Fairfield Twp. Bd. of Trustees v. Testa (Slip Opinion) , 153 Ohio St. 3d 255 ( 2018 )

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Fairfield Twp. Bd. of Trustees v. Testa, Slip Opinion No. 2018-Ohio-2381.]
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SLIP OPINION NO. 2018-OHIO-2381
FAIRFIELD TOWNSHIP BOARD OF TRUSTEES, APPELLANT, v. TESTA, TAX
COMMR., ET AL., APPELLEES.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Fairfield Twp. Bd. of Trustees v. Testa, Slip Opinion No.
2018-Ohio-2381.]
Taxation—Exemption—R.C. 5709.07(A)(2)—House of public worship—Tax-
increment-financing agreement—Priority of exemptions under R.C.
5709.911—When tax-increment-financing agreement was approved prior
to the effective date of R.C. 5709.911, but a township did not preserve its
right to service payments under the agreement, the house-of-public-worship
exemption has priority.
(No. 2016-0995—Submitted April 10, 2018—Decided June 21, 2018.)
APPEAL from the Board of Tax Appeals, No. 2015-633.
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SUPREME COURT OF OHIO
Per Curiam.
{¶ 1} In this appeal, appellee tax commissioner defends the property
owner’s entitlement to its exemption from taxation as a house of public worship
pursuant to R.C. 5709.07(A)(2). Appellant, Fairfield Township Board of Trustees,
filed a complaint against the continued exemption pursuant to R.C. 5715.27(E).
The township claims that by granting and continuing the public-worship
exemption, the tax commissioner unlawfully relieved the church of its payment
obligations as the owner of property subject to a recorded covenant. The covenant
relates to a tax increment financing (“TIF”) agreement entered into between the
township and a previous owner of the church property.
{¶ 2} The tax commissioner found that R.C. 5709.911 subordinated the
property’s original TIF exemption to the public-worship exemption, and therefore
rejected the township’s argument. The Board of Tax Appeals (“BTA”) affirmed.
{¶ 3} The township has appealed.
I. Factual Background
A. The TIF Agreement
{¶ 4} Tax-increment financing “is a method of promoting and financing the
development of real property by directing ‘ “all or a portion of the increased
property tax revenue that may result” ’ from the development toward defraying the
cost of improvements that are part of the development.” Kohl’s Illinois, Inc. v.
Marion Cty. Bd. of Revision, 140 Ohio St. 3d 522, 2014-Ohio-4353, 20 N.E.3d 711,
¶ 3, quoting Princeton City School Dist. Bd. of Edn. v. Zaino, 94 Ohio St. 3d 66, 68,
760 N.E.2d 375 (2002), quoting Meck & Pearlman, Ohio Planning and Zoning
Law, Section T 15.29, at 704 (2000). In this case, the “development” involved
“public infrastructure improvements” that included road and bridge construction,
signalization of an intersection, and the extension of public utilities. See R.C.
5709.73; R.C. 5709.40(A)(7); R.C. 5709.73(B).
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{¶ 5} Once a TIF agreement is in place, any increase in the assessed value
of the designated parcels is subject, in whole or in part, to (1) an exemption from
taxation and (2) a concomitant obligation of the property owner to make payments
“in lieu of tax” into special fund used to pay for the development—such payments
are referred to as “service payments.” R.C. 5709.73(B), (D); R.C. 5709.74. In this
case, Fairfield Township obtained the agreement of the Fairfield City School
District and the Butler County Joint Vocational School District to exempt 100
percent of the increased assessed value and extend the TIF agreement over a 20-
year period in consideration of an agreement to compensate those districts with a
portion of the payments to be made in lieu of taxes.
{¶ 6} In addition to the township’s TIF resolution and the TIF
Compensation Agreement between the township and the school districts, the record
contains the “Developer’s Service Agreement,” to which there were several parties:
(1) the township, (2) the county, (3) the developer, DPR Properties, Inc., and (4) a
lending bank. The agreement sets forth the parties’ obligations relating to the
township’s TIF zone. Among other things, DPR consented to the TIF and agreed
to apply for exemption of the designated property from real-estate taxes. DPR
committed itself and its assigns to making service payments in lieu of taxes into the
township’s “tax increment equivalent fund.”
{¶ 7} The term of the TIF agreement is 20 years, unless the bonds and
obligations are paid off earlier. Thus, the obligation to make service payments
extends from 1998 through 2018. The agreement states that it must be recorded
and referenced in any deed transferring property owned by DPR. It also provides
that the service-payment obligations “shall be covenants running with the land and
shall be enforceable by Township and County, against DPR and all successors and
assigns of DPR.”
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B. The Parcel at Issue
{¶ 8} The parties stipulated at the BTA that DPR had conveyed the parcel
at issue to W.M.M. Partnership on September 14, 1999. The property was then
used as an insurance office. On December 13, 2011, W.M.M. conveyed the then-
vacant property to Tri-City Church of God.
C. Course of Proceedings
{¶ 9} On September 3, 2013, the church filed an application to exempt the
property as a house of public worship. The tax commissioner granted the
exemption on December 9, 2013, finding that under R.C. 5709.911, the public-
worship exemption was superior to the previously approved TIF exemption. The
township’s efforts to intervene in the church’s exemption case were rebuffed for
lack of standing.
{¶ 10} On December 11, 2014, the township filed a complaint against the
continued exemption of the real property as a house of public worship. The tax
commissioner’s final determination denied the complaint and retained the exempt
status of the property on April 13, 2015. The denial of the township’s complaint
was based on the same rationale as the commissioner’s grant of exemption to the
church: the commissioner again found that the TIF exemption was subordinated to
the public-worship exemption by R.C. 5709.911.
{¶ 11} The township appealed to the BTA. Relying on the record created
below it and the parties’ stipulations, the BTA affirmed the tax commissioner’s
determination. BTA No. 2015-633, 2016 Ohio Tax LEXIS 1269 (June 10, 2016).
II. Analysis
A. How the Exemption Statutes Apply to this Case
{¶ 12} As discussed, under R.C. 5709.73, the township passed a resolution
that created tax-exempt status for the increase in assessed value of the properties
designated by the TIF agreement, and pursuant to the service agreement, the
developer DPR was obligated to file an application to “effect and maintain” that
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exemption during the period of the TIF agreement. Before 2004, it was unclear
whether a later owner of a parcel could obtain a different exemption based on its
own use of the property and thereby supersede the TIF exemption, thus relieving
the later owner of the obligation to make service payments.
{¶ 13} In 2004, the legislature addressed this issue by enacting R.C.
5709.911, which established a priority of exemptions. Broadly speaking, for any
TIF exemption approved after the effective date of R.C. 5709.911, the priority of
exemptions depends upon whether the property owner either filed the application
for the TIF exemption or consented to that exemption in writing if the political
subdivision had filed the application. In either of those circumstances, the TIF
exemption controls over a later claim of another exemption. R.C. 5709.911(B). On
the other hand, if the political subdivision applied for the TIF exemption without
the owner’s written consent, the TIF exemption is subordinate to another exemption
of the property. R.C. 5709.911(A).
{¶ 14} For TIF exemptions, such as the one at issue here, that were
approved before the effective date of R.C. 5709.911, Sub.H.B. No. 427 (“H.B.
427”), Section 10(B), 150 Ohio Laws, Part III, at 4122-4123, an uncodified
provision of the act, is dispositive. That section states that all TIF exemptions
approved prior to the effective date of that act “shall be considered to have been
granted subject to the limitations set forth in division (A) of section 5709.911 of
the Revised Code, as enacted by this act.”
{¶ 15} Those limitations are twofold. First, “[a]n exemption granted under
[R.C. 5709.73] shall be subordinate to an exemption with respect to the property or
portion of the property granted under any other provision of the Revised Code.”
R.C. 5709.911(A)(2)(a). Second, service payments in lieu of taxes under R.C.
5709.74 are not required with respect to the property that is exempt from real
property taxes under another provision of the Revised Code during the effective
period of the exemption. R.C. 5709.911(A)(2)(b).
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SUPREME COURT OF OHIO
{¶ 16} H.B. 427, Section 10(B), mitigates the harshness of that rule by
specifying steps that a township can take to preserve its right to service payments.
An application for a TIF exemption could have been refiled within 90 days of the
effective date of H.B. 427 and was subject to only ministerial approval by the tax
commissioner. If an owner had filed the application for the exemption, and the
exemption was approved before H.B. 427 became effective, the township could
have filed a notice under R.C. 5709.911(C) to preserve the right to service
payments. Additionally, the third and fourth sentences of Section 10(B) prescribe
a process that, in a proper case, permits a township to preserve its rights by re-
recording its TIF agreement.
{¶ 17} According to the parties’ stipulations, the township “did not file an
application for exemption with the Tax Commissioner with respect to the property
within the TIF district, including the Subject Property, after the effective date of
Sub.H.B. 427.” Additionally, the township “did not make any filing with respect
to the TIF district with the Butler County Recorder’s Office after the effective date
of Sub.H.B. 427.” The township does not contest the tax commissioner’s argument
that by failing to perform one or the other of these acts, the township failed to
exercise its option under H.B. 427 to preserve the priority of the TIF exemption
over the public-worship exemption.
B. The Statutes Control over the Real Covenant
{¶ 18} The gravamen of the township’s appeal is that the law of contracts
and real covenants provides that the service payments are covenants running with
the land that can be enforced against the church. In the township’s view, the
continued enforceability of the real covenants means that the church cannot claim
a house-of-public-worship exemption but is limited to the partial TIF exemption,
which requires that service payments be made.
{¶ 19} We disagree. Under R.C. 5709.911, the church’s house-of-public-
worship exemption has priority, and thus no service payments are required. As a
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January Term, 2018
general matter, townships are “ ‘creatures of the law and have only such authority
as is conferred on them by law.’ ” Drees Co. v. Hamilton Twp., 132 Ohio St. 3d
186, 2012-Ohio-2370, 970 N.E.2d 916, ¶ 13, quoting State ex rel. Schramm v.
Ayres, 158 Ohio St. 30, 33, 106 N.E.2d 630 (1952). And as demonstrated in Drees,
this legal limitation militates against permitting townships to enforce tax or in-lieu-
of-tax obligations that the statutes themselves no longer authorize.
{¶ 20} Moreover, the law of real covenants by its own force makes Section
10(B) of H.B. 427 and R.C. 5709.911(A)(2)(b) controlling, with the result that the
requirement to make service payments can no longer be enforced. A well-
established prerequisite for enforcing a covenant that runs with the land is that the
restrictions imposed cannot be against public policy. Dixon v. Van Sweringen Co.,
121 Ohio St. 56, 166 N.E. 887 (1929), paragraph one of the syllabus. This doctrine
derives from the more general contract principle that “ ‘the right of making
contracts at pleasure is a personal privilege of great value,’ ” but that privilege
“ ‘must be restrained when contracts are attempted against the public law, general
policy, or public justice.’ ” Cincinnati City School Dist. Bd. of Edn. v. Conners,
132 Ohio St. 3d 468, 2012-Ohio-2447, 974 N.E.2d 78, ¶ 15-17, quoting Key v.
Vattier, 1 Ohio 132, 147 (1823). As a result, under the common law, the public-
policy doctrine calls for the court to “examine whether the subject deed restriction
accomplishes a result that the legislature has sought to prevent.” Orwell Natural
Gas Co. v. Fredon Corp., 2015-Ohio-1212, 30 N.E.3d 977 (11th Dist.), ¶ 62. If so,
the covenant becomes unenforceable.
{¶ 21} For example, in Conners, we invalidated a deed restriction that
prevented property that had been sold by a school district from being used for
educational purposes when the new owners sought to use the property as a
community school because the restriction violated R.C. 3313.41. That statute
called for public-school property, when offered for sale by a school district, to be
made available to community schools.
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{¶ 22} Applying this doctrine to the present appeal is straightforward: by
dictating that TIF exemptions be subordinated to other exemptions, and by
invalidating the requirement that service payments be made, R.C. 5709.911 bars
the enforcement of the real covenant with respect to service payments.
C. The Kohl’s Case is Inapposite
{¶ 23} The township argues that our decision in Kohl’s, 140 Ohio St. 3d 522,
2014-Ohio-4353, 20 N.E.3d 711, establishes that real covenants in TIF agreements
operate outside the TIF statutes and somehow supersede them. We disagree.
{¶ 24} In Kohl’s, we addressed a complaint filed by a property owner. The
property was subject to a TIF agreement that included a “no-contest” covenant, that
is, a covenant that explicitly barred filing a challenge to the valuation on which the
assessment of the service payments was based. The covenant had been recorded in
the chain of title of the owner who had filed a valuation complaint. We vacated the
BTA’s decision holding that the owner’s valuation complaint was void. We held
that the covenant by itself did not eclipse the statutory right to file a complaint, with
the result that the covenant was not a jurisdictional bar. Id. at ¶ 22. But we also
held open the possibility that the covenant might constitute a valid defense against
the valuation complaint if the beneficiaries of the covenant—the county
commissioners and the school district—demonstrated that it was legally and
factually proper to enforce it against the complainant. Id. at ¶ 29. Accordingly, we
vacated the decision and remanded the matter to the BTA for further proceedings.
{¶ 25} The township relies on our statement in Kohl’s that “if the no-contest
covenant is valid and binding on Kohl’s, the source of its legal force is not statutory,
and accordingly, it does not impose a jurisdictional limitation on the BOR.” Id. at
¶ 27. That phrase, the township argues, means that H.B. 427 does not affect the
binding force of the covenant, which requires the property owner to make service
payments.
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{¶ 26} That argument is mistaken, because the passage in Kohl’s not only
addresses a jurisdictional issue that is simply not present here but also emphasizes
that no statutory provision addressed the no-contest covenant. By stark contrast,
R.C. 5709.911 directly addresses the issue of the priority of exemptions. In Kohl’s,
there was no conflict between a statute and the covenant because there was no
statutory provision addressing the propriety of the covenant. But in this appeal,
H.B. 427 conflicts with enforcement of the real covenant. Kohl’s is therefore
inapposite.
D. The Township Lacks Standing to Raise its Constitutional Challenge
{¶ 27} The township also argues that if the statute supersedes the real
covenant, and if the house-of-public-worship exemption supersedes the
requirement to make service payments, the township’s contractual rights have been
unconstitutionally impaired. In essence, the township argues that R.C. 5709.911
cannot retroactively change TIF obligations entered into in 1998.
{¶ 28} This argument invokes Article II, Section 28, Ohio Constitution,
which states: “The general assembly shall have no power to pass retroactive laws,
or laws impairing the obligation of contracts * * *.” The township invokes the
contract-impairment prohibition as an as-applied challenge to R.C. 5709.911, citing
Middletown v. Ferguson, 25 Ohio St. 3d 71, 495 N.E.2d 380 (1986) (setting aside
the result of a legislative initiative in a bond-validation proceeding based on the
impairment-of-contract claim advanced by the city). The township argues that the
real covenant requiring service payments may not be impaired by the statute.
{¶ 29} We disagree. As discussed, the parties have stipulated that the
township did not take action pursuant to H.B. 427 to preserve the priority of the
TIF exemption and thereby retain its right to service payments. Because the
township did not avail itself of the statutorily created opportunity to preserve its
rights, it has been injured by its own omissions rather than by the operation of the
statute itself.
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{¶ 30} We have held that “[t]he constitutionality of a state statute may not
be brought into question by one who is not within the class against whom the
operation of the statute is alleged to have been unconstitutionally applied and who
has not been injured by its alleged unconstitutional provision.” Palazzi v. Estate of
Gardner, 32 Ohio St. 3d 169, 512 N.E.2d 971 (1987), syllabus. The township in
this appeal was injured by its own failure to take the prescribed step to preserve its
rights under the very law it challenges, and the township did not establish why it
could not have done so. We conclude that the township lacks standing under
Palazzi to advance an as-applied contract-impairment challenge.
{¶ 31} The tax commissioner argues more broadly that as a political
subdivision, the township cannot claim any protection under the contract-
impairment clause. With respect to this argument, the commissioner relies on
Toledo City School Dist. Bd. of Edn. v. State Bd. of Edn., 146 Ohio St. 3d 356, 2016-
Ohio-2806, 56 N.E.3d 950, ¶ 2, in which we held that “the Retroactivity Clause
* * * does not protect political subdivisions * * * that are created by the state to
carry out the state’s governmental functions.” The commissioner argues that by
extension, no political subdivision may assert a contract-impairment claim.
{¶ 32} We decline to address this far-reaching argument because we have
already found that the township lacks standing to assert the as-applied challenge.
III. Conclusion
{¶ 33} For the foregoing reasons, we affirm the decision of the BTA.
Decision affirmed.
O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, FISCHER, DEWINE,
and DEGENARO, JJ., concur.
_________________
Schroeder, Maundrell, Barbiere & Powers, Lawrence E. Barbiere, and John
W. Hust, for appellant.
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January Term, 2018
Michael DeWine, Attorney General, and Christine T. Mesirow and Kody
R. Teaford, Assistant Attorneys General, for appellee Tax Commissioner.
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