REAL ESTATE LAW PRACTICE KEY POINTS
By Steven B. Bashaw
McBride Baker & Coles
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(Copyright 1999 - All Rights Reserved)
1. "KNOWING" VIOLATION UNDER RESIDENTIAL REAL PROPERTY DISCLOSURE ACT AN ISSUE OF FACT.
The Third District has added to the precedent on post-closing actions relating to residential real estate transactions with Woods v. Pence, (3rd Dist., March 12,1999), No. 3-98-0469. In this case the appellate court found that the trial court erred in granting summary judgment in favor of the seller where the evidence showed that the sellers had made between three and five repairs to the roof of the property in a four year period but failed to disclose any defects to the buyer at the time of the contract. The Court held that the reasonableness of the seller's belief that the problem had been corrected was a question of fact and not a basis to grant summary judgment, and further held that the fact that the buyers were aware of water damage might be a factor in determining damages at trial, but did not preclude liability. The Residential Real Estate Disclosure Act, (765 ILCS 77/20), imposes liability for a knowing violation of the duty of disclosure prescribed, but what is knowingly false, what is known by the buyer regardless of the disclosure report, and what need not be disclosed based on a reasonable belief that a defect has been corrected, are all clearly issues of fact according to this recent case.
2. CONSTRUCTIVE NOTICE OF PROCEEDINGS TO PURCHASERS
In Equitable Real Estate Investments, Inc. v. United States Department of Housing and Urban Development, (N.D.Il. 1998), 14 F.Supp.2d 1058, the Court ruled that when property was sold in foreclosure, a purported purchaser of the property who had constructive notice of the foreclosure could not recover for improvements to the property under the theories of either unjust enrichment nor equitable lien for the value of the improvements. The ruling underscores the applicability of the "doctrine of lis pendens" reported last year and the concept of constructive notice of the foreclosure proceeding imparted by the recording of the lis pendens. (See the March, 1998 "Flashpoint" discussion of First Midwest v. Pogge, (4th Dist. 1997), 678 N.E.2d 1195.)
3. CARE IN DRAFTING CONSTRUCTION ESCROW INSTRUCTIONS.
Most real estate practitioners have occasion to draft escrow instructions to govern payments to contractors and subcontractors during the construction of a residence. The task usually involves balancing the protection of the owner and the lender with the needs of the builder, and too often lawyers defer to the lender and title company to make to assure all is well. In Fantino v. Lenders Title and Guaranty Company, (2nd Dist. February 26, 1999) No. 2-98-0475, the appellate court's reversal of the trial court's finding that the Fantino's were third-party beneficiaries of the escrow agreement drafted "for the direct benefit of the lender" is a source of warning to all. The Fantinos were actual parties to the escrow, but the agreement specifically limited the title company's duty to protect to the lender's interests. Accordingly, when the contractor overdrew on the escrow and committed forgery, the owners filed suit and obtained a judgment at trial against the title company based on the theory that they were third party beneficiaries of the escrow agreement and a breach of fiduciary duty. The appellate court reversed because the escrow agreement created only duties on behalf of the title company for the benefit of the lender, and therefore did not protect the owner. The owner was expressly a party to the escrow agreement and therefore could not be a third party beneficiary. Clearly a lesson for all involved in construction escrows, this case points out the importance of making certain that the owners' interests (in addition) to the lender's are specifically addressed in the escrow agreement.
4. ABUSE OF DISCRETION IN EXERCISING EQUITY AT CONFIRMATION OF SALE
In a case the foreclosure litigators might want to copy and carry in their briefcases, Judge Esterbrook ruled that Eastern District of Wisconsin Judge Reynold overstepped his bounds in refusing to confirm a foreclosure sale after attempting to force the Secretary of Housing and Urban Development to settle with a defaulting mortgagor during a mortgage foreclosure case. SHUD was the holder of the mortgage by assignment, and the trial court repeatedly ordered the United States to discuss settlement during the case. After two years of refusing to settle, and the court being unwilling to let the litigation proceed, a judgment in favor of the United States was entered and a foreclosure sale at last occurred. The court, however, refused to confirm the sale and ordered the United States to convey the property to the North Milwaukee State Bank for approximately $10,000 less than the sale bid in resolution. (Apparently this was based upon HUD's purported general practice to accept a settlement in a sum equivalent to the appraised value of the property regardless of the debt.) The Court's decision reversing and remanding with direction to confirm the sale and entered a deficiency judgment contains some quotable language for plaintiff's attorney's in foreclosure cases when confronted by a judge "exercising equity":
"The United States had a legal entitlement to a swift sale and confirmation, so that it could collect the debt. Judges are entitled to ask litigants to negotiate...but cannot force them to settle...What happened here was the equivalent of judicial permission to occupy the house rent-free for more than two years, calculated to coerce the United States to settle. ...A judge is not a chancellor entitled to apply his own idea of humane policies toward debtors. Congress has decided how much time debtors such as LaCroix have to pay (or redeem); judges must implement rather than frustrate those rules."
Debtor's attorneys, of course, can distinguish this case on the fact that the Plaintiff was the United States of America. Additionally, the substantive basis of the decision was that only the Department of Justice is authorized to settle litigation in which the United States is interested pursuant to 28 U.S.C. 519, 29 C.F.R. 0.160, 0.168(d)(2), and therefore HUD could not have possibly agreed to the resolution directed by the Court based upon any "general practice", and it was clear that the Department of Justice refused the settlement offers.
5. EXERCISE OF THE RIGHT OF REDEMPTION IN TAX DEED CASES
The concept that someone must have an "interest" in the real estate in order to exercise the right to redeem real estate from a tax sale seems to be as difficult for the Courts as it is for practitioners to grasp. In the recent case of In re Application of Cook County Treasurer, (Ill.S.Ct., December 31, 1998), No. 85156, the majority opinion written by Justice Hiepel found that the owner of "record title" who held neither legal nor equitable interest in the real estate has no right to redeem. In this convoluted case the party who redeemed (Williams) was acting under a power of attorney for Lee, who had entered into an installment contract and conveyed title to Smith as the purchaser. Smith, however, never recorded the deed, and Lee subsequently informed Smith that she was rescinding the contract and the deed as procured by fraud, and entered into a contract to sale the same property to Williams. (Yes, the same Williams acting under the power of attorney - I warned you it was convoluted....). The Supreme Court ruled that Lee, as the owner of record who had no legal or equitable interest in the property, had no right to redeem, but, affirmed the appellate court's decision allowing the redemption on other grounds. In addition to good language regarding the necessity of recording a deed to create an "interest" as to third parties to the transaction, this case found that Williams did not have a right to redeem as Lee's representative, but DID have an interest sufficent to redeem in his own stead. Under 35 ILCS 200/21-345, "any owner or person interested in that property" has the right to redeem. While Lee was no longer the "owner", (regardless of her "record title" due to the unrecorded deed to Smith), Williams did have an "interest" sufficient to have a right to redeem by virtue of the contract to purchase; "the contract to purchase itself is sufficient to create an equitable interest in the property." Justice McMorrow's specially concurring opinion gets to the heart of the issues and the public policy that the redemption laws should be liberally construed in favor of redemption, but this is a classic example of a case that can be "misread by the headnotes."
6. UNAMBIGUOUS REAL ESTATE CONTRACT LANGUAGE, SUMMARY JUDGMENT, "TERMINATE", COMPOUNDED INTEREST.
In Reaver v. Rubloff-Sterling, (3rd Dist., March 12, 1999), No. 3-98-0560, Rubloff-Sterling entered into a contract to purchase a 29.5 acre parcel of commercial real estate from Reaver contingent upon obtaining permission from the Department of Transportation to install two curb cuts that would allow access to the property. They later amended the agreement to divide the property into two separate parcels, and Rubloff-Sterling was granted an option to buy parcel 2 contingent upon obtaining the curb cuts. The amendment provided the purchaser was to pay a non-fundable sum of $1,750 upon the execution of the amendment, earnest money of $5,000 deposited at that same time, and the balance of the purchase price of $663,550, together with accrued interest at the rate of 8.25% from the date of the closing of Parcel 1 payable, quarterly in arrears. Rubloff-Sterling never obtained permission for the curb cuts and made no quarterly payments of interest. Seller sued for approximately $40,000 in interest on the option to buy parcel 2. The trial court found that the contract unambiguously required the Purchaser to pay the Seller interest even though the option was not exercised as a matter of summary judgment, and Seller appealed. The appellate court affirmed and the opinion has four very useful points for real estate litigators to note: (1) If the language of a contract is unambiguous, the intent of the parties must be determined solely from the words of the contract. Obviously, Rubloff-Sterling's position was that the interest was only to be payable if and when it exercised its option. Because the wording of the contract was clear and unambiguous, the "intent" of the parties was contained within the words of the document and summary judgment proper. (2) The use of the word "terminate" in the contingency provision did not relieve Purchase of the obligation to pay interest under the option. If the parties had so intended they should have used the words "expunge" or "refund" to indicate an intent to forego the interest rather than "terminate" which "simply means 'to bring to an ending". (3) Compound interest exists when accrued interest is added to the principal and the whole is treated as a new principal for the calculation of interest for the next period. Compound interest is disfavored in Illinois; and this was not compound interest. (4) The Interest Act (815 ILCS 205/2) provides for creditors to be allowed 5% interest for all monies after they become due on "any bond, bill, promissory note, or other instrument of writing", and a contract for the sale of real estate qualifies as an "instrument of writing" under this provision of the act. (If Fantino v. Lenders Title and Guaranty Company, gave one pause to consider the importance of careful drafting, this case should certainly emphasize that point four-fold!)
7. LANDLORD AND TENANT: FAIR DEBT COLLECTION PRACTICES ACT
Most real estate litigators have become accustomed to the pronouncement of the United Supreme Court that we are "Debt Collectors" subject to the Fair Debt Collection Practices Act, (15 U.S.C. Section 1692 et seq.), but the warnings seem to bear repeating, and especially so as each new scenario presents itself.
In a recent New York case, the Second Circuit has ruled that lawyers who send a three day rent demand letter to tenants under New York law, (similar to our "Five Day Notice"), are required under the Fair Debt Collection Practices Act to include the statements that the communication is an attempt to collect the debt and the "30 day validation" notice statement. (See the decision by Judge Posner in Bartlett v. Heibl, (7th Cir. 10/8/97), No. 7-1946, discussed in the Illinois Bar Journal, Vol. 85, December 1997, page 582 for a "safe harbor" example of the FDCPA language in the Northern District of Illinois.) The Court ruled that the notice was a "communication" that was an attempt to collect a debt under the FDCPA. The "offending" attorney made a motion to dismiss the FDCPA claim, but the Court, even while it acknowledged that it might be opening a floodgate of litigation, denied the motion. Romea v. Heiberger & Assoc., (2nd Cir. 12/9/98), No. 98-7259, U.S. App. LEXIS 30906.
8. MORTGAGE FORECLOSURE: RIGHTS TO RENT AFTER SALE
During the mortgage foreclosure case, the lender was outbid by a third party but a substantial deficiency remained. Although the mortgage included an assignment of rents, the Court ruled that the purchaser at sale became solely entitled to the rents as part of the property rights purchased at the sale. The court held that the foreclosure sale extinguished the mortgagee's rights to rents regardless of the deficiency, and after sale the right to the rents accrued to the purchaser. Norwest Bank Arizona, N.A. v. Superior Court, (Ariz. Ct. App. 1998) 963 P.2d 319. This same outcome would probably be the result under the Illinois Mortgage Foreclosure Act, which has recently seen some focused attention on the area of entitlement to surplus funds from foreclosure sales. (See the February, 1999 "Flashpoint" discussion of Members Equity Credit Union v. Duefel relating to rights to surplus.)
9. REPRESENTATION OF CLOSING CLIENTS IN LITIGATION
In an article entitled "Beware When You Envision Double Duty", Chicago Daily Law Bulletin, Friday, February 12, 1999, (call the Law Bulletin Information Network at (312) 644-7800 to subscribe or go to http://www.lawbulletin.com to see their web site), Cornelia Wallis Honchar and Lawrence M. Templer provide a clear and distinct warning that all too may real estate practitioners fail to heed when a contract goes "bad" and litigation becomes necessary. When an attorney knows that he or she may be required to testify as a witness in the case, Rule 3.7(a) of the Rules of Profession Conduct prohibits an attorney from accepting or continuing employment in litigation. This apparent blanket prohibition is tempered where the attorney's appearance is not obviously mandated but only a possibility, (Weil, Freiburg & Thomas P.C. v. Sara Lee Corp., (1st Dist. 1991) 577 N.E.2d 1344), and where there are other people who could provide the same testimony, (Park-N-Shop Ltd; v. City of Highwood, (N.D. Il. 1994), 864 F.Supp. 82). The issue of disqualification or withdrawal is largely one of the discretion of the trial court in weighing the hardship to the client against the logistics of a trial and efforts of the adverse party to disqualify the attorney. In the end, of course, there is also the huge question of whether by being involved in the facts and controversy that gave rise to the litigation the attorney can possibly be objective and effective during litigation, or is likely to succumb to viewing the case as a "litigant" invested in the outcome rather than purely as an advocate. Experience seems to dictate withdrawal in real estate contract litigation simply because the transactional attorney's actions, (i.e., giving proper notice to terminate or modify a contract), are often the pivotal issues. Read this article if you are confronted with the issue and it may give you a clear perspective that might serve your client well.
10. SOME THOUGHTS ON THE "BUSINESS" OF REAL ESTATE and LAWYERING
There can be no question that the law is becoming more of a "business" as each day passes, and real estate practitioners are probably more aware and impacted by this than most attorneys. Two "news" items of note are articles found in recent journals.
In the National Law Journal on March 18, 1999, the article "Realty Trade Group Sues Over Online Home Listing" announced "the first legal battle of its kind" as an internet provider was sued by a real estate trade group over using multiple listing home sales information. The Realtor Association of Greater Fort Lauderdale sued Property America Corp in federal court claiming the company's web site illegally infringed on its copyrighted MLS information by posting facts about the property gathered and owned by the group. Property America responded that "it doesn't list real estate, it doesn't sell real estate. It acts as a host for Realtors who want to advertise listings. And if you want to [see] the property, you go to the Realtor link." Sounds like a "tuff battle" warming up.
In the December, 1998 issue of the DuPage County Bar Journal Brief, Peter J. Birnbaum, President of Attorney's Title Guaranty Fund Inc., wrote an article entitled "Realtor/Lender Controlled Business: Do We Fight or Surrender?" The article sets forth Peter's perspective on another "turf battle": the increasing efforts of Realtors and lenders to control real estate transactions by controlling title and closing business through "tie-in" arrangements. While I do not always agree with Peter on all topics, (I'm still a staunch believer that lawyers are lawyers and should not be title companies), his concerns are genuine and his recommendations appropriate when he urges us to (1) focus on lawyer/client relations above all else, for your duty is to your client not the Realtor or any other party "sending you the file"; (2) take to the high ground, for good Realtor relations will carry the day; and, (3) the legal profession must lead and not follow; especially in the arena of technology and communication. Peter's article ends with a quotable statement: "We need to think outside the box. Real estate sales, real estate financing and trust services are but a few examples of services lawyers should be providing clients as "trusted advisors". This is not a battle over title work; it's much bigger than that."