(September, 1998)


By Steven B. Bashaw

Steven B.  Bashaw, P.C.

Suite 1012

1301West 22nd Street

Oak Brook, Illinois  60523

Tel.: (630) 472-9990

Fax.: (630) 472-9993


(Copyright 1998 - All Rights Reserved)


1. Residential Home Inspection Issues:

The vast majority of residential real estate contracts now incorporate a home inspection rider providing that the contract is contingent upon the buyer obtaining an inspection of the premises which does not reveal any "deficiencies" within a specific time period These same riders then provides for a number of different methods of dealing with any adverse items disclosed. While there are a number of cases relating to the attorney’s role during the inspection period, (see the prior May, 1998 "Flashpoint"), home inspection issues and some recent cases are well considered in an article by Tania Snyder that appeared in the Attorney’s Title Guaranty Fund May, 1998 "the ATG Concept", newsletter. The articles noted that in Conner v. Merrill Lynch Realty, Inc., (1st Dist. 1991) 220 Ill.App.3d 522, 581 N.E.2d 196, 163 Ill.Dec. 245, the court affirmed summary judgment in favor of the inspector in a case alleging negligence and breach of contract due to the fact that the basement flooded following closing. The court’s rationale was that the inspector pointed out telltale signs of flooding at the inspection, but the buyers relied upon the seller’s explanation rather than the inspector’s warnings and therefore did not rely upon the inspection. The inspector, the court ruled, had fulfilled his duty to the buyer by noting the defect. In Mitchell v. Skubiak, (1st Dist. 1993) 248 Ill.App.3d 1000, 618 N.E.2d 1013, 188 Ill.Dec. 443, another action for negligence against the inspector, the court ruled that no cause of action existed for defects of which the buyer was actually aware. Turning back to the attorney’s role, in Howard v. Druckemiller, (2nd Dist. 1992), 238 Ill.App.3d 936, 611 N.E.2d 1, 183 Ill.Dec. 148, the Court reversed summary judgment holding that the buyer’s attorney’s recommendation that the buyer rely upon the VA appraisal without an separate inspection (regardless of the VA’s disclaimer that the appraisal did not insure there were no defects) was actionable.


2. Activation of an Assignment of Rents requires actual or constructive possession:

The decisions in Comerica Bank-Illinois v. Harris Bank, (1st Dist. 1996), 284 Ill.App.3d 1030, 676 N.E.2d 380, stands for the proposition that in order to enforce an assignment of rents provision in the event of a default and foreclosure, a lender must either take actual possession of the premises or obtain "constructive possession" by virtue of the entry of an order of court appointing either a receiver or mortgagee in possession. As a result of Comerica and the decision in Fidelity Mutual Life Ins. Co. v. Harris Trust & Savings Bank, (7th Cir. 1995), 71 F.3d 1308, lenders must move quickly after a default to file a complaint to appoint a mortgagee in possession or receiver in order to stop a borrower from "milking" rents during default. While activiation of the assignment of rents by notice to the tenants is an effective tactic to remove the incentive for delay from the borrower by interrupting the flow of rents, in order not to run afoul of case law holding that activation of the assignment of rents without actual possession or a court order is unenforceable as against public policy in Illinois, action in the courts is necessary. See the recent article by Robert C. Feldmeier, "Enforcing Assignment-of-Rents Provisions in Illinois, August, 1998, Vol. 86 Illinois Bar Journal 436.


3. Real Estate Tax sale and the Automatic Stay in Bankruptcy:

When the owners of real estate file a Chapter 13 Bankruptcy, a tax sale which occurs while the stay is pending, or if the stay is later reinstated, is void and will be declared a sale in error. This was the holding in Ballinger v. Hickory Point Bank & Trust, (4th Dist. 1997) 291 Ill.App.3d 588, 683 N.E. 2d 995, 225 Ill.Dec. 492 , even though the debtors failed to include the tax debt in their original Chapter 13 petition, the Chapter 13 was converted to a Chapter 11, which was then reinstated after being dismissed for failure to pay the filing fee, and finally converted to a Chapter 7 and discharged. The sale was a "sale in error" and set aside on the motion of the mortgagee and the tax buyer was entitled to a refund of his money plus interest.


4. Cost of recording assignment of mortgages and escrow fees:

Residential real estate practitioners who have witnessed the increasing specialization and segregation of tasks in mortgage lending often encounter a charge to the buyer at closing for the cost of recording an assignment of mortgage from the lender who originates a loan to the investor who has purchased the loan and notice of another entity address where the loan will be serviced. While the recording charge for the assignment is a relatively small expense, it commonly creates some ire in the buyers who are already disconcerted by the fact that "their lender" has sold the loan before the ink is even dry on the paper. In a recent case, the Illinois Courts have ruled that lenders may charge a borrower for the assignment fee -- provided it is clearly and meaningfully disclosed in an itemized good faith estimate. In this case the lender simply provided a "gross recording charge estimate" under RESPA regulations. There is interesting language in this decision relating to custom and practice relating to closing costs and the Court clearly felt the lender was guilty of "passing on" the recording fee to the buyer that it felt was the lender’s cost of doing business. Their decision that the charge was in error under these circumstances was based upon the fact that the disclosure simply set forth an estimate of "gross recording charges" without specific reference to the assignment. The case also reviewed the bank’s charging a fee for "suspension" of the escrow account, and found this fee did NOT to violate either the Illinois Mortgage Escrow Act or Consumer Fraud Act under the recent decision in Stern v. Norwest Mortgage, (where a fee for waiver of escrow was found not "deceptive" in violation of Consumer Fraud). The Court ruled that the "suspension" fee involved an option not addressed by the Escrow Act and therefore did not violate it. Judge DiVito dissented relating to the issue of "gross estimate of recording fees", and concurred on the escrow suspension fee decision in a well reasoned opinion that indicates there is still room for reasonable minds to differ on these issues. Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., (1st Dist. 1996) 286 Ill.App.3d 48, 676 N.E.2d 206, 221 Ill.Dec. 685.


5. Counseling the For-Sale-By-Owner Client:

Representing the owner of residential real estate who intends to sell their property without using a Realtor can create a number of problems for the lawyer; ranging from "loyalty" issues, to having to step into the tasks ordinarily undertaken by the Realtor such as negotiating and drafting the offer/contract and answering "marketing strategy" questions. In an article that begins as a conversation among lawyers suggesting that there is good business opportunity for attorneys in the "FSBO" (For-Sale-by-Owner) market, Aurora Abella-Austriaco of Attorney’s Title Guaranty Fund, Inc., also provides a handy representation check list and warnings that would serve well as a hand-out piece to any FSBO who might come into your office. The article, entitled "Counseling the For-Sale-By-Owner Client" appeared in the Real Estate Marketplace section of the May 27, 1998 Chicago Daily Law Bulletin.


6. Confirmation of Foreclosure Sales Article:

An article dealing with the cases cited in the March, 1998 "Flashpoint" relating to confirmation of foreclosure sales was published in the Real Estate Marketplace section of the Chicago Daily Law Bulletin, June 24, 1998. Entitled "Illinois Mortgage Foreclosure Law: A Growing Trend in Confirmation of Sales", by Steven B. Bashaw of McBride Baker & Coles, (this "Flashpoint" editor), analyzes the decisions in Citicorp Savings v. First Chicago Trust, (1st Dist. 1995) 269 Ill.App.3d 293, 645 N.E.2d 1038, Fleet Mortgage v. Deale, (1st Dist. 1997) 287 Ill.App.3d 385, 678 N.E.2d 35, and Commercial Credit Loans v. Espinoza, (1st Dist. 1997) 293 Ill.App.3d 915, 689 N.E.2d 282, suggesting that the courts’ recent decisions denying confirmation have eroded the integrity of sales and thereby driven the sales prices down by increasing the risk to third party bidders.


7. "Redemption Clogging" in exotic financing:

In today’s ever specializing and speculation driven economy, profit making sometimes requires one to wear more than one hat. Often a lender is a prospective purchaser and a buyer is actually a builder and eventual lessor. Mortgage documents that provide the lender may purchase the premises under certain circumstances and in the event of a default, John C. Murray reminds us in an article entitled "Title Insurance coverage for Clogging Issues", "Real Estate Marketplace" Section, Chicago Daily Law Bulletin, August 26, 1998, may raise issues relating to "redemption clogging". Jack describes a relatively rare and esoteric transactional device with clarity, and then provides methods by which title insurance and drafting foresight may be used to avoid enforcement problems with exotic financing vehicles like "equity-kicker" loans and other transactions that blur the distinction between "lender" and "partner".


8. Mechanic’s Lien Act Section 34 demand for suit:

While acknowledging the purpose of Section 34 and 35 of the Mechanic’s Lien Act is to provide a method for property owners to force to issue the validity of a mechanic’s lien claim and clear a cloud on title by a homeowner, the court’s majority opinion in Krzyminski v. Dziadkowiec, (1st Dist. 1998) ___ Ill.App.3d ____, 695 N.E.2d 1275, 231 Ill.Dec. 156, has suggested an interesting window of opportunity to contractors; a matter not lost on Judge Sheila M. O’Brien in her dissent. In this case the property owner sent a demand to the contractor to institute suite within 30 days under the provisions of Section 34, approximately six months after completion of the work, and even though there was no notice of claim for lien recorded. When the contractor did not file suit, the owner issued a demand for a release under Section 35, and then filed an action to clear the cloud on their title. The Court’s decision reversed the trial court grant of summary judgment for the owner holding that to permit a property owner to require the contract to file suit and enforce his lien rights when no claim had been filed, (and the two year time period from the date of last work to file had not yet passed!), would be contrary to the intent of the act in providing that two year period. Judge O’Brien’s dissent noted that the majority’s opinion permits a contractor to maintain an ability to claim a lien for two years without being required to prove his claim and with no recourse to the owner to clear their title other than to wait and see what the contractor will do.


9. Illinois Credit Agreements Act is a bar to affirmative defenses and counterclaims in foreclosure - REALLY!

Although the cases upholding the application of Illinois Credit Agreements Act, (815 ILCS 160/1), have consistently barred borrowers from asserting counterclaims and affirmative defenses against lenders based on alleged oral agreements to restructure a loan or forbear, it appears that defendants have not grown weary of this defense; or appeals based upon it. In the most recent case, Teachers Insurance and Annuity Association of America, (2nd Dist. 1998) ____ Ill.App.3d ____, 691 N.E.2d 881, 229 Ill.Dec. 408, the Court considered and rejected the borrower’s numerous arguments that (1) the mortgagor-mortgagee relationship is a fiduciary arrangement allowing avoidance of the oral agreements limitation under theories of equitable or promissory estoppel similar to those employed to avoid the impact of the Statute of Frauds, (2) the Credit Agreements Act violates the borrower’s right to equal protection, and (3) the Credit Agreements act is "special legislation" or "dual purpose legislation", in order uphold the constitutionality and application of the law. It would certainly appear that the courts are convinced that the Credit Agreements Act IS a bar to defenses based on alleged oral statements made by lenders to borrowers, and even these fairly inventive arguments are unpersuasive.


10. Lease provisions exempting landlord from damages arising from negligence is void as against public policy regardless of whether suit is brought under tort or contract theory.

The Plaintiff landlord brought an action to enforce an indemnification provision of a lease against the tenant to recover workman’s compensation costs paid to the landlord’s employee. The trial court dismissed the case pursuant to Section 2-619 based upon the Landlord Tenant Act’s voiding of lease provisions "exempting" a landlord from liability for damages arising from its negligence as contrary to public policy. (765 ILCS 705/1) On appeal, the landlord argued that inasmuch as the claim was based upon a "contract" rather than "tort" theory, the statute’s prohibition was inapplicable, citing a 1990 case limiting application of the act to negligence actions. (Madigan Brothers, Inc. v. Melrose Shopping Center Co., (1st Dist. 1990), 198 Ill.App.3d 1083, 556 N.E.2d 73. 145 Ill.Dec. 112. The court’s majority opinion specifically declined to follow the Madigan case and held that: "We do not believe that the same lease provisions can be simultaneously void and not void...Whether a particular lease provision is void depends not on the cause of action in which the lease provisions is invoked, but rather, whether the language of the lease provision runs afoul of the statutory prohibition." In dissent, Justice Hoffman disagreed with the majority opinion, but on definitional terms rather than distinctions relating to contract versus tort theory of recovery. The dissent notes that the statutory prohibition addresses "exemption" lease provisions as void against public policy without reference to "indemnification". Inasmuch as the lease language at issue was an "indemnification" rather than an "exemption" clause, Justice Hoffman took the position was that it was not void.