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

Posted by David Lindner on December 28, 2011

 

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

Posted by David Lindner on August 25, 2011

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

Posted by David Lindner on July 11, 2011

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

Posted by David Lindner on May 12, 2011


 

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

Posted by David Lindner on March 25, 2011

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

Posted by David Lindner on March 18, 2011

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

Posted by David Lindner on March 01, 2011

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.

Deadline to Challenge Ohio Real Estate Taxes is March 31

Posted by David Lindner on February 18, 2011

Attorney Anthony R. Vacanti provides the following upate on Ohio real estate tax challenges:

Rock bottom real property values are taking center-stage in the today’s headlines, both nationally and in Northeast Ohio. Have you ever thought about your or your company’s real property tax liability in such a context? Have your or your company’s real property taxes gone down with property value? Understanding the process may help in determining if you should challenge the value attributed to personal or company’s real property.

The procedure by which property is valued for tax purposes is set forth in Ohio Revised Code Chapter 5713. Real property is taxed at 35% of its true value, which is referred to as the assessed value for property. The county auditor is charged with adjusting the assessed value of each parcel within a county every three years. There are two different evaluations that occur: “Reappraisal Year” and “Update Year.” The Reappraisal Year occurs every six years, and during the Reappraisal Year each parcel is viewed and evaluated based on market conditions. The Update Year occurs three years after the Appraisal Year, and involves re-valuing property without physical inspection. This is often done using computer-assisted modeling of value changes by neighborhood and type of property within the county. The value of property is based on its condition on January 1st of each year. Each County has a different Reappraisal Year and Appraisal Year.

The county auditor’s valuation of property may be challenged. Pursuant to Section 2, Article XII of the Ohio Constitution, real property is to be taxed “according to value.” Ohio Revised Code Section 5713.03 also requires that each separate tract of property be valued according to its “true value.” Section 5713.03 states, in relevant part, that “[t]he county auditor, from the best sources of information available, shall determine, as nearly as practicable, the true value of each separate tract, lot, or parcel of real property and of buildings, structures, and improvements located thereon.”

This begs the question:  How is “true value” of property determined? True value is equivalent to fair market value, which the Ohio Supreme Court in State ex rel. Park Investment Co. (1964), 175 Ohio St. 410, has defined as follows:

“The best method of determining value, when such information is available, is an actual sale of such property between one who is willing to sell but not compelled to do so and one who is willing to buy but not compelled to do so. In Re Estate of Sears (1961), 172 Ohio St. 443, paragraph 2 of syllabus. This, without question, will usually determine the monetary value of the property. However, such information is not usually available, and thus an appraisal becomes necessary. It is in this appraisal that the various methods of evaluation, such as income yield or reproduction cost, come into action. Yet, no matter what method of evaluation is used, the ultimate result of such an appraisal must be to determine the amount which such property should bring if sold on the open market. “

In sum, when property is recently the subject of an arm’s length transaction between a willing seller and willing buyer, the sale price of the property will constitute the value for taxation purposes. The determination of how “recent” a real property transaction has to be is determined on a case-by-case basis. Generally one year or less is a good rule of thumb, but the purchase price of property in a transaction occurring later may still be relevant. It is important to note that only the value of real property, not the value of personal property, is considered when determining real property value. It should be noted that an arm’s length sale may not be considered evidence of true value if the sale was not arm’s length, for example sales involving bankruptcy or lease-backs. 

When real property was not subject to a recent sale or such sale was not conducted at arm’s length, then an appraisal or other evidence may be necessary to challenge the county’s real property value applied to the subject property, especially when the market has drastically declined, as in today’s current economy. Generally, when a recent arm’s length sale is not available, there are three other property valuation approaches used in determining true value:

1              Cost Approach to Value – determines value by estimating the costs to reproduce the improvements to the property based on current prices of labor and materials;

2              Market Approach to Value – the value of the property is determined by analyzing recent sales of similar properties; and 

3              Income Approach to Value – the value of the property is based on the net cash flow that can be produced by the property, capitalized at the rate of return that would be required based on the risk associated with holding the property. 

Given the drastic decline in the real estate market and corresponding real property values, it may be beneficial to review your own industrial, commercial, retail, business, and/or residential real property tax liabilities to see if they have also declined. If you disagree with the assessed value of your real property, you may file a complaint with your local county board of revision.

A complaint must be filed with the board of revision by March 31, 2011. The complaint form is straightforward, and the county provides a form with instructions. A counter-complaint may be filed, and many times is filed, by the Board of Education where the property is located. This counter-complaint must be filed within 30 days after the Board of Education receives notice of the filing of a complaint. If a tax assessment complaint is filed and unsuccessful, the property owner has the right to file an appeal to either the Court of Common Pleas or the Ohio Board of Tax Appeals.

In considering if you will challenge the valuation of your or your company’s real property, you must keep in mind that March 31 will be an absolute deadline to file a complaint and failure to file by this date will result in a loss of your rights to challenge the 2010 valuation. The standard complaint form is referred to as Form DTE 1, Complaint against the Valuation of Real Property. Although the instructions accompanying the complaint indicate that certain non-attorneys may prepare the complaint and file it on behalf of a company, it is important to note that the Ohio Supreme Court has questioned the constitutionality of that provision, and has determined that in many circumstances having a non-attorney prepare the complaint may constitute the unauthorized practice of law, especially if the matter involves legal issues and would involve the questioning of witnesses, such as appraisers.  See, e.g., Dayton Supply & Tool Company, Inc. v. Montgomery County Board of Revision (2006), 111 Ohio St.3d 926, 927. Consequently, it is advisable to consult an attorney when filing a complaint. 

The material appearing in this article is meant to provide general information only and not as a substitute for legal advice.  Readers should seek the advice of their attorney or contact Tony at avacanti@bdblaw.com or 800.686.2825.

This article may not be reprinted without the express permission of Buckingham, Doolittle & Burroughs, LLP © 2011.

An Introduction to New Market Tax Credits

Posted by David Lindner on January 20, 2011

Buckingham attorney Neil Bhagat provides the following introduction to New Market Tax Credits:

            New Market Tax Credits (NMTCs) are an increasingly utilized strategy for encouraging economic development in struggling areas.  At its core, the program allows investors to receive a tax credit in return for making qualified equity investments in groups designated as Community Development Entities (CDEs).  The CDEs must then use these investments in low-income communities that are located throughout the United States.  For organizations that need access to capital, NMTCs are a valuable tool for getting a commercial project from the planning stages to the building stage.  While not meant to be a lead source of financing, NMTCs can provide the edge in making a project market worthy.

            NMTC investments are used to finance a variety of activities, including: loans or equity investments in businesses, loans or equity investments in real estate projects, and capitalization of other CDEs.  NMTCs have been utilized to create community health care centers, charter schools, community facilities, public markets, factories, commercial developments, and more throughout the United States.  Among the thousands of projects successfully financed with NMTCs, some specific examples include a grocery-anchored shopping center in San Diego, a charter school in Newark, the development of a high-tech business incubator in Detroit, and a manufacturing facility in rural Iowa.  The possibilities for developers are limitless, provided the development will occur in what qualifies as a low-income community.

            In December of 2010, Congress extended the NMTC program for two years, making $3.5 billion available in tax credits each year.  Ohio has a smaller NMTC program making $10 million available in tax credits to those who have already been allocated federal NMTCs.  Despite the success of NMTCs, with the political uncertainty surrounding 2012, now is the time to investigate and examine whether utilizing NMTCs is right for your organization.

            It is important to remember that the NMTC process can be both lengthy and competitive.  It is estimated that the dollar amount of credits requested is 12 times greater then the number of credits awarded.  As a result, you will need to ensure compliance with the many regulations surrounding NMTCs.  With appropriate guidance, your NMTC application can be targeted to increase your chances of successfully receiving credits.

            The application process for New Market Tax Credits can be complicated, so please consider the following a general introduction.  A developer must first create a CDE, certified by the Community Development Financial Institutions Fund at the United States Department of Treasury.    Provided the CDE is certified, the CDE can then apply for the right to receive tax credits, which in turn are sold to investors.  This provides equity to the CDE to place in community development projects while the investor receives a tax write-off.  CDEs are evaluated on the following criteria: business strategy, community impact, management capacity, and capitalization strategy.  The investor receives a credit totaling 39 percent of the cost of the investment which is then claimed over a seven-year period.  As you can see, there are a variety of areas in which one can get involved with NMTCs.  Loans for development and reducing tax liability jump to the top of the list.  Should you choose to utilize NMTCs, know that beyond acquiring extra capital for your project, you are helping to create infrastructure and jobs in areas that need them.

Helpful Resources

The following are some resources to learn more about the New Market Tax Credit program.  Remember that consulting with an advisor or attorney specializing in New Market Tax Credits will help to ensure you are getting advice that is relevant to your situation.

The Community Development Financial Institutions Fund is a part of the Department of Treasury and provides a wealth of information regarding frequently asked questions and the application process. 

Ohio also has a New Markets Tax Credit Program designed to help leverage the federal version of the NMTC program.

The New Markets Tax Credit Coalition provides helpful information and highlights some success stories of the program.

If your project needs that final boost of financing to ensure its viability, New Market Tax Credits may be the answer.

Cash Deposit Requirement in Real Estate Purchase Contracts

Posted by David Lindner on December 13, 2010

Buckingham attorney Anthony R. Vacanti offers the following insight on the common requirement that an earnest money deposit in a real estate contract be made in cash:

This is the time of year where people focus their attention on gifts, celebrations, and decorations.  People pay so much attention to the details of these tasks, yet when it comes to the details of important real estate contracts, people simply do not pay the same amount of attention.  Unfortunately, for many of those people, that lack of attention may lead to worse problems down the road.  I suspect many reading this article have experience negotiating and implementing real estate deals.  I also suspect that those deals are memorialized in writing (if not, they should be!)  However, how much attention do you give to the exact language of the contract?

The provisions of a written contract are very important, yet many buyers and sellers do not pay much attention to such provisions.  Instead, they rely on form contracts and do not conform their actions to the obligations called for in such contracts.  Those buyers and sellers, however, are exposing themselves to the risk of a deal imploding, and worse yet, litigation.  The reason?  The provisions of a contract generally constitute the “law” between the buyer and seller in the deal concerning how each party may act.  The rights and obligations of the parties in the transaction only exist through the provisions of the contract, and the transaction may die by those same provisions.

A recent Ohio court decision evidences the importance of paying attention to provisions of a contract, no matter how common or simple that provision may seem.  In S&G Invests., L.L.C. v. United Cos., L.L.C.,[1] the defendant corporation, United Cos., LLC (“Buyer”) contracted with the plaintiff company, S&G Invests., LLC (“Seller”) for the purchase of property. The contract contained a fairly typical earnest money deposit provision that required Buyer to deliver an initial deposit of $50,000 in cash to the escrow agent within three banking days of the contract's effective date. The provisions of the contract indicated that failure to deliver the initial deposit would render the contract null and void. 

As its earnest money deposit, Buyer delivered a certificate of deposit (CD) in the amount of $50,000 to the escrow agent. Seller did not learn of the form of deposit until months later, when it attempted to retrieve the initial deposit from the escrow agent. Upon discovering the earnest money deposit consisted of a CD, not cash, Seller requested that Buyer replace the CD with cash as required by the contract. Buyer did not comply, but instead notified Seller that it elected to terminate the contract.

Seller then filed a complaint for breach of contract.  Unfortunately for Seller, the trial court dismissed the complaint, and the court of appeals agreed with the trial court’s decision.  The courts determined that the CD was in Buyer’s name, automatically renewable, and nontransferable. The CD had a maturity date. Unlike cash, the funds were not redeemable until the arrival of the date. The funds were not liquid or secure like cash.  The court found that Seller’s complaint for breach of contract contained a claim that Buyer breached the contract by failing to deposit cash as the initial deposit, which amounted to an acknowledgment that a CD did not qualify as cash. Therefore, according to the courts, Buyer’s delivery of a CD to the escrow agent did not fulfill the initial deposit requirement of the contract.  Consequently, the contract became null and void and of no further force or effect under the plain terms of the contract.  The courts found that Seller could not sue for breach of contract because there was no contract upon which to litigate since the failure of Buyer to make the earnest money deposit in cash under the terms of the contract rendered the contract null and void. 

The S&G Invests., L.L.C. v. United Cos., L.L.C. case provides an important reminder to both buyers and sellers:  pay attention to contract provisions and to the parties’ respective obligations under such contract.  Here, costly litigation could have been avoided if Buyer complied with the express language of the contract by depositing cash, and if Seller paid attention to the fact that Buyer deposited a CD, not cash.  Moreover, many form contracts require cash earnest money deposits; however, many buyers deposit checks instead of cash.  Failure to strictly comply with contractual provisions, as simple as they may seem, creates the risk of the deal falling apart and/or litigation.  Indeed, in the example above, the Buyer was the one who allegedly failed to perform under the contract, but ultimately got out of the deal despite such alleged failure because of a technicality based on the contract language. 

So a word to the wise: pay attention to the provisions of contracts, negotiate those provisions that concern you (or hire a qualified attorney to assist), and insure you and the other party with whom you are dealing strictly comply with the terms of such contract.  Property transactions live by the written word and die by the written word, so it imperative to have an understanding of the written words in the contract!

 

[1] Decided Aug. 9, 2010, 12th Dist. Ct. App. No. CA2010-03-017, 2010 Ohio 3691