Electronically Signed Email Exchange May Constitute Enforceable Real Estate Contract

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

(A Watch Your Language Series Article)

(Watch your language when creating contracts [and when not intending to create a contract])

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. Courts traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial transactions, since both parties will usually have attorneys to review their documents. More and more, parties to residential real estate contracts are being held to the same standard governing commercial transactions. Because courts often defer to the specific language of real estate documents, unintended results are often the norm for parties who do not carefully draft their documents.

 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, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

This watch your language precept is just as (if not more) important in cases determining whether or not a contract has been created, than it is in cases determining the meaning of language within a legally created contract. The Court of Appeals for the First Appellate District of Ohio was recently faced with this very issue in Mezher v. Schrand, 2018-Ohio-3787.

Background of Mezher v. Schrand.

This case involves the alleged sale of a high-end residential property in Mt. Adams, Ohio owned by defendants-appellees Karri and Jeff Schrand (“Seller[s]”). Plaintiffs-appellants Joseph and Mike Mezher (“Buyer[s]”) argued that the Sellers agreed by a series of email exchanges (electronically signed) to sell their home to the Buyers and that the Sellers breached that agreement. The Sellers argued that no agreement existed because of the requirements of the Statute of Frauds.

The email exchange between the Buyers and the Sellers in Mezher started with both parties going back and forth on price. These introductory emails contained a general description of the property (address) and clearly identified the parties. The last three emails in the exchange were as follows:

Buyer (Sept 29, 2017): “However, will split it [price difference] again with you because I want to be flexible. I am good at $982,500 for a purchase price. Based on inception [sic] and customary closing, we can get a simple contract drafted Monday and have it signed by us Tuesday with the earnest money cashier check to you upon acceptance of contract by Tuesday. Please let me know, Mike[.]”

Seller (Sept 30, 2017): “We accept.”

Buyer (Sept 30, 2017):  “Great, I agree too.”

When the parties met on October 5, 2017, an argument ensued, and the Sellers refused to sign a written form contract the Buyers brought with them. The Buyers then filed a complaint against Sellers, requesting specific performance of the real estate contract allegedly established by e-mail exchange. The trial court granted summary judgment in favor of the Sellers, finding that the September 29-30 email exchange between the parties did not satisfy the Statute of Frauds, because the emails did not describe the subject property with particularity. The Buyers then appealed to the Hamilton County Court of Appeals.

What is the Statute of Frauds?

In Ohio (and most other jurisdictions), the “Statute of Frauds” (originating from a 1619 Act of Parliament) basically establishes that certain contracts must be memorialized in a signed writing to be enforceable. Specifically, Ohio’s Statute of Frauds (ORC §1335.05) provides, in pertinent part that: “no action shall be brought …upon a contract or sale of lands… or interest in or concerning them,… unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith...”. There are limited, “equitable” exceptions to the rule, such as “part performance”, “unjust enrichment” and “promissory estoppel” that courts have imposed in order to avoid unfair legal remedies. See “An Oral Contract to Buy Real Estate is not Worth the Paper it is not Written on” — Ohio Real Estate Blog, April 30, 2010.

Does an email or other electronic form of writing satisfy the Statute of Frauds?

Yes. While not contemplated in 1619, the “electronic age of contract formation” has been with us in Ohio since the turn of the century. Pursuant to ORC §1306.06 (C)-(D), if a law requires a record and/or signature to be in writing, an electronic record and/or signature satisfies the law. To erase any doubt with respect to contracts, ORC §1306.06 (B) provides: “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

What writing is sufficient to satisfy the Statute of Frauds?

More perplexing than whether or not a writing exists, is the question of what writing is sufficient to satisfy the Statute of Frauds. The general law in Ohio is that in order for a real estate contract to comply with the Statute of Frauds, it is necessary that the signed contract or memorandum: (1) identify the subject matter; (2) establish that a contract has been made (both parties to the contract must assent to its terms and have a “meeting of the minds” as to those terms); and (3) state the essential terms with reasonable certainty.

What are the essential terms of a real estate contract?

In Ohio, courts have identified the essential terms of a real estate contract as: “the identity of the parties to be bound; the subject matter of the contract; consideration; a quantity term and a price term”. What is not essential? According to recent Ohio court decisions, a written contract for the sale of land need not include the character of the deed to the executed, specify who should pay taxes on the sale or state whether a mortgage must be given to secure the purchase money in order for the contract to still comply with the Statute of Frauds. Additionally, the contract does not violate the Statute of Frauds because the writing does not state a specific date of performance (i.e. closing date) or because of the failure to designate the nature of the interest being conveyed.

Analysis of Mezher v. Schrand.

The court of appeals in Mezher reversed the trial court’s decision, easily concluding that the emails at issue did in fact describe the subject property with particularity. While a list of personal property (appliances, window treatments…) was not specified, the address of the real estate was embedded within the subject line of each email in the exchange and all the other essential terms could be found in the body of the emails. According to the appellate court in Mezher, a list of ancillary personal property is clearly a non-essential term in a contract for the sale of real property.

The appellate court, however, also remanded the case back to the trial court on the issue of whether or not a “meeting of the minds” occurred within the emails vs simply a price negotiation to be followed up by a more complete written contract. Recall that the Mezher email exchange contemplated that the parties would sign a formal document shortly after the email exchange.

As explained by the court of appeals in Mezher, “Given the circumstances surrounding the parties’ email exchange and later discussions, including that other terms of the sale had yet to be agreed upon, an issue of fact exists as to whether the parties had a present intention to be bound at the time of the email exchange, or whether the parties did not intend to be bound until execution of the more formal contract.”

The Mezher court did cite precedent establishing that an agreement can be specifically enforced even where the parties contemplated execution of a later, formal written document, so long as the parties (at the time of the “informal contract”) have manifested an intent to be bound and their intentions are sufficiently definite. The determination of intent, however would be a matter for the trier of fact, not the court of appeals.

What is the moral of this story?

First, “say what you mean, precisely, or a judge will tell you what you meant.” The general rule in Ohio is that when the parties have clearly agreed to the “critical terms” of a real estate transaction, the court may determine on its own the meaning of any ambiguous or uncertain terms. While courts will typically factor in to their decisions, what they believe the parties’ mutual understanding to be, more often than not, a court’s determination does not match up with a party's actual understanding and someone goes home from court unhappy.

Second, there is no hard and fast rule or finite list as to what is and what is not an “essential” term of a real estate contract. While we know that price, identification of the parties and property description are essential terms, and that the closing date and description of personal property are non- essential terms, there are limitless provisions that could be deemed essential by a court of law, the absence of which could render the contract unenforceable. In other words, don’t worry about the number of pages in your contracts, worry about what is reflected within the pages.

Third, the enforceability of a real estate contract containing essential terms depends… on whether the parties have manifested an intention to be bound by such terms and whether these intentions are sufficiently definite to be specifically enforced. Unless absolutely clear in the “contract”, however, the intent of the parties will be based on a fact finder’s (judge or jury’s) evaluation of not only the language itself, but the circumstances surrounding the language. The fact finder certainly will not have a better idea of the parties’ intentions than the parties themselves, but will have the power to nonetheless, make the call. In other words, if you don’t want your preliminary negotiation or letter of intent to be construed as a final contract, spell that out, clearly and definitively. It is no guarantee, but a clear statement that the document “is not intended to be binding” will always be evidence of non-intent to create a binding contract.

Finally, get with the times. These days, contracts can be created in cyberspace, as easily as they can be on a written document entitled “contract.” If you don’t want your emails to be binding contracts, don’t sign them, or better yet, don’t write them in the first place.

Bragdon v. Carter- Life Estate or Unreasonable Restraint on Alienation

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

(A Watch Your Language Series Article)

 As is commonly known, ignorance of the law is no excuse to one who is charged with a crime.

In real estate, however, while ignorance of the law will rarely result in a prison term, it will almost always result in unintended consequences that could have easily been avoided by hiring (at the outset) qualified, legal professionals whose job is to know the law and know it well.

The defendants in the recent case of Bragdon v. Carter, 2017-Ohio-8257 (4th Appellate District) found this out the hard way.

The facts of the case are as follows:

Burl Bragdon, an individual from Scioto County died testate in 1998, and owned a tract of real estate at the time of his death. Bragdon’s will provided in pertinent part: “ITEM IV: I give, bequeath and devise my real estate equally to my children and friend, BELINDA DILES, BRENDA BRAGDON, BURL BRAGDON II, and BETH A NIXON, per stirpes, provided that said real estate not be sold until twenty-one (21) years after the death of my granddaughter, MORGAN MCKENZIE DILES, born April 14, 1996. It is the purpose of this bequest that my children and their heirs shall always have a place to live.”

The executrix, Belinda Diles Carter admitted the will to probate, and thereafter, a certificate of transfer was issued, conveying a one-fourth interest in the real estate to Burl Bragdon’s three children and his friend, as directed under the will. The certificate of transfer noted the following: “Said real estate may not be sold until twenty-one (21) years after the death of Morgan McKenzie Diles.”

While, apparently, Burl Bragdon wanted the property to be a continual homestead for his children and grandchild, the family had other plans. After a series of transfers by the children named in the will, 100% of the interests in the property were held by Corey and Heather Bragdon (who were not named in the will, and whose relation is not explained in the decision) who wanted to then transfer the property outside of the family, without being subject to the restriction against transfer. Accordingly, Corey and Heather Bragdon (plaintiffs/appellants) filed a complaint with the trial court for a declaration that the plaintiffs hold valid title, without the restriction (which plaintiffs claimed was invalid).

Basically, the trial court in Bragdon v. Carter was faced with deciding whether or not the property could be lawfully sold, in light of the restriction in the will and certificate of transfer. On January 23, 2017, the trial court entered judgment in favor of the defendants. In its judgment entry, the trial court found that the restriction on alienation was valid and that the transfer of the property was a clear violation of Burl Bragdon’s wishes, was contrary to Ohio law, and would unfairly and unjustly divest Morgan McKenzie Diles of her future interest in the property. Heather and Corey Bragdon then filed a notice of appeal.

The appellants in Bragdon v. Carter claimed that the trial court erred (made a mistake) as a matter of law in finding the transfer restriction valid. They claimed that Ohio has adopted, from our English common-law heritage, what is known as the “rule against unreasonable restraints on alienation.”  This general rule provides that since one of the main incidents of ownership of real property is the right to convey it, the law will not allow the rights of ownership to be limited by imposing restraints by those who seek to convey or dispose of their property, and at the same time maintain control over its alienation or use. This rule stems from the abolishment of the feudal “fee tail” which restricted the transfer of real property to a specific line of male heirs.  Our “modern law” frowns upon such restraints since they stifle the free use and development of real property, and consequently, are not in the best interest of society and commerce.

The appellee’s argument (and apparently, the basis of the trial court’s decision) was that only a valid “life estate” was transferred, not a transfer of fee simple absolute title, subject to a restriction against lifetime transfers.  

To get a better grasp of the issue faced by the court of appeals in in Bragdon v. Carter, a brief “Real Estate Law 101” lesson on estates (interests) in land is warranted. As a general rule, real property ownership is more like the possession of a bundle of rights (vs. merely the possession of dirt and improvements on the dirt).  The basic rights included in such “bundle” are the right to use, the right to sell, the right to mortgage, the right to lease, the right to give away, and right to enter (or the right to refuse to exercise any of these rights). The fullest possible title to real estate (the biggest bundle of rights) is called "fee simple absolute". Examples of lesser estates are leases (right to use, but no right to sell), easements and life estates. Life estates are estates in land where parties measure ownership by the life of the life estate holder. The life estate terminates on the death of the life estate holder, and then the property passes to a future, named owner (known generally as the “remainderman” or the “remainder holder”). While the owner of a life estate can sell its interest, the buyer would be limited to enjoy/use the property until the death of the life estate holder or “life tenant”, at which time all of the rights of ownership would belong to/pass to the reminder holder.

The court of appeals in in Bragdon v. Carter agreed with the appellee’s general conclusion that if a valid life estate (with a remainder interest to the granddaughter) was created, the trial court’s approval of the transfers and declaration of ownership to plaintiff-appellants would unfairly and unjustly divest Morgan McKenzie Diles of her future interest in the property. In reversing the trial court’s finding for defendant-appellees’ however, the court of appeals determined that there was no clear indication that a life estate was intended. Citing precedent to support its holding, the court stated that “[a] devise or bequest of a life estate must be clearly expressed to be effective. “ Analyzing the documents provided, the court found no mention of the term “life estate”, no designation of the granddaughter as the remainder holder, and no other indication of intent to have created a life estate. Moreover, the court cited statutory authority directing the court to not establish a lesser estate without a clear expression of the creation of the same. Pursuant to Ohio Revised Code Section 2107.51, “every devise of an interest in real property in a will shall convey all the estate of the devisor in the property, unless it clearly appears by the will that the devisor intended to convey a less estate.”

In sum, the court of appeals in Bragdon v. Carter concluded that “the real property at issue was transferred in fee simple absolute, and the portion of the devise attempting to restrict the alienability of the property is void and of no effect as being repugnant to the devise and the public policy of this State. Thus, the trial court erred in determining that the restriction was valid.” Based on the foregoing, the court reversed the judgment of the trial court and remanded the cause to that court to enter judgment in favor of plaintiff-appellants Corey and Heather Bragdon.

What is the moral of this story?

Simply, to win at the “game of real estate law”, you have to know the rules. It is against the rules to restrict fee simple absolute transfers of real estate to certain people for certain periods of time. It is absolutely fine, however, to transfer lesser estates such as leases or life estates. Carrying our analogy further to a game of football, a forward pass and a forward lateral both move the ball forward. However, a forward lateral moves the ball forward in such a way that it is against the rules. Lawyers are trained to know the rules, and should always be used in the game of real estate. Penalties in terms of legal fees and unintended consequences are much harder to swallow than the loss of a down, yardage or the outcome of a football game.

Another moral of this story is the following, common thread in many Ohio real estate decisions (and articles re: same in this Blog): “Watch your language, and say what you mean, precisely, or a judge will decide what you meant.” I presume that the use of the following four words in Mr. Bragdon’s will and certificate of transfer would have changed the outcome of this decision and the “law of unintended consequences”: “life estate” and “remainder interest.”

“Game” (Case) Called on Account of Absurdity

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

(A Watch Your Language Series Article)

“If the law supposes that," said Mr. Bumble, "the law is an ass — an idiot.”

Many laymen (and lawyers) believe, as Mr. Bumble in Charles Dickens’s Oliver Twist does, that the law, as a general rule is absurd. Admittedly, there have been many absurd court decisions over the years that reinforce this quotation. More often than not, however, it is one or more of the parties to a lawsuit that are absurd, and the court just affirms their inherent absurdity.

This is particularly true in commercial contract law, predominantly because of the prevailing judicial deference to the written word in commercial documents, without regard to the consequences of such deference.

General Rule Re: Commercial Contract Interpretation

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. Courts 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 will usually have attorneys to review their documents. Because courts often defer to the specific language of a commercial document (or lack thereof), unintended results are often the norm for parties who do not seek professional advice, and for professionals who do not closely review their documents. Even the failure to follow a seemingly trivial grammar rule (the use of i.e. vs. e.g.) can result in unintended consequences. In a 1995 Connecticut case, in spite of the tenant’s verbalized intent to the contrary, the court held that the use of “i.e.” [meaning, that is] vs. e.g. [meaning, for example] preceding a short list of repair items in a lease served to limit landlord’s structural responsibility to only those items listed in the lease vs. merely providing examples of the same.

 Because of this judicial deference to “commercial language”, 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, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

The “Absurd Result Exception”- Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090 (Eighth District Court of Appeals; See also, prior vacated opinion at 2017-Ohio-2983)

What if the contract language is clear, but affirmation of such language would lead to an “absurdly unfair” result?

Fortunately for the appellant in the recent case of Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090 (See also, prior vacated opinion at 2017-Ohio-2983), the Eighth District Court of Appeals, recognizing that sometimes litigants need to be protected from their own absurdity, confirmed that there is an exception to the general rule of judicial deference to clear contract language, applicable when such clear language would yield a truly absurd result.

The facts of the case are as follows:

On April 29, 2011, Defendant-appellant, 5701 Lombardo, L.L.C (“Lombardo”) and plaintiff-appellee, Beverage Holdings, L.L.C. (“Beverage”) entered into an agreement in which Beverage purchased from Lombardo a preschool/daycare business known as the Goddard School. Lombardo was not able to sell the building at the time of the business sale because of outstanding debt it had on the property (and a large prepayment penalty which would have been due upon a premature payoff of the mortgage). As a result, Lombardo and Beverage, through related entities, entered into a lease agreement which provided that Beverage would lease the property at $12,500/mo. and continue to run the Goddard School until Lombardo was able to sell the real property. Beverage also paid the taxes, assessments, insurance, all utilities and all maintenance and repairs.

Approximately four years later, Beverage sent Lombardo a notice of its intent to purchase the real estate for $1,202,110.09, which included adjustments (credits) for principal payments, a prepayment fee, $462,500 in rent credits, and the security deposit. Lombardo refused to sell at that price and notified Beverage that it was revoking the purchase agreement. Beverage then filed a complaint against Lombardo for declaratory judgement, damages and other legal and equitable relief.

Predominantly at issue was Section 3(a)(ii) of the purchase agreement, which provides that “the purchase price shall be decreased by [credited for]: Rents received by Seller from the tenant of the Premises, prorated to date of closing.” While both parties agreed that there was to be a credit for rents received, they disagreed as to the amount. Beverage claimed the credit should be for all rents received from the date of the agreement. Lombardo claimed the credit should only be for a prorated amount of the rent for the month of closing.

The purchase agreement also provided that at closing, Beverage Holdings would “receive a credit equal to the reduction in principal for the mortgage notes from the date of the execution of this agreement until the closing date.”

The trial court ruling:

The trial court found for Beverage, concluding that “Section 3(ii)(a) of the Agreement provides Beverage a credit for all rents paid from the date of the Agreement until closing.”

To justify its ruling, the trial court first quoted decisions establishing the “two-part general law re: contract interpretation”; namely, that (1) “When parties to a contract dispute the meaning of the contract language, courts must first look to the four corners of the document to determine whether or not ambiguity exists;” and (2) “If the contract terms are clear and precise, the contract is not ambiguous, and must be honored.” The trial court then reasoned that the contract was clear, as it called for a credit of “rents received,” and there was no language in the contract limiting the credit to rents received for the month of closing.

“Beverage Holdings I” (Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-2983- Vacated):

The Eighth District Court of Appeals in Beverage Holdings I, initially agreed and affirmed the trial court’s decision.

In so doing, it reiterated the general law of commercial contract interpretation in Ohio, citing several Ohio Supreme Court and Eighth Appellate District decisions.

According to the court in Beverage Holdings I, “Contracts are to be read, giving effect to every part of the agreement;…the intent of the parties is to be determined from the contract as a whole;” and while “extrinsic or parol evidence is admissible to explain an ambiguity or uncertainty arising out of the terms of a written instrument…[w]hen the terms in a contract are unambiguous, courts will not in effect create a new contract by finding an intent not expressed in the clear language employed by the parties.”

Applying the facts to the law, the court in Beverage Holdings I concluded that, “[r]elying on the four corners of the agreement and giving these terms their ordinary meaning, the agreement provides for all rent paid by Beverage to be deducted from the initial purchase price.”

When Lombardo sought to introduce parol evidence to give full effect to the parties’ intent, the court in Beverage Holdings I disallowed such evidence, determining that since “the terms of the agreement are unambiguous, we find the parol evidence rule inapplicable to the instant case.”

Had the story ended there, this article would have deemed the Beverage Holdings I decision to be just another example of a court adhering to the general rule regarding commercial contract interpretation.

“Beverage Holdings II” (Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090):

However, subsequent to the Beverage Holdings I hearing, a motion for reconsideration was filed, and upon re-review, the Eighth Appellate District in Beverage Holdings II (issued August 3, 2017), reversed the trial court’s holding (and its prior decision issued May 25, 2017).

Consequently, Beverage Holdings now stands for confirmation of another exception to the general rule of contract interpretation; the “absurdity exception.”

In its “about face”, the court in Beverage Holdings II first cited prior Ohio Supreme Court decisions to justify its reversal of Beverage Holdings I, and its confirmation of the absurdity exception. Quoting Alexander v. Buckeye Pipe Line Co., 53 Ohio St.2d 241, 374 N.E.2d 146 (1978), the court in Beverage Holdings II stated: “Common words appearing in a written instrument are to be given their plain and ordinary meaning, unless manifest absurdity results or unless some other meaning is intended from the face or overall contents of the instrument.”

The Supreme Court of Ohio found no absurdity in the contract language of Alexander (giving the grantee the right, in an easement agreement “to lay additional lines of pipe alongside of the first line”), but rather it established the so-called absurdity exception in the negative. The Ohio Supreme Court in Alexander sided with the defendant, concluding that it would not be absurd to interpret the language as allowing for limitless pipeline installations because “the term ‘additional’ has a numerical connotation, and the term ‘alongside of’ has a geographical connotation…[and], when the term ‘alongside of’ is read in conjunction with the preceding phrase ’to lay additional lines of pipe,’ it is apparent that the term ‘alongside of’ does not contain a numerical limitation, but simply indicates that the parties intended that additional lines be laid side by side or adjacent to the first line.” 

The court in Beverage Holdings II cited further “absurdity precedent” in several insurance policy decisions, most notably Cincinnati Ins. Co. v. Anders, 2003-Ohio-3048 (2003), whereby the Ohio Supreme Court in Cincinnati held that it would be absurd to consider an insured’s failure to disclose prior property damage as an “occurrence” entitling the insured to coverage for its fraudulent, non-disclosure.

Applying the facts to the law, the court in Beverage Holdings II basically echoed the dissenting opinion of Judge Stewart in Beverage Holdings I, who stated: “Given that the parties understood that Lombardo had issues with its financing prior to entering into the real estate purchase agreement, it would be absurd to conclude that Lombardo intended to deduct from the purchase price both principal payments and all rents received during what could be a lengthy lease term (the parties contemplated a lease term of as much as ten years).”  According to the court in Beverage Holdings II, interpreting the rent credit provision as requiring all rents between contract and closing vs rents in the month of closing to be credited, could yield the absurd result that “Beverage would not only acquire the property, but would also be owed money at closing [from the Seller, Lombardo]-all the while enjoying the profits from operating the business.”

Based upon the foregoing, the court in Beverage Holdings II reversed the trial court’s decision and remanded the case back to the trial court to determine what the parties truly intended with their purchase agreement.

What Is The Moral Of This Story?

Don’t hang your hat on the “absurdity exception to the rule.” First of all, we have no guidelines as to what is considered “absurd.” Perhaps judges will know absurdity, like obscenity, when they see it, but we do not have the advantage of “judicial hindsight- x ray specs.” The few “absurdity cases” out there do seem to turn more on equitable principles than on “interpretive absurdity.” For example, the court in Alexander wanted to prevent an insured from benefiting from its own fraudulent, non-disclosure and the court in Beverage Holdings II was concerned with the plaintiff-appellant “taking advantage of errors in drafting.” Nevertheless, despite a few hard to prove exceptions, the general rule re: judicial deference to the written word in commercial documents, still… rules. Commercial real estate and other contract decisions are still yielding absurd results, for example, those turning on the use of seemingly trivial grammar rules such as e.g. vs. i.e., and the insertion, or omission of commas. In other words, you must still “watch your language, and say what you mean, precisely, or a judge will tell you what you meant.”

It is Down to the Wire Now in Ohio Residential Real Estate Transactions

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

This… is …. Jeopardy. Our single category today is Obsolete Ways of Doing Business. Here is the clue: On and after April 6, 2017, this form of doing business (in residential real estate transactions in Ohio) will join the Dictaphone, pay phone, typewriters, original documents and carbon copies as a now obsolete way to do business. And the question-answer is? What is paying funds to escrow/title agents in the form of cash, personal checks, money orders and certified checks for amounts exceeding $1,000.

In other words, on and after April 6, 2017 (the effective date of the law), title/escrow agents can only accept wire transfers of funds over $1,000 in “residential transactions” (defined as transactions regarding any real property improved or to be improved with a one-to four-family dwelling) in Ohio. The reason is that Ohio’s “Good Funds Law”, Ohio Revised Code Section 1349.21 was amended as part of Ohio HB 463 signed in December of last year. Prior to the amendment, only personal checks over $1,000 were prohibited methods to transfer funds. For a copy of ORC 1349.21 (prior to and after amendment), see: http://codes.ohio.gov/orc/1349.21.

According to the Ohio Legislature, “The goal of the legislation was and remains (after its amendment) to protect against fraud and to preserve the integrity of consumer funds that are held and disbursed in real estate transactions.”

There are two basic exceptions to the law’s general rule that funds over $1,000 in residential transactions in Ohio must be wired to escrow. The first is regarding funds originating from brokerage trust accounts. Title agents are permitted to accept checks drawn on a broker’s trust account with no dollar limitation. So, for example, if a broker is holding a $15,000 earnest money deposit, a $15,000 check drawn on the broker’s trust account can be accepted by the title company. The second exception is that funds initiated by the United States, State of Ohio, or by an agency, instrumentality or political subdivision of either may be in the form of a check or Electronic ACH.

The Ohio Land Title Association (OLTA)* has published the following (re-printed with permission), FAQ’s summary of the law, as amended:

OLTA OHIO GOOD FUNDS LAW FAQs

(Related to ORC §1349.20-§1349.22 and the changes to ORC §1349.21, effective April 6, 2017)

Q: Does the law only regulate funds collected from the consumer (buyer/borrower/seller)?

A: No. This aspect of the law has not changed, the law regulates any and all funds collected by an escrow or closing agent in connection with an escrow transaction involving residential real property. So, it also regulates the funds collected from a lender as well as from a consumer.

Q: Is it permissible to use cash over $1,000 if it is deposited in the escrow account of the closing agent in advance of closing?

A: No. The law only permits cash if it is in the amount of $1,000 or less AND it is physically received by the escrow agent prior to disbursement AND intended to be deposited no later than the next banking day after the date of disbursement.

Q: Does an “internal transfer” of funds from one account to another at the same institution qualify as “electronically transferred funds” under the law?

A: No. All electronically transferred funds must be sent via the real time gross settlement system provided by the federal reserve banks (i.e. wire transfer) and must be immediately available for withdrawal and disbursement. Electronically transferred funds may also be sent via the automated clearing house (ACH) system only if they are initiated by the United States, State of Ohio, or by an agency, instrumentality or political subdivision of the United States or the State of Ohio.

Q: If the buyer needs to bring $1,200 to close, is it acceptable if they bring a $1,000 cashier’s check and $200 in cash?

A: No. Cash, personal checks, business checks (other than those drawn on a real estate broker’s trust account), certified checks, cashier’s checks, official checks, or money orders must be in an aggregate amount not exceeding $1,000. Any checks or money orders must also be drawn on a federally insured bank, savings bank, savings and loan, or credit union.

Q: If the buyer has given the real estate broker $2,000 in earnest money, and the broker brings these funds to closing, can they be used?

A: Yes. As long as the broker brings these funds in the form of a business check drawn on the broker’s special or trust bank account (as defined under ORC §4735.18(A)(26)) these funds can be presented at closing. There is no limit on the amount of a check from the broker’s account.

Q: Can an escrow or closing agent accept a cashier’s or certified check over $1,000 if it is deposited in time to “clear” the bank before disbursement?

A: No. The law only permits cashier’s or certified checks in an aggregate amount of $1,000 or less.

Q: If the buyer needs to bring $1,500 to closing and has given the real estate broker $1,000 in earnest money, can the buyer use the earnest money and bring the difference in the form of a personal check?

A: Yes. As long as the broker draws the $1,000 on the broker’s special or trust account, the consumer can bring the difference in the form of a personal check. The broker’s trust account check does not count toward the aggregate limitation of $1,000 for cash, personal checks, business checks, certified checks, cashier’s checks, official checks or money orders.

Q: Is the law only applicable to residential transactions?

A: Yes. This aspect of the law has not changed. The law only applies to residential real property transactions which are defined as any real property improved or to be improved with a one-to four-family dwelling.

Q: If all parties to a residential real property transaction agree and instruct that other forms of funds are acceptable in that transaction, can the escrow or closing agent follow this separate instruction?

A: No. The terms of the law must be strictly followed and does not permit the consumer, lender, or escrow or closing agent to alter the types of acceptable funds in a residential real property transaction.

Q: Is a check from another title company for greater than $1,000.00 is exempt from the rule. In other words, can a title company which takes seller’s proceeds for seller to buy new send those funds by check to the new title company. In other words, are title company to title company checks exempt regardless of the amount of the check.

A: The answer was no, we came to the conclusion that the statute is clear that title company checks are not exempt from the rule.

Q: Does it apply to refinances?

A: Yes. It applies to all residential transactions.

Q: Does it apply to cash deals?

A: Yes. It applies to all residential transactions.

Q: What about a bank funding into a bank account? A situation with a lender like Union Savings Bank that funds their refinances into the Escrow Account of the Title Agency that is an IOTA Account set up at the same bank.

A: The lender will not be able to do an ACH into your account. They will have to send the funding by wire via the real-time gross settlement system provided by the Federal Reserve banks, as outlined in the code.

Q: With the increase in wire fraud, doesn’t this make it riskier for the consumer?

A: If the proper procedures are put into place to make sure that any wire instructions are provided in person or verified by the parties prior to being sent, the risk of not having funds available for disbursement or being told they did not clear, post-closing, stop the consumer from being harmed. Fraudulent Certified Checks and Cashier’s Check pose a greater risk to the consumer than a wire.

Q: Bank branches set limits on the amounts that can be wired from a consumer account.

A: It seems like mobile banking limits the amount that can be wired from an account but not an actual branch visit in order to initiate the wire, although this may vary by bank. We have also instructed the agents to let their customers know when the order is opened, that the money needed from all parties will need to be in the form of a wire for any amount over $1,000, so they need to check with their bank to see what that banks policy is on sending wires. If they will only be able to send increments of the total each day, they will need to start the process early, in order to have the full amount of any funds needed on the day of disbursement.

Q: Is the law applicable to only residential transactions

A: Yes

Q: Does the new law apply to escrow funds pertaining to out of state transactions?

A: If the money for this transaction will be received and disbursed from the Ohio IOTA account, then it will have to follow this law. The only exception to this would be for a Commercial transaction, as this does not apply to commercial deals.

Q: Does the statute totally prohibit the taking of all but the enumerated checks or can we take checks as long as no disbursement is made from the escrow account until that check has cleared, in other words, if I [title/escrow agent] get an earnest money deposit of $10,000.00 in check form but my transaction is not closing for 60 days, and there will be no disbursement on that file for 60 days can I accept that check?

A: Unless the funds are for Earnest Money and those funds were sent to us from the Real Estate Broker from the Real Estate Brokers Trust account, all deposits will need to be in the form of a wire. The above scenario is most likely to happen in a commercial transaction though, which would not be covered by this rule.

Q: How does this affect “back-to-back” closings in round-table areas?

A: Back-to-back closings currently come with many challenges and the change to the Good Funds Law will not meaningfully change the structure. For many reasons (title defects, underwriting issues with new loan, slow delivery of documents, delay in delivery of remotely-signed documents, delay in receipt of lender’s funds on day of close, etc.), it can be difficult to synchronize two closings to happen within a few hours on the same day. Such a structure is discouraged because it can lead to additional complications for a seller (soon to be buyer) when a variable on the first transaction causes delay in closing and/or disbursement and impacts their ability to close on the second transaction. For various reasons, many title companies already require that the funds from the first closing be wired for the second closing. For all residential transactions, this will now be required (unless such proceeds are $1,000 or less). Title professionals have already been discussing ways to efficiently verify and securely wire funds from one company to another and closings should be scheduled to allow reasonable time for the funds to be wired from one company to the next.

*The Ohio Land Title Association serves to advocate and advance its members’ educational, ethical, and professional interests. OLTA benefits the public by promoting quality and integrity in real estate transactions. OLTA promotes safe and efficient transfer of ownership, provides educational opportunities, and is a legislative advocate.  To learn more about the Ohio Land Title Association, log on to their website at:  http://www.olta.org/.

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In addition to amending Ohio’s Good Funds Law, Ohio HB 463, effective April 6, 2017 also: makes permissive the awarding of actual damages and attorney's fees in housing discrimination cases before the Civil Rights Commission; expedites foreclosures regarding court-certified abandoned properties, bans the use of plywood to secure vacant residential properties and makes certain other modifications to Ohio’s foreclosure laws, housing creditor rights laws and UCC laws.  For a legislative summary of Ohio HB 463, log on to: https://www.legislature.ohio.gov/download?key=6187&format=pdf.

Judicial Deference to the Written Word in Commercial Documents, Still Rules, Except When It Is Clear There Has Been a Mutual Mistake

By: Stephen D. Richman, 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. Courts 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 will usually have attorneys to review their documents. Because courts often defer to the specific language of a commercial document (or lack thereof), unintended results are often the norm for parties who do not seek professional advice, and for professionals who do not closely review their documents. See, e.g. Christiansen v. Schuhart, 2011-Ohio-1199 (5th Dist. Ct. of App.) 2003 [document that used the words “easement” and “license”, and lacked “binding on successors language” was held to be a revocable license instead of a perpetual easement].

 Because of this judicial deference to “commercial language”, and the fact that courts will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

Notwithstanding this deference to the written word, as aptly stated by the genie in the Disney film Aladdin, "There are a few provisos, a couple of quid-pro-quos…” While the genie was specifically referring to the rules with regard to granting wishes, there are also a few exceptions with regard to the rules of “commercial contract deference law”. Most notably is the equitable doctrine of “mutual mistake”. Basically, a court may reform (in essence, re-write) a written agreement, if it finds that “the party seeking reformation has proven by clear and convincing evidence that both parties to an agreement were mutually mistaken as to the substance or meaning of the document. Equity will even permit the reformation of a written instrument not only as between the original parties but also as to parties in privity with them [such as the original parties' successors in interest], unless the opposing party can demonstrate that he was a bona fide purchaser without knowledge of an encumbrance on the property.” Mason v. Swartz (1991), 76 Ohio App.3d 43,50.

The appellant (Circle J. LLC) in the recent case of Dysart v. Circle J, L.L.C., 2016-Ohio-869, unfortunately learned about the afore-mentioned proviso, the hard way (with a judgment for the appellee).

The facts of the case are as follows:

In 1996, David and Kathryn Dysart (Plaintiffs-Appellees) acquired 50 acres of a larger property owned by Leslie and Joan Maust in Wooster, Ohio. Being adjoining properties, there were a number of utility easements and one access easement granted at the time of the sale. The easement at issue in Dysart is the access (driveway) easement which grants the Dysarts (and their successors) the right to use a driveway which runs across the Mausts’ property.

In 2008, the Mausts sold their adjoining property to Circle J. LLC (Defendants-Appellees) a holding company owned by Jamie and Jody Snyder. The contract stated that the property was being purchased/sold subject to existing easements, including the driveway easement at issue, and copies of the easements were attached to the purchase agreement as exhibits. Between 2008 and 2011 the driveway was used by the Dysarts, without any issue from Circle J.

In 2011, the Dysarts attempted to sell their 50-acre property without success. They then tried to sell the property by auction in April of 2013. The day before the scheduled auction, however, Mr. Snyder/Circle J told the auctioneer that he was terminating the driveway easement. Circle J claimed that the document’s plain language permitted either party the right to terminate. The relevant provision states: “This Agreement may be amended, or terminated in whole or in part by Grantors or Grantees, or their respective successors in title to Parcel 1 and Parcel 2 without the consent of any tenant, lessee, mortgagee or other person claiming by or through them.” (Emphasis added). As a result of the unilateral termination, the Dysarts canceled the auction and filed a complaint against the Snyders and Circle J, LLC (collectively “Circle J”), seeking reformation of the driveway easement to reflect the original parties’ intent to create a perpetual easement, and seeking damages. The trial court entered judgment in favor of the Dysarts, reforming the easement document by substituting the word “and” between “Grantors” and “Grantees” for the word “or.”

 Circle J appealed, claiming the trial court erred: 1) in finding that the Dysarts were granted an easement vs. a license; and 2) by reforming the purported “easement”. Circle J argued that since easements are assignable, perpetual interests running with the land that cannot be terminated unilaterally by any individual party, the document in question must be a license which is a personal right or privilege, that does not convey a property interest, is not assignable, does not run with the land and can be revoked unilaterally. Alternatively, if the document was to be construed to be an easement, Circle J argued that the courts should honor the plain language of the easement, and allow either party to terminate the same.

The Dysarts argued that the original parties intended to create an easement allowing permanent access to the Dysarts’ property, rather than a mere license that could be unilaterally terminated and to the extent that the easement document indicated that the easement could be terminated, the document contained a mutual mistake as to the parties’ intent. In addition to the testimony of the Mausts and Dysarts which confirmed such intent, the attorney for the Mausts admitted to the mistake in the document (claiming “boilerplate made him do it”) and further testified that the document was a perpetual easement because: 1) in his practice he would never title a document as an “easement” (as the agreements here were titled) if it could be terminated unilaterally by any party; 2) the agreements were recorded, and there would be no reason to publicly record a mere license; and 3) other provisions in the driveway easement (i.e. binding upon successor language) supported the conclusion that a perpetual easement (revocable only upon mutual assent) was intended.

The trial court and the appellate court in Dysart basically upheld the “mutual mistake proviso” to the “deference to actual language in a commercial instrument rule”. Citing precedent (prior court decisions on point), the Ninth District Court of Appeals in Dysart held that a trial court may reform a written agreement if it finds “that the party seeking reformation has proven by clear and convincing evidence that the parties were mutually mistaken as to the substance or meaning of the document.”

Applying the law to the facts, the appellate court had no problem finding clear and convincing evidence. The Dysarts testified that when they bought the subject property, the parties all discussed their intent to create an easement granting permanent access to the home via the existing driveway. Mr. Maust testified that he directed his attorney to draft the document to “guarantee access to the house that’s on that 50 acres… for as long as the house existed.” Finally, the attorney for the Mausts testified that, after conferring with the parties, he intended to draft agreements that could not be terminated unilaterally by either the grantor or grantee.

Circle J’s final argument was that “the exception to the exception” applies, namely that, irrespective of the mutual mistake of the original parties (Mausts and the Dysarts), Circle J was a bona fide purchaser without knowledge of an encumbrance on the property. The court of appeals in Dysart easily shot down this argument. First, the court cited precedent to clarify that while a court may not reform an instrument as against a bona fide purchaser without notice of the encumbrance, notice may be either constructive or arise from actual knowledge, and when an encumbrance has been recorded, a subsequent purchaser is charged with constructive notice.

In Dysart, the court held that the Snyders had at a minimum, constructive notice of the driveway easement when they purchased the Mausts’ property because: 1) the driveway easement was recorded; 2) the real estate purchase contract contained a section captioned “Subject to Existing Easements/Agreements” and a copy of each easement agreement was attached to the contract; 3) the Deed contained the requisite “subject to language”; and 4) Jamie Snyder testified that he was aware of the easements when he bought the Mausts’ property and never believed he had unilateral authority to terminate the driveway easement until April, 2013, after he asked his attorney to review the easement document.

What is the moral of this story?

Don’t hang your hat on the proviso. The general rule re: judicial deference to the written word in commercial documents, still… rules. Courts are reluctant to reform a document w/o clear and convincing evidence, and rarely is the evidence clear or convincing. Cases are turning on the use of seemingly trivial grammar rules such as e.g. vs. i.e., and the insertion, or omission of commas. The Dysart case and the legal fees that both parties incurred could have been avoided by the use of “and” vs “or”.  Most importantly, “watch your language, and say what you mean, precisely, or a judge will tell you what you meant.”