On October 12, 2010, the Ohio Supreme Court held that a foreclosure sale of real property generally does not qualify as an arms-length transaction in an action to revalue the property before the Board of Revisions ("BOR"). The Court’s ruling will impact future BOR cases involving property sold through foreclosure.

In this case, Fenco Development Company filed a BOR complaint against the auditor's valuation of an apartment building that Fenco acquired on February 27, 2006. The auditor valued the property at $479,600; however, Fenco claimed the property’s value was $135,000 - the price it paid to the U.S. Department of Housing and Urban Development (“HUD”) at a foreclosure auction.

The Court noted that ORC 5713.03 generally requires the auditor to “. . .consider the sales price of [any] tract, lot, or parcel to be the true value for taxation purposes” if the sale was “an arms-length sale” that occurred “within a reasonable length of time, either before or after the tax lien date.” However, the Court noted an exception to this general rule in ORC 5713.04, which states, “the price for which such real property would sell at auction or forced sale shall not be taken as the criterion of its value.”

The Court noted that as a general matter, foreclosure sales reflect a strong impetus to liquidate property in order to obtain cash to satisfy one or more creditors. This Court considered this motivation as a type of duress — though the compulsion to sell quickly may be greater or less in any particular case. More generally, the circumstances of a foreclosure sale deprive the sale of its arms-length character for purposes of R.C. 5713.03, because the motivations of the parties to the sale, particularly the seller, do not qualify as “typical” of the motivations of other persons in the general marketplace.

The Court held that the record did not contain any reliable and probable evidence to support the Board of Tax Appeals ("BTA") finding that the HUD sale of the property qualified as “voluntary.” First, the Court noted the documentation of the sale referred to it a “foreclosure.” Second, the BTA did not specifically state what evidence it relied upon in finding that the HUD sale was voluntary. Rather, the evidence showed that HUD had attempted to sell the property to a previous bidder for $506,000, and when that sale fell through, HUD accepted Fenco's bid of $135,000 approximately two months later.

Lessons Learned

School boards should be cognizant of the manner in which real property is sold in assessing a BOR complaint to re-value real property. Unfortunately in the current economic climate, foreclosure sales are a common means by which title to real property is transferred. School boards that confirm a foreclosure sale may wish to challenge any BOR Complaint seeking to re-value property based on an arm's length transaction.