Read It Or Lose It, Or How Access Was Lost

You don’t have to be in the retail property industry for very long before you first come across an access agreement. After all, not all properties are sitting right out there on a prime highway. A plot might be developable if it could be moved to a spot right along the “best” road, but it doesn’t work that way. So, deals are made allowing those traveling to and from one property to cross over an adjoining property. Often, these arrangements are mutual; sometimes they are not.

When we come across such an arrangement for the first time, we probably read the documents pretty carefully. Likely, when we get to our fifth or tenth such agreement, we skip over the boilerplate. One of those provisions is the one that reads something like: “will be binding upon and inure to the benefit of ….” After all, these provisions aren’t much more than, “blah, blah, blah.” We’ve seen them many times before and they are always the same – until they aren’t. That’s what a car dealer discovered about a combined access and sign license with the following provision:

The Sign License shall run with the land and be binding upon and inure to the benefit of Grantor and Grantee and their respective successors and assigns, and the Access License shall be binding upon and inure to the benefit of Grantee and Grantor, and Grantor’s successors and assigns.

At first, there was a shopping center fronting along a major thoroughfare. The rear of the shopping center was bounded by a secondary road. The shopping center’s owner also possessed a developable property on the other side of that secondary road and sold it to a car dealership. As part of that deal, the parcel slated to house the dealership was granted access across the shopping center so that its own customers could travel from the major thoroughfare, across the shopping center, across the secondary road, and then into the dealership (and back again). The dealership property wasn’t very visible from the major thoroughfare. To compensate, the dealership was given the right to erect and maintain a sign on the shopping center, adjacent to that major thoroughfare.

The sale took place in 1985. By 1997, two things had changed. One, of little legal concern, was that the roads had been reconfigured in a way that made the secondary road more accessible and into commercially reasonable alternate access to the dealership. More significantly, an innocent legal change occurred. In 1985, the dealership property had been purchased by a partnership, seemingly of two brothers. Limited liability companies first became available in 1994 in the state where the property was located. For reasons known to almost all readers, it is much wiser to operate as a limited liability company than as a partnership. So, in 1997, for many of those reasons, the dealership-property owning partnership deeded the property to a limited liability company owned by the same two partners.

As a result, the access license was lost, but the sign license was not.

How was that? Well, those who carefully read the cited text above may have noticed that the sign license ran with the land and “inure[d] to the benefit of Grantor and Grantee and their respective successors and assigns,” but the access license burdened and inured to the benefit of the “Grantor’s successor and assigns,” but not those of the grantee-dealership.

Was that a technical nicety to be easily ignored by a court? No, it wasn’t. The omission was no oversight. The parties knew how to write the “successors and assigns” part and chose to write it differently for signage than for access. And, there was no indication that the parties knew better access would be built for the dealership in the future (i.e., “down the road,” as it turned out).

The problem turned out that no one on the dealership side thought to read the access license to see if it would survive the “simple” change in form of ownership. After all, it was a “no-brainer” to switch from owning the property as a partnership to owning it as a limited liability entity, except that, in this case, it wasn’t.

So, let us ask this question. When handling the purchase of a property benefitted by an access easement of any type, do you read the “successors and assigns” provision? Or, is it (like many other ones), just “blah, blah, blah”?

By the way, in 1997 it would have been difficult to structure the property transfer in any other way. But, nowadays, many states have “conversion” statutes that allow a partnership to “become” a different form of entity without destroying the identity of the original entity. Essentially, the statutes specify that the “new” form of entity is the same as the “old” one, just as if only the entity’s name had been changed. Had that type of law been available in 1997, no deed would have been required; the ownership of the dealership property would have remained the same; and, the access license would have remained in effect. But, if no one reads the access license, would a “conversion” have been considered?

Further, had the original partners sought to sell the property to a third party, they could not have sold the “partnership” without destroying that entity, but once it became a limited liability company, it could have sold the membership interests, thus maintaining the legal vitality (continuity) of the company. As noted, limited liability companies were not available in 1985 where the property was located, but corporations were. So, if the partners had realized that to keep the access easement, the legal ownership of the property could not change, they should have considered acquiring the property using the only limited liability entity available to them in 1985 – as a corporation. Though the tax advantages were not as good to them at the time as they got with a partnership, they would have been in a position to ultimately sell the property without destroying the access license.

Yes, it’s complicated. That’s why you have to know what you are doing or realize that you don’t and then engage people who do. Those “people” aren’t always in the real estate industry.

Here’s a “no surprise.” We’re not finished. We have some questions. First, why was the sign license transferrable, essentially perpetual, but the access license only personal to the original buyer of the dealership property? Is that suggestive of a drafting error? Also, the benefit of the access license ran to the grantee (i.e., the dealership property) and was a burden on the shopping center property. Yet, the way the language reads as to the access license, it “shall … inure to the benefit of … Grantor, and Grantor’s successors and assigns.” What does that mean? Shouldn’t the text have read: “the Access License shall be binding upon Grantor and Grantor’s successors and assigns and inure to the benefit of Grantee”? Hypertechnical? Yes.

This “lesson” comes from a November 22, 2019 decision out of an Ohio Court of Appeals. It can be seen by clicking: HERE. Though you’ll see exactly how the court decided in favor of the shopping center owner, you’ll also see that much of the court’s decision deals with the sign access license. That license was fairly specific as to the kind of sign that could be placed on the shopping center, not only as to its size but also that it had to be a “single pole identification sign.” Apparently, the specifications matched the original sign. However, when the sign was replaced, upgraded so to speak, its appearance sharply changed. The dealership prevailed in this dispute. Those who click through to the actual decision will learn why.