REAL ESTATE LAW PRACTICE KEY POINTS
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. LENDER'S BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING AS BASIS FOR AN ACTION IN TORT:
While there have been a good number of recent cases dealing with the implied duty of good faith and fair dealing in contract actions, (and especially relating to that duty on behalf of lenders), the recent case of Voyles v. Sandia Mortgage Corp., (2nd Dist., November 4, 1999, modified opinion filed February 16, 2000 after the release of these Keypoints), No. 2-98-0753, appears to be the first to recognize this as a basis for a cause of action in tort. "Defendant property notes that no Illinois cases have heretofore explicitly recognized the independent existence of a tort action for breaching the duty of good faith and fair dealing.... Recent decisions, however, have shown that courts have implicitly accepted the existence of the tort."
Ms. Voyles purchased a single-family residence in Springfield, Illinois, but then rented it to her attorney when she moved to Chicago to find employment. As a result of personal problems, she made arrangement with her tenant/attorney for him to make the monthly mortgage payments directly to the lender. Following an all too familiar course of events, the lender was taken over by the RTC and then the servicing of the loan was transferred to Fleet Mortgage. Fleet refused to accept payments from the tenant based on a suspected violation of the due on sale clause, and then increased the monthly mortgage payments to reflect the annual property tax. (Neither of these actions or the basis for their decisions was communicated to Ms. Voyles.) A convoluted series of tenders and refusals culminated when Ms. Voyles attempted to refinance her residence in the Chicago area and was denied based upon a pending foreclosure initiated by Fleet Mortgage in Springfield. Before the foreclosure could be resolved, Ms. Voyles was unexpectedly terminated from her job, and the refinancing fell through. She filed suit against Fleet alleging negligent reporting of credit information (Count I), negligent failure to correct falsely reported credit information (Count II), breach of contract (Count III), breach of the duty of good faith and fair dealing (County IV), and for punitive damages based on willful conduct. The Trial Court granted Fleet's motion for summary judgment and the Appellate court reversed. The Court's decision begins with a restatement of the implied duty of good faith and fair dealing, then finds that the actions of the lender relating to the credit reporting were "intentional" as "purposeful and directed" rather than "negligent" as "careless or accidental", and finally rejects the Moorman doctrine and proximate cause as a defense. While the decision was expressly "Based on the narrow circumstances of this case", there can be no doubt that the court found a cause of action exists for breach of the duty of good faith and fair dealing, and lenders whose conduct approaches that of Fleet Mortgage here had best beware.
2. TITLE INSURANCE - DUTY TO DEFEND
In Sabatino v. First American Title Insurance Company, (2nd Dist., November 17, 1999), No. 2-99-0183, the Plaintiffs brought a declaratory judgment action against First American Title seeking a judicial determination that the defendant was obligated to defend and indemnify them in a civil suit brought by the owner of an adjacent parcel of real estate, Robert G. Hershenhorn. That suit related to a sanitary sewer line that ran from Hershenhorn's property, across plaintiff's property, and then discharged into the sewer line in the street. At one distant point in time, both properties were a single parcel; which gave rise to an implied easement by necessity. When the plaintiffs sought a zoning variance to construct an addition on their home, Hershenhorn objected, raising the issue of the unrecorded easement (of necessity by implication). The variance was denied and, without Hershenhorn's permission or knowledge, Plaintiffs then modified their plans (without showing Hershenhorn's alleged easement) and began construction. Their addition included the installation of a permanent modification to the sanitary sewer line that diverted and rerouted it around the new foundation they had constructed. As a result, debris accumulated in the sewer line and sewage and effluence flowed on to Hershenhorn's property. In response to his two count complaint seeking a permanent injunction directing the restoration of the original sewer easement and punitive damages, Plaintiffs notified First American Title of the litigation and requested it defend and indemnify them under their policy of title insurance because the unrecorded easement was not an exception to coverage. In reversing the Trial Court's grant of summary judgment in favor of Plaintiffs and against the title company, the Appellate Court's decision noted that the policy did not insure for intentional acts of the insured nor for matters attaching or created subsequent to the date of the policy. The gravaman of the cause of action stated by Hershenhorn was not to seek a judicial determination of the existence of the easement, but, rather, sough recovery for the deliberate, wrongful and intentional actions of Plaintiffs in interfering with the unrecorded easement, and therefore fell within the exclusion of the policy for those intentional acts. Additionally, the Court noted, the actions complained of (and for which indemnification and defense was sought) occurred after the policy was issued and also fell outside of the terms of the policy coverage. Since the complaint sought relief in the form of redress for Plaintiff's intentional and wrongful conduct that occurred after the date of the policy, and the policy excluded coverage for the conduct complained of, the title company had no duty to defend. The decision also noted that under the circumstances, the title policy also provided alternatives in lieu of accepting a tender of defense, (i.e., to pay or otherwise settle with other parties), of which the title company could have chosen to avail itself rather than defending.
3. ISBA ADVISORY OPINIONS ON PROFESSIONAL CONDUCT AFFECTING REAL ESTATE PRACTICE:
Real Estate practitioners should be aware of two ISBA Advisory Opinions on Professional Conduct published in November, 1999, which could impact their day-to-day practices.
The first, Opinion No. 99-07, relates to "Communication with Unrepresented Persons" in real estate financial transactions and the digest proffers that "A lawyer for a lender has an obligation to correction a home loan applicant's misunderstanding that the lawyer also represents the applicant in a home financing transaction if the lawyers knows or reasonably should know the unrepresented person misunderstands the lawyer's role in the matter" pursuant to IRPC, Rule 4.3, and referencing previous Opinions Nos. 86-11, 88-03, and 93-14. In the factual scenario provided, the lawyer represents the credit union but his fees are paid for by the borrower in addition to other loan origination charges. Because the buyer is paying the lawyer's fees, the facts indicate the borrower is "under the impression that the lawyer will be representing his interests as well as those of the credit union in the transaction." The opinion turns on the provision of Rule 4.3 that "When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding." (One cannot help consider the fact that Realtors, whose role and loyalties were commonly misunderstood by buyers in residential real estate transactions, have dealt with this matter much more effectively in the revisions of the Real Estate License Act of 2000 by providing that compensation does not determine agency (Section 15-40) and setting forth specific agency relationship disclosures in Section 15-35.)
The second, Opinion No. 99-06, relates to business transactions with clients and the referral of the client to a trust company when the lawyer receives a fee from the company. In an opinion clearly related to the rationale behind disclosure of fee arrangements between title companies and their 'lawyer/agents', the ISBA states that the lawyer must disclose his relationship with the trust company to the client, the method and source of his compensation, and obtain the client's consent. The factual scenario is obviously intended to cover the recent efforts by 'bar-related' title companies to expand their relationship with attorneys and their clients from title to trust administrative services. Carefully noting that the lawyer bills the client for legal services in preparing the trust instruments, and that the trust company does not practice law or prepare documents (are they kidding?), the Opinion takes the position that this arrangement is permissible provided "an extensive written disclosure and consent form which the client must sign as party of the trust agreement" is obtained; (which, of course, we are all to presume is fully explained and understood by the client...just like the disclosure of title/agency relationships are explained and understood....hmmmm). In a transactional world which is "driven by meaningless disclosure", (not the least of which are the 'Miranda-like' Fair Debt Collection Practices Act statements), is it any wonder lay people don't listen to much of what lawyers have to say and take even less at face value? The reasoning of this ISBA Committee opinion notes that (a) a lawyer who is both a director and lawyer for a bank may not insist his clients designate that bank as a fiduciary, (b) it is professionally improper for a lawyer employed by a company selling revocable living trusts from to prepare those documents for his clients or aid in the unauthorized practice of law, or (c) receive a fee from an investment advisor to whom the lawyer refers clients unless the "appropriate disclosures are made"...and..."provided that appropriate safeguards are employed to satisfy the rules regarding conflicts of interest". And those "safeguards' are?? Well....., "an extensive written disclosure and consent form which the client must sign", of course! This closure comes from the hands of the same lawyer who probably told the client at their house closing to simply sign the 'Errors and Omissions Agreement' that the lender "provides in case of a 'typo' in the documents", and then noted that the disclosure on the bottom of the title bill "just refers to the fact that I have a 'relationship' with the title company". The Opinion concludes that the Committee "believes that the arrangement described is not professionally improper", but fails to deal with it's own citation to the law of In re Anderson, (1972), 52 Ill.2d 202, 287 N.E.2d 682, and In re Schuyler, (1982), 91 Ill.2d 6, 424 N.E.2d 1137, which mandates that in addition to full disclosure and consent, "the client had the advice of independent counsel before entering into the transaction". Oh, the tangled web we weave.
(These Opinions can be found at http://www.isba.org/)
4. INTENTIONAL ENCROACHMENTS AND LACHES:
In Whitlock v. Hilander Foods, Inc., (2nd Dist., October 29, 1999), No. 2-98-1421, Whitlock owned the property south and adjacent to the property owned by Hilander Foods, Inc., and upon which it had operated a grocery store for a number of years. When Hilander built an addition to its store, it installed footings underground that encroached on the Whitlock property; although the wall itself did not encroach. The Trial Court granted Hilander's motion for summary judgment finding that Whitlock was guilty of laches and had not sufficiently met the burden to support a mandatory injunction to remove the footings considering the relative hardships to the parties. The Appellate Court reversed and remanded.
First, noting that the court must balance the hardship to defendants in requiring that they remove the encroaching footings against the benefit to the plaintiff in order to grant an injunction to remove the encroachment, ("if the former is great and the latter slight, the court will ordinarily leave the plaintiff to his remedy at law" for damages), the decision makes the distinction that where the encroachment is deliberate and intentional, the injunction may issue without considering balancing the relative hardships. "One who knows of a claim to land that he proposes to use as his own proceeds at his peril if he goes forward in the face of protest or warnings from the owner and places a structure on the land." The Trial Court was also found to have erred in determining that Whitlock was guilty of laches in delaying the filing of suit where there were factual issues relating to Hilander's assurance that it would "work something out" with Whitlock. Hilander's attorneys and agents repeatedly told Whitlock that there would be suitable compensation forthcoming for the encroachment, and this was sufficient representation to raise an issue of fact of whether defendant contributed to the Plaintiff's delay in bringing suit on the issue of laches.
5. TREE ENCROACHMENT ARTICLE:
And....on the topic of encroachments.... Sooner or later we all will have a client who asks us what he or she can do about a neighbor's tree that has limbs growing over a lot line, or are rubbing a hole in a roof, or clogging a sewer line, and they will EXPECT us to know the answer off the top of our heads. Fear not -- simply keep a copy of Richard F. Bales' article on "Tree Encroachments" at hand. This article previously appeared as a Chicago Daily Law Bulletin article, and has presumably been published by Chicago Title Insurance Company in their "Title Issues" series, but can currently be found in its entirety in the November 1999, DuPage County Bar Association "Brief", p. 14. With ample footnotes and case citations for serious research, the article covers everything from boundary tree encroachments, (the trunk and not the roots or branches determines ownership and responsibility), to encroachments of roots and branches, self-help (of the tree-trimming variety), and the growing trend to place greater responsibility on the owner of the property where the tree is located.
(Dick is currently working on an article relating to rights in "air parcels" which should also be interesting to real estate practitioners and will most likely find mention here in the coming months.)
6. CONTRACT CONDITIONAL UPON "PERMITABILITY" OF VACANT LOTS AND SLANDER OF TITLE:
In a breach of contract for the sale of real estate case, the court interpreted the meaning of the provision that the closing was to take place when the vacant "lots [were] permitable by the [City of Geneva]." American National Bank v. Bentley Builders, Inc., (2nd Dist., October 20, 1999) No. 2-99-0004. Bentley agreed to purchase five vacant lots on which the Plaintiff was in the process of obtaining final plat approval. The Plaintiff sent Defendant a letter from the City's building inspector indicating that "building permits are now available for construction of single family homes", but Defendant refused to close and explained that according to industry custom, they believed the lots would be "permittable" only when the site improvements necessary to secure occupancy permits (i.e., curbs and underground utilities) were completed. Plaintiff declared a default, Defendant recorded the contract, and Plaintiff sued seeking a declaration that Defendant was in default, damages for slander of title, breach of contract, and rescission of the agreement. The trial court ruled the term "permitable" was ambiguous and allowed parole evidence to determine the intention of the parties. The Appellate Court affirmed in part and reversed in part. The order granting summary judgment in favor of the Defendants for slander of title by recording the contract was reversed. The decision held that the Trial Court's finding that Defendant had acted with malice in the recording after notice of termination by the Plaintiff was an issue of fact, and a proper inquiry would have to be made as to whether the Defendant had reasonable grounds to believe that it had an interest in the five lots at the time of recording. The issue of fact, of course, revolved around the parties' interpretation of "permitable", and the case was remanded for trial on the facts.
7. "AIA" CONSTRUCTION CONTRACTS VIEWED FROM DIFFERENT PERSPECTIVES:
The American Bar Association's Real Property, Probate and Trust Law Section magazine, "Probate and Property", November/December, 1999, contains four articles that review the 1997 American Institute of Architects Construct Contract documents from differing view points. Stanley P. Sklar's "An Overview of the AIA Owner/Contractor Documents" has a decidedly 'subcontractor' vantage. James P. Houghton's article title gives away his bias; "Changes to the A201-The Architect's Perspective". Owner and Lender perspectives are analyzed together by Lynn R. Axelroth, ("The New AIA Construction Documents from Owner and Lender Perspective"), and "The 1997 AIA Construction Documents: A guide for Lender's Counsel" by Dianne S. Coscarelli fills the remaining gaps. This is a valuable compilation of a number of different view points which should be of use until 2002 if Stan Sklar's note that "The AIA's cycle for reviewing and updating the documents has now accelerated from a 10 year cycle to a five year cycle, perhaps reflecting the dynamic nature of the construction industry" is true.
8. THE CONSUMER FRAUD ACT DOES NOT APPLY TO THE SALE OF A SINGLE-FAMILY HOME:
From time to time I have a client who encounters a post-closing problem and wants to file suit against a seller of a residential home. Usually there are high emotions, and even though I am anxious to both express my client's indignation as a "consumer" who has been "defrauded", AND find a cause of action that will support an award of my attorney's fees for representing the party so grievously wronged, I find it necessary to convince myself again and again that a count under the Consumer Fraud and Deceptive Practices Act simply does not lie against an individual who sells his or her own home, even though the sale is through a real estate broker. Carrera v. Smith, (2nd Dist. July 1999), 305 Ill.App.3d 1079, 713 N.E.2d 1282, 239 Ill.Dec. 432, is a good, recent reminder of the law in Zimmerman & Northfeld Real Estate, Inc., (1st Dist. 1986), 156 Ill.App.3d 154, 510 N.E.2d 409. The Sellers in Carrera stated in advertisements and listing sheets that the residence had four bedrooms. They did not indicate that two of the bedrooms in the basement were added in violation of the DuPage County Building Code. Even though they knew of the violation of the code, and the Residential Real Property Disclosure Report falsely stated they knew of no violation of any local law or regulation, no cause of action was stated under Consumer Fraud, (815 ILCS 505/2), because sellers were individuals, not engaged in 'trade or commerce', who sought only to sell their own single-family home. (No matter how many times I read this, it seems something is not quite right.)
Consumer Fraud requires a sale in trade or commerce, the Residential Real Property Disclosure Act requires the buyer prove the seller had actual knowledge, and some trial courts still persist in ruling that even the non-title representations made in the contract are merged into the deed of conveyance. If you, (like I) need to read it in a non-caselaw venue to reaffirm this, see "Illinois Consumer Fraud Act: A Primer on Recent Developments", by James R. Keller, Vol. 87 Illinois State Bar Journal 474, September 1999.
9. REVERSE (ANNUITY) MORTGAGES; COMING OF AGE, THE INTERNET AND TITLE INSURANCE:
Ever since I first read about them in a text book for a course I was teaching for the Savings and Loan League fifteen years ago, I have been enamored with "Reverse (Annuity) Mortgages". (I've also thought long and hard about taking my social security checks and living in 'financial splendor' down in Honduras, so take this all with a 'grain of salt'). A Reverse (Annuity) Mortgage is one in which a mature borrower applies for a loan from a lender based upon built-up equity in his residence. The borrower makes no monthly payments, but receives payments from the lender in a lump sum, monthly installments, or equity line of credit to be repaid from the equity in the home, usually payable when the borrower sells the home and downsizes into 'assisted living' residence or dies. In an article in the March, 1999 Illinois State Bar Association Real Property Section Newsletter, (which I have been carrying around a while), Todd A. Rowden discusses the fact that what "seems almost too good to be true" may in fact be just that, and especially so given the coming of age of the baby boomers and the intersection of Internet and banking competition. In "Reverse Mortgages and the Internet Era - Lenders and Title Insurers Beware", Vol. 44, No. 4., (all ISBA Real Estate Section Council newsletters for 1999 and thereafter are available on-line at http://www.isba.org/), Todd’s article chronicles a case of some of the potential for abuse that occurred in a reverse annuity mortgage situation and a resulting lawsuit seeking class action status in a California case alleging causes of action ranging from "elder abuse" to statutory consumer fraud, deceptive practices, and common law fraud where the combination of the loan fees, maturity fee, and accrued interest exceed more than four times the amount of cash paid to the borrower. Warning that "A combination of vulnerable seniors and questionable lending practices [in a new age of Internet lending] will most certainly result in an increase of litigation, the author warns that title insurers may soon become the litigation target as well as the lenders who make these loans.
A topically related article on "Title Insurance for Reverse Mortgages" by Randall J. Kadlec, vice president and senior underwriting counsel of Chicago Title Insurance Company, appeared in the July 28, 1999 Chicago Daily Law Bulletin, "Real Estate Marketplace" Supplement. This article chronicles the history of reverse mortgages since statutory recognition in Illinois in 1978, recounts the market's reticence to embrace the financing concept, and ends with a review of the title insurance needs of lenders and questions relating to the amount of insurance that is required to protect a lender who has no fixed mortgage debt amount except the stated maximum principal "cap" on the loan. Together, these articles will go a long way to answer your questions about reverse mortgages; except "Where do I get one"...(I know I put that article aside somewhere before the Millenium..... when my short-term memory started to fade.....)
10. GET A LIFE:
In a continuing effort to offer some "balance" to the practice of real estate law that was begun some months ago, I urge you to consider putting those cases and articles aside for one Sunday afternoon this month and read: "Transforming Practices: Finding Joy and Satisfaction in the Legal Life", by Steven Keeva, Contemporary Books, $24.95 (retail) 256 pages. (This one gets some mixed reviews but might be worthwhile to you.) Better yet, if you are a 'dog lover' or simply tired of clients, try the highly readable "Pack of Two, The Intricate Bond Between People and Dogs", by Caroline Knapp, Dial Press, 238 pages. (Here is a book by a woman who openly admits she likes dogs better than most people, but does so in a human and touching was that is quite moving, poetic at times and certainly not a standard "dog book".)