Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

As I wind up my teaching of introductory Business Law to Capital University undergraduates this summer, it seemed a good time to review some key points to keep in mind about contracts when we're all out there in the business world.

     1.  Contracts don't have to be in writing to be valid and enforceable.  As I've explained to my students, a contract can even be implied from the actions of the parties at times.  And except for (A) the sale/purchase of real estate or (B) the sale of "goods"  of more than $500 (yes I know that would apply to almost any "good" of any consequence), an oral contract or "handshake" deal works just fine and IS enforceable. 

     2.  It's better if you DO put a contract in writing. Aside from the obvious benefit of having an objective reference upon which to rely later as to what in fact WAS agreed, its very existence can prevent testimony about what was supposedly said orally on the side.  The parol evidence rule prevents testimony of any prior or contemporaneous oral conversations.  In the case of the sake of goods subject to Article 2 of the Uniform Commercial Code (UCC), this rule is relaxed somewhat to allow information about the prior course of dealing between the parties, but even here, a written contract can certainly narrow the issues if there is a dispute later.    

     3.  A contract does not have to be a single document.  A series of correspondence, conversations, exchange of purchase order forms, or even voicemail or email can be enough to cement a deal, whether you know it or not.  So if you want to be sure you don't have a contract until you're ready to have one, say so. 

     4.  Precise language is best.  And by precise language, I do NOT necessarily mean use of "legal" terms, especially if you are not a lawyer and may not fully understand what those terms mean.  What  I am talking about here is making sure everything is spelled out EXACTLY as you envision it happening.  If there is a key part of the contract to you, make sure appropriate and adequate definitions are included to be sure you and the other party are on the same page.  DO NOT JUST ASSUME YOU BOTH MEAN THE SAME THING. Spelling out the consequences of a breach of the contract is often appropriate - this might take the form of liqudated damages or an explicit right to specific performance.  Are there any important excuses for nonperformance?

     5.  If you do not want to be bound until you get financing, your lawyer looks over and/or prepares a written agreement, or some similar contingency, then say so.  One way to do this is to write "Term Sheet" at the top of the page, jot down the essential business terms - including quantity, price, what's being sold (and any special level of quality etc.) - and put something along the lines of "This is not a binding contract until [whatever your contingency is, i.e. both parties have signed a written agreement]" at the bottom. of the page.

• For other information about contracts, visit my Contract Essentials post.
• You can also visit my post about the Jay Leno -Conan O'Brien - NBC dispute and how it illustrates contract law alive and at work in the "real world".

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So your neighbor put up a fence?  Does it really matter if it's actually on the true property line and should you insist on a survey (even though it'll probably make you seem like a jerk)?  The Ohio Court of Appeals says YES, especially if it's commercial property and the fence infringes more than a few inches.   See Huber v. Cardiff, 186 Ohio App.3d 384, 2009-Ohio-3433 (2d App. Dist. Miami Cty.)   A while back I did a post on ADVERSE POSSESSION which has surprisingly (at least to me) become one of my most popular posts (right behind the foreclosure and GM posts).  Well now there's more....  Fences really DO matter.

Recently, the Ohio Court of Appeals dealt with a property owner operating an automobile repair business wanting to expand his nonconforming use of property zoned "residential".   He wanted to construct a new building on the property.  In conjunction with the zoning approval process, a site survey was required.  That survey revealed that a small strip of land about 20 feet wide inside the property owner's side of the fence in fact was titled in the neighbor's name.  As a result, the property owner was forced to file a quiet title action and assert adverse possession to effectuate his expansion plans.    

The fence had been erected more than 30 years ago - well in excess of the 21 years required under Ohio law to have a valid adverse posession claim.  No one knew who had originally erected the fence.  Ownership of the property on which the property owner's auto repair business stood had changed hands several times before being sold to the current owner in 1998.  All of the parties involved on both sides of the fence and their predecessors in interest believed that the fence marked the actual property line.

The neighbor contended that the property owner and his predecessors had not used the property to the degree sufficient to constitute an actual and continuous use of the property in question necessary to establish a claim of adverse possession.  The neighbor pointed out that the the property on the property owner's side of the fence and been vacant land for several years and further argued that occassional entry on to the property owner's side to clear debris interrupted the property owner's possession. 

The Court of Appeals found in favor of the property owner and upheld his claim of adverse possession.  It stated. "the ultimate test for adverse possession is the exercise of dominion over land consistent with actions a true owner would take."  In its view, the fact that it was unclear who erected the fence was irrelevant.  The Court also noted that it did not matter that the land was vacant for a period of time.  Rather, because the property owner parked cars on the land in question and the parties on either side of the fence acted as if it was the true property line, the Court held that these actions were sufficeint to allow the [roperty owner to gain title by adverse possession. 

So, be aware - it really does matter where that fence goes between you and your neighbor. 

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If a borrower or guarantor gives a security interest in a promissory note to a lender, the lender's main concern is probably whether the obligor on that note will pay up.  Understanding the underlying transaction giving rise to the note is not always a  high priority.  As a consequence, lenders can be misled about the enforceability of their security interest in a promissory note executed to evidence settlement of a tort claim if they are not knowledgeable about applicable law.

A few months ago, a savvy guarantor challenged the enforceability of my lender client's security interest in a promissory note by alleging that the note pledged as collateral evidenced a structured settlement of a tort claim.  The guarantor argued that the note evidenced the settlement of a discrimination lawsuit and pointed to some language in the applicable statute which at first certainly seemed to support the guarantor's position.  On closer examination, however, it became clear that while clever, the exclusion relied upon by the borrower was in fact much narrower than suggested by the guarantor. 

Direct Pay Letter?  Now to the casual dabbler in secured transactions law, it might seem that the best way to realize upon a promissory note evidencing a tort lawsuit settlement which has been pledged as collateral for a now delinquent obligation would be to send one of those “direct pay” letters.  Ohio Rev. Code §1309.406(A) – (I am sooooo glad Ohio finally got with the program and doesn’t have weird numbering any more for the UCC, at least for UCC Article 9) -- provides:

an account debtor on an account, chattel paper, or payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor

And this is what my lender client proceeded to do.  Seems pretty straightforward, right?   However, the obligor on the note pledged as collateral balked at honoring the direct pay letter on the grounds that the guarantor had convinced them that a garnishment proceeding was necessary due to a statutory exception for "structured settlement payments". 

Special Structured Settlement Provisions.  The guarantor had argued that Ohio Rev. Code §1309.406(K) carved out a giant exception to the application of UCC Article 9 which required additional action before my lender client could realize upon its collateral.  That statute provides “[n]othing in this section shall supersede the provisions of sections 2323.58 to 2323.587 of the Revised Code.”

So now we go to the “killer” rule. Ohio Rev. Code §2323.581 adds additional requirements that must be met for a transfer -- which pursuant of Ohio Rev. Code 2323.58 includes an assignment, pledge, or grant of a valid security interest -- in “structured settlement payment rights” to be effective. It provides that no “direct or indirect transfer of structured settlement rights” is effective and no obligor on such an obligation is required to make payments to the “transferee” unless

• the “transferee” has provided the payee/borrower “and other interested parties” with certain detailed required disclosures detailed in Ohio Rev. Code 2323.582 BEFORE the payee “becomes obligated under a transfer agreement” AND
• the transfer has been approved in advance by the Court.

A "structured settlement" is defined by Ohio Rev. Code 2323.58(L) as "periodic payments of damages for injury to a person that is established by a settlement or a court judgment in resolution of a tort claim."  Thus, the unwary lender might come to believe its security interest has serious enforceability issues.  That would be wrong.

Remember the Definition of "Payee".  Iin this case, as in many others, you gotta read the small print.  The definition of "payee" -- upon which the exception of Ohio Rev. Code 1309.406(K) relies -- narrows the scope considerably of those structured settlement payments potentially excluded from the reach of a direct pay letter.  Pursuant to Ohio Rev. Code 2323.58(G), "payee" is an "individual" receiving payments "excludable from the individual's gross income under federal income taxation laws applicable to that individual".  According to the IRS, these payments arise from tort claims involving physical injuries or physical sickness and workers compensation claims.  26 USC 104.

Thus, while superficially perhaps a matter of concern for a lender, in reality, the language of Ohio Rev. Code 1309.406(K) only applies to payments related to personal injury claims.  So, happily for my lender client, we were eventually able to convince the note obligor to honor the direct pay letter.  The lessons to be learned?  First, make sure you follow a clever borrower's argument ALL the way to the end.  And, second, remember that promissory notes evidecing personalnjury settlements may  be vulnerable to enforceability challengs. 

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Now that pretty much anyone can set up a web-based business, even the smallest business can, and probably will, have customers in states other than that company's home base.  In addition to having to worry about when there's enough interaction with customers in a state to mean your business really needs to register with the Secretary of State as a "foreign" entity, there's always the possibility of being sued in some distant state by an unhappy customer/client.

Maybe you thought they'd have to come to Ohio to file a lawsuit against you.  Wrong.  Courts routinely can and do "exercise jurisdiction" over nonresident defendants they deem to have had sufficient connection with the states and its residents that it is not unfair to require them to defend an action in that State.  Thus, If a court decides your company has "minimum contacts" with the particular state your unhappy customer chose to file a lawsuit in, that state is where you have to go to defend the legal action, even if it's a long way from home for you.  See World-Wide Volkswagen v. Woodson, 444 U.S. 286 (1980); Int'l Shoe Co. v. Washington, 326 U.S. 310 (1945)

It all starts with the state's "long arm" (yes, that IS what it's really called) jurisdiction statute.  Ohio's long arm statute is found in Ohio Rev. Code 2307.382.  Among other circumstances justifying the exercise of jurisdiction  over a defendant in a state far from its home base is "transacting any business in the state."  Ohio courts, as do courts in many other states, interpret "transacting business" rather broadly.  The Ohio Supreme Court has explained that it includes "to prosecute negotiations, to carry on business, to have dealings... carrying on of prosecution of business negotiations which have been either wholly or partly brought to a conclusion."  Kentucky Oaks Mail Co. v. Mitchell's Formal Wear, Inc., 52 Ohio St.3d 73 (1990).

Essentially, the test is whether the defendant has "purposefully availed” itself of a forum state when he has “deliberately engaged in significant activities within [the] state or created continuing obligations between himself and residents of the forum state,”   Richer v. Fraza/Forklifts of Detroit, 828 N.E.2D 205, 168 Ohio App.3d. 634, 2005-Ohio-1945 (10th App. Dist – Franklin Cty), or has otherwise “reach[ed] out beyond one state and create[d] continuing relationships and obligations with citizens of another state.” Calphalon Corp. v. Rowlette, 228 F.3d 718, 722 (6^th Cir. 2000)..

Courts are still wrestling with the sorts of websites and internet activity which can subject a business to jurisdiction and the possibility of a lawsuit in any given forum outside the state of the company’s formation. Courts remain divided about what the appropriate analytical framework should be and how the internet/web fits within the traditional “minimum contacts” paradigm of analysis. Although the United States Supreme Court has recognized the Internet as “a unique and wholly new medium of worldwide human communication,” Reno v. ACLU, 521 U.S. 844, 850 (1997), it has yet to provide any specific guidance on how the concept of jurisdiction should be applied to web-based businesses. In addition, other courts have shown a reluctance to endorse any new theories of jurisdiction applicable only to the internet. See, e.g., GTE Media Servs., Inc. v. BellSouth Corp., 199 F.3d 1343, 1350 (D.C. Cir. 2000) (“[w] e do not believe that the advent of advanced technology, say, as with the Internet, should vitiate long-held and inviolate principles of federal court jurisdiction.”).

Generally two main standards are used by courts to determine whether jurisdiction over a particular defendant is appropriate in cases involving the web.  Most courts seem to increasingly prefer the “sliding scale” test enunciated in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp.1119 (E.D. Pa. 1997). The major alternative is the “effects” test set forth in Calder v. Jones, 465 U.S. 783 (1984). Courts sometimes use both to reach a decision. See Bailey v. Turbine Design, Inc., 86 F. Supp.2d 790 (W.D. Tenn. 2000). The Sixth Circuit has adopted the sliding scale test. Neogen Corp. v. Neo Gen Screening, Inc. 282 F.3 883 (6^th Cir. 2002).  In both cases, the less interactive the website, the less likely a court is to exercise jurisdiciton.

Sliding Scale. The sliding scale test for determining jurisdiction is largely based on the nature of the website involved.  As set forth in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp.1119 (E.D. Pa. 1997), jurisdiction depends on extent of internet use and depends upon “level of interactivity and commercial nature of the exchange of information that occurs on the Web site.”   The Court explained:

At one end of the spectrum are situations where a defendant clearly does business over the internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the internet, then personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on an internet website which is accessible to users in foreign jurisdictions. A passive website that does little more than make information available to those who are interested in it is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive websites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the website.

Effects Test     The other major test for determining whether the court can exercise personal jurisdiction over a nonresident defendant is known as the “effects” test”. See Calder v. Jones, 465 U.S. 783 (1984). Under this analysis the question is whether the nonresident defendant has purposefully caused “negative effects” to happen in the forum state. It is especially popular in defamation, trademark infringement, and other intentional tort cases.

Recently,in Kauffman Racing Equipment, LLC v. Roberts, 2010-Ohio-2251,  the Ohio Supreme Court addressed the jurisdiction issue in the context of alleged defamatory statements made in various internet postings.  The Court held that it did indeed have personal jurisdiction over the alleged internet defamer, saying  "We decline to allow a nonresident defendant to take advantage of the conveniences that modern technology affords and simultaneously be shielded from the consequences of his intentionally tortious conduct."  The opinion contains an excellent discussion of the jurisdiction concept. 

The Court's Office of Public Information's summary is useful for those not wanting to read the relatively lengthy opinion.  At least one commentator - whose concise analysis of the case is very helpful - believes that the case expands the jurisdiction of Ohio courts when it comes to stuff posted on the internet.  See this analysis as well 

I will be speaking on this and other "Advanced Issues in Business Entity Selection" topics on August 16, 2010 at NBI's seminar entitled LLC or Inc.?  Entity Selection for the Small to Medium Sized Business.  For more information or to register and attend, click this link. 

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In this uncertain economic time, many people think they may have found an answer in actually doing what lots of us fantasize about - they chuck that job before it chucks them, deciding they'd just rather be their own boss.  But buying a business, even a relatively small one, or becoming a franchisee is not as simple as driving down to the hardware store to buy some nails, paint, and lumber.  And it takes a LOT more time, especially to get it right from the get-go.

Earler this week I attended the monthly meeting of the Ohio Business Brokers Association (OBBA) which is a trade association for brokers involved in helping folks buy or sell business; for the most part, members focus on the purchase and sale of going concern owner operated businesses.  If you ARE ready to buy a business, these are the professionals who know what's happening inthe market and can assist you in finding the appropriate business for you to acquire.

BUT - and yes, that's a big one - before you pick up the phone and dial one of these individuals up, you need to evaluate where you really are on the continuum between daydreaming about what having your own business and understanding the hard realities of the often long days and nights involved in being your own boss.  Like many other things, buying a business requires some preparation before you even start looking for the right one. 

At yesterday's OBBA meeting, Emmet Apolinaro, OBBA's President and a business broker with Sunbelt of Columbus, shared someinitial questions he asks prospecitve buyers which he has graciously allowed me to share here.  Among his themes:

• Be realistic about your past "real life" experience running a business, or perhaps more accurately, the relative absence of that experience and have a plan about how to bridge those knowledge gaps
• HOW are you planning to finance the purchase, understanding that one way or another you probably ARE going to have to come up with some cold hard cash of your own to make the deal come together?  Banks are cautious and investors are even scarcer than usual which is to say you're more likely to get a bundle from the tooth fairy.
• Educate yourself on the process of acquring an ongoing business, understand that it differs from buying a house, and accept that much needs to be done before you close the deal. 
• IS YOUR SPOUSE ON BOARD, TOTALLY AND IRREVOCABLY?  If the answer to this isn't an honest absolutely yes, you have a lot of work to do first.

I think these are good pointers for anyone considering business ownership for the first time.  I would add a couple of my own:

• Realize that it will likely be a roller coaster ride both before you get to the closing and after you've successfully become a proud new entreprenuer,  Issues, disputes, and just differences in opinion often arise between the parties as they work towards having the business change hands.  Indeed, as an attorney who handles these transactions on a regular basis, I always start to worry if we get too close to the closing and the deal HASN'T almost cratered at least once.  Afterwards, the "highs" will be higher and the "lows" will be lower than when you worked for someone else.
• Having professionals such as attorneys or accountants on your team does cost money (and generslly not just a few hundred dollars) at a time when that's at a premium.  But, as the saying goes, you can pay me now or you can pay me more later when you may discover that what you own is not what you thought you'd bargained for.  Budget at least as much for professionals as for your IT needs.

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Well, I'm finally back!!  And proud to announce the opening of my own shop - Rasmussen Law Office.  (I know lots of people say "Offices", but that seems stupid to me when really there's just the one office of me, myself and I.)  My new office is located in Dublin, Ohio, a northwestern suburb of Columbus, and is very close to where I worked when I previously practiced law in Dublin..  Good place for a business lawyer, I think.  So it feels very comfortable.  My new address is:

5956 Wilcox Place, Ste B, Dublin, Ohio 43016

tgr@rasmuslaw.com

I will continue to offer pragmatic legal counsel and advice to owner operated companies and their principals regarding issues arising in the course of their business, including

• Business Formation
• Agreements/Disputes among owners
• Contracts
• Leases of equipment or business premises
• Acquisition/sale of business 

In addition, I will represent banks and other creditors in negotiating, structuring and collecting commercial loans and leases.  

So a new chapter begins...

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I just wanted to let folks know that I haven't had a chance to blog lately -- but intend to be back on the horse soon --  because I have been dealing with a particularly nasty bout of pneumonia.   Been hanging out in the hospital for about 3 weeks now, but I should be getting my release papers Monday or Tuesday.

Then I'm doing a rehab stint at a place TBD to wean myself off of the portable oxygen tank I'll be hooked up when I leave the hospital.   Since luging around an  oxygen tank seems rather incompatible with golf and sailing. my two summer time loves, it is obviously imperative to accomplish this mission ASAP,  I've been told to look at a weekor two.

Hopefully, I can get started blogging again while this exciting rehab experience transpires.  In the meantime, the best way to reach me is through my personal e-mail:

Raztigger@gmail.com

More later......

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With all  the foreclosures going on these days, sooner or later one of these cases is bound to affect a tenant leasing all or a portion of the premises being foreclosed.  So what happens to a tenant in these situations?

The answers depends upon factors such as

• what the lease says, i.e. does it say that it is subordinate to any mortgage
• whether it was the lease or mortgage whcih was executed first
• whether it was the lease or the mortgage which was recorded first
• whether the tenant is joined as a party defandant to the foreclosure

So let's start with what the lease says.  Nearly all commercial leases in Ohio are likely to say that the lease is subordinate to any existing or subsequent mortgage financing by the owner of the real property.  In the unlikely event that a commercial lease does not have this provision, the tenant's lease will generally ride thorough the foreclosure if it was executed before the mortgage or at least recorded before the mortgage.  If the mortgage was executed before the lease, then it will depend on whether the tenant is named as a party defendant to the foreclosure and what rights of the tenant are at issue.

The BIG issue is what happens if a lease is executed after the mortgage, but the tenant is not made a party defendant to the foreclosure.  In Ohio, the definitive case is New York Life Ins. Co. v. Simplex Products Corp., 135 Ohio St. 501, 21 N.E. 2d. 585 (Stark Cty. C.P., 1939).  That case said that since there was no privity between the tenant and the purchaser at Sheriff's sale and the tenant's interest came from the property owner's interest which was auctioned, the lease was terminated - regardless whether the tenant was made a party to the foreclosure. 

However, as is often the case, the facts of the Simplex case left the door open for creative lawyering because it involved a foreclosure sale purchaser interested in enforcing a lease of a tenant not named in the foreclosure.    In Davis v. Boyajuan, 229 N.E.2d 116 (C.P. 1967), the Stark County Common Pleas Court took the out and held that if the purchaser wanted to evict the tenant.  the lease remained in force with respect to a tenant not made a party to the foreclosure.  Consequently, if the tenant was not named as a party to the foreclosure but was in compliance with its obligations under the lease, the purchaser at a foreclosure sale could not kick the tenant out.  But see Prudential  Ins. Co. of America v. Bull Market, Inc., 420 N.E.2d 140 (C.P. Montgomery Cty. 1979)  ("[T]his court concludes that the Supreme Court  [of Ohio] did in fact announce in Simplex. that this state follows the minority rule to this effect that foreclosure terminates a lease of the mortgagor  for lack of priority between the lesee and the mortgagor.")

So these are mere Common Pleas Couty decisions - isn't there anything more authoritative?  More recently, the Ohio Court of Appeals for the Eighth Appellate District in Cuyahoga County has weighed in.  In Victoria Mortgage Corp. v, Williams, 1996 WL 200160,  involving a foreclosure sale purchaser attempting to evict a tenant with an oral lease who was not joined as a party to the foreclosure, the Court succinctly explained the majority rule not followed by Ohio:

The rule in a majority of jurisdictions regarding the survival of a lessor's rights when the lessee is not joined in a foreclosure action is that the lessee does not lose his or her right to possession  or quiet enjoyment.   A judicial sale is treated as a reversion which is subject to the lease, and the purchaser  acquires the rights and duties of the mortgagor thereby becoming the new lesser.

However, because Ohio follows the minority rule, the Court ultimately found that the lease was junior to the mortgage and was extinguished at sheriff's sale.

But what if the lease contains attornment provisions, as is common?  These provisions essentially say that the tenant will recognize any purchaser as stepping into the shoes of the seller/lessor, at least so far as it comes to continuing to pay rent.  In Brandon/Wiant Company v. Teamor, 125 Ohio App.3d 442, 708 N.E.2d 1024 (1998), the Eighth Appellate District Court of Appeals  in Cuyahoga County held that the lease as a contract was clear and unambiguous in stating that the tenant had agreed to accept subsequent purcahsers of the property as lessor.  While the case involved a lessor trying to collect rent from the tenant, in dicta, the Court noted:

[The tenant]  certainly has a right to enforce the obligations owed him bythe lessor against [the purchaser at foreclosure].  The lease is in full effect against both parties to the agreement.

The Fifth Appellate District Court of Appeals out of Muskingham County has consideted the foreclosure purchaser wishing to terminate a lease situation.  In First Federal Savings and Loan Association of Zanesville v. Rig Oil Company, Inc., 1983 WL 7013, the Court acknowledged Simplex, but found the reasoning in Davis persausive.  The Court said:

there is a significant difference between a nonjoined party being given the benefit that miight accrue from nonjoinder and denying him rights not litigated as a result of non-'joinder.  

Clear as mud, right?  So let''s try some general guidelines...

>>>>> IF YOU ARE A COMMERCIAL TENANT WANTING TO BE SURE YOU ARE PROTECTED AGAINST THE FORECLOSURE OF THE PROPERTY OWNED BY THE LANDLORD...

Consider obtaining a SNDA Agreement, short for Subordination, Non-Disturbance, and Attornment Agreement.  These agreements provide more certainty for commercial tenants when the landlord is in default, but the tenant is not and wishes to remain in place.  For more on how this works, vist the Ohio Real Estate Advisor Blog's post "Don't Forget the 'ND' and the 'A' in 'SNDA's'". 

>>>>> IF YOU ARE A LENDER AND/OR SUCCESSFUL PURCHASER AT FORECLOSURE SALE WHO WANTS TO PROTECT THE STREAM OF INCOME OF RENTS FROM TENANTS FOLLOWI NG FORECLOSURE SALE...

Check the lease for attornment language.  If none, and perhaps even if there is, best to have tenant named as party defendant.

IF YOU ARE A LENDER AND/OR SUCCESSFUL PURCHASER AT FORECLOSURE SALE WHO WANTS TO BE ABLE TO HAVE EXCLUSIVE POSSESSION OF THE PROPERTY  FOLLOWING FORECLOSURE SALE.....

If you are in Stark County, definitely include tenants as defendants if there is going to be a desire to evict them following foreclosure.  If you are in Cuyahoga County, don't worry too much  about it.  Elsewhere in Ohio, it just depends on your judge, although to be safe, tenants should probably be included as defendants.  Of course, if the lease contains subordination language, you may be O.K regardless  on contractual grounds.

And of course, sometimes, there may just be too many tenants to make notification and addition as party defendants practical.  There's also the additional wrinkle that in some counties - Lucas Countywhich includes Toledo comes to mind - local rules actually require teants be notified. 

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Property law is full of echoes and language of a bygone era.  A recent case involving the renovated historic Lincoln Theater in Columbus illuetrates one such concept  - what's a covenant "running with the land" and how do you tell that's what it is. 

In City of Columbus v. Capital City Urban Redevelopment Corp., 2008-Ohio- 6835 (10th App. Dist.), the Lincoln Theater is now the subject of a legal dispute revolving around Saturday kids' movies for a buck and placement of a plaque.  In December, the Couri of Appeals affirmed the trial ourt's determination that these retritive covenants "run with the land" and are binding on the Lincoln Theater's current owner - as well as all subsequent purchasers. The case is currently being appealed to the Ohio Supreme Court as Case No. 10-184.

Capital City Community Urban Redevelopment Corporation (Capital City") bought the Linoln Theater in 1991 to save it from demolition.  In 2002, the theater was sold to another nonprofit corporation called Columbus Urban Growth Corporation ("CUG").  The General Warranty Deed transferring ownership contained the following language:

Subject to easements and restrictions of reord, real estate taxes due at the June 2003 collection and thereafter, and provisions of prargraph 9 of the Real Estate Purhase Agreement between the parties whih is incorporated by this reference.

 The referenced Real Estate Purchase Agreement paragraph had two restrictions concerning the use of the theater:

(a) The Buyer agrees to provide Saturday movies for children once the theater is operational, and for so long as feasible.  The cost is to be $1.00 or less for a double feature.

(b) A bronze plaque is to be permanently installed and maintained on the front of the property.  The size, text, and location of plaque on the building may be selected by Charles L. Adrian [affilated with Capital City] and will be architectually onsistent with the Long Street facade of the property. 

After CUG sold the theater to the City of Columbus in 2004, problems arose concerning whether the cheap Saturday kids movies and maintenance of a bronze plaque applied to the City of Columbus as the new owner and to any subsequent purchaser.   In a way, the whole case seems silly to me.  What's the big deal about having a plaque on the front of the building about its histori nature?  And Saturday kiddie movies for a buck are required only so long as it is "feasable"  - which would certainly be open for interpretation. 

The case does, however, do a good job both of stating the rule  and showing the difficulty in applying the rule to particular facts.  As the Court of Appeals explains:

The determination of whether a ovenant euns with the land depends on whether the covenant is real or personal.  A real covenant runs with the land; a personal covenant usually does not run with the land,  A real ovenant is related to the realty, having for its object something annexed to, inherent in, or connected with the land.  A covenant is determined to run with the land when the liability to perform it or the right to take advantage of it passes to the assignee of the land   The common law test of a ovenant running with the land requires that its performance or non-performance must affect the nature, quality, value, or mode of enjoyment of the estate demised yo which it must relate.  Conversely, a personal covenant does not run with the land, and is for the personal use and enjoyment of the land solely by the original parties to the ovenant.  (itations omitted).

The Court of Appeals further referenced three factors to help in making the determination whether a covenant is one running with the land and thus binding on all subsequent owners of the property:

• intent of the parties
• whether the covenant "touches and concerns the land" which means "the property was made more useful or valuable by the covenant"
• whether privity of contract exists

Prvity and intent were not at issue according to the majority.  The rationale of the Court as to why Saturday kid movies "touch and concern" the land and is a covenanr "running with the land" is interesting:

the showing of Saturday movies for children directly relates to the ongoing operation of the theater.  The Saturday children's movies are deeply intertwined with how the theater may be used on Saturdays and affects many areas of the business, including maintenance, scheduling, income, purchasing, advertising, and marketing.  The property os also made more useful by tremendously increasing the theater's usage by children, as well as their parents, the theater will also increase the goodwill between it abd the nearby neighborhoods, citizens, and rhe surrounding area.   

For my money, while the Court got the test right, the case sorta feels like a result in need of a rationale.

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