REAL ESTATE LAW PRACTICE KEYPOINTS

(JULY 1999)

 

By Steven B. Bashaw

McBride Baker & Coles

10th Floor - One MidAmerica Plaza

Oakbrook Terrace, Illinois  60171-4710

Tel.: (630) 954-7588

Fax.: (630) 954-7590

e-mail:  SBashaw @MBC.COM

(Copyright 1999 - All Rights Reserved)

 

 

1. MORTGAGE ASSIGNMENT FEES AND TAX ESCROW SUSPENSION FEES REVIEWED BY ILLINOIS SUPREME COURT:

 

Most transactional attorneys have come across the issue at a real estate closing of the borrower being required to pay the cost of the recording of the originating lenders' assignment of mortgage to the investor. Another common encounter is the charge of a fee relating to a waiver of the real estate tax escrow. (I commonly make disparaging remarks about lenders who are asking my clients to pay their "cost of doing business" in selling the loan in the secondary mortgage market at closing.)  In Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., (Il. S. Ct., June 17, 1999), No. 83822, the Illinois Supreme Court has ruled that a lender neither violated the Illinois Consumer Fraud Act nor the Deceptive Business Practices Act by charging the borrowers a mortgage assignment recording fee and a tax escrow suspension fee at closing.

 

The majority opinion, written by Justice Bilandic, first deals with the mortgage assignment recording fee by noting that RESPA mandates only that the Good Faith Estimate set forth a gross or "amount or range" of recording charges; not a detailed itemization.  It is only at closing that a detailed itemization of all charges is required on the HUD-1 Settlement Statement. (The Court even noted that the Good Faith Estimate form provides only a single line for estimating the recording charges, whereas the HUD-1 contains several lines and spaces for a lender to identify the amounts of specific recording fees.)  Accordingly in this case, where the Good Faith Estimate disclosed a gross recording fee of $80, and the actual recording fees at closing, (including the $15 assignment of mortgage recording fee), were $77, there was no violation.  Moreover, the Court ruled, Congress included compliance with the disclosure regulations prescribed by HUD as a condition for absolving lenders from liability under RESPA. Here the lender had complied by disclosing the gross recording charges under RESPA, and therefore was rendered EXEMPT under Section 10b(1) of the Consumer Fraud Act's provision for "actions or transactions specifically authorized by laws administered by any regulatory body".

 

Turning to the Escrow Suspension Fee, the majority opinion then noted that the borrowers admitted that they had asked the lender to suspend its escrow requirement AFTER the loan had been approved. Accordingly, the Court distinguished the holding in Stern v. Northwest Mortgage, Inc., (1997) 179 Ill.2d 160, because the borrower here voluntarily agreed to the fee AFTER they had rejected their options under the Illinois Escrow Act, and the Court was simply upholding the "rights of competent parties to enter into contracts." This was not a situation where the lender was imposing a fee on the borrowers because they chose to exercise an option provided by the Escrow Act, but rather a circumstance where the parties modified the terms of the loan agreement at closing and following an election by the borrower.

 

Justice Harrison concurred in part and dissented in part.  Based on reasoning that the Consumer Fraud Act should be liberally construed, Judge Harrison found the assignment of mortgage recording fee violative because of the fact that the lender "without plaintiff's prior knowledge and consent, [was] assessing them a fee that was not theirs to pay..."

 

 

2. COOPERATIVES CREATE A LANDLORD-TENANT RELATIONSHIP ALLOWING REMEDY OF FORCIBLE ENTRY AND DETAINER:

 

In Harper Square Housing Corporation v. Hayes, (1st Dist., June 17, 1999), No. 1-97-4177, the First District affirmed the finding by the Cook County Circuit Court that a Cooperative has the right to proceed in forcible entry and detainer against a member/occupant of a unit in the Coop.   The Court noted that the Illinois Courts have previously reviewed the nature of a cooperative and ruled that the usual coop creates the relationship of landlord and tenant between the cooperative and shareholder-occupant, and therefore extended to the corporation the usual remedies of a landlord against a tenant for nonpayment.  In this case the tenant attempted to rely upon a prior decision in which the Court found a cooperative shareholder was not a "tenant", but the First District distinguished that case from this based upon the unique "Mutual Ownership Contract" which contained no language indicative of a leasehold.  In the case at bar, the Court found ample language of a "lease", references to the right to "re-let the unit" and references to a term of lease arrangement,  and therefore upheld the Circuit Court's ruling imposing the remedies of a landlord, holding that the nature of the relationship is to be determined by reviewing, in totality,  the cooperative's documents.  (This case also has some good language relating to the fact that a lack of subject matter jurisdiction is a fundamental defect that may be raised at any time by any means.)

 

 3. EMINENT DOMAIN AND THE TAKING OF "REPLACEMENT" PROPERTY PURSUANT TO AN AGREEMENT AMONG GOVERNMENTAL AGENCIES

 

In this case, The Department of Transportation of the State of Illinois v. Callender Construction Company, (4th Dist., May 28, 1999), No. 4-98-0184, the Court grappled with a convoluted fact pattern that included a prior federal lawsuit enjoining IDOT's construction of Interstate 72 from Springfield to Quincy by passing through the Pike County Conservation Area, endangered species, and a "land trade" between IDOT and the Illinois Department of Conservation.  The Defendant landowner objected to the condemnation alleging a lack of necessity and statutory authority for the taking, noting that the condemnation of 400 acres of private land, plus restrictive easements on several hundred additional acres, to replace 35 acres of Conversation Area was grossly excessive and an abuse of power.

 

The Court found that the Illinois General Assembly had concluded that the expressway was necessary for the public good.  In order to obtain federal funding IDOT had to satisfy the IDOC that there was no feasible or prudent alternative to construction through the conservation area. Then, to provide for mitigation to preserve the wildlife habitat by using its power of eminent domain to replace the land acquired from the Conversation Area in order to comply with the statutory mandates regarding wildlife habitat and endangered species, the Court found IDOT acted within its authority to acquire a restrictive easement on defendants' property.  In response to the dissent filed by Justice Cook arguing that "replacing" 35 acres with 400 and restrictive easements on hundreds of other acres was simply gross, the majority opinion cited existing law that "the court will not inquire into the extent to which the [taking of] property is necessary for such [public] use unless it appears that the quantity of property taken is grossly in excess of the amount necessary for the use."  Judge Cook responded, "The argument that there are no limits upon IDOC's power to demand replacement property, perhaps in reaction to pressure by environmental groups is without support.... {while} the majority states that intergovernmental agreements are encouraged. I believe that this is true, but I would caution that an agreement between two governmental bodies should not be allowed to compromise basic rights of individuals."

 

This case is also noteworthy for its definition of the term "necessary" in a condemnation setting as meaning "expedient", "reasonably convenient" or "useful to the public,"  and not as limited to an absolute physical necessity.

 

 

4. DEVELOPMENTS IN ELECTRONIC CASE CITATIONS:

 

The Illinois State Bar Association is working with the Illinois Supreme Court on the issues relating to a "universal citation" system that will permit citations to electronically stored case decisions.  The ISBA drafted a model rule in April 1999 for consideration by the Court.  The model is intended to be both vendor and media neutral because of the fact that many cases are available from various sources on the Internet far before the official reported decisions appear in print.  The distinction in the state bar association's proposal is that decisions are assigned sequential numbers as they are decided, (rather than the current case numbers assigned upon filing), and the paragraph numbers, rather than page numbers, are the internal decision locator due to the varying "page" sizes within various electronic formats. In essence, the Court would be the "publisher" inasmuch as it would control the sequential case and internal paragraph numbering.  The citation would contain the case name, followed by the year in which the decision is rendered, a court of decision designation, an opinion number followed by the specific paragraph referenced, ending with a website domain name; i.e., Smith v. Jones, 1999, Ill.App. 3rd Dist., No. 12345, P4, Supreme Court Rule 6 currently regulates the form of case citations. (See article "State bar making push for electronic-age case cites", by Molly McDonough, Chicago Daily Law Bulletin, May 19, 1999, p. 1.)

 

 

5. TRUST ACCOUNTS AND REAL ESTATE CLOSINGS EXPLAINED:

 

When the Attorney Registration and Disciplinary Committee first noted that there may be a problem with the practices of attorneys acting as title or disbursing agents at real estate closings, the Illinois State Bar Association Real Estate Section Council responded with proposed amendments to the Supreme Court Rules. This resulted in Rule 1.15 providing the circumstances under which an attorney can accept certain forms of proceeds and immediately disburse without running afoul of trust account ethics.  The Rule limits the form of funds and requires a specific form of bank account.  The details are discussed in the articles "Trust Accounts and the New Rules for Real Estate Closings," by Paul Sullivan of Quinn, Johnston, Henerston & Pretorius of Peoria, Illinois. The article can be found in the May, 1999, ISBA Bar Journal, Vol. 87, and in the on-line version of the Illinois Bar Journal at the Illinois State Bar Association website; http://www.isba.org/.

 

 

6. ELECTRONIC REAL ESTATE COMMERCE IS COMING!

 

Over the last few years, I have heard a great deal from my partner, Tom Smedinghoff, about the need for law establishing the verification of electronic signatures in order for commerce on the Internet to finally mature.  I really didn't think that the Electronic Commerce Security Act, (5 ILCS 175/1-101), which becomes effective on July 1, 1999, however, would have too great of an impact on my real estate practice. (After all, I deal with things like the Statute of Frauds and the Rule in Shelly's Case, not "day-trading" and "e-bay" contracts.)  But the article in the June, 1999 ISBA Journal, Vol. 87, P. 308, "Illinois law Enters Cyberspace: The Electronic Commerce Security Act", by R. J. Robertson, Jr. and Thomas J. Smedinghoff, (also available in the on-line version of the Illinois Bar Journal at the Illinois State Bar Association website; isba.org), however contains a number of examples that clearly indicate that this law will have an impact on the formation of all contracts; real estate and otherwise. The law provides that after the effective date of the act, e-mail messages between parties may constitute "electronic records" that satisfy the statute of frauds' requirement that a contract be in writing.  The Act's provision that "where a rule of law requires information to be "written" or "in writing", or provides for certain consequences if it is not, an electronic record satisfies that rule of law." This applies to real estate as well as options contracts.  5 ILCS 175/5-115(a).    Additionally, after the effective date of the law, a person's name at the end of their e-mail message may satisfy the statute of frauds' requirement that the writing be "signed" by the party to be charged.   The law is specifically designed to "remove any doubt regarding the enforceability of electronic signatures.” (See Final Report of the Commission on electronic Commerce and Crime, January 16, 1998), the Act creates a rebutttably presumed "secure electronic signature" to acknowledge the minimized risk of electronic impersonation in transaction.

 

(Do I now put an "X" after my name on e-mail now?)

 

 

7. STATUTE OF LIMITATIONS ON NON-NEGOTIABLE NOTES, MERGER, AND VENDOR'S LIENS:

 

In Krajcir v. Egidi, (1st Dist., June 4, 1999) No. 1-98-0838, the Court determined that the applicable statute of limitations period depended upon whether the promissory note given for the purchase of real estate was a negotiable instrument or not.  If the note was a negotiable instrument, under Section 3-118 of the Uniform Commercial Code, the applicable statute of limitations was 6 years from the due date.  If, however, the note was not a negotiable instrument governed by the UCC, the statute of limitations for collection was 10 years from the date the cause of action accrues pursuant to 735 ILCS 5/13-206, governing written evidences of indebtedness, non-negotiable notes, and written contracts.   Turning to Section 3-104 of the UCC, the Court noted that by definition, a negotiable instrument is one that is an unconditional promise to pay an fixed amount of money, with or without interest, to bearer or order on demand or at a definite time. The subject promissory note was determined not to be a negotiable instrument because it did not contain the words of negotiability, ("to order" or "to bearer"), and was not payable either on demand or at a definite time. (The note's due date was "on the date of final endorsement [funding] by [HUD] on Project No. 071-35488"; the financing of the defendant's rehabilitation project for the property).  Having ruled that 735 ILCS 5/13-206 applied, the Court noted that the 10 year statute of limitation begins to run when the cause of action accrues, and that the statute further provides "but if any payment or new promise to pay has been made...then the action may be commenced thereon at any time with 10 years after the time of such payment or promise to pay.", and found the action timely filed.

 

This case also reversed the trial court's dismissal of Plaintiff's action finding that the delivery of the deed constituted a merger of the contract into the deed.  Noting that the doctrine of merger is not favored by modern courts, especially where there are other obligations of the contract which delivery of the deed does not fulfill, (i.e., payment of the balance of the purchase price), the Court found that the contract was not merged where there are continuing installment payments due.

 

Finally, the Court found that the seller was entitled to enforce a vendor's lien, stating "In cases where a lien has not been reserved expressly, a lien is raised in equity in favor of the vendor who has parted with legal title without receiving payment of the full purchase price; it arises in every sale and conveyance of land when the purchaser has not paid in full." - good language for real estate litigators to come back to anytime they represent sellers who haven't been paid!

 

 

8.  LEASES AND LAND TRUSTS; BENEFICIARIES, LESSORS, AND AGENTS:

 

The Defendants, Shadeco, Inc. and Morningstar Lamp Company, Inc., leased industrial property, title to which was held in a land trust, from R-Five, Inc.  The Plaintiff, R-Five, Inc. was the beneficiary of the land trust and brought a forcible entry and detainer action against each tenant.  The trial court found that R-Five had no standing to enforce the terms of the lease inasmuch as it was not the legal title holder, and the trust agreement contained language that "no beneficiary hereunder shall have any authority to contract for or in the name of the Trustee or bind the Trustee personally" .  On appeal, the First District found that R-Five, Inc. could enter into and enforce the leases as the beneficiary designated in the land trust agreement, and reversed the trial court.  The leases clearly identified R-Five, Inc. as the lessor and expressly designated it as the beneficiary of the land trust holding title. The defendant's argument was that specific provisions in the trust agreement both designated R-Five as the beneficiary and prohibited any beneficiary from contracting in the name of the trustee. The Court rejected the resulting argument that the leases were executed by R-Five in violation of the express language of the trust and without authority, finding that R-Five had the legal capacity to sue under the leases. The prohibition, the Court ruled, related solely to "One of the most common errors is for a beneficiary to execute a lease in the name of the land trustee by himself as an agent. Such a lease...is meaningless and not binding upon the trustee since the beneficiary is not an agent of the trustee." Here, however, the Court noted, R-Five never designated itself as an "agent", but only acted as a "beneficiary", and therefore did not violate the trust agreement prohibition.

 

A convoluted argument, but the Court concluded that the lessor was clearly and permissibly identified as R-Five, in its individual beneficiary capacity, and not as an agent of the trustee, and therefore could sue.  (Why didn't they just pay the trustee's fee and get the lease signed in the first place?)

 

 

9. ZONING CASES AND ROBERT'S RULES OF ORDER:

 

Many real estate practitioners, (and some parliamentarians and libertarians as well), who attend or represent clients in zoning hearings might be interested in the ruling in County of Kankakee v. Anthony, (3rd Dist., May 3, 1999), No. 3-98-0107. In their efforts to contest the County's case alleging that they violated county zoning ordinances by constructing and operating a private religious school in their garage without proper permits and a zoning variance, the Anthony’s counter-claimed that the ordinances violated their rights under state and federal constitutions; namely, the equal protection, free exercise of religion, freedom of speech, and freedom of religion provisions of each, but all to no avail. It was in their argument that the 1996 zoning ordinance amendment was not validly enacted because it did not receive a simple majority of votes of the county board, however, that the Anthony’s almost carried the day.

 

The Counties Code requires that zoning code amendments be passed by a "simple majority of the votes of the board".  In the passage of the pertinent portion of Kankakee's zoning code, the Anthony's discovered that the recorded vote was 14 "aye" votes, 11 "nay" votes, 1 "present" vote, and 2 members absent.  A "simple majority" of 28 board members would have required 15 votes, and the question was whether the 1 "present" vote, when added to the 14 "aye" votes, equaled the requisite number; (i.e., is a "present" vote one in favor of the pending measure for the purpose of determining if a simple majority has been obtained.)  After an admirable recitation of definitions and explanations from Robert's Rules of Order, (one that might come in handy at a late night board meeting), the Court ruled a "present" vote is NOT to be counted toward passage.  A "simple majority...requires the affirmative votes of more than half...", and 14 "ayes and 1 "present" does not equal 15 affirmative votes.

 

The decision nonetheless affirmed the trial court's ruling against the Anthony’s, but not based upon the reasoning set forth by the trial court in rendering its decision. The Appellate Court turned to the fact that the Anthony's undisputed principal use of their property was as a residence. The use of the garage as a school was neither incidental to a single-family home, nor was it a permissible accessory use, and therefore violated the 1967 Zoning Code, (remember the 1996 zoning code amendment was voided), "because there can only be one principal use of their residential property and a school does not qualify as an accessory use." (There's another little "tidbit" for you zoning folks!)

 

 

10.  OIL AND COAL, MINERAL TITLES; WHAT DO YOU KNOW?

 

Like most practitioners in the Chicago area, what I don't know about oil, gas, coal, and mineral rights would fill a book or two.  But this month I came across two sources of a little more knowledge in the area.

 

James K. Weston's article, "Mineral Title - A Problem or Not?" appeared in the May 26, 1999, Chicago Daily Law Bulletin's "Real Estate Market Place" section.  The article contains just enough to get you started on things like:  "By their nature, oil and gas have been thought to be personal rather than real property.  Both are mobile as compared with something like coal, which stays in place. (Visions of Pierson v. Post yet?) As science progresses, more has been learned about the nature of the mineral so that theories about underground rivers or lakes of oil and gas have been displaced by facts that they are captive to porous rock formations, and hence not so apt to move about. Case law does not seem to have caught up to these changes ideas yet..."; and  "State regulations impose spacing requirements limiting the number of wells that can service a given acreage.";  the definition of a "production clause" in a mineral lease, (the lease continues so long as oil and gas are produced regardless of the stated term period,  if "...and so long thereafter as oil and gas are produced" language is present); or a "shut in" clause in a lease, (which allows for production to stop when the price of oil drops to a level making withdraw unprofitable provided a predefined reduced rental is paid).

 

The second source is the United States Supreme Court decision by Justice Kennedy in Amoco Production Co. v. Southern Ute Tribe, (S. Ct., June 7, 1999) No. 98-830. This case provides some scholarly background into mineral law. Beginning with Land Patents issued pursuant to the Coal Land Acts of 1909 and 1910, and including "a brief overview of the chemistry and composition of coal.", this decision deals with the issue of whether CBM gas, (coalbed methane gas found within the coal formation), was includable in Congress' definition of "coal" in the 1909 and 1910 Act patents. If so, the rights to the gas were reserved by those acts and eventually passed to the Ute Indians.  If the Court were to construe the coal reservations to have excluded the gas, the rights belong to Amoco as the successors to the land patentees. Justice Kennedy notes in his decision that in the early 1900s, CBM gas was considered a dangerous waste product that escaped from coal naturally, and not as something to be thought of as having any value at all. While the times may have changed and CBM gas may now have some value, the definition that Congress ascribed to coal in 1909 and 1910 was the basis for the interpretation by the Court that the reservation did not include the CBM gas and resulted in a ruling against the tribe. Justice Ginsberg dissented, ......but that was just more discussion about passing gas......