Real Estate and Construction Law Update

Residential Landlord Liable for Attorneys' Fees for Terminating Tenant's Utilities

David Lindner — Mon, 14 May 2012 12:19:12 -0500

From time to time, I get a call from a residential landlord who is frustrated that a tenant has ceased paying rent, but won’t vacate the premises. When I tell the landlord that he or she must proceed with a statutory eviction or “forcible entry and detainer” action in municipal court, the frustration often grows. The landlord will sometimes say things like “I own the apartment, I’ll just move his things out and change the locks,” or “I’ll have the water and electricity turned off, then he’ll have to move out.”

While there may have been a time when such practices were commonplace, they have long been prohibited in Ohio. The Ohio Landlord and Tenant Act, Chapter 5321 of the Ohio Revised Code, prohibits “self-help” remedies against residential tenants. Specifically, Section 5321.15(A) and (B) prohibit terminating utilities, excluding the tenant from the premises, threatening any unlawful act, or seizing the tenant’s property:

(A) No landlord of residential premises shall initiate any act, including termination of utilities or services, exclusion from the premises, or threat of any unlawful act, against a tenant, or a tenant whose right to possession has terminated, for the purpose of recovering possession of residential premises, other than as provided in Chapters 1923., 5303., and 5321. of the Revised Code.

(B) No landlord of residential premises shall seize the furnishings or possessions of a tenant, or of a tenant whose right to possession has terminated, for the purpose of recovering rent payments, other than in accordance with an order issued by a court of competent jurisdiction.

(C) A landlord who violates this section is liable in a civil action for all damages caused to a tenant, or to a tenant whose right to possession has terminated, together with reasonable attorneys fees.

A landlord who violates the prohibitions under (A) or (B) may be liable for damages as well as the tenant’s attorneys’ fees pursuant to division (C). One landlord found this out the hard way in the recent case of Crenshaw v. Rowland, 196 Ohio App.3d 7171, 2011-Ohio-5942 (Sixth District Court of Appeals, Lucas County).

In this case, the landlord, Crenshaw, filed an eviction action against the Rowlands, who were her tenants, alleging that the tenants had failed to pay rent. The tenants counterclaimed, alleging among other things that the landlord had unlawfully terminated the water service to the premises in an effort to get them to leave. At trial, the landlord admitted that she had the water service terminated and that she had also informed the Lucas County Health Department and Lucas County Children Services that the premises had no water. The tenants were then informed by the County that they would have to leave the premises because it did not have running water.

The trial court awarded damages of $800 to the tenants due to the landlord’s terminating the water in breach of R.C. 5321.15. The tenants requested an award of attorneys’ fees pursuant to R.C. 5321.15(C) in addition to the damages. The trial court held that the tenants were not entitled to attorneys’ fee because they were in breach of their obligations under the lease for failure to pay rent. On appeal, the court of appeals held that, regardless of whether or not they failed to pay rent, the award of attorneys’ fees was mandatory where the landlord violated the prohibitions of 5321.15(A) or (B). Thus, the case was remanded to the trial court to determine the amount of attorneys’ fees that the landlord would have to pay to the tenant.

This case should serve as a warning to all residential landlords who are seeking a “short-cut” to the evictions process that taking a “self-help” approach may end up costing you more time and money in the long run.

Deadline to Appeal Tax Valuation in Ohio is Approaching

David Lindner — Fri, 17 Feb 2012 09:38:22 -0500

Is your real estate tax valuation too high? With the current downturn in the real estate market, many real estate owners have been able to achieve significant real estate tax savings through revaluing their real estate through Ohio’s Board of Revision process. Complaints to revalue your real estate must be filed with your county Board of Revision before March 31, 2012.

Once the complaint is filed, you will need to establish a fair market value through an appraisal or an arm’s-length sale. At a later date, the Board will hold a hearing where your counsel will offer evidence of your property’s fair market value. Decisions are generally rendered shortly after the hearing. If a new value is established for your property and you paid tax based on the old (higher) value, your overpayment will be credited against tax due or refunded if no tax is due.

Nicholas George and James Simon are Partners at our law firm Buckingham, Doolittle & Burroughs. They would be happy to answer questions you may have concerning this article. They can be reached by calling (330) 376-5300 or by emailing ngeorge@bdblaw.com or jsimon@bdblaw.com.

Ohio Is the New Hot Spot for Oil and Gas Leasing

David Lindner — Mon, 30 Jan 2012 11:53:33 -0500

Oil and gas wells are nothing new in Ohio. For decades, operators have drilled throughout the state in search of oil and gas. Recently, however, the application of hydraulic fracturing has made it feasible to drill into the deep Marcellus Shale layer under eastern Ohio and parts of New York, Pennsylvania and West Virginia.

The hydraulic fracturing process involves drilling horizontally into the Marcellus Shale. Millions of gallons of water and sand are then pumped into the rock to fracture it and allow the trapped gas to be released.

In most areas, the shale lies a mile or more below the surface, making it very expensive to initiate a drilling operation; however, the rewards may make it worthwhile. By some estimates, the Marcellus Shale may contain up to 500 trillion cubic feet of gas, of which ten percent may be recoverable. The wellhead value of this amount of gas could be as much as one trillion dollars!

A few thousand feet below the Marcellus Shale lies the Utica Shale, which is thicker and more geographically extensive. The Utica Shale layer may also have great commercial significance in the years to come.

Because of the great potential, operators have been aggressively pursuing oil and gas leases with land owners in the areas where the Marcellus Shale is found. The lease compensation to the land owner typically consists of an initial per-acre signing bonus, which has increased dramatically over the past several years, plus a royalty in the event a producing well is ever drilled.

The customary royalty amount is 1/8 or 12.5%. Although there are many customary terms in oil and gas leases, any lease should be reviewed by an attorney before signing it. Terms can always be negotiated, and the customary terms are not necessarily appropriate or reasonable in every situation.

Due to low natural gas prices, 2010 was an historically slow year for new oil and gas wells in Ohio, but that is expected to change as operations begin to ramp up in Eastern Ohio. Many see the drilling as an economic boon to the state, providing money to landowners as well as jobs to those in the oil and gas and related industries. Governor Kasich’s office estimates that shale drilling will create over 200,000 new jobs in Ohio while bringing in an additional 500 million dollars in revenue.

While there is still a great deal of uncertainty about the economic impact of this new oil and gas boom, it is clear that the industry is moving ahead and that new wells will be drilled. The success of these new wells, and fluctuations in gas prices, will determine how extensive new drilling operations become. Both operators and landowners are dealing with variables beyond their control, so it will pay to stay up to date on the latest developments and negotiate leases accordingly, rather than simply relying on standard form documents.

The Ohio Department of Natural Resources website gives further information on Ohio oil and gas leasing activity and regulation.

Contact attorney David Lindner for more information.

Termination of the Construction Contract: What to Do When a Project Goes Bad

David Lindner — Wed, 28 Dec 2011 10:01:46 -0500

Attorney Frederick M. Lombardi provides the following overview of “for cause” termination of a private construction contract. The second part of this article will focus on termination “for convenience” and damages arising as a result of termination.

There are many reasons for terminating a construction contract. Some of the most common are nonpayment by the owner or contractor, nonperformance by the contractor or subcontractors, timeliness of performance, lack of communication or simply an inability to get along. These issues should be addressed in a construction contract.

Because termination ends one or both parties’ rights or contractual obligations prior to the completion of the project, careful consideration should be given to the consequences. The timeliness of project completion and potential added costs, not to mention exposure to damages, require that termination be approached by both parties with extreme caution and after thorough analysis by legal counsel, construction experts, accountants, architects and other pertinent industry experts.

Most construction contract issues can be resolved and every effort should be made to do so through negotiations and, if necessary, compromise before termination. Finding a resolution can help parties avoid the risks of additional delays and costs in the aftermath of termination, exposure to damages, and the uncertainty of legal outcomes when facts are judged and conclusions reached by third-party judges or arbitrators.

“For cause” termination may result when an owner, contractor or subcontractor does not fulfill obligations within the contract. Examples include:

owner failing to pay the contractor or the contractor to pay its subcontractors or suppliers;
owner failing to properly coordinate a work schedule where separate contracts exist for discrete parts of the construction project;
work stoppage by court order through no fault of the contractor (e.g., work stopped by a court or government order due to failure of an architect to issue a certificate of payment that is proper and due, or reasons other than acts of God or force majeure);
contractor failing to perform in a timely manner or properly coordinating its subcontractors or suppliers;
contractor failing to perform in terms of the quality or quantity of the work and materials furnished in accordance with the construction contract, the plans and/or the specifications.

Even in these extreme situations, a notice of default and an opportunity to cure the default is generally provided for in the contract and, if not, still should be given in most circumstances. The objective is to give the parties one last chance to avoid termination and the risks associated with it.

When termination is necessary, there are some practical considerations for the owner prior to issuing the termination notice.

First, if the project has performance bond coverage, notice should be provided to the surety in order to utilize the surety as another avenue of approach in an effort to encourage the contractor to cure the default. A surety may take over the project, pay the owner for any liability incurred, find a replacement contractor or deny the claim. The owner should carefully review the terms of the performance bond in order to ensure that all conditions precedent to claiming performance bond coverage have been met.

Second, prior to issuing a termination notice, the owner should consider engaging a qualified construction expert to evaluate the status of the project and to memorialize the existing condition of the project for litigation purposes. A qualified construction expert can advise the owner on the probable cost of completion and the likelihood that the contractor could accelerate or otherwise cure the default. The expert also can provide effective assistance in securing completion of the project.

Based upon the analysis and advice of a qualified construction expert, the owner may find it far preferable to maintain the current contractor and accept a later completion date rather than to terminate under default and suffer even more in terms of completion costs, delays and exposure to litigation.

Ohio Board of Tax Appeals May Accept Property Valuations Not Previously Presented to the Tax Commissioner

David Lindner — Thu, 25 Aug 2011 14:19:35 -0500

In WCI Steel, Inc. v. Testa, the Ohio Supreme Court recently held that a taxpayer is allowed to introduce a new property valuation or appraisal at the Board of Tax Appeals (BTA) not previously presented to the Ohio Tax Commissioner. Although this case involved Ohio personal property tax, the ruling also applies to real property valuation disputes, as explained by Attorney Steven A. Dimengo in an interview with WKSU. To properly preserve one’s right to dispute the Tax Commissioner’s determination of property value, and therefore present a valuation or appraisal not previously presented to the Tax Commissioner, the taxpayer’s Notice of Appeal to the BTA must: (1) state the objection to the Tax Commissioner’s actions in valuing the property; and (2) identify the treatment the Tax Commissioner should have applied.

In this case, the Supreme Court remanded the case to the BTA to determine the value of the taxpayer’s property, taking into consideration the newly presented appraisal.

Guarantor of Commercial Lease May Be Liable for Attorneys' Fees

David Lindner — Mon, 11 Jul 2011 09:45:13 -0500

Buckingham Attorney Clay Keller analyzes the following recent Ohio case in which a guarantor was held liable for the landlord's attorneys' fees:

The use of a guarantee for a commercial lease is sometimes employed when a landlord seeks additional recourse to secure payment of rent in the event of a default under the lease. As illustrated by a recent appellate decision by the Ohio Fifth District Court of Appeals in Strip Delaware L.L.C. v. Landry’s Restaurants, Inc., et al. (2010) 191 Ohio App.3d 822, the liability of a guarantor can be extensive and go well beyond just payment of what would be commonly understood to constitute “rent” due under the lease. In the Strip Delaware case the landlord, The Strip Delaware, L.L.C., entered into a lease with Landry’s Seafood House-Ohio, Inc., which was the tenant. The parent corporation of the tenant, Landry’s Seafood Restaurants, Inc., a Delaware Corporation (“Landry’s) executed a separate guarantee agreement with the landlord concerning the lease.

On appeal Landry’s argued that it was not liable to pay the landlord’s attorney fees which it incurred in the subsequent lawsuits field after the tenant defaulted. Landry’s argued it only executed a separate guarantee agreement which did not expressly make it liable for the payment of attorney fees. The appellate court flatly rejected Landry’s argument and affirmed the trial court’s award of a judgment in favor of the landlord and against Landry’s for attorney fees in the amount of $133,908.66, plus interest at the rate of 18% from June 9, 2008, when the trial court entered the original judgment granting attorney fees.

This case illustrates an all too common problem that arises in the context of commercial guarantees whether the same are used in a lease or some other commercial transaction document. When a guarantee agreement or guarantee provision is made part of the transaction, the party executing as “guarantor” does not fully understand or appreciate what it is agreeing to pay in the event of a default by the tenant or primary obligor. Oftentimes the misunderstanding is the difference between a “business understanding” of what is being agreed upon as compared to the legal significance of what is actually set down in writing and executed by the parties. For example, in everyday usage the term “rent” is commonly understood to mean the amount that must be paid per month for rental of the property at issue and perhaps it also includes associated CAM (common area maintenance) charges. The term “rent,” however, can have a far broader meaning depending upon how it is defined in the lease. As one would expect, if a dispute progresses to litigation involving a commercial lease, what had been discussed in the negotiations, or what the parties believe was the agreement, will not be given any consideration by the court if the issue is covered by clear and unambiguous provisions in the written lease.

In the Strip Delaware case the guarantee agreement executed by Landry’s did not specifically say anything about Landry’s being liable to the landlord for payment of its attorneys’ fees in the event the landlord became involved in litigation due to the tenant’s default. But, the lease broadly defined rent to mean: “[e]xcept as provided to be paid by Landlord, Tenant shall pay any and all rents and sums of money or charges required to be paid by tenant under this Lease (collectively the ‘Rent’).” The lease further provided that in the event the landlord had to bring suit for “recovery of rent or any other amount due” the losing party would be liable to pay the prevailing party its expenses, attorneys’ fees and court costs.

After analyzing the definition of “rent” in the lease and the language utilized in the guarantee agreement the trial and appellate courts both concluded that the guarantee agreement executed by Landry’s made it liable for payment of landlord’s attorney fees plus 18% interest, in addition to the other amounts recoverable by the landlord.

Accordingly, cases like Strip Delaware illustrate the importance of having a thorough understanding of what all the technical aspects of a commercial lease mean before it is executed so that if a problem later arises the parties, including any guarantor, are not subjected to unpleasant surprises regarding their respective rights and obligations under the lease.

New Market Tax Credits, Part II

David Lindner — Thu, 12 May 2011 12:40:49 -0500

Attorney Neil Bhagat presents a follow-up to his Introduction to New Market Tax Credits:

Recently, Bloomberg Markets Magazine published an article criticizing the use of New Market Tax Credits (NMTCs) to finance commercial real estate developments. In particular, the article focused on the renovation of the Blackstone Hotel in downtown Chicago, which used $15.6 million in NMTCs. While the article largely questions specific NMTC appropriations, it also raises the issue of whether more oversight is needed to ensure the program accomplishes its purpose.

Many of the criticisms of the NMTC program focus on the “census tracts” that determine where such credits can be utilized. The census tracts combine various data that measure facts such as low median family income, unemployment rates, and family poverty rates in order to establish those locations in which NMTCs are available. Critics of NMTCs assert that this methodology is not exact and that census data from ten years ago is not current enough to reflect gentrifying areas. While there is certainly an argument that any type of development is critical to spurring the growth of an impoverished area, it is uncertain at this juncture when and if changes will happen in determining eligibility criteria for NMTCs.

Despite the potential need for changes with the criteria determining what areas should be eligible for NMTCs, it is clear that there is opportunity for a wide variety of projects. While one might not think a luxury hotel qualifies for NMTCs, the fact that it is located in an area meeting the U.S. Department of Treasury’s guidelines is critical. This should encourage developers to examine whether a location in which they are considering development might qualify for NMTCs. Throughout Ohio, there are numerous census tracts that qualify for NMTCs, not only in Cleveland, Akron, Canton, and the larger cities, but in rural counties as well. NMTCs were originally created to spur development in underdeveloped and underutilized areas, not only metropolitan cities. As a result, it may be wise for a developer to conduct some research or contact an advisor in order to determine if any projects in the pipeline might qualify for NMTCs.

While conscientious of the negative publicity a luxury hotel might get for receiving tax credits, a developer, especially one in a smaller city or rural area, might consider this an opportunity. Should the backlash against tax credits going to large developers increase, the opportunity for smaller developers who have complied with the application process may increase as well.

In Ohio, besides the NMTC program, there are a wide range of incentives available to businesses. Some of these include the Enterprise Zone Program and Community Reinvestment Areas. You might be surprised to learn what options are available. For a more in-depth discussion of what areas might qualify for NMTCs and other related incentives and credits, contact attorney Neil Bhagat at nbhagat@bdblaw.com or 888.811.2825.

Check back next month for a further discussion regarding some of these possibilities and how they can save money for developers or your business.

Phillipe Cousteau to Speak in Cleveland on April 8, 2010

David Lindner — Fri, 25 Mar 2011 10:16:53 -0500

Phillipe Cousteau, grandson of the legendary Jacques Cousteau, will be in Cleveland on April 8, 2010 as the keynote speaker for EcoWatch's third annual Green Gala. Mr. Cousteau focuses on educating the public about the Earth's water resources and the need to protect them. He was also recently featured in a CNN production concerning the Arctic. The Green Gala is held at Executive Caterers, 6111 Landerhaven Drive, Mayfield Heights, Ohio. Local companies will be sponsoring the attendance of Northeast Ohio students. Tickets are available through the EcoWatch website.

Cuyahoga River Sediment Is Cleaner

David Lindner — Fri, 18 Mar 2011 09:33:08 -0500

James F. McCarty of The Plain Dealer reports that sediment dredged from the Cuyahoga River appears to be less toxic than in years past. This would be good news not only because it shows that recent river clean-up efforts have been successful, but also because it would allow the sediment to be disposed of on land, or potentially in the open waters of Lake Erie. Currently, the sediment must be housed in dikes along the lakefront, but those dikes will soon reach capacity. If further testing confirms the lower toxicity of the sludge, the Ohio Environmental Protection Agency will still need to sign off on any new disposal plan.

Ohio Sales and Use Tax in Construction Contracts

David Lindner — Tue, 01 Mar 2011 11:33:35 -0500

Attorney Steve Dimengo presents the following article on Ohio Sales and Use Tax issues in construction contracts:

Editor’s note: This is part 1 of a two-part series about tax issues affecting contractors. Part 2 will address the classification of property – whether an improvement is real or personal property.

In a construction contract, the contractor is deemed the consumer of any tangible personal property purchased that it incorporates into real property and, thus, must pay tax on the purchase of such property. The construction contractor is the consumer even though he may subcontract the actual labor to incorporate the materials into the real property. However, subcontractors who purchase materials for incorporation into a job must pay tax upon the purchase of the materials.

A contractor cannot use tax erroneously paid on the purchase of its materials as an offset against tax that should have been collected. For example, a contractor may erroneously believe property to be constructed is real property and remit the sales tax due on the materials as they are purchased while failing to collect tax upon completion of the project. Under such circumstances, the contractor can only obtain a refund of tax it erroneously paid on its materials.

To avoid the foregoing problem, a contractor is allowed to request certification from the owner as to the classification of the property – real or personal property – before the contract is executed. The owner must respond to the request, and the contractor can rely thereon so that the risk of erroneous classification is transferred to the owner.

If in doubt, claim the resale exemption

Since a contractor cannot always be certain as to whether property being purchased will be incorporated into real property or sold as tangible personal property, he or she should claim the resale exemption for any uncertain purchases. Use tax must then be paid on those materials subsequently incorporated into Ohio real property by the contractor, other than as part of an exempt construction contract .

Claim an exemption for materials used on Exempt Construction Contracts

A contractor may claim exemption upon the purchase of materials to be incorporated into:

1. Real property under a construction contract with the U.S. government or its agencies, the State of Ohio, or an Ohio political subdivision;

2. Real property which is owned or will be accepted for ownership at the time of completion by the U.S. government or its agencies, the State of Ohio or its political subdivisions;

3. A house of public worship or religious education, or a building used exclusively for charitable purposes by a nonprofit organization operated exclusively for charitable purposes;

4. The original construction of a sports facility under §307.696 of the Ohio Revised Code; or

5. A hospital facility entitled to exemption under §140.08 of the Ohio Revised Code.

A contractee claiming one of the above exemptions must execute the Construction Contract Exemption Certificate available on the Ohio Department of Taxation’s website. A contractor is then protected from liability if it is later determined that the contract did not qualify for exemption; the contractee assumes liability for any unpaid taxes.

Rather than using copies of the Construction Contract Exemption Certificate when making purchases of materials, the contractor or subcontractor may use a Contractor’s Exemption Certificate when purchasing materials to be used for an exempt contract. However, this certificate only protects the vendor/seller of the materials.