REAL ESTATE LAW PRACTICE “KEYPOINTS”

(September, 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 SEPTEMBER, 2003 installment and wondered "Why ?" given the fact that you are probably reading them in November, ponder no more. Challenging and time-consuming matters kept me from this work and this is one of the 'make-up' issues for September and October!)

 

1. PREMISES LIABILITY; OPEN AND OBVIOUS DANGERS "DISTRACTIONS":

In Green v. Jewel Food Stores, Inc., (1st Dist., Sept., 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/1stDistrict/September/Html/1021856.htm, the plaintiff filed a lawsuit for negligence based on an injury sustained as she left the store when she fell while reaching out to stop a runaway shopping cart in the parking lot. Generally, a business operator owes his customers a duty to exercise reasonable care to maintain his premises in a reasonably safe condition for their use. In response to the argument here by Jewel that there was no duty to protect Green from a condition which is "open and obvious" such as rolling shopping carts in the parking lot, the Supreme Court held that there nonetheless is a duty where the hazard is open and obvious if it is foreseeable that one would be "distracted" from the hazard under the circumstances. "The proper inquiry in deciding whether the distraction exception applies to the open and obvious doctrine is "whether the defendant should reasonably anticipate injury to those entrants on his premises who are generally exercising reasonable care for their own safety, but who may reasonably be expected to be distracted, as when carrying large bundles, or forgetful of the condition after having momentarily encountered it." Holding that the exception applied here, the trial court's grant of summary judgment was reversed, finding that as a matter of law Jewel owed a duty of care to Green because it was reasonably foreseeable that a customer would be distracted by an unattended shopping cart and trip and fall over the irregular pavement in the parking lot "based on the distraction exception to the open and obvious rule."

 

2. CONDOMINIUMS; MEMBERS' RIGHTS TO EXAMINE BOOKS AND RECORDS:

In this era of contumacious living and litigation it should not be surprising that a case like Taghert v. Wesley, (1st Dist., September 30, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/1stDistrict/September/Html/1013554.htm should find its way into the appellate court's published decisions. Francis Taghert filed a complaint against the President (Walter Wesley) and a Director, (Nat Ozmon), of the 1140 Lake Shore Condominium Association, of which he was a member and unit owner. He alleged the Defendants violated the Condominium Property Act, (765 ILCS 605/19), the Association's Declaration, and breached their duty when they refused to provide him with the books and records of the Association pursuant to a written request. The Defendants argued that the proper party defendant was the Association, not they, and that the Plaintiff failed to state a "proper purpose" for inspecting the condominium documents as required by Section 19(e): "Except as otherwise provided…any member of an association shall have the right to inspect, examine and make copies of the records [of the association] at any reasonable time or times but only for a proper purpose, at the association's principal office. In order to exercise this right, a member must submit a written request…stating with particularity the records sought to be examined and a proper purpose for the request." Noting that "there is a veritable dearth of case law in the state of Illinois interpreting Section 19…and its provisions directing the inspection of documents.", the decision holds that the burden of proof that the request is for a proper purpose is on the owner making the request, and notes that the member is entitled to recover reasonable attorney's fees and costs from the association if the board of directors acted in bad faith in denying the request. Citing decisions relating to the examination of corporate books and records that define a "proper purpose" as "when a shareholder has an honest motive, is acting in good faith, and is not is not proceeding for vexations or speculative reasons.", Taghert was found to have met the "proper purpose" test. He requested the "budgetary files" of the finance committee in order to determine if there was "misfeasance in the process of determining special assessments". The Defendant's response that he could obtain the information by "attending a meeting of the finance committee" was not an adequate reply. The trial court's order to produce the documents, granting sanctions, attorneys fees and costs was affirmed.

 

3. REAL ESTATE TAXES; VOLUNTARY PAYMENT DOCTRINE:

The Plaintiffs had a very interesting case here….which they lost on appeal as moot under the voluntary payment doctrine, and resulting in a good lesson to the unwary in the area of real estate tax practice. Leafblad v. Skidmore, Treasurer of Lake County, (2nd Dist., October. 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/2ndDistrict/October/Html/2021229.htm. The Plaintiff complained that the real estate tax bill on his property was void because it was based on an "unauthorized reassessment". The "unauthorized" part was due to the fact that under the Property Tax Code, (35 ILCS 200/1 et seq.), the county assessor can only make general reassessments at four-year intervals in Lake County. In the "nonquadrennial years", assessments can be increased only to apply the equalization factor, correct previous assessment errors, or reflect changes made to the property. The pertinent tax assessment year, (2001), was not a quadrennial year for Plaintiff's property, but it was reassessed in that year and with a resulting increase in the tax bill. Leafblad asked the trial court to enjoin the collection of the taxes and order the re-computation of the taxes as though no unauthorized reassessment had occurred. (Great argument, eh?) Well…the problem was that the Plaintiff had to concede that he had paid the disputed taxes and failed to do so "under protest". This rendered the recovery of the paid taxes moot because "A taxpayer may not recover taxes that have been paid voluntarily unless a statute allows such a recovery. 35 ILCS 200/23-5 and 23-10 provide for "payment under protest", but Leafblad did not avail himself of the protection of the statute, and "Thus, as plaintiff voluntarily paid the disputed taxes, he cannot recover his payments even if the taxes were illegal."

 

4. LANDLORD/TENANT; WAIVER OF INTEREST ON SECURITY DEPOSITS:

Most leases have a good number of ineffectual "waivers" written by aggressive landlords in the body of the document. Add a waiver of interest on security deposits to the list based on the decision in Wang v. Williams, (5th Dist., September 10, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/5thDistrict/September/Html/5010872.htm. The complaint was filed by Mr. Wang to recover his security deposit against a landlord that operated 10 apartment buildings with a total of 227 units. The particular complex in question had more than 25 units. When he deposited his security deposit of $225, however, he also signed the lease which provided "Tenants agree to waive right to interest on security deposit." The Landlord provided Wang with an itemization at the end of his lease charging him for $460 in cleaning and $10 for repair of a hole in the hallway, but no credit or setoff for security deposit interest, with the result being the application of his deposit and a balance due of $245. No portion of the security deposit or interest thereon was returned at the end of the lease, and the tenant sued. The trial court dismissed Mr.Wang's complaint brought pursuant to the Security Deposit Return Act, (765 ILCS 710/0.01 et seq.), based on the waiver. The Fifth District reversed finding the waiver ineffective as a violation of public policy. The Security Deposit Return Act was intended to protect a class of people who rent from large property owners, and provides for an award of attorney's fees and costs against those landlords who violate its protection. This is a "consideration of public concern", and an attempt to "circumvent the mandates of the statute" or "The attempted avoidance of the protections of the Act was ineffectual…The provisions of the Act are still implied into the lease. The plaintiff, therefore, still has a colorable claim for a breach of contract.", and the trial court erred in dismissing based on the waiver.

 

5. EASEMENTS; CEMETERIES AND RIGHTS OF THE RELATIVES OF A DECEDENT TO INGRESS AND EGRESS:

Kenneth and Gerald Villiger operated an irrigation system on their farm adjacent to the Old Catholic Cemetery in Marshall County. The system moved above the ground on a "in-line tandem wheel assembly which supports a horizontal bar that delivers water to the ground below." The system also passed through a portion of the cemetery, over graves and headstones belong to the relatives of the Plaintiffs in Bogner v. Villiger, (3rd Dist., August 29, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/3rdDistrict/August/Html/3021030.htm. The relatives sough an injunction to prevent the defendants from operating the irrigation system through the cemetery. The Villigers defended alleging they had a prescriptive easement. The trial court ruled in favor of the Plaintiffs and granted the injunction. On appeal, the Third District affirmed.

Turning first to the issue of standing, this decision holds that Illinois law provided that relatives of those buried in cemeteries have a protected interest in the nature of an easement that permits them to go to the grave, attend and care for it, subject to the reasonable bylaws of the cemetery. The Illinois Supreme Court held in 1947 that this "property right by easement in the burial plot [is one which] the law recognizes and protects from invasion whether it be by a mere trespasser or from the unauthorized and illegal acts of the authorities in control…[and]…a court of equity will enjoin the owner of land from defacing or meddling with graves on land used for public burial purposes, at the suit of any party having deceased relatives or friend buried therein." Once standing and a protected right were established, the trial court's findings that there was no adequate remedy at law and that irreparable harm would result were easily affirmed.

 

6. LIEN PRIORITY; SUBROGATION REVISITED:

Over the last three years, the doctrine of conventional and equitable subrogation appears to be gaining strength and support. (See Aames Capital Corporation v. Interstate Bank of Oak Forest (2nd Dist. July 31, 2000), and LaSalle Bank v. First American Bank, (1st Dist., September 12, 2000). Another case in this area is the recent decision in Union Planters Bank v. FT Mortgage Companies, (5th District, July 17, 2003), http://www.state.il.us/court/Opinions/AppellateCourt/2003/5thDistrict/July/Html/5020450.htm. The doctrine is applied once again, and it is noteworthy that the decision was initially filed on June 11, 2003 as a Rule 23 ruling, but a subsequent motion to publish was granted on July 17, 2003.

FT Mortgage appealed from the trial court's ruling in favor of Union Planters Bank's priority position. The facts in the case begin with a 1994 mortgage made by Charles LaFore and his wife Theresa to Delmar Financial for $120,000. In 1996, the LaFores made a second mortgage to Equicredit for $28,000. In February 1998 the LaFores signed a third mortgage and note on their home to Magna Bank, (which late merged with Union Planters Bank) for $138,000. Finally, in November 1998, the LaFores made a loan with FT Mortgage for a "cash-out refinancing" for $148,000. In the process the this refinancing, only the Delmar and Equicredit loans were disclosed by the LaFore application, and the Union Planters February, 1998 mortgage originally made to Magna Bank, (mortgage #3), was not referenced. FT's closing instructions to the title company, (Reliable Research), required its mortgage be in a first-lien position as a condition of closing. Reliable's title search only discovered two mortgages, (not the same two listed by the LaFores on their application); Equicredit and Magna/Union Planters, and did not reference the Delmar loan. At closing, Reliable paid off only two mortgages, Delmar and Equicredit, and did not payoff the Union Planters mortgage, leaving a $138,000 mortgage lien outstanding. LaFore made no payments thereafter and Union Planters instituted a foreclosure action. FT filed a counterclaim for declaratory judgment that its lien was a priority over the earlier recorded mortgage of Union Planters under the doctrine of conventional subrogation. The doctrine as applied here argues that since FT's mortgage funded the satisfaction of the Delmar and Equicredit mortgages which were prior to Union Planters third position mortgage, it's priority was subrogated to their 1994 and 1996 lien dates, resulting in a priority lien over the 1998 Union Planters mortgage. The trial court granted Union Planters motion for summary judgment and rejected FT's subrogation theory.

The Fifth District reversed. Citing the Aames language that "the doctrine of first in time, first in right is not always as clear and obvious as it may seem", Justice Kuehn notes that "Subrogation is a method by which one party involuntarily pays a debt of another and succeeds to the rights of the other with respect to the debt paid….[and]…applies in the context of lien priority in that one party is subrogated to the lien priority of another. Distinguishing between the two types of subrogation, (contractual or conventional and common law or equitable), the decision notes that conventional subrogation requires an express agreement between the parties and that the proponent of the theory must meet the burden of proving that no injury is done to an innocent party by application of the theory. Here, the 'express agreement' element was met by the language in the mortgage requiring it be a first priority lien and the intent of the parties at closing as indicated by the closing instructions. The element of 'no injury' was satisfied by the fact that Union Planters mortgage priority position was unchanged by the transaction; i.e., it was in a third position behind the Delmar and Equicredit mortgages before the transaction, and in that same relative position when FT was subrogated to those mortgages by payment. FT was only subrogated to the liens of Delmar and Equicredit tot the extent of the debts paid in the refinancing, and the since "Presumably, UPB had constructive knowledge of these unreleased mortgages when it loaned its money to the LaFores. Consequently, UPB would be in no worse a position than it was in prior to the refinancing." The fact that the LaFores received some cash in the process of refinancing was a distinction that was not critical; "Refinancing is somewhat of a guessing game". While Reliable was arguably negligent in its title search, the Court did not find this negligence imputable to FT in order to deny application of conventional subrogation.

 

7. LANDLORD TENANT; BANKRUPTCY AND PAYMENT OF THE CURRENT MONTH'S RENT:

In Ha-Lo Industries, Inc. v. CenterPoint Properties Trust, (7th Cir., September 3, 2003), http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=02-4331.PDF, the 7th Circuit affirmed the District and Bankruptcy Court's decisions directing Ha-Lo to pay its former landlord, CenterPoint Property, Inc., the entire month's rent due under its lease for the month in which it filed its election to reject the lease in its bankruptcy case. Section 365(d)(3) of the Bankruptcy Code requires that a debtor pay rent that has accrued and become due under a lease at the time of exercising the option to reject the lease as an executory contract under the Code. While the bankruptcy court granted Ha-Lo the right to reject the lease on September 2, 2001, the debtor continued to occupy the premises under the terms of the lease and waited until October 3, 2001 to provide notice of its rejection, effective November 2, 2001. On November 1, 2001, the debtor paid $60,031.17 to the landlord representing prorated rent for 3 days in November, and vacated on November 4th. The landlord accepted the payment but demand the balance due for the entire month of November and brought a claim in bankruptcy court for payment. The bankruptcy court granted the landlord's request and ordered payment of $600,311.00 representing the balance of rent for the entire month of November. The Court's reasoning was that Section 365(d)(3) requires payment for the entire month because the November rent accrued on November 1 under the terms of the lease, the rejection was not effective until November 2, and the debtor did not actually vacate the premises until November 4. Subsection (b)(2) requires the trustee perform all such obligations of the debtor until the lease is rejected, and those obligations are governed by the terms of the lease. The lease here provided that rent for any month was due and payable "in advance in twelve (12) equal monthly installments…on the first (1st) day of each month. Accordingly, the debtor's obligation to pay the entire monthly installment of rent arose on November 1. "As we acknowledge in Handy Andy, landlords, unlike other creditors, are 'forced to deal with [their] bankrupt tenant[s] on whatever terms the bankruptcy court impose[s] because landlords cannot evict their tenant." Ha-Lo controlled the landlord's entitlement to rent by choosing when to exercise its option to reject the lease. If it had rejected the lease effective October 31, 2001 rather than November 2, 2001, it would not have had to pay the November rent. Having chosen November 2, 2001, it controlled its own destiny and that destiny required payment in full. The argument for prorating was declined based on the fact that the language of the lease did not support any right to prorate.

 

8. A NEW TAKE ON THE OLD ADMONITION OF 'DON'T LET THE BEDBUDS BITE' AND LEGISLATIVE OVERVIEW:

My friend Jim Weston of Chicago Title recently provided me with two bits of source material that must be included in this installment if real estate lawyers are to keep abreast of the times.

The first is the decision in Matthias v. Accord Economy Lodging, Inc., (7th Cir., October 21, 2003), http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=03-1010.PDF. The case begins with revelation that Accord Economy Lodging, Inc. is an entity that owns and operates the "Motel 6" and "Red Roof Inn" chain of motels; (one of which "keeps the light on for you"). Matthias rented a room for the night in downtown Chicago and were "bitten by bedbugs, which are making a comeback in the U.S." according to the decision; which then scholarly cites newspaper articles in the Chicago Tribune and Washington Post with headlines "You'll Be Itching to Read This: Bedbugs Are Making a Comeback: Blame World Travelers and a Ban on Certain Pesticides" and "Bloodthirsty Pests Make Comeback". The entire matter was pretty upsetting to the jury, which awarded $186,000 in punitive damages finding that defendants were guilty of "willful and wanton conduct" under Illinois law based on evidence that the hotel management had acknowledged to its pest control contractor that there was a "major problem" and all the contractor was doing was "chasing them from room to room". The Matthias room had even been noted "DO NOT RENT UNTIL TREATED" on the night they occupied it. Noting that the Chicago Ordinances provide for the revocation of a hotel license where unsanitary conditions are permitted to exist, the Court affirmed the punitive damage award noting "We are sure that the defendant would prefer to pay the punitive damages assessed in this case than to lose its license."…and, somehow, resisted the temptation to say: "That'll teach 'em not to let the bedbugs bite"!

Jim's second contribution is his excellent summary of the "New Laws from the 93rd General Assembly, 2003 Spring Session" that appears in the ISBA Real Estate Section Council Newsletter for September, 2003, Vol. 49, No. 2, (available electronically to members of the section by sending an e-mail to jlyman@isba.org with "Real Property newsletter" in the subject header and your name and e-mail address at which you want to receive the newsletter). Providing subject headings of "Conveyancing", "Real Estate Taxes", "Local Government", "State Regulation", "Insurance", "Estate and Trust" and "Miscellaneous", Jim covers bills enacted ranging condominium association absentee voting and flag waving to the ill-fated Mortgage Certificate of Release Act and enabling legislation for internet access to public records in the Recorder's offices. Vetoed bills and amendatorily vetoed legislation are separately highlighted.

 

9. REAL ESTATE TRANSACTIONAL PRACTICE; TID BITS FROM THE TRENCHES:

Another exchange of e-mails on the ISBA Transactional website that is too good not to disseminate is the following from Robert Pattullo, a real estate practitioner at Rock, Fusco in Chicago, reflecting on the plight of attorneys trying to represent buyers and sellers in residential real estate transactions, make a living, avoid being sued by their clients and, at least in one case, a title company that believes the attorney's control of the choice of a title insurer should be limited. The case referenced is the pending matter between an IRELA member attorney and World One Title in McHenry County challenging the attorney's conduct in refusing to order title as provided in the listing agreement. I am not certain I agree with all of Bob's proposals, but they certainly do direct our attention in the right direction:

"I read the article relating to the One World Title law suit. It reminded me of my belief that IRELA [Ed.: Illinois Real Estate Lawyers Association…e-mail John O'Brien at jobatty@aol.com if you don't know what this is] must take a much more aggressive and broad based marketing campaign to win the minds and hearts of homebuyers and sellers.

The One World suit evidences that the real estate broker/sales agent is the first person with whom most home sellers and buyers have contact. As we know, the home seller more often than not enters into a signed agreement with the broker prior to receiving advice from an attorney. These agreements can set the stage for an on-slaught of anti-consumer and anti- lawyer type of covenants (such as where title is ordered from).

This puts the legal profession behind the 8 ball both in terms of protecting the consumer, as well as having a fair shot at securing business.

To the best of my knowledge, the legal community has been shy to aggressively take on a marketing campaign which demonstrates the need for home owners and buyers to make their lawyer the first stop when planning to buy or sell a home.

There could be excellent advertisements on TV, in the Trib, and material on the need for such consultation and the benefits a consumer can receive from doing so. The many facts to be pointed out by such campaigns could be:

1. Pointing out the fact that only an attorney truly represents the needs of his or her client;

2. That the listing agreement represents the single most expensive cost of the transaction other than the price

3. That the listing agreement is a transaction with a 3rd party and various protections which a person should try to obtain.

4. That there is an opportunity to negotiate on $$$ when negotiating a listing agreement

5. The opportunity to discuss the sales process

6. That a agent is not authorized to give legal advice

7. That there would probably be nominal costs up front

Show how you can negotiate down from 6-5% as a matter of routine (a savings of 5,000 on a 500M deal). Show how we help avoid issues on disclosure forms, show how we can save buyers from questionable lending costs.

I think we are fooling ourselves to think that litigation and legal theories will save us. It buys time but does not prevent the possible bad ending.

I think the profession has to hit at the single point that distinguishes our role in the transaction above all others - we need to make the lawyer the "go to person" on the deal.

I would further suggest that this is something which the ISBA, CBA and ABA should join in on. It could be done so professionally and as a public service means. Show parents deciding to move and calling their atty to make sure it is all done the right way. You may even get some brokerage companies to join so they look like the "good guys" to go to (okay, I am dreaming on this one).

In addition to the foregoing, or an alternative, IRELA should come up with a rider which homeowners or buyers would attach to a listing agreements to better protect the client. For example, we could have a download form which says that the listing agreement is subject to atty review and approval; or that notwithstanding anything in the agreement to the contrary, the terms of the rider control and they are: the right of the home owner to chose surveyors; title companies; commissions paid only upon closing,......

(On a related thought, has anyone given thought to preparing a letter which a client would provide to a lender spelling out what the customer client is willing to pay for on a loan. Have the client give a letter to the lender saying I want a $300,000 loan at no more than 6% interest and I will pay no more than 1000 in costs associated with the loan? Could this or something similar put an end to the $100000000 doc prep fees?

If we get lucky, the govt will start to look much closer at the brokers and start have them make disclosures and have 3 day rights of rescission on their agreements.

Thanks for all the hard work. Thanks for listening

Bob Pattullo

Robert L. Pattullo, Jr.

Rock, Fusco & Garvey, Ltd.

350 North LaSalle, Suite 900

Chicago, Il. 60610

312-970-3416

312-464-3525(fax)"

 

10. FROM THE TITLE COMPANY PERSPECTIVE: EXTENDED COVERAGE TITLE POLICY and TITLE INSURANCE AS EVIDENCE OF 'MARKETABLE TITLE':

Another recent e-mail inquiry on the ISBA Transactional website dealt with the distinction between "standard" and "extended" coverage title policies, to which Dick Bales provided the following excellent response:

"Can anyone give me a quick description of title insurance providing "extended" coverage. Thank you.

 Stan G.

From Dick Bales:

Re: Title policies and extended coverage

Every owner's title policy contains five standard exceptions, also called general exceptions. These are:

1. Rights or claims of parties in possession not shown by the public records.

2. Encroachments, overlaps, boundary line disputes, or other matters that would be disclosed by an accurate survey and inspection of the premises.

3. Easements, or claims of easements, not shown by the public record.

4. Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the public records.

5. Taxes or special assessments that are not shown as existing liens by the public records.

If the title company is furnished the necessary documentation, and this documentation reveals no additional matters or adverse interests, it can waive, or delete, these five standard exceptions from the owner's title policy. This is called giving "extended coverage" to the owner's title policy. Generally speaking, once the title company is furnished a survey of the property in question, it can waive standard exceptions "2" and "3." Of course, any adverse matters disclosed by the survey will have to be shown as special exceptions to any title policy issued. The other general exceptions are usually waived upon the seller's execution of a title insurance company affidavit in which the seller makes certain statements relative to possible mechanics liens, unrecorded leases, and other matters. Title companies have different names for this affidavit; one of them is an "ALTA Statement."

MORE FROM DICK BALES ABOUT WHAT A TITLE POLICY DOES AND DOES NOT DO:

It's interesting how the real estate contract ties into some of the more esoteric aspects of title insurance.

My company was recently asked to insure a single family residence. The survey revealed a rather substantial encroachment of a patio onto adjoining property. We showed the encroachment on our commitment and declined to endorse over the exception.

We later discovered that one of our "sister" companies had previously issued an owner's title policy with extended coverage and did not show the encroachment. Accordingly, we had an obligation to issue a new policy without raising this offending exception.

As I prepared to waive the encroachment from the commitment, the buyer's attorney asked me, "So, are you going to insure that my client has the right to maintain the patio in its present location?" I replied that that would not necessarily be the case. Granted, we might have remedies like an easement agreement, license agreement, or the doctrine of adverse possession. (Regarding adverse possession, see 735 ILCS 5/13-101 et seq.) However, in the event the neighbor brought suit, asking for the removal of the patio, and the insured tendered a claim based on owner's policy extended coverage, we would also have the option of following the claim procedures set forth in the title policy, which provide for the payment of loss due to the diminution of value of the insured property resulting from the removal of the encroachment. The buyer's attorney replied, "But my client is buying the property BECAUSE there is this patio!"

This situation illustrates the unfortunate truism that title insurance cannot cure all real estate ills. Here, the buyer now wants to back out of the transaction because of the encroachment. But can he? In this instance we are prepared to issue the policy free of the encroachment. Therefore, what right does he have to back out of the contract? Because of the mere POSSIBILITY of a problem with the encroaching patio? Whether or not the buyer can cancel the contract depends on the wording of the contract. If the contract says that the seller is to convey merchantable title (that is, title not subject to a reasonable probability of litigation), then yes, the buyer could pull the plug. But if the contract says that the seller merely has to convey title via a warranty deed, then it seems to me that the buyer has no other choice but to purchase the home, together with the encroaching patio.

Similarly, an attorney recently phoned me with this story. His client was purchasing some property at a foreclosure sale. The seller's attorney sent him the contract for his review. Seller's counsel had deleted the clause that stated that the seller would convey MERCHANTABLE title and instead inserted a phrase that provided that the seller would convey INSURABLE title. The attorney asked me, "Is there a difference between merchantable title and insurable title?"

I feel that there is a vast difference. As noted above, merchantable title is title reasonably free from the specter of litigation. See Farmers & Merchants Bank v. Holland, 309 Ill.App. 193, 32 N.E.2d 987 (1941); Firebaugh v. Wittenberg, 309 Ill. 536, 141 N.E. 379 (1923); Geithman v. Eichler, 265 Ill. 579, 107 N.E. 180 (1914). Conditions which have been held to render a title unmarketable include the following: a break in the chain of title; see Ewing v. Plummer, 308 Ill. 585, 140 N.E. 42 (1923); the existence of restrictive covenants; see Cowen v. Epstein, 248 Ill.App. 111 (1928); a building line violation; see Nelson v. Anderson, 286 Ill.App.3d 706, 676 N.E.2d 735 (1997). On the other hand, lack of access may not render title unmarketable. See Sinks v. Karleskint, 130 Ill.App.3d 527, 474 N.E.2d 767 (1985). (But remember that the owner's title insurance policy does insure against loss arising by reason of a "lack of a right of access to and from the land.")

Section 5/15-1501 of the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1501) defines necessary and permissible parties. One might argue that the failure to serve a permissible party with notice of a pending mortgage foreclosure would result in an unmarketable title. See Brya v. Thomas, 186 Ill.App. 281 (1914). However, this same title would certainly be insurable. The title company would simply issue its owner's policy subject to the rights of the omitted party. After all, section 1501(a) of IMFL makes it clear that a foreclosure can go forward without all parties being named; the statute includes the caveat that "any disposition of the mortgaged real estate shall be subject to the interests of all other persons not made a party. . . ."

Taken to an extreme, it seems to me that ANY property is ultimately insurable--the title policy would merely contain any and all defects as additional Schedule B exceptions. After all, remember the old title insurance maxim: Schedule A giveth and Schedule B taketh away. Accordingly, I suggested to my caller that he may want to insist that his client's foreclosure title be merchantable and not just insurable.

So how does the real estate lawyer make sure that he or she is not lulled into a false sense of title insurance security? A good idea, I think, is to periodically review the Conditions and Stipulations of the title insurance policy. The savvy real estate attorney should know what the title policy does and does not cover.

Dick Bales

Chicago Title Insurance Company

Wheaton, Illinois