The Supreme Court of Ohio held today that when a public school district offers a vacant school building for sale, a deed restriction barring any future use of the property for school purposes is unenforceable because such a restriction is contrary to the public policy of the state in favor of community schools.
The court’s 6-1 decision, which affirmed a ruling of the First District Court of Appeals, was authored by Justice Judith Ann Lanzinger.
The case involved the 2009 auction sale by the Cincinnati City School District (CPS) of a vacant building on Tremont Road that had formerly housed the Roosevelt School. In promotional materials for the auction, the school district advised potential purchasers that the auctioned buildings “may not be used as any type of educational facility.” The district also included in the sale/purchase agreement for the property a requirement that the buyer use the building for “commercial development,” and explicit statements that the buyer would not itself use the property “for school purposes,” and that the deed would be restricted to bar any future use of the property for school purposes by a subsequent purchaser other than CPS.
Dr. Roger Conners and his mother, Deborah Conners, were the only purchasers to bid at auction on the property. They bid $30,000, and on June 9, 2009, entered into the Purchase and Sale Agreement containing the deed restriction. Title was conveyed by a quitclaim deed on June 30, 2009.
On October 8, 2009, the Connerses received conditional use approval from Cincinnati’s Office of the Zoning Hearing Examiner to “reopen the school as a charter school.” The following January, their attorney notified the CPS school board and its chief legal counsel that the deed restriction barring future use of the property for school purposes was void as against public policy, and that they intended to open a charter school at the former Roosevelt School location in August 2010.
CPS filed suit in the Hamilton County Court of Common Pleas, seeking a declaration that the deed restriction prohibiting the use of the property as a school was valid and enforceable. They also sought an injunction barring the Connerses from taking any action toward opening a school on the property. At the time that CPS filed suit, the Connerses had moved forward with renovation of the property pursuant to the zoning approval, investing $60,000 in rehabilitation of the building and purchasing $10,000 of school furniture, among other expenditures. The Connerses sought and were granted judgment on the pleadings, and CPS’s complaint was dismissed. In its order, the trial court stated that the deed restriction at issue was void as against public policy.
The First District Court of Appeals affirmed, holding that the deed restriction was void as against the public policy embodied in former R.C. 3317.41(G), which required public school districts to give charter school operators the first option to purchase vacant school buildings if they were “suitable for use as classroom space.” The statute was amended to delete “suitable for use as classroom space” in 2011.
The Supreme Court agreed to review the case to determine whether the public policy embodied in legislation favoring creation of community schools outweighs a public school district’s statutory authority to negotiate contract terms in its business dealings, including the authority to enforce deed restrictions in a district’s sale of its property to a private buyer.
In today’s decision, Justice Lanzinger wrote: “Ohio boards of education are creations of statute, and their authority is derived from and strictly limited to powers that are expressly granted by statute or clearly implied therefrom. ... In enacting R.C. 3313.17, the General Assembly gave boards of education the discretionary authority to contract with other parties in order to administer Ohio’s system of education. ... A board of education, however, also has a duty ‘to manage the schools in the public interest.’ ... Thus, while a board of education has the authority to contract, it must do so with the public in mind.”
"The General Assembly also enacted legislation that placed restrictions on a board of education's authority to dispose of property. R.C. 3313.41 governs school districts' discretionary sale or donation of school buildings. The statute in effect at the time this suit was filed, former R.C. 3313.41(G)(1), ... required that before a school district sells a school building 'suitable for use as classroom space, prior to disposing of that property under divisions (A) to (F) of this section ... it shall first offer that property for sale to the governing authorities of the start-up community schools established under Chapter 3314 ... at a price that is not higher than the appraised fair market value of that property.' ... When this section was amended in 2011, the amendment deleted the 'suitable for use as classroom space' requirement. ... Under former 3313.41(G)(2), which has since been deleted, the same first offer requirement was required for similar property that has not been used for a year."
"These statutes show that the General Assembly did not intend that a board of education have an unfettered right to dispose of its property. They also indicate a legislative preference for giving charter schools the opportunity to operate out of unused public school buildings, a rational choice because charter schools are themselves 'public schools' ... and 'part of the state's program of education.'"
Legislation on charter schools was adopted when the General Assembly enacted R.C. Chapter 3314 in 1997, titled 'The Community Schools Act.' ... In enacting R.C. Chapter 3314, the General Assembly declared that its purposes included 'providing parents a choice of academic environments for their children and providing the education community with the opportunity to establish limited experimental educational programs in a deregulated setting.' ... Because we acknowledge that the General Assembly has expressed a strong interest in community schools, we now turn to the deed restriction to determine whether including it in CPS's contracts violates a stated public policy."
"The freedom to contract is a deep-seated right that is given deference by the courts. This deference, however, is not absolute. We have observed that the "'liberty of contract is not an absolute and unlimited right, but upon the contrary is always subservient to the public welfare. ... The public welfare is safeguarded, not only by Constitutions, statutes, and judicial decisions, but by sound and substantial public policies underlying all of them.'"
"Deed restrictions are generally disfavored and will be 'strictly construed against limitations upon ... use, and that all doubts should be resolved against a possible construction thereof which would increase the restriction upon the use of such real estate.' ... The restriction in Section 8 of the Purchase and Sale Agreement states: 'B. Buyer agrees not to use the Property for school purposes, and that the deed to the Property will be restricted to prohibit future use of the Property for school purposes. Such deed restriction will not apply to the Seller, and will not prevent the Seller from repurchasing any portion of the Property in the future and using the Property for school purposes.'"
"The restriction, on its face, prevents the free use of the property for educational purposes. The language thus directly frustrates the state's intention to make classroom space available to community schools, as evidenced by R.C. 3313.41(G). Furthermore, the restriction is not neutral; it seeks to thwart competition by providing that the restriction applies to all buyers except CPS itself. This consequence hinders the results that the General Assembly has created under R.C. 3313.41, 3318.08, 3318.50, 3318.52 and the Ohio Community Schools Act − that is, allowing an unused school building to be transferred to community schools that will use the building to provide school choice."
"In our view, the statutes reflect the General Assembly's purpose of requiring boards of education to sell unused school buildings to community schools by giving them first refusal ensuring that the price is fair, and financially assisting them through a loan program to purchase adequate classroom space. The General Assembly continues to clarify its intent that unused public school buildings should be offered to community schools without restriction, as evidenced by the recent changes to the language of R.C. 3313.41(G) where the General Assembly removed the term 'suitable for classroom space' from the law. The deed restriction in this case is at odds with these statutes. The restriction effectively adds barriers to building purchases that the legislature seeks to prevent."
"We emphasize that we continue to uphold the importance of the freedom to contract and recognize the narrowness of the doctrine on public policy. In this case, however, involving a contract between a private party and a political subdivision, there is a compelling reason to support the application of the doctrine. We therefore hold that the inclusion of a deed restriction preventing the use of property for school purposes in the contract for sale of an unused school building is unenforceable as against public policy. The judgment of the court of appeals is affirmed."
Justice Lanzinger's opinion was joined by Chief Justice Maureen O'Connor and Justices Evelyn Lundberg Stratton, Terrence O'Donnell, Robert R. Cupp and Yvette McGee Brown. Justice Paul E. Pfeifer entered a partial dissent in which he agreed that the deed restriction was not enforceable as against public policy, but indicated that he would apply the court's opinion only prospectively.
Justice Pfeifer wrote: "In this case, the school board sold property with a deed restriction. Although no evidence on this issue was presented, based on logic and a rudimentary understanding of how real estate is valued, I am willing to presume that the deed restriction caused some diminution in the sales price. It strikes me as unfair that the buyer should be able to buy at a reduced rate because of a deed restriction and then realize full value by having this court declare the deed restriction against public policy. Essentially, the buyer has received a windfall and the school district has not received the full value for its property." As a preferred remedy for this inequity, Justice Pfeifer said he would require the purchasers to pay CPS the difference between the price they actually paid for the property and its fair market value without the deed restriction at the time of the sale.