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

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

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

-A Watch Your Language Series Article-

 

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

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

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

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

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

The specific facts of the case are as follows:

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

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

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

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

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

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

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

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

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

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

  

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

Taxpayers Appealing Board of Tax Appeals Decisions May No Longer Get their Day in Court (in the Supreme Court of Ohio, that is)

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

As of September 29, 2017, those wishing to appeal Ohio Board of Tax Appeals (“BTA”) decisions no longer have a choice between the Ohio Supreme Court and the court of appeals (for the county in which the taxed property is located or the taxpayer resides). Appeals of BTA decisions must now be filed with the appropriate court of appeals.

The reason is a little known modification of Ohio Revised Code Section 5717.04 (“ORC 5717.04”) that was slipped into the State budget bill for 2018-2019 (Ohio House Bill 49).

Those that believe their case is “supreme court worthy”, however, may still be able to get in the door, one of two ways: by transfer application; or by appeal of the court of appeals decision.

   

Pursuant to newly revised ORC 5417.04, “within thirty days after a notice of appeal is filed with the appropriate court of appeals, a party to the appeal may file a petition with the supreme court to transfer jurisdiction over the appeal to the supreme court. The supreme court may approve the petition and order that the appeal be taken directly to the supreme court if the appeal involves a substantial constitutional question or a question of great general or public interest. Appeals for which jurisdiction is transferred to the supreme court under this paragraph shall proceed as though the decision of the board of tax appeals had been appealed directly to the supreme court. Appeals for which jurisdiction is not transferred to the supreme court shall proceed in the court of appeals.”

If the transfer petition is denied, and the taxpayer is unhappy with the decision of the court of appeals, it may (as was the case before the amendment to the statute) appeal the appellate court’s decision to the Ohio Supreme Court, which can decide to hear the appeal or allow the appellate court’s decision to stand.

Reportedly, the Ohio Supreme Court lobbied for these changes to lighten its docket because the majority of its tax decisions have dealt with mathematic valuations and calculations vs. matters of statewide importance. Opponents of the amended statute claim it will “erode the uniformity of the tax code in the state of Ohio.” (See “Ohio Taxpayers Lose Right to Take Disputes to High Court”, Julie Carr Smyth/The Associated Press, posted 9/29/17, Ohio Times Reporter.com).

For a complete version of newly amended Ohio Revised Code Section 5717.04, click on the aforesaid highlighted link to the statute.

Ohio Supreme Court: Charitable-Use Exemption from Real Estate Taxes Based on Nondiscrimination, Not Quantum of Charitable Care

On June 15, 2017, the Ohio Supreme Court issued its decision in Dialysis Ctrs. of Dayton, L.L.C. v. Testa,Slip Opinion No. 2017-Ohio-4269, which provided clarity on the basis for granting or denying a charitable-use exemption from real property taxes.

The Dialysis Centers of Dayton, L.L.C. (“DCD”) owned and operated 4 dialysis centers in the Dayton area. For most of 2006, DCD was jointly owned by Miami Valley Hospital, a nonprofit entity, and several physicians.  By 2007, the physicians were no longer members of DCD, and it became wholly owned by the hospital. A single member LLC is a disregarded entity for tax purposes and its transactions would appear on the tax returns of the sole member.  In some of the centers, DCD rented a percentage of space to physicians to use as offices.

In order for a patient to be treated at one of DCD’s facilities the patient went through an intake process, where an employee of DCD would evaluate the patient’s options for paying for the treatment, with potential sources being Medicare, Medicaid and private insurance coverage. If a patient had no coverage and was indigent, the DCD employee would help the patient investigate whether he or she qualified for Medicare or Medicaid. If the patient was responsible for payment of a portion of the dialysis costs and couldn’t afford to pay that portion, the DCD employee worked with the patient to determine if he or she qualified for charitable care. Although all of the foregoing options for coverage and payment were pursued, the centers treated all patients, regardless of whether he or she could afford the treatment costs.

When the hospital took over 100% of the ownership of DCD, it adopted an operating agreement that provided that DCD’s charitable purpose included “provide services to indigent patients regardless of their ability to pay.”

When a review of DCD’s tax exemption request was conducted by the county tax department, it asked DCD to quantify what portion of its services were ‘uncompensated care’, which excluded write-off’s for bad debts. DCD quantified such treatment at 28%.

The tax commissioner subsequently denied DCD’s exemption application based upon that low percentage of ‘uncompensated care’ and in 3 of the 4 cases, also in part due to the fact that some space was leased to independent contractor physicians.

DCD appealed to the Board of Tax Appeals (“BTA”) who upheld the tax commissioner’s determination based on insufficient evidence of charitable care at the locations (i.e., quantity).  DCD then appealed to the Ohio Supreme Court (the “Court”).

The Court’s review was based on whether the BTA’s review was “reasonable and lawful.” While the BTA is responsible for determining factual issues, the Court “will not hesitate to reverse a BTA decision that is based on an incorrect legal conclusion.” (quoting, Gahanna-Jefferson Local School Dist. Bd. of Edn. v Zaino, 93 Ohio St.3d 231, 232, 754 N.E.2d 789 (2001))

The Court determined the following:

·         Because the physicians were part owners in DCD in 2006, DCD was not eligible for a charitable-use exemption in 2006.

·         In 2007, DCD was entitled to its exemption for that portion of the space at each center that is devoted to dialysis services; i.e., the space leased to the private physicians would not be exempted from real property tax.

·         The matter was remanded to the tax commissioner to conduct further proceeding to allocate between the portion leased to the physicians and the portion used for dialysis services and calculate the exemption accordingly.

The Court’s based its determination to grant the exemption on the fact that nondiscrimination, rather than quantum of charitable care, is the criterion for exemption. Proof of unreimbursed care was unnecessary. The Court stated “For purposes of Ohio’s charitable-use property-tax exemption, the provision of medical or ancillary healthcare services qualifies as charitable if those services are provided on a nonprofit basis to those in need, without regard to race, creed or ability to pay.” It further noted that in the era of insurance and governmental health care benefits, care may be paid for by third party payors without destroying charitable status.

The Court went on to state that “A crucial factor in the charitable status of property use is whether a facility is open to serve the general public—or to that part of the general public that has a special need—in order to cater to the needs of that whole segment of the public.”

For the foregoing reasons, the Court found that the excessive focus by the tax commissioner and the BTA on the quantity of charitable care was reversible error, and for tax year 2007 the facilities at issue should have been exempted from real estate taxes except for the portion leased to private physicians.
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Ohio Supreme Court Declines to Terminate Gas and Oil Lease Based on Its Plain Language

By: Connie Carr

A recent decision by the Ohio Supreme Court (the “Court”) highlights once again the importance of clearly stating in your contract what you mean or a court will decide for you.

Bohlen v. Anadarko E&P Onshore L.L.C., Slip Opinion No. 2017-Ohio-4025, involves Ronald and Barbara Bohlen, owners of approximately 500 acres in Washington County, Ohio, who entered into a gas and oil lease (the “Lease”) as lessors with Alliance Petroleum Corporation (Alliance) as the lessee. (Alliance later assigned a portion of the Lease to Anadarko.)

The lease provided for a one year term and would continue after the initial one year term for so long as gas or oil or their constituents are produced or are capable of being produced on the Bohlen’s property in paying quantities, in the sole judgment of the lessees, or are the lessee is conducting operations to search for oil or gas. The Lease also provided that Alliance must pay the Bohlen’s a “delay rental” of $5,500 per year “for the privilege of deferring the commencement of a well”, otherwise the Lease became null and void and the parties’ rights under it would terminate. The Lease stated that a well is commenced “when drilling operations have commenced on the leased premises.”

The parties also entered into an addendum to the Lease (the “Addendum”) that provided for a minimum annual royalty payment. If the royalty payments made by Alliance to the Bohlen’s was less than $5,500 in any calendar year, the it must make up the shortfall between the royalty payments and the minimum royalty payment.

Alliance drilled two wells during the first year of the Lease. The second well drilled was successful and produced gas.  The company paid the Bohlen’s $5,500 for the first year of the Lease. Thereafter, it paid royalty payments based on the gas produced each year from 2008 through and including 2013. The annual royalties paid in those years never reached nor exceeded $5,500.

The Bohlen’s filed a declaratory action against Alliance and Anadarko in the trial court requesting the court issue an order declaring the forfeiture of the Lease. Both sides of the case filed motions of summary judgment asking the court to issue a judgment in favor of their arguments. The Bohlen’s argued that (1) the Lease violated public policy and was void because it allowed Alliance and Anadarko to encumber their property indefinitely by paying delay rental payments, (2) the Lease should be terminated by its terms because Alliance and Anadarko did not pay the minimum annual rental of $5,500 as required by the delay rental clause, and (3) the Lease terminated under its own terms due to the lessees failure of oil and gas production.

The trial court agreed with the Bohlen’s arguments and ordered forfeiture of the Lease. Alliance and Anadarko appealed to the Fourth District Court of Appeals, who reversed the trial court on all three arguments. The Bohlen’s appealed to the Court, who upheld the appeals court.

Since it was the review of a summary judgment ruling, the Court conducted its own full review of the arguments made on both sides. The Court has long maintained that gas and oil leases are contracts to which contract law applies.  One key principle of contract law provides that unless there is an ambiguity in the contract language, a court will not give the contract any meaning other than what the plain language of the contract states.

Using this point of review the Court looked at the delay rental language in the Lease. Leases often provide for a primary term and a secondary term when it comes to the duration of the lease. In the Bohlen’ lease, the primary term was one year. The second term provides for a continued duration for so long as gas or oil or their constituents are produced or are capable of being produced on the Bohlen’s property in paying quantities, in the sole judgment of the lessees, or are the lessee is conducting operations to search for oil or gas.

As noted earlier, the Lease provided that it would be void and all rights of the parties to the Lease would terminate if Alliance failed to pay a delay rental of $5,500 per year for the privilege of deferring the commencement of a well.  Alliance drilled a well during the primary term which met the definition of a commencement of a well as defined in the Lease.

The Bohlen’s argued that the delay rental addressed in the Lease with respect to the primary term should be read in conjunction with the Addendum language regarding minimum annual rent and the termination provision in the delay rental clause should be extended beyond the primary term. However, the plain language doesn’t provide for the termination provision in question to apply beyond the application of the delay rental clause and the obligation for payment of delay rental ceased once drilling was commenced. The Court held that underpayments by the lessees under the minimum annual rental provision in the Addendum did not entitle the Bohlen’s to forfeiture of the Lease under the unrelated delay rental clause.  If the parties wanted the termination provision of the delay rental clause to apply to the minimum rental provision they should have stated that clearly in the Lease.

A no-term, perpetual lease violates public policy. The Bohlen’s argued that the Lease allowed the lessees to delay drilling on the undrilled acreage indefinitely by paying the $5,500 minimum annual rent.  The Court disagreed with the Bohlen’s interpretation of the Lease and Addendum, stating that the plain language of the Addendum does not modify the delay rental clause and therefore does not create a no-term, perpetual lease.

Whether the lessees owe the Bohlen’s money for their underpayment of the annual minimum rental is another issue that was not addressed by the Court since it was not raised by the parties in their appeals. The Court the case to the trial court for further proceedings.

As my colleague, Steve Richman, points out in his series of “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 real estate transactions, since both parties to a commercial transaction 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.”
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Ohio Supreme Court Issues Two More Decisions Real Estate Tax Valuation Decisions

Here we go again….the Ohio Supreme Court has been busy with more appeals of real estate tax valuations. Two more decisions on this topic have been recently issued by the court.

The first is Johnston Coca-Cola Bottling Co., Inc. v. Hamilton Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-870, which was decided by the court on March 14, 2017.  The property owned by Johnston Coca-Cola Bottling Co., Inc. (“Coke”) was a manufacturing and distribution facility (over 400,000 sq.ft.) located on 34.46 acres in Cincinnati. Coke had filed a complaint seeking the reduction in property value for tax year 2011 and provided an appraisal that set the property value at $6,800,000. The Board of Revisions (the “BOR”) rejected Coke’s complaint and kept the county valuation of $13,571,760. On appeal to the Board of Tax Appeals (the “BTA”), Coke provided a new appraisal in which the property was valued at $8,550,000. The county submitted a new appraisal prepared by its in-house certified general appraiser who valued the property at $14,000,000. The BTA issued its decision increasing the property’s value to the $14,000,000 recommended by the county’s appraiser. It found the county’s appraisal to be more persuasive, in part due to his reliance on more localized sales comparables that were in or closer to Cincinnati. Coke appealed to the Ohio Supreme Court and lost again.

Here’s what we learned from the court’s decision:

·         The BTA decision to adopt one appraisal as more persuasive than the competing appraisal is within its discretion. Absent a clear abuse of that discretion the court is not going to overturn the BTA.

·         The fact that an appraisal was offered by a county employee does not, in and of itself, make the appraisal less credible or probative absent evidence of actual bias.

·         The county appraiser consideration of the property’s ‘present use’ in order to determine which sales comparables were the most appropriate is permitted so long as it’s not the sole measure of value, was used appropriately, and other factors relevant to the property’s ‘exchange value are also considered. (‘Exchange value’ means the amount for which a property would sell on the open market by a willing seller to a willing buyer.)

The second decision was Lutheran Social Servs. of Cent. Ohio Village Hous., Inc. v. Franklin Ct. Bd. of Revision, Slip Opinion No. 2017-Ohio-900, decided by the court on March 16, 2017. The case involved two government-subsidized housing developments for the elderly owned by Lutheran Social Services of Central Ohio Village Housing, Inc. (“Lutheran Services”). Property 1 was a 44-unit apartment complex on 3.339 acres that the county valued at $1,250,000. Property 2 was a 46-unit apartment complex located on 3.938 acres that the county valued at $1,456,400. Lutheran Services filed a complaint challenging the property valuation for tax year 2008 and the South-Western City Schools Board of Education (the “BOE”) filed a counter complaint seeking to retain the county auditor’s values.

The BOR held hearings and Lutheran Services presented appraisal reports and testimony and argued for valuations of Property 1 at $780,000 and for Property 2 at $740,000. The BOR adopted the county auditor’s original valuation in both instances and Lutheran Services appealed to the BTA.  When the BOR record was sent to the BTA the BOR certified compact discs supposedly containing audio recordings of the hearings but the CD for Property 2 was blank.

At the consolidated BTA hearing on the two properties, Lutheran Services relied on the appraisal reports and testimony previously presented to the BOR. The BOE presented testimony of an appraiser to the BTA, who had reviewed the appraisals provided by Lutheran Services and was critical of the appraisals. The BTA issued a brief decision adopting the opinions of value provided by the appraiser for Lutheran Services. However, the decision only provided the BTA conclusion that the appraisals were probative. No mention was made by the BTA regarding the contrary testimony provided at its hearing by the BOE’s witness. Also, when the BTA record was forwarded to the court upon the BOE’s appeal, the CD for the BOR hearing on Property 2 was sent with a note that it was blank, but no mention was made in the BTA decision about the defect in the record. The court vacated the BTA’s decision and remanded the case back to the BTA for further proceedings.

What we learned by the court’s requirement of a ‘do-over’ by the BTA:

·         While the BTA is not obligated to make formal findings of fact and conclusions of law, it must engage in sufficient discussion regarding the evidence presented to it so the court has some ability to determine whether the BTA acted reasonably or lawfully, or not.

·         The BTA cannot adopt one side’s argument without at least addressing the contrary evidence and testimony presented at its hearing by the opposing party. It must explicitly account for the evidence in reaching its decision regarding the value of each property.

·         The BTA cannot adopt one party’s evidence/testimony in the absence of a hearing record certified by the BOR, without exercising its statutory power to recover the missing hearing record or otherwise obtain the pertinent evidence.

·         The BTA is not prevented from readopting the appraisals submitted by Lutheran Services so long as it explains by the critical testimony offered by the BOE’s witness does not impugn the validity of their reliance on such appraisals. Absent an abuse of discretion, the court on a rehearing could very likely uphold the BTA second time around.

·         The appraiser for Lutheran Services appeared to have complied with prior case law that requires valuations of government-subsidized property using market rent and expenses. If the BTA readopts the appraisals and adequately addresses the reasons for not agreeing with the BOE’s offered testimony, Lutheran Services might finally win the day. It will only have taken nearly a decade.

As these decisions show, the court will give significant deference to the BTA’s findings of a question of fact, weighing evidence and assessing credibility of appraisals as such actions are the statutory job of the BTA. However, the court cannot read minds. The BTA’s reasoning needs to be laid out in the record and damaged/missing evidence must be addressed.

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Ohio Court: Forced Sale Creates Presumption That Sale Price Is Not The Correct Basis For Property Valuation

By Connie Carr, Partner at Kohrman Jackson & Krantz LLP

On December 28, 2016, the Ohio Supreme Court issued another opinion regarding real property valuation in Utt v. Lorain Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-8402. This case involves the valuation of a single-family home in Elyria, Ohio that was recently the subject of a recent sale.

The property owners had purchased the property from the Federal National Mortgage Association (Fannie Mae), who owned the property as a result of foreclosure, having paid $54,000 to acquire it. Fannie Mae sold the property 3 months later to the current property owners for $20,000.

The county auditor valued the real property at $79,700 for tax year 2012 and the property owner challenged the valuation citing their 2011 purchase as a recent arm’s length sale. The Board of Revision (BOR) upheld the county auditor’s valuation and the Board of Tax Appeals (BTA) reversed it and valued the property at the sale price.   This case illustrates the process and burden of proof on each party challenging a valuation when a recent sale has occurred.

1.    The property owner has the initial burden of proof, to provide evidence of a recent arm’s length sale establishing a lower value. In this instance, the property owners provided the auditor’s parcel report, the conveyance fee statement and documentation of the real estate agent’s listing. Note, in some cases, a copy of the recorded deed and the purchase agreement may also be appropriate to show that the sale transaction was recent to the tax lien date and was arm’s length in nature. [Also note that this case was based on the county’s 2012 valuation. State law in 2012 put more emphasis on sale value. Under RC 5713.03 in 2012, if a property owner proved the facts supporting a recent arm’s length sale, and such evidence was unrebutted, then the auditor was required to use such sale price for the valuation n 2012. RC 5713.03 was later amended and currently provides more latitude to the auditor regarding whether to base a valuation on a recent sales price or not.]

2.    The burden then goes to the Board of Education, county auditor, or other parties objecting to a lower valuation, to rebut the property owner’s facts.  The rebuttal must either show the transfer was not recent to the tax lien date or, more typically, that the sale was not an arm’s length transaction. A presumption that the sale was arm’s length may be rebutted is the challenger can show that the sale was a forced sale under RC 5713.04. (“….The price for which such real property would sell at auction or forced sale shall not be taken as the criterion of its value….”) This is not a difficult burden to meet. Previously, the court held that the sale of foreclosed property by HUD “is generally regarded as a transaction that is not a voluntary sale between typically motivated market participants.” See Schwartz v. Cuyahoga Cty. Bd. of Revision, 143 Ohio St.3d 496, 2015-Ohio-3431, 39 N.E.3d 123.

3.    If the property owner’s facts regarding the sale being arm’s length are initially rebutted, then the burden of proof goes back to the property owner.  The property owner will have to prove that despite the property being purchased through a forced sale, it was nevertheless an “arm’s length transaction between typically motivated parties.” See Olentangy Local Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 141 Ohio St.3d 243, 2014-Ohio-4723, 23 N.E.3d 1086.

In this case, the auditor and BOR presented expert testimony regarding Fannie Mae, its ownership of the property as a result of foreclosure, arguing that the property owners did not pay true value for the property. The expert also stated that at the time of the sale to the property owners, Fannie Mae did not act as a ‘typically motivated’ seller because it was insolvent and in conservatorship. The BTA did not accept the expert’s testimony because he did not have firsthand knowledge of the sale and only provided ‘general market commentary.’ Because none of the parties was disputing the sale price, the BTA reversed the BOR’s decision and set the value at the lower sale price of $20,000.

The court disagreed. It held that the expert’s testimony was in fact sufficient to show that the sale was a forced sale. The burden was then on the property owners to show that “the sale was nevertheless an arm’s-length transaction between typically motivated parties”. See Olentangy at 43. The property owners did not participate in the court hearing, nor the BTA hearing, and the documents they previously provided did not meet their burden.  The court reversed the BTA and reinstated the county’s valuation.

Property owners need to be aware that the sale price for real property, while providing some evidence of a property’s value, is not necessarily controlling and the auditor can consider other evidence; particularly when facts and circumstances indicate it may have been a forced sale.

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Ohio Supreme Court Upholds Valuation of Condominium Development As Separate Units

The Ohio Supreme Court (the Court) recently issued another opinion real property valuations on December 28, 2016 in an appeal of a Board of Tax Appeals (BTA) December.  In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision (Slip Opinion No. 2016-Ohio-8375), the valuation dispute focused on the appropriate valuation of 16 unsold condo units in a 20-unit condominium development for the 2009 tax year.

The county auditor valued the 16 condo units at $5,986,400. The property owner provided an appraisal by an MAI certified appraiser that valued the condo units at $2,900,000.  The auditor valued the units as 16 separate units and the appraiser valued the units as a single economic unit similiar to an apartment complex.  His reasoning was based upon the changing real estate market after the financial meltdown in 2008 that resulted in condo units not selling and rented out instead. He treated the condo complex as a ‘stalled’ condominium development and used an income approach and sales comparisons more in line with an apartment complex. The Board of Revision (BOR) adopted the appraiser’s valuation and the BOE appealed. In the BTA hearing the BOE provided conveyance fee statements for the 4 units that previously sold along with square footage information from the county auditor’s web site.

The BTA overturned the BOR and reinstated the auditor’s higher valuation, resulting in an appeal by the property owner to the Court. The appraiser defended his valuation of the remaining 16 units as ‘one economic unit’ stating that it was the way the market looks at units when sales have stalled at a condo development. The property owner was currently renting out the 16 unsold units. However, only 1 of his 5 sales comparables was a broken condominium complex.

The BTA found that the appraisal was unreliable because it valued the condo units collectively as one would value an apartment complex, which effectively resulted is a discounted value contrary to Ohio law. The BTA also did not consider the appraiser’s sales comparisons to be appropriate to use as comparables because 4 of the 5 were not condo units.  Finally, the BTA found additional fault with the appraisal because the cost approach was not considered in completing the valuation. The property in question was new construction, having been built from 2006-2008, which was less than 12 months prior to the tax lien date.

Stating that ‘common ownership doesn’t transform condominium units into an apartment complex’, particularly when the ‘complex’ doesn’t include all of the units (emphasis added), the BTA held that the evidence was not sufficient to support a lower valuation and reinstated the auditor’s valuation.

The property owner argued to the Court that the BTA erred in characterizing the appraiser’s valuation as an improper ‘bulk discount’ but the Court, referencing R.C. 5311.11, disagreed, finding that the appraiser’s method was a back-door approach to an improper discount.

The property owner also claimed that the BOE did not submit evidence to contradict the BOR’s adoption of the appraiser’s valuation and therefore the BTA was acting unreasonably and unlawfully in restating the auditor’s valuation.  In making this argument the property owner was invoking what is known as the “Bedford” rule, which provides that once a board of revision has reduced the value of a property based on owner’s evidence, that new value eclipses the auditor’s original valuation, and the board of education cannot rely on it as a default valuation. (See Worthington City Schools Bd. of Edn. vFranklin Cty. Bd. of Revision, 140 Ohio St.3d 248, 2014-Ohio-3620, 17 N.E.3d 537; and Dublin City Schools Bd.of Edn. v. Franklin Cty. Bd. of Revision, 147 Ohio St. 3d 38, 2016 Ohio-3025).

The Court held that the Bedford rule does not require adoption of the BOR valuation because there was a legal error in the BOR’s determination.

Finally, the property owner argued that the BOE had a burden to present evidence of value and that it failed to do so, and therefore the BTA should have adopted the appraiser’s valuation. The Court disagreed, finding that the BOE had submitted the conveyance fee information and deeds for the 4 units which previously sold, and this information was sufficient to permit an independent valuation by the BTA.

To finally resolve matters in this dispute, the Court held that the record contained sufficient information to overturn the BOR’s adoption of the appraisal value and contained sufficient information for the BTA to perform an independent valuation of the units. The Court then remanded the case back to the BTA instructing it to determine the value of each individual unit based upon sales price and other evidence in the record.

This decision provides some needed clarity  but is not good news for condo developers who are still struggling to sell units in their developments.

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Ohio Supreme Court Upholds Broad Discretion of BTA in the Valuation of Real Property

On October 27, 2016, the Ohio Supreme Court (the court) issued its decision in Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, Slip Opinion no. 2016-Ohio-7466, which stemmed from an appeal of a Board of Tax Appeal (BTA), no. 2011-3590. The court’s decision involved  real property valuation case and concerns the proper valuation of a 240-unit apartment complex in Northeast Franklin County for tax year 2005.

The property at the center of this case was originally valued at $13,600,000 and the property owner sought a reduction in the valuation t $9,720,000. The Board of Revision (BoR) ultimately adopted (in a 2-1 vote) a valuation of $9,338,000 proposed by an MAI certified appraise. The BTA affirmed the BoR decision.

The board of education (BoE) appealed arguing that the absence of market data and other flaws in the appraisal made it unreasonable and unlawful for the BoR and BTA to accept the appraisal.

There are 3 approaches used in appraising property—income, cost and sales comparisons.  For an income producing property, the income stream is critical for determining its value. When a property is new, the cost basis of the property may make more sense. Because the variables affecting each property, such as unit size, floor plans, amenities, access to transportation, etc. differ so much from one property to the next, sale comps may have limited utility.

The appraiser in this case relied primarily (but not exclusively) on the income stream produced by the property. It was a newly constructed property so the appraiser averaged the 2004 and 2005 numbers since the property was leased up by 2005. He reasoned that an arm’s length purchase price would typically be based upon the income stream and therefore a more accurate valuation should rely on the income approach.  The appraiser also looked at 10 sales comparisons, taking into consideration the range of cap rates an price per unit to serve as a check on his estimated value and to determine the best cap rate to use in his income valuation.

The BoE objected and the case advanced to the court where the BoE advanced the following proposition of law: “An appraisal that fails to include relevant market data and the specific adjustments made thereto is inherently unreliable and cannot be used to determine the true value of real property for tax purposes.” It argued that the BTA erred is relying on the appraisal because the report did not include sufficient data under its market and income approaches and further did not include a cost approach, all of which was unlawful. It should be noted that additional data was provided by the appraiser in testimony.

When tax appeals come before the court, it is often held that when the court reviews the BTA’s disposition of the factual issues in a property valuation case, the court “does not sit either as a super BTA or as a trier of fact de novo.” The BTA is given wide discretion in determining the weight to give evidence and the credibility of witnesses before it. The BoE in its appeal must demonstrate that the BTA’s and BoR’s weighing of evidence and the force it applied to such evidence was unreasonable or unlawful, and the standard the BoE must meet is that the BTA and BoR abused their discretion. This is a difficult standard to meet. It means that the BoE must prove that the BTA exhibited an unreasonable, arbitrary or unconscionable attitude.

The court found that while the BoE pointed to matters that definitely relate to the probative force of the appraisal, it failed to establish unlawfulness or an arbitrary or unconscionable attitude on the part of the BTA in adopting the appraisal.

During testimony, the appraiser provided his reasons for using the approach that he did and for why he did not use the cost approach. It was in within the discretion of the trier of fact, i.e., the BoR and the BTA, to credit the appraiser’s testimony and report.

When evaluating the merits of whether to appeal the decision of the BTA in a property valuation, we need to keep in mind that the court will not disturb the BTA’s decision merely because a different expert might have found merit in using another approach.

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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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