Real Estate and Construction Law Update - Real estate and construction law updates and analysis.

If you are a landlord or tenant, or you represent landlords or tenants, then you are probably familiar with estoppel certificates. While estoppel certificates are commonplace in commercial leasing and often treated as simple “form” documents, they can have significant consequences if their terms and provisions are not fully understood. For example, a tenant who executes an estoppel certificate without fully reviewing and understanding it may be giving up the right to assert important defenses to potential landlord claims under the lease.

Before we talk about what specifically should or should not be in an estoppel certificate, let’s take a moment to review exactly what an estoppel certificate is and why landlords ask their tenants to sign them in the first place. Most leases require the tenant to provide the landlord with an estoppel certificate upon request. Lenders and purchasers typically require a landlord to obtain an estoppel certificate from the major tenants of a property, or a specified percentage of tenants, upon a sale or refinancing of the property. Estoppel certificates are a significant issue in a sale or refinancing because they provide independent verification to the buyer or lender of the cash flow from the tenants’ rent payments. They also help the buyer or lender identify any lease defaults or disputes with tenants that could cause a problem after closing.

In some cases, the lease will say exactly what information will be required to be included in the estoppel certificate. In other cases, the lease will contain little detail about the contents of the estoppel certificate. To avoid disputes about the content of the estoppel certificate, a good practice is to attach the actual form of estoppel certificate as an exhibit to the lease. Most often, the required information will include (a) the date of commencement; (b) a statement that the lease is unmodified and in full force and effect, or stating what modifications have been made; (c) the date to which rent has been paid; and (d) that there are no defaults by either party except as specified. If the landlord financed tenant improvements, then the estoppel certificate may state the remaining amount of the tenant improvement allowance. Depending on the buyer or lender’s requirements, there may be additional information or representations requested. The lease will typically require that the tenant return the executed estoppel certificate within a certain number of days after the landlord’s request. If the tenant fails to return the estoppel certificate in a timely fashion, the lease may give the landlord the right to execute the estoppel certificate on the tenant’s behalf.

By signing the estoppel certificate, the tenant “estops,” or prohibits, itself from taking a position contrary to what it stated in the certificate. Therefore, it is important to verify all the factual statements set out in the estoppel certificate and make sure they are true, and not too broad or overreaching. The tenant or tenant’s counsel should review the estoppel certificate against the lease requirements to make sure the statements in the estoppel certificate are consistent with what is required under the lease. The tenant must also pay close attention to the timeframe for responding, since failure to respond by the deadline may be a default under the lease.

The danger in certifying to something that is not accurate is that the tenant may be giving up the right to contest it at a later time. For example, a tenant who signs an estoppel certificate stating that there are no landlord defaults may have a difficult time later if it comes to light that there was a landlord default, even if it was unknown to the tenant at the time, during the period covered by the estoppel certificate. Therefore, the tenant or tenant’s counsel may try to limit the statements in the estoppel certificate by stating that they are true “to the best of tenant’s knowledge.” Above all, it is essential that the tenant confirm the accuracy of all the statements in the estoppel certificate prior to signing.

Contact the author of this article: David J. Lindner

A typical written lease agreement has a lease term that is specified as a number of months or years, or that extends from a certain commencement date to a certain termination date.  It is not uncommon, though, for a tenant to remain in possession of the premises beyond the expiration of the specified term.  When the tenant holds over beyond the term specified in the lease, a number of questions arise.  For instance, can the tenant be evicted immediately or is he entitled to stay for another term?  If he cannot be evicted immediately, how long is he permitted to stay and under what terms?  The answers to these questions turn on both the lease language and the conduct of the parties.

In Ohio, a tenant who holds over beyond the term of the lease is known as a “tenant at sufferance.”  The landlord has the option either to treat the tenant at sufferance as a trespasser and immediately file an eviction action, or hold the tenant at sufferance to a new lease term.  What sometimes happens, however, is that the tenant continues paying rent to the landlord and the landlord continues accepting it, even though the lease term has expired.  In such a case, the law treats the tenant’s continued payment of rent as an offer to hold over for an additional term, and the landlord’s acceptance of rent constitutes an acceptance of that offer.

When this offer and acceptance occurs, the length of the holdover tenancy is determined by looking to the rent payment provisions of the expired lease. Where the expired lease provided for payment of rent on a monthly basis, the holdover tenancy is treated as a month-to-month lease, which may be terminated upon 30 days’ notice by either party.  If the lease provides for annual rent, then the holdover term is from year-to-year.

In Kazmaier v. Fat Jacks, LLC, 2010 Ohio 3627, P4 (Ohio Ct. App., Wood County Aug. 6, 2010), the landlord brought an eviction action against the tenant, which had held over beyond the lease expiration date.  The court ruled that the landlord, by continuing to accept rent after the lease had expired, had agreed to an additional holdover term and therefore could not bring an eviction action until that term had expired.  Looking at the payment provisions of the expired lease, the court found that the holdover was on a year-to-year basis because the rent, although payable in monthly installments, was nevertheless stated as yearly rent.

Landlords will often dissuade tenants from holding over by including in the lease an express provision governing holdovers.  This provision may provide that the rent during any holdover term increase to 150% or even 200% of the rent payable in the immediately prior term.  Additionally, a landlord should pay close attention to the rent payment provisions of the lease so that a holdover tenancy is limited to a month-to-month term, rather than year-to-year.  While it is tempting to accept a check from a tenant after the lease has expired, a landlord must be aware that by doing so he inadvertently may be renewing the lease term.

Of course, leases often contain express renewal provisions.  For example, the tenant may have the option to extend the term of the lease for a certain number of additional periods by providing written notice to the landlord a certain number of days or months prior to the expiration of the current term.  The renewal terms will typically be upon all the same terms and conditions of the current lease, except that rent will be increased.  The rent increase may be stated as a fixed amount, a percentage, or be based upon increases in the Consumer Price Index.  Another option is to state that rent for any renewal period will be the “fair market rent,” which then must be agreed upon by the parties or determined through an appraisal process. 

The automatic renewal clause is another possibility, but something both landlords and tenants should consider carefully before including in a lease.  An automatic renewal clause states that if neither party affirmatively cancels the lease, the term will automatically renew for another term, thus creating a perpetual lease.  If the parties are not diligent about giving the required notice to terminate, they may find themselves bound to an additional term when they may have thought the lease was about to expire.  A trap for the unwary in using an automatic renewal clause is that even though the stated term may be just one year, the fact that it is a perpetual lease makes it in reality a lease that is in excess of three years.  In Ohio, all leases over three years must be notarized to be effective.  Therefore, if the parties fail to notarize a lease with an automatic renewal clause and the rent is monthly rather than yearly, the lease will be construed as a month-to-month lease.

As you can see, if the parties do not pay sufficient attention to these lease renewal issues, they risk ending up with a result different than what was intended.  Both landlords and tenants should give careful thought to what they are trying to accomplish and be sure to consult with their attorneys concerning the technical details of the lease renewal so they do not fall victim to one of these traps.

Contact David J. Lindner

Attorney John P. Slagter presents the following overview of recent changes to Ohio's property valuation rules:

The Ohio Legislature recently adopted House Bill 487 (“HB 487), which changed the property valuation rules for county auditors.  HB 487 became effective on September 10, 2012.  The new law does two things: 

(1)  clarifies the property interests to be valued, and

(2)  provides flexibility to the county auditor in determining the value of property that is the subject of a recent arm’s length sale to consider factors other than just the sale price. 

            Ohio Revised Code (“R.C.”) §5713.03 provides that the county auditor is charged with the responsibility of determining the taxable value of each separate tract, lot or parcel of real property, building or structure.  Every three years, each county in the State of Ohio goes through a valuation analysis of property located within the county as required by R.C. §5713.01.  The valuations are characterized as either a reappraisal year or an update year.  A reappraisal year requires a physical review of all properties within the county.  Those physical reviews occur every six years and are often referred to as a “sexennial reappraisal”.  In the interim period, between the six year reappraisal, the auditor will conduct an update, which is often referred to as a “triennial update”.  The update is typically done by reviewing the overall percentage changes in certain areas of the county and making an overall percentage adjustment for such areas as opposed to an individual adjustment for each parcel. 

            The new law gives discretion to the auditor to determine the taxable value of property based on factors other than a recent sale of the property at issue.  This change in discretion occurred by changing the statutory language from “shall” to “may”.  Specifically, HB 487 changes R.C. §5713.03 to read, in pertinent part that,   “in determining the true value of any tract, lot or parcel of real estate under this section, if such tract, lot or parcel has been the subject of an arms’ length sale between a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor shall may consider the sale price of such tract, lot or parcel to be the true value for tax purposes.”  This simple one word change in statute will make a considerable change in the discretion of the county auditor.  The impact of this change is tied to an Ohio Supreme Court case known as Berea City School Dist. Ed. of Bdn. v. Cuyahoga Cty. Bd. of Revision (2005) 106 Ohio St. 3d 269.  In the Berea case, the Supreme Court held that, when a property has been the subject to a recent arms’ length sale between a willing buyer and seller, the sale price shall be the true value for tax purposes.  The Court responded that, since §5713.03 contained the word “shall”, it was mandatory for the County auditor to use the sale price when determining value.  Therefore, the recent change from the word “shall” to the word “may”, eliminated this mandatory obligation on county auditors and provided additional flexibility.

What does this mean for you?

            Although R.C. §5713.03 deals with the county auditor’s authority for setting value, it is likely that the Board of Revision and Ohio Court’s will use a similar methodology when determining value. Previous case law restricted the use of other evidence, including that of appraisers, in determining valuation when there was a recent sale.  The change to R.C. §5713.03 , allows the Board of Revisions and the Ohio Courts the flexibility to consider factors other than the sales price will be most applicable in the case of unique sale terms, such as a lease sale back.  In a lease sale back transaction, the owner of property transfers property to a new owner and then leases the property back.  Many times this was done for accounting and other business purposes, but oftentimes issues were raised about whether or not such transactions reflected the true value of the property or the fair market value of the property.  It is often claimed that the lease may have inflated or deflated the conveyance value. 

            In Cuyahoga County, Lake County, Lorain County and Stark County, the reappraisal year is 2012, which will be reflected in the tax bill you receive in 2013.  Your rights to challenge such value must then be filed by March 31, 2013.  Likewise, if your property was recently subject to an arm’s length sale, the auditor is no longer required to solely use the sale price and has discretion to use other information such as appraisal information.  As such, you may need to consider obtaining an appraiser or securing other evidence to justify and support the value of the property beyond what the sale price reflects. 

For more information, contact Attorney Slagter.

Attorney Matthew Duncan presents the following article on collecting judgments against defaulting tenants: 

When rental property owners file a lawsuit to evict a tenant (called a forcible entry and detainer action), the complaint typically contains a second cause of action for unpaid rent.  Depending upon the amount of rent that is left unpaid by the tenant, it may or may not make economic sense for the property owner to pursue collection of the rent once a tenant has been properly evicted.  In Ohio, separate hearings are held to determine the issues of whether the property owner is entitled to retake possession of the property from the tenant and the amount of rent and other damages that the tenant owes to the owner. 

The initial hearing on the issue of whether or not the property owner is entitled to evict the tenant is generally a short proceeding that takes place soon after a forcible entry and detainer action is filed.  However, a tenant has twenty-eight (28) days from the date that he or she is served with the complaint to file an answer in response to the second cause of action for unpaid rent.  (Ohio Rule of Civil Procedure 12)  If the tenant fails to file an answer within that time, it is advisable for the property owner to file a motion for default judgment with the court, asking that a judgment be entered against the tenant for the balance of rent and damages that are then owed under the lease agreement.  Depending upon the local rules of the court that hears the case, some courts require that you submit an affidavit supporting the amount of rent and damages owed by the tenant, while others do not.  Some courts will also require the appearance and testimony of the property owner at a hearing on the second cause of action for unpaid rent even when a tenant has not filed an answer in the case. 

In the event that the tenant does file an answer to the complaint, a hearing will be held by the court at which the property owner must present testimony and evidence to prove the amount of liability that is owed by the tenant.  The tenant also has the opportunity to present testimony and evidence concerning what amounts are owed under the lease, if any.  The court will then make a ruling on the amount owed by the tenant in the form of a judgment. 

Obtaining a judgment gives you a court’s ruling that you are entitled to collect a certain amount from the tenant, but is in no way the last step in attempting to collect payment from the tenant.  In order to begin trying to collect the judgment, a certificate of judgment lien should be recorded in the county in which the former tenant now resides.  Judgment liens attach to any real property owned by the judgment debtor in the county in which they are recorded.  Judgment liens only attach to property owned by the debtor at the time that the lien is filed.  In Ohio, judgments and judgment liens are good for five (5) years and then must be renewed as provided in Ohio Revised Code Section 2329.07. 

In the event that you do not have information concerning the former tenant’s assets, such as place of employment, bank accounts or vehicle information, it is advisable to conduct a debtor’s exam of the tenant.  A debtor’s exam must be scheduled through the court, which will serve the tenant with a notice to appear at the courthouse to answer questions about their assets.  As part of the debtor’s exam notice, you may also include a list of requested documents for the debtor to bring with them, such as tax returns, bank account statements, vehicle titles and wage payment records.  It is advisable to have an attorney conduct the debtor’s exam for you. 

If you know your former tenant’s place of employment through a debtor’s exam or from other sources, a wage garnishment is one of the more effective ways to collect a judgment.  Your local clerk of courts will have a form to use for wage garnishments.  After a wage garnishment notice is issued, the tenant’s employer must file an answer stating whether the person is employed there and whether there are any garnishable wages available to you.  Up to 25% of a person’s wages can be garnished by creditors.  In the event that another creditor is already garnishing the tenant’s wages, you will have to wait until your garnishment becomes effective.  Additionally, debts such as child support payments take precedence for garnishment by law.

A judgment debtor’s bank accounts may also be attached to pay a judgment in a procedure similar to a wage garnishment.  Again, your local clerk of courts has forms available to use for bank account attachments.  In order to be able to attach a judgment debtor’s bank account, you will need to know at what bank their accounts are located, and will need to serve said bank with the attachment request.  The bank must then file an answer with the court stating how much money was in the account at the time that the attachment was filed.  If there is money in the account that is not otherwise exempt from attachment by law, the bank should issue a check to the clerk of courts for the amount in the account, provided that it is less than or equal to the amount owed under your judgment.

A generally less effective means of collecting a judgment is through attachment of personal property.  This procedure involves having the local sheriff attach and appraise personal property owned by your judgment debtor and to auction the property at a sheriff’s sale.  There are numerous exemptions to this procedure found in Ohio Revised Code § 2329.66.  Motor vehicles are the most common type of personal property sold through an attachment.  Unless the motor vehicle is valuable enough to cover a significant portion of your judgment, it is generally not worthwhile to pursue this collection route given the considerable time and expense involved in this procedure.

Once you have gone through the trouble of obtaining a monetary judgment against someone, it is generally advisable to investigate what assets they might have to pay off the judgment.  The options described above are the most common, though not necessarily the only legal means of collecting a judgment.  It is advisable that you seek legal counsel to determine what collection options might be the most feasible for your particular circumstances.

Contact Matthew Duncan for more information.

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.