Imagine the following scenario: perhaps even a typical scenario in today's commercial real estate environment. A commercial landlord receives a notice from its tenant's legal counsel. The notice informs the landlord that the tenant, who is seven years into a ten year lease, is vacating the premises in thirty days and would thereafter have no further duties or obligations under the lease. Landlord assumes that tenant was obligated to pay the balance due under the lease for the remaining three years. That may not be the case.
The Ohio Statute of Conveyances (the "Statute") requires that most conveyances of an interest in real property must be acknowledged.1 Generally, this means that the conveyance instrument must be signed in the presence of a notary public.
A lease is a conveyance of an interest in real property and the Statute requires that any real estate lease for a period of more than three years must be acknowledged. However, that is not the end of the story because a lease that appears to be for a period of three years or less may still need to be acknowledged in order to be effective. A lease generally serves multiple purposes, both conveying an interest in real property and defining other covenants and agreements of the tenant – such as: real estate tax, insurance, common area maintenance – that do not typically need to meet the requirements of the Statute. Therefore, when executing an amendment or modification of a lease, one must determine if the amendment or modification constitutes a conveyance of an interest in real property and therefore must be acknowledged. If the amendment or modification is strictly contractual in nature, it does not require acknowledgement.2
For example, a lease for a period of one year that automatically renews and therefore could extend beyond three years, must be acknowledged. A lease amendment that extends the length of the lease or either increases or decreases the amount of property being leased most likely will be required to be acknowledged, while an amendment that alters a purely contractual arrangement such as utilities, repairs, or insurance obligations will not need to be acknowledged.
Returning to the scenario described above, a lease that must be acknowledged under the Statute, but is not, is defectively executed and does not operate to convey the estate for the term of leasehold intended to be created.3 Instead, the frequency of rent payments will determine the term of the leasehold. Importantly, all of the other terms of the defectively executed lease, except duration, will still be controlling.4 Assuming that the tenant described above made rental payments monthly, it would likely be determined that his leasehold interest was a month-to-month lease and he will be able to avoid the remaining three years of his lease because it was defectively executed.
Generally speaking, the value of a lease to the landlord is greatly impacted by the duration of the lease. A long term lease offers greater value to the landlord because the landlord can rely on that source of income for an extended period of time and can therefore plan accordingly. However, if the lease is defectively executed that value goes away and the landlord may find itself with vacant property generating no income. This could have a very negative impact on any development plans based on cash flow or, worse, could trigger a default of certain loan covenants in the agreement with the landlords' lender. Most of this can be avoided with a lease agreement properly executed under the terms of the Statute.
Our real estate team at WHP recommends that commercial landlords pull their leases out of the filing cabinets (real or virtual) and make sure that they have been properly executed in order to avoid any unpleasant surprises.
__________________
1 Ohio Revised Code 5301.
2 See Cuvier Press Club v. Fourth & Race St. Associates, Ltd., 1 Ohio App.3d 30, 439 N.E.2d 443.
3Delfino v. Paul Davies Chevrolet, Inc. (1965), 2 Ohio St.2d 282, 284–285, 209 N.E.2d 194, citing Richardson v. Bates (1858), 8 Ohio St. 257, and Wineburgh v. Toledo Corp. (1932), 125 Ohio St. 219, 181 N.E. 20, paragraph one of the syllabus.
4 See Burger v. Buck, 2008-Ohio-6061. See also Friedrich v. Matrka, 1978 WL 217890 (citing, Frank v. Flynn (1964) 120 Ohio App. 361, 197 N.E.2d 657).
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.