REAL ESTATE LAW PRACTICE “KEYPOINTS”

(August, 2003)

 

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 2003 - All Rights Reserved)

In addition to encouragement from the Illinois Institute of Continuing Legal Education and the Illinois State Bar Association's Real Estate Section Council, it should be noted that Chicago Title Insurance Company helps underwrite the monthly production of these real estate law "Keypoints". Chicago Title is committed to the role of attorneys in real estate transactions and their continuing education in this area. Its staff attorneys are pleased to offer their view points on various developments in the law as set forth below from the perspective of a title company serving the public and the attorneys who represent their clients in real estate transactions.

(Ed.'s Note: If you noticed that the masthead above refers to these as the AUGUST, 2003 installment and wondered "Why ?" given the fact that you are probably reading them in October, ponder no more. Challenging and time consuming matters kept me from this work in August and September, but be assured that there will be forth coming 'make-up' issues for September and October shortly!)

 

1. RESPA: THE ONGOING TALE OF RELEASE FEES:

Over the past few years, there has been considerable litigation relating to fees charged at residential real estate closings relating to recording charges and alleged violations of RESPA. In 2001, the 7th Circuit in Eschevarria v. Chicago Title and Trust Co., (7th Cir., 2001), 256 F.3d 623, ruled that where a title company overcharged for recording services, this did not constitute a RESPA violation because the portion of the fee which was in excess of the actual cost was kept by the title company and not "split" with the recorder as required under RESPA's prohibition against fee splitting with third parties. In 2002, the Court in Kzralic v. Republic Title, (7th Cir., 2002), 314 F.3d 875, affirmed the Eschevarria decision that there can not be a RESPA violation unless the fee at question is actually split with a third party. Now, in Weizeorick v. ABN Amro Mortgage Group, (7th Cir., July 24, 2003), http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=02-2801.PDF the Court finally allows a case in this arena to withstand a motion to dismiss. Weizeorick filed suit against ABN Amro over a fee of $10.00 included in a mortgage payoff statement and referred to as a "Recording discharge/release of Lien Fee". (There was also a "Fax Fee" of $15.00 included in the payoff statement; another common charge in these types of closings.) At the closing, the title company also charged Weizeorick a "Release Fee" of $25.60. This 7th Circuit decision holds that Weizeorick DID state a cause of action, and reverses and remands the case to the District Court.

After recounting the prior decisions in Eschevarria and Kzralic, the Court notes that there were two separate entries on the RESPA statement for the fees and two separate payments, and while the charges were independently stated, the fees were paid from a single source as deductions from the net proceeds available to Weizeorick. Weizeorick did pay twice for the same service. The case more analogous to the facts in Weizeorick is Christakos v. Intercounty Title Co., (N.D. Il. 2000), 196 F.R.D. 496, in which Intercounty Title twice charged to have the mortgage released; once by itself and once by the lender, and then paid one half of the total fee to the lender who released the mortgage. Here, Weizeorick paid twice for the release; once to the lender by the inclusion of the fee in the payoff, and once to the title company. Noting that RESPA "places liability on both the giver and receiver of an unearned kickback", and does not require the parties involved have knowledge they are participating in the scheme, a liberal reading of the complaint states a cause of action under RESPA sufficient to survive a motion to dismiss. An action under RESPA requires an allegation that the fee was collected for other than services actually performed. Weizeorick alleged that the title company, rather than ABN actually recorded the release. Reflecting what actually may be the final determination of what actually occurred, the decision notes: "It is possible that [ABN's] $10.00 fee was incurred for the preparation or delivery of the release.", and not for the recording, and that this different item was that for which the title company charged $25.60. In any event, the District Court incorrectly dismissed the case, and its decision was reversed and remanded.

 

2. REAL ESTATE BROKERS; BUYER'S BROKER LIABILITY FOR LEAD BASE PAINT DISCLOSURES:

In Griffin v. Rodney Bruner and Century 21 Country North, Inc., (2nd Dist., July 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/2ndDistrict/July/Html/2020898.htm, the Plaintiff was the purchaser of a residence which proved to have lead based paint after the closing. The Plaintiff's son became ill with lead poisoning, and a subsequent inspection resulted in the discovery of harmful levels of lead based pain in several rooms in the house. Rodney Bruner and Century 21 were the "Buyer's Broker", but were compensated through a commission splitting arrangement with the listing broker, Carter Realty. Count II of the Complaint sought money damages, attorney's fees and court costs against Bruner and Century 21 under the Residential Lead-Based Paint Hazard Reduction Act of 1992, (42 USC Section 4852d(a)(4)). The Realtor filed a motion to dismiss pursuant to 2-615 of the Code of Civil Procedure alleging that the Act does not apply to him inasmuch as he was not the seller's agent under Illinois law and sufficient facts were not alleged to support an allegation that he knowingly violated the Act. The trial court granted the motion to dismiss. The Second District affirmed.

Under the Illinois Real Estate Salesperson's Licensing Act of 2000, the source of the Realtor's commission is not the determining factor of agency. The Northern District of Illinois has held that a buyer's agent, even one that is compensated via a commission sharing agreement with the seller's agent, is not liable under Section 4852d(a)(4). (See Flowers v. ERA Unique Real Estate, (N.D. Il., 2001), 170 F.Supp. 840), and the Second District, although not bound by this precedent, was "persuaded by the fact that the only two federal decisions addressing the issue reach the same results with the same reasoning", alluding also to a federal district decision from Maine. Section 4852d(a)(4) requires an agent to ensure compliance with the lead paint disclosures, but the Buyer's Broker here was not a sellers' "agent" for the purposes of the act and therefore not responsible for failure to disclose.

 

3. REAL ESTATE TAXES; ASSESSMENT AS RESIDENTIAL RATHER THAN FARM LAND BASED ON SUBDIVISION:

The Bond County Board of Review appealed the PTAB determination that land owned by Clarence Potthast should be classified as "farmland" for assessment purposes in The Property Tax Appeal Board v. Potthast, (5th Dist., August, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/5thDistrict/August/Html/5020064.htm. The 6.31-acre parcel at issue was part of a 9-acre tract of land subdivided by Zahner into three parcels in 1974. Zahner never improved the property, but sold two of the three parcels to Clarence Potthast, Sr., who in turn sold them to his son, Clarence Potthast, Jr., in 1994. Over the next five years, Clarence Potthast, Jr. grew and harvested hay on the property. In 1999, the Bond County Board of Review assessed the parcels as rural residential lots rather than as farmland, asserting that because they were part of a recorded subdivision, they were residential for tax assessment purposes. The disparity of the assessed valuation, ($6,556.00 as residential versus $233.00 as farmland), was significant and lead to a path that ran from the County Board to the Property Tax Appeal Board to the Circuit Court and ended with the Fifth District reversing the trial court and finding the property agricultural rather than residential for assessment purposes.

Finding that property "must be classified and valued according to their use", the Fifth District held that until the actual use "changes to residential, as evidenced by the development of roads, sewers, etc.," the assessor should not "automatically re-assess subdivided agricultural property as residential". Noting that 35 ILCS 200/9-65 provides that lots shall be reassessed and placed upon the assessors books as of the first day of January immediately following the recording or filing of the subdivision, the decision notes that there is an exception under Section 200/10-30(a) for parcels where "At the time of platting the property is vacant or used as farm as defined in Section 1-60", and that "Section 10-30 of the Code was enacted to protect real estate developers, who change the use of property from farmland to residential or commercial or industrial use, from rising assessments that result from the initial platting and dividing of the farmland." The distinction is that while section 9-65 leads to an increased assessment, based on a change of use from farmland to residential, whenever a subdivision of farmland coincides with the property's change to residential use, Potthast had continued to use the land for agricultural purposes. Accordingly, the assessor's office, in reassessing the property from acreage to lots, pursuant to section 9-65, was not required to ignore its agricultural use and reassess the property from agricultural to residential."

(Ed. Note: Another facet of this issue was recently considered the most recent "Keypoints" in Brazas v. PTAB, (2nd Dist., June 11, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/2ndDistrict/June/Html/2020878.htm, where the Court held that the Assessor was correct in assessing property under construction for a period of over four years at a portion of its completed value under the Act.)

 

4. TAX DEEDS; STATUTORY PRIORITY OF DEMOLITION LIEN AND ALTERNATIVES:

The priority issues between real estate tax deeds and demolition liens are resolved by statute. (35 ILCS 200/22-35) The Court sets forth the law, and the statutory "alternative" available to a tax deed purchaser adversely impacted in the consolidated appeal of In. re Application of the County Treasurer of Cook County, Andres Scholnik and Capital Tax Corporation, Petitioners, (1st Dist., August, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/1stDistrict/August/Html/1020940.htm. The facts as stated surround the purchase of real estate located in the Town of Cicero at a tax sale by Andres Scholnik. The tax sale was a scavenger sale which took place in 1999 due to the fact that real estate taxes had not been paid for the preceding ten years. Scholnik was the successful bidder at the sale. In 1996, however, the Town of Cicero filed a demolition suit against this and other adjacent property, and a judgment was entered in the sum of $324,9000 for the cost of the entire demolition in June 1998. In June 2000, Scholnik filed a petition for tax deed, and in April 2001, filed a motion for declaratory judgment in the tax deed case seeking a declaration that he was not required to reimburse Cicero for the demolition pursuant to the judgment. The trial court agreed and Cicero appealed.

Reversing the trial court, the First District sets forth the law in the Property Code relating to tax deeds on demolished property, (35 ILCS 200/22-35). That section provides the issuance of a tax deed will not affect the right, title or interest of a city, village or incorporated town has in real estate by virtue of "advancements made from public funds" under the police and welfare powers of the municipality, unless the purchaser of the tax deed reimburses the town for the costs advanced. The same statute also provides that, in the alternative to reimbursing the municipality, the tax deed purchaser may apply for a sale in error and obtain a refund of his sale bid. Here, the Town of Cicero advanced public funds pursuant to its police and welfare power to demolish a building partially located on the tax parcel Scholnik had purchased. Accordingly, the tax deed "should not have been issued until Scholnik reimbursed Cicero for its expenditure of public funds on the subject property or until Cicero waived its lien thereto." The Appellate Court did provide Scholnik some relief, however, with its ruling that since Section 22-35 only requires reimbursement for funds advanced specifically relating to the tax deed parcel, he was not required to reimburse the Town for the entire demolition cost, but only for the pro rata share attributable to the property on his parcel.

(The case also has an interesting discussion rejecting the Town of Cicero's res judicata argument that Scholnik was bound by the entry of the judgment in the demolition proceeding because he was present and requested the court to "stay the demolition order on a portion of the property." Since he was not a named defendant in the case or mentioned in the judgment, and no language in the judgment required that he specifically reimburse Cicero for the cost of demolition, the judgment in the prior demolition proceeding did not meet the "identity" requirements for res judicata to apply.)

 

5. SPECIFIC PERFORMANCE; DAMAGES FOR DELAY IN PERFORMANCE:

Talerico v. Olivarri, (1st Dist., August, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/1stDistrict/August/Html/1022961.htm is a Specific Performance case that reverses prior case law in Illinois. Talerico owned an operated a bakery adjacent to a building owned by Olivarri. They entered into an agreement by which Talerico was to purchase Olivarri's property for $118,000, but Olivarri refused to convey. Talerico filed a two-count complaint. Count I was for declaratory judgment that the contract was in full force and effect, and Count II was for specific performance. Olivarri filed a motion to voluntarily tender specific performance, and the trial court entered an order granting specific performance on Count I and dismissing Count II of the Complaint. Thereafter, the transaction was closed, but Talerico filed an amended complaint seeking damages for rent and expenses incurred in obtaining renting other property during the time Olivarri refused to perform and the for loss of tax benefits by virtue of their inability to qualify the transaction as a Section 1031 Exchange because of Olivarri's delay. The trial court, relying on the precedent in Arnold v. Leahy Home Building Co., (1981), 95 Ill.App.3d 501, and Douglas Theatre Group v. Chicago Title & Trust, (1997), 288 Ill.App.3d 880, dismissed the amended complaint pursuant to Section 2-619 of the Code of Civil Procedure.

On appeal, the First District reversed and rejected the Arnold and Douglas Theatre case theories. These cases had held that once a plaintiff obtains the remedy of specific performance, the breach of contract is "erased", rendering the award of damages "inconsistent with the erasure of the breach". In reversing, the Appellate Court here relied upon the Second Restatement of Contracts and the broad language in Rotogravure Service, Inc. v. R. W. Borrowdale Co., (1979), 77 Ill.App.3d 518, 527, that "[T]he trial court hearing [equitable] matters has full jurisdiction to award such legal damages as have resulted from delay in the performance of the contract in addition to decreeing specific performance". The Second Restatement of Contracts, Section 358, Comment c, provides that "In addition to any equitable relief granted, a court may also award damages or other relief. Since an order seldom results in performance within the time the contract requires, damages for the delay will usually be appropriate." Whether damages for rent for other property during the delay period, related expenses, and loss of tax benefits were "reasonably foreseeable" is a question of fact and, accordingly, the case was reversed and remanding for further proceedings on plaintiff's claim for damages for rents paid, related expenses during the delay period and loss of tax benefits.

(The opinion also sets forth a very concise statement of the elements of a real estate contract necessary to satisfy the statute of frauds.)

 

6. ESTATES IN LAND; LIFE ESTATES, FEE TAILS AND VESTING:

Although perhaps more germane to an estate planning case law review, I couldn't help but visualize my law school real estate professor, eyes a-twinkle, going through the explanation of "a brief history" of the fee tail set forth in the Third District opinion in Dempsey v. Dempsey, (3rd Dist., August, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/3rdDistrict/August/Html/3020816.htm. The facts of the case, (in simplified form), are that Ralph Dempsey left a will leaving his real estate in Fulton County as follows: (1) A life estate to his wife Gertrude, followed by (2) a life estate to his son David and the son's wife Evangeline, (and for the life time of the survivor of them), (3) with the remainder to the "heirs of the body" of his son David. The words contained in the devise in the will describing the remainder were "to the heirs of the body of my son…share and share alike, and in fee simple." Then, of course, folks began to pass away in a bit of an unexpected order: Ralph in 1956, Gertrude in 1961, David's son, David Kevin in 1981, David's wife, Evangeline, in 1984, David's daughter Karen in 1998, and David in 1999. When David died, (thereby terminating his life estate), the surviving "heirs of his body" were his only surviving son, Ian, and two children, (Jennifer and Kevin), of his deceased son, David Kevin.

The question before the trial court in this action to declare the interests of the three surviving heirs was WHEN did the remainder interests vest? Ian argued that since Ralph's will created a fee tail in David, and Section 6 of the Conveyances Act, (765 ILCS 5/6), converts a fee tail into a life estate followed by a vested remainder in fee simple, upon Ralphs's death David had only a life estate and his children had a vested remainder in fee. This would result in Ian owning a 2/3 interest in the real estate because 1/3 would have vested in himself, Karen and David upon Ralph's death, and Karen thereafter left her 1/3 to Ian in her will; ergo a 2/3 total interest by vesting following by devise. David Kevin's children, Jennifer and Kevin, however, argued that Section 6 of the Conveyances Act does not apply and the remainder interests were contingent until the death of the life tenant, their father David Kevin. Because Karen predeceased David, their argument continued, her remainder interest did not vest and she was not able to devise a 1/3 interest to Ian. Rather, at the time of David's death only Ian and David Kevin were surviving, and therefore they each received a 50% vested remainder estate. (You may have to diagram this.) The ultimate legal issue is whether the remainder interests vested upon the death of the last life tenant, David, or upon Ralph's death, under the Conveyances Act, or, independent of the Conveyances Act, upon the birth of David's children.

The Third District affirmed the trial court's division of the property into two ½ interests, (50% to Ian and 50% to Jennifer and Kevin as David Kevin's heirs per stirpes) based upon a finding that while under the Conveyances Act, the remainder interests would have vested upon the death of the holder of the last life estate, the words of devise "In fee simple" destroyed the possibility of a fee tail by vesting title immediately rather than contingently, making the Conveyances Act "conversion" of the estate inapplicable.

The decision begins with a "brief history of the fee tail", starting in medieval times as a vehicle to keep title to lands within a family, to Thomas Jefferson's opposition to the form as a "symbol of hereditary aristocracy", and reform legislation in the United States in the nineteenth century culminating in Illinois' action in1827 abolishing the fee tail. The Illinois Conveyances Act provides that what would otherwise have been a fee tail is statutorily converted into a life estate in the grantee, with a fee simple remainder in the grantee's children. If the grantee has no children, the remainder is contingent, and if there are children, the remainder is vested subject to expansion or "reopening" for any after-born children. If no children are born, the estate reverts to the heirs of the grantee. Here, however, the words of devise did NOT create a fee tail subject to statutory conversion because of the language creating a "fee simple" in the heirs of the body of David's son. By giving his descendants a fee simple estate in his will, Ralph destroyed the "fee tail" by cutting off the right of reversion to his heirs should there ever not be any "heirs of the body of my son". Because a fee tail was not created, the Conveyances Act did not apply to convert the title to a vested remainder with a life estate at the time of creation.

Nonetheless, "Absent the application of the fee tail estate and the Illinois Conveyance Act, we are left with the plain language of the will", whereby Ralph gave a life estate to David with the remainder to the heirs of David's body in fee simple. Whether the remainder to heirs or heirs of a living person's body is contingent or vested is settled law in Illinois; it is contingent until the death of the life estate measuring life. (Remember the 'trick question' of the Estates final exam beginning with a telephone book listing of relatives and then asking for the names of Joe's 'heirs' when Joe is not yet dead? Answer: Joe doesn't have any heirs until he dies!) Here, since the language of the will created a fee simple in the heirs of the body of David, and that fee simple did not vest until David's death in 1999, (at which time, Karen's interest, she having already died in 1998 with no heirs, had lapsed); when only Ian and David Kevin's children were the remaining heirs of David's body. Ian took 50% as one of two vested remaindermen, and Jennifer and Kevin took 25% each per stirpes as the heirs of David Kevin. "The remainder is contingent and vested upon David's death. At the moment of David's death, his heirs were determined. The trial court correctly ruled that the estate be distributed per stirpes, [by representation based upon the heirs of the body of David determined at the time of his death, following Karen's death without issue], with defendant taking a one-half share, and plaintiffs, though their father taking a one-quarter share each.

 

7. THE IMPACT OF POST TITLE POLICY CONVEYANCES FROM THE TITLE INSURANCE PERSPECTIVE:

More and more people seem to be executing post-title policy conveyances of their homes. This may be due to estate planning, or it may be to satisfy a new lender's loan underwriting requirements. A discussion of the title insurance ramifications of these conveyances is, therefore, probably timely.

Any discussion must first begin with the relevant title policy Conditions and Stipulations:

Paragraph 1 of the Conditions and Stipulations of the 1992 ALTA owner's title insurance policy provides as follows:

"'Insured' [is defined as] the insured named in Schedule A, and, subject to any rights or defenses the Company would have had against the named insured, those who succeed to the interest of the named insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors."

Paragraph 2 of the Conditions and Stipulations is as follows:

"The coverage of this policy shall continue in force as of Date of Policy in favor of an insured only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest."

With these two paragraphs in mind, consider the following scenarios:

1. Adam acquires a home and takes title in his own name. He obtains an owner's title insurance policy. A year later he conveys his home into his revocable living trust. Does Adam still have title insurance protection? If not, what can he do about it?

Adam's conveyance to himself as trustee terminated his title insurance. See Butera v. Attorneys' Title Guaranty Fund, Inc., 321 Ill. App. 3d 601, 747 N.E.2d 949 (2001); see also Gebhardt Family Restaurant, L.L.C. v. Nation's Title Ins. Co. of New York, 132 Md. App. 457, 752 A.2d 1222 (2000). But he need not order a new title policy. Most title companies offer "substitution of Insured" or "assignment of policy" endorsements. With such an endorsement, Adam, as trustee of his living trust, can be added as an Insured to his title policy.

2. John and Jane are brother and sister and take title to their home as joint tenants. Their title insurance policy names both of them as the Insured. Jane gets married six months later. John decides to refinance their purchase money mortgage and buy his sister out. Jane conveys her interest in the land to him with a quit claim deed. John was an Insured when he bought the land with his sister, and he is an Insured now. Does John need any additional title insurance protection?

Yes he does. John was an Insured, but only as to a one-half interest in the land. John should obtain an endorsement to cover the additional half interest he now has.

3. Mark buys a home in 2001. At that time he obtains a title insurance policy in his name. In 2002 he meets Mary, and they get married. In 2003 Mark and Mary decide to refinance his original purchase money mortgage. Mark wishes to add Mary's name to the title. Mark quit claims his interest in the land to himself and Mary, as joint tenants. Are there any issues or problems?

Yes there are. At the time Mark executes the quit claim to himself and Mary, he would continue to be an insured because of his "retained" interest pursuant to paragraph 2 of the Conditions and Stipulations of his owner's policy. However, it appears that he would be an Insured for only a 50% interest in the land. In the event Mark died, Mary would own the land as a surviving joint tenant. She would also be an Insured by operation of law pursuant to paragraph 1 of the title policy Conditions and Stipulations. But would she be an Insured as to a 50% interest in the land or a 100% interest? This appears to be an open question, and so it seems to me that the prudent thing to do is to add Mary as an Insured to the title policy (and redefine Mark as an Insured) at the time Mark executes the quit claim deed.

More and more people are using revocable living trusts as estate planning vehicles. But a post policy conveyance into a living trust may terminate title insurance policy protection. To address this concern, Chicago Title has drafted the following "Estate Planning Conveyance Endorsement." This owner's policy endorsement can be purchased for a small additional premium when the Insured acquires the land. This endorsement eliminates the need to later purchase an "assignment of policy" or "substitution of Insured" endorsement.

ESTATE PLANNING CONVEYANCE ENDORSEMENT

"The Company hereby agrees that a conveyance of the land described in Schedule A made without consideration and after the Date of Policy by the Insured, with or without warranties, to the trustee of a Living or Revocable Trust, Illinois Land Trust, or other estate planning vehicle wherein the Insured is the primary beneficiary of said trust or other vehicle shall not terminate the coverage of this Policy under the provisions of Paragraph 2 of the Conditions and Stipulations of this Policy.

The Company further agrees that the grantee trustee noted above shall be an Additional Insured under this Policy.

The Company further agrees that it will not interpose said conveyance as a defense to any claim tendered under this Policy by the Insured or by the Additional Insured.

The rights of the Additional Insured under this Policy shall be subject to the defenses, if any, the Company may have under this Policy against the grantor Insured.

Nothing contained in this Endorsement shall be construed as extending the Date of Policy to the date of said conveyance, to the date of its recording, or to any other date. The Company assumes no liability for defects in said conveyance or for defects, liens, or encumbrances affecting title to the land described in Schedule A created or attaching subsequent to the Date of Policy."

Note that paragraph 2 of the Conditions and Stipulations of the owner's title policy indicates that policy coverage continues if the Insured has liability by reason of covenants of warranty. Does this mean that if an Insured uses a warranty deed to convey his home to himself or herself as trustee of his living trust, the original Insured still enjoys title insurance protection?

This is an interesting argument that to date has not been tested in the courts. However, many title insurance professionals feel that paragraph 2 contemplates a conveyance to a purchaser for value, and that it was not meant to act as a subterfuge to bootstrap title insurance protection to a no consideration transfer of property.

Finally, consider this all too common situation: Charles purchased his home as trustee of his living trust a year ago. He obtained a title insurance policy at that time; the Insured was Charles, as trustee. Charles now wants to refinance his purchase money mortgage. His lender insists that he convey the property out of his living trust, as the lender wants the mortgage executed by him as an individual and not as trustee. At closing he executes a trustee's deed to himself individually; he also executes a deed in trust, whereby the property is conveyed back to himself as trustee of his living trust. The title company closer records the documents in this order: Trustee's deed from Charles, as trustee, to Charles, as individual; mortgage executed by Charles, as individual; deed in trust to Charles, as trustee.

Everything is back to where it was before closing. Nonetheless, under a strict interpretation of Paragraph 2 of the Conditions and Stipulations, title policy coverage automatically ceased once the land was conveyed to Charles as an individual! The immediate conveyance back to the original Insured did not resurrect what was already terminated. It remains an open question as to whether a title company would deny coverage in the event a claim was later tendered. (Perhaps this situation is fodder for another title policy endorsement?)

Dick Bales

Chicago Title Insurance Company

Wheaton, Illinois

(Ed. Note: The Discovery Channel, as part of its series on "Unsolved History" (Wednesday nights, seven p.m., Discovery Channel), is doing a show based on Dick Bale's book, "The Great Chicago Fire and the Myth of Mrs. O'Leary's Cow", debunking the myth of the Chicago Fire based on title record analysis. The show will air in the Chicago area on November 26, 2003, (the day before Thanksgiving, at 7:00 pm, while we are all preparing the fixin's for the next day and looking for something on cable to watch). They flew Dick out to California for two days of filming, and then spent two days filming herein in Chicago. Who sez title examiners have no fun? Dick Bales, a movie star? Well, he hasn't given up underwriting analysis yet……)

 

8. ADVERSE POSSESSION; LANDLORD/TENANT AND THE ADVERSE ELEMENT:

There are always some interesting questions being posted on the ISBA Transactional Law list serve. Occasionally, an answer comes back that is too good to just let get deleted, but should go in a folder somewhere. Here is an interesting exchange between John R. Russell of Tinley Park and Timothy A. Gutknecht of Columbia, Illinois, relating to an adverse possession claim of a tenant against his landlord.

From John R. Russell, posted August 13, 2003 to the list serve:

Here are the facts:

Party A purchases a large piece of land from Party B. The land has a pre-existing commercial building on part of the property (vacant at time of purchase). A establishes a new business in that building. B runs a separate business on another portion of the parcel. A vast portion of the parcel is vacant, and A plans to develop the vacant portions with single-family housing. As part of the sale, B negotiates a long-term lease with A. The terms of the lease are pretty simple -- it allows B to continue to operate his business. There is no rent paid, except B must pay all expenses connected with the property, including taxes, utilities, and maintenance. As long as B operates his business, the lease cannot be cancelled by A. Fast forward about 23 years. A's business in the pre-existing commercial building is flourishing. B's business on the leased property is doing well too. A has developed most of the vacant property available for development, and there are about 70-80 single-family homes in 3 subdivisions. B has not always lived up to his part of the bargain -- he doesn't pay the taxes. A pays the taxes, and occasionally makes demand that B pay what's due. Once or twice in the past, B has "settled" on a past due tax debt by giving A real estate in an adjacent development. Currently, B is has not paid his fair share of the taxes for 8 or 9 years. A is planning to develop the last bit of developable vacant land. Its all in the planning stages -- months to years away in reality. A has noticed a problem. B's business has begun to encroach on this vacant parcel, to the tune of about 150 feet. Because this was undeveloped land, nobody ever noticed. Not clear as to exactly when the current use actually began to encroach, but B has been behaving as if the land is part of the leased parcel. But, for arguments sake, let's say its been going on for over 20 years. Do principles of adverse possession (continuous, exclusive, hostile, open notorious etc) apply to a lease? If we go through with the development plan, and "retake" the 150 feet, it could severely curtail B's business (but it would not shut him down, just severely inconvenience him). If B owned the leased portion, A would certainly be fighting an adverse possession claim. But A is the title holder to both parcels -- B's side is subject to a long term lease which allows for exclusive use of B's business. We may have an argument and leverage for negotiation because of the taxes/breach issue. But what about the legal/ethical issues of inadvertently allowing B to use a large portion of the adjacent parcel?

From Timothy A. Gutknecht, a response extraordinaire' :

John:

A tenant is never permitted to deny the validity of the title of anyone from whom he has accepted a lease, and during the existence of the tenancy, a tenant is estopped from disputing the title of his landlord. Owen v. Village of Brookport, 208 Ill. 35, 51, 69 N.E. 952, 959 (1904). It has long been established in Illinois, as elsewhere, that when a lessee goes into possession of the premises, he is thereby estopped to challenge his landlord's title and will not be permitted to prove title in another, or even in himself. Freed v. Young, 21 Ill. App. 3d 64, 66, 315 N.E.2d 72, 74 (1st Dist. 1974).

While a tenancy exists, the tenant cannot dispute the title of his landlord, either by setting up a title in himself, or a third person. Rigg v. Cook, 9 Ill. 336, 351 (1847). The possession of the tenant is the possession of the landlord as long as the tenure is acknowledged. Id. The possession of the tenant is in the interest of the landlord, and the landlord may be said to have been in possession through the tenant. Martin v. My Farm, Inc., 111 Ill. App. 3d 1097, 1103-4, 445 N.E.2d 44, 49, 67 Ill. Dec. 752, 757 (5th Dist. 1983).

Further, a tenant wishing to assert adverse possession against his or her landlord must first surrender possession of their tenancy. Chicago Terminal Transfer Railroad Company v. Barrett, 252 Ill. 86, 94-5, 96 N.E. 794, 796 (1911); Brown v. Keller, 32 Ill. 151, 155 (1863).

Does that answer your question?

Very truly yours,

Timothy A. Gutknecht,

CROWDER & SCOGGINS, LTD., Attorneys at Law

121 West Legion Avenue

P.O. Box 167 Columbia, Illinois 62236

Telephone: 618/281-7111

Yep! I think that pretty well does the job for John… and Tim, Thank You for some good case law from all of us, too! (The ISBA List Serve is a 'wonderful thing' and open to all ISBA members by joining at ISBA.org.)

 

9. EMINENT DOMAIN; OBLIGATION TO NEGOTIATE IN GOOD FAITH AND DISCLOSURE OF APPRAISAL REPORT TO PROPERTY OWNERS:

The decision in Department of Transportation v. Hunziker, (3rd Dist., July, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/3rdDistrict/July/Html/3020525.htm, is a further refinement in the growing body of law requiring that public bodies negotiate in good faith as a precondition to the filing of a Condemnation action. Here, Hunziker received notice that the Department of Transportation intended to take a permanent right of way, remove a portion of asphalt paving, curbs, landscaping, parking lot fixtures and an advertising sign from the land on which a Burger King restaurant stood in order to widen Interstate 74. He was provided with a detailed "Basis for Computing Total Approved Compensation and Offer to Purchase" indicating a total compensation figure of $72,000, but the Department denied his request for a copy of the appraisal report on which the offer was based. The Department stated its policy was "not to release appraisals except in response to an appropriate discovery request."

Hunziker filed a traverse, motion to dismiss and a motion for expedited discovery. After the appraisals were provided in response to discovery, the trial court denied the traverse and dismissal motions, finding that IDOT was not required to furnish copies of the appraisals during negotiation. Hunziker filed an interlocutory appeal, and the decision holds that the Court has jurisdiction to hear such an appeal "Since good faith negotiation by the condemnor is a condition precedent to exercising that right…the question of whether the Department must disclose its appraisal reports is appealable because of its relationship to the issue of good faith negotiations."

Noting that a good faith attempt to reach an agreement with the property owner is a condition precedent to the initiation of condemnation proceedings, the Court holds that the condemnor MUST disclose an appraisal report used to establish a offer of compensation in order to establish a good faith attempt has occurred. 735 ILCS 5.7-102 sets forth the precondition to filing a condemnation complaint: (1) At least 60 days before filing, a certified letter, return receipt requested to the owner of the property, (2) setting forth the amount of compensation proposed and the basis for computing it, (3) a statement that the agency continues to seek a negotiated agreement, and (4) in the absence of an agreement, a court proceeding will be initiated. While the Department here argued that the "Basis for Computing Total Approved Compensation and Offer to Purchase" satisfied the statutory mandate, the Appellate Court disagreed.

The taking of private property is in derogation of individual rights, and statutes empowering the taking must be strictly construed to protect the rights of the property owners. The Courts have previously held that the Eminent Domain Act "evidences clearly a public policy to encourage voluntary acquisitions of property and to discourage forced appropriations though the exercise of the right of eminent domain." And, "Finally, requiring the Department to disclose its appraisal reports helps to level the playing field between the condemnor and the property owner." Accordingly, "Requiring appraisal disclosure as part of that good faith effort enables the property owner to assess the reasonableness of the Department's offer without incurring the expense of hiring his own appraiser.", and is only fair where, as distinct from "a private negotiation where either party can choose to walk away from the negotiation if the price is not right." The owner can not "walk away" from the transaction in condemnation, and will incur costs and expense of defense of the condemnation if the offer is not accepted. Requiring disclosure of the appraisal is appropriate where the agency is required to act in good faith and the parties are negotiating on an uneven "playing field".

Justice Lytton dissented, noting that "The majority labors over a definition of "basis", picks one that suits it, and decides that "basis" means "appraisal…The statute does not require a letter enclosing an appraisal; it requires the letter to give the property owner the basis for the compensation. A 'basis' is simply that…a basis. 'Basis' is not 'appraisal'. " Drawing on a federal case from the Western District of Kentucky, (Wise v. United States), and the provisions of various states from Alabama to New Jersey and California where a written statement and summary of the calculation of compensation has been approved over disclosure of an appraisal, Justice Lytton attacks the majority premise: "Furthermore, an appraisal does not put the property owner on a better footing for negotiation. Nothing changes. Landowners would still need to obtain their own appraisal to determine whether the land may be worth more than the DOT appraisal reflects.", and ends with the prediction that "The majority's opinion will undoubtedly discourage state agencies from getting any appraisals at all. That would be an unfortunate result of this new rule."

 

10. REAL ESTATE CONTRACTS; FRAUDULENT CONCEALMENT AND SUBROGATION:

Gregg purchased a residence from DiPaulo. After closing, Gregg discovered the property was infested with termites, and made a claim on their homeowner's policy with CNA. CNA paid the cost of repairs and remediation and then sued DiPaulo for common law fraud based on false statements and concealment as subrogee of Gregg in Gregg v. DiPaulo, (July, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/1stDistrict/July/Html/1023490.htm. The trial court granted summary judgment in favor of DiPaulo, primarily due to its ruling that CNA could not be subrogated to the Gregg's "collateral contract rights", and CNA appealed.

The First District reversed, finding that CNA's subrogation claim was not based on the buyer's "collateral contractual rights", but based on the tort of fraud and concealment. While case law supports the dismissal of a subrogee's claim based on contract, "it is the universally accepted rule that an insurer may be subrogated to the insured's rights against any person wrongfully causing a compensable loss to the insured." Although the genesis for the cause of action subrogated to was the contract, the cause itself was for the tort of fraudulent concealment, and should not have been dismissed. Admittedly, the focus of this decision is a "fine point" that might not affect most real estate practitioners, but the decision also has a clear and concise statement of fraudulent concealment that is worthy of quoting: "Sellers of real estate have a duty to disclose defects which could not be discovered on a reasonable and diligent inspection. [cite] While the seller's silence in not disclosing defects, standing alone, is not enough for a fraud action, there is enough when that silence is combined with active concealment…[cite]…In addition, a fraud claim may be based solely on a seller's false representation made in a disclosure report pursuant to the Residential Real Property Disclosure Act [cite]. " Add that to your Residential Real Property Disclosure Act arsenal, and you've got some pretty good case law ammunition.