We caught Team Ivy hard at work on a Friday afternoon, all wearing their snazzy new Ivy Pointe Title polos. From left to right: Chris Finney, Laura Linneman, Tida Griffits, Patty Gillespie, and Rick Turner.
Thanks, all!
In April of this year, the Ohio legislature passed an updated Good Funds Law for transactions involving residential real estate to mandate, among other things, wire transfers for amounts in excess of $1,000, with a few exceptions.
Now, that amount has been increased to $10,000.
So, the new rule is that a ll funds coming into a title company to fund a residential real estate transaction must come in in one of the following ways:
- Electronically-transferred funds, including wire transfers;
- Personal checks, cashier’s checks, money orders or Official Checks of $10,000 or less;
- Automated clearing house (ACH) transfers; or
- Checks from a real estate broker’s escrow account.
We will keep you updated with further changes in the law so that we can continue to be “accurate and on-time, everytime.”
I want to extend a warm and sincere “Thank You” to the attorneys, staff, vendors, and clients of Finney Law Firm, LLC who have joined together to make our firm — dedicated to “Making a Difference” for our clients and in our profession and community — a tremendous success in our first four years in operation.
We started our new firm in Eastgate in the fall of 2013 with a great group of attorneys, a loyal and experienced staff, a top-notch lineup of vendors and a solid core of clients. Since then, we have attracted more talented attorneys and staff, and have been met with simply overwhelming response from our clients.
We started with just four attorneys and three staffers. Since then, we have grown to nine full-time attorneys, and are about to add our tenth. We have expanded the law firm at Ivy Pointe in Eastgate three times, and eventually added space in the Rookwood Pottery building in Mt. Adams. Just weeks ago, we tripled our space at Mt. Adams, so that the two offices are now roughly equal in size.
Under the leadership of attorney Rick Turner, we started Ivy Pointe Title, LLC in the fall of 2014 to support our commercial real estate closings and added to that base residential transactions. He started with one full-time staffer, and now oversees an operation of seven full time employees. Due to tremendous success under his leadership, in November, we plan on doubling the size of the title company.
Our journey has taken us three times to the United States Supreme Court (with three unanimous victories) and numerous times to the Ohio Supreme Court. We have handled dozens of multi-million dollar corporate and real estate transactions for our small business clients, and we have saved clients more than five million dollars in real estate taxes. We successfully have handled numerous class actions for clients, including acting as local counsel for the ground-breaking class action against the Internal Revenue Service. All of this is while we have daily served, client-by-client, to “make a difference” in their transaction or litigation matter.
These accomplishments are the result of the combined efforts of many people, and to each and every one of them I owe my deep gratitude. The engine of commerce, the laboratory of legal innovation, and the commitment to client service we have made together is enduring and flourishing, ultimately, because we all work together to provide value for our loyal clients in each assignment.
Thank you, most sincerely, for making this such a fun, rewarding adventure!
Christopher P. Finney, President
How do I obtain an Ohio commercial real estate broker lien?
First, let’s be clear: There is no lien right for real estate brokers for property consisting solely of between one and four residential units. (O.R.C §§1311.85 and .86).
However, licensed real estate brokers do have lien rights in transactions involving commercial properties, i.e., anything other than between one and four residential units. (O.R.C §§1311.86).
The lien rights extend to brokerage contracts for the provision of services for selling, purchasing, and leasing. (O.R.C §§1311..86(A) and (B)). They do not appear to cover the provision of property management services.
What is a lien?
In one sense, a lien does not get you anything more than the contract rights you already have: You have a signed listing agreement, you have earned your commission, you can sue in a court of competent jurisdiction, and you can thus get paid the amount of money you are owed.
But as a practical matter, lien rights are tremendously powerful in “turning the tables” on a property owner, giving quick, inexpensive and powerful leverage to the Realtor to resolve a commission dispute.
Why is a lien important?
Leverage often is the “whole ballgame.” So often, (a) debtors will avoid debts they clearly owe just because they can, for purposes of the time-value of money (by delaying the payment, they can use your money in the interim) and (b) the reality is that most creditors will not go to the trouble and expense of hiring and paying an attorney to collect the sums owed to them.
Litigation can cost as little as $20,000 per case, up to hundreds of thousands of dollars for a vigorously-contested action. So, the question for a Realtor claiming a commission is: Can I “check” or “checkmate” a property owner (seller or landlord) into recognizing, dealing with and paying my claim without the two years and tens of thousands of dollars in legal fees needed to vindicate that right?
A lien is a powerful tool — it encumbers real property
A lien is an encumbrance on real property. In most cases, real property encumbrances have the same priority of the order of filing, i.e., the first-filed is paid first from the sale proceeds, the second, second and so forth. (Ohio mechanics liens are the major exception to this rule, dating back to the date of first work on a project.)
This gives the lien holder two distinct advantages, many times powerful advantages: (a) their claim is secured against the real estate (i.e., the owner cannot further squander the equity in the property by a sale or mortgage) (b) the claimant has placed a cloud on the title with what may still be a disputed claim, effectively preventing the owner from selling or mortgaging the asset until the earlier of (i) the statutory expiration of the lien or (ii) the judicial disposition of the claim and the lien rights.
Thus, as a practical matter if the property owner wants to sell his property or take out a new mortgage or refinance an existing mortgage, he will have to “deal with” the Realtor’s claims before doing so.
A broker’s lien is unilateral — it does not require the owner’s signature or consent
Contrary to what many clients ask of us in a simple contract or tort claim (“please lien their property”), in most circumstances a lien cannot be placed against real property until either (a) the owner signs a voluntary instrument such as a mortgage or (b) the conclusion of litigation, which usually takes years. In the meantime, a defendant can sell and mortgage the property, or otherwise encumber it, and then squander the asset without concern for the plaintiff’s claims. (This is constrained by concerns about fraudulent conveyance issues that will be discussed in another blog entry later.)
The right to place a unilateral lien against real estate is very narrow, being limited to government liens (such as tax liens, assessments, environmental liens, etc.) and mechanics liens (for work done on real property and materials delivered to real property for incorporation therein).
Commercial brokerage lien rights
O.R.C. §1311.86 provides such unilateral lien rights for the collection of a commission in commercial transactions in specific circumstances set forth in the statute. Being a unilateral filing, means that the Realtor claiming the lien simply signs and files a piece of paper in the Hamilton County Recorder’s office. It does not require a signature (on the lien filing) of the property owner.
Statutory requirements
Because the lien arises from the statute, strict compliance with the statutory mandates will be required. F. W. Winstel Co. v. Johnston, 103 Ohio App. 525, Paragraph 1 of the Syllabus (1st Dist. 1957). These are set forth in O.R.C. §1311.86:
- It is for written brokerage contracts only (O.R.C. §1311.86(A) and (B)).
- It is for “for services related to selling, leasing, or conveying any interest in commercial real estate” (O.R.C. §1311.86(A)) and “for services related to purchasing any interest in commercial real estate.” (O.R.C. §1311.86(B)).
- “The lien is effective only if the contract for services is in writing and is signed by the broker or the broker’s agent and the owner of the lien property or the owner’s agent.” (O.R.C. §1311.86(A) and (B)).
- The lien is for the broker only, not his salespersons. (O.R.C. §1311.86(C)(1).
- The lien amount is either the brokerage commission due, or if due in installments only that portion due on conveyance. (O.R.C. §1311.86(C)(2) but in the case of commercial leasing, (O.R.C. §1311.86(C)(3).
- Only the property subject to the brokerage agreement can be liened. ((O.R.C §§86(C)(5)).
Lien contents
To perfect a lien, the following steps must be followed:
- The claimant must prepare, sign and have acknowledged (notarized) an affidavit containing each of the following: (a) name of the broker who has the lien, (b) the name of the owner of the lien property, (c) a legal description of the lien property, (d) the amount for which the lien is claimed, (e) the date and a summary of the written contract on which the lien is based, and the real estate license number of the broker. R.C. 1311.87(B)(2).
- Additionally, the lien affidavit must state that the information contained in the affidavit is true and accurate to the knowledge of the broker. Id.
Lien deadlines
The timeframes within which a commercial broker’s lien must be filed are:
- For a sale of liened, the Affidavit must be recorded prior to the conveyance of the property. R.C. 1311.86 (B)(3).
- For a purchase of liened property the Affidavit must be recorded within ninety days after the conveyance of the property. R.C. 1311.86 (B)(4).
- For liens based upon a leasing commission, the Affidavit must be recorded within ninety days after a default by the owner in payment. R.C. 1311.86 (B)(5).
Notice to property owner
One other requirement not to overlook: “On the day the lien affidavit is recorded, the broker shall provide a copy of the lien affidavit to the owner of the lien property and, where a contract for the sale or other conveyance of the lien property has been entered into, to the prospective transferee, where known, either by personal delivery or by certified mail, return receipt requested. O.R.C. 1311.86 (B)(6).
Be careful — “Slander of title” claims can be nasty
If one files a lien against real property that is later determine to have been in bad faith, the lien claimant can find himself the target of a suit for a cause of action known as “slander of title.” Slander of title is the tort of impairing title to someone’s real estate without a reasonable basis therefor. McClure v. Fischer Attached Homes, 2007-Ohio-7259, ¶ 21, 882 N.E.2d 61 (Clermont Co. C.P. 2007), citing Green v. Lemarr, 139 Ohio App. 3d 414, 433 (2d Dist. 2000).
The really bad part of a slander of title claim is that it can include an award to the property owner of an award of his attorneys fees and a punitive damages amount. Additionally, the commercial brokerage lien statute specifically allows for the prevailing party to recover its attorney’s fees. O.R.C. 1311.88(C) (“[A] court may assess the nonprevailing parties with costs and reasonable attorney’s fees incurred by the prevailing parties.”). However, in cases involving general slander of title claims (i.e., outside of the commercial brokerage lien context), the attorney’s fees have been limited to the those “necessary to counteract a disparaging publication,” and did not include those incurred in prosecuting the slander of title. Cuspide Props. v. Earl Mech. Servs., 2015-Ohio-5019, ¶ 40 (6th Dist. 2015).
Thus, we recommend moving forward with the filing of an affidavit for a commercial broker’s lien cautiously, only where the broker is certain of the merits of his position and even then still willing to withstand the possible claim for slander of title from an owner.
Conclusion
The Finney Law Firm is privileged to have many real estate brokerage clients, including commercial Realtors. The commercial lien right is a very powerful one, and one that we think is under-utilized in commission disputes.
Consider one of our attorneys to assist you in such a dispute, including the use of the right to a commercial lien.
Frequently, clients desire to lend money, seller-finance the sale of their business or other asset, buy and then lease out a building, or engage in some other business transaction because they are motivated by favorable business terms the transaction provides on its surface: A high rate of interest, a good return under a lease, or a more promising sale price than otherwise the seller would obtain, for example.
This entry asks a prospective private lender to think twice about the risks associated with this activity and to take as many steps to protect himself as possible under the circumstances.
Who is the “lender” and who is the “borrower”
For purposes of this entry, there are many circumstances in which a party is a “lender” and another is the “borrower.”
- Obviously, a simple monetary loan in which there is a lender and borrower is one such transaction.
- Another occurs where an investor either owns a building and desires to rent it, or purchases one for leasing purposes. In addition, as a part of a leasehold transaction, the landlord may be putting into the premises significant sums in “tenant buildout costs.” Here, the renter is “using” the landlord’s money, his credit, and his asset, in exchange for monthly (read: deferred) payments. This is a form of “loan.”
- When a seller is selling his busines, his building or another asset, and does anything other than take back 100% of the purchase price at the time of conveyance, he is a “lender.” (And the worse situation is where the seller is taking a subordinate position to a lender who gets a first mortgage or other lien on the assets acquired. In such situation, the liklihood of the seller getting his “loaned” funds is significantly impaired, and the chance of default significantly higher.)
- Even co-signing a loan or a lease, or guaranteeing the debt of another, is “lending” your credit to the co-borrower.
Four important factors to consider
But consider these factors before “lending” your money, your asset, and your credit to a third party:
First, ask yourself: “Why can’t this buyer get conventional financing?” Banks are in the business of assessing and taking the risks associated with lending. If this “borrower” does not qualify for a bank loan, why should you be in the business of being a lender? Have you really fully assessed the risks of lending to this “borrower.”
Banks know experientially and actuarially the “warning signs” that predict loan defaults. Among these are an inability to come up with an adequate down payment, a poor credit score, a history of litigation, and other warning signs. I spoke with one lender recently, and they said they will never lend to people who fail to pay their taxes — ever.
Second, in my experience, a buyer of an asset is much more likely to raise defenses and counterclaims against a seller than the buyer would be able to as against a third party lender: Fraud in the inducement of the sale, property defects, misrepresentations in the business accounts, and simple contract breach. Buyers will raise any and every excuse and defense against paying money they owe.
Third, the more desperate the “borrower” is, the more likely he is to agree to generous transaction terms: a high rate of interest, a high sale price, or some other above-market remuneration. And — I say this based on experience — borrowers who have no intention and no ability to pay back the “loan” are the most willing to agree to generous lending terms.
Fourth, if you are going to leap (into the position of being a lender), at the very least look first: do the kind of due diligence that a lender would — a credit check, a background check, reference checks, and a simple check of court clerks sites and bankrupcy court history for obvious signs of fiscal distress.
The ABCs of improving your position as a lender
So, you have made the decision to “lend.” What steps can you take to improve your position and increase the liklihood of getting your money paid back, with interest?
A. Certainly ask for a personal guarantee of any “loan” to a corporate entity. Accepting simply a corporate signature, whether of a note maker, a tenant or the buyer of an asset, is asking for trouble, unless that company’s creditworthiness has been thoroughly ascertained
B. Don’t be shy about asking for the personal guarantee of the principal’s (or principals’) wife (or wives). If the borrower is earnest about putting their name, their assets and their creditworthiness behind a promise, and they have asked you to extend credit to them — then shouldn’t their wife also stand behind the obligation? Stating it differently, the most common and most obvious dodge of debtors avoiding their creditors is to place their assets in the name of their wife. Don’t let them avoid their obligations to you so easily.
C. Are there third parties who can guarantee the debt? A business partner? A parent? Who is interested in the success of this borrower’s business such that they would be willing to stand behind its obligations?
D. Look for assets to lien. Does the “borrower” (or his wife) own a house, stocks, jewelry, accounts receiveable, or equipment or inventory in their business? Are those assets presently free from any first lien against them? If so, and if the borrower is earnest about paying back your debt, then he should not have qualms with providing a security interest against those assets to stand behind the loan. (Note: Please consult an attorney about how to properly take a lien in various assets; it can be tricky.)
E. Would some patience or a reduced price yield either a cash buyer or enable the buyer you have to go and get a bank or other third party loan? If so, it may be wise to take one of those options.
Conclusion
Lending is an ultra-hazardous activity that should not be undertaken lightly.
There are exceptions where the seller’s main motivation is not necessarily getting payback of the loan: a parent helping a child; a business or building owner who is getting a great sale price for the asset, and perhaps much of it in cash; or simply a weak market with few buyers. And so long as our clients enter into a transaction understanding the risks of being a “lender,” we are fine with that decision.
But we see many clients seduced by more favorable terms from a borrower or seller-financed buyer who desperately needs their cash versus a stingier cash buyer.
Our suggestion: Think about taking the money and running instead.
The risks inherent in being a lender is why they say: “Cash is king.”
In a case that was previously discussed here, the Ohio Supreme Court issued an important ruling in a real estate valuation case, Terraza 8, LLC v. Franklin County Board of Revision, 2015-2063, yesterday.
R.C. 5713.03 was amended in 2012 – allowing that the auditor may consider a recent sale price as the true value of real estate rather than shall, and requiring that the property be valued “as if unencumbered.”
Writing for a unanimous Court, Justice Fischer agreed with the property owner that recent changes to R.C. 5713.03 mean that County Auditors are no longer required to adopt a recent sale price as the true value of real estate, and that the purchase price in sale and lease back transactions can be rebutted by a showing that the sale price does not reflect the value of unencumbered fee-simple estate. The decision is available online here.
With the advent of the camera phone, the ubiquitous device in everyone’s pocket, there is no longer an excuse for failing to document “things” for posterity. And such forethought from our clients can prove decisive in a legal battle.
Examples where photos are helpful
The best example of the value of real-time photos is in construction disputes. We find it is regular practice of owners, architects, engineers, contractors, and materialmen to take photos at each stage of the work completed, which helps to establish the quality of the work, the conformity of the work to the plans, and the stage of completion at a particular point in time, and perhaps document the development of defects in material or workmanship as they are installed. (This then, of course, helps to pinpoint the blame.) The forensic or retrospective value of photos at each stage of construction can be invaluable.
Another example of the value of photos is in commercial and residential landlord/tenant in disputes. In those disputes, the condition of the property as delivered to tenant or as surrendered to landlord is frequently contested. My sharper clients have taken the time to document the condition of the property both at the beginning and end of the relationship with their camera phone. Those photos can make a liar of a defendant (or plaintiff) and permit a party to establish his minimum elements of a case he is presenting.
The existence of photos also could be used in an automobile accident situation, a dispute over the quality of goods delivered or to prove a person was in a particular place at a point in time.
Another example for me personally is that I just hate to get parking tickets, yet many times those darned parking meter are malfunctioning. When this happens, I take a business card, note on it “out of order” and slip it into the “credit card slot” on the meter while my car is parked there. Before slipping the card into the slot, I take a picture of the meter (they all have identifying numbers on them now) and the “out of order” card.
Admissibility and use of photos
Photos are, of course, generally going to be admissible as evidence in a trial or in alternate dispute resolution. So often at trial, I hate to say, one party or the other is outright lying to the judge. A photo can clear up the inconsistency in statements pretty effectively. The judge or jury should be thrilled to have such (nearly) incontrovertible evidence versus deciding which party is lying.
Number of photos
The memory capacity for photos on your telephone is almost unlimited, and it takes mere seconds to snap several pictures. Think about thoroughly preserving the record for posterity (or trial). Make the time to take several (indeed dozens) of shots — narrow and wide angle, and from every perspective — to preserve the moment for later reference.
Conclusion
Get with the times. Use this incredibly effective tool to enhance your position in dispute resolution. Or, saying it differently, I get frustrated when a client could have made their case stronger simply by whipping out that phone and documenting and saving information for a later date. This is especially true when the client knows the matter is heading into litigation.
Our Ohio clients frequently come to us having performed their own amateur sleuthing on questions about title to real property before an initial meeting. And the easiest place for them to have started their work is the County Auditor’s web site.
Based upon the Auditor’s information, they many times have drawn preliminary conclusions regarding who owns the property, the configuration of the property, and in some cases access road information. And they have formed preliminary opinions about the topic they want to discuss.
Thus, the client has come to see me asking to confirm what they have learned, and to seek more information about their property, and to then act upon that information, enforcing their rights through legal action.
The question addressed in this blog entry is:
How reliable — from the perspective of establishing legal title to real property — is that information on County Auditor’s web sites?
Information available on line about real property in Ohio
There are a host of on-line resources about real property in Ohio, including building permit issuance and code violations, recorded deed and mortgage information, City, Village and Township ordinances and resolutions establishing assessments and condemnation proceedings, aerial photographs, and maps showing improvements and public utility information. In Hamilton County, for example,
- Here is the Recorder’s site;
- Here is the CAGIS (Cincinnati Area Geographic Information System) site; and
- Here is the site with building permit and violation information.
Information available on Ohio County Auditor’s web sites
County Auditor web pages are different in each County, but as a general proposition, I find the Auditor’s web site to be among the most easily accessible and broadly informative sites on real property in Ohio. In my experience, every Ohio County has a pretty good Auditor’s website.
For example, here is the Hamilton County Auditor’s site. Each site is chock full of useful information on every tax parcel in the County: A property search function that reveals property tax valuation, information on the current and past property taxes [amount and payment history], the sale price and date, the acreage, a drawing and picture of the house and sometimes other improvements, an aerial map and a tax map.
[Note: Our office provides a valuable service to clients in helping them to reduce their real estate taxes. The essence of this service is to shallenge the County Auditor’s valuation as being too high, which frequently they are, however, in many cases — perhaps an equal or greater number of cases — the valuations are too low. The point here is that even the County Auditor’s valuation is but “one man’s opinion,” and it too can be a point of reference, but is not the last word on valuation quesitons.]
Can I rely upon that County Auditor’s information in forming opinions about title?
And their question, a question I received today from a client, is
“can I rely on the information on the Auditor’s web site in drawing conclusions about real estate title.”
The short answer is: “No.”
As to real property in Ohio, the County Auditor has a big job, but a relatively simple job: (a) to divide up the County into separate parcels on his records for taxation purposes and (b) to establish a valuation of each parcel for tax purposes. That’s it.
What this means is that sometimes:
- the parcel maps are not fully informative as to the parcel identities;
- the tax bill’s parcel descriptions are many times similarly short-hand;
- the County Auditor’s site does not necessarily show comlicated ownership and contractual relationships that may be of record such as the fact that a property is subject to a Land Installment Contract; and
- the owner information is either not quickly updated, incomplete (the Auditor’s site does not and does not purpose to type in all the owners’ names or the complete name as recited on the deed) or inaccurate.
A year ago, I had an instance in which a client who had purchased real property was distressed that for nearly two months the site was not updated showing him as the owner of real estate. In that instance, the Auditor had stopped updating his site for a period of time for some year-end reconciliation.
But importantly, the Auditor does not claim to be the official or last word on “who owns property.” That simply is not the function of the Auditor’s web site or the Auditor’s office.
How, then, is legal title established?
Well, in truth, title to real property is not “a piece of paper,” but is a legal construct that is established by records from a number of offices — the County Recorder, the County Engineer, the Clerk of Courts, County Probate Court records, and Federal Bankruptcy Court records. Ohio has detailed standards for how legal title is to be established: The Ohio Title Standards prepared by the Real Property Law Section of the Ohio State Bar Association.
But the main repository of the official records of “who owns property” is the office of the County Recorder. And, unfortunately, at least at present, at least for a layman (it may depend on the County), it simply is not as informative and user-friendly as the County Auditor’s site.
To establish title to real property, which really requires a review of all of the records noted above, our firm uses the services of a professional title examiner. That examiner will, using indexing systems established in each County, find the current deed to the property, establish what other claims appear in the various records (monetary liens, easements, covenants, etc.), and based upon all of that information we should be able to establish the claim at issue.
Sometimes we determine that title or the issue in question can’t be made clear from the real estate records and either further documentation is required (by others affirmatively relinquishing their interests) or a court proceeding is necessary to “clear title.”
Conclusion
So, this blog entry has taken our fine readers through a shortened version of the legal maze that exists in Ohio (and most other states) to establish ownership of land, as well as easement and covenant rights of owners and their neighbors.
But the important point made here is that (a) the Auditor’s records are a great shorthand way to quickly find out information about property, including less-than-fully-reliable information about current ownership. But (b) the Auditor’s records are not — and are not intended to be — reliable information on which legal conclusions should be drawn and acted upon, especially ones that are of any importance.
Please call our real estate professionals, Isaac T. Heintz, Eli Kraft-Jacobs, Chris Finney and Rick Turner with your questions about real estate title.
In commercial tenant space, whether office, warehouse, manufacturing or retail, landlords typically want three-, five- or seven-year lease terms. And this is reasonable given the cost of tenant build-out, Realtor commissions and the demands of their mortgage lenders. It also is relatively standard in the marketplace.
However, a tenant will rightfully reason that they can’t anticipate their space needs for a year much less over a seven-year period of time. The company might need to relocate, be bought out or go out of business, the principal could die or become disabled, or the tenant’s business model could change substantially.
One concession I recommend that tenants request in a commercial lease is an early-termination option. By having the right to walk away from a lease, it gives enormous flexibility and power to a tenant. Recently, a landlord explained to me that he is glad to offer this tenant concession.
Typically, a termination option is not free. Here are typical issues a landlord will want to discuss:
- The lease termination option might not kick in until some period into the lease, say after the first year.
- The landlord will want generous advance notice provisions, say three to six months to allow him to advertise and market the premises for re-letting to a new tenant.
- An early termination fee of anywhere from three months to one year of base rent and CAM charges.
- A reimbursement of Realtor fees paid (many times paid up front, but calculated on the entire lease term value).
- A reimbursement of tenant improvement costs.
So often I am consulted after the fact by a tenant who wants “out” of their lease on a document we were not asked to help negotiate, and the tenant is in a real spot. Sometimes in that circumstance the landlord is digging in his heels wanting the full rent and CAM amounts for the entire lease period — and they may well be entitled to that.
But if only the tenant had asked for this simple concession on the front end — when he had negotiating power — his life would be simpler and his finances richer.
__________
If you want to speak with our commercial leasing attorneys, ask for Issac T. Heintz, Eli N. Krafte-Jacobs or Christopher P. Finney.
As attorneys, especially in a smaller city like Cincinnati, we can be tempted to trust one another, especially experienced real estate practitioners as to the timing of recording of instruments. But that trust can be misplaced, as many times between the “closing” and “recording” things go awry.
Roundtable closings
In Ohio, particularly southwest Ohio and for residential properties, round-table closings are common. For clients from other parts of the country, this can seem like a quaint (and legally dangerous) custom.
The buyer, seller, lender, and Realtors all gather in a room with a title agent to sign and exchange documents and funds. This ceremony is a “closing” and there occurs the formal payment of the purchase price, funding of the loan and the delivery of the deed.
Escrowed closings
This can differ from closings more common in other parts of the country where the seller places in escrow the deed, the buyer places in escrow the note and mortgage and the lender and buyer pay the sums to the escrow agent. (Escrowed closings are not unheard of in the Cincinnati marketplace, especially for commercial transaction or corporate executives whose schedule will not allow them to attend a closing in person.)
In this setting, the title agent holds both the escrowed funds from the buyer and the lender, and the deed and mortgage for recording. Then, he records the instruments and checks the title to assure that “all is clear” before disbursing funds.
The “gap”
Thus, with an escrowed closing, there is no “gap” between funding the recording. The funds are not released until after recording and title updating showing no intervening liens or deeds.
However, with a roundtable closing, the funds are released to the seller at the closing table, and the deed and mortgage may not be recorded for hours or days. In the meantime, in theory if not in practice, a deed, easement, mortgage or involuntary lien (such as a tax lien, a judgment lien or a mechanics lien) could be recorded against the real estate.
Since Ohio is a largely race/notice state as to the order of recordation of instruments (whoever records first without actual notice of someone else’s interest in the property “wins” the contest for priority), the later-recorded deed or mortgage would lose priority to an instrument intervening beforehand.
This is a large potential risk in terms of losing value for the buyer or lender. The total value of the real estate can be lost as a result of such a priority issue.
This timeframe between closing (or the last title update) and the recordation of the title instruments is known in the real estate industry as the “gap.”
Insuring the gap
So, the issue for a buyer should be: Who is taking the risk for the gap? It goes without saying that a seller delivering a warranty deed is promising to deliver good title to the buyer. But what if the seller is a crook, bankrupt, deceased or simply un-findable after the closing?
Well, (a) if a buyer purchases an owner’s policy of title insurance, (b) specifically requests that the title company insure the “gap,” and (c) that “gap” coverage is issued at the closing table, then the buyer will be protected from losses from an intervening instrument. If all three circumstance are not present, then the buyer is going to bear this risk and have claims solely against the seller for breach of warranty covenants.
Real-life experience
We recently were approached by a buyer from a round-table closing on a residential property. It took the title agent six days after the closing to record the deed. In the intervening timeframe, the seller gave a deed to a second buyer. (Sure, this was entirely fraudulent conduct by the seller, but nothing should surprise us anymore.) That second buyer’s deed went on before the deed of the first buyer. The first buyer even purchased an owner’s policy of title insurance, meaning at the closing he obtained a “commitment” for a title insurance policy. But that commitment did not contain “gap” coverage language, rather the policy was conditioned upon the instruments being recorded without loss of priority.
Conclusion
That particular matter is still in litigation, but, win or lose, this story highlights the grave risk of closing a transaction by roundtable closing, and failing to ask for and obtain affirmative “gap” coverage. This admonition applies equally in residential and commercial transactions.
Finally, this ties in with our earlier admonitions: (a) buy title insurance (Why title insurance?) and (b) Don’t just buy a title insurance policy; read the policy, on our Ivy Pointe Title blog. While it would be nice to tell clients that protecting their interest is as simple as buying an owner’s policy of title insurance, it is not. The buyer must read and understand the exceptions to coverage and also ask for “gap” coverage. Otherwise, he retains significant risks of partial or total title failure.