REAL ESTATE LAW PRACTICE “KEYPOINTS”

(November, 1999)

 

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

e-mail:  sbashaw@bashawlaw.com

(Copyright 1999 - All Rights Reserved)

 

1. AGREEMENT TO RELEASE MORTGAGE:

In a Bankruptcy decision appealed to the District Court, and then to the Court of Appeals for the Seventh Circuit, the interpretation of an addendum to a mortgage note requiring release of a mortgage upon certain conditions was considered. In Re Michael J. Krueger, (7th Cir., September 24, 1999), No. 99-1221.

The Debtor appealed the bankruptcy court's judgment in favor of the lender finding that the Bank was not required to release the mortgage it held on his residence. While the loan was for the purchase of a saloon in Moline, Illinois, Mr. Krueger also pledged his home as collateral. The note addendum requested by Krueger provided that the Bank would release the mortgage when (1) the balance of the loan is paid below $26,000, and if (2) all payments were paid on or before the due date and all terms are met. Mr. Krueger paid a single payment 14 days late. The Bank accepted the late payment without reacting in any fashion. Thereafter, he reduced the balance below $26,000 and requested a release from a Bank employee. He received no response and contacted the same employee on two other occasions, but did not receive either a release or refusal. Thereafter he closed the saloon following damage during a windstorm and eventually filed bankruptcy. His Chapter 13 plan, however, proposed that the Bank release its mortgage on his residence under the terms of the note addendum. The Bank objected to confirmation of the plan on the basis of feasibility, good faith, and that it improperly required the Bank to release its mortgage, which it alleged it was not legally required to do under the terms of the addendum because Mr. Krueger had not made all payments on or before the date due. Krueger contended that the single late payment was de minimis and not material, that strict compliance was waived by the Bank's acceptance of the late payment without declaring a default or advice to him that it would deny release, and that the Bank was estopped to demand strict compliance. Each argument failed before each court. The decision noted that the addendum was clear and unambiguous and "A court cannot revise a contract and give a litigant a better bargain that he himself made." Waiver is an intentional relinquishment of known right, but nothing in the evidence indicated the Bank knew or intended to relinquish its right to demand strict performance as a condition to early release. There was no detriment or change in Mr. Krueger's position as a result of any reliance upon any conduct of the Bank. And, finally, whether a single, 14 day late payment was material or de minimis must be determined from the intent of the parties as expressed in the addendum. Parties to a contract may make timely performance a material element of the contract, and that was what occurred here.

All of Mr. Krueger's arguments were for naught, and the decisions in the Bankruptcy, District, and Court of Appeals all affirmed the Bank's right to refuse release of the mortgage under the terms of the addendum.

 

2. LANDLORD/TENANT: WAIVER OF CONSENT TO ASSIGNMENT OF LEASE PRESUMED BY CONDUCT:

While the case of American National Trust Co. v. KFC of Southern CA, Inc.(1st Dist., September 30, 1999) No. 1-98-1356, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/September/HTML/1981356.htm, contains some complex inter-party relationships in a bankruptcy context, it stands clearly for the proposition that a landlord's conduct following the assignment of a lease may determine whether or not the assignment has been consented to, regardless of whether the consent was actually given. The original lease between American National Trust and Naugles, Inc. was for 15 years and contained a provision that the lease was not to be assigned without the landlord's consent; which would not be unreasonably withheld. Naugles merged with Kentucky Fried Chicken and requested American National consent to an assignment of lease to Collins Foods and Collins Properties, which was then acquired by Sizzler International, Inc. The landlord refused consent without financial information and assurances of the lessee's performance by the assignors. Nonetheless, the lease was unilaterally "assigned" through the circuit of successors and subsidiaries, and rent checks issued by Sizzler were cashed by the landlord on a monthly basis over a period of five years. During that time the landlord also requested Sizzler execute an affidavit in support of a tax appeal. When the rent checks stopped coming, American filed a complaint in the Circuit Court for failure to pay rent, taxes, and maintenance expenses, against all four of the "lessees"; Naugles, KFC, Collins Foods and Properties and Sizzler. KFC responded with a motion to dismiss pursuant to Section 2-619 on the basis of a purported release by assignment. Before the motion could be argued, Sizzler and its subsidiaries, Collins Foods and Collins Properties, filed for bankruptcy in California. American filed a proof of claim in the bankruptcy, acknowledged the assignment of the lease, and eventually entered into a stipulation with the "tenant/debtor" for payment of two-thirds of the sums due under the lease. Thereafter, American resumed its suit against KFC. KFC's motion to dismiss under 2-619, based on a finding that American had by its conduct consented to the assignment and thereby released KFC, was granted. The decision holds that "Restrictions against assignment are intended to benefit only the lessor of property and where attempted assignment of a lease by a tenant is in contravention of its terms, the assignment is only voidable and not void....Where the landlord does not elect to treat the leasehold as void, the requirements of the lease regarding its assignment are deemed waived.". Based on this, the Court ruled the undisputed conduct subsequent to the assignment, (acceptance of payment of rent, obtaining tenants affidavits in tax appeals, and filing proof of claim and stipulation in bankruptcy for rents"), all proved American acquiesced in the assignment and the consent provisions were waived. The assignment was valid and KFC released.

 

3. REAL ESTATE TAX ASSESSED VALUATION - LEASE vs LICENSE:

In Metropolitan Airport Authority of Rock Island County v. State of Illinois Property Tax Appeal Board, (3rd Dist., August 27, 1999), No. 3-98-0633, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/August/HTML/3980633.htm, the issue was whether the relationship between the airport and car rental companies using space in the airport facility created by a "Concession Agreement" was than of landlord/tenant under a lease or a mere license. The distinction was important because although property belonging to an airport authority is exempt from property taxation, it loses that exemption when leased to a non-exempt entity. "While leases are taxable, licenses are not subject to taxation under the property tax code...Whether an agreement is a license or a lease is not determined by the language used, but by the legal effect of the provisions and intent of the parties." The decision affirming the administrative ruling and circuit court holding in favor of the PTAB noted that a lease is a contract conveying a lesser interest in property than a deed, which gives possession in exchange for the payment of rent, but does not grant the lessor control over the lessee's operations on the premises. A license, on the other hand, is a limited right to use property for a specific purpose, subject to the management and control of the licensor. A license conveys no right in the land and is revocable at the will of the licensor. Turning to the facts that the airport authority exercised no control over the conduct of the rental car companies in the day-to-day running of their business and the only restriction in the Concession Agreements was upon the use of the premises only for operating a car rental facility, the relationship was determined to be a lease rather than a license. There were specific termination provisions in the Concession Agreements that required specific enumerated occurrences and written notice to terminate. This is inconsistent with the terminable at will nature of a license. Finally, the agreement contained an express statement that payments were to be deemed as lease payments, and although the Authority argued that this provision was operative only in the event of bankruptcy, the Court deemed this to be a general statement of the intent of the parties in their agreement. (Does that mean that if they had called it a "license" it would have been one?...probably not; which is perhaps the basis for the lease vs. license distinction in the decision.)

 

4. PARTITION SUITS: WEIGHT TO BE GIVEN TO COMMISSIONER'S REPORTS:

Before a sale pursuant to a complaint for partition can be held, the Code of Civil Procedure requires that three commissioners appointed by the court make a physical partition of the premises "if the same are susceptible of division without manifest prejudice to the rights of the parties, (735 ILCS 5/17-108), that the commissioners report to the court in writing, (735 ILCS 5/17-109), and that the court shall order the premises be sold at public sale only if not susceptible of division, (735 ILCS 5/17-116). Joseph v. Joseph, (3rd Dist., October 8, 1999), No. 3-98-0959, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/October/HTML/3980959.htm, deals with the rare situation in which the commissioners disagree in their determination of divisibility. Here, two of the commissioners reported that the property was not susceptible to division, whereas the third commissioner reported that it was, and that equity could be achieved through "owelty"; (i.e., payment to compensate and equalize the values of the divided lots - A new contribution to my 'real estate vocabulary!). The trial court denied the defendants' objections, finding that the majority report was not contrary to the manifest weight of the evidence, and this appeal ensued. Noting that "No specific legislative directive is given as to the manner in which an aggrieved party's challenge to the commissioners' report is to proceed or as to the level of deference a trial court should give to the report when a challenge is made.", the appellate court reversed the judgment of the trial court and remanded the case for a hearing on the objections to the commissioners' majority report. It is the trial court, not the majority of commissioners, the appellate decision reasoned, that alone has the authority to decide the issue of divisibility, and the ruling that the majority report was not against the manifest weight of evidence was an improper delegation of the trial court's authority. (Just goes to show that it is also "how you say it" rather than necessarily what you say....)

5. LEGAL DESCRIPTIONS AND INCLUSION IN A 'TIF' DISTRICT:

Tax increment financing districts, ("TIF districts"), seem to be more and more prevalent these days. Even in La Salle County, the interplay between the power to create TIF districts and condemnation seems to be creating some interesting results. In City of Marseilles v. Radke, (3rd Dist., September 30, 1999), No. 3-98-0518, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/September/HTML/3980518.htm, the city adopted an ordinance creating a real property TIF district and an attendant redevelopment plan to support a condemnation suit across Radke's property to acquire an easement to construct a railroad spur in an industrial area. A consent judgment was entered requiring Radke to convey the easement. The city was to pay him $30,000 and make a good faith effort to help him obtain better access to his property. Radke noticed, however, that there was an inconsistency in the legal description of the easement and the boundary area of the TIF district, and moved to vacate the judgment. His theory was that the easement was outside of the TIF district according to one interpretation of the legal description of the district, and therefore the court lacked subject matter jurisdiction to approve the consent judgment. The appellate court's ruling upholding the denial of the motion to vacate relied upon the fact that the ordinance which created the boundaries of the TIF district also had a map attached which, when considered in conjunction with the legal description containing a 'scrivener's error', clarified the intended boundaries of the district. Of more general precedental value is the finding that: "Illinois courts have consistently applied a more relaxed standard of interpretation to descriptions of municipal boundaries than to those in deed or contracts.", and "If the ordinance and accompanying map, when viewed together, fairly apprise the public of the property involved, the description will be considered sufficient."

6. CONSTRUCTIVE TRUST DISTINGUISHED FROM RESULTING TRUST:

In a case that initially makes you wonder just how many fraudulent conveyance theories there are in the world, the Seventh Circuit Court of Appeals draws an interesting distinction between constructive trusts and resulting trusts under Illinois Law that may prove worthwhile to some litigators. In Dunham v. Kisak, (7th Cir., October 4, 1999), No. 99-1106, the bankruptcy trustee filed an adversary complaint asserting that in executing a quit claim deed to his parents within ten months of his bankruptcy filing, Kisak fraudulently transferred the property. The bankruptcy court denied the trustee's request for relief noting that the debtor had either "bare legal title" or an interest in the real estate that "has no value whatsoever" because his parents were the real party in interest and he held title "solely in constructive trust for his parents". On appeal, the district court affirmed on a different ground, stating the debtor's interest in the property was a "resulting trust under Illinois law", rather than a constructive trust. The Court of appeals affirmed both lower courts, but clarified the theories noting that a constructive trust is imposed as a remedy to prevent unjust enrichment in cases of wrongdoing, whereas a resulting trust seeks to carry out a donative intent rather than thwart a wicked scheme. (Got that??) Noting that Illinois law presumes that when a deed lists two family members as joint tenants, only one of who supplied the consideration, that one is presumed to be making a gift of a one-half interest in the property and only by clear and convincing evidence can a resulting trust theory overcome the presumption. In this case, there was no clear and convincing evidence to support a resulting trust, and the conveyance was simply transferring the title in the parents and not a scheme to defraud the creditors because the son never had an interest available to him for disposition.

(Just when we thought fraudulent conveyances was getting clearer, eh?)

 

7. STATUTES OF LIMITATIONS-TRESPASS AND IMPROVEMENTS DEFINED:

In an action for damages caused by trespass of the City of Chicago during the construction of a subway system under Dearborn Park, the land trustee which owned and developed the property was confronted with the city's motion to dismiss the action as time barred. Bank of Reavenswood v. City of Chicago, (1st Dist., August 19, 1999), No. 1-98-1690, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/August/HTML/1981690.htm.  The city contended that the case was filed after the one year statute of limitations pursuant to 745 ILCS 10/8-101 relating to actions against the city. The plaintiff argued that the gist of the action was in tort for the design or construction of an improvement to real property under 735 ILCS 13-214(a), which has a four year statute of limitation period, AND, that the trespass alleged is continuing or repeated injury and therefore the period does not begin to run until the date of the last injury or when the tortious activity ceases. The First District affirmed the trial court's ruling in favor of the city with Justice Wolfson dissenting without opinion. First the decision defines an "improvement" under Section 13-214(a) as a valuable addition made to property amounting more than mere repairs or replacement and intended to enhance its value, beauty, utility or adapt it for new or further purposes. A good and useful definition that might be handy elsewhere, but certainly not helpful to the Plaintiffs. "A subway system, unlike a sewer system or construction work on a traffic intersection does not have any actual relation to the use or enjoyment of the real property located above it such that its presence could be considered an improvement." Turning to the purpose of a statute of limitations, ("...not to shield a wrongdoer; rather it is to discourage the presentation of stale claims and encourage diligence in the bringing of actions"), the Court held that the construction of the subway was a single act, and while the presence of the subway below ground would be a "continual effect from the initial violation but not a continual violation.", it was therefore time barred after more than one year following construction. (This case also contains a discussion of the law relating to inconsistent rulings between the trial court judges after reassignment of a case. Judge Boharic initially denied the City's motion and granted the plaintiff's motion for summary judgment on the issue of trespass and then denied a motion to reconsider. On reassignment, Judge Lichtenstein granted the City's later filed motion for summary judgment and dismissed the case. This decision notes that a judge does NOT err in reconsidering a motion already ruled upon by another judge because the circuit court has inherent power to modify or vacate an interlocutory order anytime before judgment, a court is not bound by an order of a previous judge, and has power to correct orders that it considers to be erroneous.")

 

8. CONDOMINIUM, TOWNHOUSE ASSOCIATIONS and COOPERATIVES - ABA CLE ON "CO-OPTED LIVING":

Residential transactional attorneys are handling more and more "Co-opted Living", (i.e., condominium, planned communities with homeowners associations, and cooperatives), home sales and purchases these days. Many of us simply view the transaction much the same as single family closings except the need for an assessment letter and first right of refusal. However, as pointed out in the October, 1999 ABA Journal article entitled "Co-opted Living" by Laura Castro Trognitz, quoting Arnstein & Lehr attorney Michael Kim, "It's not like when you buy a single-family home and the only thing you have to worry about are the zoning restriction and the building code. You have a private set of covenants that will control the use of the property. It will also determine your participatory rights and the governance of that property." The article begins with some general discussions of the nature of the various forms of "co-opts" and the relationships between members, but develops some leading-edge cases references such as the recent Illinois case of Bloomfield Club Recreation Association v. The Hoffman Group, Inc. , (which we recently note as standing for the proposition that the warranty of habitability does not extend to recreational facilities), and notes that federal legislation such as the federal Telecommunications Act of 1996 can preempt association restrictions relating to antennas and satellite dishes that limit member's ability to receive programming, while the Fair Housing Amendments Act of 1988 may be the controlling legislation where a disabled resident becomes disruptive of the community because of a disease which results in involuntary howling and hooting.

Both instructive to attorneys not familiar with this area and thought-provoking to more seasoned practitioners, the article served as an introduction to a "call-in CLE" on October 20, 1999...but fear not.... the audio tapes of the program are available through the "ABA-CLE On Demand" service providing telephone audio library 24 hours-a-day at (800) 285-2221. The article and program are highly readable and worth a little investment of time.

 

9. FRAUDULENT TRANSFERS AND TENANCY BY THE ENTIRETY--SIMPLIFIED:

While past "Flashpoints" have given quite a bit of notice to the issues of the interplay between the Uniform Fraudulent Transfers Act and the limitations of the sale of real estate held in tenancy by the entirety to satisfy the debt of only one spouse, (i.e., McKernan v. Gregory, In Re the Marriage of Del Guidice, and Harris Bank v. Weber case notes), an article of great worth appeared in the September issue of the ATGF newsletter "the ATG Concept". "Fraudulent Transfers and Tenancy By The Entirety" by Christopher Beck, ATG Senior Law Clerk, goes beyond the standard treatment of the caselaw and statutory amendments, (although Chris should be a bit more careful in his "gender reference" to Justice Hutchinson in her Weber dissent), noting that under the current "sole intent" standard some transfers that would be fraudulent under UFTA may still be protected under tenancy by the entirety tests. "Future cases will also likely lead to some balance between the interests of protecting the marital home furthered by the tenancy by the entirety provisions and the public policy against fraudulent transfers.". Chris concludes that "The legislature, in seeking to resolve the division among the courts, (i.e., McKernan in the Second District and Del Guidice in the First District), may have made this area of the law more convoluted by not giving any clear guidance as to how 'sole intent' is to be determined." A very clear and concise statement of the status of current law and where we are probably headed.

 

10. DEED REQUIREMENTS PRIMER:

Most real estate transactional lawyers know that "conveys and warrants" is the magic language to create a warranty deed and that "conveys and quitclaims" are the words of conveyance for the less deed. Knowing that the general warranty deed also conveys after-acquired title by statute, (765 ILCS 5/7), and where to find the statutory distinctions among the various types of deeds, however, can take a few extra minutes in the library. To the rescue is an article that appeared in the August, 1999 "the ATG Concept" newsletter entitled "Deed Elements and Recording Requirements." In addition to the statutory citations relating to all of the deed requirements, ( a deed need not be acknowledged to be recorded [765 ILCS 5/20] but can not be admitted into evidence at trial without further proof of execution [765 ILCS 5/31/ 5/35]), the article refers to those hard-to-find-in-the-digest cases to establish the presumption that a deed is delivered and accepted where the grantee is in possession of the property and an unrecorded deed is void as to all subsequent creditors and purchasers without notice until filed of record, [765 ILCS 5/30]. This article might be a good one to keep in a three-ring binder somewhere for future reference.