Title: Fairfield Township Board of Trustees v. Testa

State: ohio

Issuer: Ohio Supreme Court

Document:

[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.] 
 
 
 
NOTICE 
This slip opinion is subject to formal revision before it is published in an 
advance sheet of the Ohio Official Reports.  Readers are requested to 
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 
South Front Street, Columbus, Ohio 43215, of any typographical or other 
formal errors in the opinion, in order that corrections may be made before 
the opinion is published. 
 
 
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 
 
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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). 
January Term, 2018 
 
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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.” 
 
 
SUPREME COURT OF OHIO 
 
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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 
January Term, 2018 
 
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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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{¶ 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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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. 
SUPREME COURT OF OHIO 
 
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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. 
January Term, 2018 
 
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Michael DeWine, Attorney General, and Christine T. Mesirow and Kody 
R. Teaford, Assistant Attorneys General, for appellee Tax Commissioner. 
_________________