7124 or 1-614-487-8585 or visit online at www.ohiobar.org.

CLE Update: May/June OSBA Seminars- Eminent Domain, 1031 Exchanges, Commercial Leases

Eminent Domain

Practice Area: Real Property
3.0 CLE Credit Hours
Wed 20-May-2009 - OSBA, Columbus
Wed 20-May-2009 - WEBCAST
Wed 27-May-2009 - Forum Conference Center, Cleveland

Topics:
* Issues of compensation
* Regulatory takings
* Takings for economic development

Registration: Program begins at 1 p.m., concludes at 4:15 p.m.
Pre-registration Tuition: $165.00 OSBA member / $206.00 non-member
Walk-in Tuition: $190.00 OSBA member / $231.00 non-member
Course #09-026
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1031 Real Estate Exchanges

Practice Area: Real Property
3.0 CLE Credit Hours
Wed 20-May-2009 - WEBCAST
Wed 20-May-2009 - OSBA, Columbus
Wed 27-May-2009 - Forum Conference Center, Cleveland

Topics:
* Pros and cons of 1031 exchanges
* Recent changes in the law
* Capital gains issues
* Types of 1031 exchanges available and how to execute them

Registration: Program begins at 8:30 a.m., concludes at 11:45 a.m.
Pre-registration Tuition: $165.00 OSBA member / $206.00 non-member
Walk-in Tuition: $190.00 OSBA member / $231.00 non-member
Course #09-027
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Commercial Leases

Practice Area: Real Property
6.0 CLE Credit Hours
6.0 Specialization - Business, Commercial and Industrial Real Property
6.0 Real Estate CE Pending
Thu 4-Jun-2009 - OSBA, Columbus
Thu 4-Jun-2009 - WEBCAST
Thu 11-Jun-2009 - Forum Conference Center, Cleveland

Topics:
* Lease terms
* Damage to property
* Mitigation of losses
* Operating expense and tax provisions
* Leasehold improvements

Registration: Program begins at 8:30 a.m., concludes at 4:15 p.m.
Pre-registration Tuition: $200.00 OSBA member / $250.00 non-member
Walk-in Tuition: $225.00 OSBA member / $275.00 non-member
Course #09-193
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For more information and/or to register, contact: osba@ohiobar.org

IS PRIVATE PROPERTY DAMAGED BY PUBLIC USE, “TAKEN” FOR A PUBLIC USE?

Earlier in the year (February 2, 2009), we posted on our Site a blog dealing with the issue of whether or not extraordinary delays in issuing permits constituted a “taking,” requiring just compensation be paid pursuant to the Ohio and United States Constitutions. The Supreme Court in State ex rel. v. Middlefield, 120 Ohio St.3d 313 (2008), answered in the affirmative, but only if governmental bad faith is proven, and there is no property owner delay.

Another “out of the ordinary takings case” was recently decided by the Ohio Supreme Court on March 5, 2009: State ex rel. Blank v. Beasley, 121 Ohio St. 301, 2009-Ohio-835. In Blank v. Beasley, the Court was faced with the question of whether or not private property that is damaged by public use constitutes a taking for public use. If a taking is proven, Ohio law requires that public authorities initiate appropriation proceedings so that “just compensation” is paid to the property owner. State ex rel. Blank v. Beasley was actually a combination of two actions resulting from similar claims in connection with the Ohio Department of Transportation’s widening of State Route 5 through Cortland, Ohio, including upgrading curves, sidewalks and drainage. To complete the project, the Department required easements over the properties in question, perpetually (to construct and maintain storm sewers) and temporarily (to construct drives and grade the properties). Since ODOT and the property owners could not reach an agreement amicably, ODOT filed appropriation proceedings to “take” the easement rights and establish just compensation for such rights as required by law.

There was no dispute regarding the easements being “takings” requiring just compensation. The dispute arose because both property owners complained that other “parts” of their properties were appropriated (and they should be adequately compensated for same), as a result of ODOT trucks using existing parking lots to park and stage equipment (also damaging the lots), and various damage claims. The damage claims including breaking of sewer lines; hitting support posts; moving water lines (causing water backup) and breaking of gas lines.

The Director of ODOT argued that the damage claims did not rise to the level of a constitutional taking of private property, because they were claims for damage caused by negligent or other tortuous conduct of the State’s contractors, and consequently, the damage was “unrelated” to the public use of the project. The property owners replied that the further damage and intrusions resulted directly from the work being performed on the appropriated property and the State should have anticipated this. Neither party argued about the extent of the damages. The sole issue was whether or not the damage and other intrusions were “takings” requiring just compensation from the State of Ohio.

The Court answered the issue affirmatively, and negatively. Yes, the State’s operations and/or parking of heavy construction equipment on the property owners’ parking lots (and the ensuing damage of same) constituted a taking; and no, the other damages did not constitute a taking.

In justifying its holding, the Court first acknowledged that Ohio only guarantees just compensation when private property is taken for public use, in contrast to constitutions of other states that guaranty compensation for private property that is taken for or damaged by public use. Notwithstanding that acknowledgment, however, the Court reasoned that there were situations where damage by public use would constitute a taking by public use. The Court cited decisions where the property owner established that the damage was intentionally directed at their property. In those cases, the damage would constitute a taking according to the Ohio Supreme Court. On the other hand, the Court (quoting decisions from Ohio, Wyoming, Connecticut; and treatise authority) explained that “if damage for which recovery is sought is a result of negligent construction, recovery may not be had in a condemnation proceeding; the owner is relegated in such cases to a common law action for damages”. It was these “negligence related decisions” that led the Court to conclude that the pipe breakings, and other related damages in Blank v. Beasley were the cause of the contractor’s negligence, not foreseeable by ODOT, and not, therefore, compensable as a taking of property.

The Court in Blank v. Beasley, however, determined that ODOT’s parking and operation of the construction equipment in the parking lots (and the damage they caused) was not mere negligence. While the State may not have intended the parking lot damage, given the weight of the equipment and the extent of the encroachment, the Court held that the State acted with “knowledge amounting to a substantial certainty” that its conduct would cause such damage, and that was good enough to constitute a taking.

If it seems that the Majority’s justification for its conclusion “comes out of the blue,” you would be in good company as the two dissenting Judges in this decision said exactly that. From the property owners’ vantage point, however, this case seems to widen the “spectrum definition of takings,” to include “public damages” that were not necessarily intentionally caused, but resulted from foreseeable circumstances beyond mere negligence. Governmental agencies can argue, however, that the Court in Blank v. Beasley clarified its holding, reiterating that the foreseeability of the damage is a “factor of great weight,” but “not wholly determinative” of the issue.

Extraordinary Delays In Issuing Permits Can Be A Taking Without Just Compensation, If There Is Governmental Bad Faith, and No Property Owner Delay

(State ex. rel. v. Middlefield, 120 Ohio St. 3d. 313 (2008).

When we think of a “taking” of private property by a public entity, what typically comes to mind is a physical act to condemn and demolish, such as leveling a home in the way of a new highway.

However, the law also recognizes that a taking can occur in cases where there is no physical invasion, but a regulation deprives property of less than 100% of its economically viable use. These are sometimes referred to as “partial takings”. See Penn Cent. Trans. Co. v. New York City, 438 U.S. 104 (1978).

The Supreme Court of the United States in Penn established that the following factors must be evaluated to determine if property is taken without physical means: 1) the economic impact of the regulation on the claimant; 2) the extent to which the regulation interfered with distinct, investment-backed expectations and 3) the character of the government action. This “factors test” was recently recognized by the Ohio Supreme Court in State ex rel. Gilmore Realty, Inc. v. Mayfield Hts., 119 Ohio St. 3d 11 (2008); State ex. rel. Shelly Materials, Inc. v. Clark Cty. Bd. Of Commrs., 115 Ohio St. 3d 337 (2007); and in the December 4, 2008 case of State ex. rel. v Middlefield, 120 Ohio St. 3d. 313 (2008).

In Middlefield, the Court was faced with the question of whether or not a long delay by a municipality in issuing a zoning permit, and thereafter, an occupancy permit constituted a partial taking. If a taking is proven, Ohio law requires that public authorities initiate appropriation proceedings, so that “just compensation” as required by the United States and Ohio Constitutions be paid to the property owner.

The applicable delay in this case was a six month period for issuance of a zoning permit (where the property owner’s engineer first had to resubmit site plan drawings for twenty items the Village wanted corrected, then one hundred-fifty items, and then four items) and a nine month period between zoning permit issuance and occupancy permit issuance.

The Court in Middlefield focused on the third factor of the Penn decision and analyzed: the length of the delay; whether or not any part of the delay was caused by the property owner; and whether or not bad faith on the part of the government was involved. For the first, six month delay, the Court held there was no “taking”, reasoning that the property owner had no evidence that the City was out to get him, and to the contrary, the property owner admitted his engineer made multiple mistakes. The Court held the “second delay” was not a taking, because the property owner waited four of the nine months to apply, and there was no admissible (vs hearsay) evidence proving the City ordered contractors off the job site. Finally, when it came time to prove damages, there was evidence presented that the property increased in value, and that the property would have suffered losses, even if it was built earlier, without the delays.

So, what is the moral to this story? Some may look at this decision as further proof to the old adage that “you can’t fight City Hall”. There probably is some truth to that adage when applied to “partial takings cases”, as the Court seemed to imply that public bodies are charged with the health, safety and welfare of all its citizens, and it legitimately takes time to evaluate the same. However, the underlying theme in this case appears to be more of a message to property owners, that they won’t be able to blame cities for their (or their agent’s mistakes), and if they are going to try, they better have good evidence that City Hall acted in bad faith. Finally, don’t lose sight of damages. It is difficult to prove that a delay causes economic damages when the value of a property increases during the time of delay, and the property would have operated at a loss during the delay.

CLE Update: Eminent Domain Seminars

The Americal Law Institutie American Bar Association is presenting 2 seminars in the eminent domain area of law. For the experienced practitioner, "Eminent Domain and Land Valuation Litigation." For the practioner that is new to the field, "Condemnation 101: How to Prepare and Present an Eminent Domain Case." Both seminars are being held on January 8-10, 2009 at the Edon Roc Resort in Miami Beach, Florida, and will also be available as webcasts.

For more information on the Eminent Domain and Land Valuation Litigation seminar, click here.

For more information on the Condemnation 101: How to Prepare and Present an Eminent Domain Case, click here.

The following special pricing is also being offered: Take the Eminent Domain and Land Valuation Litigation seminar, and bring an associate to Condemnation 101: How to Prepare and Present an Eminent Domain Case, also being held at the same time and location, and receive 50% off the associate's registration.