IL Underwriting References

Adverse Possession

Adverse Possession

By

Richard F. Bales

Definition of Adverse Possession

Adverse possession is the open and hostile possession of land under claim of title to the exclusion of the true owner, which, if continued for the period prescribed by statute (20 years), ripens into an actual title. See 735 ILCS 5/13-101, 5/13-107, 5/13-109, 5/13-110.

Significance of Adverse Possession to the Title Company

When the examiner or closer is reviewing a plat of survey, he is going to be looking for, among other things, possible encroachments.

Example Number One: Assume that the closer is closing the sale of lot 1. Adam, the owner of lot 1, is selling lot 1 to Baker. The survey shows that a shed located primarily on lot 1 is encroaching onto lot 2, an adjoining lot. Charles owns lot 2.

Under certain circumstances, the owner of lot 1 could acquire title to that part of lot 2 occupied by the encroaching shed. That is, Baker (or his successor), the owner of lot 1, might eventually own by adverse possession that part of lot 2 occupied by the encroaching shed. This is the case, even though Charles (or his successor) is the record owner of lot 2.

Example Number Two: Assume that the closer is closing the sale of lot 1. Adam, the owner of lot 1, is selling lot 1 to Baker. The survey shows that a shed located primarily on lot 2, the adjoining lot, is encroaching onto lot 1, the land being insured.

Under certain circumstances, the owner of adjoining lot 2 could acquire title to that part of lot 1 (the land being insured) that is occupied by the encroaching shed. That is, Charles (or his successor), the owner of lot 2, might eventually own by adverse possession that part of lot 1 occupied by the encroaching shed. This is the case, even though Baker (or his successor) is the record owner of lot 1.

Example Number Three: Assume, for example, that the closer is closing the sale of lot 1. Adam, the owner of lot 1, is selling lot 1 to Baker. The closing is taking place in 2015. The survey shows that a shed located primarily on lot 2, the adjoining lot, is encroaching onto lot 1, the land being insured. The closer ignores the encroachment, and the title policy is issued to Baker with no mention of the encroachment. A year later Charles, the record owner of lot 2, files a court proceeding wherein he seeks ownership of this portion of lot 1 by adverse possession. The title company may have to defend this lawsuit.

Clearly the title examiner and closer have to be aware of the law of adverse possession.

Elements of Adverse Possession

There are five elements to adverse possession:

• continuous possession; • hostile or adverse possession; • actual possession; • open, notorious and exclusive possession; • possession that is under a claim of title inconsistent with that of the true owner.

Each of these elements must exist concurrently for 20 years. See Tapley v. Peterson, 141 Ill.App.3d 401 (1986); Fyffe v. Fyffe, 292 Ill.App. 539 (1938).

Some people have devised memory devices as a means of remembering the basic elements of adverse possession. For example, adverse possession is possession that is:

O - Open C - Continuous; claim of title E - Exclusive A - Actual N - Notorious

or,

H - Hostile E - Exclusive L - Lasting U - Uninterrupted V - Visible A - Actual

That is, “If you lose title to your land due to adverse possession, you are in a “heluva” situation.”

Claim of Title

"Claim of title" does not mean that the claimant has to have supporting title documents. Rather, “claim of title” means that the claimant must treat the property as if it were his own, to the exclusion of the true owner.

Exclusive Possession

Possession much be such as to equate with an unequivocal act of ownership; the adverse possessor must tell the community that the land is under his exclusive use and enjoyment. See Towle v. Quante, 246 Ill. 568 (1910); Brooks v. Bruyn, 24 Ill. 372 (1860).

The enclosing of land by a fence has always been the classic indication of possession. But see Burlew v. City of Lake Forest, 104 Ill.App.3d 800 (1982), which stands for the proposition that an encroachment of a fence over an insubstantial portion of a lot is not sufficient notice of possession to constitute adverse possession of said portion.

Example: A survey of lot 1, the land being insured, shows a neighbor’s fence encroaching three inches onto lot 1. The closer fails to raise this encroachment on the title policy. A few years later the neighbor files suit, claiming ownership of these three inches of the adjoining land. The neighbor is claiming title based on adverse possession--the three-inch encroachment of the fence. The title company that insured lot 1 might be able to argue that such an insubstantial encroachment does not constitute adverse possession.

The mowing of weeds or picking up trash is not sufficient acts of possession. See C. & N. W. Ry Co. v. Kennedy, 344 Ill. 309 (1931).

But on the other hand, see Joiner v. Janssen, 85 Ill.2d 74 (1981), where the Illinois Supreme Court found there was sufficient acts of possession in that the “plaintiffs mowed the grass on the 14-foot strip in question, raked leaves, planted and removed trees, bushes and flowers, gave away trees, bushes and flowers from the land as gifts, buried their pet dog on the strip when it died, shoveled snow from the walk in front of the strip, and generally maintained the property . . . .”

For similar elements of adverse possession, see Brandhorst v. Johnson, 12 N.E. 3d 198 (2014).

Sufficient possession would be by fencing the land, cultivating the land, or by the erection of buildings on the land. See Brooks v. Bruyn, 18 Ill. 539 (1857); Bugner v. Chicago Title & Trust Co., 280 Ill. 620 (1917)

Taking wood for fuel, fences, and other purposes, from timberland, is sufficient possession, even if the land is not enclosed. See Bellefontaine Imp. Co. v. Niedringhaus, 181 Ill. 426 (1899)

In Tapley v. Peterson, 141 Ill.App.3d 401 (1986), adverse possession was maintained by displaying lawnmowers which were sold as part of the business operated from the home.

One can adversely possess land covered by water, even if it is not fenced in. See Burns v. Curran, 282 Ill. 476 (1918).

In this case, the land in question was occasionally flooded by the Illinois River. It was argued that the flooding interrupted the adverse possession, that the possession was not "continuous." The court said otherwise, that the failure to use the land because it was flooded would not interrupt the possession.

Example: Adam buys a summer home in Door County, Wisconsin. Baker owns the summer home next door. Baker starts to adversely possess a portion of Adam’s property, but only for nine months out of the year. Baker does not go to Door County in the winter months. Nonetheless, such possession, while not continuous for twelve months out of the year, could ripen to adverse possession.

One does not have to live on the property in order to adversely possess it. See Whittington v. Cameron, 385 Ill. 99 (1944). In this case, the claimant erected fences, a house, and a barn. Crops were grown on the land by a tenant of the claimant, and not the claimant himself. The tenant adversely possessed the property, but the tenant’s occupation accrued to the benefit of the claimant.

The Possession Must be Hostile

Hostile does not mean having "ill will" towards someone. Rather, it means the assertion of ownership incompatible with that of the true owner. It simply means, “without permission.” See Joiner v. Janssen, 85 Ill.2d 74 (1981); Cobb v. Nagele, 611 N.E.2d 599 (1993).

Thus, permissive possession can never ripen into adverse possession. See Brettman v. Fischer, 216 Ill. 142 (1905), where the court said it was not adverse possession when the owner invited the claimant onto the land and made improvements paid for with money the owner gave him.

Example: Adam and Smith are neighbors. Smith erects a fence that encroaches two feet onto Adam's land. Adam says nothing for 20 years. This is hostile possession that is without permission, and thus the occupation could constitute into adverse possession.

Example: Assume the same facts as above, but now, as Smith is putting up the fence, Adam comes out and tells him, "Say, I think that fence is encroaching two feet on my yard. Since I want to be a good neighbor, I won't make you take it down; I'll let you keep it there, until you decide to take it down and replace it. But, I just want you to know that it is on my land." This is now permissive possession, which can never ripen into adverse possession.

• Example: An attorney advised his client, who had an encroaching neighbor, to send his neighbor a Christmas card every year. In the card, while wishing his neighbor best wishes of the season, the client would also give his neighbor permission to use his property during the coming year.

• Example: An attorney prepared a letter on behalf of his client; the letter allowed the neighbor to continue to maintain his fence on the client’s land. The client sent the letter to his neighbor via certified mail, return receipt requested. The attorney then recorded a copy of the letter (together with the certified mailing receipt and the legal description of the client’s land) against the client’s land.

Because permission negates adverse possession, the continue occupation of the client’s land would never ripen into adverse possession.

Hostility must be a claim of ownership. Thus, acts of trespass would never ripen into adverse possession. See Leonard v. Pearce, 348 Ill. 518 (1932).

The Possession Must be Continuous

The possession must be continuous and without interruption. Once interrupted, the claimant must start over again. See Jacobi v. Jacobi, 345 Ill. 518 (1931)

Example: A garage is built so that it encroaches onto adjoining property. Eighteen years later, it is destroyed. It is rebuilt in the same location. Because the possession was interrupted, the encroacher must start the twenty-year statute all over again.

Open and Notorious

The use of the land must be “open and notorious.” Thus, one cannot obtain adverse possession or a prescriptive easement when the use is invisible to the owner of the servient estate. An example of this type of use would be a subsurface sewer or drain line. See Murtha v. O’Heron, 178 Ill.App. 347 (1913).

The Statutes Relating to Adverse Possession:

There are several statutes relating to adverse possession. The various requirements of these statutes are as follows:

735 ILCS 5/13-101 20 years occupation

735 ILCS 5/13-107 7 years occupation connected title

735 ILCS 5/13-109 7 years occupation color of title 7 years of payment of taxes

735 ILCS 5/13-110 7 years of payment of taxes vacant land color of title

Note that there is a kind of “sliding scale” with the various statutes.

That is, 735 ILCS 5/13-101 merely requires twenty years occupation.

735 ILCS 5/13-107 requires only seven years occupation, but a “connected title.”

735 ILCS 5/13-109 seven years occupation and, since it only requires a lesser form of title, called “color of title,” it also requires seven years payment of taxes.

Finally, 735 ILCS 5/13-110 also requires this form of title (color of title) plus seven years payment of taxes, since it does not require any occupation for vacant land.

Under 735 ILCS 5/13-101, one needs to adversely possess the land for 20 years. Under this statute, one does not need to have payment of taxes or any accompanying color of title. See Scales v. Mitchell, 406 Ill. 130 (1950).

Example: In 1980 Adam buys lot 1. In 1990 Baker buys lot 2. Baker immediately builds a fence that encroaches one foot onto the east line of Adam’s lot. The fence remains for twenty years. Adam never gave Baker his permission to put up the fence. It would appear that Baker now owns that portion of Adam’s land enclosed by Baker’s fence.

735 ILCS 5/13-107 allows one to adversely possess the property in only seven years. However, the claimant must have seven years of possession and "a connected title." Payment of taxes is not required.

Case law indicates that the "connected title" needed is "prima facie title," i.e., title to the land that a reasonable person would pay money for. See Elston v. Kennicott, 46 Ill. 187 (1867)

A "connected title" appears to be a stronger form of title than the "color of title" referred to below.

For example: the Illinois Supreme Court notes in Carpenter v. Fletcher, 239 Ill. 440 (1909) that "prima facie title" would be a judge's deed, together with the order authorizing the making of the deed. On the other hand, "color of title" would be the deed alone.

Perhaps the term, “connected title” is simply another meaning for “chain of title.” That is, “connected title” is a series of deeds, A to B, B to C, C to D, and so on. Such a title is much stronger than simply title to land based on one deed to the “owner.”

735 ILCS 5/13-109 provides that one may adversely possess property if there is seven years of possession, seven years of successive payment of taxes, and color of title.

A deed that was "void for uncertainty”—it purported to convey an acre out of a tract of land, without adequately describing the acre—is not color of title.  See Hanna v. Palmer, 194 Ill. 41 (1901).

A certificate of sale, issued at a tax sale, is not color of title, since it does not purport to convey title. See Harrell v. Enterprise Sav. Bank, 183 Ill. 538 (1899).

A sheriff's deed, a tax deed, or an administrator's deed, valid on its face, but void, because of a defect in the underlying proceedings, may still be color of title. See, respectively, Fritz v. Joiner, 54 Ill. 101 (1879); Wells v. Wells, 262 Ill. 320 (1914); Kelly v. Donlin, 70 Ill. 378 (1873).

Example: Adam and Baker buy property in 2000. At that time they take out a purchase money mortgage. In the next ten years, they take out two more mortgages, one in 2005 and one in 2010. In 2015 the 2000 lender begins foreclosure proceedings. The 2000 first lender fails to make the other lenders necessary parties to the foreclosure proceeding. Nonetheless, the foreclosure is completed and a sheriff's deed is issued. Since there was no jurisdiction over the junior lenders, the sheriff's deed, which purported to convey clear title, is void as to those two lenders. Nonetheless, it is still color of title. In this regard, see 735 ILCS 5/2-1401.

One need not have "color of title" in order to adversely possess property. But, if one does not, then there is adverse possession only as to that land actually and continuously occupied for at least twenty years pursuant to 735 ILCS 5/13-101. See Ingraham v. Brown, 231 Ill. 256 (1907).

735 ILCS 5/13-110 provides that if one may adversely possess property if he pays taxes for seven successive years on vacant land and has color of title.

Adverse Possession: Owner v. Owner

Note that, generally speaking, a true owner of the land cannot adversely possess the land, as against another true owner.

Example: Adam and Baker own a home. Adam moves in, while Baker says to him, "see you in 20 years; I'm off to Europe for an extended vacation." When Baker comes back, Adam can't say "you no longer own the property; I own it by adverse possession."

The reason for this is that Adam did not exert a claim of title inconsistent with the rights of the other owner, Baker. Adam did not repudiate Baker's title and claim adversely to him. See Carpenter v. Fletcher, 239 Ill. 440 (1909).

However, if, while Baker was gone, Adam, pretending to be the sole owner, sold the property to Charles, and Charles went into possession and paid the taxes on the property, Charles could eventual own the property via adverse possession. The deed, conveying one-half interest, would be sufficient color of title for the whole interest. See Hinchman v. Whetstone, 23 Ill. 185 (1859).

Payment of taxes is not a necessary factor when the adverse possessor is claiming ownership under the 20-year statute of limitations. See Illinois Cent. R. Co. v. Cavins, 238 Ill. 380 (1909).

Tacking

One person alone does not have to be in possession for the full 20 years in order to have adverse possession. Rather, there can be a succession of owners. This principle is called "tacking." That is, one ownership is "tacked on" to another ownership. See O'Connell v. Chicago Park District, 376 Ill. 550 (1941).

Example: A owns lot 1 in 1990. A begins to adversely possess a portion of lot 2 in 1995. He does so by building a shed on a portion of lot 2. A deeds lot 1 to B in 2000, who deeds it to C in 2005, who deeds it to D in 2015. Through the years, each successive lot owner also adversely possesses the same portion of lot 2. There is a connected chain of title here, or privity of title, in that there is a succession of people, all linked together by their various deeds, and thus each owner can “tack” his adverse possession claim to the claim of the previous owner.

Note that privity of title does not require a deed that specifically describes the property adversely possessed. In the example above, each deed described only lot 1. However, since there was still adverse possession of lot 2, there is, nonetheless, the necessary connection of estates. See Rich v. Naffziger, 255 Ill. 98 (1912).

Payment of Taxes

The payment of taxes is not necessary when bringing an adverse possession claim under the 20-year statute. (735 ILCS 5/13-101) See County Collector of DuPage County v. Bodoh, 98 Ill.App.3d 950 (1981).

Under the statute relating to adverse possession of land for seven years, with payment of taxes and color of title (735 ILCS 5/13-109), the possession, the color of title, and the payment of taxes must exist concurrently. See Beard v. Henn, 28 Ill.2d 11 (1963).

In other words, an adverse occupier cannot pay taxes for seven years, but pay two years’ worth of these seven years of taxes before he goes into possession. See Irving v. Brownell, 11 Ill. 402 (1849)

The payment of taxes, the color of title, and the possession must all run concurrently for seven years.

Under 735 ILCS 5/13-110, you may acquire title to vacant land if you have color of title and pay taxes for seven successive years. See Woods v. Glos, 257 Ill. 125 (1913).

All taxes must be paid for seven successive years, and seven years must elapse from the date of the first payment.

One has to have color of title first before one can make a tax payment that "counts" towards possession. See White v. Harris, 206 Ill. 584 (1904).

No Adverse Possession against the State

Title insurers often learn that one cannot obtain via adverse possession lands owned by the state. It is for this reason that encroachments into public streets and roads should be approached with caution. See 735 ILCS 5/13-111, 735 ILCS 5/13-120(6).

But the title insurer should be aware that the "no adverse possession against the state" maxim is a rule that is riddled with exceptions; these are outlined in the IICLE book entitled Illinois Municipal Law. For example, the rule applies only to municipal-owned property that is held for a public use. Thus, in City of Chicago v. Middlebrooke, 143 Ill. 265 (1892), there was allowed the adverse possession of city-owned property where the court found that” . . . the property in question was not devoted to any public use or held for any public purpose." 143 Ill. 265 at 269.

Example: A municipality owns a vacant lot. At one time the municipality was going to put a public park in the lot, but it never did. The lot is now just filled with weeds and trash. Because this lot serves no public purpose, it is possible that one might be able to adversely possess it. See Wanless v. Wraight, 202 Ill.App.3d 750 (1990).

The rationale seems to be: If the land serves no public purpose (compare a city park with benches and a playground to a vacant weed-filled lot), it can be sold and conveyed by the municipality without any breach of municipal duty. That is, because the land has lost its “public property protection,” it can be adversely possessed.

Rule of Title Practice: One should approach the insurance by adverse possession of public land with extreme caution. See, e.g., Miller v. Metropolitan Water Reclamation District of Greater Chicago, 374 Ill. App.3d 188 (1st. Dist. 2007) wherein the court found that there was no adverse possession of the public land, even though the land was leased as a golf course.

Practical Concerns for the Title Company

Fences

Some rural title companies will raise an exception when a survey shows a landowner’s fence that is substantially inside the landowner’s property line. The title companies are concerned that the adjoining neighbor, by occupying that land up to the fence (by mowing, planting, etc.) could eventually own that land by adverse possession.

The exception might be:

Possible adverse interest of the owner of the land east and adjoining the land described in Schedule A in and to that portion of the insured property that is west of the east property line and east of the fence located on the land, as disclosed by a survey.

Raising an exception is probably a good idea, but attorneys for insureds might be very concerned about such an exception. A good rule is as follows: If the property is 1-4 residential, the examiner should probably not raise this exception. But if the insured property is a farm or large property, the examiner should consider the exception, as the number of square feet in question, even with the fence set one foot inside the lot line, might be considerable.

Encroachments into a Public Right-of-Way

A public street will usually consist of more than the asphalt surface. In a residential neighborhood, e.g., the dedicated road that one sees on a plat of survey might include the parkway (that area between the sidewalk and the paved street surface), the sidewalk, and nine to twelve inches of grass on the inside side (the “house” side) of the sidewalk.

In other words, if one were to stand in the middle of a street and look down the asphalt street, the asphalt, the grass parkway, the sidewalk, and even a few inches of grass on the other side (the “house” side) of the sidewalk, on both sides of the asphalt street, would all be part of the dedicated right-of-way.

For this reason, a survey might show an encroachment of a shed or fence into the street, even though an inspection would simply show the shed or fence sitting on some grass.

So what if the seller comes to closing with a plat of survey that shows a three-inch encroachment of a fence into the street?

Despite Illinois case law that states that there can be no adverse possession against a municipality, one might be able to insure over this small encroachment into the street for the loan policy. The key is the nature of the right-of-way. If the street is in an established residential area, with little likelihood in the future of the street ever being widened, one might be able to insure over the encroachment, as the encroachment would be a problem only if the street were widened.

Any endorsement issued would have to exclude from coverage any license fees that might be imposed by the municipality for the continued maintenance of the encroachment in the street.

In this regard, consider the following language:

This endorsement, however, does not insure against loss or damage resulting from any license fee or other charge that may be imposed by the City of _____ for the continued maintenance of said encroachment.

An underwriter must be consulted when offering this kind of coverage.

The examiner may be asked to endorse over an encroachment into a public right-of-way based on a “hold harmless agreement” executed by the municipality. The examiner should read such an agreement very carefully! Many times the agreement includes so many conditions and exclusions that it offers little, if any, protection to the homeowner and little, if any, comfort to the title company.

Both sets of survey standards commonly used by surveyors in Illinois (The 2016 ALTA/NSPS land title survey standards and the current Illinois boundary survey standards) require the surveyor to show all evidence of possession throughout the surveyed premises and to show all encroachments. The reason for this is the possibility of adverse possession.

It should be clear that the law concerning adverse possession is very complex. The court will strictly construe these laws.

The reason for this is because a court is being asked to take away someone's property and give it to someone else, not because this person paid for it, but rather, merely because he occupied it.

There is a legal maxim that "equity abhors a forfeiture." The court will not forfeit someone’s property just because a third party is occupying it unless all the elements of adverse possession are met.

Notwithstanding this, the Company may be asked to insure title possibly acquired via adverse possession (probably more accurately described as a long period of occupation) without court order. To do so, the Company will require a survey to make sure that no other party is occupying the land. Underwriter approval is required.

Example:

Several years ago an examiner was asked to insure a complete lot, when the southeast corner of the lot had never been conveyed by the owner of the subdivision, which was platted in 1946.

The underwriter decided to insure the entire lot, even though the current owner never acquired a deed for this corner. The factors that the underwriter considered were:

• The current owners of the parcel had been paying taxes on the complete lot since they acquired it.

• For at least 20 years previously, the parcel had always been taxed as one lot. That is, the omitted lot corner never had its own tax number. Thus, the county tax assessor had never "recognized" the existence of the corner as a separate parcel of land.

• The corner had never been deeded out. Thus, no other person had a recorded interest in this corner.

• A survey indicated no adverse possession by the adjoining lot owner.

• The adjoining lot owner had no record interest in the corner.

The underwriter wanted to start a new chain of title for this southeast corner. As it never had been deeded out, record title was still in the name of the developer. Such an affidavit would put third parties on notice of the insured's interest in the property.

The underwriter accordingly prepared and recorded the following "Affidavit of Adverse Possession."

AFFIDAVIT OF ADVERSE POSSESSION

State of Illinois County of DuPage

Thomas D. Jones and Bonnie C. Jones hereby affirm that they have resided at the property commonly known as 307 W. Oak Street, Lombard, Illinois 60148 since 1963.

Said land is legally described as follows:

Lot 63 in Ellis’ Resubdivision of Block “G” in Greenfield Resubdivision of Outlot 2 and part of Outlot 3 in the southeast quarter of Section 6, Township 39 North, Range 11, East of the Third Principal Meridian, according to the plat of Ellis’ Resubdivision recorded June 29, 1927 as document 238649, in DuPage County, Illinois.

Permanent Index Number: 06-06-401-063

Thomas D. Jones and Bonnie C. Jones affirm that they have been in actual, open, notorious, adverse, visible, hostile, exclusive, and continuous possession under a claim of right and color of title since 1963, and that during all this time they have paid to the proper authorities all taxes and assessments levied or assessed on the land.

Thomas D. Jones and Bonnie C. Jones affirm that in all the time they have been in possession of the land, their title, ownership, or occupancy has never been questioned or disturbed.

This affidavit has been executed and recorded to put third parties on notice of the undersigned’s ownership interest in the above-described property and to induce Chicago Title Insurance Company to issue a title insurance policy insuring the title to this property.

Further affiants sayeth not.

The term, “affidavit of adverse possession” is probably a misnomer. There may be times when the adverse possessor may not be in possession for the requisite number of years under the adverse possession statutes. That is acceptable. In this example the examiner is not using the affidavit to change title pursuant to the statute; the examiner is using the affidavit to replace a break in the chain of title.

Encroachment onto the Land in Question

Encroachments onto the land in question have always been a concern for the title insurer. There is always the chance that the encroacher will assert a claim of adverse possession against the owner of the land being encroached upon.

There is no endorsement that the title company can give to an owner’s policy when there is such an encroachment.

If the title company were to do so, it would be faced with an immediate tender of a claim by the Insured—“I want this fence off my land!” Note that the title company could, though, endorse over such an encroachment on the loan policy.

For the loan policy, consider the “diminution” endorsement:

The Company hereby insures the insured against loss or damage that the insured shall sustain by reason of the diminution of the value of the security shown in Schedule A as a result of the encroachment shown at exception _____ in Schedule B.

What recourse does the attorney for the owner of the land have when the survey discloses an encroachment onto the land in question?

Ideally, prior to closing the attorney for the seller should ask the current owner of the land to execute an easement or license agreement with the adjoining neighbor.

The seller is the best party to do this, not the new buyer. The seller has known the neighbor since he has lived there. The chances are better that the seller can negotiate the execution of the agreement and not the new buyer.

The Easement Agreement and the License Agreement

If the parties agree to an encroachment agreement, how should the agreement be constructed? Should it be an easement or a license? And why should the parties even execute an agreement?

If the attorney represents the encroacher, then theoretically he might want an easement, because then the other party cannot revoke it. Only the client can extinguish the easement.

If the attorney represents the encroachee (the party whose land is being encroached upon), then he might prefer a license, because then, theoretically, the client might later want to revoke the license.

It is probably preferable that any such agreement be worked out with the current owner and the neighbor, as these parties know each other.

It is in the best interests of both parties to work out an agreement.

• The attorney for the encroachee should insist that the agreement contain provisions for the extinguishing and disclaiming of any possible adverse possession claims, so that the encroachee does not lose title to that portion of his property burdened by the encroachment.

• The attorney for the encroachee should also consider language providing that if the encroaching structure is ever destroyed, in a state of disrepair by more than 50 per cent, or otherwise has to be replaced, then the structure will be moved off the encroachee’s land and relocated, if necessary, onto the encroacher’s own property.

• The attorney for the encroacher should urge the encroacher to sign the agreement, because then the encroacher will have a legal basis for maintaining the encroachment on his neighbor’s property. Otherwise, assuming that the twenty-year statutory period for adverse possession has not yet run, he risks either the court-ordered removal of the encroachment or the payment of money damages. In this regard, see 735 ILCS 5/13-101 et seq. To see at what lengths a plaintiff must go in order to obtain the adverse possession of land, see McNeil v. Ketchens, 397 Ill. App. 3d 375 (2010).

• In addition, the encroacher still risks the possibility of a lawsuit if the encroachment is not removed. This would be the case, even if the statutory time period for adverse possession has run. It is possible, e.g., that the elements necessary to establish adverse possession have not all been met.

• Finally, both parties should welcome the execution of the agreement. Almost all owners of land will eventually become sellers. A recorded executed agreement that allows for the encroachment will help cure a potential title problem for both the encroacher and the encroachee.

Sample forms are attached at the end of these materials.

Other Options

What can seller’s counsel do if the encroacher will not sign the agreement?

A Letter to the Neighbor: Remove the Encroachment

He could draft a letter, ordering the encroacher to remove the encroachment. This is always a risky proposition. If the neighbor refuses to move the offending structure, then litigation may be the next step. And in the event of a lawsuit, does the neighbor have a defense that he has adversely possessed the land for twenty years and now owns the property?

A Letter to Neighbor: Keep the Encroachment

Another option is for the attorney could mail a certified letter to the neighbor, return receipt requested. But this letter would not order the neighbor to remove the encroachment. Instead, the letter would advise him that he may continue to maintain the encroachment in its present location. This would break the “hostility” element necessary for adverse possession. The attorney should attach his client’s legal description to a copy of the letter and record it, together with the returned receipt. See Peters v. Greenmount Cemetery Association, 259 Ill.App.3d 566, 632 N.E.2d 187, 198 Ill. Dec. 128 (4th Dist. 1994); 527 S. Clinton, LLC v. Westloop Equities, LLC, 403 Ill. App. 3d 42, 932 N.E.2d 1127, 342 Ill. Dec. 666 (1st Dist. 2010); 527 S. Clinton, LLC v. Westloop Equities, LLC, 7 N.E.3rd 756 (1st Dist. 2014).

Illinois Cases Concerning Adverse Possession

Even though “equity abhors a forfeiture,” court cases concerning adverse possession are still being decided, and are still being decided against the owner of the land.

Estate of Welliver v. Alberts, 278 Ill.App.3d 1028 (1996); the plaintiffs acquired the land by maintaining trails and letting a motorcycle club use the land for an endurance test.

Ruth Crawford v. Adolph and Beulah Love, 614 N.E.2d 50 (1993); the holder of a tax deed prevailed over the adverse possession claim because issuance of the tax deed nine years into the twenty year period meant that there was no twenty year possession period without interruption.

Cobb v. Nagele, 242 Ill.App.3d 975 (1993); the farming the land for forty years satisfied the requirements for adverse possession.

Wanless v. Wraight, 202 Ill.App.3d 750 (1990); a village owned land used as a parking lot. Plaintiff asserted a cause of action for adverse possession against the village. The village argued that there was “no adverse possession against the municipality.” Nonetheless, the court allowed for the action of adverse possession by the neighbor, stating that the use of the land as a parking lot was not a “public use” that would bar the application of adverse possession against the village.

Peters v. Greenmount Cemetery Association, 632 N.E.2d 187 (1994); the lower court rejected plaintiff’s claim of adverse possession, stating that the plaintiff had not been “hostile” towards the cemetery, that he failed to show that he felt ill will towards the cemetery. The appellate court reversed, pointing out that “hostile” does not imply actual ill will, but rather, the assertion of ownership that is incompatible with that of the true owner. The court found that the hostility requirement was satisfied simply by the landowner using the property as his own.

Beverly Trust Company v. Dekowski, 216 Ill.App.3d 732 (1991); the court ruled that the owner of the land did not have to have actual knowledge of the defendant’s actions in order to meet the “open and notorious” element of adverse possession. Rather, the correct test is whether the community in the vicinity of the land is or could be apprised of defendant’s possession and exclusive use.

Knauf v. Ryan, 338 Ill. App. 3d 265, 788 N.E.2d 805, 273 Ill. Dec. 214 (2nd Dist. 2003) (2nd Dist., April, 2003); there was adverse possession because of the planting of trees and the placement of a garden and a telephone utility box.

Miller v. Metropolitan Water Reclamation District of Greater Chicago and the City of Evanston, 374 Ill. App. 3d 188 (1st Dist. 2007); the plaintiffs tried to argue that the land was no longer of a public use, and thus a cause of action for adverse possession would lie. The court disagreed, saying that even though the land was subleased to the Evanston Wilmette Golf Course Association, “the people of the state at large have a continuing general interest in the subject property during the leasehold and, therefore, the subject property retains its public character.” Thus, the court held that the encroachment of improvements onto the land did not constitute adverse possession, even though this “public” land was leased as a golf course.

McNeil v. Ketchens, 397 Ill. App. 3d 375 (2010); this case illustrates the arduous road the plaintiff must travel in order to prove ownership by adverse possession.

Joiner v. Janssen, 85 Ill.2d 74 (1981); the Illinois Supreme Court rules on an adverse possession case.

LICENSE

This license agreement is made the 8th day of October, 2002, by and between John Jones (hereinafter “Jones”) and Sam Smith (hereinafter “Smith”);

Whereas, Jones is the owner of property legally described as follows:

(Parcel One:) Lot 1 in Block 50 of Riddle Highlands, in the City of Aurora, Kane County, Illinois (common address: 1538 Palace Street, Aurora, Illinois 60506)

Whereas, Smith is the owner of property legally described as follows:

(Parcel Two:) Lot 2 in Block 50 of Riddle Highlands, in the City of Aurora, Kane County, Illinois (common address: 1540 Palace Street, Aurora, Illinois 60506)

Whereas, Smith’s fence encroaches onto the western line of Parcel One by approximately two feet at the widest point (said fence encroachment hereinafter “Fence”), as shown on the survey of Parcel One, dated October 1, 2002, by Western Engineering, P.C. (hereinafter “Survey”), which is attached hereto as Exhibit A;

Therefore, in consideration of one dollar and for the mutual promises and agreements hereinafter contracted, it is agreed as follows:

1) Jones hereby grants to Smith a license for the use, maintenance, and repair of the Fence at its present location as shown on the Survey;

2) Jones and Smith agree that this grant is a revocable license, personal to Smith, for the use, maintenance, and repair of said Fence and is given to Smith at the discretion of Jones and shall in no way be construed as giving Smith a real property interest in Parcel One;

3) Jones shall not be responsible for any maintenance, repair, upkeep, or liability because of said Fence, and Smith agrees to indemnify and hold Jones harmless from any loss occasioned by said Fence being located on Parcel One and by Smith’s exercise of his rights and privileges hereunder, including any loss arising or growing out of any damage or injury caused by the negligence of Smith;

4) Smith agrees that if said Fence is ever destroyed or is in a state of disrepair by more than fifty percent, or otherwise has to be replaced, then the Fence will be removed from Parcel One, whereupon this license will automatically terminate and be of no further force and effect. Any replacement fence will be erected entirely on Parcel Two;

5) Smith agrees that if the Fence is ever removed from Parcel One for any reason (for example, a voluntary removal for aesthetic reasons), this license will automatically terminate and be of no further force and effect. Any replacement fence will be erected entirely on Parcel Two;

5) This license will automatically terminate when Smith conveys Parcel Two to a purchaser for value and/or ceases to occupy the residence situated thereon. Furthermore, this agreement may be terminated by Jones at any time, and Smith agrees to remove said Fence if and when requested in writing by Jones.

6) By executing this agreement, Smith disclaims and relinquishes any and all real property interests he has or may have in the land of Jones, including, but not limited to, any possible claim based on the adverse possession of that portion of Parcel One occupied by said Fence.

________________ John Jones

_______________ Sam Smith

GRANT OF EASEMENT

This grant of easement is made the 1st day of November, 2002, by and between John Jones (hereinafter “Jones”) and Sam Smith (hereinafter “Smith”);

Whereas, Jones is the owner in fee simple of property legally described as follows:

(Parcel One:) Lot 1 in Block 50 of Riddle Highlands, in the City of Aurora, Kane County, Illinois (common address: 1538 Palace Street, Aurora, Illinois 60506)

Whereas, Smith is the owner in fee simple of an adjoining parcel of land, lying adjacent to and immediately west of Parcel One and more particularly described as follows:

(Parcel Two:) Lot 2 in Block 50 of Riddle Highlands, in the City of Aurora, Kane County, Illinois (common address: 1540 Palace Street, Aurora, Illinois 60506)

Whereas, Smith’s fence encroaches onto the western line of Parcel One by approximately two feet at the widest point (said fence encroachment hereinafter “Fence”), as shown on the survey of Parcel One, dated October 1, 2002, by Western Engineering, P.C. (hereinafter “Survey”), which is attached hereto as Exhibit A;

Therefore, in consideration of one dollar and for the mutual promises and agreements hereinafter contracted, it is agreed as follows:

1) Jones hereby grants to Smith and his heirs, successors, and assigns an easement for the use, maintenance, and repair of the Fence at its present location as shown on the Survey, said easement to be appurtenant to Parcel Two;

2) Jones shall not be responsible for any maintenance, repair, upkeep, or liability because of said Fence, and Smith agrees to indemnify and hold Jones harmless from any loss occasioned by said Fence being located on Parcel One and by Smith’s exercise of his rights and privileges hereunder, including any loss arising or growing out of any damage or injury caused by the negligence of Smith;

3) Smith agrees that if said Fence is ever destroyed or is in a state of disrepair by more than fifty percent, or otherwise has to be replaced, then the Fence will be removed from Parcel One, whereupon this easement will automatically terminate and be of no further force and effect. Any replacement fence will be erected entirely on Parcel Two;

4) Smith agrees that if said Fence is ever removed from Parcel One for any reason (for example, a voluntary removal for aesthetic reasons), this easement will automatically terminate and be of no further force and effect. Any replacement fence will be erected entirely on Parcel Two;

5) By executing this agreement, Smith disclaims any possible claim based on the adverse possession of that portion of Parcel One occupied by said Fence;

6) The easement herein granted shall run with the land and shall inure to the benefit and use of Smith and his heirs, successors and assigns, provided, however, that nothing contained herein shall be construed as a conveyance to Smith of any fee simple interest in Parcel One;

7) Smith may terminate this grant of easement by executing a release of easement and delivering said release to the then-current owner of Parcel One at 1538 Palace Street, Aurora, Illinois 60506, whereupon all rights, duties, and liabilities hereby created shall terminate. Said current owner of Parcel One shall then be responsible for recording said release in the office of the Recorder of Deeds, Kane County, Illinois.

________________ John Jones

_______________ Sam Smith

Agency

Powers of Attorney

An agent does not have to be an individual. For example, it can also be a partnership or a corporation. But in this situation, the examiner may have to review corporate resolutions or partnership agreements in order to determine the identity and authority of the person or persons who may properly execute the documents on behalf of the agent.

Corporate Authority

Last effective date: November 17, 2019 All statutes checked through November 17, 2019

See generally the Business Corporation Act of 1983 (hereafter “the Act”), which is found in the Illinois statutes at 805 ILCS 5/1 et seq.

A domestic corporation is incorporated under the laws of Illinois. A foreign corporation is organized under laws other than the laws of Illinois. See 805 ILCS 5/1.80(b).

The Business Corporation Act of 1983 gives a corporation broad powers. For example, it can sell, convey, mortgage, or otherwise dispose of its assets. See 805 ILCS 5/3.10. A corporation, however, does not have unlimited authority to do this. Consequently, the Company has adopted various underwriting practices when insuring the mortgage or sale of corporate property.

Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Fees and Charges

Both domestic and foreign corporations have to pay license fees and franchise taxes. See 805 ILLCS 5/15.05. A license fee covers regulations costs. A franchise tax is a tax on the privilege of carrying on business in the nature of a corporation. See 805 ILCS 5/15.20 and 805 ILCS 5/15.35. If these charges are not paid, the following can result:

• The Secretary of State can administratively dissolve any domestic corporation. See 805 ILCS 5/12.35.

• The Secretary of State can revoke the certificate of authority of a foreign corporation. See 805 ILCS 5/13.50(h).

• A domestic corporation cannot maintain a civil action in Illinois until the charges are paid. See 805 ILCS 5/15.85(c). The Secretary of State can refuse to file any articles, certificates, or other documents relating to a domestic or foreign corporation until all fees are paid. See 805 ILCS 5/15.85(a).

• The annual franchise tax of a corporation is a prior and first lien on the real property of the corporation. See 805 ILCS 5/15.80(d). It is enforceable for seven years after the date the annual report was filed for the period that gave rise to the franchise tax lien. See 805 ILCS 5/15.90(a).

When insuring the sale or mortgage of corporate real estate by a domestic corporation, the title examiner wants to be sure that all taxes, fees, and charges have been paid. This exception probably does not have to be raised when the examiner is dealing with an established corporate customer that management knows to be financially sound.

A certificate of authority must be obtained by a foreign for-profit corporation before it can transact business in Illinois. Once the certificate is revoked, the foreign corporation no longer has the authority to transact business in Illinois and is prohibited from doing so. Also, the foreign corporation cannot maintain a civil suit in any court in Illinois. However, it can defend an action in Illinois. See 805 ILCS 5/13.05, 805 ILCS 5/13.55(c), 805 ILCS 5/13.70, 805 ILCS 5/13.75.

Clearance for a Domestic Corporation

• A corporation has the power to sell and mortgage property. See 805 ILCS 5/3.10(e).

• The examiner should obtain and review a certificate of good standing. See 805 ILCS 5/15.95(e). The certificate is not necessary if dealing with an established corporation that is financially sound. (In lieu of obtaining a certificate of good standing, the examiner may confirm the good standing of a corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.)

• How important is the certificate of good standing? The Illinois Secretary of State will administratively dissolve a corporation if, for example, it has not paid any fee or its franchise tax. See 805 ILCS 5/12.35(c). The dissolution of a corporation terminates its corporation existence. A dissolved corporation cannot carry on any business except what is necessary to wind up its affairs. See 805 ILCS 5/12.30.

• Each corporation shall have a board of directors, and the business and affairs of the corporation shall be managed by the board of directors. See 805 ILCS 5/8.05.

• A majority of the number of directors fixed by the by-laws, or in the absence of a by-law fixing the number of directors, the number stated in the articles of incorporation or named by the incorporators, shall constitute a quorum for the transaction of business unless a greater number is specified by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(a).

• The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless the act of a greater number is required by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(c).

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of board authorization of the proposed deed or mortgage. See 805 ILCS 5/8.50.

• When the title company is insuring the sale or mortgage of all or substantially all of the corporate assets of the corporation, and the transaction is made in the usual and regular course of business of the corporation, the examiner must obtain the authorization of the board of directors. Shareholder consent is not needed, however. See 805 ILCS 5/11.55.

• Even if the title company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 5/8.50.

• The resolution should be executed by a quorum of the board of directors, thus evidencing the board’s approval of the proposed transaction. However, note that 805 ILCS 5/8.50 does state that “one officer, in this Act generally referred to as the secretary, shall have the authority to certify the by-laws, resolutions of the shareholders and board of directors and committees thereof, and other documents of the corporation as true and correct copies thereof.”

• If the proposed conveyance is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the examiner must obtain approval from the holders of at least 2/3 of the outstanding voting shares of stock (as well as a corporate resolution). See 805 ILCS 5/11.60(c).

Execution of the Deed or Mortgage by a Domestic Corporation:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2). (The wording of this statute indicates that a deed or mortgage need be executed by only one authorized party. Naturally, the specific requirements of the corporation, as detailed in, e.g., its resolution, may differ from those set forth in this statute.)

• If the corporate resolution does not indicate the names of the people who are to sign the documents, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

• 805 ILCS 5/1.10(b)(2)(v) provides that if the corporate assets are in the possession of a receiver, trustee or other court appointed officer, then the documents should be signed by the fiduciary or the majority of them if there are more than one.

• Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Clearance for a Foreign Corporation (805 ILCS 5/13.05 et seq.)

Clearance:

• The examiner should not ask for an Illinois certificate of good standing. Instead, the examiner should request evidence that the foreign corporation is in good standing in its home state.

• It is certainly true that a foreign corporation has to pay license fees and franchise taxes. However, these fees have to be paid by the foreign corporation as a condition to doing business in the State of Illinois. See 805 ILCS 5/13.50(h); 805 ILCS 5/15.50 and 805 ILCS 5/15.65.

• As set forth in the Act, merely owning real estate, in and of itself, does not constitute doing business in Illinois. See 805 ILCS 5/13.75(9). For a list of “activities that do not constitute transacting business,” see 805 ILCS 5/13.75.

• “Owning, without more, real or personal property” is not transacting business in Illinois. “Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature” is not transacting business in Illinois. See 805 ILCS 5/13.75(9); 805 ILCS 5/13.75(10).

• Is the selling, buying, and mortgaging of several lots in a series of closings transacting business? Perhaps it is. If the examiner is concerned about a foreign corporation transacting business in Illinois, the examiner should check to see if the Illinois Secretary of State has filed the foreign corporation’s application for authority to transact business in Illinois as a foreign corporation. This filed application is evidence that the foreign corporation can transact business in Illinois. Alternatively, the examiner should consult an underwriter. See 805 ILCS 5/13.05; 805 ILCS 5/13.15; 805 ILCS 5/13.20.

• Article 13 of the Business Corporation Act (805 ILCS 5/13.05 through 805 ILCS 5/13.75) concerns foreign corporations. Unlike the statutes concerning domestic corporations, Article 13 contains no provisions for corporate resolutions or shareholder approval. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can accept a corporate resolution that has been passed by the board of directors of the foreign corporation in order to insure a deed or mortgage executed by a foreign corporation.

Execution of a Deed or Mortgage by a Foreign Corporation

• Article 13 contains no provision for document execution. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can rely on 805 ILCS 5/1.10(b)(2). That is, the deed or mortgage of a foreign corporation should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares.

Corporate Clearance for the All-Cash Transaction

Assume that a corporation is purchasing property in an all-cash transaction. One might think that in this situation, the examiner does not have to be concerned about obtaining the appropriate corporate clearance, that if a claim were to arise, the claim would be an “act of the insured,” which is excluded from policy coverage pursuant to Exclusion 3(a) of the 2006 ALTA owner’s title policy.

However, it is Company policy that the examiner obtain the evidence that the corporation exists as a valid corporation, even in an all-cash transaction. The reasoning is as follows:

If a corporation were not in good standing in Illinois, it would not be able to maintain a lawsuit in Illinois courts. See 805 ILCS 5/15.85(c). This would deprive the Company of its right to subrogation under the owner’s title policy.

That is, if the Company settled a claim on behalf of its insured corporation and then wished to sue in Illinois on behalf of the corporation for recoupment, it would not be able to do so. The Company had “stepped into the shoes of the corporation” and so would not be able to maintain the lawsuit.

Rule of Title Practice—A Summary

Generally speaking, an examiner should request a copy of a corporate resolution when insuring a conveyance or mortgage of a foreign or domestic corporation.

A resolution is not needed if the proposed transaction is within the ordinary scope of business of the corporation. Consider, for example, a relocation company selling a home.

The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors of the corporation to execute the document. However, the resolution should offer guidance in the execution of the document(s).

In the event the contemplated conveyance or mortgage comprises a sale or mortgage of all or substantially all of the assets of the corporation, the examiner must obtain both a corporate resolution and also written evidence of the shareholders’ approval of the transaction.

Dissolution of Corporations (805 ILCS 5/12.05 et. seq.; 805 ILCS 105/112.05 et seq.)

If a domestic corporation does not pay its franchise tax or file its annual report, the Illinois Secretary of State can administratively dissolve the corporation. See 805 ILCS 5/12.35. Corporate dissolution is evidenced by the Secretary of State issuing a certificate of dissolution, which is filed with the Illinois Secretary of State and mailed to the registered office of the corporation. See 805 ILCS 5/12.40(b).

In the alternative, the shareholders can consent in writing to dissolving the corporation. See 805 ILCS 5/12.10; 805 ILCS 105/112.10. Furthermore, all members of a corporation, or a quorum of members of a not-for-profit corporation, can vote to dissolve the corporation. See 805 ILCS 5/7.10; 805 ILCS 105/107.10.

A circuit court can dissolve a corporation if the Attorney General shows that the corporation abused its authority or violated the law. See 805 ILCS 5/12.50; 805 ILCS 105/112.50. Furthermore, a circuit court can also dissolve a business corporation if a creditor proves that it has a judgment that cannot be satisfied by the corporation’s assets. See 805 ILCS 5/12.50.

If a court enters an order of dissolution, it will supervise the “winding up” of the corporation’s business. See 805 ILCS 5/12.65; 805 ILCS 105/112.65; 805 ILCS 5/12.40(c).

Years ago, when a corporation dissolved, a corporation’s assets vested in the shareholders of the corporation. This has not been the case since July 1, 1984. Now, the dissolution of a corporation does not transfer title. Instead, upon dissolution of the corporation, title to the land remains in the corporation. See 805 ILCS 5/12.30(c)(1).

“Winding Up” the Corporation’s Business

Upon dissolution, the corporation cannot carry on any business except that necessary to “wind up” its affairs. See 805 ILCS 5/12.30. 805 ILCS 5/12.30(b) states that “after dissolution, a corporation may transfer good and merchantable title to its assets as authorized by its board of directors or in accordance with its by-laws.” See also 805 ILCS 105/112.30, which concerns the dissolution of not-for-profit corporations.

Therefore, a corporation can be dissolved and still convey real estate to an Insured. Because the Act allows a dissolved corporation to “wind up” its affairs, the dissolved corporation does not have to pay any unpaid license fees and franchise taxes before it conveys real estate.

However: Any request to insure a conveyance by a dissolved corporation as part of the “winding up” process when the corporation has been dissolved for more than a year should be referred to an underwriter. The underwriter may decide that a long-dissolved corporation can no longer wind up its affairs. Instead, the corporation may have to be reinstated.

Rule of Title Practice for Dissolved Corporations

• Upon dissolution of a corporation, title to the land remains in the corporate name. Title does not vest in the names of the shareholders. See 805 ILCS 5/12.30(c)(1).

• Upon dissolution, a corporation cannot carry on any business except what is necessary to “wind up” its affairs. Thus, it does not appear that a dissolved corporation can mortgage its corporate property. See 805 ILCS 5/12.65.

• After dissolution, the corporation may transfer title to its assets “as authorized by its board of directors or in accordance with its bylaws.” See 805 ILCS 5/12.30(5)(b).

• The examiner will obviously be unable to obtain a certificate of good standing. However, the examiner should ask for a resolution that not only authorizes the proposed conveyance, but also indicates that the deed is part of the “winding up” process of the corporation. See 805 ILCS 5/8.05(a); 805 ILCS 5/8.50; 805 ILCS 5/11.55; 805 ILCS 5/12.40(c).

• When examining title to land that is held by a dissolved corporation, the examiner should show the certificate of dissolution as a Schedule B exception on the title commitment. Upon a sale of the land, the certificate can be waived for any policy issued.

Execution of deed:

• The deed should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2).

• If the corporate resolution does not indicate the names of the people who are to sign the deed, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

Other Matters Concerning Dissolved Corporations

See the 2012 Illinois Supreme Court case Pielet v. Pielet, 2012 IL 112064; this case indicates that in order to sue a dissolved corporation, the cause of action must exist prior to the time of dissolution. This case concerns Section 12.80 of the Business Corporation Act, or 805 ILCS 5/12.80.

Because of this case, the examiner should not accept a personal undertaking when it is executed by a corporation. Instead, the undertaking should be executed by one or more shareholders. (See also A Plus Janitorial Corp. v. Group Fox, Inc., 2013 Ill. App. (1st) 120245.)

Example: Land is owned by ABC Corporation. The corporation is in financial difficulty. It wants to sell the building it is constructing. At the closing, the Company agrees to accept a personal undertaking from the corporation for possible mechanics lien claims. Three months later the corporation is dissolved. Four months later a mechanics lien is recorded, and the claimant immediately begins foreclosure proceedings. Five months later the Company is tendered the defense of the mechanics lien claim. The Company immediately tenders the defense of the claim to the corporation, but it is now dissolved. A court might conclude that the cause of action arose after the corporation was dissolved, and that therefore, the corporation has no legal obligation to honor the personal undertaking.

Once a corporation pays its delinquent fees and charges, the Secretary of State can reinstate the corporation. See 805 ILCS 5/12.45; see also 805 ILCS 105/112.45.

Once reinstated, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution. That is, the corporate existence “relates back” to the time the certificate of dissolution was issued. Once reinstated, it is as if the certificate was never issued. See 805 ILCS 5/12.45(d).

Not-for-Profit Corporations

See the General Not-for-Profit Corporation Act of 1986, which is codified as 805 ILCS 105/101.01 et seq.

In General

A not-for-profit corporation is a corporation whose income is not distributable to its members. See 805 ILCS 105/106.05. A not-for-profit corporation may be organized for charitable, religious, or educational purposes, or for any one or more of the other purposes outlined in 805 ILCS 105/103.05. A not-for-profit corporation has the power to sell or mortgage any or all of its property or assets. See 805 ILCS 105/103.10(e) and 805 ILCS 105/111.55.

Clearance for a Not-for-Profit Corporation

• A not-for-profit corporation has the power to sell and mortgage its property. See 805 ILCS 105/103.10(e).

• A not-for-profit corporation can be involuntarily dissolved for, among other things, failing to file its annual report or failing to pay any fees and charges. See 805 ILCS 105/112.35(a) and 805 ILCS 105/112.35(c). For this reason the examiner should either ask for a certificate of good standing or confirm the good standing of the corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.

• The examiner should review the bylaws of the corporation to see if there are any limitations on the corporation’s power to sell and mortgage its property. The examiner may also want to look at the articles of incorporation. See 805 ILCS 105/101.80(c); 805 ILCS 105/101.80(e); 805 ILCS 105/102.10; 805 ILCS 105/102.25.

• When insuring the sale of mortgage of all or substantially all of the corporate assets of the corporation, when made in the usual and regular course of business of the corporation, the examiner will need the authorization of the board of directors. See 805 ILCS 105/111.55.

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of the consent of the board of directors. See 805 ILCS 105/108.50(b).

Even if the Company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 105/108.50(b).

• If the proposed conveyance or mortgage is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the transaction is authorized in the following manner: If the corporation has no members or no members entitled to vote on the proposed conveyance or mortgage, then the majority vote of the directors in office can authorize the conveyance or mortgage. See 805 ILCS 105/111.60.

But if the corporation has members entitled to vote on the proposed conveyance or mortgage, then the board of directors has to adopt a resolution recommending the sale or mortgage. The members then have to vote at either an annual meeting or a special meeting to authorize the deed or mortgage. A two-thirds affirmative vote of a quorum (a quorum being members holding one-tenth of the votes entitled to be cast) is needed. See 805 ILCS 105/107.60; 805 ILCS 105/111.60.

Execution of deed or mortgage:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other authorized officer. If there are no such officers, then the document should be executed by a majority of the directors or by such directors as may be designated by the board of directors. If there are no such officers or directors, then the document should be executed by the members or such members as may be designated by the members at a lawful meeting. See 805 ILCS 105/101.10.

Corporate Merger (805 ILCS 5/11.05)

The statute provides as follows:

Any two or more corporations may merge into one of such corporations or consolidate into a new corporation in the following manner:

The board of directors of each corporation shall, by resolution adopted by a majority vote of the members of each such board, approve a plan of merger or consolidation setting forth various items. These are set forth in the statute. They include the following:

• The names of the corporations proposing to merge or consolidate, and the name of the corporation into which they propose to merge, which is hereinafter designated as the surviving corporation or to consolidate, which is hereinafter designated as the new corporation;

• The terms and conditions of the proposed merger or consolidation and the mode of carrying the same into effect;

• A statement of any changes in the articles of incorporation of the surviving corporation to be effected by such merger or a statement of the articles of incorporation of the new corporation;

• Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

The Illinois Entity Omnibus Act

See also the Illinois Entity Omnibus Act, codified as 805 ILCS 415/101 et seq. This Act provides for conversions and domestications.

Conversion involves Illinois and foreign entities of different types. Domestication concerns Illinois and foreign entities of the same type.

Examples of Conversion

An Illinois corporation can become an Illinois limited liability company. A Delaware corporation can become an Illinois limited liability company.

Examples of Domestication

An Illinois corporation can become a Delaware corporation. A Delaware corporation can become an Illinois corporation.

To create a conversion or domestication, a statement of conversion or a statement of domestication must be filed with the Illinois Secretary of State.

Corporations and Judgments

A corporation is a legal “person.” Thus, it can sue and be sued; it can incur liability in its own name. See 805 ILCS 5/3.10(b) and 805 ILCS 5/3.10(d).

Employees of the corporation manage the corporation, but under agency law, the employees are not personally liable for their actions. Instead, the corporation is liable for the employees’ actions. See 805 ILCS 5/3.10(p). Therefore, only judgments against the corporation (and not judgments against an employee or shareholder) have to be shown on the title commitment for property owned by a corporation. See 805 ILCS 5/3.10(b); 805 ILCS 5/3.10(p). See also 805 ILCS 105/103.10(b); 805 ILCS 105/108.70.

Municipal Corporations

See 65 ILCS 5/11-76-1 et seq. (Sale or Lease of Real or Personal Property)

Home Rule Municipalities

Until 1970 units of local government were deemed to be creatures of the state. It was thought that all of their powers must be specifically granted by the Constitution or by state statute, or must be necessarily implied from that grant of power.

But then the 1970 Illinois Constitution created home rule. Home rule municipalities are governed by Article 7, Section 6, of the Illinois Constitution, which provides that “a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals, and welfare, to license, to tax, and to incur debt.”

Compare these broad powers to non-home rule units. Article VII, Section 7 of the Illinois Constitution states that “counties and municipalities that are not home rule units shall have only powers granted to them by law. . . .” These powers include the right to make local improvements by special assessment; to adopt, alter, or repeal their forms of government by referendum; to provide for the selection of their officers; to incur debt, and to levy taxes.

Home rule units are municipalities with over 25,000 people. Municipalities can opt in or out of home rule status by referendum. A county that has a chief executive officer elected by the electors of the county is also a home rule unit. Home rule units are not special districts, like a park district.

The website of the Illinois Municipal League contains a list of all of the home rule municipalities in Illinois. Go to www.iml.org and then search “home rule.” Then click on, “Home Rule Municipalities.”

The Sale of Municipal Property by a Home Rule Unit

Home rule units can adopt whatever rules they choose in selling their property. Thus, home rule units have two alternatives:

• They can adopt by ordinance whatever rules they choose, or,

• They can follow the statutes.

Rule of Title Practice for Home Rule Municipalities

The examiner should ask for a copy of the ordinance for the sale of property, and then follow the ordinance. See below for a sample title exception:

In order to insure the sale of municipal property pursuant to an ordinance drafted pursuant to the municipality’s home rule status, we should be furnished a copy of said ordinance. This commitment may be subject to additional exceptions after our review of said ordinance.

Non-Home Rule Municipalities

Non-Home Rule municipalities do not have the option of drafting their own ordinances to sell property. Instead, they must follow the Illinois statutes. These various statutes are outlined below. (Unless otherwise stated, the following underwriting rules apply to non-home rule municipalities.)

The Sale of Municipal Property by a Non-Home Rule Municipality

A city or village has the power to convey real estate when, in the opinion of the corporate authorities, the real estate is no longer needed by the city or village. This power shall be exercised by an ordinance passed by three-fourths of the corporate authorities of the city or village then holding office, at either a regular meeting or a special meeting. See 65 ILCS 5/11-76-1.

This ordinance shall specify the location of the real estate, the use thereof, and such conditions with respect to further use of the real estate that the corporate authorities deem necessary. See 65 ILCS 5/11-76-2.

But before the corporate authorities sell the land by virtue of the ordinance, notice of the proposal to sell the land shall be published once each week for three consecutive weeks in a daily or weekly paper published in the city or village, and if there is no such paper, then in some paper published in the county in which the city or village is located. The first publication shall be not less than thirty days before the day provided in the notice for the opening of bids for the real estate. The notice shall contain an accurate description of the property, state the purpose for which the land is used, and state at what meeting the bids will be considered and opened. See 65 ILCS 5/11-76-2.

The corporate authorities may accept the high bid or any other bid determined to be in the best interest of the city or village by a vote of three-fourth of the corporate authorities then holding office. However, by a majority vote of those holding office, they may reject any and all bids. See 65 ILCS 5/11-76.2.

The deed conveying this property is signed by the mayor or president and also the municipal clerk. See 65 ILCS 5/11-76-3.

Sale of Land by the Resolution of a Non-Home Rule Municipality

The corporate authorities may also authorize the sale of surplus real estate by resolution. See 65 ILCS 5/11-76-4.1.

The value of the real estate is determined by an appraisal. The resolution is published “at the first opportunity following its passage” in a newspaper published in the municipality or, if none, then in a newspaper published in the county where the municipality is located. The corporate authorities may accept any contract proposal determined by them to be in the best interest of the municipality by a vote of two-thirds of the corporate authorities then holding office. In no event, however, shall the price by less than 80% of the appraised value. See 65 ILCS 5/11-76-4.1.

A Non-Home Rule Municipality’s Alternative Means of Selling Surplus Property

See 65 ILCS 5/11-76-4.2. This section of the Act applies if a municipality has a population of less than 20,000 and is in a county with an unemployment rate that is higher than the national average for at least one month during the six months preceding the adoption of the resolution to sell the real estate.

If the ordinance (65 ILCS 5/11-76-2) or resolution (65 ILCS 5/11-76-4.1) has failed to work, then the corporate authorities may by a different resolution (65 ILCS 5/11-76-4.2) authorize the sale of surplus land by either the staff of the municipality, by listing with a real estate agency, or by public auction.

The resolution must be published once each week for three successive weeks in a newspaper (in the same manner outlined earlier). No sale may be conducted until at least thirty days after the first publication. The corporate authorities may accept any offer or bid by a vote of 3/4 of the corporate authorities then holding office.

Rule of Title Practice

When insuring the sale of municipal property, consider a generic exception similar to the following:

In order to insure the sale of municipal property, we should be furnished the following, and our commitment and policy may be subject to additional exceptions after our review of these materials:

If the municipality is a home rule municipality, we should be furnished a copy of the appropriate ordinance. If the municipality is not a home rule municipality, (or if it is, but it follows the procedure outlined in the Illinois Compiled Statutes), then we should be furnished a copy of the appropriate ordinance (together with the number of “yes” and “no” votes as to its passage); a copy of the published notice, including evidence as to when the notice was published; and a statement as to the number of “yes” and “no” votes that approved the winning bid. If the sale was by resolution, we should be furnished a copy of the appraisal, a copy of the corporate resolution, evidence of publication, and a statement as to the number of “yes” and “no” votes that approved the contract to purchase the real estate pursuant to said resolution.

The Purchase of Municipal Property by a Non-Home Rule Unit

See 65 ILCS 5/11-76.1-1 et seq.

The corporate authorities of each municipality having a population of less than 500,000 people can purchase real estate for public purposes. To do so they must pass an ordinance; they need an affirmative vote of two-thirds of the corporate authorities. See 65 ILCS 5/11-76.1-1.

After the ordinance has been passed, it shall be published in a newspaper that is published (or if not published, then circulated) in the municipality at least twice within thirty days after its passage. In municipalities with less than five hundred people in which no newspaper is published, then publication can be had by posting a notice in three prominent places within the municipality. The ordinance shall not become effective until thirty days after its second publication. See 65 ILCS 5/11-76.1-3.

The Exchange of Real Estate

See 65 ILCS 5/11-76.2-1 et seq.

For an exchange of real estate, there first must be a public hearing pursuant to a three-fourths vote of the members of the corporate authorities. Notice of the public hearing must be published in a newspaper of general circulation. The notice must be published not less than fifteen days or more than thirty days prior to the date of the hearing. The notice shall include a legal description of all properties and the terms and conditions of the exchange.

After the public hearing, the corporate authorities may authorize the exchange. In order to do so they need a three-fourths vote. If the exchange is authorized, the authorization is by ordinance, and the ordinance should include the following:

• That the land to be exchanged in no longer needed by the municipality for the public interest;

• That the land to be received will prove useful to the municipality and will be for the public interest;

• And that the total value of the land to be received is approximately equal to or exceeds the value of the land being traded.

Note that the wording of the statute indicates that land can be exchanged between a municipality and an individual, legal entity, or other non-municipality. For the transfer of real estate between municipalities, see below.

The Transfer of Real Estate between Municipalities

See 50 ILCS 605/1 et seq.

This statute is called the Local Government Property Transfer Act. The “transferee municipality” has to declare by ordinance that it is necessary or convenient for it to use, occupy or improve any real estate held by the “transferor municipality.”

The transferor municipality can convey the land to the transferee municipality by a deed signed by the mayor, president, or other chief executive of the transferor municipality, attested by its clerk or secretary and sealed with its corporate seal, all authorized by a resolution passed by a two/thirds vote of the members of the legislative body of the transferor municipality.

A municipality has the power upon resolution passed by a two-thirds vote of the members of its legislative body then holding office to transfer property to the State of Illinois. The term “State of Illinois” includes the state or any department, commission, board or other agency of the state.

The Local Government Property Transfer Act includes provisions for the releasing of easements and restrictions.

Home Rule Issues

The title examiner should be cautious about relying on a municipality’s status as a home rule municipality.

Example: An attorney contacts the title examiner. The attorney represents a home rule municipality. He wants the city to vacate a road pursuant to 65 ILCS 5/11-91-1. This statute requires the approval of at least three/fourths of the alderman, trustees, or commissioners. The attorney argues that because the city is home rule, the city can enact an ordinance that allows for merely a simple majority to approve the vacation. Is the attorney correct?

Some underwriters feel that he is not correct. They claim that the law has made it clear that there are certain matters of law that cannot have local variations. The determination of the extent and ownership of fee title to real estate is one of them. Rather, this determination is more properly an affair of the state.

But on the other hand, Oak Park, Downers Grove, and Peoria all have ordinances that allow for this type of vacation.

For example, this is the current Oak Park ordinance:

22-11-1: Vacation of Streets and Alleys: Streets and alleys may be vacated by the Board of Trustees pursuant to the provisions and procedures set forth in division 91 of the Illinois Municipal Code (65 ILCS 5/11-91-1 and 5/11-91-2), provided, however, pursuant to the home rule powers of the Village as set forth in Article VII, Section 6 of the Illinois Constitution, an ordinance vacating a street or alley shall be effective upon being passed by the affirmative vote of a majority of the Board of Trustees (1981 Code).

Furthermore, consider this analysis: The Illinois Supreme Court in Schillerstrom Homes, Inc. v. The City of Naperville, 198 Ill.2d 281, 762 N.E.2d 494 (2001) said this:

This court has formulated a three-part inquiry for evaluating the constitutionality of exercise of home rule power. First, we must determine whether the disputed exercise of local government power falls within section 6(a) [of Article VII of the Illinois Constitution]—that is, whether the local government’s activity is a function pertaining to its government and affairs. If so, we must determine whether the General Assembly has preempted the use of home rule powers in this area. If not, then we must determine ‘the proper relationship’ between the local ordinance and the state statute.

That is, these three factors are as follows:

• Does the contemplated exercise of local government power pertain to the government and affairs of the local government?

• If so, has the General Assembly preempted the use of home rule powers in this area? That is, does the statute in question contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution?

• If the statute does not contain such specific language, is the state statute an attempt to declare the subject an issue that requires exclusive state control?

The Illinois Supreme Court states the following as to the first factor:

An ordinance pertains to local government and affairs where it addresses local, rather than state or national, problems. . . . . Whether a particular problem is of statewide rather than local dimension must be decided not on the basis of a specific formula or listing set forth in the Constitution but with regard for the nature and extent of the problem, the units of government which have the most vital interest in its solution, and the role traditionally played by local and statewide authorities in dealing with it. [Citation omitted] Municipal development regulations . . . undoubtedly pertain to local affairs.

One might argue that the vacation of a right-of-way certainly pertains to local government and affairs.

Secondly, the vacation statute (65 ILCS 5/11-91-1) does not contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution.

But as to the third factor: This seems rather nebulous. What is “the proper relationship” between the local ordinance and the state statute?” What does this statement mean?

The Schillerstrom court goes on to say:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

In this regard, the case of The City of Wheaton v. Robert A. Sandberg, 215 Ill.App.3d 220, 574 N.E.2d 697, 158 Ill. Dec. 584 (1991) is illuminating. In this case the City of Wheaton wanted to condemn property. Wheaton is a home rule municipality. The defendant claimed that Wheaton’s enabling ordinance on which the condemnation action was based was invalid because it was preempted by the uniform state statutes created by the Commercial Renewal and Redevelopment Areas Act of the Illinois Municipal Code.

Specifically, the defendant claimed that the enabling ordinance was invalid because its definition of a “blighted area” differs from the definition of “blight” found in the state Act. That is, the state statute specifies that excessive vacancies may be one of the five elements necessary for a finding of blight, while the ordinance merely provides for vacancy alone in all or any part of the building as sufficient for a finding of blight.

The court concluded that there was no evidence indicating the necessity for uniform standards under the Commercial Renewal and Redevelopment Areas Act. Nor did the court perceive an overriding policy interest on the part of the state in keeping these standards uniform. Thus, the court maintained that the City of Wheaton could enact an enabling ordinance that did not conform to the state statute. (However, the court later said that although the ordinance was not preempted by the state statute, it was invalid on constitutional grounds.)

How does the holding of this case affect the issue relative to a right-of-way vacation? Again, the statement from the Schillerstrom case seems to be the key:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

It does not appear that the State of Illinois’ requirement of a 3/4 vote as set forth in 65 ILCS 5/11-91-1 is an “express attempt” by the state to maintain exclusive control over the means of a right-of-way vacation.

However, this Schillerstrom statement does refer to a condition precedent of “a determination that the State’s expression of interest” does not amount to an attempt by the State of asserting exclusive state control of the matter. Who makes this so-called “determination?” If the court has not yet made a determination that the statutory requirement of a 3/4 vote is not an attempt to declare the subject of right-of-way vacations a matter that requires exclusive state control, could a disgruntled homeowner bring suit because of a home rule right-of-way vacation?

But is it up to the court to make this determination? In the alternative, can the municipality make this determination in its ordinance? That appears doubtful.

Rule of Title Practice

Any request to insure a municipal real estate transaction pursuant to a home rule ordinance when a corresponding state statute already exists that also governs this transaction should be referred to an underwriter. Is there a chance of an adjoining homeowner being upset by the proposed transaction? The underwriter may want to ask for a personal undertaking for defense costs in the event there is litigation.

Other Statutes

• For the transfer of real estate from a municipality to the State of Illinois, see 50 ILCS 605/4.

• For the sale of school district real property, see 105 ILCS 5/5-22 et seq.

• Note that there does not appear to be a statute that governs the purchase of school district property. In that regard, the title examiner should request a copy of the real estate contract and a copy of the minutes of the meeting of the board of education wherein that contract for the purchase of the real estate has been approved. For gifts or donations to school districts, see 105 ILCS 5/5-21.

• For the sale of land by a forest preserve district in a county of less than 550,000 people, see 70 ILCS 805/6e.

• For the sale or exchange of land owned by a fire protection district, see 70 ILCS 705/10a.

• For the conveyance of park district property, see 70 ILCS 1205/10-1 et seq.

• For the acquisition of real estate by the Illinois State Toll Highway Authority, see 605 ILCS 10/9 et seq.

• For the acquisition of real estate by the Cook Country Forest Preserve District, see 70 ILCS 810/8; 70 ILCS 810/10; 70 ILCS 810/38.

• For the acquisition, finance, and sale of township property, see 60 ILCS 1/85-10(c); 60 ILCS 1/105-10.

• For the sale of public library property, see 75 ILCS 5/4-7(6) and 75 ILCS 5/4-16.

• For the mortgage of public library property, see 75 ILCS 5/5-6 and 75 ILCS 10/7(12).

• For the purchase of public library property, see 75 ILCS 5/4-7(4), 75 ILCS 5/5-6, 75 ILCS 10/7(4) and 75 ILCS 10/7(11).

Park Districts

See 70 ILCS 1205/1-1 et seq.

Can a Park District Mortgage Its Property?

It is not clear. Note that 70 ILCS 1205/6-2 states that the park district can “pledge its property,” but this is somewhat ambiguous.

70 ILCS 1205/9.3-5 indicates that a park district can mortgage an indoor or outdoor recreational facility under certain circumstances, but again, this is not a clear mandate.

The issue concerning a park district of other unit of government is: what happens when the loan is foreclosed? There is a basic underlying concept that a unit of government cannot lose its property.

Before insuring a mortgage of park district property, consider having the park district first obtain a declaratory judgment that it can mortgage the property in question.

Can a Municipality Mortgage Its Property?

• There are at least two statutes that refer to a municipality mortgaging its property. See 65 ILCS 5/11-74-4(5), which concerns an “industrial project.” 65 ILCS 5/11-74.4-4(c) indicates that a municipality can mortgage property within a “redevelopment project area.” However, what happens if the mortgage is foreclosed? There is a basic underlying doctrine or concept that a unit of government cannot lose its property.

But on the other hand, consider the broad wording of 65 ILCS 5/11-74.4-4(c), which provides as follows:

[Within a redevelopment project area, a municipality may] own, convey, lease, mortgage or dispose of land and other property, real or personal . . . . No conveyance, lease, mortgage, disposition of land or other property owned by a municipality, or agreement relating to the development of such municipal property shall be made except upon the adoption of an ordinance by the corporate authorities of the municipality. Furthermore, no conveyance, lease, mortgage, or other disposition of land owned by a municipality or agreement relating to the development of such municipal property shall be made without making public disclosure of the terms of the disposition and all bids and proposals made in response to the municipality's request.

• If asked to insure the mortgage of municipal property, the examiner should talk to an underwriter. The examiner may need to insist that the corporate municipality obtain a declaratory judgment that it can mortgage its property.

• 65 ILCS 5/8-1-3.1 provides that a municipality may borrow money from a bank or other financial institution, but the money must be repaid within ten years from the time the money is borrowed.

• 65 ILCS 5/8-1-6 and 65 ILCS 5/8-1-7 provide that a municipality cannot incur an expense unless an appropriation has been previously made pursuant to an appropriation ordinance. 65 ILCS 5/8-1-7(a) further states as follows: “Any contract made, or any expense otherwise incurred, in violation of the provisions of this section shall be null and void as to the municipality, and no money belonging thereto shall be paid on account thereof.” This statute illustrates a potential problem in insuring a mortgage of municipal property.

Can a Township Mortgage Its Property?

See 60 ILCS 1/85-10(c) and 60 ILCS 1/85-10(d). However, 60 ILCS 1/85-10(c) states that a township may finance the purchase of real estate by the use of “finance contracts.” This suggests that a township can mortgage property. However, see Attorney General Opinion Number 97-010, which states: “It has long been the rule in this State that a unit of local government may not legally execute a mortgage without express statutory authority to do so. (1933 Ill. Att’y Gen. Op. 758.)”

The Public Trust Doctrine

Customers will occasionally ask a title company to underwrite restrictions that benefit the public and not private parties. See, e.g., Morgan County v. Braner, 71 Ill. 546 (1874); Huntley Fire Protection District v. Huntley Development Limited Partnership, 338 Ill. App. 3d 609, 788 N.E.2d 355, 273 Ill. Dec. 46 (2003).

Example: In 1987 Landowner deeded Blackacre to Village. The deed includes a covenant that the property “is to be used for public park purposes.” For more than thirty years Blackacre has been used for a park. But in 2019 Village wants to enter into an inter-governmental agreement with School District, whereby Blackacre will be traded to School District in exchange for Whiteacre. School District indicates that after the two properties are exchanged, Blackacre will no longer be used as a public park. Can the 1987 covenant be endorsed over, providing coverage to School District over the violation?

It appears that in this instance the “public trust doctrine” is applicable. This tenet stands for the proposition that units of government own “trust resources,” like parks, as a trustee, and that these resources cannot be conveyed if the transfer would diminish or defeat traditional public access to and the use of those resources.

See Paepcke v. Public Housing Commission of Chicago, 46 Ill.2d 330, 263 N.E.2d 11 (1970); “Illinois Central and the Public Trust Doctrine in State Law,” 15 Va. Envtl. L.J. 713 (Summer 1996).

In order to endorse over this covenant, the Company will probably request that an appropriate government official contact the Attorney General’s office for an opinion, consenting to the violation of the covenant.

Factors to be considered by the Attorney General’s office would include: Is there another park near Blackacre? Will Whiteacre be used as a park?

Example:

In 2019 the Company was asked to insure the sale of the existing Geneva Public Library to a private party. The library was subject to a decades-old covenant that restricted the use of the land to a public library. The Company was asked to underwrite this covenant.

In this situation, the Company considered the Public Trust Doctrine. The Company agreed to endorse over the covenant upon the satisfaction of the following conditions:

• The new public library had to be relatively close to the old library. (The two buildings were six blocks apart.)

• The new library had to be at least as big as the old library. (The new library was substantially bigger.)

• The Company would not issue the endorsement until the old library was sold to a purchaser for value, a certificate of occupancy had been issued for the new library, and the new library was open for business.

Agreement for Deed

Last effective date: June 18, 2019

The Installment Contract for Deed

By

Richard F. Bales

Part I: The Installment Sales Contract Act

Introduction

An installment contract to purchase real estate is sometimes called articles of agreement for warranty deed, articles of agreement for deed, or a contract for deed. It is an agreement between a seller and purchaser of real estate. Pursuant to the contract or agreement, the purchaser agrees to pay to the seller the purchase price of the land plus interest, but payable in installments over a set period of time. After the parties execute the contract, the buyer (sometimes called the contract purchaser) will usually go into immediate possession of the land. However, the seller retains legal title to the property until the buyer pays the full purchase price. The contract normally provides that the seller will deliver the deed to the buyer once the final payment is made. See 735 ILCS 5/15-1214 for a statutory definition.

The Installment Sales Contract Act

Public Act 100-416 (SB 885), effective January 1, 2018, created the Installment Sales Contract Act, to be codified at 765 ILCS 67/1 et seq. The Act is intended to be a consumer protection device for buyers who purchase residential real estate under installment sales contracts from sellers who engage in the business of selling real estate portfolios through installment sales contracts.

The Act at 765 ILCS 67/5 defines “installment sales contract” or “contract” as follows:

‘Installment sales contract’ or ‘contract’ means any contract or agreement, including a contract for deed, bond for deed, or any other sale or legal device whereby a seller agrees to sell and the buyer agrees to buy a residential real estate, in which the consideration for the sale is payable in installments for a period of at least one year after the date of sale, and the seller continues to have an interest or security for the purchase price or otherwise in the property. ‘Installment sales contract’ does not include a financing arrangement that for religious or cultural reasons does not allow the imposition or collection of interest and that is offered by a person, partnership, association, limited liability company, or corporation doing business under and as permitted by any law of this State or the United States relating to banks, savings and loan associations, savings banks, or credit unions.

“Residential real estate” means land containing 1 to 4 dwelling units.

“Date of Sale” means the date on which buyer and seller have signed the contract.

Most importantly, the Act defines “seller” as:

An individual or legal entity that possesses a legal or beneficial interest in real estate and that enters into an installment sales contract more than 3 times during a 12-month period to sell residential real estate.

The Act deems a seller who holds title to multiple properties under multiple legal entities (e.g., various LLCs or land trusts) a single seller. Thus, the Act clearly applies only to individuals or entities who sell residential real estate on installment sales contracts as a business. For example, the Act will apply to a business entity that acquires REO properties in bulk from lenders and re-sells properties individually under installment sales contracts.

See all definitions at Section 5 of the Act.

The Act only applies to qualifying contracts executed on or after January 1, 2018. See Section 90 of the Act.

Section 10(c) of the Act requires that all qualifying installment sales contracts must “clearly and conspicuously” disclose a set of 28 required contract elements. Many of these required elements would most likely be included in any installment sales contract under any circumstances—whether required by statute or not. For example, one of the required elements demand an accurate description of the subject property. Others require correct disclosure of the financial terms and conditions of the transaction.

Additional required elements relate to disclosures of routine matters, such as taxes, insurance, and liens on the property, if any. Some required elements are designed to be consumer protection provisions. For example, the contract must include a certification of compliance with local building codes (or a warranty in lieu of certification), notice of the rights to obtain an appraisal and an inspection prior to signing, and so on.

A complete list of 28 required contract elements at Section 10(c)(1) through Section 10(c)(28) of the Act. These 28 items are also shown below:

(1) The address, permanent index number, and legal description of the residential real estate subject to the contract. (2) The price of the residential real estate subject to the contract. (3) The amount, if any, of any down payment applied to the price of the residential real estate subject to the contract and the resulting principal on the loan. (4) The amount of the periodic payment, any grace periods for late payments, late payment fees, and to whom, where, and how the buyer should deliver each payment. (5) The interest rate being charged, if any, expressed only as an annual percentage rate. (6) The term of the loan expressed in years and months and the total number of periodic payments due. (7) The amount, if any, of any balloon payments and when each balloon payment is due. (8) A statement outlining whether the seller or the buyer is responsible for paying real estate taxes and insurance and how responsibilities of the buyer and seller change based on the time period the residential real estate subject to the contract is occupied by the buyer and what percentage of the principal is paid down. In all circumstances not defined in the disclosure required by this subsection, the seller has the responsibility for paying real estate taxes and insurance. (9) The amount that will be charged periodically, if any, for the first year to pay real estate taxes. (10) The amount that will be charged periodically, if any, for the first year to pay insurance. (11) A statement that the amounts listed in items (9) and (10) of this subsection are subject to change each year. (12) The fair cash value as defined in the Property Tax Code and set forth on the real estate tax bill for the year immediately prior to the sale, and the assessed value of the property as set forth on the real estate tax bill for the year immediately prior to the sale. (13) The amount of real estate taxes for the year immediately prior to the sale. (14) Any unpaid amounts owing on prior real estate taxes. (15) The amount of the annual insurance payment for the year immediately prior to the sale. (16) The type of insurance coverage, including, but not limited to, property insurance and title insurance, for the buyer and seller that will be required or provided. (17) The seller's interest in the structure being sold. (18) Any known liens or mortgages or other title limitations existing on the property. (19) An explanation as to when the buyer will obtain the title. (20) A statement defining what repairs the buyer is financially responsible for making to the residential real estate subject to the contract, if any, and how responsibilities of the buyer and seller to repair the property change based on the time period the residential real estate subject to the contract is occupied by the buyer and what percentage of the principal is paid down by any repairs made by the buyer. In all circumstances not defined in the disclosure required by this subsection, the seller has the financial responsibility for all repairs required to be made pursuant to the installment sales contract. (21) A statement defining what, if any, alterations of the property must be approved by both the buyer and the seller prior to the alterations being made, including requirements to provide evidence of proper permits, insurance, and lien waiver agreements. (22) Any additional charges or fees due at the time of the date of sale or at a later date. (23) An amortization schedule, as defined in Section 5. (24) A certificate of compliance with applicable dwelling codes, or in the absence of such a certificate: (i) an express written warranty that no notice from any municipality or other governmental authority of a dwelling code violation that existed with respect to the residential real estate subject to the contract before the installment sales contract was executed had been received by the seller, his or her principal, or his or her agent within 10 years of the date of execution of the installment sales contract; or (ii) if any notice of a violation had been received, a list of all such notices with a detailed statement of all violations referred to in the notice. (25) A statement, in large bold font stating in substantially similar form: "NOTE TO BUYER: BEFORE SIGNING THE CONTRACT THE BUYER HAS THE OPTION OF OBTAINING AN INDEPENDENT THIRD PARTY INSPECTION AND/OR APPRAISAL SO THAT THE BUYER CAN DETERMINE THE CONDITION AND ESTIMATED MARKET VALUE OF THE RESIDENTIAL REAL ESTATE AND DECIDE WHETHER TO SIGN THE CONTRACT.” (26) If the residential real estate or any dwelling structure thereon that is subject to the contract has been condemned by the unit of government having jurisdiction, the contract shall include a statement, in large bold font stating in substantially similar form: "NOTE TO BUYER: THE RESIDENTIAL REAL ESTATE BEING SOLD THROUGH THIS CONTRACT HAS BEEN CONDEMNED BY THE UNIT OF GOVERNMENT HAVING JURISDICTION." (27) A statement that the seller provided the buyer the installment sales contract disclosure prepared by the Office of the Attorney General as required under Illinois State law. The statement shall include the date on which the buyer was provided with the disclosure, which must be at least 3 full business days before the contract was executed. (28) A statement that: (i) if the buyer defaults in payment, any action brought against the buyer under the contract shall be initiated only after the expiration of 90 days from the date of the default; and (ii) a buyer in default may, prior to the expiration of the 90-day period, make all payments, fees and charges currently due under the contract to cure the default.

The buyer cannot waive any of these 28 required contract provisions. See Section 10(d) of the Act.

It is possible that an installment sales contract that fails to include any 1 or more of the 28 required contract provisions may be void and unenforceable. Section 50 of the Act states, “Any contractual provisions or other agreements contrary to this Act are void and unenforceable.” (emphasis added)

The Act creates a “cooling-off” period during which neither buyer nor seller is bound for 3 days after an unexecuted contract, in final form, is accepted by buyer and seller. See Section 70 of the Act.

The Act provides that each party (buyer and seller) has a right of rescission until both parties receive an executed copy (with notarized signatures of buyer and seller) of the contract. If either party rescinds the contract under this provision, seller must return all earnest money deposits to buyer. See Section 10(b) of the Act.

Section 20 of the Act requires the seller to record the installment sales contract or a memorandum thereof. The recording must occur within 10 business days of the date of sale and “prior to any subsequent sale or other transfer of any interest in the . . . contract . . .” Presumably, this means that the seller must record within 10 business days of the date of sale and within 10 business days prior to any assignment of the contract or any conveyance or mortgage of the real estate.

If the seller chooses to record a memorandum rather than the full contract, Section 20(a) of the Act sets out minimum requirements for the form and content of the memorandum. These requirements are set forth below:

A memorandum of the contract shall be titled "Memorandum of an Installment Sales Contract" either in capital letters or underscored above the body of the memorandum. At a minimum, the memorandum of the contract shall include: the address, permanent index number, and legal description of the residential real estate subject to the contract; the names of the buyer and seller; and the date the contract was executed. The memorandum of the contract shall be signed by the buyer and the seller with the signatures notarized. However, any provision in an installment sales contract that forbids the buyer to record the contract or a memorandum of the contract is void and unenforceable.

As indicated above, Section 20 voids any contract provision prohibiting buyer from recording the contract or memorandum. See Section 20(a) of the Act.

If the seller fails to timely record, the buyer has a right of rescission until such time as the seller does record. If the seller’s failure to timely record is coupled with a title defect that impairs the seller’s ability to convey marketable title to the buyer, then the buyer has an additional right of rescission for 90 days after discovering the title problem. If the buyer properly exercises the right of rescission under Section 20 of the Act, then the seller must return to the buyer “all money paid to the seller as of the date of rescission.” See Section 20(c) of the Act (Note that the seller must return all money paid by the buyer, not just earnest money.)

Section 85 of the Act declares that any violation of the Act constitutes an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq.

Finally, the Act directs the office of the Attorney General to develop a consumer protection disclosure form with respect to installment sales contracts. See Section 75(a) of the Act. Required contract element (27), set forth above, requires the seller to include in the contract a statement that the Attorney General’s disclosure form has been delivered to the buyer and the date on which it was delivered. (This is consistent with Section 70(d) of the Act.) The parties cannot waive delivery of this disclosure form. See Section 70(b) of the Act.

This is how Section 75 reads:

(a) The Office of the Attorney General shall develop the content and format of an educational document providing independent consumer information regarding installment sales contracts and the availability of independent housing counseling services, including services provided by nonprofit agencies certified by the federal government to provide housing counseling. The document shall be updated and revised as often as deemed necessary by the Office of the Attorney General.

(b) The document describe in subsection (a) of this Section shall include the following statement: ‘IMPORTANT NOTICE REGARDING THE COOLING-OFF PERIOD: Illinois State law requires a 3-day cooling-off period for installment sales contracts, during which time a potential buyer cannot be required to close or proceed with the contract. The purpose of this requirement is to provide a potential buyer with 3 business days to consider his or her decision whether to sign an installment sales contract. Potential buyers may want to seek additional information from a HUD-approved housing counselor during this 3-day period. The 3-day cooling-off period cannot be waived.’

The seller must deliver a copy of the Attorney General’s disclosure form prior to acceptance of the contract by both parties. See Section 70(c).

P.A. 100-416 also amends the Illinois Mortgage Foreclosure Law (IMFL), the Condominium Property Act, and the Consumer Fraud and Deceptive Business Practices Act to include references to the new Installment Sales Contract Act.

Upon default, the amendment to the IMFL will apparently require sellers to foreclose most contracts governed by the Installment Sales Contract Act. See amended 735 ILCS 5/15-1106(a)(2) and new 15-1106(g). The amendment deletes IMFL’s original requirement that foreclosure is mandatory if the payment period on an installment contract exceeded 5 years. As amended, all installment sales contracts for residential property must be foreclosed pursuant to the IMFL on default if the amount owed at time of default is less than 80% of the original purchase price. In all other cases, sellers may elect to foreclose under IMFL but are not required to do so.

This is how revised 735 ILCS 5/15-1106(a)(2) now reads:

From and after July 1, 1987, (the effective date of Public Act 84-1462) the following shall be foreclosed in a foreclosure pursuant to this Article: any real estate installment contract for residential real estate entered into on or after July 1, 1987 (the effective date of Public Act 84-1462) the amount unpaid under the terms of the contract at the time of the filing of the foreclosure complaint, including principal and due and unpaid interest, at the rate prior to default, is less than 80% of the original purchase price of the real estate as stated in the contract.

This is how new 735 ILCS 5/15-1106(g) reads:

The changes made to this Section by this amendatory Act of the 100th General Assembly apply to real estate installment contracts for residential real estate executed on or after the effective date of this amendatory Act of the 100th General Assembly.

COMMENTARY: This bill was advocated by Lisa Madigan and consumer protection groups as a means of offering consumer protection to people considering buying a home through what one of the groups called a “rent-to-own contract.” After the foreclosure crisis, there was a resurgence of predatory installment contracts—that is, contracts resulting in people buying homes in extremely bad condition at highly inflated purchase prices and high loan interest rates. This legislation offers protection from predatory contract terms.

One wonders how often the new Installment Sales Contract Act will actually apply. How many consumers will be able to take advantage of its disclosure and other protections? Will, for example, REO sellers avoid regulation by switching to some other form of seller financing, such as purchase money mortgages? In any event, there may be one unexpected consequence arising from this Act. Buyers may be encouraged to record sale contracts, whether the contracts are covered by the Act or not. Attorneys and title examiners will have to study any recorded contract to determine whether it represents a valid interest in the property in question.

As discussed later in Part II, the Illinois Supreme Court in Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962) discusses the doctrine of equitable conversion—that is, upon the execution of a contract, the contract purchaser becomes the equitable owner of real estate, subject only to the lien of the contract seller for the unpaid balance of the purchaser price. It is possible to negate equitable conversion in an installment contract. When equitable conversion is negated, the contract purchaser no longer has an interest in the land. Instead, the purchaser is more like a tenant with an option to purchase. As discussed in more detail in the materials, being an equitable owner of the land is a benefit to the contract purchaser, but the Act does not address this issue.

Some attorneys have maintained that the definition of “installment sales contract” or “contract” is broad enough to cover purchase money mortgages taken back by the seller. Title companies insure the validity and priority of purchase money mortgages. Does this mean that title companies have to make sure that, e.g., the twenty-eight points outlined above are covered in the mortgage?

It is easy to see why attorneys might feel this way. Consider again the definition of an installment sales contract. See the underlined words below. See especially the words that provide that “the seller continues to have an interest or security for the purchase price.” Don’t these words suggest a seller taking back a purchase money mortgage?

Any contract or agreement, including a contract for deed, bond for deed, or any other sale or legal device whereby a seller agrees to sell and the buyer agrees to buy a residential real estate, in which the consideration for the sale is payable in installments for a period of at least one year after the date of sale, and the seller continues to have an interest or security for the purchase price or otherwise in the property.

Ultimately, though, the definition is not that broad. The definition refers to a document “whereby a seller agrees to sell and the buyer agrees to buy” the real estate. A purchase money mortgage is not such a document. That is, the mortgage is not the document that creates the installment contract.

As indicated above, the Act defines “seller” as:

An individual or legal entity that possesses a legal or beneficial interest in real estate and that enters into an installment sales contract more than 3 times during a 12-month period to sell residential real estate.

Thus, it seems clear that the Act applies only to individuals or entities who sell residential real estate on installment sales contracts as a business. For example, the Act will apply to a business entity that acquires REO properties in bulk from lenders and re-sells properties individually under installment sales contracts.

Therefore, it is quite possible that the real estate attorney may never have to be concerned with the provisions of the Installment Sales Contract Act. That is, unless the attorney is representing a party in a transaction wherein the land is being sold on contract and the owner of the land is a “serial contract seller,” the attorney may never have to concerned that, for example, section 10(c) of the Act requires that all qualifying installment sales contracts must “clearly and conspicuously” disclose the aforementioned set of 28 required contract elements. Nonetheless, this Act may generate a renewed interest in the sale of property via an installment contract.

Part II: Issuing the Contract Purchaser’s Title Insurance Policy

Facts: Assume that Sam Seller owns lot 1 in Blackacre Subdivision, Aurora, Illinois. His attorney drafts a real estate installment contract for deed wherein Sam Seller agrees to sell the property to Benjamin Buyer via an installment contract, also known as Articles of Agreement for Warranty Deed.

A title commitment for lot 1 discloses these Schedule B items:

• Sam Seller’s purchase money mortgage that he executed when he bought lot 1;

• A platted utility easement;

• A platted building line;

• Real estate tax information.

The attorney also prepare a memorandum of contract, which he records on February 28, 2019.

Question: How does the title examiner prepare a title policy for this transaction?

Answer: The examiner can prepare a 2006 ALTA owner’s title policy. Further details are set forth below.

Schedule A

In the early 1980s title companies would issue contract purchaser’s title insurance policies wherein they would name both the contract seller and the contract purchaser as the insured parties, but they would be named “as their interests may appear.” Today, it is more appropriate to insure only the contract purchaser. Thus, the “name of insured” in Paragraph 1 of Schedule A of the owner’s policy would be: “Benjamin Buyer.” In Paragraph 3 of Schedule A, title could be shown as being vested in this Insured as well.)

Years ago title company computer systems had hardcoded commitment and policy forms. As a result, examiners could not change the boilerplate of the title insurance policy. Thus, the examiner could not change the wording of paragraph 2 of Schedule A of the owner’s policy to read anything but:

The estate or interest in the land that is insured by this policy is: fee simple, unless otherwise noted.

This meant that the examiner had to be creative in drafting his legal description, as the examiner would describe the contract purchaser’s interest within the legal description. For example:

The right to purchase and occupy, pursuant to the terms of an installment contract, Lot 1 in Blackacre Subdivision, Kane County, Illinois, as described in a memorandum of articles of agreement for deed recorded February 28, 2019, as document 2019-4589, Kane County, Illinois.

With today’s computer systems, the examiner should be able to amend the policy boilerplate. Therefore, the examiner may not have to amend the legal description. Instead, the examiner can modify Paragraph 2 of Schedule A of the owner’s policy to read, for example, as follows:

The estate or interest in the land that is insured by this policy is: The right to purchase and occupy the land described in Schedule A, pursuant to the terms of an installment contract referenced herein.

Schedule B

The examiner should raise the following exceptions in Schedule B of the title policy:

• Terms, conditions, and provisions of the articles of agreement for deed, Sam Seller, contract seller, and Benjamin Buyer, contract purchaser, a memorandum of which is recorded February 28, 2019, as document 2019-4589. (See the footnote below for examples of “generic” title policy exceptions relating to the articles of agreement for deed.)

• Sam Seller’s mortgage. (Note that it is not necessary that Sam Seller’s lender consent to the sale of the land via installment contract. The reason for this is that the title company is not insuring this mortgage; the title company is showing the mortgage in Schedule B of the owner’s policy);

• The platted utility easement;

• The platted building line;

• Real estate tax information.

Endorsements—Installment Contract Purchaser Endorsement “A”

Title companies can offer two endorsements that can be appended to title policies that insure a contract purchaser. Installment Contract Purchaser Endorsement “A” reads as follows:

Installment Contract Purchaser Endorsement “A”

1. The contract to purchase shown in Schedule B is an interest covered by this policy vested in the insured contract purchaser. The Company insures against loss or damage sustained by the contract purchaser by reason of:

A. The unenforceability of the right to receive a deed under the contract, unless the insured contract purchaser does not fulfill the terms of the contract, and

B. The refusal of a trustee, in the event of the seller’s or record title owner’s bankruptcy, to issue a deed under the terms of the contract, unless the insured contract purchaser is not in possession of the land.

2. This policy does not insure against loss or damage sustained by the insured contract purchaser by reason of:

A. Matters that first affect title to the land after the policy date.

B. Failure of the insured contract purchaser to do everything necessary:

(A) To secure proper deeds from the seller, seller’s successor in interest or the record title owner;

(B) To secure releases from other persons then having an interest in the title or a lien on the land, or;

(C) To secure a final court order that determines the persons then entitled to receive payment from the insured.

C. Costs, attorneys’ fees and expenses to secure the final court order referred to above in paragraph 2.B.( C ) or to enforce the contract.

D. A foreclosure of any mortgage executed by an owner of the fee simple interest in the Land.

Installment Contract Purchaser Endorsement “A”—A Discussion

This endorsement gives assurances to the installment purchaser of a 1-4 unit residential property that:

• the contract is valid;

• the right to receive a deed under the installment contract is enforceable if the purchaser’s obligations have been met, and;

• the trustee in a seller’s bankruptcy may not refuse to issue a deed if the purchaser is in possession of the land.

Installment Contract Purchaser Endorsement “B”

The second endorsement is similar to the first endorsement, but with one important additional coverage. Paragraph 1.C. adds protection over possible future judgments against the contract seller of 1-4 residential property as long as the contract purchaser remains in actual physical possession of the property. This protection arises pursuant to the doctrine of equitable conversion, which is discussed below.

Installment Contract Purchaser Endorsement “B”

1. The contract to purchase shown in Schedule B is an interest covered by this policy vested in the insured contract purchaser. The Company insures against loss or damage sustained by the contract purchaser by reason of:

A. The unenforceability of the right to receive a deed under the contract, unless the insured contract purchaser does not fulfill the terms of the contract, and

B. The refusal of a trustee, in the event of the seller’s or record title owner’s bankruptcy, to issue a deed under the terms of the contract, unless the insured contract purchaser is not in possession of the land.

C. Entry of any court order that constitutes a final determination enforcing the lien of any judgments for monetary damages against the contract seller, or his successors or assigns, rendered after the date hereof and while the insured contract purchaser continues to occupy the insured premises.

2. This policy does not insure against loss or damage sustained by the insured contract purchaser by reason of:

A. Matters that first affect title to the land after the policy date.

B. Failure of the insured contract purchaser to do everything necessary:

(A) To secure proper deeds from the seller, seller’s successor in interest or the record title owner;

(B) To secure releases from other persons then having an interest in the title or a lien on the land, or;

(C) To secure a final court order that determines the persons then entitled to receive payment from the insured.

C. Costs, attorneys’ fees and expenses to secure the final court order referred to above in paragraph 2.B.(C) or to enforce the contract.

D. A foreclosure of any mortgage executed by an owner of the fee simple interest in the Land.

Installment Contract Purchaser Endorsement “B”—A Discussion

Equitable Conversion

The Illinois Supreme Court in Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962) defines equitable conversion as follows:

Equitable conversion is the treating of land as personalty and personalty as land under certain circumstances. Hence, as between the parties and those claiming through them, when the owner of land enters into a valid and enforceable contract for its sale he continues to hold the legal title, but in trust for the buyer; and the buyer becomes the equitable owner and holds the purchase money in trust for the seller. The conversion takes place at the time of entering into the contract. It stems from the basic equitable principle that equity regards as done that which ought to be done. The doctrine of equitable conversion has been recognized in Illinois, as it has in practically every other jurisdiction, since earliest times. 25 Ill. 2d at 449.

Shay v. Penrose sets forth the doctrine of equitable conversion, that upon the execution of a contract, the contract purchaser is the equitable owner of real estate, subject only to the lien of the contract seller for the unpaid balance of the purchase price.

This doctrine has tremendous ramifications for the contract purchaser. It means that although subsequent judgment creditors of the contract seller who have notice of the equitable rights of the contract purchaser have an interest in the property, this interest is subject to the contract purchaser’s interest.

Example: Adam owns a single family home located on lot 1. Adam and Baker enter into articles of agreement in 2019 wherein Baker agrees to buy lot 1 via an installment contract. Baker’s attorney orders a title insurance commitment, and at the closing he gives the closer a memorandum of the contract and asks her to record it after the closing. He asks the closer to issue Installment Contract Purchaser Endorsement “B.” The closer records the contract and issues the owner’s title insurance policy. Baker moves into the home. Two years later, in 2021, a judgment is recorded against Adam. In 2024 Baker is prepared to get a mortgage and make a final “balloon payment” of the amount he still owes to Adam.

Question: Baker’s attorney orders a title commitment and only then discovers the judgment against the seller that was recorded in 2021. Is there a problem?

Answer: No, there is no problem. Once Baker executed the installment contract, Baker became the equitable owner of the land. By taking possession of the house and by recording a memorandum of the contract, third parties, such as Adam’s judgment creditor, had notice of Baker’s equitable interest—an interest that is prior to the lien of the 2021 judgment. The title company can issue the owner’s title policy, showing the judgment in Schedule B, but endorsing over the judgment.

The concept of notice of an installment contract is illustrated in Reuss v. Nixon, 272 Ill. App. 219 (1933):

The contract of purchase was on record at the time the judgment was taken and the vendee was then in possession of the real estate. Conceding for the sake of discussion that the judgment creditor has a lien on the legal title remaining in the vendor after the execution of the contract of purchase, such lien is subject to the equities and rights of the vendee. . . . The time for the performance of the contract has arrived and as against the holder of the legal title and as against judgment creditors claiming a lien on the legal title bound by notice of the vendee’s rights, the vendee is entitled to a deed conveying the real estate to him clear of any liens which do not secure any debts or liability of the vendee. 272 Ill. App. at 224, 227.

The key to this protection for the contract purchaser is two-fold. One, the contract purchaser must be the equitable owner of the land, and two, there must be notice—that is, notice to third parties of the rights of the equitable owner. Note that in Reuss v. Nixon, notice was by both recorded document and possession. The effect of recording as notice to third parties is set forth in 765 ILCS 5/30:

All deeds, mortgages and other instruments of writing which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record.

Notice by possession is discussed in Burnex Oil Co. v. Floyd, 106 Ill. App. 2d 16, 245 N.E.2d 539 (1969):

The parties agree on the general rule that a bona fide purchaser of real property from the record owner acquires good title thereto free and clear of any interest therein except such interest of which he has notice. . . . Such notice may be actual or constructive and contemplates the existence of circumstances or facts either known to a prospective purchaser or of which he is chargeable with knowledge which imposes upon such purchaser the duty of inquiry. Where real estate is in the possession of someone other than the record owner, such possession is generally regarded as notice to the world of the interest represented thereby and is legally equivalent to the recording of such interest (Citations omitted). A purchaser is bound to inquire of the person in possession by what tenure he holds and what interest he claims in the premises (Citations omitted). Possession having the same effect as recording, charges a prospective purchaser with notice of all legal and equitable claims of the occupant (Citations omitted). Because possession has such substantial significance and consequences it follows that the possession or evidence of continuing acts of ownership thereof must be visible, open, exclusive and unambiguous. 106 Ill. App.2d at 21, 22.

Burnex Oil Co. v. Floyd makes it clear that possession of the property is equivalent to the recording of the installment contract. As long as the contract purchaser remains in possession of the property, one might conclude that title companies should be able to give the coverage set forth in paragraph 1.C. of the endorsement without requiring that the contract be recorded. On the other hand, in light of current statutory law (see below), which requires the recording of the contract, or memorandum thereof, a title company might prefer that the contract be recorded as a condition to offering this coverage. If the parties do not wish to record the contract or memorandum, then the examiner should raise an appropriate exception: “Consequences arising from the failure to record the contract described in Schedule A, or memorandum thereof, in the public records.”

Recording the Contract or Memorandum Thereof

As for recording the contract, or memorandum thereof, see 765 ILCS 70/2, which provides as follows:

After the effective date of this Act all contracts for the sale of a dwelling structure may be recorded or registered with the recorder or the Registrar of Titles in the same manner as a deed or other document relating to the title of the real estate to be sold. Any provision in a contract for the sale of a dwelling structure which forbids the contract buyer to record the contract or provides that recording shall not constitute notice or provides for any penalty for recording is void.

In addition, see section 20(a) of the Installment Sales Contract Act, or 765 ILCS 67/20(a). (Again, though, that this Act applies only to “serial” contract sellers. 765 ILCS 67/5 defines “seller” as “an individual or legal entity that possesses a legal or beneficial interest in real estate and that enters into an installment sales contract more than 3 times during a 12-month period to sell residential real estate.”)

765 ILCS 67/20(a) is as follows:

Within 10 business days of the date of sale of any residential real estate subject to an installment sales contract, and prior to any subsequent sale or other transfer of any interest in the residential real estate or contract by the seller, the seller shall record the contract or a memorandum of the contract with the county recorder of deeds. A memorandum of the contract shall be titled "Memorandum of an Installment Sales Contract" either in capital letters or underscored above the body of the memorandum. At a minimum, the memorandum of the contract shall include: the address, permanent index number, and legal description of the residential real estate subject to the contract; the names of the buyer and seller; and the date the contract was executed. The memorandum of the contract shall be signed by the buyer and the seller with the signatures notarized. However, any provision in an installment sales contract that forbids the buyer to record the contract or a memorandum of the contract is void and unenforceable.

Finally, see 765 ILCS 5/28:

Deeds, mortgages, powers of attorney, and other instruments relating to or affecting the title to real estate in this state, shall be recorded in the county in which such real estate is situated; but if such county is not organized, then in the county to which such unorganized county is attached for judicial purposes. No deed, mortgage, assignment of mortgage, or other instrument relating to or affecting the title to real estate in this State may include a provision prohibiting the recording of that instrument, and any such provision in an instrument signed after the effective date of this amendatory Act shall be void and of no force and effect.

This endorsement is usually issued to 1-4 residential property. With underwriter approval, the examiner can consider issuing it for other types of real estate. Note that if the property is vacant land, and the buyer desires this coverage, then the contract must be recorded. See Beals v. Cryer, 99 Ill. App. 3d 842, 426 N.E.2d 253 (5th Dist. 1981). This case concerns a dispute between the contract purchaser and a creditor of the contract seller. The purchaser argued that his acts of possession—cutting the grass—were sufficient notice of his interest in the land. The court rejected the purchaser’s contention that this “possession” constituted notice.

A purchaser of vacant land should always insist that the contract, or memorandum thereof, be recorded. The recording puts third parties on notice of the contract purchaser’s interest in the land. If the contract or memorandum is not recorded, a subsequent judgment creditor of the seller might not have any notice of the contract purchaser’s interest in the land. With no notice of this interest, the judgment creditor might be able to foreclose his judgment, free and clear of the installment contract.

Example: Seller and Buyer enter into an installment contract to purchase vacant land. Buyer makes a substantial down payment towards the contract. Neither the contract nor a memorandum of contract is recorded. After the contract is executed, a judgment against the seller is recorded. The judgment is quickly foreclosed. Because no evidence of the contract was recorded, and because the buyer was not in possession of the vacant land, the foreclosure of the judgment resulted in the extinguishing of the installment contract.

Other Matters

In order to obtain Endorsement B” coverage, the contract purchaser must be the equitable owner of the land. If asked to consider this endorsement, the title company will want to examine the installment contract. It is possible to negate equitable conversion by adding appropriate language to the contract. For example:

No right, title, or interest, legal or equitable, in the premises, or any part thereof, shall vest in Purchaser until the delivery of the deed aforesaid by Seller, or until the full payment of the purchase price at the times and in the manner herein provided.

 If a “no equitable conversion” clause has been added to the contract, the title examiner should decline to extend this coverage to the contract purchaser. When a “no equitable conversion” clause is added to the contract, the contract purchaser is more like a “lessee with an option to buy” and less like an installment contract purchaser who has an equitable interest in the land.

An Additional Title Policy Exception

In the 1980s title companies would usually raise the following exception on a policy when insuring a contract purchaser:

The rights of the Insured under this policy shall be subject to the defenses, if any, the Company might have against the party in title to the estate or interest described in Schedule A.

This exception relates to matters known to the contract seller but not disclosed to the contract purchaser. An example might be an undisclosed contract to perform work on the land, resulting in the recording of a mechanics lien claim. If the title company were insuring the fee simple owner of land, and this owner let a contract that resulted in the recording of a mechanics lien claim, the title company would probably deny the tender of a title claim as a matter “created, suffered, assumed, or agreed to by the Insured Claimant.” That is, the matter would normally be excluded from title policy coverage pursuant to Exclusion 3(a) of the ALTA 2006 Owner’s Title Insurance Policy.

This exception should be raised on any contract purchaser’s owner’s title insurance policy. Any request to waive the exception should be referred to a title company underwriter.

Insuring the Mortgage of a Contract Purchaser

An examiner might be asked to insure the mortgage of a contract purchaser. This can be done; however, an underwriter should be consulted. The underwriter will want to make sure that the contract does not negate equitable conversion. Also, the underwriter will want to make sure that the loan policy is subject to the contract to purchase. The underwriter will also want to make sure that the lender’s closing instructions do not contain the traditional “first lien” language.

This is an important consideration. When insuring the mortgage of a contract purchaser, the lender will never have a so-called “first lien.” The loan policy will always be subject to the contract to purchase, and normally the lender will not want to have its policy subject to this prior contract to purchase. The reason for this is that if the contract purchaser fails to make payments pursuant to the contract, the contract seller can foreclose this contract pursuant to the Illinois Mortgage Foreclosure Law, extinguishing the lien of this mortgage in the process.

Of course, if the parties were to subordinate the contract to the lien of the mortgage, the contract to purchase could be shown in Part II, Schedule B of the loan policy.

Part III: The Installment Contract, Equitable Conversion, and Lien Protection

Consider another example of equitable conversion:

Issue: Post-Contract Judgments Recorded Against the Contract Seller

Example Number One: Seller owns a single family residence. In 2019 Seller enters into an installment contract to sell the residence to Buyer. The contract has a three-year balloon payment. In 2022 Seller’s attorney orders a new title insurance commitment to bring down title prior to the execution of a deed of the residence from Seller to Buyer. Seller’s attorney discovers that in 2021 a judgment creditor recorded a $50,000 memorandum of judgment against Seller.

This example is similar to the previous example, but with one crucial difference. In this example, assume that the contract contains a “no equitable conversion” provision such as outlined above and set forth below:

No right, title, or interest, legal or equitable, in the premises, or any part thereof, shall vest in Purchaser until the delivery of the deed aforesaid by Seller, or until the full payment of the purchase price at the times and in the manner herein provided.

With this provision in the contract, Buyer is no longer an equitable owner of the land. Indeed, he has no interest in the land; Buyer is essentially “renting to own” the home while he has been in possession of the home. Even though Buyer had executed an installment contract to buy the land, he had no equitable interest in the land that was superior to the interest of Seller’s subsequent judgment creditor. Because the buyer had no equitable interest in the land, the lien of Seller’s judgment, although subsequent to the installment contract, was a lien on the land that was superior to the installment contract. See Hayes v. Carey, 287 Ill. 274, 122 N.E. 524 (1919), and Vereyken v. Annie’s Place, Inc., 964 F.2d 593 (Mich., 1991), which are discussed below.

Issue: Post-Contract Judgments Recorded Against the Contract Purchaser

Now consider a second example:

Facts, Example Number Two: Seller owns a single family residence. In 2019 Seller enters into an installment contract to sell the residence to Buyer #1. Buyer #1 goes into possession of the residence. The contract has a three-year balloon payment due in 2022. In February of 2021 Buyer #1 stops making installment payments to Seller. In June of 2021 Buyer #1 moves out of the home during a weekend, abandoning the property. In August of 2021 Seller finds a new buyer for the home—Buyer #2. Seller’s attorney orders a new title insurance commitment to bring down title to the home. When Seller’s attorney receives the title insurance commitment, he discovers that in 2020 a judgment creditor recorded a $50,000 memorandum of judgment against Buyer #1, the previous contract purchaser.

The abbreviated facts of the second example are as follows:

Seller owns a single family residence. Seller sells the residence to Buyer #1 on installment contract. Buyer #1 defaults on the contract and moves out of the residence. Seller agrees to sell the residence to Buyer #2. Seller orders a new title insurance commitment. Seller discovers that a creditor has recorded a judgment against Buyer #1. Question: How can Seller now sell the home to Buyer #2 free of the judgment?

Assume that in this case the installment contract did not negate equitable conversion. Does this mean that Buyer #1 is the equitable owner of the land? If Buyer #1 is the equitable owner of the land, can a recorded judgment against Buyer #1 attach to Buyer #1’s equitable interest in the land?

The answer to both questions is yes. Consider both the following case law and this question: What is the effect of the contract purchaser’s judgment liens on the contract seller’s legal interest in the land being sold via installment contract?

See Farmers State Bank v. Neese, 281 Ill. App. 3d 98, 665 N.E.2d 534, 216 Ill. Dec. 474 (1996). In July 1989 Thomas and Susan Neese contracted to purchase land from Wade on a five-year installment contract. In November 1989 they obtained a loan from the bank; they assigned their contract to the bank as security for the loan. In July 1991 the IRS filed a notice of tax lien. In June of 1992 the bank recorded both the contract and the assignment. After the IRS filed the notice, the Neeses defaulted on their loan payments, and in July 1994 the bank initiated foreclosure proceedings.

The bank argued that its security interest was prior to the IRS lien. The court disagreed; citing Shay v. Penrose, the court stated that “at the time the tax lien was filed, the Neeses had equitable title to the property in question. There was thus an interest to which the IRS lien could attach.” 281 Ill. App. 3d at 103. However, because the bank failed to record the contract and assignment prior to the recording of the IRS lien, “the bank’s interest as assignee was not perfected and was properly subordinated to the IRS lien.” 281 Ill. App. 3d at 104.

In Hayes v. Carey, 287 Ill. 274, 122 N.E. 524 (1919), Thomas and Margaret Carey executed an installment contract to buy a farm in 1912. The Careys never made a payment towards the contract, and so the parties entered into a lease in 1914, thereby allowing the Careys to remain on the farm. In 1915 the contract was inexplicably recorded. In 1916 James Cleary, a judgment creditor of Mr. Carey, attempted to levy on Carey’s interest in the farm.

The court determined that because Carey had abandoned the contract, he had no equitable interest in the farm, and that therefore, there was no equitable interest to which the judgment could attach. The court stated that “since Carey had lost all right to enforce the contract by its abandonment and forfeiture, a sale of his interest in the land under the execution would convey no title, and could have no other effect than to cloud the title of the defendants in error.” 287 Ill. at 279.

But because Carey never made a contract payment, he did not have any equity in the property. This is the same fact pattern in Vereyken v. Annie’s Place, Inc., 964 F.2d 593 (Mich., 1991). In Vereyken the court stated that “although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee’s equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached, except perhaps the vendee’s right to a deed upon full payment.” 964 F.2d at 594-95.

These cases illustrate two important concepts: one, a judgment can attach to a contract purchaser’s interest in land, but two, in order for said lien to attach, the contract purchaser must have some equity in the land. These two points are set forth in the following case, Orme v. United States, 269 F.3d 991 (Montana, 2001).

The federal court in Orme distinguished the Vereyken decision. In Orme v. United States the Ormes sold property to Mr. and Mrs. Burgess in 1989 pursuant to an installment contract. In 1994, the United States filed a federal tax lien against the Burgesses. In 1997 the Burgesses forfeited the contract, the contract was terminated, and the Ormes recorded a quit claim deed that had been held in escrow.

When the Ormes attempted to sell the property to another buyer, they discovered the federal tax lien. The Ormes then filed a quiet title action in state court, and the United States removed the case to federal court. The district court granted the Ormes’ motion for summary judgment, and the United States appealed.

Citing Drye v. United States, 528 U.S. 49, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999); 26 U.S.C. Section 6321; and applicable state law, the U.S. Court of Appeals, Ninth Circuit, held that a federal tax lien may attach to the equitable interest of a contract purchaser. The court also cited 26 U.S.C. Section 7425(b): “A nonjudicial sale of property is made ‘subject to and without disturbing federal tax liens if (1) the federal tax liens were filed more than 30 days before the sale, and (2) notice of the sale is not given to the IRS in accordance with Section 7425(c)(1).” 269 F.3d at 994. The 9th Circuit Court of Appeals concluded:

Because the Ormes terminated the contract without giving notice as required under Section 7425(b) and because the federal tax lien was filed more than 30 days before the termination, the federal tax lien survived the Ormes’ forfeiture of the land sales contract (citations omitted). Furthermore, when the Ormes recorded the quit claim deed to the property on July 11, 1997, the Burgesses had built up $13,457.44 of equity, leaving a balance of $11,542.56 in principal on the $25,000 purchase price. Indeed, when the Government filed its lien, the Burgesses had already established approximately $10,000 in equity. Thus, unlike in Vereyken, where the vendee had built up no equity, the Government’s lien in the amount of $5,312.22 could be fully satisfied by the Burgesses’ equitable interest in the property. 269 F. 3d at 996.

General Observation

It seems clear that if Buyer #1 has any equity in the land at all, the title company cannot automatically waive a recorded judgment that is recorded against Buyer #1 when preparing to issue a title policy in favor of Buyer #2.

Equitable conversion is a two-edged sword that cuts both ways. It protects the contract purchaser against the enforcement of any judgments against the contract seller that are recorded during the pendency of the contract. But equitable conversion also creates a real property interest to which the contract purchaser’s judgments can attach.

The Basic Problem

Facts

Seller owns a single family residence. Seller wants to sell the residence to Buyer via an installment contract. Sam is the attorney for Seller, and Bob is the attorney for Buyer.

Issue

Sam represents Seller, and he is concerned about judgments recorded against Buyer. Sam wants the installment contract prepared so that equitable conversion is negated. This way, if a lien is recorded against Buyer during the pendency of the contract, and then Buyer later defaults, Sam can convince the title company that the contract was basically a “rent to own” contract—that is, since the judgment against Buyer could not attach to the land because Buyer had no equitable interest in the land, then if Sam found a new buyer of the property, the title company could insure New Buyer free and clear of the judgment against the original buyer.

But Bob represents Buyer, and he is concerned about liens recorded against Seller. Bob wants the installment contract drafted so that Buyer is the equitable owner of the land—that is, he does not want the contract to include a “no equitable conversion” provision. If Buyer is the equitable owner of the land, and if a memorandum of contract is recorded, Bob can ask the title company to issue its policy insuring Buyer, but with the additional policy endorsement, insuring against post-policy (and post-contract) judgments recorded against Seller.

In other words:

Sam represents Seller, and he does not want equitable conversion in the contract. Bob represents Buyer, and he wants equitable conversion in the contract.

Question

Is there a solution to this dilemma?

Answer

Yes, there is. There are actually two possible solutions.

First, the contract could be prepared so that it contains provisions for equitable conversion. However, the contract purchaser would be an Illinois land trust. Thus, the risk of post-contract/post-policy judgments being recorded against Buyer, individually, would be minimized. If a memorandum of contract is also recorded, the title company could issue its title policy endorsement to Buyer, thus offering insurance over Seller’s possible post-contract judgments.

But the second solution is simpler, easier, and better. Buyer can execute the contract as contract purchaser. The contract should not negate equitable conversion. If a memorandum of contract is recorded, the title company could issue its title policy endorsement to Buyer, thus offering insurance over Seller’s possible post-contract judgments. If a post-contract judgment is recorded against Buyer, Seller can foreclose its installment contract like a mortgage, thus wiping out any post-contract judgment against Buyer. In this regard, see 735 ILCS 5/15-1106(3)(c).

Is Forfeiture of the Installment Contract an Alternative Remedy? (The short answer is no.)

Back in the early 1980s the late Peter A. Hess wrote a treatise on contract forfeitures. At that time, the pamphlet was required reading for every real estate attorney.

Question: Can’t the attorney simple declare a forfeiture of an installment contract and eliminate post-contract liens that are recorded against a contract purchaser who is in default of the contract?

Answer: Forfeiture is an appropriate remedy for eliminating the interest of a defaulting contract purchaser. However, it cannot eliminate post-contract liens. In the event the attorney forfeits a contract and then discovers one or more judgments recorded against the contract purchaser, the title examiner must determine if the contract purchaser has any equity in the land. The examiner must obtain a copy of the original contract between the buyer and seller. The examiner must also request an affidavit from the seller that sets forth the original amount of the contract; the amount of money the buyer has paid towards the contract; when the buyer stopped making payments on the contract; the amount of the unpaid contract balance; and the amount of any defaults (e.g., if the seller has paid insurance, taxes, attorney's fees, which can be charged to the buyer). If the contract purchaser has any substantial equity in the land, then the examiner cannot waive any judgments recorded against the purchaser. Instead, the liens must be underwritten in the conventional fashion. (See Part IV for further discussion.)

Additional Thoughts on Equitable Conversion

In Eade v. Brownlee, 29 Ill.2d 214, 193 N.E.2d 786 (1963), the Supreme Court was asked to consider a contract that contained a “no equitable conversion” clause. In Eade the court looked to the intent of the parties, as evidenced in this clause, in determining that there was no equitable conversion.

But in Cox v. Supreme Savings and Loan, 126 Ill. App. 2d 293, 262 N.E.2d 74 (1970), the appellate court ruled on the rights of parties under a contract that had a “no equitable conversion” clause identical to the clause of the contract litigated in Eade. Here, as in Eade, the court looked to the intent of the parties, but held that the clause was not controlling, as a rider attached to the contract expressed an intent that was contrary to the “no equitable conversion” clause of the contract:

The buyer went into possession on the date of the contract, collected the rents, issues and profits, paid the taxes and insurance, leased the apartments and performed whatever repairs were done to the building. . . . The rider [to the contract] also required the purchasers to ask for consent and approval of the seller for any capital or major expenditures before any contract for such expenses could be made. The contract required the purchasers to correct five code violations at their own expense. . . . It seems almost axiomatic that this rider to the contract is attached to alter, modify or change the normal course of events as described in the articles of agreement. Indeed the contract is expressly stated to be ‘subject to a rider agreement attached hereto.” . . . . In the face of the rider to this contract, it is abundantly clear that paragraph five [the ‘no equitable conversion’ clause] was in fact and in law nullified by the rider. It is fictional rather than factual to hold that the purchasers here under paragraph five of their agreement had nothing but a possessory right. To so hold is to fly into the face of the language and the conduct of both parties. 126 Ill. App. 2d at 295-97, 301.

As Michael J. Rooney points out in his article, “Installment Contracts: The Illinois Perspective,” published in the October 1980 issue of the Illinois State Bar Association’s Real Property newsletter:

In other words, even if the parties provide that the purchaser has no equitable interest, when they also provide that the purchaser must maintain insurance, pay taxes, be entitled to possession, and exercise such other dominion and control as would be exercised by an ‘owner’ of real estate, how may it be said that the purchaser does not have an interest in the premises? Can an attorney convert a horse into a zebra simply by changing its name?

Negating Equitable Conversion when Drafting the Installment Contract

Assume, after all of this, that the attorney nonetheless wants to effectively draft an installment contract that negates equitable conversion. As noted above, the contract in Cox v. Supreme Savings and Loan contained a “no equitable conversion” clause, but the court determined that the rider to the contract, which made it clear that the purchasers had more than a mere possessory right to the property, nullified this clause.

Note, however, that the court in Cox cites City of Chicago v. Mandoline, 26 Ill.App.2d 480, 168 N.E.2d 784 (1st Dist. 1960). If the attorney uses both Cox and Mandoline as a guide in drafting the contract, then perhaps the attorney might be able to negate equitable conversion.

In the Mandoline case Mandoline sold property on contract to Powe. The contract contained a “no equitable conversion” clause. A few months later, the City of Chicago filed a statement of claim against both Mandoline and Powe, charging them with twenty-four separate violations of the Municipal Code.

Mandoline argued that when Powe moved into the property, Powe assumed exclusive control of it. Because Mandoline was neither in possession or control, Mandoline had no duty to comply with the ordinances.

The appellate court determined that Mandoline, the contract seller, was the owner of the land, and that under the articles of agreement he had complete control of the property to the exclusion of Powe, the contract purchaser.

The court noted such factors as the following:

• Powe was not permitted to record the contract.

• Powe could not sublet the property without Mandoline’s permission.

• Powe could not make any repairs that would constitute a lien on the premises, and he was required to submit to Mandoline every contract, together with the plans, for any improvement to the property.

The court concluded by stating the following:

Actually, all that Powe received under the agreement was the right to occupy the premises as long as he made the specified monthly payments. He could not obtain control until he received the deed. . . . It thus appears that Mandoline was not only the owner of the property and thus liable under the ordinances for any violations, but that under the articles of agreement he had complete control of the property to the exclusion of the contract purchaser, Powe. 26 Ill.App.2d 483-84.

But in Cox v. Supreme Savings and Loan Association, the court noted that the contract purchasers had much more than the mere right of occupation:

The buyer went into possession on the date of the contract, collected the rents, issues and profits, paid the taxes and insurance, leased the apartments and performed whatever repairs were done to the building. . . . The rider [to the contract] also required the purchasers to ask for consent and approval of the seller for any capital or major expenditures before any contract for such expenses could be made. The contract required the purchasers to correct five code violations at their own expense. . . . In the case at bar, the purchasers exercised all of the rights of an owner and performed all the duties of an owner and were prohibited only from making major or capital improvements without authority of the seller. The purchasers’ rights here far exceeded the right to possession only. They, not the seller, exercised all of the prerogatives of ownership with the limitation as to capital improvements previously noted. 126 Ill.App.2d 295-97.

It appears that these two cases may offer guidance in drafting an installment contract so as to avoid the application of the doctrine of equitable conversion. It seems that in order to avoid triggering the doctrine, the contract must be drafted so that the contract purchaser is given, in the words of the Cox court, “the right to possession only.”

That is, Cox and Mandoline represent two opposite ends of the equitable conversion spectrum. The more the contract is drafted like the one in Cox, the more likely a court will find that the equitable conversion doctrine applies. Conversely, the more the contract is written with Mandoline in mind, the more a court might conclude that there is no equitable conversion.

Putting It All Together

Consider this example:

Sellers sells a home via installment contract to Buyer #1. A memorandum of contract is recorded against the home. Buyer #1 defaults on the contract and abandons the property. Seller prepares to sell the home to Buyer #2. A title search discloses a $10,000 judgment recorded against Buyer #1. What can seller do? Can the home be sold to Buyer #2 free and clear of the judgment?

In this case, assume that the installment contract negated equitable conversion. But per Cox v. Supreme Savings and Loan and City of Chicago v. Mandoline, the contract should be reviewed to make sure that the terms of the contract do not negate the “no equitable conversion” provisions of the contract. But what if the contract did not negate equitable conversion? In that event, the seller should furnish the title company a statement as to how much equity (i.e., money) Buyer #1 had in the land. In both Hayes v. Carey and Vereyken v. Annie’s Place, Inc. the court determined that if the equitable owner has no equity in the land, then there is no real equitable title to which a lien could attach. See, e.g., Vereyken , where the court stated that “although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee’s equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached, except perhaps the vendee’s right to a deed upon full payment.” (Furthermore, note that it is possible that any equity the contract purchaser might have had in the land might have dissipated due to the possible contract-mandated payment of maintenance costs, utilities, and taxes. Furthermore, the payment of attorney’s fees resulting from Buyer #1’s abandonment of the property might also result in the loss of the contract purchaser’s equity.)

Thus, if it is clear that Buyer #1’s contract (both in form and substance) negates equitable conversion, the title company may be willing to waive the judgment that was recorded against Buyer #1.

Second, in the alternative, if Buyer #1’s contract did not negate equitable conversion, resulting in Buyer #1 being the equitable owner of the land, but if it can be shown that Buyer #1 had no real equity (i.e., money) in the land, the title company may be willing to waive the judgment that was recorded against Buyer #1.

Equitable Conversion and the Installment Sales Contract Act

The Installment Sales Contract Act, codified at 765 ILCS 67/1 et seq., does not contain a provision that prohibits the addition of a “no equitable conversion” clause to the contract. That is, the Act does not contain a provision such as:

Any provision in an installment sales contract that negates the doctrine of equitable conversion or otherwise provides that the Purchaser shall acquire no right, title, or interest, legal or equitable, in the land until the delivery of the deed or until the full payment of the purchase price is void and unenforceable.

Is this a problem?

Example: Owner sells a single family residence to Buyer via an installment contract. The purchase price is $100,000. The contract contains the afore-mentioned provision that negates equitable conversion. Six months after the contract was executed, a $12,000 judgment is recorded against Buyer. Fifteen months after the contract was executed, after Buyer has paid $15,000 towards the contract price, Buyer defaults on the contract. Seller comes to the title company and tells the examiner that he has a new contract purchaser for the property. Seller points to the provision in the contract that was signed by Buyer that negates equitable conversion. Seller tells the examiner that the contract is essentially a “rent to own” contract. That is, since Buyer acquired no interest in the land pursuant to this provision, the Buyer was basically a tenant, and therefore, the examiner should be able to waive the judgment that was recorded against Buyer.

Question: If the contract did not contain such a provision, would the examiner have been less willing to waive the recorded judgment? Instead, would the examiner have insisted that the contract be foreclosed, thus providing for the lien to be foreclosed out through foreclosure and providing for maximum protection of Buyer (who might still be in possession of the land?)

Equitable Conversion and the Title Company

Example Number One

Charles owns a parcel of real estate. In 2016 Charles executes an installment contract in favor of Baker. A memorandum of contract is recorded. It is now 2019. Baker is ready to get a mortgage and buy out his contract. Unfortunately, a $10,000 judgment has been recorded against Charles, the contract seller.

Summary of the Facts

Charles owns the real estate in fee simple. Baker is buying the real estate pursuant to an installment contract. A judgment has been recorded against Charles.

Question

Can Baker somehow acquire title to the property free and clear of this judgment that has been recorded against Charles, the owner of the land?

Answer

Possibly yes. The title company needs more information before making a determination. What is the nature of the land? If the land is improved, who is in possession of the property? Who is paying the real estate taxes? The title company must review a copy of the contract. Does the contract negate equitable conversion? Furthermore, the examiner must consider the facts of the Cox and Mandoline cases, discussed above. The more the contract is drafted like the one in Cox, the more likely a court will find that the equitable conversion doctrine applies. On the other hand, the more the contract is written with Mandoline in mind, the more a court might conclude that there is no equitable conversion.

Assume that in this example, a memorandum of contract was recorded, and thus third parties have been put on notice of Baker’s interest in the land. The examiner must verify that the contract and any amendments thereto do not contain a “no equitable conversion” clause. The examiner must look at the terms of the contract. The examiner must make sure the contract is not like a Mandoline contract—that is, a contract giving the contract purchaser possession only. If the contract is not like a Mandoline contract, the examiner may be able to insure title in Baker, the contract purchaser, free and clear of the judgment against Charles, the owner and contract seller.

Example Number Two

Facts A person buys a home pursuant to an installment contract. During the pendency of the contract, a judgment is entered against the contract purchaser for $10,000. A memorandum of judgment is recorded. The contract purchaser is now in the process of obtaining a mortgage to pay off the contract so he can acquire fee title to the property. The contract purchaser has paid $30,000 to the contract seller pursuant to the installment contract. Question

Is this mortgage considered a purchase money mortgage, or a refinance? If the mortgage is a purchase money mortgage, the title company can show the judgment in Part II, Schedule B of the loan policy. But if the mortgage is a refinance, then the judgment will have to be paid off or otherwise satisfactorily underwritten.

Answer The examiner must look at the copy of the contract. Did the contract waive equitable conversion? If so, then it is possible that this mortgage will truly be a purchase money mortgage.

But the examiner must also make sure that the terms of the contract do not negate the "no equitable conversion" clause.

If there is no equitable conversion, then the examiner can treat the mortgage as a purchase money mortgage and show the judgment in Part II, Schedule B of the loan policy.

On the other hand, if the contract did not waive equitable conversion, then, pursuant to Shay v. Penrose, the contract purchaser became the equitable owner of the land, and that is an interest to which the judgment could attach.

In this case, the contract contained a “no equitable conversion” clause, and there were no contrary contract provisions. The examiner must now conduct further analysis.

A true purchase money mortgage is a mortgage used in a situation where, “but for” the mortgage, the property could not be purchased.

In this case, the property was being purchased via an installment contract. However, the contract purchaser had paid only $30,000 towards the purchase price of $100,000. Thus, the contemplated mortgage is in fact a purchase money mortgage.

Yes, the contract purchaser had paid $30,000 towards the purchase price, but this does not mean that the contract purchaser has $30,000 worth of equity in the property. Remember, the contract contained a “no equitable conversion” clause.

Because the contract had a “no equitable conversion” clause, it is as if the contract purchaser was a tenant with no equitable interest in the land who was making “rent to own” payments. Thus, the situation is as if the contract purchaser has made a $30,000 down payment towards the purchase of property and now needs a purchase money mortgage to buy the property.

In this case, because the contract had a “no equitable conversion” clause, resulting in the contract purchaser being akin to a tenant making “rent to own” payments, the mortgage is a purchase money mortgage. The examiner can show the judgment in Part II, Schedule B of the loan policy, and show the judgment in Schedule B of the owner’s policy.

Again, if the contract did not waive equitable conversion, then, pursuant to Shay v. Penrose, the contract purchaser became the equitable owner of the land. Thus, the mortgage is not a true purchase money mortgage. That is, a purchase money mortgage answers the issue, “but for the mortgage, the purchaser could not purchase the land. But in this case, the contract purchaser IS the equitable owner of the land, and thus, the mortgage is not a purchase money mortgage.

Part IV: Insuring Title after the Forfeiture of the Installment Contract

Introduction

Under an installment contract, the seller has to convey title to the land once the purchaser has paid the purchase price. The contract may state that the buyer has to pay the entire price, or, the contract may state that once the buyer has paid a certain amount, the seller will execute a deed and take back a purchase money mortgage. The purchaser will usually make contract payments, which are made up of principal and interest, just like a mortgage.

But: if the purchaser does not keep current with the payments, the contract may provide for the termination of the purchaser's interest. In addition, the contract may allow for the seller to re-enter the land and take possession of it.

But in order to do this, the contract must provide for this option. That is, the contract must contain a provision that allows the seller to declare a forfeiture of the contract in the event the purchaser defaults.

If the contract does not provide for forfeiture as a remedy, then the seller's only right is one of rescission - i.e., the seller must refund the purchaser's payments, less a fair amount of rent. See People ex rel. Smith v. Mersinger, 18 Ill. 2d 486, 165 N.E.2d 308 (1960).

Thus, there is a big difference between forfeiture and rescission. In forfeiture, the seller keeps all the money. In rescission, the seller has to give some of the money back.

The Installment Contract and the Illinois Mortgage Foreclosure Law

If the title company is asked to insure title after a forfeiture of contract, the first thing the title company will want to do is to examine the contract to determine if the contract contains a provision that provides for a forfeiture.

Any discussion of forfeitures of contracts must be done under the umbrella of the Illinois Mortgage Foreclosure Law, or IMFL.  (735 ILCS 5/15-1101 et seq.) Why?  Under the IMFL, certain installment contracts are deemed to be mortgages and are required to be foreclosed as such.

IMFL divides installment contracts into three different types:

1. Those contracts that must be foreclosed under IMFL, and thus cannot be forfeited;

2. Those contracts that may be foreclosed under IMFL, and thus may instead be subject to forfeiture;

3. Those contracts that cannot be foreclosed under IMFL, and thus must be subject to forfeiture or some other remedy.

• As to contracts that must be foreclosed as mortgages under the IMFL, all three of the following requirements must be met; see 735 ILCS 5/15-1106(2):

1. The contract must be entered into after July 1, 1987 (the effective date of the IMFL);

2. The contract must be for residential real estate;

3. The unpaid amount of the contract must be less than 80% of the original price. In other words, the contract purchaser must have already paid down 21% or more of the price. In this regard, see also 735 ILCS 5/9-102(a)(5).

Thus, if all three factors are present, the contract seller must foreclose the contract as a mortgage. But if even one factor is missing, then the contract can be forfeited.

• Contracts that may be foreclosed under the IMFL:

Any contract entered into after July 1, 1987.  Thus, the contract can either be foreclosed or it can be forfeited.  See 735 ILCS 5/15-1106(3)(c); see also 735 ILCS 5/15-1107(c).

• Contracts that may not be foreclosed under the IMFL:

Pre-July 1, 1987, contracts. Thus, one could either forfeit the contract or one could foreclose it under the "old" mortgage foreclosure law. See 735 ILCS 5/15-1106(3)(c).

Illinois Mortgage Foreclosure Law Procedural Issues

Procedurally, the foreclosure of a contract is similar to the foreclosure of a mortgage. That is, one would file the complaint and record the notice of foreclosure.

The Mortgage Foreclosure Act provides for reinstatement, a chance for the buyer to cure defaults. If the contract is foreclosed, there is a 90 day period of reinstatement, commencing upon service of the complaint on the buyer. See 735 ILCS 5/15-1602.

The contract purchaser would have the right to redemption under the IMFL. If the property is not redeemed, a sale is held and a deed can eventually be issued. See 735 ILCS 5/15-1603.

A Synopsis of the Steps of Analyzing a Forfeiture Problem

1. Read the contract. Is there a default under the terms of the contract? Does the contract provide for forfeiture as a remedy?

2. If the answer to both of the above questions is yes, then a warning notice (see below) must be prepared and served on the contract purchaser.

3. Once the warning notice is served, and the proper time period has elapsed, and the buyer has not cured the default, then a declaration of forfeiture must be prepared and recorded.

4. If the buyer is still in possession, then a forcible entry and detainer action pursuant to 735 ILCS 5/9-101 et seq. is commenced. This action seeks possession of the property.

5. If the contract seller is successful, and the buyer is still in possession, then a court order is issued, asking that the sheriff physically eject the purchaser from the property.

Step One—The Warning Notice

The warning notice serves three purposes:

1. It reinstates the "time is of the essence" provision of the contract. Many contract sellers are too lenient—that is, they accept late payments. If a seller accepts such payments, courts have ruled that the seller has waived his right to now insist on prompt payments. This is the case, unless the seller gives the buyer notice that in the future he intends to demand strict adherence to the contract. See Hill v. Alber, 261 Ill. 124, 103 N.E. 612 (1913); Fox v. Grange, 261 Ill. 116, 103 N.E. 576 (1913); Kirkpatrick v. Petreikis, 44 Ill. App. 3d 575, 358 N.E.2d 679, 3 Ill. Dec. 281 (1976).

2. It also gives the purchaser the statutorily mandated time period of “at least 30 days” to cure all defaults. See 735 ILCS 5/9-104.1(a); Chrisman v. Miller, 21 Ill. 227 (1859); Given v. Lofton, 359 Ill. 228, 194 N.E. 512 (1935). Note that the statute states that "at least 30 days" is necessary. This is not the same as "within 30 days."

3. It is a condition precedent for the forcible entry and detainer action—that is, one can maintain an action for possession only when a signed written demand has been made. See 735 ILCS 5/9-104.1(a); 735 ILCS 5/9-102(a)(5). Thus, this demand serves this statutory requirement. See Brannen v. Seifert, 2013 IL App (1st) 122067, 1 N.E.3d 1096, 377 Ill. Dec. 209 (1st Dist. 2013)

All interested parties must be served with notice of the demand. If the parties are husband and wife, they each should be served individually. Personal service is best. If this is not possible, use registered mail or certified mail, return receipt requested. See 735 ILCS 5/9-104.1(c).

Elements of the Warning Notice

1. The warning notice should be addressed to and served upon all interested parties.

2. It should recite the particulars of the making of the original contract and all assignments, if any.

3. It should correctly describe the property.

4. It should recite the default or forfeiture provisions of the contract.

5. It should set forth all of the defaults of the contract purchaser.

6. It should notify the purchaser of the seller's intention to declare a forfeiture if the purchaser does not cure the defaults and the seller's intention to file suit under the Forcible Entry and Detainer Act to obtain possession.

7. It must be signed by the seller or his agent.

8. It must be notarized.

9. An affidavit of service must be attached to the warning notice.

Step Two—The Declaration of Forfeiture

After the time set forth in the warning notice has expired, and the purchaser has not cured the defaults set forth in the notice, the declaration of forfeiture should be prepared. The elements of the declaration are:

1. The declaration must contain a description of the original contract.

2. The particulars of the service of the warning notice must be included.

3. The declaration must set forth the defaults of the purchaser.

4. It must state that the purchaser has failed to cure the defaults.

5. It must state that because of these defaults, and that because the purchaser has failed to cure these defaults, a forfeiture is declared.

6. The declaration must contain the legal description of the property.

7. The seller should sign the declaration, and the signature should be notarized.

8. The affidavit of service should be attached to the declaration of forfeiture.

9. The warning notice should be attached to the declaration of forfeiture.

The declaration of forfeiture should be served in the same way that the demand notice is served. It should be served on the same parties.

The declaration of forfeiture should be recorded, if the contract requires it, or if the contract was previously recorded. If the contract has a clause in it, stating that the recording of the declaration of forfeiture is conclusive evidence of a forfeiture, then the declaration should be recorded. See Forest Preserve Real Estate Improvement Corp. v. Miller, 379 Ill. 375, 41 N.E.2d 526 (1942).

Step Three—The Demand for Possession

The demand for possession is not necessary unless the contract purchaser remains in possession after the forfeiture has been declared. The demand for possession addresses the issue of possession; it does not concern matters of title. The demand is governed by the provisions of the Forcible Entry and Detainer Act, which is set forth at 735 ILCS 5/9-101 et seq.

Provisions of the Forcible Entry and Detainer Act

There are various provisions of the Forcible Entry and Detainer Act. As indicated above, this comes into play when the purchaser is still in possession. See Reid v. Arceneaux, 63 Ill. App. 2d 113, 211 N.E. 2d 24 (1965).

If it appears that the plaintiff is entitled to the possession of the land, judgment for the possession thereof and for costs shall be entered in favor of the plaintiff. See 735 ILCS 5/9-110.

However:

If the contract was entered into after July 1, 1962, the court may stay any enforcement of a judgment, giving possession to the seller, for a period of not to exceed sixty days from the date of judgment. See 735 ILCS 5/9-110.

If the unpaid balance of the contract is less than 75% of the purchase price, the court shall stay the enforcement of the judgment for a period of 180 days from the date of the judgment. However, the court may grant a stay of less than 180 days (but in no event, less than sixty days), if the seller had previously granted extensions to the buyer to pay the amounts due, or for other good cause shown. See 735 ILCS 5/9-110.

If during the period of stay, the buyer pays the entire amount due up to that time--in other words, if the buyer cures all defaults--the contract shall remain in force. But note: the buyer can only seek this protection once every five years during the pendency of the contract. See 735 ILCS 5/9-110.

Note that this is similar to the provisions relative to reinstatement that are part of the Illinois Mortgage Foreclosure Law, or IMFL. See 735 ILCS 5/15-1602.

Some commentators may feel that this statutory provision puts a burden on the seller. The seller is forced to wait up to 180 days, with no income coming in to the owner, with the possibility that the buyer, at the end of 180 days, will still not cure the defaults. But remember that this is a forfeiture—the seller gets to keep all the money that has been paid, and he gets to keep the property, too. Thus, this provision may not be as harsh as it might at first seem.

If during the 735 ILCS 5/9-110 time period, the buyer cures all the defaults, he can go into court and file a motion, asking that the judgment for possession be vacated. If the court is satisfied that this has been done, it will grant the motion. But if the defaults have not been cured, enforcement of the judgment for possession can be done as soon as the stay period has expired. All the rights of the purchaser to the real estate are terminated. See 735 ILCS 5/9-110.

But remember: Forcible entry and detainer only goes to the issue of possession. A final order in a forcible entry and detainer case does not necessarily prevent the buyer from bringing an action for equitable relief later, based on some form of equitable title theory because of a partial payment of the contract price.

Title Company Procedures and Problems Concerning Contract Forfeitures

Assume that an attorney comes into the office of the title company and tells the examiner that he wants to forfeit an installment contract. He asks the examiner, "What do you need to waive this contract from the title commitment?” How should the examiner reply? What should the examiner ask for?

1. The examiner will want a copy of the original contract. Upon receipt, the examiner should examine it, making sure that the contract allows for a forfeiture of the contract.

2. The examiner should ask for a copy of the warning notice, together with the affidavit of service.

3. The attorney should give the examiner a copy of the declaration of forfeiture, together with the affidavit of service.

4. The examiner should request a copy of the order entered in the Forcible Entry and Detainer case that gives the seller possession.

5. Most importantly, the examiner should ask for an affidavit executed by the seller that includes the following: the original amount of the contract; the amount of the unpaid balance; the amount of money the purchaser has paid towards the contract; when the purchased stopped making payments; the amount of the defaults (e.g., if the seller has paid out money to pay for insurance, taxes, attorney's fees, and other items that should be charged to the buyer); whether the buyer is still in possession of the land; if the buyer is not in possession of the land, the identity of the person who is in possession of the land; and copies of all communications that have taken place between the buyer and seller, both written and oral. (The examiner will want to review these materials to make sure that the seller has not made any representations to the buyer that may have revived the contract after the forfeiture.) Finally, the affidavit should include a statement that the seller has made no defaults on the contract.

At this point the title company is faced with two problems. The first is possession. If the buyer is still in possession of the property, the title company should not insure title free and clear of the rights of the purchaser. Rather, the title examiner should tell the customer to come back when the purchaser has been ousted. The reason is simple: how can the title company insure over or waive the purchaser's rights pursuant to a forfeiture of the contract, when the purchaser is still in possession of the property by virtue of the contract?

But even if the purchaser is out of possession of the property, there is still a second problem. This concerns the contract purchaser's equity—that is, how much money has the purchaser paid on the contract? It is possible that the contract purchaser can later go into court and seek some kind of equitable relief, which is separate and apart from the issue of possession.

For this reason, if the purchaser has paid down a lot of money on the contract, and now the contract is forfeited, the examiner may want to insist that the seller go back into court, either on a quiet title action or an action for a declaratory judgment, and ask that the court determine that the purchaser has no interest in the land.

In the alternative, the seller should obtain a quit claim deed from the buyer. Perhaps the seller could give the buyer some “moving money” in exchange for a deed.

As a last result, the seller may have to foreclose his contract.

Equitable Conversion v. Equity

The Illinois Supreme Court case, Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962) describes the doctrine of equitable conversion, that upon the execution of a contract, the contract purchaser is the equitable owner of real estate, subject only to the lien of the contract seller for the unpaid balance of the purchase price.

These two concepts—equitable conversion and equity—have entirely different meaning, and they are treated quite differently when underwriting issues relating to installment contracts. Consider the following examples:

Example Number One

Adam owns lot 1. Adam executes an installment contract in 2019 wherein he agrees to sell lot 1 to Baker. Baker agrees to make installment contracts over the next five years. A memorandum of contract is recorded. Because the contract does not contain a “no equitable conversion” clause, Baker becomes the equitable owner of the land, subject to the payment of the contract purchase price.

In 2021 a judgment creditor records a judgment against Adam.

In 2024 Baker is ready to make his final installment payment. His attorney orders a title commitment, and only then does the attorney discover the judgment recorded against Adam. However, because of the doctrine of equitable conversion, and because a memorandum of contract was recorded, Baker’s interest as equitable owner of the land is superior to the lien of the judgment. The title company should be able to insure Baker, endorsing over the judgment. The amount of the lien is irrelevant in this example.

Example Number Two

Same facts as above, but in this example the contract between Adam and Baker contains a “no equitable conversion” clause. An example of a “no equitable conversion” clause is:

No right, title, or interest, legal or equitable, in the premises, or any part thereof, shall vest in Purchaser until the delivery of the deed aforesaid by Seller, or until the full payment of the purchase price at the times and in the manner herein provided.

Baker has been making installment payments towards the purchase price, but in this example he is not the equitable owner of the land. His legal status is more like a tenant with an option to purchase the real estate. Because Baker has no interest in the land, the judgment against Adam is a lien on the land that is prior to Baker’s contract interest.

Example Three

Adam owns lot 1. In 2019 he sells lot 1 to Buyer #1 pursuant to a five-year installment contract. Adam records a memorandum of contract against the property. The contract contains a “no equitable conversion” clause.

Buyer #1 makes three monthly installment payments but then stops making payments. A few months later, in 2020, a judgment creditor records a judgment against Buyer #1. Buyer #1 remains in possession of the land without making any further installment payments for a few more months, but then over the course of one weekend Buyer #1 moves out of the property without telling Adam.

Adam contacts his attorney, who begins contract forfeiture proceedings against Buyer #1. Adam lists the property for sale, and eventually a new buyer is found—Buyer #2. Adam’s attorney orders a title insurance commitment, and at that time Adam and his attorney discover the judgment recorded against Buyer #1.

There are two issues in this example—one, the contract interest of Buyer #1, and two, the judgment recorded against Buyer #1.

In this example, Buyer #1 has little equity in the land—he made only three installment payments, and he later abandoned the property. Even though Buyer #1 never executed a deed or release of contract back to Adam, the chances seem great that Buyer #1 will never come back and assert that he has an equitable interest in the land—not because of equitable conversion, but because of the meager installment payments he made toward the purchase price. Note that this is not a legal argument, it is just a reasonable and common sense conclusion based on a particular set of facts.

But as for the legal reasoning, consider these two additional arguments:

Because the contract contained a “no equitable conversion” clause, Buyer #1 never became the equitable owner of the land. His interest in the land was more like a tenant with an option to buy. Because Buyer #1 never had an interest in the land, there was no interest in the land to which the judgment could attach. The title company should be able to waive the judgment.

Second, assume that the contract did not contain a “no equitable conversion” clause. Buyer #1did not pay much money towards the installment contract. Assume that what money Buyer #1 did pay towards the contract was offset by Adam’s expenses, such as his legal fees. Therefore, these circumstances suggest that Buyer #1 had no equity (i.e., money) in the land to which the judgment could attach.

Again, consider what the court said in Vereyken v. Annie’s Place, Inc., 964 F.2d 593 (Mich., 1991). In Vereyken the court stated that “although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee’s equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached.” 964 F.2d at 594-95.

Contract Forfeiture: A Summary

When insuring title after the forfeiture of a contract, here are the two key issues that the title examiner must consider:

• One, how much money has the contract purchaser paid towards the contract?

• Two, where is the contract purchaser? Is the purchaser still in possession of the property, or has the purchaser moved out of the property?

If the examiner has a situation where the purchaser has moved out of the property, but the purchaser has paid some money on the contract, but not a lot of money (e.g., 5% of the contract price or less), then the examiner might be able to insure title after the forfeiture without requiring the seller to go to court. Instead, the examiner could ask for an unsecured title indemnity (also known as a personal undertaking) to cover defense costs in the event the purchaser files a cause of action. Before considering this option, the examiner must feel confident that the contract seller will prevail in any subsequent cause of action brought by the contract purchaser.

If the contract purchaser has paid a lot of money towards the contract, it might be advisable for the examiner to instruct the seller to foreclose the contract rather than forfeit it. By foreclosing the contract, all of the buyer's rights (not just the possessory ones) are before the court and can be adjudicated. Foreclosure has an added benefit; the seller can avoid a possible subsequent title company requirement of going to court to quiet title to the land. Also, foreclosure might be the best remedy in the event the title examiner has to face a possible third issue: what if the contract purchaser not only has some equity in the land, but has some post-contract judgments entered against him as well?

If possible, the contract seller should always consider obtaining a post-forfeiture deed from the contract purchaser, even if the seller has to throw additional money at the purchaser. If the seller essentially bribes the purchaser with “moving money” in exchange for a deed, the seller effectively cures both possessory problems and possible “buyer’s equitable title” concerns without the risk of later possibly having to defend against a court case brought by the contract purchaser wherein the purchaser asserts some type of equitable interest in the land.

Conclusion

Public Act 100-416 (SB 885), effective January 1, 2018, created the Installment Sales Contract Act, codified at 765 ILCS 67/1 et seq. Perhaps the Illinois legislature should consider some legislative amendments to other statutes.

For example, perhaps the stay provisions of section 9-110 of the Forcible Entry and Detainer Act (735 ILCS 5/9-110) should be reviewed and amended. Is 180 days (or even sixty days) too long a time for a forfeited contract purchaser to remain in possession of the land? If the legislature is unwilling to shorten these time periods, then perhaps this Act should be amended to allow for the appointment of a receiver in certain instances. If a contract seller chooses to foreclose an installment contract, he can seek the appointment of a receiver pursuant to section 15-1704 of the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1704). But there is no similar statutory remedy available to the contract seller who chooses forfeiture instead of foreclosure. The appointment of a receiver (if not to be in actual possession of the property, but at least to have “full power and authority to operate, manage and conserve” the property, might be beneficial to the owner of land who is forced to wait out the statutorily required 180 days.

Bibliography

Peter A. Hess, Forfeiture of Installment Contracts in Illinois (Chicago: Chicago Title Insurance Company, 1981) (Note: these materials originally appeared in an edition of Real Estate Litigation, published by the Illinois Institute for Continuing Legal Education.)

Michael F. Jones, “Drafting the Installment Contract,” Chicago Bar Record (September-October 1980), pp. 97-101.

Robert Kratovil, “Forfeiture of Installment Contracts in Illinois,” 53 Illinois Bar Journal, no. 3 (November 1964), pp. 188-197.

Michael J. Rooney, “Installment Contracts: The Illinois Perspective,” Real Property 26, no. 1 (October 1980), pp. 1-7.

Bankruptcy

General

====Effect of BK Discharge==== -

Open case with Discharge:

once the debtor is discharged, equitable title to the real estate is “re-vested” in the debtor absent any adversarial proceeding.

Treatise

BANKRUPTCY

By

Richard F. Bales

Introduction

How Bankruptcy Works

There is a meeting with the creditors. A bankruptcy trustee is appointed. The debtor’s assets are liquidated and distributed to the creditors in order of priority, as defined in the Bankruptcy Code. (11 U.S.C. § 101 et seq.). Secured creditors have priority over unsecured creditors.

• A secured creditor is a creditor that has property pledged as security for the debt.

• An unsecured creditor has no security pledged as collateral for the debt, just the promise to repay the debt.

Once the assets are liquidated and distributed, individual debtors receive an order of discharge.

A bankruptcy timeline might look like this:

• The automatic stay is imposed as to actions against the debtor; • The debtor’s assets are collected; • Creditors must file claims or forever be barred from enforcing a claim; • Claims are allowed or disallowed as they are filed; • Preferences and fraudulent transfers, if any, are adjudicated; • Creditors receive pro rata distributions of assets; these creditors are thereafter barred by the debtor’s discharge from bankruptcy from taking any further action against the debtor.

Key Concepts in Bankruptcy

There are several key concepts that underlie virtually every type of bankruptcy case.

The Automatic Stay (11 U.S.C § 362)

The automatic stay is imposed upon actions against the debtor and the property of the debtor once a bankruptcy petition has been filed. The automatic stay gives the debtor “breathing room”—that is, the stay gives the debtor protection against the collection efforts of his creditors.

Any action, such as a mortgage foreclosure, made while this stay is in effect is void. In addition, the stay also helps for an orderly distribution of the assets of the debtor. That is, without the stay, there would be a race to the courthouse, everybody trying to be first to file his lawsuit. With the automatic stay, creditors cannot file lawsuits, enforce liens, or foreclose a lien on the debtor’s property.

The automatic stay also tolls, or temporarily halts, the statutes of limitation for the enforcement of liens against real estate.

The automatic stay is discussed in greater detail in these materials.

Limitations on the Debtor

In addition, limitations are placed on the debtor during the bankruptcy. For example, the Company will almost always (if not always) require bankruptcy court approval before insuring a conveyance, lease, or mortgage by the debtor or by a bankruptcy trustee.

Payment of the Debtor’s Obligations

The debtor’s obligations are repaid either through the liquidation of the debtor’s assets or through a court-approved reorganization or repayment plan.

The Discharge from Bankruptcy

The discharge operates as an injunction, preventing any attempts to enforce certain debts against the debtor.

Note, though, that the discharge only discharges certain types of debts. Mortgages, judgments, and other secured liens will remain as liens against the land, even after a bankruptcy discharge. (See below.)

The Bankruptcy Chapters

There are three basic types of bankruptcies that the title examiner will normally encounter:

Chapter 7 Bankruptcy Proceedings (Liquidation) (11 U.S.C. § 701 et seq.)

A chapter 7 bankruptcy occurs when a debtor’s non-exempt property is assembled by a trustee who is appointed by the court. This property is then sold and the proceeds are distributed equitable to the debtor’s creditors. The proceedings will serve to discharge the debtor’s personal obligation to pay many but not all debts.

Chapter 7 may be either voluntary or involuntary.

• Voluntary chapter 7 bankruptcy—the debtor requests a discharge from his debts.

• Involuntary chapter 7 bankruptcy—the creditors of the debtor are forcing the debtor into bankruptcy. The creditor wants to prevent the debtor from disposing of his assets; they also want a fair distribution of his property.

Once the petition is filed, non-exempt assets are surrendered to the bankruptcy trustee. The bankruptcy court thus gets jurisdiction over all of the debtor’s assets, both real and personal.

Chapter 11 Bankruptcy (Reorganization) (11 U.S.C. § 1101 et seq.)

Although individuals (except stock or commodity brokers) may file a Chapter 11 bankruptcy petition, the debtor is usually a corporation or a partnership.

The main goal of a Chapter 11 bankruptcy is to restructure the debtor so that it may continue to operate. It is to give the debtor “breathing room” so that the debtor may reorganize his business and continue to operate. Compare this with a Chapter 7 bankruptcy, where the goal is simply to liquidate all debts.

A Chapter 11 bankruptcy may be either voluntary or involuntary.

In a Chapter 11 bankruptcy, a plan of reorganization is drafted and submitted to the court. There is much latitude in the plan. The plan may provide for the repayment of claims in full or for less than the amount due. The plan may allow for the sale of property, either subject to or free of liens. A majority of creditors must approve the plan.

11 U.S.C. § 1129 concerns the confirmation of the plan. This section of the Bankruptcy Code sets out certain requirement of the plan. The plan must meet these requirements. If the plan meets these requirements, but each class of creditor does not approve the plan, then the court may force a “cramdown” of the plan if it is fair and equitable. (That is, the court may force the creditors to approve the plan.)

This plan may include the sale of mortgage of real estate. Once the plan has been confirmed by the court, jurisdiction over any real estate that falls outside the plan revests in the debtor, and the debtor is free to deal with that property as if the bankruptcy had not existed—assuming that this real estate was listed in the debtor’s schedule of assets.

After confirmation, dischargeable debts are discharged.

Sometimes the debtor retains control of the business throughout the duration of the plan. Such a debtor is called a debtor in possession.

Chapter 13 Bankruptcy (Adjustment of Debts; Payment Plan) (11 U.S.C. § 1301 et seq.)

Individuals with a regular income can seek relief by debt adjustment over a three-to-five year period rather than by liquidation. This allows a debtor who makes payments under a Chapter 13 plan to keep non-exempt assets that would otherwise be lost in a Chapter 7 proceeding. A trustee is usually appointed.

A Chapter 13 bankruptcy is only for individuals (not corporations or partnerships) who voluntarily file petitions. Chapter 13 is designed to allow a debtor to retain all or most of his property and to use future income to pay creditors at least as much, and, it is hoped, more, than they would have received in a Chapter 7 bankruptcy. Thus, this plan is for debtors with a regular income.

In Chapter 13, the debtor’s income is paid directly to the trustee. The plan usually lasts for 36 months. The court, though, may extend the length of the plan to five years. The bankruptcy concludes when the trustee has been discharged and the case closed or dismissed.

But what if the plan is not completed? In that event the examiner must be cautious. For example, the examiner would not be able to rely on an order that “avoids” or removes, a lien, if that order is predicated on the completion of the plan.

Exempt Property (11 U.S.C. § 522)

Exempt property is defined in Section 522 of the Bankruptcy Code. Exempt property is property that is not part of the bankruptcy estate. Examples of exempt property include a sole debtor’s interest in real estate as a joint tenant or tenant by the entirety. See 11 U.S.C. 522(b)(3)(B).

The Bankruptcy Schedules

The following are the schedules that are most likely to be reviewed by the Company’s underwriters:

Schedule A—List of real property Schedule C—List of property claimed as being exempt Schedule D—List of creditors holding security interests Schedule E/F—List of creditors who have unsecured claims Schedule G—List of executory contracts and unexpired leases

Debts That Are Not Discharged in Bankruptcy

Note that some debts are not discharged in bankruptcy. For example, taxes, alimony, child support, educational loans, fines, and government liens, such as state or federal income tax liens. See Section 523 of the Bankruptcy Code, or 11 U.S.C. § 523.

Example: A title commitment shows a state revenue lien against the seller. The seller argues that the lien was discharged in bankruptcy. This is not the case. State of Illinois revenue liens are not discharged in bankruptcy.

Also, note that a debt that has not been scheduled—that is, a debt that is not listed as a liability on the debtor’s bankruptcy Schedule E/F—is not discharged.

Debts that are the subject of a reaffirmation agreement—that is an agreement whereby the debtor agrees, after the filing of the bankruptcy petition, to pay the debt—are not discharged.

In addition, a debt that is incurred after the filing of the bankruptcy petition is not discharged.

As will be discussed later, judgments against the land may not be discharged.

Corporations, limited liability companies, and partnerships do not obtain a discharge in a Chapter 7 case. Instead, they merely go out of business.

A Chapter 7 bankruptcy is concluded when the court enters an order discharging the trustee and closing or dismissing the case.

Rule of Title Practice

The examiner should not assume that he can waive a lien from the title commitment because the customer brings in a bankruptcy discharge. The examiner should make sure that it is a type of lien that can be discharged. The examiner must also make sure that the lien is scheduled—that is, that the lien is listed on the bankruptcy schedule of debts.

Examining Practice—Pending Bankruptcies

How can the title examiner become aware of a bankruptcy?

• The customer may tell the examiner.

• If the land has been scheduled as an asset of the debtor’s estate, Section 549(c) of the Bankruptcy Code, or 11 U.S.C. § 549(c), provides that a notice of bankruptcy should be recorded in the county in which the subject land is located. This notice is similar to a lis pendens. (It appears, however, that many trustees do not record such a notice.)

• Many times the bankruptcy trustee will file a notice with the tax collector. This notice will be posted in the tax records. The filing of such a notice prevents the real estate taxes from being sold at a tax sale.

• It is possible that a name search may indicate the existence of a bankruptcy. This is why some title companies may search the names of the beneficiaries of a land trust, if they can be determined, when preparing a title commitment.

• A bankruptcy filing might be disclosed in another pending proceeding, such as a mortgage foreclosure case.

Examining Practices—Title Vesting

When the examiner determines that the owner of the land has filed for bankruptcy (any chapter), the examiner should show the title finding as follows:

John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

There are two reasons for showing the vesting this way:

• One, the vesting emphasizes the importance of the pending bankruptcy to both the customer and to other examiners.

• Two, the vesting serves as a reminder of the possibility that any conveyance or mortgage of the land by the debtor should not be insured without the bankruptcy court’s approval. (See 11 U.S.C. § 541(a)(1), which is discussed below.)

Additionally, an exception to the pending bankruptcy should be shown in Schedule B of the title commitment and to the rights of the trustee. For example:

Any matters arising out of or by virtue of that certain bankruptcy case:

Name of Debtor: Date of Filing: U. S. District Court: State: Case No.: Chapter:

And the rights of the trustee in and to the land arising pursuant to said bankruptcy case.

Contrary to popular belief, title to real estate does not automatically vest in the bankruptcy trustee once the bankruptcy petition has been filed. This is the case, even in Chapter 7 bankruptcy. The Bankruptcy Code makes it clear that the duties of the trustee are to collect and administer the property, not take title to property. In other words, the bankruptcy trustee simply has jurisdiction to administer the real estate of the debtor. In this regard, see 11 U.S.C. § 704(a)(1):

The trustee shall—collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.

See 11 U.S.C. § 541(a)(1). All non-exempt property, as defined in the Bankruptcy Code, belongs to the bankruptcy estate upon the filing of the bankruptcy. The bankruptcy case trustee is the trustee over this estate. One bankruptcy commentator has compared a bankruptcy estate to a decedent’s estate. This is a very appropriate comparison. That is, the executor or administrator of a decedent’s estate has the power to administer the assets of the decedent.

Pursuant to the Probate Act, the executor or administrator has the power to sell the land of a decedent. See 755 ILCS 5/20-4 and 755 ILCS 5/28-8(a). However, the executor or administrator do not own the property; they have only the right to administer the property.

Similarly, see 11 U.S.C. § 363(b)(1). The bankruptcy trustee also has the right to administer the property. Although the bankruptcy trustee does not own the debtor’s land, the trustee still has the right to sell the land:

See 11 U.S.C. § 363(b)(1): The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. . . .

Note that the trustee cannot sell the land unless there is first notice and a hearing. Thus, the rights of a bankruptcy trustee are more akin to the rights of the executor or administrator of a supervised estate and not an independent administration estate.

See also Bankruptcy Rule 6004(a): “Notice of a proposed use, sale, or lease of property, other than cash collateral, not in the ordinary course of business, shall be given pursuant to. . . .”

What Constitutes Property of the Estate of the Debtor?

See 11 U.S.C. § 541(a)(1). The property of the estate of the debtor is “all legal or equitable interests of the debtor in property as of the commencement of the case.” The beneficial interest of an Illinois land trust has been held to be the property of the estate of the debtor. (11 U.S.C. § 541(a)(1) does include some exceptions.)

Property recovered by the bankruptcy trustee or debtor-in-possession because of a preference or fraudulent transfer (see below) also becomes the property of the estate.

If a debtor acquires property within 180 days after filing the bankruptcy petition, this property becomes the property of the estate if it was obtained by bequest, devise, or inheritance, as a result of a property settlement or divorce decree, or as a beneficiary of a life insurance policy or death benefit plan. See 11 U.S.C. § 541(a)(5).

Example: On June 1 John Smith files for bankruptcy. A month later his father dies and John inherits a fortune. This money that John inherited is an asset that is under the jurisdiction of the bankruptcy court and may be used to pay John’s creditors.

The Automatic Stay (11 U.S.C § 362)

When a debtor files bankruptcy, the debtor receives the protection of an automatic stay pursuant to 11 U.S.C. § 362(a)1), which stays “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor.” This is an automatic stay on the commencement or continuation of proceedings, such as mortgage foreclosures, against the debtor and his estate. The automatic stay remains in effect until the bankruptcy court disposes of the case or grants relief from the stay (i.e., “lifts” the stay). Actions taken in violation of the state are generally void.

Because of this automatic stay, the statute of limitations for the enforcement of liens are tolled, or temporarily halted, by the bankruptcy. This means that bankruptcies must be taken into account when an examiner is asked to waive a lien because the lien is extinguished pursuant to the applicable statute of limitations.

When does the automatic stay terminate? See 11 U.S.C § 362(c):

• When the stay is lifted pursuant to court order.

• When the property ceases to be the property of the estate. This happens if the property is abandoned or is exempt.

• Upon the earliest of any of the following events: the closing of the bankruptcy case, the dismissal of the bankruptcy case, or at the time a discharge of bankruptcy is either granted or denied.

Example: On February 1, 2019, a judgment is entered against Owner. On June 1, 2020, Owner files for Chapter 13 bankruptcy. Owner is discharged from bankruptcy exactly two years later, on June 1, 2022. The automatic stay was never lifted. The stay was, however, terminated when the case was dismissed.

The statute of limitations for a judgment is seven years from the entry of the judgment. Because of the bankruptcy, the statute of limitations has been tolled for two years—that is, the duration of the bankruptcy. Therefore, the judgment cannot be waived on the basis of the statute of limitations until February 1, 2028.

The Effect of the Automatic Stay on Other Proceedings

The effect that a bankruptcy has on other proceedings depends on when the bankruptcy was filed.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed before a mortgage foreclosure is filed.

In this event, the examiner should raise the following exception:

An order should be entered in the bankruptcy proceeding noted herein that authorizes the filing of the foreclosure proceeding.

This order will lift the automatic stay and allow the proceeding to go forward.

When will the court lift the automatic stay and allow the proceeding go forward? See 11 U.S.C. § 362(d):

• The court will lift the stay for cause;

• The court will lift the stay if the court determines that the debtor does not have any equity in the property and the property is not necessary for the reorganization of the debtor.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed after the mortgage foreclosure complaint is filed but before the expiration of the mortgage foreclosure redemption period.

Remember the eight basic elements of the foreclosure process under the Illinois Mortgage Foreclosure Law:

The complaint is filed; Notice is served on all parties; The reinstatement period begins, runs, and ends; The judgment of foreclosure is entered; The redemption period begins, runs, and ends; The judicial sale is held; The confirmation hearing is held; The judicial deed is entered.

The automatic stay enjoins, or prevents, not only the commencement of actions against the debtor but also the continuation of any actions. This means that service of process against a debtor while the stay is in effect is void.

This means that if a mortgagor is in bankruptcy and the bankruptcy petition is filed after the foreclosure complaint is filed but prior to the expiration of the redemption period (see above), the examiner must ask that the bankruptcy stay be annulled, and not merely lifted, and that actions taken in violation of the stay be ratified.

In this event, the examiner should raise the following exception:

An order should be entered in the bankruptcy proceeding noted herein annulling the automatic stay and ratifying all actions taken in said foreclosure proceeding in violation of the stay.

Because the automatic stay tolls, or temporarily halts, the running of the redemption period, the examiner must make sure that any foreclosure sale took place after the redemption period expired, taking into consideration the period of time during which the redemption period was tolled by the stay.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed after the expiration of the redemption period but prior to the recordation of the sheriff’s deed.

This should not be a problem, because a bankruptcy that is filed after the mortgagor’s redemption period has expired will not extend or revive the redemption period.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed after the recordation of the sheriff’s deed.

This example raises the issue—can a mortgage foreclosure sale be set aside by a bankruptcy court as a fraudulent transfer? See 11 U.S.C. § 548; see also 740 ILCS 160/1 et seq.

The U.S. Supreme Court decided this issue in BFP v. Resolution Trust Corporation, 511 U.S. 531, 128 L. Ed. 2 556, 114 S. Ct. 1757 (1994). In this case the U.S. Supreme Court ruled that assuming there is a mortgage foreclosure sale that was conducted consistently with the requirements of the state’s foreclosure law, then, absent irregularities in a mortgage foreclosure proceeding or a sales price so low that it would “shock the conscience of the court,” a subsequent bankruptcy filed by the mortgagor may be safely ignored.

Issues Concerning the Automatic Stay

Example: John files for bankruptcy on January 2nd. An Illinois revenue lien against John is recorded on March 2nd. He is discharged from bankruptcy on June 2nd. During all this time, the automatic stay is never lifted. The attorney comes in and tells the examiner to waive the lien because it was recorded in violation of the automatic stay. The attorney points to 11 U.S.C. § 362(a)(4), which states that the filing of a bankruptcy petition operates as a stay of “any act to create, perfect, or enforce any lien against property of the estate.” Thus, it does appear that even the recording (i.e., the “creating”) of the lien was in violation of the stay.

Should the examiner waive the lien? The coverage of the 2006 owner’s and loan title policies includes the cost of defense. (See Condition 5 of the 2006 ALTA owners title policy.) The examiner should not waive the lien. Instead, the examiner should ask that the bankruptcy court enter a final and non-appealable order, holding that the lien is void because of the violation of the automatic stay. (The examiner should also consider asking for evidence of service on the State of Illinois of the motion for the order.)

Bankruptcy Rule 4001(a)(3)

Bankruptcy Rule 4001(a)(3) provides as follows:

An order granting a motion for relief from an automatic stay made in accordance with Rule 4001(a)(1) is stayed until the expiration of 14 days after the entry of the order, unless the court orders otherwise.

Entry of the order means “entry on the docket.” Thus, if an examiner is given an order that lifts the automatic stay, the examiner should treat the stay as being lifted only after such order is entered on the docket, fourteen days or such lesser or greater time as the court has specifically directed has expired, and no appeal from the order has been filed.

Discharge of the Debt

• In Chapter 7 cases, a debt is discharged when the individual is discharged from bankruptcy. See 11 U.S.C. § 727; 11 U.S.C. § 524.

• In Chapter 11 cases, a debt is discharged occurs when the plan is confirmed, unless the plan or the order confirming the plan say otherwise. See 11 U.S.C. § 1141.

• In Chapter 13 cases, a debt is not discharged until after the debtor pays all debts as required by the plan. See 11 U.S.C. § 1328.

Judgments and Bankruptcy

Judgments against the Seller

Example:

2014—Adam buys Blackacre. 2018—A judgment against Adam is recorded. 2019—Adam files bankruptcy, creditor is scheduled, debt is discharged. 2020—Adam decides to sell Blackacre.

A title examiner performs a title search and finds the judgment. The examiner shows the judgment on the commitment. Adam’s attorney comes in to meet with the examiner. The attorney claims that the judgment should be waived because it was “taken care of” in the bankruptcy.

Question: Is the attorney correct? Should the examiner waive the judgment?

Answer: No, the attorney is not correct. All that the bankruptcy did was eliminate the judgment debtor’s personal liability; it did not eliminate the lien on the land. Illinois law is clear that a lien on real estate survives the bankruptcy discharge unless a specific bankruptcy court order declares the lien void.

Generally speaking, pre-bankruptcy judgments against an owner of land cannot be waived after the owner is discharged from bankruptcy unless:

• The land is sold free and clear of all liens;

• There is a specific court order, issued upon motion and notice to the creditor, removing the lien from the property. This order is usually called an “order avoiding the judicial lien.” See 11 U.S.C. 522(f).

Rule of Title Practice

Unless there is a specific bankruptcy court order voiding an identified lien, then a lien on the land, perfected prior to the filing of a bankruptcy proceeding, is not affected by the debtor’s discharge from bankruptcy.

The examiner should tell the attorney that the lien can be waived when the bankruptcy court issues an order avoiding the judicial lien.

That is, the attorney should file a motion for an order avoiding the judicial lien with the bankruptcy court, asking that the court remove the lien from the home. If the bankruptcy court grants the motion and issues the order, the judgment creditor’s lien will be extinguished. (There should not be a problem with the bankruptcy court granting the motion and issuing the order if the judgment debt is scheduled in the bankruptcy petition.)

The examiner must remember that he cannot immediately waive a title exception pursuant to this “order avoiding the judicial lien.” Bankruptcy Rule 8002 provides for an appeal period of fourteen days from the date of docketing—the date of the entry of the order. Note that the date of the entry of the order is not the same as the date of the order. The examiner must first wait out this appeal period before waiving the lien.

Alternatively, the bankruptcy court could order the property sold free and clear of all liens.

But on the other hand: What if the seller/judgment creditor has no equity in the land; the seller is getting no money back? Then one could argue that the order “avoiding the judicial lien” is not necessary; there is nothing for the judgment creditor to attach.

That is true. But on the other hand, the judgment creditor could still enforce its lien against the new equity in the land, now that the new buyer owns it. However, most creditors give up, once the bankruptcy is filed.

But having said all this, with underwriter approval, the examiner may nonetheless consider waiving the lien in the event certain factors are present. Consider the following:

• The judgment creditor must be named in the bankruptcy proceeding;

• The amount of the judgment must be relatively small, perhaps $5,000 or less;

• The judgment is fairly old;

• The nature of the lien should be considered. (For example, it is usually safe to waive a small judgment filed by a credit card company. It is usually not safe to waive even a small judgment in favor of an attorney.) Note though, that if the judgment has been sold or assigned to a third party collection service, the examiner should not waive the judgment.

The following statute and court cases support the Company’s position regarding bankruptcy and judgments: 11 U.S.C. § 522(f)(1), 11 U.S.C. § 522(f)(2)(a), and 11 U.S.C. § 524(a); Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L.Ed.2d 66 (1991); First National Bank in Toledo v. Adkins, 272 Ill.App.3d 111 (4th Dist. 1995).

Example: But now change the facts slightly:

2015—A judgment creditor records a judgment against Adam. 2017—Adam files bankruptcy, creditor is scheduled; Adam is discharged. 2018—Adam buys Blackacre. 2019—Adam signs a contract to sell Blackacre. 2019—A title commitment is issued that shows the judgment.

The examiner examines title to Blackacre. The examiner sees the judgment and shows it on the title commitment. Adam’s attorney makes an appointment to see the title examiner; the attorney believes that the examiner should waive the judgment because liability for the judgment was discharged in bankruptcy.

Question: With these set of facts, can the examiner waive the judgment?

Answer: Assuming that the judgment creditor was scheduled in the bankruptcy proceeding, the examiner can waive the judgment. Why? In this set of facts Adam acquired Blackacre after the judgment and the bankruptcy. Because Adam acquired Blackacre after the judgment and after the bankruptcy, the judgment never became a lien on the land.

Example: And now change the facts again.

January, 2019—Baker buys a home. October, 2019—A judgment is entered against Baker. November, 2019—Baker files for bankruptcy December, 2019—A memorandum of judgment is recorded against Baker

Question: What is the issue in this example?

Answer: Here, unlike in the first example, the lien on the land was not perfected prior to the filing of the bankruptcy petition.

In this example, the recording of the memorandum of judgment would be in violation of the automatic stay of the bankruptcy.

Assuming that the debtor (Baker) is discharged from bankruptcy, the personal liability of the judgment has been eliminated. There is no lien on the land.

Therefore, can the examiner waive the judgment? What is the amount of the judgment? If it is a large amount, the judgment creditor may still attempt to sue to enforce the judgment, and the Company would be forced to pay defense costs. The examiner should consider this issue when underwriting the waiving of a judgment in these circumstances. For example, perhaps the Company might want a personal undertaking from a well-heeled indemnitor for defense costs. Or, as noted earlier, the examiner could ask that the bankruptcy court enter a final and non-appealable order, holding that the lien is void because of the violation of the automatic stay.

Reminder: A debtor’s bankruptcy tolls, or temporarily suspends, the running of the statute of limitations for a judgment.

Example: A judgment is entered against Charles in 2019. Six months later Charles files for bankruptcy protection against creditors. When he files bankruptcy an automatic stay comes into effect. This stay protects Charles from suits filed by creditors or creditors otherwise attempting to enforce their liens against Charles. A month after Charles files bankruptcy, the automatic stay is lifted. The statute of limitations for the judgment is seven years plus one month.

Other Options Other Than an Order Avoiding the Lien

A judgment is a lien on the debtor's property for seven years from the date the judgment is rendered (not from the date any memorandum of judgment is recorded.  See 735 ILCS 5/12-101. If the statute of limitations has almost expired, the examiner may want to consider waiving the judgment.  The examiner could consider a personal undertaking or a title indemnity.

If the debtor has filed a Chapter 13 bankruptcy, consider the following steps. If all of these steps have taken place, it would be a fairly risk-free proposition to waive the judgment:

• The creditor was scheduled in the Chapter 13 petition;

• The creditor was given notice of the hearing to confirm the debtor’s plan of reorganization;

• The plan, as confirmed, makes provisions for payment of the debt in full (if treated as secured) or in part (if treated as unsecured or partially secured/unsecured);

• All payments due under the plan have been made.

If the judgment is fairly old and fairly insubstantial ($5,000 or less), and the examiner is issuing only a loan policy, the examiner could consider a personal undertaking and endorsing over the judgment. (However, if there is an assignment of a judgment to a third party debt collector, the examiner should first talk to an underwriter before agreeing to endorse over the judgment, even with a personal undertaking.)

Judgment against the Buyer

If the judgment is against the buyer, not the seller, there is no issue at all. The personal obligation was discharged in bankruptcy. The buyer does not yet own the land, and thus there is no land to which the lien could attach.

Example

2013—Adam buys Blackacre . 2016—A judgment is entered against Baker. 2017—Baker files bankruptcy; the judgment creditor is scheduled. 2018—Baker is discharged from bankruptcy. 2019—Baker now wants to buy Blackacre from Adam, the current owner of Blackacre. There is no problem. The judgment cannot attach to Blackacre; the lien of the judgment has already been extinguished. That is, the lien was extinguished before the proposed sale of Blackacre. The Company can issue a commitment, showing Baker as the proposed insured. The examiner should not show the judgment in Schedule B of the commitment.

Summary

In other words: A judgment against an owner of land may be a problem, even though the owner has been discharged from bankruptcy. On the other hand, a judgment against a buyer may not be a problem if the buyer files for bankruptcy, the judgment creditor is scheduled, and the buyer is discharged from bankruptcy, all before buyer signs a contract to buy the land.

Selling Real Estate through Bankruptcy—Introduction

The sale of real estate through bankruptcy can arise in any bankruptcy case. For example:

• A bankruptcy trustee could sell a debtor’s property (Chapter 7) to liquidate the estate for the benefit of creditors.

• A debtor could sell his own property. For example, a debtor in a Chapter 7 case could sell his house as part of a short sale.

• A debtor might sell his house in a Chapter 13 case as part of a job transfer.

• In Chapter 11, the debtor may function as the trustee of his own estate (called a “debtor in possession” under the supervision of the trustee, sometimes called the “U.S. Trustee”) to fund his plan to reorganize.

The Sale of Real Estate—The Court Order

The bankruptcy trustee can sell the property, or the debtor can sell the property. In either case, and regardless of what bankruptcy chapter the debtor has filed, the examiner should have a court order authorizing the sale of the land. The judge (not the trustee) is the authority in this matter. It is possible that the court could authorize the sale of a debtor’s property despite the trustee’s objection to the sale. (For example, a trustee might object in a Chapter 7 sale, thinking that the sales price was too low and that the property had value to creditors.)

Note that in a Chapter 13 sale, the trustee would probably require that all non-exempt proceeds be turned over to him.

In cases where the trustee is selling the real estate, the court order is necessary for two practical reasons:

The debtor may claim that the trustee does not have the right to sell the property. For example, the debtor may be a married individual who has filed bankruptcy alone, and the trustee wants to sell the house owned in tenancy by the entirety. Does the tenancy by the entirety protect the home from being sold by the trustee? A court order would solve this potential problem.

The only money that the creditors may get from a Chapter 7 liquidation sale may come from the real estate, and so the creditors have an interest in getting the maximum value for the land. The Bankruptcy Code requires both notice and a hearing on any proposed sale to protect both the debtor’s rights and the creditors’ rights. The Bankruptcy Code states that the trustee may sell the land only after notice and a hearing, and this sale should then be had pursuant to a court order. The court order, issued after notice and a hearing, protects the rights of both the debtor and the creditor.

Most court orders do not specifically state that the automatic stay is lifted with respect to the land being sold. However, if the order states that the sale is approved and that the debtor or trustee is authorized to convey the property, the stay falls with that court approval.

However, having said all of this: there may be situations when the examiner will be asked to approve a “debtor in bankruptcy” transaction without a court order. For example, perhaps the debtor has filed a Chapter 13 bankruptcy, the debtor is selling his home, the trustee has approved the sale, all mortgages or other liens will be paid off at closing, the trustee has been paid all his fees, and all sale proceeds are being turned over to the trustee for payment to creditors.

Any request to insure such a transaction should be approved by an underwriter.

Selling Real Estate through Bankruptcy—the Types of Sales

Section 363 of the Bankruptcy Code (11 U.S.C. § 363) governs the procedure for sales through bankruptcy. This section is augmented by various Bankruptcy Rules (BR).

The various types of sales discussed here are:

• Sales in the ordinary course of business

• Sales not in the ordinary course of business

There are two sub-types of sales not in the ordinary course of business:

• Sales subject to liens

• Sales free and clear of liens

Also, sales not in the ordinary course of business can be:

• Public sale (auction)

• Private sale (contract)

Sales in the Ordinary Course of Business—See 11 U.S.C. § 363(c)(1)

Such sales will rarely be encountered by the title examiner. These sales usually occur when, for example, the debtor is a developer who is selling off lots.

Title Clearance for a Sale in the Ordinary Course of Business

The examiner should make sure that the sale is indeed “within the ordinary course of business.”

The examiner should get a court order (with evidence of proper notice, as set forth below.) This order must state that the sale is in the ordinary course of business.

Sales Not in the Ordinary Course of Business—See 11 U.S.C. § 363(b)

This is the type of sale the examiner will usually encounter. The purpose of this sale is to bring in cash to pay off the debts of the creditor.

There are two types of sales not in the ordinary course of business:

• Sales subject to liens

• Sales free and clear of liens

Sale Subject to Liens—See 11 U.S.C. § 363(b)

A sale can be had subject to liens pursuant to 11 U.S.C. § 363(b). A sale subject to liens is merely a sale that is not a sale free and clear of liens. (A sale free and clear of liens is described in Section 363(f) of the Bankruptcy Code.)

A sale subject to liens usually occurs when:

• There are no liens affecting title (usually very seldom);

• The liens will be paid off at closing, pursuant to a bankruptcy court order; or;

• The terms of the sales contract (or auction sale conditions) provide that the buyer is to take title subject to all liens.

Real property can be sold subject to liens after notice has gone out to all interested parties and there are no objections or requests for a hearing. Generally, no order is necessary unless there are objections.

Sale Free and Clear of Liens—See 11 U.S.C. § 363(f)

Note: If the sale is a sale free and clear of “interests”; see 11 U.S.C. § 363(f).

Note that while sales under Section 363(f) are usually referred to as sales “free and clear of liens,” the statute uses the word “interest” and not “lien.” This, then, is a much broader term.

Consider the following title commitment exception:

In the event title is to be conveyed by the trustee in bankruptcy pursuant to an order for sale free and clear of liens pursuant to Section 363 (f) of the Bankruptcy Code we should be provided with: a. Copy of the motion for sale free and clear; b. Proof of service of motion on any parties whose interests are being affected by the sale; c. Copy order entered for sale free and clear; d. Copy of bankruptcy court docket sheet; e. Schedule of creditors. Upon review of the above requested documents this commitment will be subject to such further exceptions as are then deemed necessary. Note: Provisions of Bankruptcy Rule 8002 and Bankruptcy Rule 6004(h) prevent any sale from being insured until the 14 days from the entry of the order for sale on the docket.

Why should one have such a sale? This type of sale allows the bankruptcy trustee or the debtor in possession to sell the property as quickly as possible before it declines in value. Otherwise, secured creditors would be haggling over how much money they should get and what is the priority of their claims.

Section 363(f) of the Bankruptcy Code provides as follows: The trustee may sell property free and clear of any interest in such property of an entity other than the estate, only if:

• Applicable non-bankruptcy law permits sale of such property free and clear of such interest;

• Such entity consents;

• Such interest is a lien and the price at which such property is sold is greater than the aggregate value of all liens on such property;

• Such interest is in bona fide dispute; or

• Such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Although the section does not mandate it, most orders approving sales free and clear of liens provide that the liens attach to the proceeds of the sale. The lien holders can then argue later about who gets what.

There are three main areas of concern to a title examiner when asked to insure title through a bankruptcy:

• Has a proper notice of sale been delivered to the parties entitled to notice?

• Does the order that authorizes the sale contain sufficient information to allow the title company to insure the transaction?

• Is the purchaser protected from a reversal of the order upon any appeal?

The Notice of Sale

Notice of the sale must be given to the debtor, all co-owners, all lienholders, and all interested parties.

Bankruptcy Rule 2002(a) requires that a twenty-one-day notice (unless the court shortens it) be given by mail to the above parties. This is a twenty-one-day notice for the purpose of giving the creditors a chance to file any objections.

Bankruptcy Rule 2002(c)(1) states that the notice “shall include the time and place of any public sale, the terms and conditions of any private sale and the time for filing objections.”

Bankruptcy Rule 2002(c)(1) that the notice is sufficient if it “generally describes” the property. Therefore, although a street address may be sufficient, a legal description is preferred. A street address might not be sufficient if one is dealing with a large commercial tract of land. Also, what if an easement is also being transferred? If so, an address might not be sufficient in that instance, either.

If the notice is to be free and clear of all liens, the notice must also include the following:

• A statement that the sale will be free and clear of all liens (See the notes to Bankruptcy Rule 6004 under the caption, “Notes of Advisory Committee on Rules—1987 Amendment, which are set forth in the footnote below) and

• A statement of the statutory basis for the authority to sell free and clear of all liens. (Again, see the notes to Bankruptcy Rule 6004, which are set forth in the footnote below).

This statement of the statutory basis for the authority to sell free and clear of all liens must be one of the following, which were noted above:

• Applicable non-bankruptcy law permits the sale of such property free and clear of such interest;

• Such entity consents;

• Such interest is a lien and the price at which such property is sold is greater than the aggregate value of all liens on such property;

• Such interest is in bona fide dispute; or

• Such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

The Hearing

There must be a hearing by the bankruptcy court on the motion to sell the real estate. This is the case regardless of whether it is a sale subject to liens or free and clear of liens.

The Order to Sell the Real Estate—Introduction

After the hearing, there will be a court order that authorizes the sale.

The Order to Sell the Real Estate—Private Sales

The order to sell the real estate should name the buyer. The order should indicate whether or not the sale is free and clear of liens.

If this is a sale free and clear of liens, the title examiner should decide beforehand what liens will be waived. For example, the examiner should probably not waive a building violation case.

The order should indicate to whom the proceeds of sale are to be paid. If the order is silent, then the closer should pay all the proceeds to the grantor in the deed--normally the bankruptcy trustee or the debtor in possession. Note that this could be a problem, as the seller’s attorney might want the title company to pay taxes, broker’s commission, attorney’s fees, etc.

Similarly, consider this problem when dealing with a sale free and clear of liens: What if there are not enough proceeds to pay all lienholders, but the attorney for the seller has promised the first mortgagee, for whose debt there are sufficient proceeds, that it will be paid in full?

Unless there is a provision in the order for this type of arrangement, there is no such authority to make such a payment.

How can the title examiner avoid these kinds of problems?

The order should specifically address the distribution of sales proceeds. While general language provides some guidance (e.g., “all necessary closing costs will be paid at closing”), it is preferable to identify the type of payment—for example, broker’s commission, attorney’s fees—even if the order cannot list an exact amount due.

In fact, exact amounts may tie the hands of the closer, as there are always last-minute adjustments to disbursements.

The Order to Sell the Real Estate—Public Sales

The procedures for public sales are essentially the same as for private sales. The main difference is that the examiner will want to see two orders:

• One order authorizing the auction and setting forth its terms;

• One order confirming the sale to the successful bidder.

Taxes

Section 363(f) of the Bankruptcy Code states that “[t]he trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate. . . .” This language suggests that a sale free and clear of liens may include a sale that is free and clear of tax sales and delinquent real estate taxes. Generally speaking, however, the Company is reluctant to rely on an order authorizing the sale free and clear of liens that includes such broad language. Any request to insure a bankruptcy sale free and clear of taxes must be referred to a senior underwriter. (The underwriter may require, for example, that the tax warrant books be appropriately marked so that the taxes do not go to tax sale after the closing and after the title policy is issued. There is precedent for such a request. See, e.g., 35 ILCS 200/21-100.)

Appeals

The right to appeal a bankruptcy order does not begin when the judge signs the order. The appeal period starts when the order is entered on the bankruptcy clerk’s docket.

Bankruptcy Rule 8002(a) provides for an appeal period of fourteen days from the date of docketing—the date of the entry of the order. Therefore, if the closing takes place after such fourteen day period, the examiner can delete any exception for the right to appeal.

But what about closings that take place within this fourteen day period?

The attorney for the purchaser will undoubtedly tell the closer about Section 363(m) of the Code, which provides in part:

The reversal or modification on appeal of an authorization . . . of a sale . . . does not affect the validity of a sale . . . to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such . . . sale . . . [was] stayed pending appeal.

This section does appear to protect the purchaser. However, if there were an appeal filed after closing, the Company would have to defend against the appeal. Furthermore, the court can grant a stay of the order approving the sale pursuant to Bankruptcy Rule 8005.

In the event the examiner is asked to underwrite a sale prior to the expiration of the 14-day appeal period, the examiner should consider the following:

• The examiner should obtain a personal undertaking signed by the purchaser.

• The examiner should ask for a statement from the attorney for the seller, indicating that he or she has received no notice of an appeal. This is especially useful if the examiner is closing in the latter half of the fourteen day appeal period.

• Is this a public sale or a private sale? If this is a public sale, were there other bidders? If there were other bidders, this could be a problem, as a disgruntled bidder could contest the closing. It is better to have a private sale, as there would be no possibility of a disgruntled bidder.

• The examiner should also seek senior underwriter approval. In addition, see the following section on “Problems with the Appeal.”

Example: In one case, the Company was asked to close the sale of a single family home after only four days had passed of the fourteen-day appeal period. The proposed sale was not a sale “free and clear of all liens.” Rather, notice was given to all creditors of the proposed sale, and no one objected, although they had twenty-one days to object. The first lender was scheduled to be paid 100% of what it was asking for in its mortgage payoff letter. The second lender asked for $12,000, and it was scheduled to receive $11,500, or 95.83%, of the amount set forth in its mortgage payoff letter. The property had been on the market for about a year-and-one-half, and this was only the second offer to purchase. (The first offer fell through because of bankruptcy issues.)

These additional facts make it clear that the order authorizing the sale would have virtually no impact on any claim, lien, or interest that was recorded prior to the filing of the bankruptcy petition. Therefore, there would be almost no risk to us in agreeing to go forward with the closing prior to the expiration of the fourteen-day appeal period.

Note, though, that in situations like this, a senior underwriter should always be consulted. § Summary of Appeal Issues

Bankruptcy Rule 8002(a) provides for an appeal period of fourteen days from the order’s entry on the docket to file an appeal from an order. When the final day of a deadline falls on a Saturday, Sunday or holiday for the federal court involved, the final day becomes the next day the court is open for business.

Bankruptcy Rule 6004(h) provides for a stay of an order authorizing the sale of property until the expiration of fourteen days from the order’s entry on the docket.

Bankruptcy Rule 8017 provides for a stay of any court order until the expiration of fourteen days from the order’s entry on the docket.

Note that a court may lift the Bankruptcy Rule 6004(h) and Bankruptcy Rule 8017 automatic stay, but the court cannot lift the Bankruptcy Rule 8002(a) appeal period. The appeal period runs concurrently with the automatic stay.

Problems with the Appeal

The court addressed the issue as to whether or not a purchaser is protected under 11 U.S.C. § 363(m) in In re CGI Industries, Inc., 27 F.3d 296 (1994). In this case the court held that, under the facts of the case, the purchaser was protected.

In this case, though, the closing took place four days after the order approving the sale became appealable. The court specifically said that it was not ruling on the situation where the closing took place immediately after the order became appealable.

Why would the court say this? Because if the purchaser were to successfully argue that he was protected when the closing takes place immediately after the order is entered, then the right to appeal becomes meaningless.

How much time must elapse between the date the order becomes appealable and the date of closing so that a purchaser is protected? The court in In re CGI Industries, Inc., does not answer this question.

Thus, one should not just assume that the Company will insure a sale to a purchaser within the appeal period without raising a “right of appeal” exception. Any requests to waive this exception should be directed to a senior underwriter.

Selling the Property—Abandonment (11 U.S.C. § 554)

A seller can sell property if the bankruptcy trustee has abandoned the property.

See 11 U.S.C. § 554(a):

After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

See 11 U.S.C. § 554(b):

On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

Thus, the trustee may choose to abandon property, or the court may order the trustee to abandon property.

If the property has been abandoned, the closer or examiner should, under normal circumstances, be dealing with a situation where there is a large secured creditor, taxes are being paid off, and the debtor is receiving little or no proceeds.

If there are a lot of net proceeds, this probably should not be abandoned property. In this event, the examiner should consult an underwriter.

In order to insure the sale of abandoned property, there must be a court filing or order indicating that the trustee has abandoned the property. A lifting of the 11 U.S.C. § 362 automatic stay would be a sufficient court filing.

Selling the Property—No Asset Finding

The term, “no asset finding” is not found in the Bankruptcy Code. However, the term simply means that the Chapter 7 bankruptcy trustee has determined that either the debtor has no non-exempt assets or the debtor’s non-exempt assets are not enough to make for a reasonable distribution to creditors after the liquidation of said assets and the payment of case expenses.

With a no asset finding, there will be an order of a no asset finding by the bankruptcy trustee. As indicated above, there may be assets, but the assets are so tied up with secured creditors that the trustee is essentially stating, “I have no assets to work with; there is no equity in the property.”

In a transaction concerning a no asset finding, the examiner or closer should look for little or no net proceeds of sale.

Question: Many times a review of bankruptcy cases will disclose a statement as to the following: “Trustee’s report of no assets approved and trustee discharged.” However, the debtor will not be discharged. Is this a problem?

Answer: Generally speaking, the Company can waive the bankruptcy exception, even though the debtor has not been discharged. But the examiner should look at the total picture. Does it make sense that the trustee has apparently abandoned the property?

The examiner should be concerned if the seller of the land has filed Chapter 7 bankruptcy, the bankruptcy trustee has made a “no asset” finding, but the property being sold is not shown as an asset of the debtor. The examiner could consider having the bankruptcy trustee furnish a statement indicating that the trustee knew that the debtor owned the home in question at the time the trustee made the “no asset” finding. The alternative is holding back all sale proceeds from the closing until the bankruptcy trustee can be contacted for verification that the trustee was aware that the debtor owned the property being insured.

The no asset finding is not the same as a finding of abandonment, in that with a no asset finding, the bankruptcy trustee can essentially “change his mind” and find otherwise at any time. Nonetheless, the Company will consider an initial finding of no assets in its determination of risk, but the Company will not rely on a no asset finding as being the same as an order of abandonment.

Variations of the No Asset Finding.

Facts: Husband and wife own the land. They file a Chapter 7 bankruptcy. There is a “no asset” finding posted on the docket. They are discharged from bankruptcy, but the case is still pending. An order is entered in the bankruptcy case that lifts the automatic stay, but the stay is lifted to permit a mortgage foreclosure. But then suddenly the sellers find a short sale buyer. There is no order permitting the short sale, and the bankruptcy trustee refuses to authorize a deed. Why? The trustee says that the land is not an asset of the estate. However, the land was scheduled as an asset.

Question: What can the examiner do? The order that lifted the automatic stay was to permit the mortgage foreclosure, but the order said nothing about a short sale. There is no order that lifts the automatic stay to permit the short sale.

Answer: In this example the Company accepted a deed from the husband and wife. The Company did not require a court order. Why? The order lifting the stay to permit the foreclosure required a finding that the debtor has no equity in the land. Essentially, then, the property had been abandoned by the bankruptcy trustee.

A bankruptcy trustee was once asked if a debtor in chapter 13 bankruptcy needed a court order to sell his home. He replied as follows:

My office would only take a position in this matter if the transaction were to decrease the chances that they would successfully complete their plan or if it were to generate net proceeds that should be distributed to unsecured creditors.

For example, if they sold their house to buy another house with a higher mortgage payment, there would be a negative impact on their cash flow and thus their ability to make plan payments. If the sale generated net proceeds to Mr. and Mrs. Smith in excess of their combined $30,000 homestead exemption, then the excess should be paid to my office for distribution to unsecured creditors.

I believe it is proper for Mr. and Mrs. Smith to seek permission of the Bankruptcy Court to sell their real estate.

Conversely, then, if the sellers have no equity in the home, if they are getting no sale proceeds from the sale of the home, perhaps they may even have to come to closing with cash in order sell the home, then with underwriter approval, the sellers can sell the home without approval from the Chapter 13 bankruptcy court. However, the underwriter should make sure that the trustee has been paid all of his fees.

Buyer Bankruptcy Issues

Question: Assume that a title search reveals that the proposed insured has filed for bankruptcy. The proposed insured will be executing a mortgage that the Company will be insuring. What should the examiner do?

Answer: The examiner should verify that the debtor has been discharged.

Question: What if the debtor has not been discharged?

Answer: If the buyer has filed Chapter 7 bankruptcy, the trustee should consent to the proposed purchaser and mortgage.

If the buyer has filed Chapter 11 or Chapter 13 bankruptcy, the examiner should confirm that the proposed purchase and mortgage are consistent with the Plan. If the examiner is unable to confirm this, the examiner should consult an underwriter. In this regard, see the next question and answer.

Question: The proposed insured has gone through Chapter 13 bankruptcy. The Company has been asked to insure the mortgage of the proposed insured. What should the examiner do?

Answer: Chapter 13 bankruptcy is designed to allow individual debtors to retain most of their property and to use future income to pay off creditors. In order to do this, the individual debtor must submit a plan to the court. Such a plan will usually last for three years, but may be extended to five years.

It is possible, therefore, that this mortgage is part of the debtor’s plan. The examiner should obtain a copy of the plan and review the plan to make sure that the proposed mortgage is part of the plan. If the proposed mortgage is not part of the plan, the examiner should insist on a bankruptcy court order approving the plan. Most, if not all, plans, contain language indicating that the bankruptcy court retains jurisdiction to handle situations such as this.

The issue is this: How will this new mortgage affect the debtor’s ability to successfully complete the plan? Even if this new mortgage were to pay off the existing mortgages, could this new mortgage give the debtor a higher monthly mortgage payment? Could this new mortgage make it harder for the debtor to complete the plan? This is why the examiner has to review the plan to make sure that the mortgage is consistent with the plan.

On the other hand, what if the attorney for the debtor were to give the examiner evidence that this new mortgage has a lower interest rate and a lower principal and thus the debtor’s mortgage payments would be lower than they are now?)

In the alternative, with underwriter approval, the examiner can consider waiving the bankruptcy exception if the examiner one, can verify that the new mortgage payments are less than any previous mortgage payments, and two, can verify that the borrower is not getting any cash back at the closing. But if the borrower is getting money back at the closing, then the bankruptcy trustee has to direct the Company as to who is to be paid the money. The trustee may insist that any cash back be given to him, to be turned over to the creditors.

Miscellaneous Bankruptcy Issues

Can a Mortgage be Discharged in Bankruptcy?

Question: An examiner is examining a title file where the mortgage was allegedly “discharged in bankruptcy.” In fact, the lender is scheduled on the list of creditors. The examiner contacts the lender, and the lender tells the examiner that the debt has been discharged. The examiner knows, however, that generally speaking a mortgage is a lien on the land (and not just a personal debt) and thus not usually dischargeable in bankruptcy. What does the examiner do?

Answer: There are several options:

• First of all, an order could be entered in the bankruptcy file that would “avoid” the lien of the mortgage.

• Second, the bankruptcy case could be opened up and there could be a sale free and clear of all liens.

• Third, the lender believes that its mortgage is unenforceable and the debt is discharged. Perhaps the lender will issue a release of mortgage. (This option is probably not realistic. The lender was not paid. Why would a lender voluntarily release its mortgage when the mortgage debt was not repaid?)

Otherwise, the examiner should not even consider waiving a mortgage under this set of facts without consulting an underwriter. What if, for example, the mortgagor has “reaffirmed” the mortgage by continuing to make mortgage payments after the bankruptcy?

The lender’s right to foreclose its mortgage does not go away just because the owner has filed for bankruptcy (although the automatic stay will temporarily stop the foreclosure).

A mortgage is both a personal obligation (as represented by the note) and also a lien on the land (as represented by the mortgage). A chapter 7 discharge may eliminate the mortgage debt, but it does not eliminate the mortgage lien. If it did, then everyone would mortgage their property, file bankruptcy, and then own their homes free and clear of the mortgages.

Once an owner files bankruptcy, the lender, as a secured creditor, will probably ask the court to lift the automatic stay so that it can foreclose its mortgage. Or, the trustee might sell the home. Or, the lender might wait until the bankruptcy ends and then proceed with foreclosure. Or, the owner could convert a chapter 7 bankruptcy into a chapter 13 bankruptcy and then file a repayment plan

For further information, see the section on “Lien Stripping in Chapter 13 Bankruptcy Cases” and “Mortgage Cramdowns.”

Question: John and Mary Smith own their home. They have filed for Chapter 13 bankruptcy. Now they are selling their home. Is there a problem?

Answer: There possibly is a problem. As indicated earlier, when a Chapter 13 trustee was asked to give his opinion about this fact situation, he replied with the following statement:

My office would only take a position in this matter if the transaction were to decrease the chances that they would successfully complete their plan or if it were to generate net proceeds that should be distributed to unsecured creditors.

For example, if they sold their house to buy another house with a higher mortgage payment, there would be a negative impact on their cash flow and thus their ability to make plan payments. If the sale generated net proceeds to Mr. and Mrs. Smith in excess of their combined $30,000 homestead exemption, then the excess should be paid to my office for distribution to unsecured creditors.

I believe it is proper for Mr. and Mrs. Smith to seek permission of the Bankruptcy Court to sell their real estate.

Note that some title company underwriters argue that the approval of the bankruptcy court is not needed as long as the sale is not inconsistent with the Chapter 13 bankruptcy plan. (In this situation, the risk may be more with non-residential property than with residential property.) Other underwriters believe that once the plan is confirmed, the debtor may sell his home without getting the approval of the bankruptcy trustee, as long as the examiner makes sure that the bankruptcy trustee has been paid all of his fees.

However, even if the plan provides for the sale of the home, the plan typically does not spell out the details of the sale. It is always better to make sure that the bankruptcy court approves the sale of the debtor’s home.

Question: An examiner has been asked to insure a transaction (deed, lease, or mortgage) in a pending Chapter 11 action before the plan has been confirmed. Do local recording fees and transfer tax stamp charges have to be paid for at closing?

Answer: 11 U.S.C. § 1146(a) provides that “the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 or 1191 of this title, may not be taxed under any law imposing a stamp tax or similar tax.”

The Supreme Court has made it clear that the exemption for the payment of these fees applies only when the plan has been confirmed. (Prior to this time, there were conflicting lower federal circuit court opinions.)

Rule of Title Practice: If the transaction in a Chapter 11 is to take place before the plan is confirmed, recording fees and transfer taxes must be collected. This is true even in those jurisdictions that previously relied on a federal circuit court decision holding otherwise. Any such holding has been overruled by the U.S. Supreme Court case, Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 128 S. Ct. 2326, 171 L. Ed. 2d 203 (U.S. Supreme Court, 2008).

Any recording issues with the county have to be resolved prior to closing. Otherwise, the Company risks the exposure of an ever-widening title “gap” while the parties work things out. The documents must be recorded as soon as possible after the closing.

Chapter 13 Bankruptcy—Mortgaging the Property

Question: The owner of the land has filed Chapter 13 bankruptcy. The plan has been confirmed by the court. Now he wants to mortgage the property. His attorney feels that now that the plan is confirmed, he does not need court approval to mortgage the property. Is the attorney correct? Is there a problem?

Answer: Yes, there could be a problem.

What does the plan say? Does the plan provide for the mortgaging of the property? Some title company underwriters feel that even though the plan may authorize a post-plan mortgaging of the land, the details of the plan may not be specific enough to pass title company scrutiny. The examiner should consult an underwriter. Even if the plan describes the mortgaging of the land in broad and general terms, this may be sufficient for title insurance purposes.

On the other hand, what if the plan is silent as to the mortgaging of the land. Perhaps the plan refers to the paying off of an old mortgage, but says nothing about a new mortgage.

Perhaps the plan contains language like,

Upon confirmation, the Debtor shall be vested with his assets, subject only to the terms and conditions of this Plan. The Debtor shall be entitled to continue to operate and manage his businesses and financial affairs without further order of this Court as set forth in the Plan.

Such language makes it clear that the debtor is limited by the terms and conditions of the plan, and the plan makes no mention of him getting a new mortgage.

Perhaps the plan contains language like the following:

The bankruptcy court retains jurisdiction to, among other things, enter order to further consummation of the Plan; approve modifications of the Plan upon motions brought before the Bankruptcy Court in accordance with 11 U.S.C. § 1127.

This language indicates that the bankruptcy court has retained jurisdiction to approve, among other things, a mortgage of the debtor’s land.

Again, as indicated above, a bankruptcy trustee was once asked if a debtor in chapter 13 bankruptcy needed a court order to sell his home. He replied as follows:

My office would only take a position in this matter if the transaction were to decrease the chances that they would successfully complete their plan or if it were to generate net proceeds that should be distributed to unsecured creditors.

For example, if they sold their house to buy another house with a higher mortgage payment, there would be a negative impact on their cash flow and thus their ability to make plan payments. If the sale generated net proceeds to Mr. and Mrs. Smith in excess of their combined $30,000 homestead exemption, then the excess should be paid to my office for distribution to unsecured creditors.

I believe it is proper for Mr. and Mrs. Smith to seek permission of the Bankruptcy Court to sell their real estate.

This answer is appropriate to the facts of this situation. That is, the true issue is this: How will this new mortgage affect the debtor’s ability to successfully complete the plan? Even if this new mortgage were to pay off the existing mortgages, could this new mortgage give the debtor a higher monthly mortgage payment, making it less likely for the debtor to complete his plan?

But on the other hand, what if the attorney were to give the examiner evidence that this new mortgage has a lower interest rate than the debtor’s existing mortgage, and an amount that is less than the amount of the existing mortgage? What if the debtor’s proposed monthly mortgage payments are less than the debtor’s existing mortgage payments?

Lien Stripping in Chapter 13 Bankruptcy Cases

The Company has received requests to insure sale transactions out of a Chapter 13 bankruptcy free and clear of a junior mortgage or other lien. This is sometimes called “lien stripping.” See 11 U.S.C. § 506, 11 U.S.C. § 1322(b)(2), and 11 U.S.C. § 1327.

“Lien stripping” involves the bankruptcy attorney obtaining an appraisal that establishes that the value of the property is not adequate to secure even the senior encumbrance, and that therefore, on a practical basis, the junior lien is unsecured. (That is, the fair market value of the land is less than the amount of the senior encumbrance; therefore, the junior lien is essentially unsecured.) An order is then entered that the junior lien is unsecured.

However, note that the junior lien is not actually voided until the debtor requests that the lien be voided upon the entry of the debtor’s successful completion of the Plan and after the debtor is discharged. There is then a second order voiding the lien. This second order should be recorded to clear the lien of record.

Unfortunately, the Company is often asked to waive the lien upon the issuance of the first order, not the second order.

Furthermore, we are seeing situations where we asked to waive a junior mortgage after the first order, and after the completion of the Plan, but without a second order. Any request to waive a junior lien under these circumstances should be directed to an underwriter.

Note that some debtors are following up their Chapter 7 bankruptcy cases with a Chapter 13 case to strip off their second mortgage. This is informally called a Chapter 20 bankruptcy case. (Chapter 7 + Chapter 13 = Chapter 20.) Note that some bankruptcy judges feel that this is not allowed, as a debtor ordinarily must wait four years after his Chapter 7 discharge to file a new Chapter 13 case.

Rule of Title Practice

In order to waive a junior lien pursuant to the “lien stripping” doctrine, the examiner must make sure that the debtor has completed the Plan and the second order has been issued and recorded. Otherwise, there must be a sale “free and clear of all liens” pursuant to 11 U.S.C. § 363(f). This statute is discussed in these materials.

Also, for further information, see Underwriting Bulletin No. 2012-RC-01.

Mortgage Cramdowns

A mortgagor can use a Chapter 13 bankruptcy to “cram down” a mortgage on investment property, such as rental residential property or commercial property. One cannot use this process on one’s residence. (To “cram down” a mortgage means to reduce the outstanding indebtedness of the mortgage.)

Assume that someone buys an investment property for $300,000, executing a purchase money mortgage at closing. Later, though, the property goes down in value to $150,000. Unfortunately, the borrower still owes $250,000 on the mortgage.

The borrower can cram down the mortgage to $150,000 (the current value of the property) through the Chapter 13 plan and pay that to the mortgage lender instead of the entire $250,000. Pursuant to court order, the remaining $100,000 becomes unsecured debt and is treated as such in the bankruptcy. This means that the borrower may end up paying a small amount of this debt through the Chapter 13 plan and the rest of the debt will be discharged at the completion of the plan.

Note that with a cram down (and unlike a mortgage foreclosure), the borrower is not liable for any deficiency. That is, if a mortgagor crams down a loan through a Chapter 13 bankruptcy, and the property is later foreclosed on, the borrower is not liable for the amount that has become unsecured debt. (This amount is usually equal to the foreclosure deficiency.)

Post-Bankruptcy Issues

Once the bankruptcy has been closed or dismissed and the trustee, if any, has been discharged, the bankruptcy is no longer pending. Therefore, generally speaking, unlike other proceedings, the examiner does not have to raise a commitment exception relative to the “rights of appeal” of the debtor.

There are, however, exceptions to this general rule:

• When the order closing or dismissing the case was entered on the docket within the last fourteen days. (Again, note that the time to file an appeal or motion runs from the date when the order has been entered on the bankruptcy clerk’s docket and not from when the order was entered by the court.)

• When the real estate that is owned by the debtor was not scheduled as an asset of the estate.

Question: What is the legal significance of land owned by a debtor that is neither abandoned by the bankruptcy trustee nor administered by the bankruptcy court?

Answer: The land remains property that is subject to the jurisdiction of the bankruptcy estate.

If the creditors later learn of this property that was neither abandoned nor administered, the bankruptcy may be re-opened and the debtor’s discharge may be set aside.

Trustee Avoidance of Post-Bankruptcy Transfers of Real Estate

Section 549 of the Bankruptcy Code, or 11 U.S.C. § 549, allows the bankruptcy trustee to avoid—that is, set aside—post-petition transfers of the land by the debtor. Although Section 549(b) and Section 550(b) gives some protection to those who take title without knowledge of the pending bankruptcy, how does one establish good faith and a lack of knowledge of the bankruptcy? Admittedly, the trustee may fail to record a notice of the bankruptcy, as set forth in Section 549(c) of the Code. But on the other hand, the Insured cannot claim lack of knowledge when the title commitment contains an exception for the pending bankruptcy or shows the name of the bankruptcy debtor in Schedule A.

Bankruptcy Review Online: The PACER System

Bankruptcy files can be reviewed online. Go to: www.ilnb.uscourts.gov. This is the link to the U.S. Bankruptcy Court for the Northern District of Illinois.

When reviewing a case on PACER, the examiner should look for references to other proceedings that might have an impact on title.

Practical Bankruptcy Advice for the Title Examiner—Owner Issues Concerning 1-4 Residential Property

Caveat: Remember the Appeal and Stay Periods: Bankruptcy Rule 8002(a) provides for an appeal period of fourteen days from the order’s entry on the docket to file an appeal from an order. When the final day of a deadline falls on a Saturday, Sunday or holiday for the federal court involved, the final day becomes the next day the court is open for business.

Bankruptcy Rule 6004(h) provides for a stay of an order authorizing the sale of property until the expiration of fourteen days from the order’s entry on the docket.

Bankruptcy Rule 8017 provides for a stay of any court order until the expiration of fourteen days from the order’s entry on the docket.

A court may lift the Bankruptcy Rule 6004(h) and Bankruptcy Rule 8017 automatic stay, but the court cannot lift the Bankruptcy Rule 8002(a) appeal period. The appeal period runs concurrently with the automatic stay.

Vesting, all chapters

Chapter 7: John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

Chapter 11: John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

Chapter 13: John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

Chapter 7

Chapter 7—Seller Has Filed for Bankruptcy and is Selling the Home

The trustee has the power to sell the property, either subject to liens or free and clear of all liens. If free and clear of all liens, see the above section, “Selling Real Estate through Bankruptcy.”

However, if the trustee is selling the land, the examiner still needs the court order authorizing the sale of the land. The examiner does not have to be concerned with lifting the Bankruptcy Rule 8017 automatic stay.

If the homeowner is selling the land, then the examiner also needs a court order. This may be an order of abandonment, indicating that the trustee has abandoned the property. With a court order, the examiner does not have to be concerned about lifting the Bankruptcy Rule 8017 automatic stay.

Chapter 7—Owner Has Filed for Bankruptcy and is Mortgaging the Home

An owner/debtor should not be mortgaging property when the owner has filed for Chapter 7 bankruptcy. Chapter 7 is the liquidation of assets, not the acquisition of more liabilities.

Chapter 11

Chapter 11—Seller Has Filed for Bankruptcy and is Selling the Home

Does the Chapter 11 plan allow for the sale of the property? Note that a debtor in possession who is operating a business is authorized to sell property if it is in the ordinary course of his business. In this case, all liens should be paid off, just as in a conventional closing.

Some underwriters feel that if the plan contemplates the sale of the property, then the examiner does not have to worry about lifting the automatic stay. However, most plans are not very specific. This is why a court order should be obtained in a sale pursuant to Chapter 11. If, on the other hand, the plan is very specific, then, with underwriter approval, the examiner can consider insuring a sale of the property without a court order.

Chapter 11—Owner Has Filed for Bankruptcy and is Mortgaging the Home

Does the plan allow for the mortgaging of the debtor’s property?

If the plan contemplates the mortgaging of the property, then with underwriter approval, the examiner can consider insuring the mortgage without a court order.

Obviously, if the mortgaging of the property is not contemplated by the plan, the examiner should obtain a court order.

Chapter 13

Chapter 13—Seller Has Filed for Bankruptcy and is Selling the Home

Even if the Chapter 13 Plan provides for the sale of the home, the plan typically does not spell out the details of the sale. It is always better to make sure that the bankruptcy court approves the sale of the debtor’s home. That is, the examiner should obtain a court order authorizing the sale of the home, even in a Chapter 13 bankruptcy.

Note, though, that some underwriters feel that if the debtor has filed a Chapter 13 bankruptcy, the debtor is selling his home, the trustee has approved the sale, all mortgages or other liens will be paid off at closing, the trustee has been paid all his fees, and all sale proceeds are being turned over to the trustee for payment to creditors, then the Company can insure the transaction without a court order. In this situation, an underwriter should be consulted.

Chapter 13—Owner Has Filed for Bankruptcy and is Mortgaging the Home

Does the plan allow for the mortgaging of the debtor’s property? If so, then with underwriter approval, the examiner can insure the mortgage without a court order.

Obviously, if the mortgaging of the property is not contemplated by the plan, the examiner should obtain a court order.

Other Seller Issues

Seller Has Filed Bankruptcy—Liens

Bankruptcy court orders removing specific liens from specific property may be relied on in waiving title exceptions for these liens.

In this situation, the examiner must review the bankruptcy file to make sure that the debt was scheduled and notice was given to the creditor. In addition, the examiner must wait 14 days, as measured from the entry of the order on the docket, before waiving the exception.

Seller Has Filed Bankruptcy—Who Executes the Deed?

Chapter 7:

In a Chapter 7 bankruptcy, the debtor will execute the deed if the land has been abandoned by the trustee.

Example: If the owner of the land has filed for Chapter 7 bankruptcy, the transaction is a short sale, the owner may execute the land as long as the trustee has abandoned the property in question. Otherwise, generally speaking, the trustee will execute the deed. However, keep in mind that either the debtor or the trustee may convey, depending on the circumstances and depending on the approval of the court.

Generally speaking, the title examiner will need either a court order approving the sale or a court order compelling the abandonment of the asset from the bankruptcy estate.

Again, consider the circumstances. If there is a court order approving the sale, the bankruptcy trustee might ask the court to lift the 11 U.S.C § 362 automatic stay and ask the court that the debtor be authorized to convey the land free of the automatic stay and free of the bankruptcy estate.

Chapter 13:

In a Chapter 13 bankruptcy, the examiner will almost always see deeds executed by the debtor. The sale will be approved by the court and sold free of the § 362 automatic stay and the bankruptcy estate. Instead, all the proceeds of sale (if any) will attach to the interest of the bankruptcy estate. The court will require that all non-exempt proceeds go to the Chapter 13 trustee.

Seller Has Filed Bankruptcy—Abandonment

A seller can sell land if the trustee has abandoned the property.

In order to insure “abandoned” property, there must be a court filing in the bankruptcy file indicating that the trustee has abandoned the property.

Practical Bankruptcy Advice for the Title Examiner—Buyer Issues Concerning 1-4 Residential Property

Chapter 7

Chapter 7—Buyer Has Filed for Bankruptcy and is Buying the Home

The examiner must verify that the proposed purchaser has been discharged from bankruptcy.

Chapter 11

Chapter 11—Buyer Has Filed for Bankruptcy and is Buying the Home

Is the proposed purchase and mortgage consistent with the Plan? If not, the examiner should consult an underwriter. With underwriter approval, the examiner should verify that the borrower is not getting any cash back at the closing. If the borrower is getting money back at the closing, then the bankruptcy trustee has to direct the Company as to who is to be paid the money. The trustee may insist that any cash back be given to him, to be turned over to the creditors.

Chapter 13

Chapter 13—Buyer Has Filed for Bankruptcy and is Buying the Home

Is the proposed purchase and mortgage consistent with the Plan? If not, the examiner should consult an underwriter. With underwriter approval, the examiner should verify that the borrower is not getting any cash back at the closing. If the borrower is getting money back at the closing, then the bankruptcy trustee has to direct the Company as to who is to be paid the money. The trustee may insist that any cash back be given to him, to be turned over to the creditors.

Other Buyer Issues

Buyer Has Filed Bankruptcy—Liens

If a general lien is recorded against a purchaser, and the purchaser has filed bankruptcy, is the creditor listed in the schedule of creditors? Before waiving the lien, the examiner must make sure that the debt was both scheduled and discharged. Remember, certain types of debts cannot be discharged. For example: criminal fines and student loans.

Title Examination Bankruptcy Scenarios

Scenario Number One

Facts:

John Smith files a petition for Chapter 7 bankruptcy. He is discharged. Unfortunately, a judgment creditor pursuant to a recorded judgment was mistakenly not listed as a creditor on the bankruptcy schedule.

John Smith now wishes to buy a home, and the title search has revealed this recorded judgment.

John Smith’s attorney argues that the judgment should be waived. He points out that the debtor’s case was a no “asset” case. That is, the trustee filed a “no asset” report and that there were no dividends to divide among the creditors. He states that in Chapter 7 “no asset” cases, bankruptcy courts have ruled that there is no purpose served by reopening a case to allow a debtor to add an omitted creditor to his schedules unless that debt falls under Sections 523(a)(2), 523(a)(4), or 523(a)(6)—that is, debts incurred by false pretenses, false representation, or actual fraud; debts incurred by fraud or defalcation while acting as a fiduciary; and debts for willful and malicious injury. He states a creditor is prejudiced by the debtor’s failure to list the creditor in the bankruptcy schedules only if the creditor’s rights to receive his share of dividends or obtain a determination of dischargeability are compromised.

Question: Should the examiner waive the judgment?

Answer: No, the examiner should not waive the judgment.

The fact that the judgment is essentially discharged because this was a “no asset” bankruptcy is not the issue. Rather, the issue is that both the owners and loan title insurance policies include as coverage the cost of the defense. For example, see Condition Number 5 of the owner’s policy:

5. DEFENSE AND PROSECUTION OF ACTIONS

(a) Upon written request by the Insured, and subject to the options contained in Section 7 of these Conditions, the Company, at its own cost and without unreasonable delay, shall provide for the defense of an Insured in litigation in which any third party asserts a claim covered by this policy adverse to the Insured.

The examiner should not waive the judgment, even though it may not be enforceable, because the Company does not wish to have to defend against the post-policy execution and levy of this judgment by the judgment creditor.

However, because the mortgage to be insured is a purchase money mortgage, the examiner can show the judgment in “Part II, Schedule B” of the loan policy. This part of the loan policy insures that the judgment exists, but the policy insures that the judgment is inferior and subordinate to the lien of the insured mortgage.

The examiner will need the written agreement of the lender, allowing the examiner to do this.

The examiner would then show the judgment on any owner’s policy issued.

Basic Bankruptcy Title Exceptions

Some basic Schedule B title exceptions are as follows.

As indicated above, the examiner should obtain a court order when the property is being sold:

• We should be furnished an order from the bankruptcy court approving the sale of the property, and this commitment may be subject to additional exceptions.

When the debtor is selling, raise this exception:

• The right, title, and interest of _____, Trustee of the bankruptcy estate of _____ (debtor), under Chapter _____, Bankruptcy Case Number _____, filed in the Northern District of Illinois.

Note that this exception can be waived with the court order approving the sale.

When the trustee is selling, raise this exception:

• The right, title, and interest of _____, (Debtor), Debtor under Chapter _____, Bankruptcy Case Number _____, filed in the Northern District of Illinois.

Note that this exception can be waived with the court order approving the sale.

Bankruptcy and Title Policy Coverage

Some examiners may feel that after title companies adopted the 2006 title policies, bankruptcy is no longer an issue, as the 2006 title policies exclude bankruptcy matters from policy coverage. However, this is not really the case.

To understand the issue of bankruptcy and title policy coverage, one has to understand the inter-play between the Exclusions from Coverage and the Covered Risks.

Exclusions from Coverage in the 2006 title policies are those matters that are excluded from the coverage of the title policies.

Covered Risks in the 2006 title policies are those matters for which the Company insures against loss.

The title policies use the terms, fraudulent transfer and preferential transfer

Section 548 of the Bankruptcy Code describes two types of fraudulent transfers:

A subjective fraudulent transfer is a transfer made by the debtor with the intent to hinder, delay, or defraud its creditors. (Section 548(a)(1)(A) of the Bankruptcy Code)

Example: John owns a home worth $3 +00,000. He is deeply in debt. Not wanting his creditors to record judgments against his home, he deeds it to his brother; the deed is exempt under paragraph “e.” Ten months later he files for bankruptcy.

An objective fraudulent transfer occurs when the debtor receives less than “reasonably equivalent value” in exchange for said transfer and the debtor (1) was insolvent on the date of the transfer; (2) became insolvent as a result of the transfer (for example, the debtor was left with unreasonably small working capital); or (3) believes it would incur debts beyond its ability to repay them as they matured. (See Section 548(a)(1)(B) of the Bankruptcy Code.)

Example: John sells the above home to Bonnie Buyer for $100,000. Eight months later John files for bankruptcy.

Fraudulent transfers made within two years prior to the filing of the bankruptcy petition (see Section 548(a)(1) of the Bankruptcy Code) or four years under the Illinois Uniform Fraudulent Transfer Act (see 740 ILCS 160/1 et seq.) may be set aside.

A preferential transfer is defined in Section 547 of the Bankruptcy Code. This section set forth the six elements of a preferential transfer, also called a preference:

A transfer of an interest of the debtor in property, To or for the benefit of a creditor, For or on account of an antecedent (i.e., preexisting) debt, Made while the debtor is insolvent, On or within 90 days before the date of the filing of the petition (or, if the transfer was to an “insider,” within one year preceding the petition), Which transfer benefits the creditor more than a Chapter 7 bankruptcy distribution.

Example: In late 2019 Lender loans John $100,000. In early 2020 John mortgages his home with Lender in order to secure this debt. If John is insolvent at the time of the mortgage, the mortgage is subject to attack as a preference—the mortgage could be viewed as an attempt to transform the lender's status from that of an unsecured creditor to a secured creditor. (A debtor is presumed to be insolvent during the 90 day period prior to the bankruptcy).

Exclusion from Coverage 4 of the Owner’s Title Policy

The following matters are expressly excluded from the coverage of this policy, and the Company will not pay loss or damage, costs, attorneys' fees, or expenses that arise by reason of:

4. Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction vesting the Title as shown in Schedule A, is (a) a fraudulent conveyance or fraudulent transfer; or (b) a preferential transfer for any reason not stated in Covered Risk 9 of this policy.

Commentary

It is clear that fraudulent transfers and preferential transfers are excluded from the coverage of the title policy—but only as they relate to the “transaction vesting the Title.”

Covered Risk 9 of the Owner’s Title Policy

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B, AND THE CONDITIONS, CHICAGO TITLE INSURANCE COMPANY, a Nebraska corporation (the “Company”) insures, as of Date of Policy and, to the extent stated in Covered Risks 9 and 10, after Date of Policy, against loss or damage, not exceeding the Amount of Insurance, sustained or incurred by the Insured by reason of:

9. Title being vested other than as stated in Schedule A or being defective

(a) as a result of the avoidance in whole or in part, or from a court order providing an alternative remedy, of a transfer of all or any part of the title to or any interest in the Land occurring prior to the transaction vesting Title as shown in Schedule A because that prior transfer constituted a fraudulent or preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws; or

(b) because the instrument of transfer vesting Title as shown in Schedule A constitutes a preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws by reason of the failure of its recording in the Public Records (i) to be timely, or (ii) to impart notice of its existence to a purchaser for value or to a judgment or lien creditor.

Commentary

The Company does not exclude from coverage an earlier transaction that is “prior to the transaction vesting title” that is determined to be a fraudulent transfer or a preferential transfer.

The 2006 loan policy contains similar provisions. See Exclusion 6 and Covered Risk 13 of the ALTA 2006 loan policy.

Example

Adam owns a single family home located on lot 1. Adam owes Baker $100,000. To repay this debt Adam conveys lot 1 to Baker in January. Two months later Baker conveys the land to Charles. In April Adam files bankruptcy. Adam’s creditors file suit, alleging that the transfer from Adam to Baker should be set aside as a preference.

(The creditors claim that the deed to Baker was on account of an antecedent (i.e., preexisting) debt. See 11 U.S.C. § 547.)

Assume that Chicago Title insured both transactions:

• Chicago Title insured the conveyance from Adam to Baker. • Chicago Title insured the conveyance from Baker to Charles

What is the Company’s potential liability in both transactions?

The Company insured Baker in the first transaction, the deed from Adam to Baker. In this case the Company would probably deny any claim because of Exclusion 4. The bankruptcy issue arose out of the “transaction vesting the title.”

The Company insured Charles in the second transaction, the deed from Baker to Charles. In this case Covered Risk 9 of the owner’s policy would apply, and the Company would probably accept the claim. However, the Company would have a possible defense to the claim. Section 550 of the Bankruptcy Code protects a secondary transferee from the bankruptcy trustee’s avoidance power if that secondary transferee takes for value in good faith and without knowledge of the voidability of the transfer.

11 U.S.C. § 550:

(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. (b) The trustee may not recover under section [1] (a)(2) of this section from— (1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or (2) any immediate or mediate good faith transferee of such transferee.

Acknowledgments

Thanks to Walt Adams of Chicago Title Insurance Company, Sam Shiel, and John Neuenkirchen of the Jordan Law Group for their assistance in the preparation of these materials.

Cemeteries

Last effective date: January 26, 2018

CEMETERY LAW

By

Richard Bales

I. Statutory citations

A. 20 ILCS 3435/01 et seq. (Archaeological and Paleontological Resources Protection Act)

B. 20 ILCS 3440/01 et seq. (Human Skeletal Remains Protection Act)

C. 55 ILCS 65/01 et seq. (County Cemetery Care Act)

D. 55 ILCS 70/01 et seq. (Grave and Cemetery Restoration Act)

E. 760 ILCS 90/01 et seq. (Burial Lot Perpetual Trust Act)

F. 760 ILCS 95/01 et seq. (Cemetery Perpetual Trust Authorization Act)

G. 760 ILCS 100/1 et seq.(Cemetery Care Act)

H. 765 ILCS 805/01 (Conveyance of Burial Places to County Act)

I. 765 ILCS 810/01 (Cemetery Company Land Not Used for Burial Act)

J. 765 ILCS 815/01 et seq. (Cemetery Association Land Not Used for Burial Act)

K. 765 ILCS 820/01 et seq. (Cemetery Land Ownership and Transfer Act)

L. 765 ILCS 825/01 et seq. (City Sale or Lease of Land for Cemeteries Act)

M. 765 ILCS 830/01 (Cemetery Removal Act)

N. 765 ILCS 835/0001 (Cemetery Protection Act)

O. 765 ILCS 835/14.5; Cemetery encroachments

P. 805 ILCS 320/01 et seq. (Cemetery Association Act)

Q. 805 ILCS 325/01 (National Cemetery Act)

II. Introduction

A. A cemetery is a place set apart for the burial of the dead and is a sacred place entitled to respect. See Village of Villa Park v. Wander’s Cemetery Co., 316 Ill. 226, 147 N.E. 104 (1925)

B. The corporate authorities of a municipality may purchase land and establish cemeteries. See 65 ILCS 5/11-49-1.

1. But note that the rules regarding the conveyance of land owned by a municipality are governed by the law of Municipal Corporations. See, in this regard, 65 ILCS 5/11-76-1 et seq. This law will not be covered in this material.

C. Religious corporations can also own cemeteries. See generally the Religious Corporation Act, 805 ILCS 110/01 et seq.; see specifically sections 42, 46f, 46j of said act. This corporate law will not be covered in this material.

C. Some municipalities have pet cemeteries. Note that there is no specific statutory reference in Illinois for pet cemeteries; the statutes merely refer in general terms to “animal disposal.”

1. “Cemetery” is defined in the Cemetery Care Act as “any land or structure in this state dedicated to and used, or intended to be used, for the interment of human remains. See 760 ILCS 100/2.

2. Example: A corporation is selling a pet cemetery. This transfer is governed by corporate law, not cemetery law.

3. For all these reasons, pet cemeteries will not be covered in this chapter.

III. The Organization of Cemetery Associations

A. Formation of a cemetery

1. Six or more persons may organize a cemetery association. They must present a petition to the Secretary of State. The petition must include the name of the appropriate county and the name of the cemetery.

2. The Secretary of State in return issues a certificate of organization. This certificate is recorded in the county where the land is located. See 805 ILCS 320/1, 2, 3.

3. Cemetery property is exempt from the payment of real estate taxes. See 765 ILCS 805/1; 805 ILCS 320/14.

B. Internal changes

1. Two-thirds of the trustees can approve a resolution to change the name of the cemetery. See 805 ILCS 320/3.

2. The persons receiving the certificate of organization must elect from their own number a board of trustees. The law concerning these trustees and the appointment of successor trustees is found at 805 ILCS 320/4.

3. Two-thirds of the trustees can approve a resolution to dissolve the cemetery association. Such dissolution must be approved by the state comptroller. If the association has any “care funds,” these must be disposed of in accordance with the Cemetery Care Act (760 ILCS 100/1 et seq.)

IV. Real Property Transactions by Cemetery Associations

A. Acquisition

1. 805 ILCS 320/5 authorizes a cemetery association to “acquire the necessary amount of land for the use of the cemetery association.”

a. The above wording becomes important when discussing limitations on subsequent sales, below.

2. A cemetery association may acquire land by purchase or by gift. The association may also accept gifts of personal property, such as money. See 760 ILCS 100/2.

3. A cemetery association may not acquire any more real property than is needed for burial purposes. Unfortunately, the statute does not indicate how one determines how much property is needed for burial purposes. See 765 ILCS 820/1.

a. Prior to 1895 the size of cemeteries was limited to twenty acres. As recently as 1961 the acquisition of more than fifty acres was upheld. See Spring Hill Cemetery of Danville v. Ryan, 20 Ill.2d 608, 170 N.E.2d 619 (1961).

b. It seems clear, though, that if lands are held by a cemetery association that do not lie within the cemetery, they must be sold. See Bushers v. Graceland Cemetery Assn. of Albion, 171 F.Supp. 205 (D. Ill. 1959).

4. But note that this limitation on the acquisition of land that is set forth in 765 ILCS 820/1 and noted above in paragraph 3 concerns land for burial purposes. 760 ILCS 100/2 seems to allow a cemetery association to acquire any land “impressed with a trust by the terms of any gift” when this land is used to produce investment income. This, then, would be land that is used for investment and not for burial purposes.

B. Disposition

1. Generally speaking, cemetery associations are prohibited from selling land dedicated for burial purposes. Once land is dedicated for burial purposes (such as by the filing of a plat), it may not be sold. See Bushers v. Graceland Cemetery Assn. of Albion, 171 F.Supp. 205 (D. Ill. 1959). (However, see below.)

2. However, cemetery associations may convey any land purchased for burial purposes when the state legislature or a municipal ordinance prohibits the use of the land for burial purposes. See 765 ILCS 810/1.

a. For example, when a subsequent zoning ordinance bars the use of newly-acquired land for cemetery purposes.

3. Note that some cemetery associations have been created by special act of the legislature. In these circumstances, the examiner must ask for a copy of the special act in question, as the legislature may have attached special powers or limitations to the creation of the corporation. See 765 ILCS 825/1; 965 ILCS 820/1.

4. Cemetery associations that own land in any cemetery in any county of less than 100,000 residents have the power to sell such cemetery land if the land is not suitable or required for burial purposes and in which no person has been buried, if:

a. The trustees first call a meeting of the lot owners in the cemetery. Notice of the meeting is by publication in a newspaper published in said county once a week for three consecutive weeks. If there is no such newspaper, then in a newspaper published nearest to such cemetery.

b. At the meeting there is a vote, and if a majority of the votes cast are in favor of selling the land, the trustees have the power to sell.

c. The land is sold at public sale to the highest bidder.

d. See, in this regard, 765 ILCS 815/1-5.

5. Cemetery associations do have the power to convey property. See generally the Cemetery Land Ownership and Transfer Act, 765 ILCS 820/1 et seq.

6. Rule of title practice: If insuring the conveyance of land in this manner, ask for a list of all lot owners, proof that notice of sale was mailed to each owner, evidence of the vote of lot owners, and evidence of publication.

V. Powers of a Cemetery Association

A. A cemetery association may accept donated personal and real property. The association has the right to sell donated real estate and also has the right to purchase real estate for investment purposes. See 760 ILCS 90/2; 95/2;100/2.

1. Rule of Title Practice: If the association is selling donated real estate, obtain a resolution executed by the cemetery association trustees or board of directors that authorizes the sale.

2. Rule of Title Practice: If the association is purchasing investment real estate, 760 ILCS 95/2 states that the purchase price of the real estate shall not exceed the fair market value thereof on the date of its purchase, as such value is determined by the board of directors or board of trustees of the association. If insuring a purchase, obtain some type of valuation letter from the association.

B. A cemetery association can condemn property that adjoins an existing cemetery, provided that the land lies outside the corporate limits of a municipality. See 805 ILCS 320/16.

C. A cemetery association can lend money, but only under the conditions set forth in 760 ILCS 100/3a and 765 ILCS 835/5a.

1. These conditions include a prohibition on lending money to any officer of the cemetery association and on lending money to secure a mortgage on any land outside Illinois.

2. Any such loan must be approved by the Illinois Comptroller and by the board of directors of the cemetery authority.

3. Rule of Title Practice: Before insuring any loan wherein a cemetery association is the lender, be sure that the provisions of 760 ILCS 100/31 and 765 ILCS 835/5a have been satisfied.

D. A cemetery association may convey a cemetery to a city, village, county, etc., and if said entity accepts the conveyance, the cemetery shall thereafter be under the control of said entity. See 765 ILCS 820/1a.

E. Power to Borrow

1. The statutes enumerated on the first page of this handout do not indicate that a cemetery association has the power to mortgage its real estate. Note that the general rule in the United States restricts cemetery associations from mortgaging its assets. See Jackson, Law of Cadavers 251 (1937).

2. Rule of Title Practice: Before offering to insure the mortgage of a cemetery association, consult an underwriter. At the very least, it would appear that you will need a resolution of the trustees and the approval of the State Comptroller. Any loan policy issued would be subject to the rights of the individual burial lot owners.

V. Sale of Cemetery Lots

A. Platting the Cemetery

1. When a county owns land for burial purposes, the county board can appoint three trustees to take charge of and control the burial grounds. See 55 ILCS 65/2; 765 ILCS 805/1; 765 ILCS 810/1.

2. These trustees may file or cause to be filed a plat of survey showing the lots, streets, and alleys of the cemetery. See 55 ILCS 65/2.

a. These trustees may “sell and make deeds of conveyance” of any lots for use for burials. See 55 ILCS 65/2, 55 ILCS 65/4. But the purchaser of these lots does not receive a fee simple interest in them. Rather, the purchaser receives only a license or an easement for burial purposes. See Steele v. Rosehill Cemetery Co., 370 Ill. 405, 19 N.E.2d 189 (1939); see also 765 ILCS 835/9, which refers to a “right or easement for burial.”

4. The trustees of a cemetery association formed pursuant to the Cemetery Association Act (805 ILCS 320/01 et seq. also has the right to plat its real estate into burial lots. The association has the right “to sell to any person or persons a lot or lots in said cemetery for burial purposes only, and to convey to such person or persons said lot by a proper deed of conveyance. . . .” See 805 ILCS 320/6.

a. But again, any purchaser of these lots does not receive a fee simple interest; rather, it is only a license or an easement for burial purposes. See Steele v. Rosehill Cemetery Co., 370 Ill. 405, 19 N.E.2d 189 (1939); see also 765 ILCS 835/9, which refers to a “right or easement for burial.”

B. Conveyance Back to the Association

1. A burial lot “owner” can convey the lot back to the association, to be held in perpetual trust for the purpose of its preservation as a place of burial. Once so conveyed, the lot becomes inalienable. The right to use the lot as a place of burial descends to the owner’s heirs, unless the deed provides that interment shall be confined to the bodies of specific persons. See 760 ILCS 90/1.

a. Note that this violates the Rule Against Perpetuities and the Rule Against Restraints on Alienation. However, because of this specific statutory approval, the violation is permitted. See Mason v. Bloomington Assn., 237 Ill. 442, 86 N.E. 1044 (1909).

VI. Rules of Title Practice:

A. In General

1. Conveyances by or to a cemetery association present innumerable problems to the title company. Besides the law in this handout, corporate law should also be consulted.

2. The following requirements must be met in order to insure the sale of real property by a cemetery association:

a. The land must not be needed for cemetery purposes.

b. There must not be any burials on the unneeded land.

c. The sale must be authorized by a majority of the trustees and lot owners.

d. The sale of the land must not interfere with the operation and maintenance of the cemetery, impair the integrity of the cemetery as a burial place, or deprive lot and grave owners of reasonable access to their lots and graves. In this regard, see Odd Fellows Cemetery v. Oakbridge Cemetery, 14 Ill.App.2d 378 (1957).

B. When insuring a tract of cemetery property and a cemetery association is in title, or when the examiner knows that the land is a cemetery, or when a conveyance from a cemetery is found in the chain of title, raise these title exceptions on the commitment:

1. Rights, interests, and easements of any and all persons who have purchased burial lots or parts thereof on the property in question.

2. Easements for driveways, alleys, walks and other ways upon and over the premises in question or any part thereof.

3. Statutory rights and powers of the State of Illinois and of the municipality or county to regulate and control the use of the premises in question as a cemetery and also to regulate and control the interment or removal of bodies in or from the premises in question or any building located thereon.

4. Legal limitations imposed by the laws of the State of Illinois upon the right of (cemetery association) to take, hold, convey, and mortgage real estate and also particularly as to the right of said association to sell, convey or mortgage lands that have been dedicated or used for cemetery purposes.

5. Taxes for the year (current year) , which are not yet due and payable. Taxes for the year (year of previous taxes) are shown in the warrant books as being exempt.

6. Easements, rights, or interests arising out of the following: the sale or transfer of lots or burial rights therein; the sale or transfer of crypts or vaults located on the premises; any interment in said land.

7. If the chain of title reveals that a cemetery association was in title but that the land has since been conveyed, raise this exception:

a. Satisfactory evidence is required that no bodies have been buried or interred on the premises in question.

VII. Ancestral Graveyards

A. In many rural areas deeds, will be found that reserve an ancestral graveyard. Because of the public policy surrounding the sanctity of buried persons, the existence of these private cemeteries cannot be ignored.

B. It is also possible in such areas to find burial plots on conveyed property even when the deed to the property does not indicate that the conveyance is “subject to” the burial grounds.

C. Rule of Title Practice:

1. When insuring property where there has been no reservation noted in a deed of record, but you have actual knowledge that bodies have been interred, raise this exception:

a. Easements, rights, or interests arising out of the following: the sale or transfer of lots or burial rights therein; the sale or transfer of crypts or vaults located on the premises; any interment in said land.

2. When insuring property where there has been a recorded reservation in a deed of record, but there has been no recorded evidence of the formation of a cemetery association, raise this exception:

b. Rights in perpetuity for the purposes of burial as created by reservation in a deed recorded _____ as document _____.

3. If a deed in the chain of title discloses special provisions relating to the cemetery, be sure to show those provisions as a Schedule B exception. Here is an actual exception for some Cook County property:

a. Covenants, conditions, and limitations contained in the warranty deed from the Des Plaines Avenue Cemetery Association to Ziditshover Cemetery Association recorded June 7, 1935, as document 11629705 that relate to the use of the land as a Jewish cemetery; the upkeep of the cemetery, contribution for the payment of the cost of repairs of driveways and the installation of a water system, the construction of fences, and the assessment of a maintenance fund.

VIII. Abandonment (765 ILCS 835/9 et seq.)

A. When a burial lot owner fails to pay maintenance fees to a cemetery association for a period of thirty years or more, there is a presumption that the lot has been abandoned.

1. If abandoned, the lot can be sold.

B. A cemetery association first has to file a petition in the office of the circuit clerk in the county in which the cemetery is located. The petition has to pray for an order determining that the lot (or portion thereof) has been abandoned.

1. 765 ILCS 835/10 sets forth the necessary elements of the petition. One of them is the name of the owner or owners of the lot (or portion thereof), if known.

C. All parties named in the petition are served notice of the proceeding “in the same manner as is now or may hereafter be required in other civil cases.” See 765 ILCS 835/11.

D. If the owner or his heirs or legatees under a will appears and answers, there is no longer a presumption of abandonment, and the court sets the matter for a hearing.

E. If the defendant or defendants fail to appear and answer the petition, or if they do appear, but the court determines from the evidence that there has been a continuous failure to pay the maintenance fees for a period of thirty years or more preceding the filing of the petition, then in either event an order shall be entered determining that the lot (or part thereof) has been abandoned, and that the “right or easement for burial” will be subject to sale at the expiration of one year from the date of entry of the order.

F. If within this one year period the owner or his or her heirs pays all the delinquent charges, pays the association for the costs of the suit, and contracts for the future care and maintenance of the lot (or portion thereof, hereafter just “lot”), then the lot will not be sold, and the order of abandonment will be vacated.

G. But if after one year from the date of the order, the fees have not been paid, the cemetery association has the right to sell the lot at a public sale and to grant an easement for burial purposes to the purchaser at the sale, subject to the interment of any human remains theretofore placed within the lot.

1. The cemetery association has the right to bid at the sale.

H. Notice of the sale is published once in a newspaper of general circulation in the county no less than thirty days prior to the date of sale.

IX. Removal of Cemeteries (The Cemetery Removal Act; 765 ILCS 830/1)

A. Whenever any cemetery is within the limits of any town, the corporate authorities may “for any good cause” cause the remains of all persons interred to be removed to some other suitable place.

B. The corporate authorities must first obtain the assent of at least a majority of the cemetery trustees.

C. Rule of Title Practice: If asked to insure a former cemetery wherein the remains have been removed pursuant to this Act, confirm two issues: one, that all bodies have been removed from the cemetery, and two, that the cemetery has been properly vacated.

1. Example: When the Village of Oak Brook wanted to develop a cemetery in 1962, it passed two ordinances. Ordinance No. S-46 was an “Ordinance for Removal of Thurston Cemetery.” Ordinance No. S-47 was an “Ordinance Authorizing Removal of Certain Bodies from Thurston Cemetery.”

X. The Archaeological and Paleontological Resources Protection Act (20 ILCS 3435/01 et seq.)

A. Many people will walk farmers’ fields in the spring, after a spring rain, looking for American Indian artifacts.

1. While this can be done on private property, one can not do this on public property unless one first obtains a permit from the Illinois Historic Preservation Agency.

2. “Archaeological resource” means any significant material remains or localities of past human life or activities on public land, including but not limited to artifacts, historic and prehistoric human skeletal remains, mounds, earthworks, shipwrecks, forts, village sites, or mines.

3. “Paleontological resource” means any significant fossil or material remains on public lands, including traces or impressions of animals or plants that occur as part of the geological record that are known and are included in the files maintained by the Illinois State Museum.

XI. The Human Skeletal Remains Protection Act (20 ILCS 3440/01 et seq.)

A. Any person who discovers human skeletal remains subject to this Act must promptly notify the coroner.

1. An example would be the discovery of an ancestral graveyard in a rural area.

B. The purpose of this Act is to discourage the “mining of prehistoric and historic Indian, pioneer, and Civil War veterans’ graves. . . . There is an immediate need for legislation to protect the graves of these earlier Illinoisans from such desecration.”

XII. Cemeteries and Claims

A. In the past title companies have faced claims relating to cemeteries. These claims usually arise after a landowner discovers buried human remains on his or her property.

B. What are the issues concerning these claims? How are these claims addressed?

C. Years ago a state hospital sold land to a municipality. A title company insured the sale of the land to a developer. As the developer started digging up the ground, he discovered that a portion of it was a “Potters Field.” The developer tendered a claim to the title company.

1. There is no claim here, as the Potters Field is not a defect of title. Nonetheless, the title company did get involved in the claim for public relations purposes.

D. A title company insured some property in DuPage County many years ago. As the road in front of the house was widened, bodies were uncovered. The owner of the home tendered a claim to the title company, as the title policy contained no exception for a cemetery.

1. Again, the title company was very concerned about public relations. However, it ultimately denied the claim.

2. There was a plat of the cemetery recorded. (See, e.g., 55 ILCS 65/4; 805 ILCS 320/6). However, this plat dated back to the late 1800s, but was not recorded until 1962. Thus, the plat was not in the chain of title and accordingly missed by the title searcher.

3. Also, the municipality properly vacated the cemetery. Section 2 of the vacation ordinance reads: “In order to abate said nuisance and pursuant to the powers vested in the village by the laws of the State of Illinois, said burial and cemetery grounds are hereby removed and vacated.”

a. Thus, the cemetery was not a lien or encumbrance on the title of the insured’s property.

XIII. Conclusion

A. It seems to me that there are two main concerns that we especially have to be concerned with when dealing with cemetery property.

1. The first is that we have to be concerned with whether or not the property has been dedicated for burial purposes.

2. As discussed above, generally speaking, cemetery associations are prohibited from selling land dedicated for burial purposes. Once land is dedicated for burial purposes (such as by the filing of a plat), it may not be sold. See Bushers v. Graceland Cemetery Assn. of Albion, 171 F.Supp. 205 (D. Ill. 1959).

a. However, cemetery associations may convey any land purchased for burial purposes when the state legislature or a municipal ordinance prohibits the use of the land for burial purposes. See 765 ILCS 810/1.

b. For example, when a subsequent zoning ordinance bars the use of newly-acquired land for cemetery purposes.

3. The second is potentially more serious, in that its effects are more subtle. As noted above, there is Illinois case law that provides that the sale of the land must not interfere with the operation and maintenance of the cemetery, impair the integrity of the cemetery as a burial place, or deprive lot and grave owners of reasonable access to their lots and graves. In this regard, see Odd Fellows Cemetery v. Oakbridge Cemetery, 14 Ill.App.2d 378 (1957).

a. Have you been asked to insure the sale of non-burial property that is adjacent to the cemetery burial plots? What if the access road to the burial plots is through this land? If so, these access rights can not be disturbed.

b. This issue must be considered whenever we are asked to insure the sale of cemetery property.

4. On the other hand, the insurance of the “sale” of individual cemetery plots should be avoided. Most likely this is not a true deed, but more in the nature of a license or easement. The fine print of the “conveyance” document may indicate that the document is not even an interest in land.

XIII. Conclusion

A. The attached newspaper article appeared in a Virginia newspaper on January 23, 2003. It concerns the cemetery where six McCoys (as in the famed Hatfields and McCoys) are buried.

1. These McCoy graves are on land owned by a Hatfield descendant. The McCoy descendants claim that they have been unable to visit the cemetery because the driveway leading to the graves has been marked “No Trespassing.”

B. The attorney for the McCoy descendants states that “relatives have an unquestionable right to visit the graves.” Is this true?

1. Possibly not. Assume that there is no recorded grant of easement. At the very least, the McCoys might have had an easement based on prescription.

2. An easement by prescription is created when someone uses someone else's land in an adverse manner for a prescriptive period of at least twenty years. The use of the land must not be permissive; it must be adverse to the rights of the true owner. See Page v. Bloom, 223 Ill.App.3d 18 (1991); McRaven v. Charles, 7 Ill.App.3d 55 (1972).

2. But an easement can be extinguished by abandonment.

3. Non-use alone does not terminate the easement. To have abandonment, there must be non-use, coupled with circumstances indicating that it was the intent of the owner of the easement (the dominant estate) to abandon the use of the easement. See Beloit Foundry Co. v. Ryan, 28 Ill.2d 379 (1963); Chicago Title & Trust Co. v. Wabash-Randolph Corporation, 384 Ill. 78 (1943).

a. Thus, an easement that has been dormant through nonuse, but with no intentional abandonment, can be revived. See Finn v. Williams, 376 Ill. 95 (1944).

4. It would seem that the circumstances that would indicate the abandonment of an easement of access to a family cemetery plot would be different from the circumstances that would indicate the abandonment of an easement of access to one’s home.

a. For example, the fencing off of an easement of access to one’s home for a period of six months, with no complaint from the holder of the easement, might indicate abandonment of the easement.

b. On the other hand, the fencing off of an easement of access to a family cemetery plot for a period of six years, with no complaint from the holder of the easement, still might not be sufficient to clearly indicate abandonment on the part of the easement holder.

c. But sixteen years? That might be different; that might be sufficient to indicate an abandonment of the easement.

5. Therefore, it would seem that the statement that “relatives have an unquestionable right to visit the graves” might be presumptuous.

Churches

Church (Standard Religious Corporation)

Statute: 805 ILCS 110/0.01 et seq. (Religious Corporation Act)

Clearance:

• The real property of a standard religious corporation is vested in the corporation. The property may be sold or mortgaged. See 805 ILCS 110/41.

• The trustees of the church have the care, custody, and control of the church’s real property, but this power is subject to the direction of the congregation. See 805 ILCS 110/43.

• 805 ILCS 110/36, 805 ILCS 110/46b, and 805 ILCS 110/46g refer to the recording of an affidavit that memorializes the election or appointment of church trustees or officers.

• 805 ILCS 110/36 indicates that a church may change its name or otherwise amend its “original affidavit of incorporation” by approving a resolution in accordance with the church rules and recording an affidavit.

• Examples of this type of church would include the smaller incorporated “storefront” churches.

• When insuring the deed or mortgage of this type of religious corporation, the examiner must deal with the following issues, none of which are addressed in the statute: matters regarding the sufficiency of notice to members of the congregation; the number of members needed to be present at a meeting in order to have a quorum; the number of members of the quorum who must approve the deed or mortgage; the number of trustees who must sign the deed or mortgage. (Note, however, the church’s bylaws or charter may provide guidance in this area. If these documents are silent in this regard, see below.)

• As indicated above, the Religious Corporation Act does not indicate how many members of the church have to be present at the meeting (i.e., a quorum) to vote on the proposed deed or mortgage after notice has been delivered to all the members. This statute does not indicate how many members of those members present have to approve the proposed deed or mortgage. However, Article XI, section 64, of Robert’s Rules of Order suggests that a quorum would be a majority of the voting members of the church. Article VIII, Section 46, of Robert’s Rules of Order suggests that a simple majority of the quorum can approve the deed or mortgage. See www.robertsrules.org.

• The Religious Corporation Act does not indicate how many days’ notice the congregation must have before meeting to approve the proposed deed or mortgage.

• Article XI, section 64, of Robert’s Rules of Order refers to “reasonable notice of a meeting.” What is reasonable notice?

• If the church were an unincorporated association, the members would be entitled to ten days’ notice. See 765 ILCS 115/2, which is part of the Property of Unincorporated Associations Act. Thus, it appears that ten days’ notice would be reasonable notice.

• However, the church’s charter or bylaws may provide guidance in this area.

• The examiner should ask for the following documents and information, together with a certificate executed by the custodian of the records of the church, under the seal of the religious corporation, certifying that the documents and information are true and correct: A copy of the bylaws of the corporation; the number of trustees elected to the board of trustees of said corporation; the names of all persons elected to the board of trustees of said corporation; the total number of the members of the church entitled to vote on any conveyance or mortgage of church property; a statement that notice of the proposed mortgage or sale was properly given to all such members in accordance with the bylaws; the number of members present at the meeting to consider the sale or mortgage; the minutes of said meeting; the actual “yes” or “no” vote of the members present at the meeting; the resolution as adopted by the members of the church; the number of trustees (and their names) who are authorized to sign the proposed deed or mortgage.

• The examiner may be able to obtain information about the church by searching the name of the church in www.google.com .

Execution of the deed or mortgage:

• When directed by the congregation, the deed or mortgage is executed by the trustees of the religious corporation. See 805 ILCS 110/43.

Church (Religious Corporation Subject to Higher Ecclesiastical Body)

Statute:

805 ILCS 110/46a through 805 ILCS 110/46h, inclusive

Clearance:

• A church subject to the control of a higher ecclesiastical body can incorporate. Title to real estate would be vested in this religious corporation, but the power to convey or mortgage the real estate would be subject to the “patronage, control, direction, or supervision” of the governing ecclesiastical body. See 805 ILCS 110/46a; 805 ILCS 110/46e; 805 ILCS 110/46f.

• The power to convey or mortgage church property would be vested in the church trustees, but because the trustees’ right to convey or mortgage property is subject to the authority of a higher ecclesiastical body, the examiner should obtain a certified copy of the governing “rules, regulations, articles of association, constitution, bylaws, or canons” of this superior body. The document(s) should be examined to make sure that all requirements for the conveyancing or mortgaging of local church property are met. See 805 ILCS 110/46a.

• As the local church may have bylaws with additional requirements, the examiner should obtain and review a copy of any local bylaws. See 805 ILCS 110/46e.

• 805 ILCS 110/46a through 805 ILCS 110/46h do not refer to the meeting, notice, and quorum requirements of the local church. This should not be a problem. The power of the local church to convey or mortgage property is tempered by the authority of the governing ecclesiastical body. Therefore, the examiner should not have to be concerned about the requirements of the local church—unless the bylaws of the local church provide otherwise.

• As indicated above, the governing ecclesiastical body should approve the deed or mortgage. See 805 ILCS 110/46a; 805 ILCS 110/46e.

• Examples of this type of church appear to be the Lutheran Church—Missouri Synod, the United Methodist Church, and the Presbyterian Church (U.S.A.).

• The United Methodist Church is governed by the 2016 Book of Discipline. Section 2539 concerns the purchase of property for the United Methodist Church. Section 2541 concerns the mortgaging or selling of United Methodist Church property. The 2016 edition of the Book of Discipline is readily available for review online.

Execution of the deed or mortgage:

• Any deed or mortgage should be executed by the trustees of the religious corporation. See 805 ILCS 110/46a; 805 ILCS 110/46e.

Church (Corporation Sole)

Statute:

• None

Clearance:

• A corporation sole is a legal entity consisting of a single (“sole”) incorporated office that is occupied by a single (“sole”) man or woman. See “Associational Structures of Religious Organizations”, by Patty Gerstenblith, Brigham Young Law Review, May 1995, pp. 439-480 at pp. 454-55.

• The Roman Catholic Church is an example of a corporation sole. Title to property conveyed to this church is taken in the name of the bishop. For example, in the Archdiocese of Chicago, the corporation sole is “The Catholic Bishop of Chicago.” According to the bylaws of this corporation sole, “by that name said bishop, and his successors in office . . . may acquire, hold and convey property, real, personal and mixed. . . .” See Illinois Private Laws 1861, p. 78.

• Thus, title conveyed or devised to the Roman Catholic Church is taken in the name of the bishop or archbishop of the ecclesiastical district in which the property is located.

• A corporation sole may buy, sell, lease, and mortgage property in the same manner as a natural person. Thus, the examiner needs no special documentation to insure a mortgage or deed executed by a corporation sole.

• However, the Catholic Bishop of Chicago (and perhaps other Roman Catholic corporation soles) does not have unilateral authority to sell real estate. Rather, there are two limitation levels that should be considered when the church is selling real estate of a significant value ($1,000,000 or more). The College of Consultors to the Archdiocese must first approve the transaction. Then, the Holy See (Vatican) must approve the sale. It does so by issuing a letter of approval called “Nihil Obstat,” which is Latin for, “let nothing stand in the way.” When it issues the letter, it also assesses a small percentage tax (the “taxa”) on the sale proceeds

• But note that when asked to insure a sale or mortgage of land owned by the Roman Catholic Church, the bishop or archbishop may delegate the execution of documents to a third party. In that event, the examiner should review the applicable power of attorney.

• The Church of Jesus Christ of Latter-day Saints (Mormons) also uses the corporation sole entity for its president. This corporation sole is legally titled as, “The Corporation of the President of the Church of Jesus Christ of Latter-day Saints.”

• The use of the corporation sole may be gaining favor with sovereign citizen groups. An examiner must consult an underwriter if asked to insure a transaction involving a corporation sole other than a Roman Catholic Church corporation sole or a Church of Jesus Christ of Latter-day Saints corporation sole.

Church (Unincorporated Association)

Statute:

• 765 ILCS 115/0.01 et seq.

Clearance:

A church can be an unincorporated association. See “Associational Structures of Religious Organizations”, by Patty Gerstenblith, Brigham Young Law Review, May 1995, pp. 439-480 at p. 444.

• In order to acquire, mortgage, and convey property in its own name, the church must be chartered by its “parent” entity. The examiner must obtain and review a copy of this charter. The examiner should make sure that the charter contains no limitations on the church’s power to convey and mortgage property. See 765 ILCS 115/1; 765 ILCS 115/2.

• The proposed deed or mortgage must be authorized by a vote of the members present at a regular meeting held by the organization, after at least ten days notice has been given to all members of the organization. Notice is by mail to the last known address of all the members. See 765 ILCS 115/2.

• 765 ILCS 115/1 et seq. does not indicate how many members of the church have to be present at the meeting (i.e., a quorum) to vote on the proposed deed or mortgage after ten days’ notice has been delivered to all the members. This statute does not indicate how many members of those members present have to approve the proposed deed or mortgage. Article XI, section 64, of Robert’s Rules of Order suggests that a quorum would be a majority of the voting members of the church. Article VIII, Section 46, of Robert’s Rules of Order suggests that a simple majority of the quorum can approve the deed or mortgage. See www.robertsrules.org. However, the church’s charter or bylaws may provide guidance in this area.

• 765 ILCS 115/2 refers to the “officer in charge of the records.” The examiner should request and review a certificate executed by said officer, certifying that the following documents and information are true and correct: A copy of the notice sent out to all members of the church; the date the notice was mailed; the date the meeting was held; the number of voting members of the church; the number of members present at the meeting to consider the deed or mortgage; the number of “yes” and “no” votes of those members present at the meeting.

Execution of deed or mortgage:

• The presiding officer of the church and the secretary or other officer keeping the records may execute a deed or mortgage. Any deed or mortgage should be in the name of the church. See 765 ILCS 115/2.

Church (Not-for-Profit Corporation)

Statute:

• 805 ILCS 105/101.01 et seq.; 805 ILCS 105/103.05(a)(8)

Clearance:

• A not-for-profit corporation has the power to sell and mortgage its property. See 805 ILCS 105/103.10(e).

• A not-for-profit corporation can be involuntarily dissolved for, among other things, failing to file its annual report. See 805 ILCS 105/112.35. For this reason, the examiner should ask for a certificate of good standing of the church. (It does not appear that the examiner can confirm the good standing of the corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com, as this website is designed to disclose business-related information.)

• The examiner should review the bylaws of the corporation to see if there are any limitations on the church’s power to sell or mortgage its property. The examiner may also want to look at the articles of incorporation. See 805 ILCS 105/101.80(c); 805 ILCS 105/101.80(e); 805 ILCS 105/102.10; 805 ILCS 105/102.25.

• When insuring the sale of mortgage of all or substantially all of the corporate assets of the corporation, when made in the usual and regular course of business of the corporation, the examiner must obtain the authorization of the board of directors. See 805 ILCS 105/111.55.

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, would be evidence of this consent.

• Even if the title company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage.

• If the proposed conveyance or mortgage is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the transaction is authorized in the following manner: If the corporation has no members or no members entitled to vote on the proposed conveyance or mortgage, then the majority vote of the directors in office can authorize the conveyance or mortgage. See 805 ILCS 105/111.60.

• But if the corporation has members entitled to vote on the proposed conveyance or mortgage, then the board of directors has to adopt a resolution recommending the sale or mortgage. The members then have to vote at either an annual meeting or a special meeting to authorize the deed or mortgage. A two-thirds affirmative vote of a quorum (a quorum being members holding one-tenth of the votes entitled to be cast) is needed. See 805 ILCS 105/107.60; 805 ILCS 105/111.60.

• But why would a church be conveying or mortgaging its property in a transaction that is not in its usual and regular course of business? An examiner should consider working with an underwriter when insuring title under this set of facts.

Execution of deed or mortgage:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other authorized officer. If there are no such officers, then the document should be executed by a majority of the directors or by such directors as may be designated by the board of directors. If there are no such officers or directors, then the document should be executed by the members or such members as may be designated by the members at a lawful meeting. See 805 ILCS 105/101.10.

Church (Generic)

What if the examiner or closer is not sure about what type of church is in title to the land he or she is insuring? The following is a good generic “catch all” exception that can be used in an attempt to collect as much information as possible:

In connection with the proposed conveyance or mortgage, we should be furnished a certificate by the custodian of the records under the seal of the church in title accompanied by the following:

(a) A copy of the by-laws or governing regulations or articles of the church; (b) The number of all trustees elected to the board of trustees of said church, together with the names of said trustees; (c) The total number of the members of the church entitled to vote on any conveyance or mortgage of church property; (d) A statement that notice of the sale or mortgage was properly given to all such members in accordance with the by-laws or governing regulations or articles; (e) The number of members present at the meeting to consider the sale or mortgage; (f) The minutes of said meeting; (g) The actual “yes” or “no” vote of those members present at said meeting; (h) The resolution as adopted by the members of the church.

If said church is governed by a higher ecclesiastical body, then we should be furnished a certified copy of the governing articles of this higher ecclesiastical body to which transactions by or with the church in title are subject. All limitations and requirements contained therein must be met.

This commitment is subject to such additional exceptions, if any, as may then be deemed necessary after an examination of these materials.

Church, Presbyterian

For information concerning the sale of Presbyterian church property, see the Book of Order 2017—2019. See in particular these sections of the Book of Order:

G-1.0502(d): With adequate notice, congregations can have meetings to discuss the “buying, mortgaging, or selling real property.”

G-3.0303: The “presbytery” and the “session” are two higher groups in the church.

G-4.0101: The congregation can form a corporation. The corporation has the power to “receive, hold, encumber, manage, and transfer property, real or personal, for and at the direction of the council.”

G-4.0206(a): “A congregation shall not sell, mortgage, or otherwise encumber any of its real property and it shall not acquire real property subject to an encumbrance or condition without the written permission of the presbytery transmitted through the session of the congregation.”

United Methodist Church

The United Methodist Church is governed by the 2016 Book of Discipline. Section 2539 concerns the purchase of property for the United Methodist Church. Section 2541 concerns the mortgaging or selling of United Methodist Church property. The 2016 edition of the Book of Discipline is readily available for review online.

Civil Unions

The Civil Union Act and the Execution and Preparation of Real Estate Documents

By

Richard F. Bales

Introduction

Public Act 96-1513 (S.B. 1716), effective June 1, 2011, creates the Illinois Religious Freedom Protection and Civil Union Act (hereafter Civil Union Act). The Act is codified at 750 ILCS 75/1 et seq. The Civil Union Act establishes procedures for the creation and dissolution of civil unions and is intended to provide persons entering into a civil union with the obligations, responsibilities, protections, and benefits afforded or recognized by the law to spouses. See 750 ILCS 75/5.

The passage of the Civil Union Act brings many new challenges to real estate practitioners. For example: How should parties to a civil union be described in deeds and other documents? How should the issue of homestead be addressed in these documents? Can parties to a civil union own their home as tenants by the entirety, and if so, how should they be described in the deed?

Identifying parties on deeds, mortgages, and other recorded documents

Example: Ann Anderson and Betty Barnes are partners in a civil union. They want to buy a home and take title as partners in a civil union. How should they be described in the deed?

Ann Anderson and Betty Barnes, partners in a civil union, grantees. . . ..

Note: The grantees’ tenancy in this deed must still be considered and addressed. That is, the Civil Union Act does not confer any automatic tenancy to grantees who take title as partners in a civil union.

Example: Fred Smith and Jack Jones are parties to a civil union who own their own home and want to convey it. How should they execute the deed?

A “party to a civil union” is a defined term in the statute (750 ILCS 75/10). Therefore, the following is certainly appropriate:

Fred Smith and Jack Jones, parties to a civil union, convey and warrant to. . . .

But on the other hand, one might argue that Fred and Jack might be parties to a civil union, but not with each other. For this reason, the more specific term, “partners in a civil union,” might be preferable:

Fred Smith and Jack Jones, partners in a civil union, convey and warrant to. . . .

Example: Joe Doe is not married and he is not a party to a civil union. He owns his home by himself and wishes to execute a deed. Remember that a civil union is not the same as a marriage. Thus, a grantor might be unmarried but still be a party to a civil union. Therefore, a deed wherein the grantor is described only as “an unmarried person” might be construed as being vague. That is, the grantor might be unmarried, but he or she might be a party to a civil union, and thus, the waiving of homestead might be an unresolved title issue.

For this reason, the following language is not appropriate:

Joe Doe, an unmarried person, conveys and warrants to. . . .

On the other hand, any of the following are appropriate, with the last one being the simplest and therefore probably preferable:

Joe Doe, an unmarried person and not subject to a civil union, conveys and warrants to. . .

Joe Doe, an unmarried person and not a party to a civil union, conveys and warrants to. . .

Joe Doe, a single person, conveys and warrants to. . . .

Example: John Jones and Paul Smith are partners in a civil union. Only John owns the home in which they live. The house is going to be sold. Realistically, for purposes of waiving homestead, how should the deed be prepared? That is, how should John be described in the deed in order to convey the property? How should Paul sign the deed in order to waive homestead?

John Jones, a party to a civil union with Paul Smith, conveys and warrants to. . . .

Paul Smith, a party to a civil union with John Jones, signs this deed solely for the purpose of waiving any applicable homestead interest.

The following is also appropriate:

John Jones, a partner in a civil union with Paul Smith, conveys and warrants to. . . .

Paul Smith, a partner in a civil union with John Jones, signs this deed solely for the purpose of waiving any applicable homestead interest.

Example: Sandra Smith and Isabel Douglas are partners in a civil union. Sandra owns the home in which the two of them live. Sandra now wishes to refinance her original purchase money mortgage. Sandra will execute the new mortgage. The lender is requiring that Isabel waive homestead in this mortgage. How should Sandra be described in the mortgage? How should Isabel sign the mortgage in order to waive homestead?

Sandra Smith, a partner in a civil union with Isabel Douglas, (hereafter “Mortgagor”), does hereby. . . .

Isabel Douglas, a party to a civil union with Sandra Smith, signs this mortgage solely for the purpose of waiving any applicable homestead interest.

Example: Carl Cooper owns a rental property, which he is selling to Greg and Pamela Jones. Carl has entered into a civil union with David Dawson. Neither Carl nor David live in this property.

How should Carl be described in the granting clause of the deed?

Carl Cooper, a partner in a civil union with David Dawson, conveys and quit claims to Greg Jones and Pamela Jones, husband and wife. . . .

How should the issue of homestead be addressed in Carl’s deed? Consider simply adding a statement to the face of the deed:

Appropriate but unnecessarily broad: This land is not the homestead of grantor, grantor’s spouse, or grantor’s partner in a civil union.

Preferable: This is not homestead property.

Example: Phillip Edwards and Jane Jacobs are two single people who own their own home and want to convey it. How should they execute the deed? As noted above, a description of either party as “unmarried” does not address the issue as to whether or not they are parties to a civil union.

With that thought in mind, any of the following is appropriate:

Phillip Edwards, a single person, and Jane Jacobs, a single person, convey and warrant to. . . .

Phillip Edwards and Jane Jacobs, unmarried people and not parties to a civil union, convey and warrant to. . . .

Phillip Edwards and Jane Jacobs, unmarried people and not partners in a civil union, convey and warrant to. . . .

The Civil Union Act is not reserved solely for same sex relationships. A man and woman can enter into a civil union.

With this in mind, consider the following:

Example: Frank Adams and Janet Baker own their home in joint tenancy. They have lived together for many years. Neither one has any intention of getting married.

After becoming partners in a civil union ceremony, they decide to deed their home to themselves. How should they describe themselves in the deed?

Frank Adams and Janet Baker, partners in a civil union, grantors, convey and quit claim to Frank Adams and Janet Baker, partners in a civil union, grantees, in joint tenancy. . . .

Tenancy by the Entirety

Section 20 of the Civil Union Act provides that “a party to a civil union is entitled to the same legal obligations, responsibilities, protections, and benefits as are afforded or recognized by the law of Illinois to spouses. . . .” Because of the broad application of this legislation, parties to a civil union should be able to own their homestead as tenants by the entirety.

But remember that Public Act 92-136, a 2002 amendment to 765 ILCS 1005/1c, deleted the statutory requirement that a married couple must be expressly identified as “husband and wife” on deeds creating a tenancy by the entirety. This means that “John Carlson and James Davis, partners in a civil union,” can take title to their homestead merely as tenants by the entirety (i.e., with no indicia of civil union status) and the tenancy should be valid. In addition, this amendment made it clear that the formal language “not as tenants in common, not as joint tenants, but as tenants by the entirety” was not needed in order to create a valid tenancy by the entirety.

That being the case, either one of these grantees is valid:

John Carlson and James Davis, partners in a civil union, not as tenants in common, not as joint tenants, but as tenants by the entirety

John Carlson and James Davis, as tenants by the entirety

Conclusion

Public Act 96-1513 is only a few pages long. Nonetheless, it seems clear that the changes created by this legislation will have a tremendous effect on not only the general public but on real estate attorneys as well.

Cooperatives

Cooperatives

By

Richard F. Bales

Introduction

There are at least three different types of cooperative apartments, commonly called “co-ops,” in the Chicago area. They might be informally described as follows:

• Formal Cooperative Apartments

The first type is what might be called a “formal co-op.” A corporation may own the fee simple title to an apartment building. The owners of the apartments in the apartment building hold leasehold interests in the apartments, together with shares of corporate stock. Thus, the building is occupied by the shareholders of the corporation. Each shareholder is also a lessee, entitled to the right of possession of a certain apartment in the cooperative pursuant to a lease.

The stock owned by each shareholder represents the value of a particular apartment in the building.

Ownership of the stock may not be transferred separate from the leasehold interest. Instead, stock is transferred pursuant to an assignment of lease and also pursuant to the by-laws of the corporation. The ownership of this stock is often evidenced by the issuance of a stock certificate.

Some lenders will not make loans on these co-op interests unless the loan can be secured by the recording of a mortgage. Other lenders may make a loan if they can take a security interest (UCC filing) in these shares of stock. The UCC will be recorded as evidence of the lender’s security interest in the shares of stock owned by the borrower. (See, e.g., Cook County document 1704541051. The collateral of this UCC statement is “219 shares of the common stock of Chicago Residential Incorporated issued to Debtor on August 1, 2011.”)

If stock has been issued, the lender will usually conduct UCC searches to make sure that the shares of stock that will be assigned to it have not been previously pledged or secured.

In conjunction with the lender’s security interest of the shares of stock, a “Recognition Agreement” may be executed. In this agreement, the co-op corporation acknowledges the right of the owner/borrower to occupy a dwelling space; the corporation also acknowledges the security interest of the lender in the borrower’s shares of stock.

• Not-So-Formal Cooperative Apartments

A land trust may own the fee simple title to an apartment building. In some cases, the beneficiary of the land trust will be the cooperative corporation.

In other cases, a land trust may be in title, but no cooperative corporation was ever established. Instead, the apartment owners own percentage interests in the beneficial interest of the land trust. The beneficial interest in the trust is owned and divided among the occupants of the building in percentages that are proportional to the value of each apartment. These beneficiaries usually occupy their apartments pursuant to leases. To obtain a security interest in the cooperative, a lender can either take a collateral assignment of the beneficial interest or it can execute a UCC that it will file, probably with the county recorder of deeds. This UCC will represent a security interest of the beneficial interest in the land trust.

Summary of These Two Types of Cooperative Apartments

Ownership in a cooperative usually entails both personal property rights (ownership of either shares in the title-holding corporation or a fractional interest of the beneficial interest of the title-holding trustee) and real property interests (the leasehold estate).

• Really Informal Cooperative Apartments

In still other cooperatives, there will be an “informal” cooperative in which there are no leases and the land trust beneficiaries merely have an “understanding” as to who may possess the various apartments. The Company cannot insure this third type of co-op, as there is no legal right to possession; there is only an unrecorded “understanding” between the neighbors as to who lives where and in what apartment. The only title insurance that the Company could provide is a title policy on the entire apartment building.

Characteristics of a Co-op

In a cooperative apartment building, real estate taxes are assessed against the entire property rather than against each individual apartment.

Thus, the interest of each shareholder-lessee is subject to the lien of real estate taxes for the entire building.

Also, the fee simple title to the building may be subject to an underlying mortgage that affects all units.

One permanent index number affecting all of the units; one mortgage affecting all of the units—it is clear that each lessee has a vital interest in insuring that the other lessees have the financial means to pay their share of the assessments. If apartment owners do not pay their share of the assessments, the taxes might be sold at tax sale. The mortgage might be foreclosed.

Compare this arrangement to a condominium, where each unit owner pays only his own unit’s taxes and his own unit’s mortgage.

Because of the interdependent nature of the cooperative, the board of directors must consent to any assignment of leasehold interest to a new purchaser of a cooperative apartment. From time to time newspapers will write about celebrities and politicians who are turned down by cooperative boards of directors. For example, in 1985 the San Remo, a cooperative apartment building in New York City, rejected the singer Madonna when she tried to buy a three-bedroom co-op unit for $1,200,000.

Title Insurance for a Co-op

The examiner can issue title to a cooperative in one of two ways:

• A leasehold policy (i.e., an owner’s policy with a leasehold endorsement)

• A “regular” owner’s policy, which is used in one of three instances:

 When the entire fee interest in the building is being mortgaged or sold;

 When the cooperative is the “informal” type. Individual leasehold coverage is not available to a co-op purchaser because there is no written lease for the apartments. Therefore, a title policy is issued on the entire apartment building.

 When the lender has not prepared a mortgage to be executed. Instead, the lender has prepared documents that create a security interest in, e.g., the lease, shares of stock, personal property, or fixtures.

Insuring the Co-op—Schedule A

At the commitment stage, the examiner should show as the party in title either the fee simple owner of the land or, if the examiner has independent knowledge of who the lessee is (such as a name on the title application), the examiner should show that name. However, the examiner should then also raise Softpro exception CU100:

Our title finding is for convenience only and is based on the assumption that we will find said party(s) to be the current lessee upon our receipt and review of the documentation requested herein.

The legal description will be the apartment number and the street address of the cooperative, followed by the underlying legal description of the land. For example:

Apartment 701 on the seventh floor of the apartment building commonly known as 3500 North Lake Shore Drive, which building is located on the following described real estate: _________, Cook County, Illinois

Or,

Apartment 8-C of 3500 North Lake Shore Drive, which is located on the following described real estate: _________, Cook County, Illinois

Insuring the Co-op—Schedule B

Unfortunately, there is not one overall clearance exception in Softpro that sets forth all the clearance issues relating to co-ops. CUR106 does not ask for a copy of the proprietary lease. CUR102 and CUR108 make no mention of a corporation certificate of good standing.

According, the examiner should raise the following exception:

The Company should be furnished a current certificate of good standing from the Illinois Secretary of State relating to ______________.

(Alternatively, the examiner can perform an Illinois Secretary of State search online and not raise the above exception.)

and raise the following

The Company should be furnished the following:

A copy of the corporate by-laws and any other instruments that govern the management, use or occupancy of the land; An executed copy of the original lease creating title to the leasehold estate described in Schedule A, together with all assignments thereof, if any; A written statement from the Board of Directors that authorizes and consents to the lease, assignment or mortgage to be insured and to any transfer or pledge of stock related thereto; and A written statement from the Board of Directors that there are no unpaid assessments, special assessments or other charges with respect to said leasehold and that there has been no default under the terms of said lease. This statement should cover the recording date of such lease, assignment or mortgage.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

And raise the following: Terms, provisions, covenants, rights, and options contained in the by-laws of the _____ cooperative, together with any other instrument that governs the management, use, or occupancy of the land, including but not limited to rights of refusal, consent provisions, and provisions relating to the levying and enforcement of assessments and special assessments, and any pledges of or liens upon the capital stock, and the consequences of the enforcement thereof.

The examiner should include in Schedule B all underlying mortgages, laundry room leases, and other matters that affect the “common areas” of the building. However, matters affecting other units can be ignored.

Reviewing the Lease

The examiner should review the lease. The examiner should consider the following issues:

• The name of the lessor should be the fee simple owner of the land.

• If the Company is insuring a leasehold estate pursuant to an assignment of lease, the examiner should review both the original lease and all intervening assignments of lease to make sure than there is an insurable “leasehold chain of title.”

• The lease should contain the term of the lease.

• The lease should contain a description of the leased unit, even if the description is only the floor and the apartment number.

• The lease should contain words of demise. For example: “I hereby demise” or “I hereby let.”

• The lease should be executed and notarized.

• Does the lease contain any specific provisions relating to rights of first refusal, options in the event of an assignment, sublease, or mortgage of the leasehold estate, or provisions relating to the obtaining of consents? If so, these provisions should be addressed.

• The lease, or memorandum thereof, should be recorded. Note, though, that the cooperative may prohibit the recordation of the proprietary leases. In that event, the examiner should raise Softpro exception CU103:

The insurance afforded by this commitment/policy is based on the fact that the insured is and remains in personal possession of the cooperative unit described in Schedule A.

If the lease contains no floor plan, showing the location of the apartment, raise this exception:

This policy should not be construed as insuring the exact location or dimensions of the land demised by the lease described in Schedule A.

Other Documents

The Insured’s lender will possibly have other documents. These documents may include the following:

• A loan security agreement, whereby the owner grants a security interest in the stock certificate, the lease, and all personal property and fixtures. The Company will probably not be able to insure this loan security agreement in Schedule A of the policy. The reason for this is that it is likely that the loan agreement is not a lien on the land. Consider, for example, the wording of this Cook County loan security agreement recorded February 14, 2017 as document 1704541052. Note that although the loan security agreement does not create a lien on the land:

Grantor hereby grants to the Lender a security interest in, and a general lien upon . . . all personal property and fixtures (other than household furniture and furnishings) of the debtor now or hereafter attached to, or used in connection with, the Apartment (collectively called the “Collateral.”)

• An assignment of proprietary lease, wherein the owner assigns to the lender a security interest in the lease. (See, e.g., Cook County document 1704541050.)

• A UCC financing statement, wherein the owner assigns the lender a security interest in the share of corporate stock that the owner owns. (See, e.g., Cook County document 1704541051.)

If the Company receives at closing only the above documents (or variations thereof), the examiner can issue only an owner’s policy to the lender. However, perhaps the lender has drafted a leasehold mortgage that will be signed at closing. In that event, the examiner could issue a loan policy.

The examiner and closer will quickly find that with co-op transactions, different lenders have different methods of securing a collateral interest in the co-operative.

Extended Coverage

If the examiner is insuring just a cooperative apartment, the examiner should not expect to receive a plat of survey at closing. This is understandable; the examiner is insuring an apartment in an apartment building. Nonetheless, even without a survey, the examiner can still give extended coverage over matters of survey (standard exceptions 2 and 3) when insuring the cooperative apartment as long as the examiner reviews the floor plan of the apartment. (The lease of the cooperative apartment should include a floor plan of the apartment.)

The examiner can give extended coverage over standard exceptions 1, 4 and 5 if the examiner is given an ALTA extended coverage statement signed by a representative of the board of directors of the cooperative or the fee owner and also the current lessee.

If the examiner is insuring the sale of the entire cooperative apartment building, the examiner will need a plat of survey in order to issue extended coverage over matters of survey.

Condominiums

CONDOMINIUMS

By

Richard F. Bales

Introduction to Condominiums (765 ILCS 605/1 et seq.)

The Nature of Condominium Ownership

A condominium is an “estate in real property consisting of an individual interest in a portion of a parcel of real estate together with a separate fee simple interest in another portion of the same parcel.” See Giannini v. First National Bank of Des Plaines 136 Ill.App.3d 971 (1985).

In other words, a condominium is an ownership interest in two parcels. This ownership interest is an individual interest in the condominium unit and also a percentage interest in the common elements of the condominium. All the other condominium unit owners also own an interest in these common elements.

765 ILCS 605/2(d) defines a condominium unit as “a part of the property designed and intended for any type of independent use.”

“Common elements” are defined at 765 ILCS 605/2(e) as “all portions of the property except the units, including limited common elements unless otherwise specified.”

“Limited common elements” are “a portion of the common elements so designated in the declaration as being reserved for the use of a certain unit or units to the exclusion of other units, including but not limited to balconies, terraces, patios and parking spaces or facilities.” See 765 ILCS 605/2(s).

In other words: A condominium unit owner owns a cube of air, the dimensions of which are set forth on the condominium plat. Because the unit owner only owns air space, the owner needs access to and from the unit. Access is provided over the condominium common elements, which not only include common areas like streets and walkways, but also portions of the buildings that don’t fall within the units, like the roofs of the buildings. All the unit owners own an undivided interest in the common elements. Together, that undivided interest in the common elements equals 100%.

Example: Sharon owns unit number 1 in a four-unit condominium. All the units are exactly identical. Theoretically, she would own unit 1 and also an undivided 25% interest in the common elements.

Because common elements are usually everything in the condominium project except the units, and because everybody has an undivided interest in the common elements, does this mean that Sam, who is Sharon’s next-door neighbor, can sit out on her patio every night? This is probably not the case. Her patio is most likely a “limited common element,” which is a special type of common element. The use of a limited common element is reserved exclusively for the benefit of one unit, to the exclusion of all other units. See 765 ILCS 605/2(s).

Note that a conveyance of a condominium unit also automatically conveys the limited common elements and the percentage of common elements.

The condominium exists by virtue of the condominium declaration. The declaration consists of two parts--a written document and a plat.

Creating the Condominium—Introduction

One creates a condominium by submitting the property to the Condominium Property Act. One submits property to the Act by drafting and recording a condominium declaration. By recording this declaration, the declarant agrees that this property will be governed by the Condominium Property Act. This declaration consists of both a plat and a written textual document. The plat graphically depicts the land in two ways. The first page of the plat is usually a conventional two-dimensional drawing of the land, similar in appearance to a plat of survey. The rest of the plat is a three-dimensional depiction of those cubes of air called the condominium units.

The written document contains, among other things, a legal description of the land that will become the condominium and also the bylaws. (Unless otherwise qualified, the textual portion of the declaration will hereafter be called “the declaration.”) The declaration is discussed in further detail below.

Creating the Condominium—the Plat

765 ILCS 605/5 requires the following information to be shown on the plat of condominium:

• All angular and linear data along the exterior boundaries of the parcel—that is, a complete “picture” of the legal description of the land, similar to a plat of survey. Note that this information usually appears on the first page of the plat;

• The location of all improvements on the parcel in relation to the exterior boundaries of the parcel—in other words, the distance from the exterior lot lines of the parcel to the corners of the condominium building or buildings.

• The elevations of the unfinished ceilings and floors, the location and dimensions of the interior walls of each unit in relation to the exterior boundaries of the parcel of land;

• The elevation and location (by linear measurement) of part of any unit located outside of any building—for example, a parking space or garage may be part of a unit;

• The unit number or symbol of each unit. The survey must be compared to the written declaration to make sure that the units as identified on the plat of survey are identical to the units as identified and described in the declaration.

• In other words: if the condominium building were to be destroyed, does the plat show enough information so that the building could be rebuilt in the same location on the property? Could the units be rebuilt with the same dimensions? Could the units be rebuilt in the same locations within the building?

See also 765 ILCS 605/4.1:

Construction, interpretation, and validity of Condominium Instruments. (a) Except to the extent otherwise provided by the declaration or other condominium instruments: (1) The terms defined in Section 2 of this Act shall be deemed to have the meaning specified therein unless the context otherwise requires. (2) To the extent that perimeter and partition walls, floors or ceilings are designated as the boundaries of the units or of any specified units, all decorating, wall and floor coverings, paneling, molding, tiles, wallpaper, paint, finished flooring and any other materials constituting any part of the finished surfaces thereof, shall be deemed a part of such units, while all other portions of such walls, floors or ceilings and all portions of perimeter doors and all portions of windows in perimeter walls shall be deemed part of the common elements.

Creating the Condominium—the Written Document

Section 4 of the Condominium Property Act (codified as 765 ILCS 605/4) sets forth the requirements for the written document—the textual part of the declaration:

• The legal description of the parcel. Note that the word “parcel” is the land that is submitted to the provisions of the Condominium Property Act. Section 3 states:

Whenever the owner or owners . . . intend to submit such property to the provisions of this Act, they shall do so by recording a declaration, duly executed and acknowledged, expressly stating such intent and setting forth the particulars enumerated in Section 4.

Note that by recording the declaration, a new chain of title is established for this parcel of land, a chain of title for the various units of the condominium.

• The legal description of each unit, which may be the unit number or symbol.

• The name of the condominium. Section 4(c) of the Condominium Property Act requires that the name of the condominium include the word “Condominium” or be followed by the words, “a Condominium.”

• The name of the city and county or counties in which the condominium is located.

• Each unit’s percentage interest in the common elements. This is often a separate exhibit to the declaration.

Note that the percentage interest of a unit is determined by comparing the value of the unit with the value of the property as a whole. Because all the unit owners own a percentage interest in the common elements, these percentage interests must total 100%. (See Section 4(e) of the Act.)

These individual percentage interests can change, though. Consider, for example: add-on condominiums, which are discussed later in these materials.

• Add-on condominium provisions, if any (These provisions apply only to condominiums recorded on or after January 1, 1978, and are discussed below).

• A description of both the common and limited common elements, if any, and the manner in which they are assigned to the units.

• Condominium conversion provisions, if any (to be discussed. These provisions apply only to condominiums recorded on or after January 1, 1978).

• The condominium by-laws (See Section 18 of the Act). The bylaws contains a multitude of things, most of which are really of no concern to the title insurer. These items include: The election of a board of managers; the powers and duties of the board; compensation of the board, removal from office of board members; maintenance of the common elements; and provisions concerning notice to board meetings.

Unique Features of Condominiums

Construction problems

As originally enacted, the Condominium Act contemplated that all units would be part of a completed building or buildings. Thus, condominiums without buildings or units without walls would not be allowed. In People ex. Rel. County of LaSalle v. Grundy County National Bank, 97 Ill.App.3d 101 (1981), the court did not allow the creation of a condominium for the air space above a mobile home pad, even if the mobile home was affixed to the pad and sold as part of the unit.

The Illinois legislature quickly responded with Public Act 82-246, effective January 1, 1982. It amended Section 5(2) of the Act by changing references to the plat from “the building” to “any buildings improvements and structures located on the parcel,” thus allowing a condominium with no buildings. Accordingly, a mobile home, R.V., or campsite condominium can be created.

Because of this amendment to the Condominium Act, a developer can create a condominium even before the building is built. Section 5 of the Act provides for this. Section 5 states that if the surveyor cannot certify that the plat accurately depicts the property, he must record an amended plat prior to any conveyances, showing the actual as-built location of the units.

Example: A surveyor is asked to prepare a condominium plat, even though the building has not yet been completed. Section 5 of the Condominium Act allows him to do this. However, it is suggested that the surveyor include a cautionary note on the plat, indicating that the building has not yet been constructed.

Section 5(5) and Section 5(6) read as follows:

(5) if the registered Registered Illinois Land Surveyor does not certify that such plat accurately depicts the matters set forth in subsection (3) and (4) above, such a certification for any particular unit or units as built shall be recorded prior to the first conveyance of such particular unit or units as part of an amended plat, thereby complying with the requirements of subsections (3) and (4) of this section;

(6) when adding additional property to an add-on condominium, the developer, or in the event of any other alteration in the boundaries or location of a unit, any building on the parcel or the parcel authorized in this Act, the president of the board of managers or other officer authorized and designated by the condominium instruments shall record an amended plat of survey conforming to the requirements of this section, or shall provide a certificate of a plat previously recorded that is in accordance with the certification requirements of this subsection. Such amended plat or certificate shall be certified by a Registered Illinois Land Surveyor as to accuracy in depicting changes in boundary or location in the portions of the property set forth in subsections (1), (2), (3), and (4) above, and that such changes have been completed.

Note that even if the surveyor accurately measures a building before it is platted, there may be some encroachments of the building into the common elements due to the settling of the structure. Section 23 of the Act creates easements for such unintentional encroachments.

Assume that a surveyor prepares a condominium plat. Pursuant to Section 5 of the Condominium Property Act, or 765 ILCS 605/5, the surveyor has not certified that the plat accurately depicts the improvements located on the ground. (In other words, the surveyor has depicted a condominium building and units on the land, even though at the time the plat was prepared, the land is vacant.) Can a unit in this “phantom condominium” still be insured?

Yes, a unit can be insured. By amending Section 5(2) of the Act by changing “the building” to “any buildings improvements and structures,” the Illinois legislature has provided for the insurance of such a unit. Remember, however, that the surveyor must still record a certification before a unit can be sold. The recording of such a certification would be a post-policy event. Therefore, the examiner should raise a Schedule B exception as to this certification on any policy issued prior to the construction of the improvements. For example:

The consequences of the failure of the surveyor who prepared the condominium plat described in Schedule A to record a certification that certifies that the dimensions, location, and elevations of the unit depicted on said condominium plat are the same as the dimensions, location, and elevations of the unit, as constructed.

A so-called “diminution endorsement” could be issued to any loan policy.

Insuring the Condominium Property:

Examination of the Condominium Plat

As previously noted, the condominium plat is governed by Section 5 of the Act. As the title examiner reviews the plat, the examiner should consider the following questions:

• Is the perimeter boundary of the plat consistent with the legal description of the parcel of land as described in the title commitment? That is, can the examiner “trace” the legal description of the land on the plat?

• Are the buildings shown on the survey located with reference to the perimeter boundary? That is, is there a measured distance between the building and the perimeter of the land? (As noted above, if the building were destroyed, could a builder, looking at this plat, rebuild the identical building in the same location?)

• Are the measurements of all sides of the building shown?

• Is each unit located with reference to the perimeter boundary of the legal description of the parcel submitted to the Condominium Act? That is, can the examiner begin at a corner of the perimeter boundary of the legal description of the submitted parcel and follow a metes and bounds description for the horizontal boundaries of each unit? (Note that it is customary to dimension only the units; common elements need not be dimensioned.) In other words, the examiner must be able to follow a metes and bounds description of each unit, located in reference to the perimeter boundary. Why is this important? As indicated above, if the building were destroyed, a builder must be able to reconstruct not only the building but also the units in their original location.

• Are the thicknesses of the units’ walls shown? Or in the alternative, are the interior boundaries of the units dimensioned?

• Are there upper and lower elevations for each unit? Do the elevations “make sense?” That is, is there about 8-12 feet between each elevation?

• These elevations are usually referenced by a benchmark, which is usually a permanent object, located somewhere off-site. (For example, a nut on a nearby fire hydrant). What is the benchmark? If a building were destroyed, would the benchmark remain? If not, the examiner should note this in the commitment as a plat defect.

• Does the plat disclose limited common elements? If so, are the number and identification of these limited common elements consistent with what is set forth in the declaration? For example, if the plat refers to parking spaces P-101, P-102, P-103, etc., are they identified the same way in the declaration?

• Is every unit identified with a number or symbol, as required by 765 ILCS 605/5(4)? Is this identification system consistent with what is set forth in the declaration? For example, if the plat refers to units 101, 102, 103, etc., are the units identified the same way in the declaration?

• Are there encroachments or other matters disclosed by the plat of survey that should be shown on the commitment? Examples might be a building line violation or an encroachment of a condominium building onto an easement. Such matters should be shown on the title commitment, but as affecting the common elements. (If the examiner does not add this qualifying statement, the examiner is suggesting that there is an encroachment of the actual condominium unit.)

• If the examiner is examining the plat of a brand new condominium development, the examiner should look at the date of the plat. Is the date of the plat fairly recent? This is a reasonable concern, as the examiner wants to identify all encroachments and other survey matters that may affect the common elements.

===Insuring the Condominium Property: Examination of the Condominium Declaration===

When reviewing the condominium declaration, the title examiner should consider the following questions:

• Does the declaration include the legal description of the parcel submitted to the Act? Is the legal description the same as the legal description shown in the title commitment?

• Are the legal descriptions of the units (the identifying number or symbol) set forth in the declaration consistent with how the units are depicted and described on the plat?

• Does the name of the condominium include the word “condominium,” or is the name followed by the words, “a condominium?” (For example: “Aurora Borealis Condominium” or “Aurora Borealis, a condominium.”)

• Does the declaration include the name of the city and county(s) in which the condominium is located?

• Does the declaration list each unit’s percentage interest in the common elements? Do they total 100%? This will usually be a separate exhibit. (If they total one percent, this is not correct. They must total one hundred percent.)

• Does the declaration include a statement that the property is being submitted to the provisions of the Condominium Property Act?

• Are there any use restrictions? If so, are they consistent with the proposed use of the property? For example, a residential condominium should provide for residential use.

• Is the declaration executed by the record owner of the land?

• Are there access issues? If the condominium is relatively small, simple, and straightforward, there may not be any need for easements, as there is access to a public way is over the common elements. On the other hand, there might be a master or umbrella declaration, which is a declaration of covenants, conditions, restrictions, and easements regulating rights and obligations of a number of separate condominiums in an organized complex. The condominium buildings might be geographically situated as “islands” in a common area, title to which is held by a community association. This master declaration will grant easements to all unit owners for ingress and egress and possibly other purposes. Even a simple declaration will create rights and easements that benefit the unit owners, and these rights and easements should be granted in the first conveyance of the condominium unit. This is discussed later in these materials.

• Does the declaration contain a right of first refusal in favor of the association as to the resale of the units? If so, this right should be raised on the commitment. The examiner should ask for a current letter from the association waiving this right when issuing subsequent title commitments. (A right of first refusal is the right of an association to first be offered the right to purchase a condominium unit that is being put up for sale by a unit owner.)

• Although the Condominium Property Act does not require that mortgagees consent to the declaration, this is a Company requirement. The reason is that if land is being set off as a non-buildable area, it limits the use of the property. This is discussed in more detail later.

• Although the bylaws are not essential to create the condominium, and they are of limited importance to the title company, they should be examined to make sure that there are no restrictions on the use, sale, or lease of the property.

Insuring the Condominium Property: Assessments

Section 9 of the Act creates an assessment lien in favor of the condominium association. The Act gives first lenders limited priority over assessments:

9(g)(1) If any unit owner shall fail or refuse to make any payment of the common expenses or the amount of any unpaid fine when due, the amount thereof . . . shall constitute a lien on the interest of the unit owner in the property prior to all other liens and encumbrances, recorded or unrecorded, except only (a) taxes, special assessments . . . and (b) encumbrances on the interest of the unit owner recorded prior to the date of such failure or refusal which by law would be a lien thereon prior to subsequently recorded encumbrances.

Because the Act gives first lenders limited priority over assessments, when the examiner is examining a resale of a condominium unit, the examiner should ask for an assessment letter from the association, indicating that all assessments have been paid through the date of closing.

But what about the initial sale of the units from the developer? Does the examiner need an assessment letter from the developer? Note that Section 9(a) of the Act states the following:

All common expenses incurred or accrued prior to the first conveyance of a unit shall be paid by the developer, and during this period no common expense assessment shall be payable to the association. It shall be the duty of each unit owner including the developer to pay his proportionate share of the common expenses commencing with the first conveyance. (emphasis added)

Therefore, as the developer sells condominium units, the developer should be furnishing the Company assessment letters after the sale of the first unit. (Note that the board of managers has the authority to levy assessments pursuant to section 18.4(c) of the Act).

Insuring the Condominium Property: Legal Description

Section 7 of the Act states that the legal description of a unit is its identifying number or symbol as set forth in the plat and declaration. Section 4(c) of the Act states that the name of the condominium “shall include the word ‘Condominium’ or be followed by the words ‘a condominium.’”

The legal description shown in Schedule A of the title commitment should contain the unit number, the name of the condominium, enough of the condominium parcel’s legal description to identify it, and if the county requires it, the recording information of the plat and declaration. (Remember, the plat is actually an exhibit to the written declaration and the plat and the written document are recorded together as the declaration.)

A sample legal description might read as follows:

Unit ____ in (name of condominium) Condominium, as delineated on a survey of the following described real estate: (short description of underlying property, such as “the northwest quarter of the southwest quarter of Section 11, Township 38 North, Range 9, East of the Third Principal Meridian”), which survey is attached as exhibit __ to the declaration of condominium recorded _____ as document _____, together with its undivided interest in the common elements, in __________ County, Illinois.

As discussed later in these materials, “add on” condominiums necessitate the preparation and recording of subsequent declarations that “add on” additional property. By using a legal description that provides for subsequent amendments, the examiner can use the same legal description throughout the course of the development of the property of an “add on” condominium.

Thus, in the event of an “add on” condominium, the legal description might include the words, “as amended from time to time.” See below:

“. . . which survey is attached as exhibit __ to the declaration of condominium recorded _____ as document _____, as amended from time to time, together with. . . .”

Insuring the Condominium Property: Tax Division

Section10 of the Act provides for the separate taxation of the condominium units. If examining an existing condominium, the examiner should make sure that such a division has been made and that the common elements are not being assessed separately from the units.

Insuring the Condominium Property: Schedule B Exceptions

All commitments and policies should include an exception for the terms and conditions of the condominium declaration and also the terms and conditions of the Illinois Condominium Property Act. See Softpro exception CO109:

(a)Terms, provisions, covenants, conditions, and options contained in and rights and easements established by the Declaration of Condominium Ownership recorded _____ as document _____, as amended from time to time; and (b) limitations and conditions imposed by the Condominium Property Act.

On all commitments proposing to insure the conveyance of an individual unit, the examiner should raise an exception, asking that the title company be furnished an assessment letter, indicating that there are no unpaid assessments. See Softpro exception COR100:

Upon any conveyance or mortgage of the land, a statement from either the board of managers or the managing agent of the condominium that there are no unpaid assessment liens arising by reason of the nonpayment of assessments should be furnished.

Note: The statement should cover the recording date of the mortgage or, if title is to be conveyed, the recording date of the deed, whichever is later.

The unit may be subject to a condominium declaration and also a separate homeowners declaration. Both associations may levy assessments. In this situation, the examiner should ask for assessment letters from both associations.

Some examiners, solely on a risk basis, do not raise this exception when insuring only a loan policy for a refinance or second mortgage. An examiner may consider this practice with underwriter approval.

If appropriate, the examiner should raise an exception, asking that the board of managers waive any right of first refusal. In that regard, see Softpro exception COR101, which is below:

Upon any conveyance or devise of the Land, a Certificate executed and acknowledged by the Board of Managers or the Managing Agent of the condominium should be furnished to the Company, which states that the owner has complied with the provisions of the declaration, or that said provisions have been duly waived by the Board and the rights of the Board thereunder have terminated.

Unfortunately, this exception does not specifically refer to a right of first refusal. This right has been included in the modified Softpro exception COR101 below:

Upon any conveyance or devise of the land, we should be furnished a certificate executed and acknowledged by the Board of Managers or the managing agent of the condominium, stating that compliance has been made by the owner with the provisions of the declaration relative to its right of first refusal, or that said provisions have been duly waived by the board and the rights of the board thereunder have terminated.

Easements and restrictions are created in the declaration. Thus, the declarant is creating easements and restrictions over land he already owns. To make sure that these easements and restrictions also burden and benefit the individual condominium units, the examiner should raise Softpro exception COR106:

The first deed of each individual unit should contain the following language:

Grantor also hereby grants to the grantee, its successors and assigns, as rights and easements appurtenant to the above-described real estate, the rights and easements for the benefit of said property set forth in the declaration of condominium, and grantor reserves to itself, its successors and assigns, the rights and easements set forth in said declaration for the benefit of the remaining property described therein. This deed is subject to all rights, easements, covenants, conditions, restrictions, and reservations contained in said declaration the same as though the provisions of said declaration were recited and stipulated at length herein.

When insuring a unit in a new condominium, and the declaration has not yet been placed of record, the examiner should raise this exception:

This commitment is based upon the assumption that a proper declaration of condominium executed by all necessary parties, together with a proper condominium survey, will be placed of record. This commitment may be subject to additional exceptions after our review of said condominium declaration.

Condominium Endorsements

ALTA endorsement form 4-06 and 4.1-06 are condominium endorsements. These endorsements insure against loss or damage by reason of:

• The insured unit and common elements not being part of a legal condominium;

• The condominium instruments not complying with the appropriate statutes;

• The existence of present violations of any restrictive covenants contained in the condominium documents that restrict the use of the land;

• The failure of the unit and its common elements to be entitled by law to be separately assessed for taxes. (Note the careful wording here. The assurances are not that the unit and common elements are separately assessed, but rather, that they are entitled to be separately assessed.

• An obligation to remove any improvements because of any encroachments;

• An exercise of a right of first refusal that would result in a failure of the insured’s title.

These assurances sound comprehensive, but the examiner should feel comfortable in giving the endorsement as long the examiner has properly examined the condominium instruments.

Although the endorsement even insures against loss due to future unintentional encroachments, the examiner should remember that Section 23 of the Act provides that in that event, mutual cross easements are created.

Paragraph 4 of ALTA Endorsements Form 4-06 and Form 4.1-06

ALTA Endorsement Form 4-06 and Form 4.1-06 are identical except for paragraph 4 of each endorsement:

Paragraph 4 of ALTA endorsement form 4-06 reads as follows:

The Company insures against loss or damage sustained by the Insured by reason of:

The priority of any lien for charges and assessments provided for in the condominium statutes and condominium documents at date of policy over the lien of any insured mortgage identified in Schedule A.

Paragraph 4 of ALTA endorsement form 4.1-06 reads as follows:

The Company insures against loss or damage sustained by the Insured by reason of:

Any charges or assessments provided for in the condominium statutes and condominium documents due and unpaid at date of policy.

What is the Difference between These Two Paragraphs?

Paragraph 4 of the ALTA endorsement 4-06 insures the priority of the mortgage over -future assessments. Paragraph 4 of the ALTA endorsement 4.1-06 does not concern mortgage priority; this paragraph merely insures against loss due to unpaid assessments. Thus, the 4.1-06 endorsement is appropriate for use on owners’ policies.

But which endorsement should be used on loan policies?

765 ILCS 605/9(g)(1) provides as follows:

If any unit owner shall fail or refuse to make any payment of the common expenses or the amount of any unpaid fine when due, the amount thereof . . . shall constitute a lien on the interest of the unit owners in the property prior to all other liens and encumbrances, recorded or unrecorded, except only . . . (b) encumbrances on the interest of the unit owner recorded prior to the date of such failure or refusal which by law would be a lien thereon prior to subsequently recorded encumbrances.

In other words: 765 ILCS 605/9(g)(1) states that mortgages that are recorded before any assessment (i.e., common expenses) becomes due and payable are prior to the lien of any such unpaid assessments.

765 ILCS 605/9(g)(2) provides as follows:

[With respect to mortgages and trust deeds] which are neither bonafide first mortgages nor trust deeds and which encumbrances contain a statement of a mailing address in the State of Illinois where notice may be mailed to the encumbrancer thereunder, if and whenever and as often as the manager or board of managers shall send, by United States certified or registered mail, return receipt requested, to any such encumbrancer at the mailing address set forth in the recorded encumbrance a statement of the amounts and due dates of the unpaid common expenses with respect to the encumbered unit, then, unless otherwise provided in the declaration or bylaws, the prior recorded encumbrance shall be subject to the lien of all unpaid common expenses with respect to the unit which become due and payable within a period of 90 days after the date of mailing of each such notice.

In other words: 765 ILCS 605/9(g)(2) states that if the condominium association sends a statement of unpaid common expenses to the lender of any previously recorded mortgage other than a first mortgage, then unless the declaration provides to the contrary, that previously recorded mortgage will be subject to the lien of those unpaid common expenses.

Rule of Title Practice:

• If the examiner is asked to issue a loan policy for a first mortgage, and the lender wants an “ALTA 4” endorsement, the examiner may issue the ALTA endorsement form 4-06 as long as the examiner determines (usually by reviewing a so-called “Paid Assessment Letter”) that assessments are paid through date of closing. Obviously, the examiner should also make sure that any recorded liens have been satisfied.

• If the examiner is asked to issue a loan policy for any mortgage other than a first mortgage, and the lender wants an “ALTA 4” endorsement, the examiner should issue the ALTA endorsement form 4.1-06.

• If an owner or owner’s attorney wants an “ALTA 4” endorsement for an owner’s policy, the examiner should issue the ALTA endorsement form 4.1-06.

Parking Spaces

Introduction

Condominium developers have traditionally established parking spaces in one of three ways:

• as parts of the common elements (that is, as either easements or licenses);

• as limited common elements;

• as separate units (or parts of condominium units).

Parking Spaces—As Easements or Licenses over the Common Elements

The creation of a parking space as part of the common elements (but not as a limited common element) is usually accomplished by the granting of an exclusive easement or license of the common elements. Courts have accepted this, as long as such exclusive use is set forth in the declaration. Otherwise, the grant of the use of the common elements could be considered a diminution of the common elements that is contrary to Section 4(e) of the Condominium Property Act. This statute, codified as 765 ILCS 605/4(e), states that the percentage interests in the common elements shall remain constant unless otherwise provided for in the Act or by agreement of all the unit owners. See Parello v. 1300 Lake Shore Drive Condominium, 103 Ill.App.3d 810 (1981).

The examiners may encounter this type of parking scheme in arrangements where the garage is part of the common elements. The condominium board assigns (and bills for) parking spaces pursuant to user agreements. This type of parking arrangement is used in the condominiums at Chicago’s Carl Sandburg Village.

Rule of Title Practice:

But user agreements are not easements! When parking is on the common elements, but the parking scheme is not buttressed by a recorded easement, the parking is not insurable.

Parking Spaces—As Limited Common Elements

Parking spaces are often established as limited common elements. As a limited common element, a parking space is appurtenant to the unit and can be used to the exclusion of the other unit owners. See 334 Barry in Town Homes, Inc., v. Farago, 205 Ill.App.3d 846 (1990). 765 ILCS 605/4(g) provides that the declaration must indicate the manner of the assignment of the limited common elements to the units. This is usually accomplished in one of three ways:

• Parking spaces can be assigned in the written text of the declaration.

• The recorded condominium plat that is attached to the text of the declaration may set out the assignment of parking spaces.

• The developer’s deeds to the initial purchasers of the units may include assigned parking spaces.

Insuring the Parking Space—As Part of the Common Elements

As noted earlier, Illinois courts appear to recognize an exclusive easement or license to a unit owner of a parking space over common elements if such exclusive use is set forth in the declaration.

Therefore, if the declaration provides for this use, and the easement is granted by the developer (or condominium board if the declaration so provides), then the easement can be insured as a separate interest in Schedule A. See below for an example. (Note that this “easement” is described below as a “right to use.” This is because the easement is over the common elements. All of the unit owners own an interest in the common elements, and one cannot have an easement over one’s own property.)

The right to use parking space ____, as set forth in the declaration of condominium recorded _____ as document _____ and as granted by deed recorded _____ as document ______, all in __________ County, Illinois.

The Parking Space as a Separate Unit

As a separate unit, the space is easily transferable and the owner of the condominium “living unit” can easily acquire additional parking spaces. When a parking space is a separate unit, the parking space will be separately assessed for real estate taxes. That is, the parking space will have its own individual permanent index number for tax assessment purposes.

The Parking Space as Part of the Unit

On the other hand, consider a townhouse type of structure in which the upper portion of the unit is living quarters and the lower portion is the parking area. In this case the parking space would be part of the unit. The permanent index number would affect both the parking space and the unit.

LCE - Insuring the Parking Space—As a Limited Common Element (Introduction)

A parking space can be insured as a limited common element if the declaration provides for the creation of parking spaces. Ideally, the declaration will specify which parking space has been assigned to each unit. Many times, however, the declaration will not include this information.

New Units

The Company is often asked to insure the conveyances and mortgages of all of the units in a new condominium development. Section 4(g) of the Condominium Property Act requires only that the declaration indicate “the manner” of the assignment of the limited common elements to the units. (That is, the Act does not require the surveyor to assign specific parking spaces in the condominium declaration.) Sometimes the developer will not want to indicate in the declaration (either in the text or the plat) the actual assignment of spaces. The reason for this is that the developer wants to let his purchasers choose their own parking spaces.

The insurance of parking spaces that are not assigned in the declaration involves some risks—a developer may inadvertently assign the same parking space to two different parties. This has resulted in claims to the Company. What can the examiner do to lessen these claims?

• The examiner can maintain a master file; as units and parking spaces are sold, the examiner should keep track of them in this file, noting the order number, the condominium unit number, and the parking space number.

• The examiner could have the developer sign a personal undertaking for “any and all loss, including attorney’s fees, due to the individual parking spaces of __________ Condominium being assigned to more than one unit owner.”

• The examiner could consider having the developer fund a title indemnity for, e.g., $10,000.00. The indemnity would be for the same exception as noted above. The money could be refunded to the developer once he has recorded an amendment to the condominium declaration that sets forth a completed assignment of all the spaces. The examiner might consider not returning the money until six months after the last unit has been sold, thereby verifying, as much as possible, that there are no claims of individual parking spaces being assigned to more than one party.

Existing Units

The Company has also suffered claims in its insurance of condominium parking spaces for existing condominium units. These claims arise when more than one person is attempting to use the same parking space. When asked to insure a parking space of an existing unit, the examiner should attempt to obtain the following:

• A letter from the condominium association wherein the association states that its records indicate that parking space number _____ has been assigned to unit ___________;

• An affidavit executed by the unit owner, describing both the owner’s parking space and the owner’s living unit, indicating that the owner had been using the parking space for ___ years and during all this time, no one has attempted or is attempting to assert rights in and to the parking space.

As a limited common element, the parking space is automatically transferred with the conveyance of the appurtenant unit. Although the space does not have to be included in the deed of the unit, the Company prefers that the deed include the parking space.

Insuring the Parking Space—As a Separate Unit or Part of a Unit

If the declaration creates separate parking space units, (that is, if the declaration creates parking space units that are separate fee simple ownership interests in land), a parking space can be insured by adding it to Schedule A as a separate parcel.

Naturally, a separate search must be done, including a tax search. The parking space is then conveyed by a deed.

A parking space can also be part of the unit. The parking space is insured when the unit itself is transferred and insured. (For example, the unit owner lives in the west half of a unit and parks his car in the east half of the unit.)

Transferring Easements

As noted above, parking spaces can consists of easements on the common elements. An examiner should consult an underwriter if the examiner is asked to insure a transfer of such an easement. Who would execute the assignment? All the owners of both the dominant and servient estates? But the easement is on the common elements, and all the unit owners own interests in the common elements. Clearly the underwriter will have to review the condominium declaration.

Transferring Limited Common Elements

Section 26 of the Condominium Property Act governs the transfer of limited common elements. In order to transfer a limited common element (e.g., assume that Alice wants to sell her parking space to her neighbor, Beth), an amendment to the declaration must be prepared and executed by all unit owners who are parties to the transfer and consented to by all other unit owners who have any right to use the affected limited common element. A deed of just the parking space/limited common element is not the proper conveyance instrument!

The amendment must contain a certificate indicating that a copy has been delivered to the board of managers. The amendment must be recorded.

Add-on Condominiums

For years builders have built condominiums in phases. Originally the developer accomplished this by reserving the right to amend the declaration without the unit owners’ approval. But this procedure was replaced in 1978 by the enactment of Section 25 of the Act, which concerns add-on condominiums.

Section 25 of the Act allows the developer to add additional property to the condominium and reallocate the percentage interest of common elements without the prior approval of the unit owners. The developer can accomplish this by simply recording an amended plat and declaration.

The add-on condominium allows the developer to reserve the right to bring in additional property in the future. It gives the developer flexibility to carry out a large scheme over time. It also allows him to abandon or modify this plan in light of unforeseen or changing market conditions.

In order for the developer to reserve this right, the original declaration must contain the following provisions:

• A reservation of an option to add additional property;

• A statement as to how percentage interests will be reallocated, how voting rights will be adjusted, and how changes in liability for common expenses shall be determined;

• A legal description of the land to be added;

• A time limit of ten years from the date of the recording of the declaration on which to exercise the option; a statement as to the circumstances, if any, under which the reservation may terminate;

• A statement as to whether portion of the additional land may be added at different times and if there are any limitations on the order in which the portions of land are added;

• A statement of the limitations, if any, of the location of the improvements on the additional land;

• A statement of the maximum number of units, if any, which may be created on the additional land;

• A statement as to the compatibility of the proposed buildings and improvements on the additional land with the existing improvements as to density, use, construction, and architectural style;

• Any supplemental plat or site plans.

This section grants the developer an easement over the existing common elements in order to construct the improvements on the additional land.

The developer has no obligation to add the additional land, and the additional land is not burdened with any such obligation, unless the condominium instruments or any other agreement of the developer provides for such an obligation.

Question: When preparing a title commitment, does the examiner use the recording information of the initial declaration, which may not have referenced the unit in question, or the recording information of the new add-on declaration?

Answer: Either way is probably correct. However, as described above, and for the sake of simplicity, it is suggested that the examiner adopt one legal description for the entire condominium project. A sample legal description might be:

Unit ____ in (name of condominium) Condominium, as delineated on a survey of the following described real estate: (short description of underlying property, such as “the northwest quarter of the southwest quarter of Section 11, Township 38 North, Range 9, East of the Third Principal Meridian”), which survey is attached as exhibit __ to the declaration of condominium recorded _____ as document _____, as amended from time to time, together with its undivided interest in the common elements, in __________ County, Illinois.” [Emphasis added]

Note that by stating that the declaration is amended from time to time, one can use the initial declaration recording information for all units of a declaration, even an add-on declaration, even after subsequent amendments are recorded.

Question: Assume that an examiner is examining land that is part of the additional property of an add-on condominium. It is still owned by the developer. The title commitment application indicates that the developer will be selling the property to a purchaser. Does the examiner have to raise any special exceptions?

Answer: No, the examiner does not have to raise any special exceptions.

Question: The examiner is examining a tract of land that was originally part of the additional property of an add-on condominium. However, the developer deeded it to a purchaser a year ago, and now this purchaser is selling it. Does the examiner have to raise any special exceptions?

Answer: Assuming that the deed to the purchaser contained no covenant or restriction relating to the add-on property, the examiner can ignore the fact that the property was once subject to the add-on provisions of the declaration. The examiner does not have to raise any additional exception.

Question: After a third party buys add-on property from the initial developer, the purchaser of add-on property can still submit the property to the Act and attempt to finish the project. Should the examiner continue to keep the condominium declaration exception on the commitment or policy for the sold add-on property? By doing so, does this implicitly mean that the title company is willing to insure that this property can be used to add on to the original condominium project?

Answer: The examiner should waive the condominium declaration exception upon the sale of add-on property to a developer. However, the examiner should examine the deed to the purchaser for any new restrictions. If there are any new restrictions, especially any relating to the possible adding on of the property in the future, these should be raised as new title exceptions.

Question: The examiner is preparing a title commitment for a unit in an add-on condominium. The condominium property was originally in two different underlying subdivisions, Subdivision #1 and Subdivision #2. The original recorded declaration brought in property only in Subdivision #1. Property in Subdivision #2 is the add-on property, and it is not scheduled to be added on until six months after the examiner issues his title commitment.

The land in Subdivision #1 is subject to certain underlying Schedule B exceptions, like utility easements. The land in Subdivision #2 is subject to different underlying Schedule B exceptions. What Schedule B exceptions does the examiner raise at the present time? Does the examiner raise only those matters that affect units in Subdivision #1? Does the examiner wait until the Subdivision #2 property is added on before he raises Schedule B exceptions relating to Subdivision #2?

Answer: Even though the Subdivision #2 property has not been added on, the examiner should issue a commitment that shows Schedule B exceptions that affect both subdivisions. Because the examiner is issuing a commitment for a condominium unit that falls in Subdivision #1, the examiner should nonetheless show Schedule B exceptions relating to Subdivision #2 as affecting the common elements.

Why should the examiner do this? The purchaser of a unit that is physically located in Subdivision #1 is on notice that this is an add-on condominium, because the condominium’s add-on provisions are set forth in the recorded condominium declaration. As such, all matters affecting land in Subdivision #2 will eventual affect the common elements of a unit owner whose unit lies solely in Subdivision #1. (Realistically, the Schedule B exceptions that affect the land in Subdivision #1 will also affect the common elements of the condominium.)

Condominium Conversions

In order to combat the many abuses that occurred in converting apartment buildings into condominiums, Section 30 of the Act was added, effective January 1, 1978. This section of the Act essentially provides for the giving of notices to the current tenants and the granting of the first right to purchase the unit to the tenant.

Section 30 includes several provisions; some of them include:

• A notice of intent to submit the real estate to the Act must be given to all tenants. The notice shall be given at least thirty days and not more than one year prior to the recording of the declaration. The developer must execute a certificate of compliance; this is attached to the declaration, indicating that such a notice was given.

• The developer must also give the tenants a schedule of selling prices and must offer to sell each unit to the occupying tenant.

• When insuring a condominium conversion, the most important requirements are making sure that the notice of intent was served on all tenants and the recording of the certificate of compliance with the declaration.

• The Act also discusses the tenant’s option to purchase his unit. If insuring a tenant’s unit and someone other than the tenant is buying it, the examiner must make sure that the tenant has waived this right to purchase. The Act provides that the deed to the purchaser may contain a statement indicating that the tenant has either waived, failed to exercise, or did not have, an option to purchase the unit.

• If such a statement is not correct, the purchaser does not forfeit the unit he bought in good faith. Instead, the tenant has a claim for damages against the seller of the unit.

The examiner should raise Softpro exception COR103 when insuring the sale of a new unit in a condominium conversion:

The first deed conveying each unit in a conversion condominium must contain one of the following statements:

(a) The tenant of unit _____ has waived or has failed to exercise the right of first refusal;

(b) The tenant of the unit had no right of first refusal;

(c) The purchaser of the unit was the tenant of the unit prior to the conversion of the building to a condominium.

Naturally, a condominium declaration and plat must be prepared and recorded.

When insuring a condominium conversion, possible mechanics liens and the issue of “new construction” is always an issue. The examiner should consider Softpro exception 104:

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, including, without limiting the generality of the foregoing, liens, or rights to a lien, arising from contracts let in connection with the construction of improvements or conversion of the existing building or buildings on the land to a condominium.

The Condominium Act requires that the developer’s certificate of compliance be attached to the declaration of a conversion condominium. In this regard, see Softpro exception 105:

The developer’s certificate, as required by Section 30 of the Condominium Property Act, as a prerequisite to the submission of a conversion condominium to the provisions of the Illinois Condominium Act, should be appended to the proposed declaration of condominium.

This certificate should state the date the required notice of intent was given.

Deconversion - Removal of Property from the Condominium Act

Section 16 of the Act provides that all of the unit owners may remove the property from the provisions of the Condominium Act. This removal is accomplished by executing and recording an instrument to that effect. The “holders of all liens affecting any of the units” must consent to this removal.

Clearly “holders of all liens” would be mortgage lenders. But the holder of a so-called “general lien,” such as a judgment creditor, would also have to consent.

Upon removal, the statute provides that all the unit owners will own the property as tenants in common. The unit owners will own an undivided interest in the property; each owner’s interest in the property will be the equivalent to the percentage interest each owner had in the condominium common elements. The liens of any lien holders would continue to be liens on the land.

Example: A and B are husband and wife and own unit 1 in Blackacre Condominiums as joint tenants. This is a four-unit condominium. A and B have a 25% interest in the common elements, and C, D, and E each individually own the other three units. C, D, and E each have a 25% interest in the common elements. A , B, C, D, and E withdraw the property from the Condominium Act. A and B, C, D, and E now own the property, but they all own the property as tenants in common! A and B no longer have a joint tenancy interest in their unit, because their unit, as a unit, no longer exists. A, B, C, D, and E no longer own cubes of air, as these cubes of air no longer exist. Instead, they are all co-owners of a tract of land. The legal description of this tract of land is now the legal description of the land that was originally submitted to the Condominium Act.

Their ownership interest in this tract of land is as follows: A owns a 12.5% interest in the property; B owns a 12.5% interest in the property; C owns a 25% interest in the property; D owns a 25% interest in the property; and E owns a 25% interest in the property.

If the examiner is now asked to issue a title commitment on this property, he should use the legal description of the land that was originally submitted to the Condominium Property Act.

In addition, the examiner should raise the following exception:

Rights of co-tenants to partition, contribution, and possession of the land described in Schedule A.

The reason for this exception is that each owner is now a co-owner of a portion of the other owners’ property. As such, each owner has the legal right to seek the partition, or forced sale, of all of the ex-condominium property. See 735 ILCS 5/17-101 et seq.

Note that condominium property is usually removed from the Act when just one party, such as a developer, has acquired all of the units.

Section 16 of the Act does not provide for the removal of only a portion of condominium property from the Act. However, with underwriter approval, and with the 100% agreement of all the unit owners, the Company has insured the removal of just a portion of the condominium property.

Sale of the Entire Condominium Project

Section 15 of the Act allows for the sale of the entire condominium property based on the affirmative vote of the unit owners. This vote of the unit owners does not have to be unanimous. Section 15(a), as amended by PA 100-292, effective January 1, 2018, states the following:

(a) Unless a greater percentage is provided for in the declaration or bylaws, and notwithstanding the provisions of Sections 13 and 14 hereof, a majority of the unit owners where the property contains 2 units, or not less than 66 2/3% where the property contains three units, and not less than 75% where the property contains 4 or more units may, by affirmative vote at a meeting of unit owners duly called for such purpose, elect to sell the property. Such action shall be binding upon all unit owners, and it shall thereupon become the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale, provided, however, that any unit owner who did not vote in favor of such action and who has filed written objection thereto with the manager or board of managers within 20 days after the date of the meeting at which such sale was approved shall be entitled to receive from the proceeds of such sale an amount equivalent to the greater of: (i) the value of his or her interest, as determined by a fair appraisal, less the amount of any unpaid assessments or charges due and owing from such unit owner or (ii) the outstanding balance of any bona fide debt secured by the objecting unit owner's interest which was incurred by such unit owner in connection with the acquisition or refinance of the unit owner's interest, less the amount of any unpaid assessments or charges due and owing from such unit owner. The objecting unit owner is also entitled to receive from the proceeds of a sale under this Section reimbursement for reasonable relocation costs, determined in the same manner as under the federal Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended from time to time, and as implemented by regulations promulgated under that Act.

(b) If there is a disagreement as to the value of the interest of a unit owner who did not vote in favor of the sale of the property, that unit owner shall have a right to designate an expert in appraisal or property valuation to represent him, in which case, the prospective purchaser of the property shall designate an expert in appraisal or property valuation to represent him, and both of these experts shall mutually designate a third expert in appraisal or property valuation. The 3 experts shall constitute a panel to determine by vote of at least 2 of the members of the panel, the value of that unit owner's interest in the property. The changes made by this amendatory Act of the 100th General Assembly apply to sales under this Section that are pending or commenced on and after the effective date of this amendatory Act of the 100th General Assembly. (Source: P.A. 100-292, eff. 1-1-18.)

Although Section 15(b), as amended, now provides a means of solving a disagreement as to the value of a unit owned by an owner who did not vote to sell the condominium project, the Act still does not indicate how to address the situation if recalcitrant owners refuse to “deliver such instruments,” as described in Section 15(a).

The original Section 15 provided no insight as how a unit owner’s mortgage can be paid off when the unit owner is “underwater”—that is, how can the proceeds of a sale of a unit be used to pay off a mortgage when the owner’s outstanding mortgage debt is more than the fair market value of the owner’s unit?

Section 15(a), as amended, appears to be an attempt to address this issue. For sales pursuant to Section 15 pending on January 1, 2018, or closed on or after January 1, 2018, an objecting unit owner is entitled to the greater of:

• One, the fair market value of the unit, less outstanding condominium assessments; or

• Two, the outstanding balance of any “bona fide debt,” (even, apparently, if the amount of that debt exceeds the fair market value of the unit), less outstanding condominium assessments.

Note that in either case, the objecting unit owner is entitled to receive reimbursement for reasonable relocation costs from the proceeds of the sale.

Section 15 still seems to be problematic. Any request to insure the sale of condominium property pursuant to Section 15 of the Act must be approved by an underwriter.

Distressed Condominium Property

Section 14.5 is a 2010 amendment to the Condominium Property Act. It is designed to rehabilitate condominium projects that have been used in mortgage fraud or have suffered the financial misfortunes of their developers.

The section defines a “distressed condominium property” as land containing condominium units that are operated in a manner or have conditions that may constitute a danger, blight, or nuisance to the surrounding community or to the general public. These conditions include, but are not limited to, two or more of the following:

• 50% or more of the units are not occupied by persons legally entitled to reside in the units. • The building has serious violations of building or zoning codes. • 60% or more of the units are in foreclosure or have been the subject of a judgment of foreclosure within the last 18 months. • The condominium declaration describes more units than physically exist on the land. • Essential utility service to the land or to 40% or more of the units is either terminated or threatened with termination. • The taxes of 60% or more of the units are delinquent.

The section authorizes a municipality to petition the circuit court to declare the land a distressed condominium property. All unit owners are to be named as defendants in the petition, and “all known other parties in interest” (such as mortgagees and other lienholders) shall be provided written notice of the proceeding. If the court determines that the land is a distressed condominium, the court may order the appointment of a receiver. If the court also finds that the property is not viable as a condominium, the court may declare:

• The property is no longer a condominium; • All former unit owners shall own the property as tenants in common; • The former unit owners’ percentage interest in the land is the same as the percentage interest they had in the condominium common elements; • The liens, if any, of each unit owner encumber each owner’s respective undivided interest in the property.

New Construction Issues

Question: A condominium association wants to raise money to replace the balconies that are outside the condominium units. It proposes to execute a mortgage. Are there any problems concerning this construction issue?

Answer: Yes, there are problems. A condominium association does not own the units and the common elements. The unit owners own the units and the common elements, which would include the balconies, and which are probably limited common elements. The association cannot execute a security interest of the units. However, the association could give a security interest or assignment of the “income stream” created by the monthly condominium assessments due the association. (In that regard, see this Kane County document: 2017K028128.)

The Company could disburse this money pursuant to an “owner’s escrow—no title insurance.”

Amendments to the Condominium Declaration

Section 17(a) of the Act states that the bylaws and the declaration can be modified only by a recorded amendment. Section 17(b) of the Act states that unless otherwise provided, amendments shall be executed and recorded by the president of the association or by such other officer authorized by the board of managers.

Section 27(a) states that if there is any unit owner other than the developer, the condominium instruments shall be amended only upon the affirmative vote of 2/3 of those voting or upon the majority specified by the condominium instruments, except in cases where the Act provides for different methods of amendment, provided that in no event shall the condominium instruments require more than a three-quarters vote of all unit owners. Mortgagee approval may be required if the condominium instruments require it.

Section 27 of the Act indicates that if there is an omission, error, or inconsistency in a condominium instrument, such that a provision of a condominium instrument does not conform to the Act or to another applicable statute, the association may correct the instrument by an amendment approved by a 2/3 vote of the Board of Managers without a vote of the unit owners. If the amendment is to correct an omission, error, or inconsistency, then the unit owners’ consent or mortgagee consent is not required, even if the condominium instruments state otherwise.

Question: Assume that three years ago Developer created an “add on” condominium. A year after the declaration was recorded, He added additional property. He built 200 units. Now, after many of the units have been sold, but before he has turned over control of the condo board to the association pursuant to Section 18.2 of the Act, he wants to add more property to the condominium development, property that was not included in the original declaration, so he can build 50 more units. Can he do this? He claims that he can do this pursuant to 765 ILCS 605/27(b), which provides for correcting omissions or errors in the declaration.

Answer: He may not be able to do this. As noted above, Section 27(b) is designed for the correction of omissions, errors, or inconsistencies. Section 4(e) provides that the percentage of ownership interest in the common elements “shall remain constant unless otherwise provided in this Act or thereafter changed by agreement of all unit owners.” The adding of additional property (and more units) would certainly change the percentage interest in the common elements, and the adding of additional property that is authorized by less than unanimous unit owner approval is not contemplated by the Act.

See also section 8 of the Act, which provides that partition of the common elements is prohibited.

See also Schaffner v. 514 West Grant Place Condominium Association, 324 Ill.App.3d 1033, 756 N.E.2d 854, 258 Ill.Dec. 580 (2001), which held that the changing of the configuration of parking spaces was a deliberate choice and not a scrivener’s error. See also Carney v. Donley, 261 Ill. App. 3d 1002, 633 N.E.2d 1015 (1994), wherein the court held that a unit owner can not extend a balcony over a portion of the common elements without the unanimous consent of the ownership. See also Huskey v. Board of Managers of Condominiums of Edelweiss, Inc., 297 Ill. App. 3d 292, 696 N.E.2d 753 (1998), where the court held that a condominium board cannot alter the percentage interest of the common elements through the use of a scrivener’s error amendment. See also Picerno v. 1400 Museum Park Condominium Association, 2011 IL App (1st) 103505.

To argue that the failure to include this land was a scrivener’s error, Developer would have to show that the intention to add this land was always contemplated by the developer. For example, he could produce negotiation documents or promotional materials that indicate that there was always the intention to have a 250-unit development.

Or perhaps the declaration might provide some insight. For example: “The buildings to be built in the entire development shall contain a maximum of approximately 250 units comprised of attached single family residences.”

Basically, the examiner needs evidence that indicates that this added land was always intended to be included in the development.

Right of First Refusal

Question: A condominium declaration contains a right of first refusal. Can this provision be removed from the declaration?

Answer: Such a removal would be accomplished by an amendment to the declaration. The amendment must be executed by the president of the association or such other officer authorized by the board of managers. (See section 17 of the Condominium Act.)

As indicated above, amendments are generally governed by both the condominium declaration and section 27 of the Act.

The examiner must review the declaration to see what the provisions are for amending the declaration. There are two issues here:

• What percentage of owners are needed to amend the declaration?

• Do the lenders of the various units need to consent to the declaration?

As for issue number one: What does the declaration provide? The declaration controls, but regardless, the approval does not have to be more than 3/4 of the unit owners. See section 27(a)(i).

As for issue number two: Does the declaration state that lender consent is needed for amendments? If the declaration is silent as to lender consent, then such consent is not needed. See section 27(a)(ii) of the Act.

As noted above, Section 27(b)(1) states that if the amendment is to correct an omission, error, or inconsistency, then unit owners’ consent or mortgagee consent is not required, even if the condominium instruments state otherwise. However, it would be hard to argue that the deletion of a right of first refusal is to “correct an omission, error, or inconsistency.”

This legislation amends Section 27(b)(1) of the Act. As amended, this section indicates that if there is an omission, error, or inconsistency in a condominium instrument, the association may correct the instrument by an amendment approved by a 2/3 vote of the Board of Managers without a vote of the unit owners. If the amendment is to correct an omission, error, or inconsistency, then unit owners’ consent or mortgagee consent is not required, even if the condominium instruments state otherwise.

Granting of utilities

Because all the owners of the units own the common elements, one would think that a grant of easement over the common elements must be executed by all the owners.

But this concept is clearly unwieldy, and so the legislature has passed amendments to the Act, allowing for an easier means of granting these easements.

• Section 14.2 of the Act states that unless the condominium instruments expressly provide for a greater percentage or different procedures, a 2/3 majority of the unit owners at a meeting of unit owners called for such purpose may elect to dedicate a portion of the common elements to a public body for use as a street or utility.

• Section 14.3 states that unless the condominium instruments expressly provide for a greater percentage or different procedures, a majority of more than 50% of the unit owners at a meeting of unit owners called for such purpose may authorize the granting of an easement for the laying of cable television cable or high speed Internet cable.

• Section 14.4 states that unless the condominium instruments expressly provide for a greater percentage or different procedures, a majority of more than 50% of the unit owners at a meeting of unit owners called for such purpose may authorize the granting of an easement to a governmental body for construction, maintenance, or repair of a project for protection against water damage or erosion.

Condemning the Common Elements

• Section 9.3 of the Condominium Act provides that “the unit owners’ association shall be named as defendant on behalf of all unit owners in any eminent domain proceeding to take or damage property which is a common element and which includes no portions of any units or limited common elements. The association shall act therein on behalf of all unit owners.”

• Also, Section 9.4 of the Condominium Act provides that “[a]fter receipt of summons in an action to take or damage a common element, the unit owners’ association shall provide to the plaintiff a list of the unit owners, mortgagees and lienholders, and the plaintiff shall provide notice by certified mail to the unit owners, mortgagees and lienholders.”

Thus, when preparing a title commitment wherein common elements are being condemned, the examiner should not show all of the unit owners in Schedule A as the owner of the property (even though they do own undivided interests in the common elements). Instead, the examiner should show the vesting as follows: (name of association) , on behalf of the unit owners, as their interests may appear.

The examiner should then show the following as a Schedule B exception:

The vesting shown in Schedule A is noted for convenience sake only, as this commitment is issued on the assumption that the condemnation proceedings referenced herein will take place pursuant to 765 ILCS 605/9.3, wherein the unit owners’ association is named as defendant on behalf of all the unit owners.

The examiner should also consider this exception:

Pursuant to 765 ILCS 605/9.4, the Company should be furnished evidence that the unit owners’ association has provided to the plaintiff a list of the unit owners, mortgagees, and lienholders, and that notice, in the proper form, of these proceedings has been furnished to said unit owners, mortgagees, and lienholders.

If we are to compile said list for the plaintiff, we should be so advised, and this commitment, when issued, may be subject to an additional charge for the cost of compiling said list.

See also Section 14.1 of the Act. This section states that if the condominium instruments provide for the withdrawal of any portion of the property in connection with a condemnation proceeding, then the percentage interest of the common elements shall be reallocated.

Use of the Common Elements

Question: The owners of a condominium want to build sixteen garage units on the common elements of a condominium. They may eventually want to sell these garage units to purchasers of condominium living units. There are twenty-four living units, and so not every owner of a living unit gets the chance to buy a garage unit. Is there a problem here?

Answer: No, there is no problem. The owners of a condominium, through the association, can do anything they want to do. In other words, they can certainly build the garages on the common elements. Then, once they are built, the owners can allow people to use the garage units through an informal process, as per the approval and vote of the association. The reason for this is that while the association cannot sell the common elements, it can control the common elements. But note that all unit owners must agree to the construction of the garages on the common elements, as it is a diminution of the common elements.

In this regard, see Carney v. Donley, 261 Ill. App. 3d 1002, 633 N.E.2d 1015 (1994), wherein the court held that a unit owner cannot extend a balcony over a portion of the common elements without the unanimous consent of the ownership.

But a problem arises when the owners want to sell these garage units. What happens, e.g., when a unit owner wants to sell his living unit and also the garage that he has been using for the past year? The garage is not really a valid unit; it is a structure built on the common elements.

The easiest thing to do then is to rely on section 16 of the Condominium Act, which allows for removal of the property from the Condominium Act.

The issue of the sale of these garage units can be addressed in one document—one could remove all of the property from the Act and then resubmit the property to the Act, but now in a new and different configuration, however one wants it.

That is, the garage units could be condominium units, they could be limited common elements, or they could be easements.

This document could be called a “removal and reinstatement amendment.”

Summary: The condominium owners have much latitude, as long as they all agree. If all the unit owners agree, they can do almost anything!

Condominium Assessments and Mortgage Foreclosure

The interplay between the Illinois Mortgage Foreclosure Act and the Condominium Act and their effect on condominium assessments is best explained by two court cases.

1010 Lake Shore Ass’n v. Deutsche Bank National Trust Co., 2015 IL 118372.

Deutsche Bank, as trustee, bought a condominium unit at a judicial mortgage foreclosure sale on June 17, 2010. On March 27, 2012, the condominium association mailed to the defendant its demand for payment of assessments. On May 17, 2012, the plaintiff filed a complaint seeking possession of the property and an award for unpaid assessments; these assessments would include those unpaid assessments arising prior to the foreclosure sale. After the defendant filed an answer, the plaintiff filed a motion for summary judgment, claiming that the lien for the unpaid assessments had not been extinguished pursuant to 765 ILCS 605/9(g)(3). Why was this the case? The defendant failed to pay the assessments accruing after it purchased the unit at the judicial foreclosure sale.

The supreme court looked at 765 ILCS 605/9(g)(3). This statute reads as follows:

The purchaser of a condominium unit at a judicial foreclosure sale, or a mortgagee who receives title to a unit by deed in lieu of foreclosure or judgment by common law strict foreclosure or otherwise takes possession pursuant to court order under the Illinois Mortgage Foreclosure Law, shall have the duty to pay the unit's proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale, delivery of the deed in lieu of foreclosure, entry of a judgment in common law strict foreclosure, or taking of possession pursuant to such court order. Such payment confirms the extinguishment of any lien created pursuant to paragraph (1) or (2) of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses, where the judicial foreclosure sale has been confirmed by order of the court, a deed in lieu thereof has been accepted by the lender, or a consent judgment has been entered by the court.

The supreme court stated that the first sentence of 9(g)(3) requires the foreclosure sale purchaser to pay the assessments beginning in the month following the foreclosure sale. The second sentence states that this payment “confirms” the extinguishment of any lien created by the prior unit owner’s failure to pay assessments. That is, the first sentence extinguishes the lien; the second sentence confirms the extinguishment. But in this case, the purchaser did not pay the assessments following the foreclosure sale, and so the lien was not extinguished.

In my opinion this case is significant to the Company because the Condominium Property Act carves out an exception to our general understanding of foreclosure law—if the foreclosing plaintiff names all necessary and permissible parties in its foreclosure action, their interests are eliminated through the mortgage foreclosure.

For example:

• Adam buys a house in 2016, taking out a purchase money mortgage with Bank. • In 2017 a judgment creditor records a memorandum of judgment against Adam. • In 2018 the State of Illinois records an income tax lien against Adam. • In 2019 Bank begins to foreclose its mortgage. If Bank names and serves both the judgment creditor and the State of Illinois, the title company could eventually insure Bank pursuant to a judicial deed and issue a title policy free and clear of exceptions for the judgment and the State of Illinois lien.

The defendant argued that the appellate court’s construction of section 9(g)(3) conflicts with section 15-1509(c) of the IMFL. This statute is codified as 735 ILCS 5/15-1509(c), and it provides that the foreclosure of a mortgage extinguishes all junior lien interests. The defendant claimed that because the condominium association never recorded its lien (but presumably unknown owners and non-record claimants were served), then the plaintiff’s lien was extinguished in the foreclosure action; the judicial deed was issued conveying the land free and clear of any lien for unpaid condominium assessments.

Section 15-1509(c) of the IMFL provides as follows:

Any vesting of title by a consent foreclosure pursuant to Section 15-1402 or by deed pursuant to subsection (b) of Section 15-1509, unless otherwise specified in the judgment of foreclosure, shall be an entire bar of (i) all claims of parties to the foreclosure and (ii) all claims of any nonrecord claimant who is given notice of the foreclosure. . . .

The Illinois Supreme Court did not agree with this argument. The supreme court stated that when there is a general statutory provision and a specific statutory provision that relate to the same subject, the statute relating to the one specific subject must prevail over the statute designed to apply to more general cases. Thus, section 9(g)(3) of the Condominium Property Act, which is a specific statutory provision, trumps the general rule of foreclosure set forth in section 15-1509 of the IMFL.

Rule of Title Practice

1010 Lake Shore Ass’n v. Deutsche Bank National Trust Co. makes it clear that a title company cannot waive an exception for unpaid pre-foreclosure condominium assessments even if a condominium association was made a necessary party to the foreclosure and a judicial deed was issued. Rather, an exception for unpaid condominium assessments should be waived pursuant to a condominium association “Paid Assessment Letter.”

Wing Street of Arlington Heights Condominium Association v. Kiss the Chef Holdings, LLC, 2016 IL App(1st) 142563.

The facts of this case are as follows: Illinois RealWorks, LLC, defaulted in its mortgage. It also defaulted in paying its monthly condominium assessments to the association, Wing Street of Arlington Heights Condominium Association. The unit was sold through the foreclosure of the mortgage.

The association filed an action to collect its assessments.  In addition, the owner’s lender, Village Bank & Trust, filed a foreclosure action. The purchaser at the sale was VBT Wing Street Condo, LLC (VBT), a wholly-owned subsidiary of Village Bank. VBT began making monthly payments of assessments until it sold the unit to Kiss the Chef Holdings, LLC.  VBT never paid any past due assessments.  When VBT sold the unit to Kiss the Chef Holdings, neither party requested an assessment letter.

In 2013 the association filed suit to enforce its lien for unpaid assessments. Kiss The Chef claimed that VBT’s payment of monthly assessments following the foreclosure sale extinguished the association’s lien for unpaid assessments prior to the sale. Kiss the Chef also claimed that VBT, as the purchaser at the sale, was the party liable for assessments, and that because the association never recorded a lien, the lien did not survive the sale from VBT to Kiss the Chef. The circuit court ruled that VBT was not a mortgagee for purposes of imposing liability on Kiss the Chef under Section 9(g)(4) of the Condominium Act. The Association appealed.

 The appellate court reversed the decision of the circuit court.  The appellate court looked at 765 ILCS 9(g)(3) and 765 ILCS 9(g)(4) and said:

• Under 765 ILCS 9(g)(3), the Act imposes an obligation on any purchaser at the foreclosure sale, including a mortgagee, to pay current assessments beginning the first month after the judicial sale.

• Under 765 ILCS 9(g)(3), The purchaser’s payment of assessments coming due following the sale serves to extinguish the association’s lien for unpaid assessments incurred prior to the sale.

• Under 765 ILCS 9(g)(4), the Act imposes an additional obligation on a purchaser, other than a mortgagee, who purchases the unit, either at the foreclosure sale or later from the mortgagee. That party must pay an amount equal to the assessments that were delinquent for the six months preceding an association’s action to collect the unpaid assessments.

In other words, Section 9(g)(4) provides the following:

One, if you are a purchaser of a condominium unit at a foreclosure sale, and you are not the lender, you have to pay six months’ worth of delinquent assessments;

Two, if you are a purchaser who acquires the unit from the foreclosing lender, you have to pay six months’ worth of delinquent assessments

There is nothing in the Act that supports the conclusion that a third-party purchaser can discharge its obligation to pay the six months’ worth of assessments due under 9(g)(4) by simply paying current assessments under 9(g)(3).

The appellate court said that VBT was a mortgagee. The Illinois Mortgage Foreclosure Law defines a “mortgagee” as “the holder of an indebtedness or obligee on a non-monetary obligation secured by a mortgage or any person designated or authorized to act on behalf of such holder. . . .” See 735 ILCS 5/15-1208.

Thus, because VBT was a mortgagee, the second element of the last bullet point applies. Kiss the Chef, the purchaser from the foreclosing lender, has to pay the past-due assessments. Had VBT been a third party purchaser and not a lender, then VBT (and not Kiss the Chef) would have been responsible for the delinquent assessments.

Note that the appellate court stated that under 765 ILCS 9(g)(3), the purchaser’s payment of assessments coming due following the sale serves to extinguish the association’s lien for unpaid assessments incurred prior to the sale. This was the key point in the recent Illinois Supreme Court case, 1010 Lake Shore Ass’n v. Deutsche Bank National Trust Co., 2015 IL 118372.

Leasehold Condominiums

765 ILCS 605/2(x) states that one can have a leasehold condominium, but only if the lessor is either exempt from taxation, a limited liability company whose sole member is exempt from taxation, or a Public Housing Authority located in a municipality that has a population of more than one million residents—that is, Chicago.

A lessor exempt from taxation might be a not-for-profit corporation or charitable organization.

765 ILCS 605/2(x), which is the “Definitions” section of the Act, defines a leasehold condominium as follows:

‘Leasehold Condominium’ means a property submitted to the provisions of this Act which is subject to a lease, the expiration or termination of which would terminate the condominium and the lessor of which is (i) exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, (ii) a limited liability company whose sole member is exempt from taxation under Section 501 (c)(3) of the Internal Revenue Code of 1986, as amended, or (iii) a Public Housing Authority created pursuant to the Housing Authorities Act that is located in a municipality having a population in excess of 1,000,000 inhabitants.

Issues Concerning Leasehold Condominiums

Question: Adam owns lot 1. Adam leases the land to Baker, using a long-term lease. Baker, the lessee, builds office condominiums on the land. Now Baker wants to sell these condominium units. What are the issues?

Answer: Baker can use deeds to convey the condominiums. Keep in mind that the lease with Adam is always going to be a Schedule B exception on any owner’s policy or loan policy issued, including the loan policy insuring a mortgage of a third party purchaser of a condominium unit. In addition, note that when the lease expires, title to all the improvements (i.e., the condominium units) will revert back to the current owner of the land. Thus, as the lease gets older, it might be harder to sell these units. In addition, the land may decline in value.

Commercial Condominiums

Question: Developer wishes to build a condominium project in the downtown area of an older Illinois town in the suburban Chicago area. He notes that the site is within walking distance to the train station, and so he believes that the project would draw commuters. He intends to have two four-story condominium buildings. The first floor will be commercial, and the second, third, and fourth floors will be residential. What are the issues?

Answer: it is possible that this development will consist of two condominium developments. That is, the commercial first floor will be one condominium, and the second, third, and fourth floors will be another condominium.

Many attorneys who represent commercial entities believe that their clients have interests that are different from residential condominium unit owners. These attorneys may insist that the commercial property be a condominium that is separate from the residential condominium. Otherwise, the residential unit owners, being a majority, might approve condominium amendments that could be detrimental to the commercial unit owners.

Miscellaneous Statutes

765 ILCS 605/29; Alterations within Units

A unit owner who owns two or more units may remove or alter the partition walls as long as he does not weaken the common elements or the units. The unit owner has to notify the board of managers of the proposed work at least ten days before he starts the work.

765 ILCS 605/31; Subdivision or Combination of Units—in General

Unless the condominium instruments prohibit it, and subject to any limitations contained in the condominium instruments, the unit owner may subdivide or combine a unit or units.

The owner must make “written application” to the board of managers, requesting an amendment to the declaration.

This statute states that the owner must set forth in the application the following:

• A proposed reallocation of the percentage interest in the common elements;

• Whether any limited common elements should be reassigned;

• In the event units are combined, whether the new unit should be granted the right to use as a limited common element a portion of the common elements within the building adjacent to the new unit.

If a majority of the board of managers approve the amendment, it shall be effective upon the recording of an amendment executed by the owners of all the units involved.

Combination of Units Pursuant to 765 ILCS 605/31

If the units are combined, the amendment may grant the owner of the combined unit the right to use, as a limited common element, a portion of the common elements within the building adjacent to the new unit.

The request for the amendment will be granted if these conditions are met:

• The use of the common element in question is not necessary or practical for use by any other owner other than the owner of the combined unit;

• The owner of the combined unit is responsible for any and all costs associated with the building and renovation work.

If the combined unit is sold, the grant of the limited common element runs in favor of the new owner.

Subdivision of a Combined Unit Pursuant to 765 ILCS 605/31

If the combined unit is later subdivided, and part of the original combined unit is sold, so that the right to use the limited common element is no longer necessary, the board may terminate the grant of the limited common element and require that the owner of the combined unit restore the common area to its original condition.

Using Common Elements Pursuant to 765 ILCS 605/31

Attorneys may remember Picerno v. 1400 Museum Park Condominium Association, 2011 IL App (1st) 103505. In this case the plaintiff and his mother in law owned two units at the opposite ends of a hallway. The plaintiff wanted to take the hallway adjacent to these two end units and enclose it, making it a kind of foyer for private use. He felt that he could do this pursuant to Section 31 of the Condo Act. The court said no. But Section 31 of the Condominium Act has now been revised to permit this. See the following; this is new 765 ILCS 605/31(a), effective January 1, 2018:

Combination of any units’ means any 2 or more residential units to be used as a single unit as shown on the plat or amended plat, which may involve, without limitation, additional exclusive use of a portion of the common elements within the building adjacent to the combined unit (for example, without limitation, the use of a portion of an adjacent common hallway.

See also new 765 ILCS 605/31(e):

Under this Section, the exclusive right to use as a limited common element any portion of the common elements that is not necessary or practical for use by the owners of any other units is not a diminution of the ownership interests of all other unit owners requiring unanimous consent of all unit owners under subsection (e) of Section 4 of this Act or any percentage set forth in the condominium instruments.

Thus, all of the unit owners do not have to approve the use of the common elements. Pursuant to 765 ILCS 605/31(b), the only approval that is needed is the approval of the board of managers.

Miscellaneous Questions and Answers

Question: Is a deed executed by less than 100% of the condominium unit owners that purports to convey a portion of the common elements a valid conveyance?

Answer: Such a deed would be invalid, because all the unit owners are not joining in the deed. Also, section 8 of the Condominium Act states that partition of the common elements is prohibited.

Pursuant to Section 16 of the Act, the entire condominium project could be withdrawn from the Act and then be resubmitted in a reconfigured pattern, with this portion of the common elements removed. In this instance, however, a unanimous vote would be required.

The examiner could accept a deed executed by the condominium association, but the examiner would need evidence that all unit owners consented to the execution of the deed.

Note that the Condominium Property Act does provide for less-than-unanimous owner approval in certain situations. Most notably is Sections 14.2 and 14.3 and 14.4 of the Act, which provides for the granting of certain easements. Section 15 allows for a less-than-unanimous vote to sell the condominium property.

Some commentators have rationalized Section 15 by observing that after a divided vote, a dissenting owner can still sell his condominium unit and walk away; he does not have to remain living in the condominium unit.

See 765 ILCS 605/18.4(a). The board of managers has broad powers. See 765 ILCS 605/18.4(g). The board has the authority “to own, convey, encumber, lease, and otherwise deal with units conveyed to or purchased by it.”

Such a provision is not used for the sale of common elements. Rather, examples of the proper use of 765 ILCS 605/18.4(g) are as follows:

• The purchase of non-condominium land for additional parking;

• The sale of land outside the common elements, such as an out lot or common area that is owned by the association;

• The purchase of a condominium unit on behalf of a janitor or other employee;

• The purchase of a unit pursuant to a right of first refusal;

• The purchase of a unit pursuant to the foreclosure of an assessment lien or foreclosure of a mortgage.

Some people have argued that Parrillo v. 1300 Lake Shore Drive Condominium, 103 Ill.App.3d 810 (1981), authorizes such a deed of the common elements.

But this case stands for the proposition that in certain circumstances, one unit owner can diminish the common elements by building a bedroom on common area. But in this case the common elements was subject to the unit owner’s exclusive use. Thus, the common elements available to the other unit owners remained the same. Therefore, section 4(e) of the Act, which prohibits the diminishing of the common elements owned by the unit owners, would not be violated by permitting the unit owners from building on the exclusive common elements, which in Parrillo was a terrace.

Question: Is a grant of easement executed by less than all of the unit owners an effective grant of easement?

Answer: The following court case seems to be controlling—see Schaumburg State Bank v. Bank of Wheaton, 197 Ill.App.3d 713 (1990). The easement would be insurable, subject to the following conditions, and subject to underwriter approval:

• The declaration may have to be amended, empowering the board to grant the easement.

• Pursuant to section 27 of the Condominium Act, the amendment must be passed by either a 2/3 vote or the majority specified in the condominium declaration (but no more than a three-quarters vote of all unit owners.)

• The amendment must be executed by the president of the association or such other authorized officer, as set forth in section 17(b) of the Act.

• The amendment and grant of easement must be recorded.

• The amendment must state that the unit owners’ percentage interest in the common elements will not be changed by the grant of easement.

• The easement must state that it is a non-exclusive easement and that all the unit owners have the right to use the easement.

• The amendment must state that all condominium owners will have the right to use the easement property in the same fashion that they could have used it before the easement was granted, which was when the easement property constituted condominium common elements.

• The examiner should obtain copies of the minutes of the meeting where this issue was discussed. The examiner may not want to insure this easement if the minutes indicate that there was much opposition to this proposed grant of easement.

• Furthermore, the examiner may want to consider obtaining a personal undertaking for defense costs in the event a disgruntled unit owner files a law suit, claiming that the grant of easement is invalid.

Question: Can a unit owner acquire common elements for his own use? For example, assume that the unit owner acquires two units at the end of a hallway, on opposite sides. This hallway is now essentially his exclusive use. Can he now acquire fee simple title to this hallway?

Answer: Yes, he can. See the above discussion of 765 ILCS 605/31(a) and 765 ILCS 605/31(e).

Question: A condominium association wants to raise money to replace the balconies that are outside the condominium units. It proposes to execute a mortgage. What are the issues?

Answer: A condominium association does not own anything. The unit owners own the units and the limited common elements. The only thing that a bank could do is acquire a security interest or assignment of the “income stream” created by the monthly condominium assessments due the association.

Question: A developer executes an add-on condominium declaration pursuant to section 25 of the Condominium Act. The developer, though, goes into foreclosure and eventually the construction lender becomes the owner of the add-on property, which has not yet been submitted to the Act. The construction lender wants to convey the add-on property to a builder, who will develop units, a building at a time, and submit the property to the Condominium Act, a building at a time. Can the builder do this? Note that Section 25 of the Act consistently refers to the developer being the person who can submit add-on property, and in this case, it is the builder, who is a subsequent purchaser, who is submitting the add-on property.

Answer: A developer of a condominium project enjoys several different rights. See, e.g., 765 ILCS 605/18.2(a):

Until election of the initial board of managers that is comprised of a majority of unit owners other than the developer (first unit owner board of managers), the same rights, titles, powers, privileges, trusts, duties and obligations vested in or imposed upon the board of managers by this Act and in the declaration and bylaws shall be held and performed by the developer.

In addition, the developer usually has significant rights pursuant to a properly drafted condominium declaration or a declaration of covenants, conditions, restrictions, and easements.

But does a subsequent purchaser step into the shoes of the developer? The court in Fairways of Country Lakes Townhouse Association v. Shenandoah Development Corporation, 113 Ill. App. 3d 932, 447 N.E.2d 1367, 69 Ill. Dec. 680. (2nd Dist. 1983) did not think so, writing that “the purchase of one corporation’s property by another does not subject the purchasing corporation to the liabilities of the seller nor does it entitle it to exercise the seller’s rights unrelated to the property.”

The Third District, however, in Board of Managers of the Medinah on the Lake Homeowners Association v. Bank of Ravenswood, 295 Ill. App. 3d 131, 692 N.E.2d 402, 229 Ill. Dec. 629 (3rd Dist. 1998), ruled otherwise, stating that a successor to a developer would include a lender “who succeeds to a developer’s interest either by foreclosure or otherwise.”

And so the answer is yes, the builder can do this. The Company can insure the property, even though it is a subsequent purchaser who will be submitting the property to the Act. There are a few caveats, however:

If the foreclosing lender acquires title to the land pursuant to a deed in lieu of foreclosure, the lender should make sure that all development rights are specifically assigned by the developer to the lender in the agreement to convey in lieu of foreclosure. Similarly, a subsequent purchaser who buys the deed in lieu property from the lender should also acquire these rights.

If, as in the example, the foreclosing lender acquires the property by foreclosing its mortgage, any judgment of foreclosure should similarly include these rights. If there is no “chain of ownership” of these rights, the examiner should consider requiring that the condominium association consent to any subsequent add-on declarations.

Will the builder be developing the add-on property in the manner that was originally envisioned? The Company risks a lawsuit, with unit owners suing to enjoin future construction, if the builder does not develop the property in a manner that is consistent with the original declaration.

In other words, if the original declaration envisioned a completed development (with add-on property) of fifty units, the builder should not be building seventy-five additional units.

Obviously underwriter approval is needed to insure this type of transaction.

New Condominium Legislation for 2018

Introduction

In recent years, the Condominium Property Act, 765 ILCS 605/1 et seq. (and its sister Act, the Common Interest Community Association Act, 765 ILCS 160/1-1 et seq.), has become the target of more proposed amendments than any other civil statute (except, perhaps, for the Property Tax Code). Most current proposed condominium amendments do not relate to the creation of condominium units and associations or to the conveyancing of condominium units. Rather, most proposed amendments concern the governance and financial affairs of associations and the relationship between associations and their members. Most of these have yet to become law.

One condominium bill, however, did become law. It does affect title to condominium units. Public Act 100-292 (HB 189), effective January 1, 2018, has been called an Omnibus Condominium Bill. It amends several sections of the Condominium Property Act.

Attorneys and title companies are seeing a marked increase in the deconversion of condominium units. The first step in the deconversion process is usually a developer buying up all of the condominium units pursuant to Section 15 of the Condominium Property Act, which is codified as 765 ILCS 605/15. The second step is usually pursuant to Section 16 of the Act. Section 16 of the Act (765 ILCS 605/16) permits all of the unit owners (or one owner who owns all of the units) to remove the units (and the appurtenant common elements) from the terms of the Act. This is accomplished by the execution and recording of an instrument to that effect, often called a “Declaration of Withdrawal.”

Section 15 of the Condominium Property Act permits unit owners to sell the condominium property—that is, the unit owners may sell all of the units and the appurtenant common elements. But note that under Section 15, less than all of the unit owners can sell all the condominium units. That is, unless the condominium declaration or by-laws provide otherwise, Section 15 allows for less than 100% affirmative votes to sell the property. Section 15, as revised, reads as follows:

Unless a greater percentage is provided for in the declaration or bylaws, and notwithstanding the provisions of Sections 13 and 14 hereof, a majority of the unit owners where the property contains 2 units, or not less than 66 2/3% where the property contains three units, and not less than 75% where the property contains 4 or more units may, by affirmative vote at a meeting of unit owners duly called for such purpose, elect to sell the property. Such action shall be binding upon all unit owners, and it shall thereupon become the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale. . . .

In other words:

• For a condominium containing 2 units: a “majority of the unit owners, may elect to sell all of the condominium units.

• For a condominium containing 3 units: not less than 66 and 2/3% of the unit owners may elect to sell all of the condominium units;

• For a condominium containing 4 or more units: not less than 75% of the unit owners may elect to sell all of the condominium units.

Note: See 765 ILCS 605/2(h) for the definition of “majority” and “majority of the unit owners.” This definition is not defined by the number of units someone owns:

(h) "Majority" or "majority of the unit owners" means the owners of more than 50% in the aggregate in interest of the undivided ownership of the common elements. Any specified percentage of the unit owners means such percentage in the aggregate in interest of such undivided ownership. "Majority" or "majority of the members of the board of managers" means more than 50% of the total number of persons constituting such board pursuant to the bylaws. Any specified percentage of the members of the board of managers means that percentage of the total number of persons constituting such board pursuant to the bylaws.

A valid vote to sell is binding on all unit owners, and Section 15 directs all unit owners to execute all documents, including deeds, necessary to complete the sale transaction. An objecting owner must sell, but he or she is entitled to payment from the proceeds of the sale.

But how does the objecting owner get paid? Prior to this amendment, the objecting owner was entitled to payment of the fair market value of his or her unit, less any outstanding condominium assessments. There was no deduction for amounts owed on mortgages.

Public Act 100-292 amends the amount payable to objecting owners. See new 765 ILCS 605/15(a):

Such action shall be binding upon all unit owners, and it shall thereupon become the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale, provided, however, that any unit owner who did not vote in favor of such action and who has filed written objection thereto with the manager or board of managers within 20 days after the date of the meeting at which such sale was approved shall be entitled to receive from the proceeds of such sale an amount equivalent to the greater of: (i) the value of his or her interest, as determined by a fair appraisal, less the amount of any unpaid assessments or charges due and owing from such unit owner or (ii) the outstanding balance of any bona fide debt secured by the objecting unit owner's interest which was incurred by such unit owner in connection with the acquisition or refinance of the unit owner's interest, less the amount of any unpaid assessments or charges due and owing from such unit owner. The objecting unit owner is also entitled to receive from the proceeds of a sale under this Section reimbursement for reasonable relocation costs, determined in the same manner as under the federal Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended from time to time, and as implemented by regulations promulgated under that Act.

Thus, for sales pursuant to Section 15 pending on January 1, 2018, or closed on or after January 1, 2018, an objecting unit owner is entitled to the greater of:

• One, the fair market value of the unit, less outstanding condominium assessments; or

• Two, the outstanding balance of any “bona fide debt,” (even, apparently, if the amount of that debt exceeds the fair market value of the unit), less outstanding condominium assessments.

Note that in either case, the objecting unit owner is entitled to receive reimbursement for reasonable relocation costs from the proceeds of the sale.

COMMENTARY: The question is always: how does the mortgage lender get paid? Under option one, above (which will generally operate if the objecting owner is current on his or her assessments), it is presumed that the selling owner will pay any outstanding mortgage debt on his or her own—from the proceeds of sale.

Under option two, above, however, it appears that the condominium association may be responsible for delivering payment to the lender. In any event, closing at a title insurance company or title insurance agent is the best way to arrange for payment to all interested parties.

Also, the question with Section 16 has always been—where does any needed extra money come from? That is, what if the proposed purchaser has offered, for example, $100,000 for each of the eight units in the building. But one of the unit owners has objected to the sale. He has remodeled his unit extensively, and it now appraises at $150,000, and he wants the full $150,000 for his unit. How is the extra $50,000 paid under option one? Answer: Either the buyer comes in with the extra $50,000, or, the $50,000 is deducted from the buyer’s offer and paid directly to the one owner. Consider the math:

$100,000 x 8 = $800,000. The buyer comes in with the extra $50,000, so the total proceeds is $850,000. $50,000 goes to the one owner. Then, all eight of the owners split the remaining $800,000, resulting in the one owner getting $150,000 and the other seven owners getting $100,000.

Or, what if the one owner insists on getting paid $50,000 more than the other owners because his unit appraises more than the other owners, and the purchaser is unwilling to come up with the extra $50,000?

$100,000 x 8 = $800,000. The one owner gets paid $50,000. $800,000 less $50,000 = $750,000. All eight owners split the remaining $750,000. Thus, seven owners get paid $93,750 each. The one owner gets $93,750 plus the extra $50,000.

Or, what if the one owner is adamant about getting paid $150,000 for his unit, and the purchaser is unwilling to raise his offer?

$100,000 x 8 = $800,000. $150,000 is paid directly to the one owner. The other seven owners then split the remaining $650,000. That means that the other seven owners each get paid $92,857.00.

Note the reference in option two above (Roman numeral “ii” in the statute) to “bona fide debt.” It is likely that this limitation was added to prevent a unit owner from executing a last minute trust deed with his brother-in-law, mortgaging all the equity in his unit, in an attempt to inflate the amount that the unit owner may get under option two.

Public Act 100-0292 also includes legislation that certainly brings to mind a 2011 appellate court case.

Attorneys may remember Picerno v. 1400 Museum Park Condominium Association, 2011 IL App (1st) 103505. In this case the plaintiff and his mother in law owned two units at the opposite ends of a hallway. The plaintiff wanted to take the hallway adjacent to these two end units and enclose it, making it a kind of foyer for private use. He felt that he could do this pursuant to Section 31 of the Condo Act. The court said no. But Section 31 of the Condo Act has now been revised to permit just this! See the following; this is new 765 ILCS 605/31(a):

Combination of any units’ means any 2 or more residential units to be used as a single unit as shown on the plat or amended plat, which may involve, without limitation, additional exclusive use of a portion of the common elements within the building adjacent to the combined unit (for example, without limitation, the use of a portion of an adjacent common hallway.

See also new 765 ILCS 605/31(e):

Under this Section, the exclusive right to use as a limited common element any portion of the common elements that is not necessary or practical for use by the owners of any other units is not a diminution of the ownership interests of all other unit owners requiring unanimous consent of all unit owners under subsection (e) of Section 4 of this Act or any percentage set forth in the condominium instruments.

Thus, all of the unit owners do not have to approve the use of the common elements. Pursuant to 765 ILCS 605/31(b), the only approval that is needed is the approval of the board of managers.

Public Act 100-292 (HB 189) amends the Common Interest Community Property Act by adding 765 ILCS 160/1-20(e). It similarly amends the Condominium Property Act by amending 765 ILCS 605/27(a)(ii). The added language creates a mechanism for “default approval” of association documents, and the language is virtually identical to both Acts. As shown below, if a lender or lienholder is asked to approve an instrument, then the lender or lienholder is deemed to have approved the instrument unless the lender or lienholder says “no” within 60 days after the mailing of the request by certified mail:

If the (community or condominium) instruments require approval of any mortgagee or lienholder of record and the mortgagee or lienholder of record receives a request to approve or consent to the amendment to the (community or condominium) instruments, the mortgagee or lienholder of record is deemed to have approved or consented to the request unless the mortgagee or lienholder of record delivers a negative response to the requesting party within 60 days after the mailing of the request. A request to approve or consent to an amendment to the (community or condominium) instruments that is required to be sent to a mortgagee or lienholder of record shall be sent by certified mail.

Public Act 100-292 (HB 189) also amends 765 ILCS 605/9, which is part of the Condominium Property Act, by adding Section 9(c)5. 765 ILCS 605/9(c)5 provides guidance as to how a condominium board of directors may dispose of surplus funds at the end of a fiscal year. The new section lists the following solutions:

• Contribute the surplus to the association’s reserve fund; • Return the surplus to the unit owners as a credit against the remaining monthly assessments for the current fiscal year; • Return the surplus to the unit owners in the form of a direct payment to the unit owners • Maintain the funds in the operating account.

The new section also provides a means by which the board may address a deficit—the board may incorporate it into the following year’s annual budget. (Unit owners may vote to select a different option, however.)

Public Act 100-0292 also contains what may be a controversial provision. 765 ILCS 605/19 relates to the records of the association. Section 19(a) was amended to include item 7. See below; the underlined words are the words added by Public Act 100-292:

Section 19(a)(7): The board of managers of every association shall keep and maintain the following records, or true and complete copies of these records, at the association’s principal office: (7): a current listing of the names, addresses, email addresses, telephone numbers and weighted vote of all members entitled to vote.

765 ILCS 605/19(e) provides that a member of an association has the right to “inspect, examine, and make copies of the records” described in the new section (7). The end result of this legislation is that any member of the association can now find out the phone number and email address of any other member.

COMMENTARY: This provision was discussed by Howard Dakoff in the November 12, 2017, issue of the Chicago Tribune. Dakoff notes that in an attempt to mitigate the potential abuse of this information, the legislature added language to 765 ILCS 605/19(e) whereby the board may require the requesting member to certify in writing that the information contained in the records will not be used by the member for any commercial purpose. Nonetheless, Dakoff was clearly troubled by this amendment. He noted that many association boards, unit owners, and management companies have expressed concern about this new law. He noted that some people feel that this new statute is an infringement upon the privacy of unit owners who do not want to give out their telephone numbers or email addresses. He added that some owners may want to “designate a phone number and email address they wish to be used for such requests, perhaps including a newly created email address.”

Dakoff concluded his article by stating: “Given that this legislation is now law, condominium associations must comply with it. However, individuals who are opposed should contact their elected officials demanding an opt-out amendment to this new requirement for unit owners who do not want such information provided.”

On the other hand, this legislation was probably passed with the best intentions in mind. That is, the Act was amended so that the board could communicate quickly with the unit owners, notifying the owners, for example, of a day when hallways would be painted or the elevator would be repaired.

Conveyances

After Acquired Title Statute

(765 ILCS 5/7) (from Ch. 30, par. 6)Sec. 7. If any person shall sell and convey to another, by deed or conveyance, purporting to convey an estate in fee simple absolute, in any tract of land or real estate, lying and being in this state, not then being possessed of the legal estate or interest therein at the time of the sale and conveyance, but after such sale and conveyance the vendor shall become possessed of and confirmed in the legal estate to the land or real estate so sold and conveyed, it shall be taken and held to be in trust and for the use of the grantee or vendee; and the conveyance aforesaid shall be held and taken, and shall be as valid as if the grantor or vendor had the legal estate or interest, at the time of said sale or conveyance.

Corporations

Last effective date: November 17, 2019 All statutes checked through November 17, 2019 (Bales)

See generally the Business Corporation Act of 1983 (hereafter “the Act”), which is found in the Illinois statutes at 805 ILCS 5/1 et seq.

A domestic corporation is incorporated under the laws of Illinois. A foreign corporation is organized under laws other than the laws of Illinois. See 805 ILCS 5/1.80(b).

The Business Corporation Act of 1983 gives a corporation broad powers. For example, it can sell, convey, mortgage, or otherwise dispose of its assets. See 805 ILCS 5/3.10. A corporation, however, does not have unlimited authority to do this. Consequently, the Company has adopted various underwriting practices when insuring the mortgage or sale of corporate property.

Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Fees and Charges

Both domestic and foreign corporations have to pay license fees and franchise taxes. See 805 ILLCS 5/15.05. A license fee covers regulations costs. A franchise tax is a tax on the privilege of carrying on business in the nature of a corporation. See 805 ILCS 5/15.20 and 805 ILCS 5/15.35. If these charges are not paid, the following can result:

• The Secretary of State can administratively dissolve any domestic corporation. See 805 ILCS 5/12.35.

• The Secretary of State can revoke the certificate of authority of a foreign corporation. See 805 ILCS 5/13.50(h).

• A domestic corporation cannot maintain a civil action in Illinois until the charges are paid. See 805 ILCS 5/15.85(c). The Secretary of State can refuse to file any articles, certificates, or other documents relating to a domestic or foreign corporation until all fees are paid. See 805 ILCS 5/15.85(a).

• The annual franchise tax of a corporation is a prior and first lien on the real property of the corporation. See 805 ILCS 5/15.80(d). It is enforceable for seven years after the date the annual report was filed for the period that gave rise to the franchise tax lien. See 805 ILCS 5/15.90(a).

When insuring the sale or mortgage of corporate real estate by a domestic corporation, the title examiner wants to be sure that all taxes, fees, and charges have been paid. This exception probably does not have to be raised when the examiner is dealing with an established corporate customer that management knows to be financially sound.

A certificate of authority must be obtained by a foreign for-profit corporation before it can transact business in Illinois. Once the certificate is revoked, the foreign corporation no longer has the authority to transact business in Illinois and is prohibited from doing so. Also, the foreign corporation cannot maintain a civil suit in any court in Illinois. However, it can defend an action in Illinois. See 805 ILCS 5/13.05, 805 ILCS 5/13.55(c), 805 ILCS 5/13.70, 805 ILCS 5/13.75.

Clearance for Domestic Corp

• A corporation has the power to sell and mortgage property. See 805 ILCS 5/3.10(e).

• The examiner should obtain and review a certificate of good standing. See 805 ILCS 5/15.95(e). The certificate is not necessary if dealing with an established corporation that is financially sound. (In lieu of obtaining a certificate of good standing, the examiner may confirm the good standing of a corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.)

• How important is the certificate of good standing? The Illinois Secretary of State will administratively dissolve a corporation if, for example, it has not paid any fee or its franchise tax. See 805 ILCS 5/12.35(c). The dissolution of a corporation terminates its corporation existence. A dissolved corporation cannot carry on any business except what is necessary to wind up its affairs. See 805 ILCS 5/12.30.

• Each corporation shall have a board of directors, and the business and affairs of the corporation shall be managed by the board of directors. See 805 ILCS 5/8.05.

• A majority of the number of directors fixed by the by-laws, or in the absence of a by-law fixing the number of directors, the number stated in the articles of incorporation or named by the incorporators, shall constitute a quorum for the transaction of business unless a greater number is specified by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(a).

• The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless the act of a greater number is required by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(c).

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of board authorization of the proposed deed or mortgage. See 805 ILCS 5/8.50.

• When the title company is insuring the sale or mortgage of all or substantially all of the corporate assets of the corporation, and the transaction is made in the usual and regular course of business of the corporation, the examiner must obtain the authorization of the board of directors. Shareholder consent is not needed, however. See 805 ILCS 5/11.55.

• Even if the title company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 5/8.50.

• The resolution should be executed by a quorum of the board of directors, thus evidencing the board’s approval of the proposed transaction. However, note that 805 ILCS 5/8.50 does state that “one officer, in this Act generally referred to as the secretary, shall have the authority to certify the by-laws, resolutions of the shareholders and board of directors and committees thereof, and other documents of the corporation as true and correct copies thereof.”

• If the proposed conveyance is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the examiner must obtain approval from the holders of at least 2/3 of the outstanding voting shares of stock (as well as a corporate resolution). See 805 ILCS 5/11.60(c).

Execution of the Deed or Mortgage by a Domestic Corporation

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2). (The wording of this statute indicates that a deed or mortgage need be executed by only one authorized party. Naturally, the specific requirements of the corporation, as detailed in, e.g., its resolution, may differ from those set forth in this statute.)

• If the corporate resolution does not indicate the names of the people who are to sign the documents, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

• 805 ILCS 5/1.10(b)(2)(v) provides that if the corporate assets are in the possession of a receiver, trustee or other court appointed officer, then the documents should be signed by the fiduciary or the majority of them if there are more than one.

• Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Clearance for a Foreign Corporation (805 ILCS 5/13.05 et seq.)

Clearance:

• The examiner should not ask for an Illinois certificate of good standing. Instead, the examiner should request evidence that the foreign corporation is in good standing in its home state.

• It is certainly true that a foreign corporation has to pay license fees and franchise taxes. However, these fees have to be paid by the foreign corporation as a condition to doing business in the State of Illinois. See 805 ILCS 5/13.50(h); 805 ILCS 5/15.50 and 805 ILCS 5/15.65.

• As set forth in the Act, merely owning real estate, in and of itself, does not constitute doing business in Illinois. See 805 ILCS 5/13.75(9). For a list of “activities that do not constitute transacting business,” see 805 ILCS 5/13.75.

• “Owning, without more, real or personal property” is not transacting business in Illinois. “Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature” is not transacting business in Illinois. See 805 ILCS 5/13.75(9); 805 ILCS 5/13.75(10).

• Is the selling, buying, and mortgaging of several lots in a series of closings transacting business? Perhaps it is. If the examiner is concerned about a foreign corporation transacting business in Illinois, the examiner should check to see if the Illinois Secretary of State has filed the foreign corporation’s application for authority to transact business in Illinois as a foreign corporation. This filed application is evidence that the foreign corporation can transact business in Illinois. Alternatively, the examiner should consult an underwriter. See 805 ILCS 5/13.05; 805 ILCS 5/13.15; 805 ILCS 5/13.20.

• Article 13 of the Business Corporation Act (805 ILCS 5/13.05 through 805 ILCS 5/13.75) concerns foreign corporations. Unlike the statutes concerning domestic corporations, Article 13 contains no provisions for corporate resolutions or shareholder approval. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can accept a corporate resolution that has been passed by the board of directors of the foreign corporation in order to insure a deed or mortgage executed by a foreign corporation.

Execution of Deed or Mortgage by Domestic Corporation

• Article 13 contains no provision for document execution. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can rely on 805 ILCS 5/1.10(b)(2). That is, the deed or mortgage of a foreign corporation should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares.

Corporate Clearance for the All-Cash Transaction

Assume that a corporation is purchasing property in an all-cash transaction. One might think that in this situation, the examiner does not have to be concerned about obtaining the appropriate corporate clearance, that if a claim were to arise, the claim would be an “act of the insured,” which is excluded from policy coverage pursuant to Exclusion 3(a) of the 2006 ALTA owner’s title policy.

However, it is Company policy that the examiner obtain the evidence that the corporation exists as a valid corporation, even in an all-cash transaction. The reasoning is as follows:

If a corporation were not in good standing in Illinois, it would not be able to maintain a lawsuit in Illinois courts. See 805 ILCS 5/15.85(c). This would deprive the Company of its right to subrogation under the owner’s title policy.

That is, if the Company settled a claim on behalf of its insured corporation and then wished to sue in Illinois on behalf of the corporation for recoupment, it would not be able to do so. The Company had “stepped into the shoes of the corporation” and so would not be able to maintain the lawsuit.

Rules of Title Practice—A Summary

Generally speaking, an examiner should request a copy of a corporate resolution when insuring a conveyance or mortgage of a foreign or domestic corporation.

A resolution is not needed if the proposed transaction is within the ordinary scope of business of the corporation. Consider, for example, a relocation company selling a home.

The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors of the corporation to execute the document. However, the resolution should offer guidance in the execution of the document(s).

In the event the contemplated conveyance or mortgage comprises a sale or mortgage of all or substantially all of the assets of the corporation, the examiner must obtain both a corporate resolution and also written evidence of the shareholders’ approval of the transaction.

Dissolution of Corporations (805 ILCS 5/12.05 et. seq.; 805 ILCS 105/112.05 et seq.)

If a domestic corporation does not pay its franchise tax or file its annual report, the Illinois Secretary of State can administratively dissolve the corporation. See 805 ILCS 5/12.35. Corporate dissolution is evidenced by the Secretary of State issuing a certificate of dissolution, which is filed with the Illinois Secretary of State and mailed to the registered office of the corporation. See 805 ILCS 5/12.40(b).

In the alternative, the shareholders can consent in writing to dissolving the corporation. See 805 ILCS 5/12.10; 805 ILCS 105/112.10. Furthermore, all members of a corporation, or a quorum of members of a not-for-profit corporation, can vote to dissolve the corporation. See 805 ILCS 5/7.10; 805 ILCS 105/107.10.

A circuit court can dissolve a corporation if the Attorney General shows that the corporation abused its authority or violated the law. See 805 ILCS 5/12.50; 805 ILCS 105/112.50. Furthermore, a circuit court can also dissolve a business corporation if a creditor proves that it has a judgment that cannot be satisfied by the corporation’s assets. See 805 ILCS 5/12.50.

If a court enters an order of dissolution, it will supervise the “winding up” of the corporation’s business. See 805 ILCS 5/12.65; 805 ILCS 105/112.65; 805 ILCS 5/12.40(c).

Years ago, when a corporation dissolved, a corporation’s assets vested in the shareholders of the corporation. This has not been the case since July 1, 1984. Now, the dissolution of a corporation does not transfer title. Instead, upon dissolution of the corporation, title to the land remains in the corporation. See 805 ILCS 5/12.30(c)(1).

“Winding Up” the Corporation’s Business

Upon dissolution, the corporation cannot carry on any business except that necessary to “wind up” its affairs. See 805 ILCS 5/12.30. 805 ILCS 5/12.30(b) states that “after dissolution, a corporation may transfer good and merchantable title to its assets as authorized by its board of directors or in accordance with its by-laws.” See also 805 ILCS 105/112.30, which concerns the dissolution of not-for-profit corporations.

Therefore, a corporation can be dissolved and still convey real estate to an Insured. Because the Act allows a dissolved corporation to “wind up” its affairs, the dissolved corporation does not have to pay any unpaid license fees and franchise taxes before it conveys real estate.

However: Any request to insure a conveyance by a dissolved corporation as part of the “winding up” process when the corporation has been dissolved for more than a year should be referred to an underwriter. The underwriter may decide that a long-dissolved corporation can no longer wind up its affairs. Instead, the corporation may have to be reinstated.

Rule of Title Practice for Dissolved Corporations

• Upon dissolution of a corporation, title to the land remains in the corporate name. Title does not vest in the names of the shareholders. See 805 ILCS 5/12.30(c)(1).

• Upon dissolution, a corporation cannot carry on any business except what is necessary to “wind up” its affairs. Thus, it does not appear that a dissolved corporation can mortgage its corporate property. See 805 ILCS 5/12.65.

• After dissolution, the corporation may transfer title to its assets “as authorized by its board of directors or in accordance with its bylaws.” See 805 ILCS 5/12.30(5)(b).

• The examiner will obviously be unable to obtain a certificate of good standing. However, the examiner should ask for a resolution that not only authorizes the proposed conveyance, but also indicates that the deed is part of the “winding up” process of the corporation. See 805 ILCS 5/8.05(a); 805 ILCS 5/8.50; 805 ILCS 5/11.55; 805 ILCS 5/12.40(c).

• When examining title to land that is held by a dissolved corporation, the examiner should show the certificate of dissolution as a Schedule B exception on the title commitment. Upon a sale of the land, the certificate can be waived for any policy issued.

Execution of deed:

• The deed should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2).

• If the corporate resolution does not indicate the names of the people who are to sign the deed, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

Other Matters Concerning Dissolved Corporations

See the 2012 Illinois Supreme Court case Pielet v. Pielet, 2012 IL 112064; this case indicates that in order to sue a dissolved corporation, the cause of action must exist prior to the time of dissolution. This case concerns Section 12.80 of the Business Corporation Act, or 805 ILCS 5/12.80.

Because of this case, the examiner should not accept a personal undertaking when it is executed by a corporation. Instead, the undertaking should be executed by one or more shareholders. (See also A Plus Janitorial Corp. v. Group Fox, Inc., 2013 Ill. App. (1st) 120245.)

Example: Land is owned by ABC Corporation. The corporation is in financial difficulty. It wants to sell the building it is constructing. At the closing, the Company agrees to accept a personal undertaking from the corporation for possible mechanics lien claims. Three months later the corporation is dissolved. Four months later a mechanics lien is recorded, and the claimant immediately begins foreclosure proceedings. Five months later the Company is tendered the defense of the mechanics lien claim. The Company immediately tenders the defense of the claim to the corporation, but it is now dissolved. A court might conclude that the cause of action arose after the corporation was dissolved, and that therefore, the corporation has no legal obligation to honor the personal undertaking.

Once a corporation pays its delinquent fees and charges, the Secretary of State can reinstate the corporation. See 805 ILCS 5/12.45; see also 805 ILCS 105/112.45.

Once reinstated, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution. That is, the corporate existence “relates back” to the time the certificate of dissolution was issued. Once reinstated, it is as if the certificate was never issued. See 805 ILCS 5/12.45(d).

Not-for-Profit Corporations

See the General Not-for-Profit Corporation Act of 1986, which is codified as 805 ILCS 105/101.01 et seq.

In General

A not-for-profit corporation is a corporation whose income is not distributable to its members. See 805 ILCS 105/106.05. A not-for-profit corporation may be organized for charitable, religious, or educational purposes, or for any one or more of the other purposes outlined in 805 ILCS 105/103.05. A not-for-profit corporation has the power to sell or mortgage any or all of its property or assets. See 805 ILCS 105/103.10(e) and 805 ILCS 105/111.55.

Clearance for a Not-for-Profit Corporation

• A not-for-profit corporation has the power to sell and mortgage its property. See 805 ILCS 105/103.10(e).

• A not-for-profit corporation can be involuntarily dissolved for, among other things, failing to file its annual report or failing to pay any fees and charges. See 805 ILCS 105/112.35(a) and 805 ILCS 105/112.35(c). For this reason the examiner should either ask for a certificate of good standing or confirm the good standing of the corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.

• The examiner should review the bylaws of the corporation to see if there are any limitations on the corporation’s power to sell and mortgage its property. The examiner may also want to look at the articles of incorporation. See 805 ILCS 105/101.80(c); 805 ILCS 105/101.80(e); 805 ILCS 105/102.10; 805 ILCS 105/102.25.

• When insuring the sale of mortgage of all or substantially all of the corporate assets of the corporation, when made in the usual and regular course of business of the corporation, the examiner will need the authorization of the board of directors. See 805 ILCS 105/111.55.

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of the consent of the board of directors. See 805 ILCS 105/108.50(b).

Even if the Company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 105/108.50(b).

• If the proposed conveyance or mortgage is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the transaction is authorized in the following manner: If the corporation has no members or no members entitled to vote on the proposed conveyance or mortgage, then the majority vote of the directors in office can authorize the conveyance or mortgage. See 805 ILCS 105/111.60.

But if the corporation has members entitled to vote on the proposed conveyance or mortgage, then the board of directors has to adopt a resolution recommending the sale or mortgage. The members then have to vote at either an annual meeting or a special meeting to authorize the deed or mortgage. A two-thirds affirmative vote of a quorum (a quorum being members holding one-tenth of the votes entitled to be cast) is needed. See 805 ILCS 105/107.60; 805 ILCS 105/111.60.

Execution of deed or mortgage:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other authorized officer. If there are no such officers, then the document should be executed by a majority of the directors or by such directors as may be designated by the board of directors. If there are no such officers or directors, then the document should be executed by the members or such members as may be designated by the members at a lawful meeting. See 805 ILCS 105/101.10.

Corporate Merger (805 ILCS 5/11.05)

The statute provides as follows:

Any two or more corporations may merge into one of such corporations or consolidate into a new corporation in the following manner:

The board of directors of each corporation shall, by resolution adopted by a majority vote of the members of each such board, approve a plan of merger or consolidation setting forth various items. These are set forth in the statute. They include the following:

• The names of the corporations proposing to merge or consolidate, and the name of the corporation into which they propose to merge, which is hereinafter designated as the surviving corporation or to consolidate, which is hereinafter designated as the new corporation;

• The terms and conditions of the proposed merger or consolidation and the mode of carrying the same into effect;

• A statement of any changes in the articles of incorporation of the surviving corporation to be effected by such merger or a statement of the articles of incorporation of the new corporation;

• Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

The Illinois Entity Omnibus Act

See also the Illinois Entity Omnibus Act, codified as 805 ILCS 415/101 et seq. This Act provides for conversions and domestications.

Conversion involves Illinois and foreign entities of different types. Domestication concerns Illinois and foreign entities of the same type.

Examples of Conversion

An Illinois corporation can become an Illinois limited liability company. A Delaware corporation can become an Illinois limited liability company.

Examples of Domestication

An Illinois corporation can become a Delaware corporation. A Delaware corporation can become an Illinois corporation.

To create a conversion or domestication, a statement of conversion or a statement of domestication must be filed with the Illinois Secretary of State.

Corporations and Judgments

A corporation is a legal “person.” Thus, it can sue and be sued; it can incur liability in its own name. See 805 ILCS 5/3.10(b) and 805 ILCS 5/3.10(d).

Employees of the corporation manage the corporation, but under agency law, the employees are not personally liable for their actions. Instead, the corporation is liable for the employees’ actions. See 805 ILCS 5/3.10(p). Therefore, only judgments against the corporation (and not judgments against an employee or shareholder) have to be shown on the title commitment for property owned by a corporation. See 805 ILCS 5/3.10(b); 805 ILCS 5/3.10(p). See also 805 ILCS 105/103.10(b); 805 ILCS 105/108.70.

Municipal Corporations

See 65 ILCS 5/11-76-1 et seq. (Sale or Lease of Real or Personal Property)

Home Rule Municipalities

Until 1970 units of local government were deemed to be creatures of the state. It was thought that all of their powers must be specifically granted by the Constitution or by state statute, or must be necessarily implied from that grant of power.

But then the 1970 Illinois Constitution created home rule. Home rule municipalities are governed by Article 7, Section 6, of the Illinois Constitution, which provides that “a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals, and welfare, to license, to tax, and to incur debt.”

Compare these broad powers to non-home rule units. Article VII, Section 7 of the Illinois Constitution states that “counties and municipalities that are not home rule units shall have only powers granted to them by law. . . .” These powers include the right to make local improvements by special assessment; to adopt, alter, or repeal their forms of government by referendum; to provide for the selection of their officers; to incur debt, and to levy taxes.

Home rule units are municipalities with over 25,000 people. Municipalities can opt in or out of home rule status by referendum. A county that has a chief executive officer elected by the electors of the county is also a home rule unit. Home rule units are not special districts, like a park district.

The website of the Illinois Municipal League contains a list of all of the home rule municipalities in Illinois. Go to www.iml.org and then search “home rule.” Then click on, “Home Rule Municipalities.”

The Sale of Municipal Property by a Home Rule Unit

Home rule units can adopt whatever rules they choose in selling their property. Thus, home rule units have two alternatives:

• They can adopt by ordinance whatever rules they choose, or,

• They can follow the statutes.

Rule of Title Practice for Home Rule Municipalities

The examiner should ask for a copy of the ordinance for the sale of property, and then follow the ordinance. See below for a sample title exception:

In order to insure the sale of municipal property pursuant to an ordinance drafted pursuant to the municipality’s home rule status, we should be furnished a copy of said ordinance. This commitment may be subject to additional exceptions after our review of said ordinance.

Non-Home Rule Municipalities

Non-Home Rule municipalities do not have the option of drafting their own ordinances to sell property. Instead, they must follow the Illinois statutes. These various statutes are outlined below. (Unless otherwise stated, the following underwriting rules apply to non-home rule municipalities.)

The Sale of Municipal Property by a Non-Home Rule Municipality

A city or village has the power to convey real estate when, in the opinion of the corporate authorities, the real estate is no longer needed by the city or village. This power shall be exercised by an ordinance passed by three-fourths of the corporate authorities of the city or village then holding office, at either a regular meeting or a special meeting. See 65 ILCS 5/11-76-1.

This ordinance shall specify the location of the real estate, the use thereof, and such conditions with respect to further use of the real estate that the corporate authorities deem necessary. See 65 ILCS 5/11-76-2.

But before the corporate authorities sell the land by virtue of the ordinance, notice of the proposal to sell the land shall be published once each week for three consecutive weeks in a daily or weekly paper published in the city or village, and if there is no such paper, then in some paper published in the county in which the city or village is located. The first publication shall be not less than thirty days before the day provided in the notice for the opening of bids for the real estate. The notice shall contain an accurate description of the property, state the purpose for which the land is used, and state at what meeting the bids will be considered and opened. See 65 ILCS 5/11-76-2.

The corporate authorities may accept the high bid or any other bid determined to be in the best interest of the city or village by a vote of three-fourth of the corporate authorities then holding office. However, by a majority vote of those holding office, they may reject any and all bids. See 65 ILCS 5/11-76.2.

The deed conveying this property is signed by the mayor or president and also the municipal clerk. See 65 ILCS 5/11-76-3.

Sale of Land by the Resolution of a Non-Home Rule Municipality

The corporate authorities may also authorize the sale of surplus real estate by resolution. See 65 ILCS 5/11-76-4.1.

The value of the real estate is determined by an appraisal. The resolution is published “at the first opportunity following its passage” in a newspaper published in the municipality or, if none, then in a newspaper published in the county where the municipality is located. The corporate authorities may accept any contract proposal determined by them to be in the best interest of the municipality by a vote of two-thirds of the corporate authorities then holding office. In no event, however, shall the price by less than 80% of the appraised value. See 65 ILCS 5/11-76-4.1.

A Non-Home Rule Municipality’s Alternative Means of Selling Surplus Property

See 65 ILCS 5/11-76-4.2. This section of the Act applies if a municipality has a population of less than 20,000 and is in a county with an unemployment rate that is higher than the national average for at least one month during the six months preceding the adoption of the resolution to sell the real estate.

If the ordinance (65 ILCS 5/11-76-2) or resolution (65 ILCS 5/11-76-4.1) has failed to work, then the corporate authorities may by a different resolution (65 ILCS 5/11-76-4.2) authorize the sale of surplus land by either the staff of the municipality, by listing with a real estate agency, or by public auction.

The resolution must be published once each week for three successive weeks in a newspaper (in the same manner outlined earlier). No sale may be conducted until at least thirty days after the first publication. The corporate authorities may accept any offer or bid by a vote of 3/4 of the corporate authorities then holding office.

Rule of Title Practice

When insuring the sale of municipal property, consider a generic exception similar to the following:

In order to insure the sale of municipal property, we should be furnished the following, and our commitment and policy may be subject to additional exceptions after our review of these materials:

If the municipality is a home rule municipality, we should be furnished a copy of the appropriate ordinance. If the municipality is not a home rule municipality, (or if it is, but it follows the procedure outlined in the Illinois Compiled Statutes), then we should be furnished a copy of the appropriate ordinance (together with the number of “yes” and “no” votes as to its passage); a copy of the published notice, including evidence as to when the notice was published; and a statement as to the number of “yes” and “no” votes that approved the winning bid. If the sale was by resolution, we should be furnished a copy of the appraisal, a copy of the corporate resolution, evidence of publication, and a statement as to the number of “yes” and “no” votes that approved the contract to purchase the real estate pursuant to said resolution.

The Purchase of Municipal Property by a Non-Home Rule Unit

See 65 ILCS 5/11-76.1-1 et seq.

The corporate authorities of each municipality having a population of less than 500,000 people can purchase real estate for public purposes. To do so they must pass an ordinance; they need an affirmative vote of two-thirds of the corporate authorities. See 65 ILCS 5/11-76.1-1.

After the ordinance has been passed, it shall be published in a newspaper that is published (or if not published, then circulated) in the municipality at least twice within thirty days after its passage. In municipalities with less than five hundred people in which no newspaper is published, then publication can be had by posting a notice in three prominent places within the municipality. The ordinance shall not become effective until thirty days after its second publication. See 65 ILCS 5/11-76.1-3.

The Exchange of Real Estate

See 65 ILCS 5/11-76.2-1 et seq.

For an exchange of real estate, there first must be a public hearing pursuant to a three-fourths vote of the members of the corporate authorities. Notice of the public hearing must be published in a newspaper of general circulation. The notice must be published not less than fifteen days or more than thirty days prior to the date of the hearing. The notice shall include a legal description of all properties and the terms and conditions of the exchange.

After the public hearing, the corporate authorities may authorize the exchange. In order to do so they need a three-fourths vote. If the exchange is authorized, the authorization is by ordinance, and the ordinance should include the following:

• That the land to be exchanged in no longer needed by the municipality for the public interest;

• That the land to be received will prove useful to the municipality and will be for the public interest;

• And that the total value of the land to be received is approximately equal to or exceeds the value of the land being traded.

Note that the wording of the statute indicates that land can be exchanged between a municipality and an individual, legal entity, or other non-municipality. For the transfer of real estate between municipalities, see below.

The Transfer of Real Estate between Municipalities

See 50 ILCS 605/1 et seq.

This statute is called the Local Government Property Transfer Act. The “transferee municipality” has to declare by ordinance that it is necessary or convenient for it to use, occupy or improve any real estate held by the “transferor municipality.”

The transferor municipality can convey the land to the transferee municipality by a deed signed by the mayor, president, or other chief executive of the transferor municipality, attested by its clerk or secretary and sealed with its corporate seal, all authorized by a resolution passed by a two/thirds vote of the members of the legislative body of the transferor municipality.

A municipality has the power upon resolution passed by a two-thirds vote of the members of its legislative body then holding office to transfer property to the State of Illinois. The term “State of Illinois” includes the state or any department, commission, board or other agency of the state.

The Local Government Property Transfer Act includes provisions for the releasing of easements and restrictions.

Home Rule Issues

The title examiner should be cautious about relying on a municipality’s status as a home rule municipality.

Example: An attorney contacts the title examiner. The attorney represents a home rule municipality. He wants the city to vacate a road pursuant to 65 ILCS 5/11-91-1. This statute requires the approval of at least three/fourths of the alderman, trustees, or commissioners. The attorney argues that because the city is home rule, the city can enact an ordinance that allows for merely a simple majority to approve the vacation. Is the attorney correct?

Some underwriters feel that he is not correct. They claim that the law has made it clear that there are certain matters of law that cannot have local variations. The determination of the extent and ownership of fee title to real estate is one of them. Rather, this determination is more properly an affair of the state.

But on the other hand, Oak Park, Downers Grove, and Peoria all have ordinances that allow for this type of vacation.

For example, this is the current Oak Park ordinance:

22-11-1: Vacation of Streets and Alleys: Streets and alleys may be vacated by the Board of Trustees pursuant to the provisions and procedures set forth in division 91 of the Illinois Municipal Code (65 ILCS 5/11-91-1 and 5/11-91-2), provided, however, pursuant to the home rule powers of the Village as set forth in Article VII, Section 6 of the Illinois Constitution, an ordinance vacating a street or alley shall be effective upon being passed by the affirmative vote of a majority of the Board of Trustees (1981 Code).

Furthermore, consider this analysis: The Illinois Supreme Court in Schillerstrom Homes, Inc. v. The City of Naperville, 198 Ill.2d 281, 762 N.E.2d 494 (2001) said this:

This court has formulated a three-part inquiry for evaluating the constitutionality of exercise of home rule power. First, we must determine whether the disputed exercise of local government power falls within section 6(a) [of Article VII of the Illinois Constitution]—that is, whether the local government’s activity is a function pertaining to its government and affairs. If so, we must determine whether the General Assembly has preempted the use of home rule powers in this area. If not, then we must determine ‘the proper relationship’ between the local ordinance and the state statute.

That is, these three factors are as follows:

• Does the contemplated exercise of local government power pertain to the government and affairs of the local government?

• If so, has the General Assembly preempted the use of home rule powers in this area? That is, does the statute in question contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution?

• If the statute does not contain such specific language, is the state statute an attempt to declare the subject an issue that requires exclusive state control?

The Illinois Supreme Court states the following as to the first factor:

An ordinance pertains to local government and affairs where it addresses local, rather than state or national, problems. . . . . Whether a particular problem is of statewide rather than local dimension must be decided not on the basis of a specific formula or listing set forth in the Constitution but with regard for the nature and extent of the problem, the units of government which have the most vital interest in its solution, and the role traditionally played by local and statewide authorities in dealing with it. [Citation omitted] Municipal development regulations . . . undoubtedly pertain to local affairs.

One might argue that the vacation of a right-of-way certainly pertains to local government and affairs.

Secondly, the vacation statute (65 ILCS 5/11-91-1) does not contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution.

But as to the third factor: This seems rather nebulous. What is “the proper relationship” between the local ordinance and the state statute?” What does this statement mean?

The Schillerstrom court goes on to say:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

In this regard, the case of The City of Wheaton v. Robert A. Sandberg, 215 Ill.App.3d 220, 574 N.E.2d 697, 158 Ill. Dec. 584 (1991) is illuminating. In this case the City of Wheaton wanted to condemn property. Wheaton is a home rule municipality. The defendant claimed that Wheaton’s enabling ordinance on which the condemnation action was based was invalid because it was preempted by the uniform state statutes created by the Commercial Renewal and Redevelopment Areas Act of the Illinois Municipal Code.

Specifically, the defendant claimed that the enabling ordinance was invalid because its definition of a “blighted area” differs from the definition of “blight” found in the state Act. That is, the state statute specifies that excessive vacancies may be one of the five elements necessary for a finding of blight, while the ordinance merely provides for vacancy alone in all or any part of the building as sufficient for a finding of blight.

The court concluded that there was no evidence indicating the necessity for uniform standards under the Commercial Renewal and Redevelopment Areas Act. Nor did the court perceive an overriding policy interest on the part of the state in keeping these standards uniform. Thus, the court maintained that the City of Wheaton could enact an enabling ordinance that did not conform to the state statute. (However, the court later said that although the ordinance was not preempted by the state statute, it was invalid on constitutional grounds.)

How does the holding of this case affect the issue relative to a right-of-way vacation? Again, the statement from the Schillerstrom case seems to be the key:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

It does not appear that the State of Illinois’ requirement of a 3/4 vote as set forth in 65 ILCS 5/11-91-1 is an “express attempt” by the state to maintain exclusive control over the means of a right-of-way vacation.

However, this Schillerstrom statement does refer to a condition precedent of “a determination that the State’s expression of interest” does not amount to an attempt by the State of asserting exclusive state control of the matter. Who makes this so-called “determination?” If the court has not yet made a determination that the statutory requirement of a 3/4 vote is not an attempt to declare the subject of right-of-way vacations a matter that requires exclusive state control, could a disgruntled homeowner bring suit because of a home rule right-of-way vacation?

But is it up to the court to make this determination? In the alternative, can the municipality make this determination in its ordinance? That appears doubtful.

Rule of Title Practice

Any request to insure a municipal real estate transaction pursuant to a home rule ordinance when a corresponding state statute already exists that also governs this transaction should be referred to an underwriter. Is there a chance of an adjoining homeowner being upset by the proposed transaction? The underwriter may want to ask for a personal undertaking for defense costs in the event there is litigation.

Other Statutes

• For the transfer of real estate from a municipality to the State of Illinois, see 50 ILCS 605/4.

• For the sale of school district real property, see 105 ILCS 5/5-22 et seq.

• Note that there does not appear to be a statute that governs the purchase of school district property. In that regard, the title examiner should request a copy of the real estate contract and a copy of the minutes of the meeting of the board of education wherein that contract for the purchase of the real estate has been approved. For gifts or donations to school districts, see 105 ILCS 5/5-21.

• For the sale of land by a forest preserve district in a county of less than 550,000 people, see 70 ILCS 805/6e.

• For the sale or exchange of land owned by a fire protection district, see 70 ILCS 705/10a.

• For the conveyance of park district property, see 70 ILCS 1205/10-1 et seq.

• For the acquisition of real estate by the Illinois State Toll Highway Authority, see 605 ILCS 10/9 et seq.

• For the acquisition of real estate by the Cook Country Forest Preserve District, see 70 ILCS 810/8; 70 ILCS 810/10; 70 ILCS 810/38.

• For the acquisition, finance, and sale of township property, see 60 ILCS 1/85-10(c); 60 ILCS 1/105-10.

• For the sale of public library property, see 75 ILCS 5/4-7(6) and 75 ILCS 5/4-16.

• For the mortgage of public library property, see 75 ILCS 5/5-6 and 75 ILCS 10/7(12).

• For the purchase of public library property, see 75 ILCS 5/4-7(4), 75 ILCS 5/5-6, 75 ILCS 10/7(4) and 75 ILCS 10/7(11).

Park Districts

See 70 ILCS 1205/1-1 et seq.

Can a Park District Mortgage Its Property?

It is not clear. Note that 70 ILCS 1205/6-2 states that the park district can “pledge its property,” but this is somewhat ambiguous.

70 ILCS 1205/9.3-5 indicates that a park district can mortgage an indoor or outdoor recreational facility under certain circumstances, but again, this is not a clear mandate.

The issue concerning a park district of other unit of government is: what happens when the loan is foreclosed? There is a basic underlying concept that a unit of government cannot lose its property.

Before insuring a mortgage of park district property, consider having the park district first obtain a declaratory judgment that it can mortgage the property in question.

Can a Municipality Mortgage Its Property?

• There are at least two statutes that refer to a municipality mortgaging its property. See 65 ILCS 5/11-74-4(5), which concerns an “industrial project.” 65 ILCS 5/11-74.4-4(c) indicates that a municipality can mortgage property within a “redevelopment project area.” However, what happens if the mortgage is foreclosed? There is a basic underlying doctrine or concept that a unit of government cannot lose its property.

But on the other hand, consider the broad wording of 65 ILCS 5/11-74.4-4(c), which provides as follows:

[Within a redevelopment project area, a municipality may] own, convey, lease, mortgage or dispose of land and other property, real or personal . . . . No conveyance, lease, mortgage, disposition of land or other property owned by a municipality, or agreement relating to the development of such municipal property shall be made except upon the adoption of an ordinance by the corporate authorities of the municipality. Furthermore, no conveyance, lease, mortgage, or other disposition of land owned by a municipality or agreement relating to the development of such municipal property shall be made without making public disclosure of the terms of the disposition and all bids and proposals made in response to the municipality's request.

• If asked to insure the mortgage of municipal property, the examiner should talk to an underwriter. The examiner may need to insist that the corporate municipality obtain a declaratory judgment that it can mortgage its property.

• 65 ILCS 5/8-1-3.1 provides that a municipality may borrow money from a bank or other financial institution, but the money must be repaid within ten years from the time the money is borrowed.

• 65 ILCS 5/8-1-6 and 65 ILCS 5/8-1-7 provide that a municipality cannot incur an expense unless an appropriation has been previously made pursuant to an appropriation ordinance. 65 ILCS 5/8-1-7(a) further states as follows: “Any contract made, or any expense otherwise incurred, in violation of the provisions of this section shall be null and void as to the municipality, and no money belonging thereto shall be paid on account thereof.” This statute illustrates a potential problem in insuring a mortgage of municipal property.

Can a Township Mortgage Its Property?

See 60 ILCS 1/85-10(c) and 60 ILCS 1/85-10(d). However, 60 ILCS 1/85-10(c) states that a township may finance the purchase of real estate by the use of “finance contracts.” This suggests that a township can mortgage property. However, see Attorney General Opinion Number 97-010, which states: “It has long been the rule in this State that a unit of local government may not legally execute a mortgage without express statutory authority to do so. (1933 Ill. Att’y Gen. Op. 758.)”

The Public Trust Doctrine

Customers will occasionally ask a title company to underwrite restrictions that benefit the public and not private parties. See, e.g., Morgan County v. Braner, 71 Ill. 546 (1874); Huntley Fire Protection District v. Huntley Development Limited Partnership, 338 Ill. App. 3d 609, 788 N.E.2d 355, 273 Ill. Dec. 46 (2003).

Example: In 1987 Landowner deeded Blackacre to Village. The deed includes a covenant that the property “is to be used for public park purposes.” For more than thirty years Blackacre has been used for a park. But in 2019 Village wants to enter into an inter-governmental agreement with School District, whereby Blackacre will be traded to School District in exchange for Whiteacre. School District indicates that after the two properties are exchanged, Blackacre will no longer be used as a public park. Can the 1987 covenant be endorsed over, providing coverage to School District over the violation?

It appears that in this instance the “public trust doctrine” is applicable. This tenet stands for the proposition that units of government own “trust resources,” like parks, as a trustee, and that these resources cannot be conveyed if the transfer would diminish or defeat traditional public access to and the use of those resources.

See Paepcke v. Public Housing Commission of Chicago, 46 Ill.2d 330, 263 N.E.2d 11 (1970); “Illinois Central and the Public Trust Doctrine in State Law,” 15 Va. Envtl. L.J. 713 (Summer 1996).

In order to endorse over this covenant, the Company will probably request that an appropriate government official contact the Attorney General’s office for an opinion, consenting to the violation of the covenant.

Factors to be considered by the Attorney General’s office would include: Is there another park near Blackacre? Will Whiteacre be used as a park?

Example:

In 2019 the Company was asked to insure the sale of the existing Geneva Public Library to a private party. The library was subject to a decades-old covenant that restricted the use of the land to a public library. The Company was asked to underwrite this covenant.

In this situation, the Company considered the Public Trust Doctrine. The Company agreed to endorse over the covenant upon the satisfaction of the following conditions:

• The new public library had to be relatively close to the old library. (The two buildings were six blocks apart.)

• The new library had to be at least as big as the old library. (The new library was substantially bigger.)

• The Company would not issue the endorsement until the old library was sold to a purchaser for value, a certificate of occupancy had been issued for the new library, and the new library was open for business.

Covenants, Conditions and Restrictions

UNDERWRITING COVENANTS, CONDITIONS, AND RESTRICTIONS

By

Richard F. Bales

“Covenants, conditions, and restrictions” (hereafter CC&Rs) is a generic term for privately-created rules and regulations that frequently govern the use and improvement of real property. They are a long-time staple of the title insurance policy, appearing regularly as Schedule B exceptions to title. For this reason many attorneys may feel that very little can be done in terms of acquiring CC&R title insurance coverage for their clients other than perhaps verifying that the limitations affect the land under examination.

But as “Sporting Life,” one of the characters in George Gershwin’s Porgy and Bess would say, “It ain’t necessarily so.” Title insurance companies can underwrite covenants, conditions and restrictions in a myriad of ways. That is, depending on the nature of the CC&R, the title company can issue an endorsement to its policy that insures against loss arising from a present or possibly even a future violation of the limitation. Under certain circumstances the title insurer can even waive the CC&R. The purpose of this article is to discuss the various underwriting options available to the real estate attorney.

The Basics—CC&Rs Defined

A covenant is an agreement or promise to do or not to do a particular act. It is created by those words in a deed or other instrument that denote an agreement between the parties to that deed or instrument. For example: A sells Blackacre to B, and the deed contains a covenant that B will not use the land “for saloon or dramshop purposes.” A restriction is a limitation on the use of the land. For example: “All lots and living units on the property shall be used for single family residential purposes only.” Land developers often utilize restrictions when subdividing land in order to establish uniform provisions concerning the use of the lots and the character, size, and location of the improvements to be constructed on the lots. These restrictions are usually called general plan restrictions, and are normally set forth on a plat of subdivision, in the developer’s deeds to the initial lot purchasers, or in a declaration. (While not entirely synonymous, the terms “covenant” and “restriction” will be used interchangeably in this article.)

A condition in a deed, on the other hand, is a qualification of the estate granted.  It is a requirement of the conveyance.  For example:  A deeds Blackacre to B on the condition that the land will never be used as a rock quarry.   

Most CC&Rs “run with the land,” which means that they are binding on subsequent owners of the property. A covenant runs with the land if: (1) the parties so intended, (2) the covenant “touches and concerns” the land (that is, relates to the use, value, enjoyment, or occupation of the land), and (3) there is privity of estate between the parties. Accordingly, any CC&R affecting the land that is recorded in a property’s chain of title will appear as a Schedule B exception in a title commitment or policy of that property.

Every CC&R includes a burden and a benefit. For example: Developer owns three contiguous parcels of land—lots 1, 2, and 3. He sells lot 1 to Purchaser, and the deed contains a covenant that the lot will be used only for residential purposes. Thus, lot 1 is burdened by this restriction. On the other hand, lots 2 and 3 enjoy the benefit of this limitation in that these lots will not be adversely impacted by Purchaser building and operating, for example, a slaughterhouse or tannery on lot 1.

The most significant difference between a covenant and a condition lies in the remedies available to the injured party(s) upon a breach of the covenant or condition. With a breach of a covenant, this injured party(s)—that is, usually other lot owners in a subdivision who are similarly bound by the covenant—can seek relief by either an action for money damages or an injunction terminating the breach of the covenant. On the other hand, a breach of a condition can result in the complete forfeiture or reversion of the title. Illinois recognizes two types of conditions—the possibility of reverter and the right of re-entry. The language used in the particular condition determines what type it is.

Example: A deeds Blackacre to B for so long as the land is used for residential purposes. This condition is called a possibility of reverter. On the day of closing, B tears down the house and starts to build a high rise office building. As soon as the land is no longer used for residential purposes, the estate in B automatically terminates and title reverts to A.

Example: A sells Blackacre to B on (upon) the condition that the property be used only for residential purposes. This condition is called a right of re-entry. If B begins building a factory, title to the land does not automatically revert to the grantor. Instead, A or his heirs must physically take possession of the property, either peaceably or by a forcible entry and detainer action. With a right of re-entry, title does not revert until the right is exercised.

Conditions have never been prevalent in Illinois. Years ago they were probably most common in deeds to railroads and units of government. (For example: A deeds Blackacre to School District for so long as Blackacre is used for school purposes.) Today one might find a condition in a deed from a land developer. (For example: Developer deeds Blackacre to B on the condition that construction of a single family residence on Blackacre be commenced within one year of the date of deed delivery.)

Statutory Limitations on the Enforcement of CC&Rs

Clearly the right of re-entry and the possibility of reverter seem harsh. Because of this, the Illinois legislature has enacted several statutes that limit their enforcement.

765 ILCS 330/1 states that a right of re-entry and possibility of reverter cannot be sold or devised in a will.

765 ILCS 330/3 provides that if a corporation makes a right of re-entry or possibility of reverter and the corporation dissolves or ceases to exist, the conditions are also extinguished.

765 ILCS 330/4 states that when a condition has not been broken, neither a right of re-entry or a possibility of reverter shall be valid for a longer period than forty years from the date of the creation of the condition.

735 ILCS 5/13-102 provides that no person shall commence an action for the recovery of lands by reason of a breach of a condition subsequent unless it is within seven years after the time the condition is first broken.

735 ILCS 5/13-103 provides that no person shall commence an action for the recovery of lands, nor make an entry thereon, by reason of the “termination of an estate upon limitation or of an estate upon conditional limitation” unless within seven years after the termination. (Black’s Law Dictionary indicates that an “estate on limitation” includes a fee simple determinable estate.)

Finally, see 775 ILCS 5/3-105(A): “Every provision in an oral agreement or a written instrument relating to real property which purports to forbid or restrict the conveyance, encumbrance, occupancy or lease thereof on the basis of race, color, religion, or national origin is void.”

Underwriting Townhome and Condominium CC&Rs

Declarations of covenants, conditions and restrictions are often recorded against townhome developments. Condominium declarations usually include CC&Rs as well. While these declarations will invariably contain the usual limitations on the use of the property, they will often include provisions for the levying of assessments. In addition, these declarations may provide for a “right of first refusal”—an option to purchase in favor of the townhome or condominium homeowners association. In order to delete any title commitment exceptions relating to unpaid assessments and options to purchase, the title company will want a paid assessment letter and evidence that the association has waived any right of first refusal.

Underwriting Non-General Plan CC&Rs

Assume that you have a 1970 deed from one individual to another. The deed contains a covenant that the land cannot be used for a restaurant. Forty years later, a developer wants to buy the property, and he is concerned about the covenant. Can the title company endorse over the covenant?

Possibly yes. As indicated above, covenants both burden and benefit the land. Ideally, the title company should perform a title search to see what other land the grantor owned at the time the deed was executed. This would be the land benefited by the covenant. The owner(s) of this land should then execute a release of the covenant.

But on the other hand: After forty years, is this covenant still viable? The title company could consider inspecting the property to determine if there is a restaurant on the benefited property. If the title company is unable to identify the benefited property, then the title company could inspect the property to see if there is a restaurant in the surrounding area. If not, the title company might consider endorsing over the covenant.

Underwriting Enforceable CC&Rs Without Violations— The Owners Comprehensive Endorsement

All real estate attorneys are undoubtedly familiar with the lenders’ comprehensive endorsement, which is appended in one form or another to virtually all title insurance loan policies. But they may not be so knowledgeable of the owner’s comprehensive endorsement. The main provisions of this endorsement provide insurance that there are no present violations of any enforceable CC&Rs and also insure against loss arising from a court order that denies the right to maintain the existing improvements on the land because of any restriction violation.

Attorneys often request this endorsement for owners policies insuring commercial, industrial, or multi-family residential properties. In order to issue it, title company personnel will review the following documentation to determine that there are no CC&R violations: copies of all recorded covenants, conditions, and restrictions, a current land title survey of the property, and information as to the present use of the land. The title company may also require information as to the character and age of all buildings located on the land as well as a letter from the property owner, certifying that there are no present violations of any enforceable restrictions. If there are no violations, the title company can issue the endorsement for an additional premium. (Note that if these materials disclose a CC&R violation, the company can still approve the endorsement, but the violation will appear as a Schedule B exception to any title policy issued.)

Underwriting CC&Rs Based on the Passage of Time

Instruments that create restrictions may recite an expiration date. After this date has passed, the restrictions are no longer binding upon the land. They may still be enforced, however, as to violations occurring prior to the expiration date. For this reason, the title company will probably not waive CC&Rs from a title commitment solely because the restrictions have expired, unless (1) the title company receives adequate assurances that there are no violations or (2) one year has passed since the expiration date and there is no pending proceeding to enjoin any CC&R violation.

Underwriting Illegal Covenants, Conditions, and Restrictions

Generally speaking, a developer may impose any covenants, conditions, and restrictions on the project as he sees fit, since this is one of the rights of land ownership. But certain restrictions have been held to be illegal and accordingly void. For example: CC&Rs that are against public policy, such as a condition that the grantee shall not marry or shall divorce; covenants that call for the performance of an unlawful act; restrictions that are impossible to perform; or restrictions that are a restraint on the alienation of property. Such CC&Rs should not appear on any title commitment or policy.

In 1948 the United States Supreme Court ruled in the landmark case, Shelley v. Kraemer, that race restrictions were contrary to the Federal Constitution and could not be enforced by any state. The Court did not hold them to be void, however, but instead indicated that as between private individuals they were valid but not enforceable in state or federal court. Section 804 of the Civil Rights Act of 1968 was subsequently enacted. This Act (which was later amended in 1988 and is commonly known as the Fair Housing Act) made it unlawful “to discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin.” With its enactment, the Act invalidated any discriminatory covenants.

While the Fair Housing Act made it unlawful to even print or publish a statement with respect to the sale of a dwelling that indicates any unlawful preference, it is possible that a title company might unknowingly reflect such a CC&R in its title commitment. In this event, the attorney should merely advise the title insurer that the restriction is now illegal and that it should be deleted from the title report.

Underwriting Conditions Subject to Statutes of Limitation

The right of re-entry and the possibility of reverter clearly seem harsh. Because of this, the Illinois legislature has enacted several statutes that limit their enforceability. 765 ILCS 330/1 states that a right of re-entry and possibility of reverter can neither be devised in a will nor sold. 765 ILCS 330/3 provides that if a corporation creates a right of re-entry or possibility of reverter and the corporation dissolves or ceases to exist, the condition is also extinguished. 765 ILCS 330/4 mandates that when a condition has not been broken, neither a right of re-entry nor a possibility of reverter shall be valid for a longer period than forty years from the date of the creation of the condition. And finally, 735 ILCS 5/13-102 and 735 ILCS 5/13-103 stipulate that if the condition has been broken, the party entitled to recover the land must commence an action within seven years after the breaking of the condition.

Fortunately, the attorney will rarely encounter a title commitment that includes a right of re-entry or a possibility of reverter as a Schedule B exception. But if he does, he should request a copy of the document and examine it in light of the above statutes. If circumstances indicate that the condition is no longer enforceable, it is very likely that the condition can be deleted from any policy issued.

Underwriting Existing Violations of CC&Rs— the “Change in Neighborhood” Concept

Times change. A covenant allowing only single family homes in SFR Subdivision might have been perfectly viable forty years ago, but now much of the area is commercial in nature. Purchaser wants to buy (and continue to operate) a plumbing supply company that was built on a lot in this subdivision two years ago. Is any title insurance protection available against the enforcement of this residential restriction?

Perhaps. Since the covenant has not been formally released of record, the title company cannot waive the restriction. However, it is possible that it can be endorsed over. Whether or not the endorsement is available depends on how drastically the neighborhood has changed. In 1977 the appellate court in Moore v. McDaniel set forth the Illinois test for enforceability:

“A restrictive covenant will not be enforced when there has been such a change in the character and circumstances of the neighborhood since the creation of the restriction that the object of the restriction cannot be accomplished by its enforcement, or if as a result of such changes it would be unreasonable or oppressive to enforce it. (Citations omitted) Before a change in neighborhood conditions will prevent the enforcement of a restrictive covenant, the change must be so radical and complete as to render the restriction unreasonable, confiscatory and discriminatory. (Citations omitted)”

The test is obviously subjective. How can the title company make the determination that there has been a change in the character of the neighborhood sufficient to prevent the enforceability of a covenant? Information gleaned from plats of survey, surveyors’ reports, zoning maps, county tax map aerial views, and if necessary a personal inspection should provide the title company with enough facts and materials to decide whether or not it can endorse over the CC&R on its owners title insurance policy.

The most common type of covenant violation that the real estate attorney will encounter is probably the building line violation. If the client’s property is one of several in the neighborhood that violate the setback line (and this can be determined by most of the resources mentioned above), it is very likely that the title company can provide affirmative coverage over the violation.

Underwriting the Modification of General Plan Restrictions

As previously noted, general plan restrictions provide for the uniform development of lots within a subdivision. But there may be instances where an owner (or prospective purchaser) desires to improve one or more lots in a manner that is contrary to the recorded restrictions. This is possible so long as the requisite number of lot owners execute a modification of the restrictions. After all necessary parties sign the document, it is then recorded against the affected lot or lots.

The terms of the instrument creating the general plan restrictions determine how many owners must sign the modification agreement. If the instrument is silent, then the consent of all the lot owners affected by the restriction is necessary.

Will all lenders whose mortgages encumber the signatories’ lots have to agree to the modification? This would be a Herculean task and would probably not be necessary unless the modification is so drastic that it would result in reducing the value of the lots.

The party preparing the modification should read the instrument creating the restriction carefully. Does it state that the restrictions can be modified by a vote of the majority of the lot owners or by a vote of the owners of a majority of the lots? There is a difference. For example:

Sunnydale Acres is a five lot subdivision; general plan restrictions affect all lots. The owners of the five lots are: Adam, who owns lots 1, 2, and 3, Baker and Baker’s Wife, who own lot 4, and Charles, who owns lot 5. Adam is the owner who wants to modify the restrictions. If the instrument states that they can be modified by a vote of the owners of a majority of the lots, then Adam can modify them with his one vote, since he owns three lots. On the other hand, if the restriction indicates that a vote of the majority of the lot owners is necessary, then he cannot do so with his vote alone, since there are four different lot owners. He will need the votes of two additional owners in order to modify the CC&Rs.

Underwriting Future Violations of Covenants, Conditions, and Restrictions

All insurance policies contain an effective date. Traditional forms of casualty insurance prospectively insure against loss caused and suffered after the policy effective date. Compare this to title insurance, which has a retrospective application in that it insures against loss caused before but suffered after the effective date of the policy. But the lines between these two types of insurance are beginning to blur, as more and more title company customers are asking for protection against loss due to a CC&R violation that will be both caused and suffered after the policy effective date.

For example: Purchaser (the aforementioned plumbing supply company magnate) wants to buy a lot in SFR Subdivision. After Purchaser acquires the property, he intends to tear down the existing home on the lot, build a commercial building on the site, and then relocate his business into the completed structure. This new post-policy use clearly violates the residential restriction and no title coverage is available for the violation under a standard title policy. Nonetheless, it is possible that a title company can issue an endorsement, insuring against loss arising from this future violation.

Endorsing over this “change in neighborhood” restriction violation is probably fairly simple—after all, what is one more non-residential use in a neighborhood that is already almost completely non-residential? But what if the facts are not as clear-cut as these? What if the neighborhood in question is merely on the fringes of change? Perhaps the lot to be insured is still surrounded by residential structures, but is located one or two blocks from a major commercial artery. In this hypothetical it seems certain that change is coming, but it is not yet there. But in anticipation of its arrival, the customer advises the title company that the property to be insured, while currently vacant, is zoned commercial. Does zoning make a difference in whether or not the title company can give coverage over a future violation?

No, it does not. A restriction is a private property right that is enforced by private parties independently of any zoning classification. As the Illinois Supreme Court said in 1930 in Dolan v. Brown: “A valid restriction upon the use of real property, incorporated in the deeds by or under which the owners hold title and which in no way threatens or endangers the safety, health, comfort, or general welfare of the community, is neither nullified nor superseded by the adoption or enactment of a zoning ordinance.” The appellate court followed this rule in the 1992 case, Pettey v. First National Bank of Geneva. Pettey concerned a 1937 covenant that restricted buildable lot size to no less than four acres. One of the owners of a tract of land that was affected by this restriction sought to rezone his property from single family residential to a planned unit development that would allow two residences per four-acre lot. Even though several people attended the zoning hearing and objected to the PUD plan on the basis that it violated the covenant, the City of St. Charles approved the plan and granted the rezoning. Two months later the objecting parties filed suit to enjoin the land development. Both the trial court and the appellate court ruled in favor of the plaintiffs.

Does Pettey ring the death knell for this type of title policy coverage? Not completely. What Pettey does indicate is that in order for a title company to endorse over a future violation of a covenant when it is not obvious that the restriction has been essentially abrogated by the “change in neighborhood” test, the insurer will likely adopt a “totality of circumstances” standard, possibly coupled with a “wait and see” approach. What is the extent of the restriction? How many lots does it affect? If there is non-residential property near the land to be insured, is this non-residential property also burdened by the restriction? What is the proposed use of the land? An office building would be the “safest” to insure, as it would be the least disruptive in the area. Its hours of operation would roughly correspond to the hours that nearby residents would be away at work. Its architecture would probably blend in with the surrounding buildings, and there would be fewer people entering and leaving during the day. With a retail or business use, there would be increased vehicular and foot traffic. Parking facilities would be more extensive. The exterior of the building, including signage, would probably be more visually distracting.

If this proposed use is retail or business, then what type is it? On the one hand, there is the traditional convenience store or the aforementioned plumbing supply company, both of which might be open only eight or ten hours a day. Compare this to a “7-11” or “Home Depot” type of operation, which is characterized by long hours and a parking lot with lights that have the candlepower of a small star. Or consider a tattoo parlor, adult book store, or massage parlor, all of which probably occupy the far end of the “acceptability” spectrum.

The impact of Pettey is tempered by the realization that the issue in this case was not merely rezoning; rather, it was rezoning that drastically affected the density of the property. Rezoning coupled with increased density is much more controversial and emotionally charged than just rezoning alone, for with increased density there is also the perceived or actual threat of the diminution of property values. Throw this specter of possible declining home prices into the middle of St. Charles, an upscale and affluent Kane County community, and is there any wonder that there was opposition to the planned unit development, first at the zoning hearing and then at the courthouse?

Ultimately, opposition (or the lack thereof) to any zoning change is an important factor in the issuance of any title policy coverage over a future CC&R violation. If a customer asks a title insurer to endorse over a prospective violation when the land has yet to be rezoned, the title company will probably first consider the above “totality of circumstances” and then simply “wait and see.” The insurer should advise the proposed insured that when he appears before the planning commission to present his case for the change of zoning, he must inform it of the restriction. If there is little or no neighborhood objection to the requested change, then the title company might consider issuing the requested coverage after the rezoning has been approved.

Underwriting Covenants, Conditions, and Restrictions for the Public Good

Occasionally customers will ask a title company to underwrite restrictions that benefit the public and not private parties. For example: In 1975 Landowner deeds Blackacre to Village. The deed discloses that the property “is to be used for public park purposes.” For twenty-five years, this has been the case. But now Village wants to enter into an inter-governmental agreement with School District, whereby Blackacre will be traded to School District in exchange for Whiteacre. School District indicates that after the two properties are exchanged, Blackacre will no longer be used as a public park. Can the 1975 restriction be endorsed over, providing coverage to School District over the violation?

It appears that in this instance the “public trust doctrine” is applicable. This tenet stands for the proposition that units of government own “trust resources,” like parks, as a trustee, and that these resources cannot be conveyed if the transfer would diminish or defeat traditional public access to and the use of those resources. In order to endorse over this restriction, the title company will probably request that an appropriate government official contact the Attorney General’s office for an opinion, consenting to the exchange. Factors to be considered by the office would include: Is there another park near Blackacre? Will Whiteacre be used as a park?

Conclusion

It is clear that in the area of covenants, conditions, and restrictions, the attorney has a wide range of underwriting options available to him. Can a restriction be waived from the title policy? If not, can it be endorsed over with affirmative protection against loss due to any present violation? What about a future violation? Whether or not any of these options is available will depend on the particular circumstances of each transaction.

Underwriting Violations of CCNRs

Title Insurance and Underwriting Violations Of Covenants, Conditions, and Restrictions

By

Richard F. Bales

Introduction

Building lines that are established by plats of subdivision are a form of covenant, condition, and restriction (CC&R), and title examiners will routinely underwrite the violations of these building lines. But what about violations of recorded declarations of CC&Rs?

Consider the following true example:

Facts

The Declaration of Covenants and Restrictions recorded on August 10, 1988, in Cook County, Illinois, as document number 88360263 contains the following covenant in Article II:

No sheds, detached garages, above the ground swimming pools, or temporary or permanent accessory buildings of any kind shall be constructed upon any lot in the subdivision. Detached buildings for the purpose of housing equipment necessary for in-ground pools are not restricted.

The survey furnished the title company disclosed a detached garage. It is September of 2017. The attorney for the purchaser has asked the title company to endorse over this violation. The attorney for the seller is willing to give the title company an affidavit stating the following:

• The garage had been on the land when the seller purchased the property in 2001. Thus, the garage had been violating this covenant for at least sixteen years;

• During all this time, no one had complained or commented on the detached garage being a violation of the declaration;

• There were six other lots in the twenty-lot subdivision that had some form of detached building or shed on them.

In addition, the recorded declaration expired on its terms in 2018, and the title company was initially contacted about this covenant in September of 2017.

Questions

What are the issues that the examiner must consider when asked to endorse over a violation of a covenant? After considering these issues, how should the title company underwrite this violation?

Discussion—Title Policy Coverage

In this example, the attorney wanted the title company to endorse over the violation of the covenant? But would this violation already be covered by the title policy?

That is an interesting question. See item 2(c) of the so-called “Covered Risks” of the 2006 ALTA owner’s title insurance policy:

2. The Company insures against loss by reason of: Any defect in or lien or encumbrance on the Title. This Covered Risk includes but is not limited to insurance against loss from:

(c) Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey of the Land.(emphasis added)

The language of this Covered Risk is taken from the ALTA Short Form Residential Loan Policy. If the survey showed the detached garage on the land, would that constitute a 2(c) violation that would be covered by the owner’s policy?

The author could not find any reported cases on this subject. However, it does appear that this would be a 2(c) violation covered by the owner’s policy. J. Bushnell Nielsen writes the following in the 2018 edition of his Title and Escrow Claims Guide:

Covered Risk 2(c) of the 2006 ALTA policies provides indemnity as to matters that would be shown on an accurate survey, a subject otherwise found in the policy only as a standard Schedule B exception to coverage. . . . The survey coverage uses certain words not defined in the policy [such as] ‘violation.’ . . . The official ALTA comments do not discuss the issue. . . . There is no direct explanation as to what type of ‘violation’ might be covered. It may refer to the violation of a setback line revealed by the survey which locates the improvements.

Mr. Nielsen adds, however, that terms used in Covered Risk 2(c) do not create coverage for a matter that does not affect title. That is, none of the terms listed in the survey coverage of Covered Risk 2(c) invoke coverage unless the effect of the ‘survey’ issue is to create a defect in the title to the property. See BV Jordanelle, LLC v. Old Republic Nat’l Title Ins. Co., 830 F.3d 1195 (10th Cir. (Utah) 2016); New South Federal Savings Bank v. Commonwealth Land Title Ins. Co., 940 So.2d 739 (La.App.3 Cir. 2006).

Accordingly, if the title examiner was unwilling to give coverage over the violation, the examiner would have to raise a Schedule B title exception. For example:

A violation of paragraph _____ of the declaration of covenants, conditions, and restrictions recorded on August 10, 1988, as document 88360263. Said paragraph prohibits detached buildings on the land, and the plat of survey made by _____dated ______ discloses a detached garage located along the south line of the property.

That is, if the examiner failed to realize that the existence of the detached garage was a violation of the declaration of covenants, conditions, and restrictions, the examiner would have given “default” coverage of the violation. This is because Covered Risk 2(c) of the owner’s policy automatically gives coverage over such violations.

Discussion—Other Violations (Change of Neighborhood)

Years ago title companies considered the “change of neighborhood” test as a reason for endorsing over the violation of covenants. That is, if there is a “residential only” covenant, but the area is now primarily commercial, has the neighborhood changed to such a degree that the covenant is now unenforceable?

Recent case law, however, has limited this test. Consider, for example, Vandelogt v. Brach, 325 Ill.App.3d 847, 759 N.E.2d 921, 259 Ill. Dec. 860 (1st Dist. 2001)

In this case, the covenant referred to a “private garage of not more than two-car capacity.” The defendant began building a three-car garage, and a neighbor sued. The court noted that seven out of thirty-eight garages, or 18.5%, in the subdivision exceeded the two car capacity.

The appellate court cited Tones Inc. v. LaSalle National Bank of Chicago, 34 Ill. App. 3d 236, 339 N.E.2d 3 (1975) for the proposition that the burden of proving that there has been a change in circumstances affecting the validity of a restriction so that the object of the restriction can no longer be accomplished and therefore may be removed without unjustly injuring neighboring properties is on the party who seeks relief from the enforcement of the restriction.

In citing the Tones case, the court determined that the change in the neighborhood that took place after the recording of the covenant was not sufficient to warrant the removal of the covenant. In citing the Tones case, the court determined that there was insufficient evidence to show that the removal of the three-car garage covenant (i.e., not enforcing the covenant) would not adversely affect the other lots for whose benefit the covenant was intended.

The trial court granted the plaintiff’s motion for a permanent injunction and ordered the defendant to make the necessary modifications to the garage so that it would be in compliance with the covenant. This was the case, even though the plaintiff’s attorney did not contact the defendants until the garage was two-thirds complete.

The appellate court affirmed the judgment of the trial court

Discussion—Laches

Could one argue that because the homeowners association had never enforced the covenant since at least 2001, that pursuant to the doctrine of laches, the association is now estopped from bringing suit?

Laches is an equitable defense. However, it does not seem to apply here. Even though the declaration was recorded in 1988, someone could move into the subdivision in 2017 and file suit a week after closing to enjoin the covenant. The reason for this is that laches is a doctrine that bars a plaintiff relief where, because of the plaintiff’s delay in asserting a right, the defendant has been prejudiced. See City of Rochelle v. Suski, 206 Ill. App. 3d 497 (1990). Granted, had the homeowners association filed suit in 2017 to enforce the covenant, then laches might be applicable. But covenants are intended to benefit other lot owners in the subdivision, not the association. Once a covenant is recorded, every subsequent lot purchaser has constructive notice of the covenant and a lot owner can enforce the covenant against any other lot owner. See Exchange National Bank of Chicago v. City of Des Plaines, 32 Ill. App. 3d 722, 336 N.E.2d 8 (1st Dist. 1975).

Note, too, that if the circumstances indicate that a party knowingly violates a covenant, thereby suggesting “a purpose to proceed irrespective of the consequences,” laches may not be used as an affirmative defense. See Pettey v. First National Bank, 225 Ill. App. 3d 539 (1992).

Discussion—The Term of the Declaration Has Almost Expired

The terms of the declaration indicated that it would expire in 2018. However, there is still the possibility that the declaration could be renewed. In addition, some people have argued that a violation of a covenant that occurs before the expiration of the covenant can still be enforced within a reasonable time after the expiration of the covenant. For example, the old Pioneer National Title Insurance examining manuals stated that one could not waive a violation of a covenant based on the expiration of the covenant until one year had passed.

Discussion—Other Matters—Encroachment Law

Illinois case law indicates that courts will usually not require the encroaching party to remove an encroachment if the encroachment is unintentional, the cost for removing it is great, the corresponding benefit to the encroached-upon landowner is small, and damages can be had at law. See Stroup v. Codo, 65 Ill.App.2d 396, 212 N.E.2d 518 (3rd Dist. 1965); Hill v. Meister, 133 Ill.App.2d 678, 273 N.E.2d 643 (1st Dist. 1971); Terwelp v. Sass, 111 Ill.App.3d 133, 443 N.E.2d 804, 66 Ill.Dec. 878 (4th Dist. 1982); Mari-Mann Herb Co. Inc. v. Borchers, 216 Ill.App.3d 1014, 576 N.E.2d 496, 159 Ill.Dec. 827 (4th Dist. 1991); Cammers v. Marion Cablevision, 26 Ill. App. 3d 176 (5th Dist 1975); Malchow v. Tiarks, 122 Ill. App. 2d 304, 258 N.E. 2d 811 (1970).

For a case concerning a title company and an encroachment, see Rackouski v. Dobson, 261 Ill.App.3d 315, 634 N.E.2d 1229, 199 Ill. Dec. 875 (3d Dist. 1994).

These cases indicate that, generally speaking, courts will usually not require the removal of the encroachment, but instead, grant money damages.

The standard title company encroachment endorsement insures against loss due to court-ordered removal. Is a covenant violation analogous to an encroachment, thus giving the title company comfort in endorsing over the violation of a covenant?

Covenants relating to land will generally be enforced according to their plain and unambiguous language. See Levitt Homes Inc. v. Old Farm Homeowner’s Ass’n, 111 Ill. App. 3d 300, 6444 N.E.2d 194, 67 Ill. Dec. 155 (2nd Dist. 1982).

However, injunctive relief is not the only remedy. Courts will grant money damages for the violation of a covenant.

For there to be an adequate remedy at law which will deprive equity of its power to grant injunctive relief, the remedy must be clear, complete, and as practical and efficient to the ends of justice, and its prompt administration as the equitable remedy. See Levitt Homes Inc. v. Old Farm Homeowner’s Ass’n, 111 Ill. App. 3d 300, 6444 N.E.2d 194, 67 Ill. Dec. 155 (2nd Dist. 1982).

Discussion—Other Matters—Building Line Violation Law

Title companies routinely endorse over building line violations. A building line is a form of covenant. It is possible that title companies are willing to endorse over building line violations, but perhaps not so willing to endorse over the violation of a covenant relating to the type of improvements to be located on the land.

If this is true, the reason may stem from the inherent difference between the two types of covenants. A building line is essentially an easement of unobstructed air, light, and vision for the benefit of the owners burdened (and benefitted) by the building line. A building line also insures a degree of uniformity in the appearance of the buildings. See Hanna v. American National Bank and Trust Co. of Chicago, 266 Ill. App. 3d 544, 639 N.E.2d 1326, 203 Ill. Dec. 507 (1st Dist. 1994). Virtually all building line violations that title companies endorse over are minor. For example, the Hanna case suggests that a 12% violation (a seven foot violation of a fifty foot setback line) is not a material and substantial violation. The violations that title companies normally see are a matter of inches, not feet. As such, title examiners are usually willing to endorse over building line violations, believing that no court would order a building moved back a few inches. Instead, pursuant to Levitt Homes, a court would grant money damages, which are excluded by the building line violation endorsement.

On the other hand, it is possible that title examiners feel that a court will order the removal of a structure that violates a covenant. Admittedly, unless the covenant is against public policy or where the principles of waiver or estoppel are present, the violation of the covenant will often be enjoined. See Cordogan v. Union National Bank of Elgin, 64 Ill.App.3d 248, 380 N.E.2d 1194, 21 Ill. Dec. 18 (1978); Wier v. Isenberg, 95 Ill. App. 3d 839, 420 N.E.2d 790, 51 Ill. Dec. 376 (2nd Dist.,1981). However, it appears that the courts will also consider the nature of the covenant before enjoining the violation. For example, Wier v. Isenberg concerned the enforcement of a subdivision covenant restricting the use of the property to residential purposes. (The defendants had appealed from the judgment of the trial court that enjoined them from practicing psychotherapy and social work from their home.)

Wier v. Isenberg concerned the enjoining of a prohibited use of the land. On the other hand, the enforcement of a covenant may concern the forced alteration or removal of a building located on the land—a much more egregious remedy. The Illinois Supreme Court in Loomis v. Collins, 272 Ill. 221, 111 N.E. 999 (1916) stated that although a complainant may enforce a covenant without proof of damages, when a court is asked to grant injunctive relief concerning the enforcement of a covenant and the possible removal of a structure, a court of equity will perform a balancing test. That is, the court will consider the inconvenience and damage that the defendant will suffer in moving or altering the building and compare that to the benefits that will accrue to the plaintiff. In Loomis, the damages to the defendant were substantial, “with little or no corresponding benefit to the complainants.”

Discussion—Other Matters—Covenant Violation Law

What are the damages v. benefits in the present example—when the violation concerns a detached garage that was constructed contrary to a covenant that prohibits detached buildings? Would a court order the removal of the building? Owners of homes in a block full of attached garages might very likely argue that a detached garage in the middle of the block is inherently more substantial in nature than a one foot building line violation, because the detached garage creates lack of uniformity and lowers property values. But is this covenant violation substantial enough to merit court-ordered removal instead of money damages?

Who knows? But if one were to apply the Loomis v. Collins balancing test to a detached building violating a covenant, a court might order the removal of a wooden ten foot by ten foot garden shed that sits directly on the ground. A court might not order the removal of a two-car garage on a cement foundation. The Vanderlogt v. Brach court-ordered alteration of a garage that was two-thirds complete appears to be consistent with the Loomis balancing test.

Finally, as noted earlier in a footnote, a court may order the removal of an encroaching structure if the encroachment is deliberate or intentional. See Pradelt v. Lewis, 297 Ill. 374, 130 N.E. 785 (1921); Turney v. Shriver, 269 Ill. 164, 109 N.E. 708 (1915); The Fair v. Evergreen Park Shopping Plaza, 4 Ill.App.2d 454, 124 N.E.2d 649 (1st Dist. 1955); Ariola v. Nigro, 16 Ill.2d 46, 156 N.E.2d 536 (1959); Whitlock v. Hilander Foods, Inc., 308 Ill.App.3d 456, 720 N.E.2d 302, 241 Ill.Dec. 847 (2d Dist. 1999); Borrowman v. Howland, 119 Ill. App. 3d 493, 457 NE2d 103 (1983).

Conclusion

Ultimately, perhaps the title company’s traditional reluctance in endorsing over this type of violation on an owner’s policy is due to the following provision in the 2006 ALTA owner’s policy that appears at the end of the Covered Risks:

The Company will also pay the costs, attorneys' fees, and expenses incurred in defense of any matter insured against by this Policy, but only to the extent provided in the Conditions.

The remedies for a building line violation and a violation of the type of covenant discussed herein are virtually the same. But the presence of a detached garage in a herd of attached garages is much more obvious and obtrusive than a one-foot building line violation. It is not that unreasonable for the title examiner to imagine this scenario: As the next door neighbor drives out of his own attached garage, he sees the offending building every day, day after day. As he drives by it every morning, on the way to work, and every evening, coming home from work, the sight of the garage may begin to gnaw at him, and he may eventually get so upset by it that he will run to the courthouse and file a complaint for injunctive relief—a cause of action that the title company will have to defend pursuant to the terms of the title policy.

Dissolution of Marriage

Reviewing (or not Reviewing) the Divorce Court Case When All Parties are Alive

If the title insurance application and commitment disclose that the former husband and wife have divorced, but they are both still alive, does the examiner have to review the terms of the judgment for dissolution of marriage? Do these terms have to be set up in the title commitment? Not necessarily so. Consider the following example.

• Example: Adam and Betty own their home. Adam and Betty get divorced. The divorce decree provides that Adam will convey his interest in the land to his ex-wife Betty upon being paid $50,000. Ideally, Adam should receive $50,000 at the closing.

But sometimes the parties may agree to disregard the settlement agreement. For example, Adam might agree to convey his interest to Betty upon being paid only $30,000. This is acceptable, as long as both parties agree to this. The signatures of both parties on the closing statement—and on the deed—would be sufficient evidence of agreement.

• Example: George and Grace buy their home in 2010. In 2019 they get divorced. The divorce decree states that upon a sale of the property, George will get $10,000 and Grace will get the balance of the net sale proceeds. At the closing, the examiner discovers that George’s attorney had earlier submitted closing figures indicating that George was to receive $15,000 at the closing. Is there a problem?

Not necessarily. As long as all parties to the divorce (in this example, George and Grace) sign the closing statement, together with any deed or deeds, the final distribution of proceeds can be freely adjusted, as long as all parties agree to the change. As the settlement agent, the title company follows the instructions of the consenting parties. The title company is not responsible for enforcing the terms of the decree of dissolution.

• Example: Fred and Wilma buy Bedrock in 2010. In August of 2019 they get divorced. The judgment of dissolution states that Fred will convey his interest in the land to Wilma in exchange for $50,000. In September of 2019 a deed from Fred to Wilma is recorded. In December of 2019 the title company is asked to do a closing. Wilma is now refinancing Bedrock.

Question: Does the title company have to make sure that Fred got paid? Does the title company have to follow the terms of the judgment for dissolution of marriage?

Answer: Not necessarily. If Fred’s deed was not “subject to” the terms of the divorce, if the land in question was not lis pendened as to the divorce case, and if a “memorandum of judgment” relative to the divorce was not recorded, then when Fred executed the deed, he gave up all interest in the land. See 765 5/10:

“Quitclaim deeds may be, in substance, in the following form: The grantor, for the consideration of _____, convey and quitclaim to _____ all interest in the following described real estate . . . .”

Fred gave up all interest he had in the land by signing and delivering the deed to Wilma. Therefore, the title company does not have to check to make sure that Fred was paid.

If Fred was not paid, then what he has is not a lien on the land. The wording of the deed makes it clear that he gave up his interest in the land. Rather, he has what is called a “constructive trust” on the proceeds of the refinancing. But that is not the title company’s concern. Title companies insure land; they do not insure the proceeds of sale.

The title examiner will, though, want to carefully examine the deed in order to make sure that the deed was not a forgery.

Rule of Title Practice: Reviewing the Settlement Agreement when All Parties Are Alive

• Generally speaking, when the owners of land are divorced, still alive, still in title, and the title company is insuring title pursuant to one or more deeds of the land signed by both parties, the examiner does not have to obtain the court proceeding and review the terms of the settlement agreement.

• If the ex-husband and the ex-wife own the land, and the land is being sold to a third party, and the judgment for dissolution (or memorandum thereof) is not recorded, a lis pendens for the proceeding is not recorded, and the deed or deeds is not “subject to” the divorce decree, there really is no reason to review the judgment for dissolution to determine if an ex-spouse should be paid money upon a conveyance of the land. The closer will be receiving a deed or deeds signed by both parties. If an ex-spouse expects to be paid at closing, he or she will tell the closer.

• Did the ex-husband and ex-wife take title to their home as tenants by the entirety? To convey their home, married tenants by the entirety must execute one deed with two signatures. Pursuant to 765 ILCS 1005/1c, a husband and wife who own their home as tenants by the entirety cannot deliver their own individual deeds. But divorce severs the tenancy by the entirety. Once divorced, the ex-husband and the ex-wife can execute individual deeds of their home.

• Assume that one of the former spouses will be buying out the other spouse and executing a new mortgage. The examiner is being asked to issue a loan policy. In that event, the examiner should determine who is in title, determine if a lis pendens has been recorded against the land, and then ask who will be executing the mortgage to be insured. The examiner must make sure that there will be a deed from the other party. Is this deed “subject to” the terms of the divorce decree? If no lis pendens has been recorded, and if the deed is not subject to the terms of the divorce decree, there is no need for the examiner to look at the divorce decree. Again, if an ex-spouse expects to be paid at closing, he or she will tell the closer.

But when the facts change, this general rule is subject to several caveats.

• If both parties are in title to the land, and if the judgment for dissolution (or memorandum thereof) is recorded, or if a lis pendens for the proceeding is recorded, the examiner will have to review the divorce proceedings. The judgment of dissolution may provide, for example, that when the family home is conveyed, the attorney for one of the spouses should be paid. Or the case may simply contain a money judgment for attorney’s fees against one of the litigants. (However, as between the titleholders, the ex-husband and the ex-wife are still free to jointly alter the terms of the judgment as it affects them.)

A recorded judgment for dissolution (or memorandum thereof) has the effect of the more familiar memorandum of judgment. Thus, the judgment of dissolution is essentially a lien on the land.

• Did the parties take title to their home as tenants by the entirety? If the two owners are still married (e.g., they have filed divorce proceedings, but no judgment for dissolution of marriage has been entered), and both parties are still occupying the home as their homestead, then both title holders must execute one deed.

• If one ex-spouse has conveyed his or her interest in the family home to the other ex-spouse (or a third party), and the judgment for dissolution (or memorandum thereof) is recorded, or if a lis pendens for the proceeding is recorded, or if the deed is “subject to” the provisions of the judgment for dissolution, then the title examiner must examine the judgment. Does the judgment indicate, e.g., that the grantor is supposed to be paid as a condition of the grantor’s conveyance? If so, the examiner must make sure that the grantor has been paid before agreeing to insure a conveyance or mortgage of the home.

A recorded deed that is “subject to” the provisions of the divorce decree indicates that the land was not conveyed free and clear of the terms of that decree.

The examiner should carefully examine the deed from one ex-spouse to the other ex-spouse. Was the deed notarized? Is there a possibility that the deed is fraudulent?

Reviewing the Court Case When a Joint Tenant or a Tenant by the Entirety is Deceased

The previous section set forth the general rule that when the two homeowners are alive, still in title to the land, but divorced, the title examiner does not have to review the terms of the dissolution of marriage court case—assuming that no lis pendens or memorandum of judgment has been recorded.

But what if the two homeowners owned their home in joint tenancy or tenancy in common, and now one of them is deceased? How do these facts affect the general rule?

The appellate court in the case, In Re Marriage of Dowty, 146 Ill. App. 3d 675, 496 N.E.2d 1252 (2nd Dist. 1986), stated that a divorce decree, in and of itself, does not sever a joint tenancy. The court added, however, the following comment:

An agreement between joint tenants to hold property as tenants in common will sever an existing joint tenancy, and may be inferred from the way in which the parties deal with the property when they treat their interest as belonging to them in common. . . . Where, however, it may be seen from the language of the judgment, and the property agreement incorporated therein, together with the matters disclosed in the transcript of the dissolution hearing, that the parties intended a division of the property, the joint tenancy will have been severed. . . .

Despite the wording of this case, most title companies take the position that joint tenancies are broken by deed and not by oral agreements, court transcripts, or settlement agreements. However, the settlement agreement may provide some form of equitable rights in favor of the estate of a deceased joint tenant or tenant by the entirety. Thus, the title company must consider the settlement agreement in the disposition of sale proceeds.

Example: John and Jane are married and own their home in joint tenancy. They have one child, a daughter named Annie. In 2018 they get divorced. The judgment of dissolution marriage states that the couple will put their home up for sale and upon the sale of the home, the proceeds will be split equally between the parties. In 2019 John dies. Jane continues to attempt to sell the home, and a few months later she finds a buyer. At the closing, the title company needs only one deed from Jane, as surviving joint tenant. The proceeds of the sale should be disbursed, taking into account, if necessary, the rules of distribution set forth in 755 ILCS 5/2-1:

The intestate real and personal estate of a resident decedent and the intestate real estate in this State of a nonresident decedent, after all just claims against his estate are fully paid, descends and shall be distributed as follows: (a) If there is a surviving spouse and also a descendant of the decedent: 1/2 of the entire estate to the surviving spouse and 1/2 to the decedent's descendants per stirpes. (b) If there is no surviving spouse but a descendant of the decedent: the entire estate to the decedent's descendants per stirpes. (c) If there is a surviving spouse but no descendant of the decedent: the entire estate to the surviving spouse. (d) If there is no surviving spouse or descendant but a parent, brother, sister or descendant of a brother or sister of the decedent: the entire estate to the parents, brothers and sisters of the decedent in equal parts, allowing to the surviving parent if one is dead a double portion and to the descendants of a deceased brother or sister per stirpes the portion which the deceased brother or sister would have taken if living.

Thus, in the above example, the proceeds should be divided pursuant to 755 ILCS 5/2-1(b), half to Jane and half to Annie.

And now change the facts slightly:

Example: Tom and Teresa are married and own their home in joint tenancy. In 2019 they get divorced. The judgment of dissolution states that Tom is to quit claim his interest in the family home to Teresa. Before he executes the deed, however, Teresa dies. John should convey the property to the heirs of Teresa pursuant to the above rules of descent and distribution.

Rule of Title Practice: Reviewing the Settlement Agreement When Title is Held in Joint Tenancy, the Parties are Divorced, and One of the Parties is Deceased:

When insuring the sale of property when property was owned by a married couple in joint tenancy and the parties have divorced, and one of the parties has subsequently died, the examiner should obtain and review a copy of the settlement agreement. The examiner and closer should consider the terms of the settlement agreement in closing the transaction and disbursing sale proceeds. However, in order to insure a sale of the property, the examiner needs to have only the surviving joint tenant execute the deed.

Rule of Title Practice: Reviewing the Settlement Agreement When Title is Held in Tenancy by the Entirety, the Parties are Divorced, and One of the Parties is Deceased:

When insuring the sale of property when the family home was owned by a married couple in tenancy by the entirety, and the parties have divorced, and one of the parties has subsequently died, the examiner should obtain and review a copy of the settlement agreement. The examiner should consider the terms of the settlement agreement in closing the transaction and disbursing sale proceeds.

But in addition, what does the settlement agreement state in regards to the tenancy of the home? If the agreement is silent, or if the agreement states that the tenancy is tenancy in common, then the examiner will need either deeds from all the heirs of the deceased owner or an executor’s deed. If the agreement states that the tenancy is joint tenancy, then the examiner needs a deed from the surviving now-joint tenant.

Deed from One Ex-Spouse to the Other Ex-Spouse that is “Subject to” the Terms of the Judgment for Dissolution

What if a deed from one ex-spouse to the other ex-spouse is subject to the terms of the divorce? Consider the following examples.

• Example Number One:

Husband and wife own their home. They get divorced, and now the ex-wife is refinancing. She brings to closing the deed from her ex-husband to herself. The deed reads that it is “subject to the terms of order entered in dissolution of marriage case number. . . .”

The divorce decree provides, among other things, that the ex-husband shall quit claim his interest in the land to his ex-wife, but that when their youngest child reaches the age of eighteen, the house should be sold, and at that time, the ex-husband shall be paid fifty percent of the sale proceeds.

Despite the terms of the divorce decree, could the ex-wife still mortgage the property, keep the money, and eventually sell the home, with virtually nothing in gross proceeds to split with the ex-husband? This is possibly so. Nonetheless, this scenario is not the title company’s concern. The title company is issuing a loan policy, and this wording does not affect the priority of the insured mortgage. The title company does not need to obtain the ex-husband’s consent to the mortgage. The title company need not insist that the ex-husband subordinate his post-divorce rights in the property to the insured mortgage. The insured lender does not have to accept its policy “subject to” the terms of the divorce decree. However, if the title company were issuing an owner’s policy in favor of the ex-wife, the terms of the decree should be raised in Schedule B of the policy.

Some judgments for dissolution will contain wording that addresses this issue:

Ex-wife agrees that she will not mortgage the property without ex-husband’s consent, whose consent will not be unreasonably withheld.

• Example Number Two:

In this second example, the judgment provides for post-dissolution maintenance payments to the ex-wife. How can the title company underwrite these payments?

Fred and Ethel get married in 2010 and buy a home together. They get divorced in 2019. Ethel quit claims her interest in the home to Fred on September 1, 2019. In December of 2019 Fred decides to refinance the home’s mortgage. Fred’s attorney orders a title insurance commitment. The title search reveals that on August 1, 2019 (a month before Ethel deeded the home to Fred), Ethel’s attorney recorded the judgment for dissolution of marriage. The judgment states that in addition to a lump sum payment, Fred also has to pay Ethel some ongoing monthly maintenance payments for the next five years. Fred’s refinance is clearly within this five-year window. How does the title company underwrite the recorded judgment for dissolution of marriage?

The title examiner should obtain evidence—either from Ethel, her attorney, or as a last resort, from Fred—that Fred has paid Ethel her lump sum payment and that he is current with his monthly payments.

When the title examiner issues the loan policy, the examiner should show the recorded judgment as an exception to title. The examiner, however, can endorse over the judgment with the standard endorsement used to endorse over liens and proceedings. The reason as to why the examiner can endorse over the lien is set forth in 750 ILCS 5/504(b-7):

Any new or existing maintenance order including any unallocated maintenance and child support order entered by the court under this Section shall be deemed to be a series of judgments against the person obligated to pay support thereunder. Each such judgment to be in the amount of each payment or installment of support and each such judgment to be deemed entered as of the date the corresponding payment or installment becomes due under the terms of the support order, except no judgment shall arise as to any installment coming due after the termination of maintenance as provided by Section 510 of the Illinois Marriage and Dissolution of Marriage Act or the provisions of any order for maintenance. Each such judgment shall have the full force, effect and attributes of any other judgment of this State, including the ability to be enforced. Notwithstanding any other State or local law to the contrary, a lien arises by operation of law against the real and personal property of the obligor for each installment of overdue support owed by the obligor. (emphasis added)

Reviewing the Court Case When Only One Ex-Spouse Is in Title

Example: Adam and Betty are married. Only Adam owns the home in which they both live. Adam and Betty get divorced. Adam is now selling the home. Does the title examiner have to review the court case and read the judgment for dissolution of marriage to see if and how the court addresses the ownership of the home?

No, the examiner does not have to review the court case. That is, as long as Adam’s deed is not subject to the terms of the judgment, and as long as a lis pendens was not recorded against the land, the examiner can ignore the court case. Adam is the sole owner of the home; Betty does not own an interest in the home. The court may direct Adam to pay Betty all or a portion of the sale proceeds. The court may even enjoin, or prohibit, Adam from conveying the property. But unless a lis pendens is recorded, or unless Adam’s deed is subject to the terms of the case, the Company is free to insure a sale of the property without reviewing the case. A “constructive trust” may be imposed on the sale proceeds for the benefit of Betty, but that is not the Company’s concern. The Company insures land; it does not insure the proceeds of a sale of the land.

Insuring Title Pursuant to a Court Order and not a Judge’s Deed?

Assume that the title company issues a title commitment for the sale of property; the last deed of record is to a married couple. One of the title exceptions is a current divorce case wherein the decree provides that the ex-husband is to quit claim all interest he has in the property to his ex-wife. But this deed was never recorded. The sale is now closing, and the ex-wife is prepared to sell “her” home to a new purchaser. Her attorney tells the examiner that the examiner can rely on the court case. “After all,” the attorney explains, “the judge ordered the ex-husband to convey the house to my client.” Can the examiner insure the sale to the new purchaser with only a deed from the ex-wife to the insured?

No, the examiner cannot insure the sale with only a deed from the ex-wife. Perhaps the ex-husband and ex-wife later reconciled and decided that the ex-husband did not have to execute a conveyance. In order to insure the sale of the home from the ex-wife to the new purchaser, the examiner will need a deed from the ex-husband.

The entry of a final order in a dissolution of marriage proceeding is not sufficient to divest title. A deed is necessary. If an ex-spouse fails to execute a deed pursuant to order of court, the judge may execute the deed instead. See 735 ILCS 5/2-1304(b).

Dissolution of Marriage and the Land Trust

Assume that the title company issues a title insurance commitment for the sale of a home and determines that title to the home is in an Illinois land trust. But the title application states that the seller is “Anthony Anderson.” The title examiner prepares a name search of Anthony Anderson, and the examiner discovers a current divorce case. The judgment for dissolution of marriage states that Anthony Anderson is supposed to convey his interest in the home to his ex-wife in exchange for $50,000. Anthony Anderson is now at the closing with a trustee’s deed, ready to tender a deed from the land trustee to the new buyer. Should the examiner be concerned about whether or not Anthony’s ex-wife received the $50,000?

The examiner need not be concerned. When title to land is in an Illinois land trust, the trustee owns the land; the land trust beneficiary has only a personal property interest in the land. Assuming that the divorce case has not been “lis pendened” against the home, the divorce decree is a nullity, as far as the title company (and the home) is concerned. The title company is insulated from any liability for failing to collect the ex-wife’s $50,000.

Name Changes

The examiner should always be aware of the possibility that the judgment of dissolution of marriage may indicate that an ex-wife will take back her maiden name. Naturally, if the ex-wife was an owner of the family home, that name should be searched in all appropriate indices.

However, the examiner does not have to obtain a copy of the judgment solely to determine if the ex-wife changed her name. Looking at the issue from a cost-benefit analysis perspective, the burden of obtaining and reviewing the judgment solely to see if the ex-wife changed her name outweighs the risk of a possible title claim.

Case Law

Peru Federal Savings Bank v. Weiden, 2016 IL App (3d) 140205

In 1998 Donald and Tina Weiden, husband and wife, purchased their home. They obtained a purchase money mortgage with Peru Federal Savings Bank. In 2006 they got divorced. The court awarded Donald the home and ordered him to pay Tina about $34,000 for her share of the property. A marital settlement agreement, incorporated in the judgment of foreclosure, provided that Tina would execute a quit claim deed of the home to Donald. In return, Donald would refinance the home and pay Tina about $34,000. The parties also agreed that they would pay their own attorney’s fees.

The law firm of Olivero & Olivero represented Donald. Shortly after the court entered the judgment of dissolution of marriage, this law firm got a judgment of about $18,000 for its attorney’s fees. The law firm recorded a memorandum of this judgment in 2008.

In 2012 Peru Federal Savings Bank filed a complaint to foreclose its mortgage. The Olivero law firm and Donald and Tina were named as defendants. The property was sold at judicial sale for almost $36,000, more than the amount owed on the mortgage. The bank set a hearing for the distribution of the excess funds. The bank noted that Olivero & Olivero was a recorded lienholder.

Tina, though, claimed that she had a lien against the property and that her lien had priority over all other liens. The trial court denied Tina’s claim, ruling in favor of Olivero & Olivero.

On appeal, however, the appellate court determined that the judgment of dissolution of marriage created an equitable lien that represented Tina’s interest in the marital property. The language of the judgment indicated that the marital residence was the security for Tina’s equitable interest—that is, Tina would execute a quit claim deed in exchange for about $34,000. Thus, the judgment of dissolution of marriage created an equitable lien in favor of Tina that had priority over the judgment lien that was recorded by Olivero & Olivero.

Does This Case Change Title Company Underwriting Procedures?

This case should not change title company underwriting procedures. Had Donald and Tina set a closing to refinance the Peru Federal Savings Bank mortgage, the examiner would have issued a commitment showing the mortgage in Schedule B. Assuming that no lis pendens for the divorce case was recorded, there would have been no need for the examiner to review the terms of the judgment for dissolution of marriage. Tina would not have executed a deed in favor of Donald unless she was paid at closing. There would have been no reason for Tina to draft her deed so that it was “subject to” the terms of the judgment.

Of course, if either Donald or Tina had been deceased, then the examiner would have to review the judgment for dissolution of marriage. This caveat is consistent with the Company’s underwriting procedures.

This case, however, is still a bit unsettling. Olivero & Olivero did everything right—that is, the law firm recorded its memorandum of judgment for attorney’s fees. It does not appear that a memorandum of the judgment for dissolution of marriage was recorded. Nonetheless, the appellate court ruled that Tina’s apparently unrecorded equitable lien was prior to the law firm’s recorded memorandum of judgment. Granted, the memorandum of judgment was recorded after the judgment of dissolution of marriage was entered, but the memorandum of judgment was recorded, and it appears that the judgment for dissolution of marriage was not recorded.

The opinion is silent as to why the court ruled this way. It is possible that the court determined that Tina’s equitable lien was prior because the law firm was not a third party creditor. Rather, because Olivero & Olivero represented Donald, the law firm obviously had knowledge of the provisions of the judgment for dissolution of marriage.

So just one question remains—would the appellate court have ruled the same way in favor of a third party creditor? For example, what if a third party judgment creditor of Donald recorded his memorandum of judgment a month after the judgment of dissolution of marriage had been entered? Would the appellate court still determine that Tina’s equitable lien was prior to the recorded judgment of this third party creditor? Such a decision very likely would change title company underwriting practices!

Easements

Last effective date: March 4, 2020 All statutes checked: March 4, 2020

Easements

By

Richard F. Bales

Introduction

An easement is an interest in land that entitles the easement owner to a limited use or enjoyment of the land burdened by the easement. See Kuecken v. Voltz, 110 Ill. 264 (1884); 16 Ill. L. Rev. 122 (1931).

There are two types of easements:

Easement Appurtenant

An easement appurtenant is created to benefit, and does benefit, the owner of a tract of land in the use and enjoyment of his land. With this type of easement, there will be two tracts of land-- a dominant tract (or estate), and a servient tract (or estate).

• The dominant estate is the land benefited by the easement.

• The servient estate is the land burdened by the easement.

Example: Oak Street runs in an east-west direction. Lot 1 is north of and adjacent to Oak Street. Directly north of lot 1 is lot 2; the north line of lot 1 is adjacent and contiguous to the south line of lot 2. Lot 2 has no direct access to a right-of-way. Therefore, the owner of lot 1 grants an access easement over the west ten feet of lot 1 to benefit lot 2. (Figure 1)

Lot 2 is the benefitted land; it is the dominant estate.

Lot 1 is the land burdened by the easement; it is the servient estate.

Easements appurtenant "run with the land.” When the land benefited by the easement is conveyed; the easement is conveyed, too. See Beloit Foundry Co. v. Ryan, 28 Ill.2d 379 (1963); see also 765 ILCS 5/7a.

Example: Adam owns lot 1. Baker owns lot 2, which has no access. In 2014 Adam grants an easement to Baker over the West 10 feet of lot 1 for ingress and egress. Baker now owns lot 2 and also has an easement interest in the west 10 feet of lot 1. In 2020 Baker sells lot 2 to Charles. Even if the deed refers to only lot 1 in the legal description, the easement is conveyed along with lot 2. (Figure 1)

Easement in Gross

An easement in gross is an easement that is a personal right of one party to the use and enjoyment of another party's land.

There are no separate tracts of land, because an easement in gross does not benefit the easement owner in the use and enjoyment of his land.

The most common example of an easement in gross is the easement that a utility company has over a portion of many residential lots.

Example: A plat of subdivision shows that there is a utility easement over the north 10 feet of lot 2. This easement is an easement in gross. (Figure 1)

Easements in gross may sometimes be hard to distinguish from easements appurtenant.

Example: Between a subdivision and a grade school there is a vacant lot. Three generations of school children have walked across the vacant lot on their way to school. Three generations of footsteps have worn a dirt path in the ground. This dirt path is certainly in the nature of an easement in gross. The school children may have a prescriptive easement (see below) in someone else’s land, but the easement does not benefit the school children in the use and enjoyment of their land.

Creation of Easements

Easements appurtenant can be created in several different ways; each will be discussed in turn.

• by grant or deed

• by reservation

• by agreement

• by mortgage

• by plat of subdivision

• by declaration

Example: Assume that Oak Street is an east-west road. Lot 1 is adjacent to the north line of Oak Street. Lot 2 is directly north of and adjacent to lot 1. Lot 2 is landlocked; it has no legal means of access to a dedicated road. Lot 2 needs an easement over lot 1 to get to Oak Street. The same person owns both lots. (Figure 1)

This can be accomplished in two ways: If lot 1 is sold first, the lot can be deeded, but the deed will contain a reservation of an easement over lot 1 that is in favor of lot 2. See Streeter v. Winnebago County, 85 Ill.App.3d 116 (1980)

If lot 2 is sold first, it can be sold, but at the same time, the deed will contain a grant of easement over lot 1 and in favor of lot 2. See Evanik v. Janus, 120 Ill.App.3d 475 (1983); Mueller v. Keller, 18 Ill.2d 334 (1960).

The title company could insure an easement by agreement, which is similar to a grant. That is, for example, instead of one party granting an easement to another party, the two parties grant easements to each other in one document. A good example of this is a party driveway.

Example: Adam and Baker own lots 1 and 2. Lot 1 is west of lot 2; they are adjacent to each other. A common driveway runs along a portion of the easterly 10 feet of lot 1 and a portion of the westerly 10 feet of lot 2. They each sign a party driveway agreement, whereby each of them conveys to the other an easement for driveway purposes over a portion of their respective lots. (Figure 2)

The title company could insure an easement that is created in a mortgage. Again, see this example:

Example: Assume that Oak Street is an east-west road. Adam owns lot 1 and lot 2. Lot 1 is adjacent to the north line of Oak Street. Lot 2 is directly north of lot 1. Lot 2 is landlocked; it has no legal means of access to a dedicated road. Lot 2 needs an easement over lot 1 so the owner of lot 2 can get to Oak Street. (Figure 1)

Adam, who owns both lots, decides to mortgage only lot 2. The lender, though, realizing that the only means of access to lot 2 is over the adjoining lot 1, insists that the mortgage grant an easement over the west 10 feet of lot 1 for ingress and egress to lot 2. Adam retains ownership of lots 1 and 2.

If and when the lender has to foreclose, the lender will take title to lot 2. At that time, the necessary separation of title will have taken place, and the lender will have an easement to get to the foreclosed property. Thus, the title company, for the mortgage policy only, can insure an easement created by a mortgage, even though the easement does not come into existence until the separation of title by foreclosure. Once the loan is paid off, though, the easement is automatically destroyed.

An easement created by a mortgage should never be insured for an owner's policy. The reason for this is that at the time of closing, the easement is still inchoate; it has not yet been created. At the time of closing there is no separation of title between the dominant and servient estates. That is, one owner still owns both tracts of land. At the time of closing the easement would be over the owner’s own property.

One does not need any kind of “special language” to create such an easement in a mortgage. That is, the normal “Parcel 2” title policy easement language is sufficient. For example: “Easement for vehicular and pedestrian access on and over the west 10 feet of lot 1 for the benefit of lot 2.”

A plat of subdivision may create land-locked lots. In that event, an access easement is often shown on the plat.

When a developer creates a plat of subdivision, he will sometimes record a declaration of covenants, conditions, and restrictions. Such a declaration may create easements, or it may provide additional terms and conditions relating to easements created by a plat of subdivision.

Easements appurtenant will always consist of two tracts of land that are owned by two separate parties. One cannot have an easement appurtenant over one’s own property.

Question: Assume that a developer develops land into a ten-lot subdivision. All of the lots are burdened by ingress and egress easements over the south 10 feet of the lots. At the time the land is platted into 10 lots, the developer owns all of the lots. How can these easements be valid, if easements appurtenant always consist of two tracts of land that are owned by two separate parties?

Answer: At the time the land is platted, the easements are created, but the easements do not become effective until the developer sells a lot to a third party, thus creating the separate ownership.

Private streets

If a plat of subdivision creates private streets, these streets are easements in favor of all the lot owners. See City of Chicago v. Hogberg, 217 Ill. 180.

Alleys

An alley might be shown on the plat of subdivision, or it might be reserved in the first deed out after the subdivision was recorded.

But if the alley is in Cook County, and it was created before the Great Chicago Fire of 1871, the only thing one might find is an entry in a tract book or a sketched copy of the plat of subdivision in a tract book, indicating the presence of an alley.

Or, there may be nothing of record at all, and it is only the plat of survey that shows that an alley is there.

Sometimes alleys are created as private alleys to benefit only the owners in the block or in the subdivision. But if the public has been using the alley for more than 15 years, then the use of the alley may have expanded to a public right-of-way. See 605 ILCS 5/2-202.

Abandonment & Vacation

add an exception for the vacated street/alley even though they had an exception for the Notice vacating them. Sometimes, the vacation ordinance will grant an easement to public utilities, sometimes not. It’s always a good idea to add:

Rights, if any, of public utilities installed in vacated ________________ Street and the vacated, unnamed alley prior to the vacation thereof together with the right to enter onto the Land for the purposes of maintaining, repairing and replacing said utilities.

In some states, adjoining landowners may have a statutory easement for ingress/egress if the vacation would land lock them though it’s rare that you’ll have that situation.

Insuring Easements

If an easement is insured, the title company will show the easement in Schedule A of the commitment and policy. Again, continuing with the above example:

Example: Assume that Oak Street is an east-west road. Adam owns lot 1 and lot 2. Lot 1 is adjacent to the north line of Oak Street. Lot 2 is directly north of lot 1. Lot 2 is landlocked; it has no legal means of access to a dedicated road. Adam wants to sell lot 2 to Baker, but Baker, as the owner of lot 2, will need an easement over lot 1 so that he can get to Oak Street. (Figure 1)

The title company has been asked to insure the sale of lot 2 to Baker. The title company will issue an owner’s title policy to Baker.

When the title company issues its owner’s policy to Baker for lot 2, the policy will indicate that Baker owns lot 2 in fee simple. A “fee simple” estate in land is the highest form of freehold estate one can have. It is complete and total land ownership. Lesser forms of interests in land would include, e.g., a leasehold interest or, as described in these materials, an easement interest.

Thus, when Adam, as owner of both lots 1 and 2, conveys lot 2 to Baker, his deed will also contain an easement over lot 1:

Parcel One: Lot 2 in Blackacre Subdivision, Kane County, Illinois

Parcel Two: An easement for vehicular and pedestrian access on, over, and across the west 10 feet of lot 1 in Blackacre Subdivision, Kane County, Illinois.

When an easement benefits the land the title company is insuring, the title company can insure the easement. When the title company insures an easement, the easement is described in Schedule A of the title commitment and policy as an additional parcel:

Parcel One: Lot 2 in Blackacre Subdivision, Kane County, Illinois

Parcel Two: An easement for vehicular and pedestrian access on, over, and across the west 10 feet of lot 1 in Blackacre Subdivision, Kane County, Illinois, as granted in the deed recorded ___ as document ___.

In other words, if an easement benefits the land being insured, it can appear in Schedule A of the policy. If an easement burdens the land being insured, it will appear in Schedule B of the policy. Thus, if the plat of subdivision for the above-referenced Blackacre Subdivision showed that there was a utility easement that ran along the north ten feet of lot 2, that utility easement would be shown in Schedule B of the title policy insuring lot 2. (See Figure 1)

An easement being insured—that is, an easement that benefits the land—will always be land other than the land being insured. In other words, if the examiner is insuring lot 1 in fee simple, the examiner will not be insuring an easement over the west twenty feet of lot 1.

In the previous example, the title company will insure lot 2 and also an easement over the west 10 feet of lot 1. When insuring an easement, the examiner is primarily concerned with five issues:

• Is the easement executed by the owner of the land burdened by the easement?

• At the time the easement was executed, was the land to be burdened by the easement (that is, the servient estate) already burdened by a mortgage? If so, did the lender consent to the execution of the easement? Are there other liens against the servient estate that have to be underwritten, like mechanics liens against the servient estate or judgments against the owner of the servient estate? Has the examiner performed a name search against all appropriate owners of the servient estate?

• At the time the easement was executed, were the real estate taxes affecting the servient estate paid?

• Is the easement parcel appurtenant to the fee simple parcel?

• Is the easement useable? Does the easement actually provide access?

Execution of the Easement

In this example, Adam owns both lot 1 and lot 2. Thus, Adam is certainly the proper party to grant the easement over the west 10 feet of lot 1.

Assume that the title company has been asked to insure an easement that will be signed on the day of closing. An Illinois land trust owns the servient estate. The examiner is asked to review the proposed grant of easement, and he sees that the grant is executed by the apparent beneficiary of the land trust.

There is a line of court cases that have held that the acts of a beneficiary can bind the land trustee. However, because the title company is insuring the easement, the grant of easement should be corrected so that the land trust in title is executing the easement.

These cases include, e.g., Madigan v. Buehr, 125 Ill.App.2d (1970), but then compare Madigan to these subsequent cases: Rizakos v. Kekos, 56 Ill.App.3d 404 (1977); Lampinen v. Hicks, 73 Ill.App.3d 376 (1979); Rizakos v. Kekos, 56 Ill.App.3d 404, 371 N.E.2d 896 (1977), Ellis Realty v. Chapelski, 28 Ill.App.3d 1008, 1012, 329 N.E.2d 370, 373 (1975); House of Realty v. Ziff, 9 Ill.App.3d 419, 292 N.E.2d 71 (1972); Hoxha v. LaSalle National Bank, 365 Ill. App. 3d 80, 847 N.E.2d 725, 301 Ill. Dec. 715 (1st Dist., 2006).

On the other hand, assume that Adam owns lot 1 and Ben owns lot 2. Adam and Ben want to enter into a shared driveway agreement. Both Adam and Ben, the respective owners of lot 1 and lot 2, must entered into the shared driveway agreement.

Liens

A title search of lot 1 shows that Adam has a mortgage with the First National Bank that affects lot 1. The First National Bank will have to somehow evidence its consent to this easement. Otherwise, when the examiner issues the title policy, the examiner will have to raise a title exception for the mortgage, indicating that the mortgage affects “Parcel 2.”

If the First National Bank does not consent to this easement, then if the bank were to foreclose its mortgage, the foreclosure could extinguish the easement. See Republic Bank of Chicago v. Village of Manhattan, 2015 IL App (3d) 130379.

But the examiner has to be concerned about all possible liens and interests against the servient estate. Consider, for example, the following:

• A mechanics lien recorded against the servient estate. If this lien is not underwritten, a foreclosure of the mechanics lien could extinguish the easement.

• A memorandum of judgment recorded against the owner of the servient estate. If this lien is not underwritten, an execution and levy of the judgment could extinguish the easement.

The title examiner may have to be concerned about other interests in the servient estate besides liens:

• In the present example, the title company has been asked to insure an easement over the west 10 feet of lot 1. Assume that lot 1 is rectangular in shape, and there is a utility easement that runs along the north 10 feet of lot 1. The examiner would have to show this utility easement in Schedule B as affecting the insured easement.

Taxes

35 ILCS 200/22-70 provides as follows:

A tax deed issued with respect to any property sold under this Code shall not extinguish or affect any . . . easement . . . which was created, on or over that real property before the time that property was sold under this Code and which is evidenced either by a recorded instrument. . . .

This statute indicates that as long as the easement is recorded before the tax sale, a tax deed will not extinguish the easement. Nonetheless, the title company normally requires that the taxes for the servient estate be paid at the time the easement is executed and recorded.

It is clear, though, that once the easement is created and recorded, and later subsequent taxes become delinquent and go to tax sale, a tax deed of those taxes cannot extinguish the previously created easement. In fact, title companies even have an endorsement insuring this:

The Company hereby insures the Insured herein against loss or damage that the Insured shall sustain by reason of the entry of any final judgment extinguishing the easement described in Schedule A as Parcel ___, or denying or limiting the use thereof, by reason of the issuance of a tax deed for nonpayment of any general tax or special assessment levied against the taxable parcel identified as follows: ___.

Is the Easement Appurtenant?

What land is benefited by the easement? Are the dominant and servient parcels contiguous or geographically positioned so that the easement legally provides access to the fee simple parcel? Does the easement to be insured truly benefit the land described in Schedule A?

In Figure 1, the answer to these questions is simple—Lot 1 is adjacent to lot 2. Sometimes, though, when the easement parcel consists of a long metes and bounds legal description, the answer is not quite so simple.

Example: Oak Street is a dedicated road that runs in a North-South direction. Lot 1 is adjacent to the east line of Oak Street. Lot 2 is adjacent to the east line of lot 1. Lot 3 is adjacent to the east line of lot 2. Thus, from west to east there is Oak Street, lot 1, lot 2, and lot 3. (Figure 3)

Lots 2 and 3 are landlocked parcels. Adam owns lot 1, and Baker owns lots 2. Adam grants Baker an easement over the south 10 feet of lot 1 so Baker can have access to lot 2. A week later Baker purchases lot 3, the adjoining lot to the east. Baker cannot use the easement for the benefit of lot 3. The easement was created to benefit only lot 2. The easement is not appurtenant to lot 3—that is, the easement does not benefit lot 3. See Beloit Foundry Co. v. Ryan, 28 Ill.2d 379 (1963); Wetmore v. The Ladies of Loretto, 73 Ill. App.2d 454, 220 N.E.2d 491 (1966); McCann v. R.W. Dunteman Co., 242 Ill. App. 3d 246, 609 N.E.2d 1076, 182 Ill. Dec. 542 (1933); Koplin v. Hinsdale Hospital, 207 Ill. App. 3d 219, 564 N.E.2d 1347, 151 Ill. Dec. 685 (1990).

Is the Easement Useable?

Does the easement actually provide physical access to the land? Can the proposed insured actually use the easement for ingress and egress to the land? An internet aerial view of the land can usually provide this assurance. However, the examiner may have to ask the surveyor to survey the easement parcel. In this regard, see Item 19 of Table A of the 2016 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys. See also Perry v. Fidelity National Title Insurance Company, 2015 IL App (2d) 150168.

In Perry v. Fidelity National Title Insurance Company, 2015 IL App (2d) 150168, Joel and Laura Perry (Perry) sued Fidelity National Title Insurance Company (Fidelity) seeking a declaration that Fidelity was obligated to defend them in a lawsuit brought by their neighbors. The neighbors sued to prevent Perry from placing improvements on the easement that provided access to the Perry property. (The easement was in a pasture.) Perry claimed that the dirt trail within the easement became muddy and often impassible during wet weather, leaving the Perry property landlocked. Although Fidelity argued that the neighbors’ lawsuit did not implicate any of the Covered Risks of the Perrys’ title policy, the appellate court disagreed. The appellate court stated:

We agree that plaintiffs raised at least the possibility of coverage under the policy, thus triggering defendant’s duty to defend. The failure to provide ingress and egress to a property can render title unmarketable.

This is an unfortunate decision. The Perrys’ deed included an easement for ingress and egress, and so the Perrys did have legal access to their land. (Fidelity insured the easement.) The appellate court indicated that the lack of improving the easement can render title unmarketable. But if title to a parcel of land can become unmarketable due to a lack of paving, title to potentially hundreds of Illinois parcels of land could be deemed unmarketable due to a physical condition that has nothing to deal with title to the property.

In addition, see Sinks v. Karleskint, 130 Ill.App.3d 527 (5th Dist., 1985). In this Illinois case Albert and Norma Sinks (Sinks) purchased land under an installment contract. The land had no legal access, but they went into possession of the property for 18 years. The court in this case stated that a purchaser of real estate “must be charged with knowledge of matters that a cursory visual inspection of the premises would reveal. Access to a public way would be disclosed by such an inspection.”

The Sinks knew that their land had no legal access, just as the Perrys knew that their access easement consisted of a dirt road.

The Sinks court also stated the following:

Even were we to equate lack of access with a title defect, a purchaser of real estate who enters into a contract with actual knowledge of title defects in the form of easements or encumbrances waives any objection to those defects.

Under facts similar to the Perry case, The Sinks court refused to find that a lack of access rendered title unmarketable.

Because the Illinois court in Perry determined that a dirt access road that sometimes becomes impassible in rainy weather renders title to land unmarketable, the examiner should talk to an underwriter before agreeing to insure an easement when the survey discloses that the easement area is unpaved and unimproved land. Thankfully, the facts in Perry were extreme—the land burdened by the easement was part of a pasture!

Example: The Company is asked to insure a recorded access easement. Reviewing a current aerial view of the land, the examiner determines that the easement area is still vacant land—a corn field. The examiner declines to insure the easement. However, with underwriter approval, the examiner could consider simply issuing the owner’s policy with no insurance of the easement, but free and clear of a “no access” exception. The insured would then have policy access coverage via Covered Risk Number 4 of the owner’s policy.

Other Issues

When insuring an easement, there are other issues that the examiner has to consider.

• Is the easement an exclusive right or can other property owners use it as well?

If other parties have the right to use the easement, then the examiner should raise an exception relating to the "rights of adjoining landowners to the concurrent use of the easement described in Schedule A."

• Has the examiner raised a Schedule B exception for the terms of the easement?

When insuring an easement, the examiner should raise a Schedule B exception relating to the "terms, conditions, and provisions of the easement described in Schedule A."

Any recorded easement will probably have some kind of terms and conditions contained in the document. These might include the duty to maintain the easement, the rights of others to the use of the easement, the obligation to use the easement for ingress and egress only, and not to park cars on it. Accordingly, the examiner should raise a Schedule B exception concerning the terms of the easement.

Assume that the examiner is insuring a very old easement that includes no terms and conditions. Does that mean that the examiner can waive this exception? No, the examiner should not waive the exception. Illinois case law makes it clear that the owner of the easement—the person who was granted the easement, the owner of the dominant estate—has an obligation at common law to maintain the easement. See Zacny v. Sasyk, 30 Ill.App.3d 93 (1975); Lakeland Property Owners Association v. Larson, 121 Ill.App.3d 805 (1984); Murtha v. O’Heron, 178 Ill.App. 347 (1913); Seymour v. Harris Trust & Savings Bank of Chicago, 264 Ill.App.3d 583, 636 N.E.2d 985 (1994); Quinlan v. Stouffe, 355 Ill. App. 3d 830, 823 N.E.2d 597, 291 Ill. Dec. 305 (4th Dist. 2005); 58 Ill. Bar Journal 832 (1970).

Alternatively, with a very old grant of easement that contains no easement terms, the examiner could raise an exception such as the following: “Possible obligation to maintain the easement described as Parcel 2 in Schedule A, as set forth in the common law of the State of Illinois.”

Overburdening the Easement

The examiner will want to make sure that the easement he is insuring is not overburdened.

The concept of overburdening an easement is misunderstood by many people.

Example: Adam owns lot 1 and Baker owns lot 2. Lot 1 is adjacent to a dedicated road, but lot 2 has no access. Adam gives an access easement over the west 10 feet of lot 1 to Baker. After the easement is granted, Baker subdivides lot 2 into four smaller “townhome” lots and one “common area” lot that provides the four lots access to the easement. Baker sells off the townhome lots and conveys the common area lot to a homeowner’s association. Before the subdivision was created, only one person, Baker, had the right of access over the west 10 feet of lot 1. But now, four people and a homeowners association own parts of lot 2. Do the four owners of what used to be lot 2 but is now four lots in a subdivision of lot 2 still have the right to use this easement? (Figure 4)

Many title people would say that the four lot owners would not have the right to use the easement, that the easement is now overburdened. But this is probably not the case. Illinois case law makes it clear that a properly- created easement not only benefits the dominant tract as a whole, but also benefits each and every part thereof.

The easement is not extinguished by a division of the dominant estate. Instead, the easement inures to the benefit of the owners of these several smaller parts of the dominant estate. See Beloit Foundry Co. v. Ryan, 28 Ill.2d 379 (1963).

Therefore, a court would probably rule that the 6 owners of lot 2 would continue to have the right to use the easement.

So what is overburdening an easement? Case law indicates that if an easement is limited in scope or purpose, the owner of the property subject to the burden—the owner of the servient estate—is entitled to prevent the burden of such easement from being increased. See Marlatt v. Peoria Water Works Co., 114 Ill.App.2d 11 (1969).

That is, overburdening of an easement occurs when the use of the easement goes beyond the scope of the contemplated purpose of the easement.

Example: A sanitary sewer easement burdens the north line of a lot. Commonwealth Edison would not have the right to put utility poles and wires within this easement area on the basis that it is a “public utility easement.”

Example: A farmer owned a large field. Some railroad tracks ran through the middle of the field, thus dividing the field into two parts. In 1950 the railroad company grants the farmer an access easement over the railroad tracks so that the farmer could move farming equipment back and forth and to and from the two parts of the field.

In 2020 a developer buys the farmer’s field (both parts) and decides to build a large residential development on both sides of the railroad track. The developer asks the examiner to insure the 1950 grant of easement. That is, the developer wants the title company to insure that that all the eventual individual home owners can use what was originally a farmer’s easement—an easement to move the farmer’s equipment into the field in order for him to till the field—as an access road to their homes.

This is probably a perfect (and true) example of the overburdening of the easement. Clearly the proposed use of this easement goes beyond the scope and intended use of the original easement.

For an excellent case considering this issue, see River’s Edge Homeowners’ Association v. The City of Naperville, 353 Ill. App. 3d 874 (2nd Dist., 2004). (This case was a title company claim.) Here the court ruled that an easement for a walkway could not be used for a bike path, as it wrongfully expanded the use of the easement.

The court said:

If an easement is limited in scope or purpose, the owner of the property subject to the easement burden is entitled to prevent such burden from being increased. [See] Consolidated Cable Utilities, Inc. v. City of Aurora, 108 Ill. App. 3d 1035 (1982). Because the easement documents here restrict the easement to use as a walkway, we hold that defendant’s proposed use of the property as a bicycle path constitutes an impermissible expansion of the purpose of the easement without just compensation.

Access Endorsements

Covered Risk 4 of the 2006 owner’s policy protects the insured in the event there is “[n]o right of access to and from the Land.” However, this right of access is limited in scope. The title policy does not insure that this access is sufficient for the insured’s intended use of the land. As the court stated in Gates v. Chicago Title Ins. Co., 813 S.W.2d 10 (Mo.App. 1991):

[I]f plaintiff had a right of access, even though over a rough and nearly impassable route, he makes no case under his title insurance policy. A title insurance company may not be expected to investigate the physical condition of a way of legal access to the insured property to determine if it is passable.

The ALTA “Access and Entry” Endorsement 17-06 expands the access coverage of Covered Risk 4. The ALTA 17-06 endorsement reads as follows:

The Company insures against loss or damage sustained by the Insured if, at Date of Policy, (i) the Land does not abut and have both actual vehicular and pedestrian access to and from _____ (the “Street”), (ii) the Street is not physically open and publicly maintained, or (iii) the Insured has no right to use existing curb cuts or entries along that portion of the Street abutting the Land.

This endorsement is designed to provide insurance that the property abuts upon, and has actual vehicular and pedestrian access to and from a specific open and publicly maintained street by way of existing curb cuts or entries. (The name of the street is inserted in the blank provided in the endorsement.)

The ALTA 17-06 endorsement provides insurance in the event that the public street is not physically open. But what if access is via an insured easement? The ALTA “Indirect Access and Entry” Endorsement 17.1-06 provides insurance in the event that the insured easement is not physically open

The ALTA 17.1-06 endorsement is designed to provide insurance that the property has actual vehicular and pedestrian access to and from a specific easement insured in Schedule A. This endorsement also gives insurance that the insured easement provides the property with access to an open and publicly maintained street.

The ALTA 17.1 endorsement reads as follows. This endorsement contains several blanks that have to be completed. For ease of understanding, these blanks have been completed with sample language. (See the underlined words in the endorsement.)

The Company insures against loss or damage sustained by the Insured if, at Date of Policy (i) the easement identified as Parcel 2 in Schedule A (the “Easement”) does not provide that portion of the Land identified as Parcel One in Schedule A both actual vehicular and pedestrian access to and from Elm Street (the “Street”), (ii) the Street is not physically open and publicly maintained, or (iii) the Insured has no right to use existing curb cuts or entries along that portion of the Street abutting the Easement.

If the insured easement is long and circuitous, the title company may want to ask that the “Parcel Two” easement parcel be surveyed. (This is especially important to consider when asked to issue the ALTA 17.1-06 endorsement.) In this regard, see Item 19 of Table A of the “Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys.” Item 19 of Table A of these standards asks that the surveyor add the following to his plat of survey: “Include any plottable offsite (i.e., appurtenant) easements. . . .”

Insuring the Easement after the Easement is Executed

In an earlier example, at the time the easement was executed and recorded, the title company insured lot 2 and also an easement over the west 10 feet of lot 1. (See Figure 1.)

Assume that ten years after this easement is granted, the title company is again asked to insure the easement in a sale of lot 2. At this time lot 1 (the servient estate) will have to be searched, but only to only make sure that the same party does not and will not own both the dominant and servient estates. If the same person now owns both estates, it is possible that the easement has merged with the fee simple estate, theoretically extinguishing the easement, because one cannot have an easement over one’s own property. How can the same person own lot 1 in fee simple and at the same time have an easement over lot 1? (If the two tracts of land are again separated into different ownerships, the easement may not automatically spring back to life. Merger is a question of intent.)

Any liens, judgments, mortgages, other easements, and even unpaid taxes against both the owner of lot 1 (e.g., judgments) and lot 1 (e.g., mechanics liens) that arise subsequent to the recording of the easement can be ignored, since these subsequent lien holders, judgment creditors, etc., acquired an interest in lot 1 subject to the easement.

Once an easement is properly created and granted to the easement holder, any subsequent conveyance of the land benefited by the easement does not have to include a description of the easement. See Beloit Foundry Co. v. Ryan, 28 Ill.2d 379 (1963); see also 765 ILCS 5/7a.

That is, a conveyance of just the fee simple estate automatically conveys the easement estate. This means that the title company could accept a deed at closing that conveys only lot 2, but it could still issue its title policy insuring lot 2 and the easement over lot 1. When lot 2 is conveyed, the easement over lot 1 is also conveyed, unless, of course, the easement is specifically excluded from the deed. In this regard, see 765 ILCS 5/7a, effective 1969. Naturally, it is certainly permissible to have the deed convey both the fee simple parcel and the easement parcel.

Easements in Schedule A and Schedule B

Sometimes an easement can appear in both Schedule A and Schedule B. This is because the same easement both benefits and burdens the insured land that is described in Schedule A of the policy.

Example: Adam and Baker own lots 1 and 2 respectively. The two lots are side-by-side; lot 1 is west of lot 2. A common driveway runs along part of the easterly 10 feet of lot 1 and part of the westerly 10 feet of lot 2. Adam and Baker each sign a party driveway agreement, whereby each of them conveys to the other an easement for driveway purposes over a portion of their respective lots. (Figure 2)

Assume that Adam is going to sell lot 1 to Charles, and the attorney has asked the examiner to insure the driveway easement as an additional parcel. The examiner would show lot 1 in Schedule A as Parcel One. The examiner would show the party driveway easement in Schedule A as Parcel Two, because the easement over part of the westerly 10 feet of lot 2 benefits lot 1. But because the party driveway easement also burdens part of the easterly 20 feet of lot 1 (the lot being conveyed to Charles that the title company is insuring), the examiner would also show the party driveway agreement in Schedule B as an exception to title.

Thus, Schedule A of the commitment for the sale of lot 1 would read as follows:

Parcel 1: Lot 1, Blackacre Subdivision, Kane County, Illinois

Parcel 2: Easement for a party driveway over the south 40 feet of the west 10 feet of Lot 2, Blackacre Subdivision, as granted in that party driveway agreement recorded _____ as document _____, Kane County, Illinois.

Schedule B would include the following exception:

Easement for a party driveway over the south 40 feet of the east 10 feet of lot 1, as set forth in a party driveway agreement recorded _____ as document _____.

Another example of easements that both burden and benefit would be reciprocal easements that both burden and benefit a shopping center.

Insuring Easements in Gross

Years ago title companies took a rather hard-lined view towards insuring easements. Title companies would only insure easements appurtenant. For example, a title company would insure one parcel in fee simple and the other parcel as an easement that benefited the fee simple parcel. But title companies refused to insure easements in gross—easements that did not benefit another tract of land. But title companies are now relaxing this approach.

Example: As part of the “rails to trails” concept that is sweeping the nation, the local park district acquires via condemnation an easement for a bike trail across an abandoned railroad right-of-way. The park district tells the examiner that all the park district wants the examiner to do is "insure its easement." The bike trail does not benefit other lands owned by the park district. Nonetheless, the examiner could issue an owner’s title policy, insuring the park district, legally describing only the easement parcel in Schedule A, and adding a "terms, conditions, and provisions of the easement" exception in Schedule B.

Rule of Title Practice:

The examiner should talk to an underwriter before agreeing to insure an easement in gross.

Implied Easement

If an owner of a tract of land uses one part of his land to benefit another part, and this use is such that if the parts were owned by different people, the use would constitute an easement, then, upon a conveyance of one of the parts, an implied easement, or easement by implication is created over this land that is already being used. See Limestone Development Corp. v. The Village of Lemont and K.A. Steel Chemicals, Inc., 284 Ill.App.3d 848 (1996); 23 Ill. L. Rev. 399 (1928).

The situation must indicate an implied intent by the parties to create an easement, even though the easement is not formally created by an instrument. See 45 Ill.Bar.J. 689 (1957).

Example: Maple Street runs east and west. Lot 1 is directly north of and adjacent to the north line of Maple Street. Lot 2 is directly north of and adjacent to the north line of lot 1. Adam owns both lot 1 and lot 2. Adam has always used a dirt road located on lot 1 to get to his house on lot 2. If Adam sold lot 1 to Baker, a court might determine that an implied easement has been retained by Adam over the dirt road on lot 1 for continued ingress and egress to his house on lot 2, particularly if this was the only way that Adam could get to lot 2. (Figure 5)

There are several elements of an implied easement.

The prior use by the one landowner must have been obvious and “long continued.” The reason for this is that the facts must indicate that the parties to the deed theoretically intended the present use of the land to continue, even after a portion of the land was sold. See Granite Properties Ltd. Partnership v. Manns, 117 Ill.2d 425 (1987).

The Limestone Development Corp. case states that a party seeking an implied easement must establish by clear and convincing evidence that at the time of the severance of title, the easement was in existence and was intended to be permanent.

The easement does not have to be necessary for the enjoyment and use of the land; it is sufficient if the easement is highly convenient and beneficial to the dominant estate. See Flower v. Valentine, 135 Il..App.3d 1034 (1985); Seiber v. Lee, 158 Ill.App.3d 361 (1987).

The ownership of the two tracts must have been in one ownership when the use commenced, and then, separated thereafter, so that one person owns the burdened tract and the other person owns the benefitted tract.

Consider the case of Legendre v. Harris, 125 Ill.App.2d 76 (1979), where the court stated:

When an owner of two adjoining lots built a portion of his garage over the boundary line between the lots and subsequently transferred one of the lots, his grantees took that lot subject to or benefited by easement by necessary implication in favor of the encroaching garage.

The court in Dudley v. Neteler, 392 Ill.App.3d 140, 924 N.E.2d 1023 (4th Dist. 2009), citing Granite Properties Ltd. V. Manns, 117 Ill.2d 425 (1987), stated the following:

An implied easement from a pre-existing use is established by proof of three elements: one, common ownership of the claimed dominant and servient parcels and a subsequent conveyance or transfer separating that ownership; two, before severance, the common owner used part of the united parcel for the benefit of another part, and this use was apparent and obvious, continuous, and permanent, and three, the claimed easement is necessary and beneficial to the enjoyment of the parcel conveyed or retained by the grantor or transferor.

Easement by Necessity

When the owner of land divides and conveys a portion of said land, so that one of those parcels of land has no legal access to a dedicated road, an easement by necessity is created. The easement by necessity is not created over land owned by a stranger. The easement by necessity is created only over the land that was divided—over either the grantor’s land or the grantee’s land. See Granite Properties Ltd. v. Manns, 117 Ill.2d 425 (1987); Luthy v. Keehner, 90 Ill.App.3d 127 (1980); 45 Ill.Bar J. 689 (1957); 12 Ill.L.Rev. 294 (1917); Canali v. Satre, 293 Ill. App. 3d 407, 688 N.E.2d 351, 227 Ill. Dec. 870 (1997).

The easement by necessity doctrine is not a general rule that a person automatically has an easement over another person’s land if needed to get to a public street. The easement by necessity exists only over land that was divided — over either the grantor’s or the grantee’s land — and only when the division itself cut off access to a public street

With an easement by necessity, the easement must be necessary, and it must be shown that at some time in the past the two tracts of land were owned by the same person. See Granite Properties Ltd. Partnership v. Manns, 117 Ill.2d 425 (1987).

The property must become landlocked at the time the land is divided. That is, if, at the time of severance, neither parcel is landlocked, but instead, a change of circumstance later creates the need for an easement, no easement is created at the time of severance. See Katsoyannis v. Findlay, 2016 IL App (1st) 150036.

Illinois courts have found an easement by necessity to exist under circumstances short of “absolute necessity” where there was no reasonable alternative access to the conveyed land. See Rextroat v. Thorell, 89 Ill.2d 221, cert. denied, 459 U.S. 837 (1982); see also 10 ALR4th 447.

An easement by implication is very similar to an easement by necessity. There are, however, a few subtle differences:

• With an easement by implication, there is a prior use of the land. The easement parcel is being used prior to the severance of the tract. This is not the case with an easement by necessity. With an easement by necessity, there is no prior use of the land prior to the division of the tract of the tract of land. (This is the major difference between an easement by implication and an easement by necessity.)

• With an easement by necessity, the owner of the burdened tract has the right to locate the easement, provided that the location of the easement is reasonably convenient. With an easement by implication, the easement is over the area that was originally being used.

• But with both an easement by necessity and an easement by implication, there was at one time one party owning one tract of land, a tract of land that was then subsequently divided. See Deisenroth v. Dodge, 7 Ill.2d 340 (1955).

• An easement by necessity ends when that element of necessity is no longer a factor. An easement by implication, however, may continue forever, even after any element of necessity disappears.

Easement by Prescription

This is sometimes called a prescriptive easement. This easement is created when someone uses someone else's land in an adverse manner for a prescriptive period of at least twenty years. The use of the land must not be permissive; it must be adverse to the rights of the true owner. See Page v. Bloom, 223 Ill.App.3d 18 (1991); McRaven v. Charles, 7 Ill.App.3d 55 (1972).

Essentially, an easement by prescription is the easement equivalent of adverse possession. The use must be adverse, uninterrupted, exclusive, continuous, and under a claim of right. See Petersen v. Corrubia, 21 Ill.2d 525 (1961).

Example: Independent Tube Corp. had an easement to use a railroad spur track. However, it had no legal right to use the drainage ditches that ran along each side of the spur track. Nonetheless, the corporation used the drainage ditches openly and continuously and without interruption for thirty years. When Ross and Kathryn Radke sued to terminate the easement and quiet the title to the land, Independent Tube Corporation counter-sued. The court ruled that Independent Tube Corporation had an express easement to use the spur track and an easement by prescription to use the drainage ditches. See Independent Tube Corp.v. Radke, 301 Ill.App.3d 713, 704 N.E.2d 72, 234 Ill.Dec. 914 (3rd Dist. 1998); see also City of Des Plaines v. Redella, 365 Ill.App.3d 68, 847 N.E.2d 732, 301 Ill.Dec. 722 (1st Dist. 2006).

The use of the land must be continuous. An occasional act of trespass is not sufficient. See Leonard v. Pearce, 348 Ill. 518 (1932).

The use of the land must be with the knowledge of the landowner, but without his permission. That is, the use of the land must be open and visible. It must be adverse to the rights of the true owner. See Ruck v. Midwest Hunting and Fishing Club, 104 Ill.App.2d 185 (1968).

The use of the land must be exclusive. This does not mean that no one else could use the land except for the easement claimant. Rather, "exclusive" means only that the claimant's right to use the land does not depend on someone else's right to use it. Thus, in Ritter v. Janson, 80 Ill.App.2d 169 (1967), the fact that the claimant was not the only person to use a passageway did not prevent him from obtaining an easement by prescription.

Note that a First District case seems to indicate that when the courts state that exclusivity is a necessary element to establish an easement by prescription, they mean that the owner of the land must be deprived of the use of the land during the prescriptive period. See Catholic Bishop of Chicago v. Chicago Title and Trust Company, 2011 IL App (1st) 102389. However, this First District decision appears to now have been largely discredited. See Brandhorst v. Johnson, 2014 IL App (4th) 130923; Nationwide Financial, LP v. Pobuda, 2013 IL App (1st) 122540-U.

The use of the land must be continuous; it must last for the full 20 years, and not be interrupted by the owner of the land burdened by this potential easement. See Roller v. Logan Landfill, Inc., 16 Ill.App.3d 1046 (1974).

It must appear that the use of the land is as a claim of right, that someone is using it as if he had the right to use it, and not as a mere privilege, i.e., not as if someone were letting the person use the land. See Light v. Steward, 128 Ill.App.3d 587 (1984).

This claim of right does not have to be well-founded; it need only be a claim of right. See Leesch v. Krause, 393 Ill. 124 (1946).

The use of the land must be “open and notorious.” Thus, one cannot obtain a prescriptive easement when the use is invisible to the owner of the servient estate, such as a subsurface sewer or drain line. See Murtha v. O’Heron, 178 Ill.App. 347 (1913).

An easement by prescription can be negated by the posting of a notice. See 735 ILCS 5/13-122.

Posting of notice that right of access is by permission and subject to control of owner. No use of any land by any person or by the public generally, no matter how long continued, shall ever ripen into an easement by prescription, or be deemed to be an implied dedication, or be deemed to give rise to any other right, customary or otherwise, to be on, or to engage in activities on, such land, if the owner of such property for a continuous period posts at each entrance to the property or at intervals of not more than 200 feet along the boundary a sign reading substantially as follows: ‘Right of access by permission, and subject to control of owner.’

Chicago Title Land Trust Co. v. JS II, LLC, 2012 IL App. (1st) 063420 concerns an easement by prescription. In this case three driveways crossed a strip of land that used to be a railroad right-of-way. The significance of this case is that one can have an easement by prescription without the claimant proving the exact location and dimensions of the easements. Precise proof is not necessary because the extent of prescriptive use defines the easement. An easement’s actual use determines its width.

For an interesting case that discusses easements by prescription and implied easements, see DeRaedt v. Rabiola, 2011 IL App (2d) 100719.

See also Rainbow Council Boy Scouts of America v. Loretta Holm, 2018 IL App (3d) 160715. In this case the appellate court upheld the trial court’s ruling. The trial court in Grundy County found that a prescriptive easement existed in favor of the Boy Scouts to access a portion of their land over a path that had been used since the 1960s, even though another means of access existed. However, this other means of access would have required either a six-mile drive or a boat trip across a lake. The trial court determined that necessity was not relevant to a finding that an easement by prescription existed.

The Easement by Necessity and the Tax Buyer

The appellate court in Gacki v. Bartels, 369 Ill. App. 3d 284, 859 N.E. 2d 1178 (2nd Dist. 2006) stated that there are two types of implied easements: the easement by necessity and the easement implied from a pre-existing use.

The court stated that until recently, easements for necessity were limited to access for foot and vehicular traffic.

But the court stated that in recent years, implied easements by necessity have been recognized for purposes such as access for utilities and other services. See the Restatement (Third) of Property (Servitudes), Sec. 2.15 (2000).

Gacki v. Bartels involves a tax buyer who bought land-locked property at a tax sale and then sued to enforce an easement by necessity over adjoining land.

The court affirmed in part, reversed in part, and remanded the case back for additional proceedings.

But the court had an interesting comment, stating that an easement may be barred by laches. See Erday’s Clothiers, Inc. v. Spentzos, 228 Ill. App. 3d 540 (1992).

Laches is an equitable doctrine that bars an action if, because of the plaintiff’s unreasonable delay in bringing suit, the defendant is misled or prejudiced or takes a course of action that he or she would not have otherwise taken.

Can Easements Created by Operation of Law Be Insured?

An easement does not always have to be insured in a title insurance policy. This is because Covered Risk Number 4 of the 2006 ALTA owners’ title insurance policy insures against loss or damage due to “no right of access to and from the land.”

The policy, though, only insures that the land has access; it does not insure the exact location or nature of this access. The insuring of an easement takes this additional step; it insures the exact location of the easement that provides access to the land. The insuring of an easement insures the access via that specific and identified easement.

Insuring easements created by operation of law should be approached with caution. This is because of the subjective nature of the easement:

• Were all the necessary elements of a prescriptive easement (adverse, uninterrupted, exclusive, continuous, claim of right) present for the creation of the prescriptive easement? For example, what if the adjacent owner is using the land with the permission of his neighbor? Permission negates an easement by prescription.

• Did the parties really intend that the easement by implication over the previously-used road remain even after the land was divided? Did the owners really intend that the continued use be permanent?

• Is the easement by necessity really truly necessary over the land? Is the land truly landlocked? At the time of severance, was the land landlocked, or did the lack of access arise after the severance, as in Katsoyannis v. Findlay?

An underwriter must be consulted before offering to insure these easements. The underwriter will review such factors as the length of time the easement has been used, the nature of the easement, the use of the easement, and whether there is any other means of access.

Example: An underwriter for a title company was once asked to insure a small house nestled in the shadow of Illinois State Route I-55 in Will County. If one looked at the property on a tax map, it seemed clear that the land had no access. But by looking at the aerial view of the land, one could see that there was a frontage road that ran alongside I-55 that provided access to this parcel of land. The seller gave the underwriter an affidavit, affirming that he had used this access road for the last ten years.

The underwriter had three choices:

• The underwriter could insure the property but raise a “no access” exception in Schedule B.

• The underwriter could insure an unrecorded easement by prescription in Schedule A.

• The underwriter chose the third option. The underwriter issued the 2006 owner’s policy. He did not insure the easement, but he did not raise a “no access” Schedule B exception, either. Rather than insure a nebulous and unrecorded easement by prescription, the underwriter chose to give the Insured access via the broader coverage of Covered Risk Number Four—the underwriter insured the Insured against loss or damage by reason of “no right of access to and from the land.”

Example: When reviewing a survey of a single-family home in Chicago, an underwriter noticed that the homeowner was using a portion of the adjoining property to the east (“East Property”) for access to the homeowner’s back yard. (In this case the homeowner (“West Owner”) was selling his home to a purchaser for value.) An aerial view of the property showed that the homes in this block were closely packed together. The survey showed that both the west wall of the home on the East Property as well as a fence on the East Property severely limited the owner of the East Property’s access to this portion of the East Property that was being used by the West Owner. (See Figure 6.)

The attorney for the West Owner asked the title company if this adverse use could somehow be insured. He told the examiner that his client had been using this adjacent property for as long as he had lived there, which was about twenty years.

The underwriter agreed to at least consider the insurance of this apparent easement by prescription under the following conditions:

• The West Owner must execute a quit claim deed to the new buyer. The quit claim deed must convey the home and also a “Parcel 2” easement by prescription over the adjoining property. For example: “Parcel 2: an easement by prescription over a westerly portion of the adjoining property to the east, said easement lying westerly of the fence and building currently located on said adjoining property, as disclosed by a plat of survey by ___, dated ___, order number ___.” The recorded deed would then put the easement in the chain of title of the property; it would provide a reference to the description of the easement in Schedule A of the policy.

• The West Owner must pay a substantial “risk premium” to the title company.

• The West Owner must execute an affidavit indicating how many years he had been using the driveway; whether or not he had received permission to use the driveway; whether the use of the driveway had ever been questioned by the East Owner or a previous owner of the East Property; and how often the West Owner uses the driveway.

Why was the underwriter concerned about the matters raised in this affidavit? Consider the following issues:

• The adverse use of the adjoining land must be for at least twenty years. See Page v. Bloom, 223 Ill.App.3d 18 (1991); McRaven v. Charles, 7 Ill.App.3d 55 (1972); Petersen v. Corrubia, 21 Ill.2d 525 (1961). If, though, the current title holder claims that he has used the land “for as long as I have lived here,” and the chain of title indicates that the title holder has owned the property for less than twenty years, perhaps the previous owner of the land has also used the adjoining property. The previous owner’s use of the land can be “tacked” onto the current owner’s use of the land, thus possibly totaling the necessary twenty years of adverse use.

• Permission negates an easement by prescription. If the West Owner is using the property with the permission of the East Owner, then all that the West Owner has is a license, and a license would not be transferable to the new purchaser.

• The examiner should decline to insure this type of easement if an owner’s adverse use of adjoining land has been questioned by the owner of the adjoining property. In this example, assume that the West Owner admitted in his affidavit that a few years earlier, the East Owner had questioned the West Owner’s use of the East Property. Assume that the West Owner sells his property to a New West Owner, and the title company nonetheless insures this easement by prescription. It is possible that the East Owner might confront the New West Owner immediately if the New West Owner starts using the East Property. This could result in the tender of a claim.

• The title company should probably decline to insure the easement if the owner of the land only rarely uses the adjoining property. That is, continuing with the above example, if the West Owner uses the East Property only a few times a year, the title company should probably decline to insure the easement. It is possible that this occasional use is more in the nature of a trespass and not an easement by prescription.

The Termination or Extinguishing of Easements by Operation of Law

When insuring an easement after it has been created, the examiner has to consider the question: Has an event occurred that may have extinguished the easement?

In that regard, the examiner should consider obtaining a survey of the easement, to make sure that the easement has not been extinguished by, e.g., abandonment. Again, see, for example, Item 19 of Table A of the 2016 ALTA/NSPS land title survey standards.

In Illinois, abandonment of an easement is accomplished by non-use coupled with an affirmative act. Erecting a fence across an easement (which would be disclosed by a survey) is an example of abandonment. That is, the easement is not only not being used, the non-use of the easement is assured by someone taking the additional step of installing a fence across the easement. Or consider a railroad spur track easement. Non-use of the spur track may not constitute abandonment, but ripping up the rails could be abandonment. See Chicago Title & Trust Co. v. Wabash-Randolph Corporation, 384 Ill. 78 (1943); Egidi v. Town of Libertyville, 251 Ill. App. 3d 224 (1992); 25 Ill. L. Rev. 302 (1930).

An easement that has lain dormant through nonuse, but with no intentional abandonment, can be revived. See Finn v. Williams, 376 Ill. 95 (1944).

In order for there to be abandonment of an easement, the owner of the easement (the owner of the dominant estate) must clearly relinquish possession or use of the easement.

Rule of Title Practice: The law relating to easement abandonment is somewhat complex. An examiner should not waive an easement because he thinks it is abandoned. An underwriter must be consulted.

An example of how extreme the test for abandonment can be is described in the case, Hart v. The Town of Shafter, 348 Ill. App. 3d 713, 810 N.E.2d 489, 284 Ill. Dec. 699 (2004). In this 2004 case the court determined that a road that had not been used since at least 1935 was nonetheless not abandoned. The court relied on the test articulated in Chicago & Eastern Illinois Ry. Co. v. Road District No. 10, 353 Ill. 160, 187 N.E. 155 (1933). That is, a road is abandoned when there is non-use and when the public has acquired the legal right to another road or where the necessity for another road as ceased to exist.

Adverse possession of the easement by a third party could also extinguish an easement. See 95 ALR2d 482; see also Deem v. Cheeseman, 113 Ill. App. 3d (1983); Miller v. Schmitz, 80 Ill. App. 3d 911 (1980). But, the examiner should not waive an easement based on adverse possession until there has been a court determination that the easement no longer exists, or until the examiner has consulted an underwriter.

The Reserved Future Easement

Example: In 1950 Developer platted a tract of land into 50 lots. The plat shows a dotted line across the northerly 30 feet of lot 1. Next to the northerly 30 feet there is the written statement, “Reserved for a future right-of-way.”

In the years after the plat was recorded, Lot 1 was bought and sold many times. It is now 2020. The current owner of lot 1 wishes to sell the lot. The proposed purchaser is unwilling to take title subject to this reservation of a right-of-way. Can the title company waive this title exception?

To answer this question, one must first determine the nature of the interest in land.

There are two types of plats: common law and statutory.

A statutory plat is a plat that is in strict conformity to the Plat Act (See 765 ILCS 205/1 et seq; see especially 765 ILCS 205/3; see also Terwelp v. Sass, 111 Ill.App.3d, 443 N.E.2d 804 (1992); Klose v. Mende, 329 Ill. App.3d 543, 771 N.E.2d 960, 265 Ill. Dec. 1 (3rd Dist. 2002); First Illinois Bank of Wilmette v. Valentine, 619 N.E.2d 834 (1993).

With a statutory plat, the fee simple ownership of the street vests in the public. With a common law plat, the public gets only an easement interest. See Grimming v. Ferris, 79 Ill.App.3d 546, 399 N.E.2d 141 (1979); Heerey v. Maniatis, 192 Ill. App. 3d 868, 549 N.E.2d 691, 140 Ill. Dec. 40 (1989).

765 ILCS 205/3 reads as follows. Note that the statute states that if one has a plat created pursuant to the Plat Act, the dedication of the rights-of-way is a fee simple conveyance to the municipality:

The acknowledgment and recording of a [plat created under the Plat Act] shall be held in all courts to be a conveyance in fee simple of such portions of the premises platted as are marked or noted on such plat as donated or granted to the public. . . and the premises intended for any street, alley, way, common or other public use in any city, village or town, or addition thereto, shall be held in the corporate name thereof in trust to and for the uses and purposes set forth or intended.

A common law plat is any plat that is not created in accordance with the Plat Act. With a common law plat, the fee simple ownership of the street vests in the owner of the adjoining lots or lots. The public, though, has an easement right to pass over the street.

This plat does not indicate that the roads are “donated or granted to the public.” Instead, there is merely a reservation of a future dedication. As such it seems that the interest that is created is only an easement interest and not a dedication in fee simple to the public. That is, lot 1 was conveyed, subject to the reservation of an easement.

As indicated above, in Illinois, abandonment of an easement is accomplished by non-use coupled with an affirmative act. In that regard, the examiner should consider obtaining a survey of the property. If, e.g., a fence has been constructed across the north 30 feet of the lot, and if an Internet aerial view shows that there has been no road constructed along the north line of the land, it seems pretty clear that the easement has been abandoned.

Consider also the above Hart v. The Town of Shafter test. Assume that the title search indicates that Developer owned 50 lots in 1950, and when he sold lot 1, he sold the lot, reserving the right to construct a right-of-way along the north 30 feet of the lot. In the following years Developer sold off all of the other lots. If an aerial view of the land shows no road constructed on lot 1 and also shows no need of a road to be built over lot 1—that is, all the lots in the subdivision have access out of the subdivision (and if even better, there are improvements constructed over the north 30 feet of lot 1.such as a fence), the examiner should be able to waive the title exception.

What if the plat had been signed by the municipality? Does the municipality have the right to enforce the right-of-way, to start paving the north 30 feet of the lot?

No, the city does not have the right to start paving the land. The plat discloses only the reservation of an easement to construct a right-of-way at a future date; it does not disclose the offer and acceptance of a dedication.

Furthermore, see Stevenson v. Cosgrove, 38 Ill. App 3d 672, 347 N.E.2d 857 (1976) and Water Products Company of Illinois, Inc. v. Gabel, 120 Ill. App. 3d 668, 458 N.E.2d 594 (1983). Both of the above cases hold that a public body signing a plat (one was a township road commissioner and the other was a municipality) does not constitute an acceptance of a dedication.

Example: Consider the DuPage County plat of Glen Park Resubdivision, recorded in 1956 as document 800980, located in Section 26, Township 39 North, Range 10. The plat of this Glen Ellyn property shows an east-west road called Glen Park Road. The east end of Glen Park Road ends at a “T” intersection. Northeast of the “T” is lot 1 and southeast of the “T” is lot 17. The south line of lot 1 and the north line of lot 17 are each burdened by a thirty-three feet “easement for future road.” Next to the future road easement are the words, “This easement is not subject to improvement or to maintenance by the township highway commissioner.”

An aerial view of the land is key to underwriting these situations. In this case the current aerial view of the land indicates that the easement property is being used as driveways for the adjoining lots. It appears that the easement is being used as a road.

The Voluntary Termination of Easements

A deed or release from the owner of the easement (the owner of the dominant estate) back to the owner of the servient estate will extinguish the easement. The idea is one of merger—the lesser easement estate merges with the fee simple estate. See 19 Corpus Juris, p. 949; 45 Ill. Bar. Journal 690 (1957).

Rule of Title Practice:

Despite an apparent merger resulting from the execution and recording of such a deed, the examiner should not automatically waive the easement. Merger is a question of the intent of the parties; perhaps the owner of the two estates wishes to subsequently convey the property again to two separate parties, who wish to continue to maintain the easement. See Village of Lake Bluff v. Dalitsch, 415 Ill. 476 (1953); Ellis v. McClung, 291 Ill.App.3d 448 (1997).

If asked to waive an easement on the basis of merger, the examiner should consider having the attorney for the owner draft a “Declaration of Merger and Extinguishment of Easement” that could be recorded against the two estates. In this regard, see Smith v. Roath, 238 Ill. 247 (1909); Ellis v. McClung, 291 Ill. App. 3d 448 (1997).

An abrogation agreement can extinguish an easement. An abrogation agreement is an agreement executed by the owners of both the dominant and servient estates. In the document the parties agree that the easement is longer valid and is of no force and effect.

A release of easement that is executed by the owner of the easement—the owner of the dominant estate—can extinguish an easement. See Beloit Foundry Co. v. Ryan, 28 Ill. 2d 379 (1963).

Note that the release must be executed by the owner of the dominant estate. A release executed by the owner of the servient estate is ineffective. The owner of the servient estate granted the easement to the owner of the dominant estate, and thus the release must essentially come back the same way.

Easement v. License

A license is a personal privilege, terminable at will, to do some act or acts upon the land of another. It is different from an easement in three main respects:

• One: A license can be terminated by the licensor, i.e., the person granting the license. See Illinois Power & Light Company v. Parks, 322 Ill. 313 (1926); Perbix v. Verizon North, 396 Ill. App. 3d 652, 919 N.E.2d 1096, 336 Ill. Dec. 171 (4th Dist. 2009)

This is not the case with an easement.  The person granting the easement cannot in essence “take it back.”

Example: Adam gives an easement to Baker. In order to release the easement, Baker must convey it back to Adam.

But if Adam gives Baker a license, then, generally speaking, Adam can later revoke that license.

But note: It may be possible that if Baker, in reliance on the license, expends large amounts of money and time in improving his property, a court could later state that the license was not revocable.

• Two: A license is not an interest in land; an easement is.

• Three: Generally speaking, because a license is a personal privilege and not an interest in land, a license does not “run with the land.” That is, if Baker gives Charles a license to use Baker’s walkway, and a year later Charles sells his house to Davis, Davis gets only the house; he does not get the right to the continued use of Baker’s walkway. That license was the personal right of Charles. See Traylor v. Parkinson, 355 Ill. 476 (1934).

An exception to this rule are commercial licenses, like the right of a utility company to use land for its facilities. These licenses do run with the land.

An oral agreement to keep open a strip of land for ingress and egress is a license. See Boland v. Walters, 346 Ill. 184 (1931).

“Blanket” Easements

Consider the grant of easement recorded in DuPage County in 1932 as document 323187.

It is a grant of “the right to construct, maintain, operate, and remove a telephone line along the road on the north side of our property located in the Southwest quarter of [Section 15, Township 40 North, Range 10, East of the Third Principal Meridian], in DuPage County, Illinois.”

Years later, how does the examiner underwrite this easement? How does the examiner decide if this old grant of easement now affects the land being insured that is also in the southwest quarter of Section 15, Township 40 North, Range 10? How does the examiner underwrite “blanket” easements?

This is a difficult situation to underwrite. Nonetheless, here are some general guidelines for waiving “blanket” easements:

• The examiner should read the grant of easement carefully. If the grant is “over, under, and across” a right-of-way, the examiner can consider waiving the grant if the land being insured does not include land within a right-of-way.

• If possible, the examiner should attempt to determine what property was owned by the grantors of the easement, and see if that property constitutes part of the land being insured. If the grantor of the easement never owned the land being insured, the examiner can waive the easement.

• If the grant is for electrical lines, and the property has since been subdivided, and if the plat provides for utility easements, the examiner can consider waiving the easement.

• If the grant is for an underground pipeline, such as the Williams Pipeline Company, the examiner should not waive the document unless the examiner is absolutely sure that it does not affect the insured property.

These pipelines are often identified on the ground by pipeline markers, hundreds of feet apart. Perhaps the surveyor can indicate that the markers, when lined up, are not near the land being insured.

• If the grant is for an easement adjacent to a road, and the land being insured was platted subsequent to the date of the grant of easement, so that although the insured land is adjacent to a road, it is clear that the road adjacent to the insured land is not the road referred to in the grant, the examiner can consider waiving the grant.

• If the grant is for pole lines, and the examiner receives a land title survey that does not disclose these lines, then the examiner can consider waiving the grant. But if the examiner is given only a boundary survey, then the examiner should not waive the grant of easement until the examiner contacts the surveyor to verify that there are no pole lines on the land being insured. (A boundary survey may not disclose existing pole lines.)

• If there is another subsequent grant of the same type of utilities, but this later grant clearly affects the insured property, then the examiner should consider waiving the older, non-specific grant.

• The examiner can consider waiving the easement if an inspection by “JULIE” discloses no such easement on the land. (JULIE is an acronym for “Joint Utility Locating Information for Excavators.)

Miscellaneous

Relocation of Easements

Can easements appurtenant ever be relocated without the joint consent of the owners of both the dominant and servient estates? This was the issue in McGoey v. Brace, 395 Ill.App.3d 847, 918 N.E.2d 559, 335 Ill. Dec. 214 (1st Dist. 2009).

The appellate court said that yes, the owner of the servient estate (the land burdened by the easement) could possibly move the easement onto other land owned by said owner, but it depends on how much harm is caused to the owner of the dominant estate.

Conservation Easements

See the Real Property Conservation Rights Act, found at 765 ILCS 120/1 et seq.

See also Bjork v. Draper, 936 N.E.2d 763 (2nd Dist. 2010)

Mechanics Liens and Easements

In Matanky Realty Group, Inc. v. Katris, 367 Ill. App. 3d 839, 856 N.E.2d 579, 305 Ill. Dec. 774 (1st Dist. 2006), the court held that a mechanics lien arising from work done on the servient estate (including the easement area) could not be enforced against the dominant estate. The court held this, notwithstanding that the claimant’s work provided beneficial improvements to the dominant estate or increased the value of the dominant estate.

Free Flow of Air

There is no right to the free flow of air in Illinois. See Chicago-Concord Lane Condominium Association v. Phil Farley, et al., 1-95-2582 (1996); 23 Ill. L. Rev. 399 (1928).

Illinois courts do not appear to recognize implied easements for light, air, and view. See Baird v. Hanna, 328 Ill. 436 (1928); Gulick v. Hamilton, 293 Ill. 126 (1920); Keating v. Springer, 146 Ill. 481 (1893).

However, the courts will recognize specific grants of easements for light, air, and view, if the boundaries of the easement are specific and if the easements have not been merged, abrogated, or abandoned. See Lehmann v. Revell, 354 Ill. 262, 188 N.E. 531 (1933).

Waters

Where two adjoining parcels of land are situated so that surface water falling or coming onto one parcel naturally descends on the other, the owner of the higher or dominant land has a natural easement in the lower or servient tract to allow the surface water to flow naturally off the dominant land onto the servient land. See Bollweg v Richard Marker Associates, Inc., 353 Ill. App. 3d 560, 818 N.E.2d 873, 288 Ill. Dec. 938 (2004); Coomer v. Chicago and Northwestern Transportation Company, 91 Ill. App. 3d 17, 414 N.E. 2d 865 (1980).

The servient owner cannot obstruct the flow of this water. See Mileur v. McBride, 147 Ill.App.3d 755 (1986).

Rule of Title Practice:

Although this easement for the flow of water may exist under the common law, the examiner should not offer to insure it unless it is pursuant to a recorded easement document.

See also 70 ILCS 605/1-1 et seq. (The Illinois Drainage Code), which provides, among other things, that a landowner cannot willfully and intentionally interfere with any ditches or natural drains that cross his land so that the flow of water is impeded, unless the ditch or drain is entirely on the landowner’s land.

Public Utilities

The Illinois Commerce Commission must, generally speaking, approve the sale of any property owned by a public utility. In certain circumstances, however, this requirement can be waived. See 220 ILCS 5/7-102.

Use of Utilities

Adam owns lot 1 in Blackacre, which has no platted utility easements. Baker owns lot 2 in Whiteacre. Lot 2 in Whiteacre is directly adjacent to lot 1 in Blackacre. Can Baker hook into the utility easement on the adjoining lot in the other subdivision? The answer appears to be yes; see Nichol v. The Village of Glen Ellyn, 89 Ill.App.2d 251, 231 N.E.2d 462 (1967).

Environmental Endorsement Statute

IL: 65 ILCS 5/11-31-1-(f)

Foreclosure Of Mortgages

Foreclosure Timeline

• A complaint to foreclose the mortgage is filed with the court. A copy of the complaint and a summons is served on the homeowner. (A summons is a court order that directs the homeowner to appear in court at a certain date and time.) The homeowner has 30 days to respond. See 735 ILCS 5/2-208; 735 ILCS 5/15-1504; Supreme Court Rule 101(d).

• Notice is also served on all necessary and permissible parties. See 735 ILCS 5/2-201 et seq.

• The notice of foreclosure is recorded. The recording of this notice puts third parties on notice of the foreclosure. If these third parties later acquire an interest in the land, they do so, subject to the outcome of the foreclosure proceeding. See 735 ILCS 5/15-1503(a).

• After the owner has received a copy of the complaint, he has 90 days to reinstate the mortgage—that is, to pay all mortgage delinquencies. See 735 ILCS 5/15-1602.

• If the owner fails to respond to the summons, a default judgment will be entered against the owner. Otherwise, the parties will appear in court on the date set forth in the summons. Eventually, the court will issue its judgment of foreclosure. The judgment must be entered more than 30 days after the date that the defendants were personally served and more than 30 days after the date of first publication as to those defendants who were served by publication. The judgment will provide that the homeowner owes $_____ and that he has _____ days to redeem, or else the property will be sold. See 735 ILCS 5/15-1501(e); 735 ILCS 5/2-206; 735 ILCS 5/2-207.

• The redemption period begins on the day that the court gains jurisdiction over the mortgagor. (This date is hereafter called the “Jurisdiction Date.”) The length of the redemption period depends on whether the land is residential or non-residential, as defined in the IMFL. With respect to residential real estate, the redemption period ends 7 months from the Jurisdiction Date or 3 months from the date the judgment of foreclosure was entered, whichever is later. Under certain circumstances, the court may shorten the redemption period. On the other hand, the mortgagor may qualify for an additional post-confirmation 30 days to redeem if the land is residential property and certain other factors are present. See 735 ILCS 5/15-1603. • If the owner fails to redeem the property from foreclosure prior to the expiration of the redemption period, the land is then sold pursuant to the terms and conditions contained in the judgment of foreclosure. Notice of the proposed sale must be published once a week for at least 3 consecutive weeks. See 735 ILCS 5/2-1507. • After the sale has been held, the court will hold a confirmation hearing. At this hearing, the court will enter an order confirming the sale unless the court finds that there was inadequate notice, that the sale was conducted fraudulently, or that the terms of the sale were unconscionable or unjust. See 735 ILCS 5/2-1508.

• Once the sale has been confirmed, the land is conveyed pursuant to a judicial deed. See 735 ILCS 5/2-1509.

Underwriting Service of Process in a Foreclosure

1. Was a party served by substituted service? If so, the return or affidavit of service must affirmatively state pursuant to 735 ILCS 5/2-203:

• A copy of the summons was left at the usual place of abode of the defendant with some person of the family of the age of 13 years or upwards;

• The family member was informed of the contents of the summons, and

• The officer or other authorized person making the service sent a copy of the summons in a sealed envelope with postage fully prepaid, addressed to the defendant at his usual place of abode.

2. Was service had on a corporation? Is the corporation dissolved? Who accepted service on behalf of the corporation?

In this regard, see 735 ILCS 5/2-204; 805 ILCS 5/1.80(l); 805 ILCS 5/5.05.

A corporation is served by leaving a copy of the summons and complaint with the corporation’s registered agent or any officer or agent of the corporation found within the State of Illinois. But the court in First Chicago Bank and Trust v. Surgeen Development, 2016 IL App (2d) 150928-U, indicated that service on a secretary of a corporation’s registered agent is not proper service on a corporation.

When the registered agent of a corporation is served, the examiner should verify the identity of the agent by looking up the corporation on the Illinois Secretary of State’s website, which is www.cyberdriveillinois.com. The examiner must then review the affidavit of service to confirm that the agent was served and not, e.g., the secretary of the agent.

If the corporation is dissolved, 805 ILCS 5/5.05 indicates that the registered agent and the registered office of the corporation on record with the Illinois Secretary of State on the date of the issuance of the certificate or judgment of dissolution shall be an agent of the corporation upon whom claims can be served or service of process can be had during the 5-year, post-dissolution period provided in 805 ILCS 5/12.80, unless such agent resigns or the corporation properly reports a change of registered office or registered agent. For further information on service of process, see Chapter 5 of the Company’s manual, “Mortgage Foreclosures,” by Richard F. Bales and Douglas M. Karlen. 3. Was service had on a limited liability company? Is the limited liability company dissolved? In this regard, see 805 ILCS 180/1-50(a).

A limited liability company may be served by delivering the summons and complaint to the registered agent of the LLC.

When the agent of a limited liability company is served, the examiner should verify the identity of the agent by looking up the LLC on the Illinois Secretary of State’s website, which is www.cyberdriveillinois.com.

Although service on a limited liability company is usually had by serving the agent, 805 ILCS 180/1-50(b) provides that the Illinois Secretary of State is appointed agent under any of the following circumstances:

• When the limited liability company has failed to appoint or maintain a registered agent in the state;

• When the limited liability company’s agent cannot with reasonable diligence be found;

• When the limited liability company has dissolved, the limited liability company has failed to appoint or maintain a registered agent in the state, the limited liability company’s agent cannot with reasonable diligence be found, and the foreclosure case is instituted within 5 years after dissolution.

Service on the Illinois Secretary of State is somewhat detailed; see 805 ILCS 180/1-50(c).

For further information on service of process, see Chapter 5 of the Company’s manual, “Mortgage Foreclosures,” by Richard F. Bales and Douglas M. Karlen.

4. Did the process server fail to personally serve the defaulting mortgagor? If so, does the court case reveal the extent of the “diligent inquiry” and “due inquiry” made in attempting to locate the mortgagor? (See 735 ILCS 5/2-206.)

For example, did the process server try to locate the mortgagor at his place of employment? Is there an address on the foreclosed mortgage? If so, did the server attempt to serve the mortgagor at that address? What is the address where tax bills are sent? Was attempted service made at that address? (U.S. Bank Trust, N.A. v. Colston suggests that unsuccessful service on a defendant at an address supplied by the defendant’s attorney meets both the “diligent inquiry” and “due inquiry” tests.)

5. When service is had by publication, how is the affidavit for service of summons worded?

Is the affidavit worded in the passive voice? For example, does the affidavit state blandly that “attempts were made to serve the homeowner” instead of “I attempted to serve the homeowner?” Does it state that “We attempted to locate the defendant” instead of the more decisive “I attempted to locate the defendant?” If the former in either instance, an underwriter should be consulted.

6. How is the affidavit submitted to support the alternate 735 ILCS 5/2-203.1 worded?

735 ILCS 5/2-203.1 states that the affidavit must include “a specific statement showing that a diligent inquiry as to the location of the individual defendant was made.” This was the fatal problem with the plaintiff’s affidavit in Urban Partnership Bank v. Ragdale. The affiant merely stated, “We don’t know of any other address.” Such a statement does not meet the requirements of the statute, which are noted above. The affiant should have set forth the efforts that affiant made in attempting to locate the address of the defendant.

Title examiners must review 735 ILCS 5/2-203.1 affidavits with this case in mind. The affidavit must describe the diligent inquiry that the affiant made in attempting to locate the defendant.

7. Is the name of the entity to be served, as shown on the affidavit of service, different from the name of the entity actually served?

When service is had on a corporation or limited liability company, the examiner should carefully examine the affidavit of service.

735 ILCS 5/204 concerns service of process on corporations. A corporation is served by delivering a copy of the complaint to either the registered agent of the corporation or any officer or agent of the corporation.

Service of process on a limited liability company is similar to service on a corporation. See 805 ILCS 180/1-50(a); this statute provides that service is had on a LLC by serving either the registered agent of the LLC or upon the Illinois Secretary of State.

The court determined in First Chicago Bank and Trust v. Surgeen Development, 2016 IL App (2d) 150928-U, that service of process was bad because the affidavit of service identified the person to be served as “Surgeen Development LLC Michael R. Konewko R/A.” However, the affidavit of service named the person who was actually served as “Kelly Mullay, the ‘Secretary for [the] Registered Agent.”

The court ruled that the record affirmatively showed a lack of jurisdiction for improper service. Service on a secretary of a registered agent is not proper service on a corporation. The affidavit of service clearly stated that service had been had on Kelly Mullay as secretary of the registered agent. Thus, the affidavit of service affirmatively showed that jurisdiction was lacking.

8. How are the names of the defendants shown on the face of the summons?

In Arch Bay Holdings, LLC-Series 2010B v. Perez, 2015 IL App (2d) 141117, the appellate court determined that the summons was invalid because although both Maria Perez and her husband, Isais Perez, were defendants, the caption of the case noted on the face of the summons listed the defendants as “Isais Perez et al.” Any summons wherein the caption of the case uses the term, “et al.” in describing the defendants is suspect.

9. Who was the process server?

In all counties except for Cook County, a sheriff may employ civilian personnel to serve process. In all counties except for Cook County, an employee of a detective agency may also serve process. But in Cook County, service must be had either by the sheriff or by a special investigator, but only if the investigator is appointed by the state’s attorney or the court. The foreclosure file should include evidence of this appointment. In this regard, see 735 ILCS 5/2-202.

10. When service is had by publication, 735 ILCS 5/2-206 provides that within 10 days of the first publication of the notice, the clerk shall send a copy of the notice by mail to each defendant whose place of residence is stated in the affidavit. Does the record include evidence that the clerk has sent this notice?

If not, keep in mind that 735 ILCS 5/15-1505.6(a) provides that defendants waive their personal jurisdiction objections by participating in the case and failing to file a motion to quash the service of process within 60 days after the earlier of these events: one, the date that the moving party filed an appearance, or two, the date that the moving party participated in a hearing without filing an appearance

Furthermore, 735 ILCS 5/15-1506(b) provides that if the objecting party in a residential foreclosure case files a responsive pleading or a motion (other than a motion for an extension of time to answer or otherwise appear) prior to the filing of a motion in compliance with section 5/15-1506(a), that party waives all objections to the court’s jurisdiction over that party.

11. If service is had on a defaulting mortgagor by publication, and a default judgment is entered against that mortgagor, an underwriter should be consulted. What are the chances that this party could later claim invalid service of process?

The underwriter should review the court file with the above factors in mind. Was there a “diligent inquiry” in ascertaining the defendant’s residence? Was there “due inquiry” in ascertaining the defendant’s whereabouts? If the degree of inquiry is questionable, the underwriter (with the approval of management) may want to consider asking the lender to execute a personal undertaking. The exception would be:

Consequences of the foreclosed mortgagor filing a post-policy petition for relief under 735 ILCS 5/2-1401, alleging improper or defective service of process.

Regarding the post-foreclosure curing of a foreclosure defect due to the failure to name a permissible party, see 735 ILCS 5/15-1603.5, “Strict foreclosure of an omitted subordinate interest.”

Homestead

With Conveyance

I am virtually not concerned about homestead with a conveyance.

See below. As long as everyone is moving out of the house, homestead is waived, “pursuant to the conveyance.”

I discuss it all in the attached.

Dick

735 ILCS 5/12-904 provides three methods of releasing, waiving, or conveying a homestead interest:

No release, waiver or conveyance of the estate so exempted shall be valid, unless the same is in writing, signed by the individual and his or her spouse, if he or she have one, or possession is abandoned or given pursuant to the conveyance. . . .

Again, these three methods are as follows:

No release, waiver or conveyance of the estate so exempted shall be valid, unless

• One, the release, waiver, or conveyance of the estate is in writing and signed by both the individual and spouse, if applicable, or;

• Two, possession is abandoned, or;

• Three, possession is given pursuant to the conveyance. . . .

Last effective date: November 15, 2019

Treatise

Homestead is a real estate concept that is misunderstood by many people in the title insurance industry. It is hoped that this article will serve as a practical guide for the understanding and comprehension of those issues relating to homestead that the title insurance examiner and closer encounters on a day-to-day basis.

Statutory law relative to homestead is set forth in 735 ILCS 5/12-901, hereafter termed "the Homestead Act."

Creation of Homestead

735 ILCS 5/12-901 provides as follows:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence, or in a cooperative that owns property that the individual uses as a residence. That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy or judgment sale for the payment of his or her debts or other purposes and from the laws of conveyance, descent and legacy, except as provided in this Code . . . .

The individual must, one, own or "rightly possess by lease or otherwise" the land, and two, must occupy it as his residence in order to be entitled to a homestead estate. Consider the following examples and note how these two factors determine the existence and ownership of the homestead estate:

Examples of Homestead

• John and Jane both own and occupy a home. Because they both own the home and both live in it, both have a homestead estate.

• John is married to Jane. John alone owns the home in which they both live. Although both live there, only John owns it, and so, only John has the homestead estate.

• John is a bachelor who lives alone in the home he owns. John has a homestead estate.

• John and Jane are not married, but instead, they live together. John alone owns the home in which they live. Despite Justice Heiple’s concurring opinion in First National Bank v. Mohr, 162 Ill.App.3d 584 (1987), which is set forth in part in the footnote below, it is reasonable to state that only John has a homestead estate. Although both John and Jane live in the home, only John owns it.

• John and Jane are married. They both own a home in which they live. They also own a commercial building. John and Jane both have a homestead interest in their home; neither has a homestead interest in the commercial building, as they do not occupy the commercial building as their residence.

• John and Jane are married. John owns the building that they live in. John is an artist. His studio is on the first floor, and they both live upstairs on the second floor. Since in this case John and Jane do occupy this commercial building as their residence, John (because he owns the building) has a homestead interest in it.

• John rents a home from his landlord. John later gets married and Jane, now his spouse, moves in. John has a homestead interest in his rented home because he both occupies it as his residence and possesses it by lease. Jane has no homestead interest; although she lives there, she does not "rightly possess by lease or otherwise" the home.

This construction of the statute is consistent with Illinois case law. See, for example, In re Frank Carver, 2003 WL 23211627 (Bankr. S.D. Ill.), where the bankruptcy court found:

The estate in land to which the homestead right attaches must be supported by title or some ownership interest, and possession alone is insufficient to entitle an individual to claim a homestead.

See also Sterling Savings and Loan Ass’n v. Schultz, 71 Ill. App. 2d 94 (1st Dist. 1966), where the Illinois appellate court held that the non-title holding spouse was “not entitled to a homestead estate based upon naked possession, without any title or right in the real estate.”

Characteristics of Homestead

One does not need to have fee title in order to obtain homestead rights. One may have homestead in a life estate, an equitable estate created by an installment contract, or, as noted earlier, a leasehold estate.

So what exactly is homestead? How can it be defined? If one thinks of real estate as being a bundle of sticks, comprising many interests in land, such as covenants and easements, “homestead” is one of these sticks. Homestead in Illinois is both an estate and an exemption. That is, homestead is an estate (an interest in land) that is exempt from the lien of creditors. It is not just the right of occupancy.

Homestead as an Exemption

735 ILCS 5/12-901 provides that homestead is an exemption that creditors cannot seize in order to satisfy the debts of the party who possesses the homestead interest.

Example: John owns and lives in a home. He meets and eventually marries Jane. Jane moves into John's home. A year later John decides to refinance his current loan by taking out a new mortgage with the local bank. If the homestead rights of John are not properly waived by Jane in the mortgage, then, in the event the mortgage is later foreclosed, the lender might be unable to obtain the full amount of the unpaid debt. That is, $15,000, representing the homestead exemption of John, might have to be set aside.

Homestead as an Estate

735 ILCS 5/12-901 provides that homestead is an estate that is shielded “from the laws of conveyance, descent, and legacy.”

Example: John owns and lives in a home. He meets and eventually marries Jane. Jane moves into John's home. A year later John decides to sell his home. If the homestead rights of John are not properly waived by Jane in the deed or otherwise, the title to this homestead estate would not pass to the grantee of John's deed. Jane might later be able to assert her rights in this estate.

Release, Waiver, or Conveyance of a Homestead Interest

It is obvious from the above two examples that it is important for the title examiner or closer to know how the homestead exemption, or homestead estate, is properly waived. Note that this issue arises in invariably the same situation:

Example: Man and woman are married, but only one spouse owns the residence in which they live. At the closing, the "title holding spouse" wants to convey or mortgage the residence.

The issue is: Does the non-title holding spouse have to sign the deed or mortgage to waive an outstanding homestead estate or exemption? If the answer is yes, then how can this homestead estate or exemption be waived?

735 ILCS 5/12-904 provides three methods of releasing, waiving, or conveying a homestead interest:

No release, waiver or conveyance of the estate so exempted shall be valid, unless the same is in writing, signed by the individual and his or her spouse, if he or she have one, or possession is abandoned or given pursuant to the conveyance. . . .

Again, these three methods are as follows:

No release, waiver or conveyance of the estate so exempted shall be valid, unless

• One, the release, waiver, or conveyance of the estate is in writing and signed by both the individual and spouse, if applicable, or;

• Two, possession is abandoned, or;

• Three, possession is given pursuant to the conveyance. . . .

Release of Homestead: Method Number One

Except when the conveyance is from one spouse to another, any deed (or mortgage) executed by the owner spouse must also be signed by the non-owner spouse. See 765 ILCS 5/27.

Although it is not necessary, the instrument should contain a clause, releasing or waiving the right of homestead.

Note that the non-owner spouse does not have to execute this instrument. For example, if John owns the house in which both he and his wife (Mary) live, a deed or mortgage need not be executed by John and Mary, husband and wife. (Mary may not, for instance, want to warrant the condition of title to property that she does not own. Or, Mary may not want to be personally liable for any mortgage indebtedness). Rather, John alone can execute the deed or mortgage as "John, married to Mary." Then, Mary need only sign the instrument, which should contain a "release of homestead" clause in order to release the applicable homestead interest.

If for some reason the deed or mortgage does not contain such a clause, the title examiner or closer might want to consider adding such a clause, so that the instrument clearly evidences the intent to release or convey homestead and so that it conforms to statutory and case law. For example, a phrase similar to the following may be added above Mary's signature:

I, ____________________, sign this deed (or mortgage) for the sole purpose of waiving or releasing any applicable homestead interest.

Because the non-owner spouse is, in fact, waiving or releasing an interest in land, any signature of the non-owner spouse should be acknowledged.

Note that the statute states that the waiver or release must be signed by both spouses. Therefore, it is possible that a “release of homestead” executed solely by the non-title holding spouse but not part of another document executed by the title holding spouse may be invalid.

Discussion of Method Number One

Example: Bob and Carol are married and live in a home that Bob alone owns. Bob and Carol want to sell the home to Ted and Alice. As Bob owns the home, he will hereafter be called "owner spouse." As Carol does not own the home, she will hereafter be called "non-owner spouse."

As it is Bob, and Bob alone, who both lives in and owns the home, Bob owns the homestead estate. However, for Bob to effectively convey this estate, Carol must execute or otherwise sign the deed. Or, to put it another way, Carol, the non-owner spouse, must sign the deed (or, e.g., a mortgage), but not to release her homestead interest, as she has no homestead interest to release. Rather, the non-owner spouse must sign the instrument in order to waive, release, or convey the homestead interest of the owner spouse. Thus, she must sign the document in order to waive, release, or convey his homestead interest!

Thus, a properly-drafted conveyance of the property will be signed by both Bob and Carol. Bob must execute the deed, as he is owner of the property. Carol must sign the deed in order to release the homestead of Bob.

See also 765 ILCS 5/27:

No deed or other instrument shall be construed as releasing or waiving the right of homestead, unless the same shall contain a clause expressly releasing or waiving such right. And no release or waiver of the right of homestead by the husband or wife shall bind the other spouse unless such other spouse joins in such release or waiver.

An Exception to Method Number One

See 735 ILCS 5/12-904:

If a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.

There is one exception to the necessity of the non-owner spouse's signature. When a conveyance is made by an individual as grantor to his or her spouse, the spouse need not join in the conveyance.

The Rationale of Homestead

To appreciate the reasoning as to the requirement of the non-owner spouse's signature, one must first understand the purpose of the homestead laws. Robert Kratovil and Raymond J. Werner, in their book, Real Estate Law (8th Edition, 1983) lists three principal reasons for these laws.

• The first is the protection of the family against being evicted from its home by the enforcement of creditors' claims. (Homestead is an exemption as well as an estate).

• The second is the traditional concept of providing some protection to the widow after the death of her husband. This concept is beyond the scope of this article.

• The third and final object of the homestead laws is the historical notion of protecting one spouse against the acts of the other spouse. In the past, lawmakers have provided that one spouse cannot convey good title to one’s own home unless the other spouse signs the deed. Thus, the one spouse cannot sell the home against the wishes of the other spouse. (Or in other words, the title holding spouse cannot sell the family home without the consent of the non-title holding spouse.) It is for these reasons that a husband and wife must join in any deed or mortgage of homestead property—with a few exceptions, to be discussed later.

Release of Homestead: Method Number Two:

Homestead can also be released or waived (but not conveyed) pursuant to an abandonment of the property. (That is, the spouse of the titleholder releases the homestead interest of the titleholding spouse by abandoning the property).

Example: Adam and Betty are married but separated. Adam owns the home that he lives in. He wishes to refinance his existing mortgage. Does Betty have to sign the mortgage? Adam assures the title company that there is no hope of reconciliation and that "they will be getting a divorce soon.” Adam may claim that Betty has never lived in the property, and that therefore there is no homestead problem.

Or, to set forth the facts even more simply:

Facts: A and B are married. A buys the home in which A and B live. B moves out. Later, A wants to execute a mortgage of the home.

Issue: Does B have to sign the mortgage in order to waive homestead?

Discussion: All the facts of the situation must be considered before waiving the requirement as to the spouse's signature on the mortgage. If the couple has been separated for ten years, there is probably little risk in not requiring the spouse to execute the mortgage. But what if the couple has been separated for only ten days? What factors should the examiner consider? These include:

• Has the non-title holding spouse ever lived on the property?

• How much time has elapsed since the non-title holding spouse moved out?

• When the non-title holding spouse moved out, what were the surrounding circumstances?

• If one spouse never lived in the property (for example, perhaps one spouse moved out of the family home and bought another house, which is now being mortgaged), how long has the other spouse lived in the home?

• Is the couple’s separation permanent or temporary? What possibility is there of a reconciliation?

• Has the non-title holding spouse established a new homestead? How permanent is the homestead? For example, has the spouse changed his or her driver’s license or voter registration?)

• Is the non-title holding spouse’s present whereabouts known?

• How accurate is the information furnished the examiner? How credible is the party furnishing this information to the examiner? Is the information being furnished by a spouse or by a third party who may not have a complete knowledge of all of the facts?

• Has one of the parties filed for divorce, or are the parties “going to get a divorce?” If the parties have formally filed for divorce, and one of the parties has moved out of the home, the examiner is probably in a good position to waive the requirement as to obtaining that spouse’s signature on the mortgage.

The Ambiguity of Abandonment

There is, unfortunately, an inherent ambiguity in the concept of abandonment of a homestead. There are many old cases that seem to indicate that the intent to abandon the home is the key, that a mere moving out of the home, without the intent to truly abandon it, does not constitute an abandonment of possession. See, e.g., McBride v. Hawthorne, 268 Ill. 456 (1915) and Ketcham v. Ketcham, 269 Ill. 584 (1915).

Illinois case law is replete with unusual decisions, holding that what seems to be abandonment is not necessarily so. For example, in McBride v. Hawthorne, 268 Ill. 456 (1915), the court stated that residing on the homestead premises is not essential in order to prevent abandonment if, when the homesteader leaves, he intends to return and occupy the property. In Brokaw v. Ogle, 170 Ill. 115 (1897) the court noted that a widow does not abandon her homestead because she goes to her daughter's house to be taken care of during an illness and rents the homestead during her absence in order to obtain money to pay the expenses of said illness. In Ketcham v. Ketcham, 269 Ill. 584 (1915) the court stated that the fact that a person leases the land of his homestead after his home thereon burns down, and no longer lives on the homestead, does not constitute an abandonment when there is no evidence of an intent to abandon.

Rule of Title Practice:

Seldom should abandonment be relied upon in order to waive a homestead exception from a title commitment or policy without careful consideration.  The reason for this is the great difficulty in determining abandonment, which is a question of intent.  How does one, e.g., determine if the "separated" wife has truly left her husband and abandoned the property or just temporarily left her spouse for a few days? Title company underwriters must thoughtfully weigh all factors before deciding not to require a spouse’s signature.

An Abandonment Variation

Example: But now change the facts slightly. Unfortunately, Adam and Betty both took title to their home. Adam now wants to refinance (or sell) the home. He tells the examiner that Betty has been gone for at least ten years, and he has no idea where she lives or even if she is still alive.

This is not a homestead issue; this is a title issue. Adam may have to file some kind of quiet title action. Although a title holder can abandon possession of land, one cannot abandon title. Although it is technically possible to adversely possess land as against a true owner, this can only be accomplished by a complete repudiation of the title of this owner. See Carpenter v. Fletcher, 239 Ill. 440 (1909). Furthermore, it is doubtful that a title company would insure title pursuant to such a repudiation.

Release of Homestead: Method Number Three

The homestead can be released if possession is of the land is delivered to a purchaser of the land "pursuant to the conveyance” by the non-title holding spouse.

Example: In 2012 John buys a home in Chicago. In 2014 he marries Jane, who moves into the home. In 2019 John and Jane decide to move to Denver, Colorado. Accordingly, John and Jane put "their" home up for sale. At closing, John, the title holding spouse, delivers a warranty deed signed by John alone. Jane, the non-title holding spouse, is unable to sign the deed, as she is already in route to Denver.

In the above example, it is clear that Jane has given up possession of the property in question. By doing so, she has released her spouse’s homestead interest. On a case-by-case basis, each situation judged on its own merits, one may choose to rely on this method as a means of waiving a homestead exception from a title policy. Although it is not necessary, the parties may want to consider adding a "release of homestead" statement to the deed. For example:

Possession by the non-title holding spouse is surrendered pursuant to and concurrently with this conveyance, sufficient to convey and release homestead, as provided in 735 ILCS 5/12-904.

Before waiving an exception relating to homestead, the title examiner or closer should verify that the non-title holding spouse is giving up possession of the land.

Rule of Title Practice

For the title examiner, the issue of homestead usually arises as follows: The application for a title commitment comes in, showing that John and Jane Doe, husband and wife, are the owners. However, the title search shows that only one spouse owns the property. When the title examiner is faced with these or similar facts, the examiner should show the following exception on the title commitment:

If applicable, the spouse of the party in title should join in the conveyance or mortgage for the purpose of releasing, waiving, or conveying the title holder's homestead interest.

Note the words, "if applicable,” in the title exception. Remember that the spouse needs to join in the conveyance or mortgage only if the property is the owner's homestead. If the title search reveals that John and Jane Doe are married, and John alone owns the property, but it is established that the property is not the residence of the owner, then the spouse of the title holder does not have to join in the conveyance or mortgage. To prevent future questions as to the transaction, however, it is acceptable (but not necessary) to write on the document, "this is not homestead property" or words to that effect. By doing this, future title examiners will realize that the property is not homestead property and, therefore, not question the absence of a spouse's signature.

Example: John owns his home. He wants to convey it to his wife. Does his wife have to sign the deed in order to release any homestead interest?

No, as noted above, John’s wife does not have to sign the deed to her husband in order to waive homestead. See 735 ILCS 5/12-904, which states: “But if a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.”

Homestead and a Spouse Not in Possession of the Home

Sometimes a potential homestead problem may not be easy to recognize. Consider the following example:

Example: Oscar and Della Renta are husband and wife. They are separated. Oscar, while he is separated from his wife, purchases a home, paying cash for it. Oscar lives there by himself for six months. He then finds out that his employer is transferring him across the country. He puts his home up for sale. It is obvious that at the time of closing, Oscar, and only Oscar, one, bought the house, and two, lived in the house.

Question: Does Della need to sign the deed?

Answer: At first one might think that Della has to sign the deed. After all, Oscar is still married, owns the home, and lives in it, thus meeting all the statutory requirements, previously discussed, of the Homestead Act.

However, Illinois case law indicates that the spouse of the title holder must reside with the titleholder in the titleholder's home in order for the Homestead Act to be operative. For example, in Dixon v. Moller, 42 Ill. App. 3d 688 (1976), the court noted that the chief object of the homestead laws is to shelter the family. In Rendleman v. Rendleman, 118 Ill. 257 at 264 (1886), the Supreme Court stated that “the holder of the title cannot wrongfully deprive the other of the enjoyment of the homestead premises." The Supreme Court in Brod v. Brod, 390 Ill. 312 at 323 (1945) noted the following:

The law and public policy of this state, as exemplified by [the Homestead Act] and the many decisions in this state thereunder, have been and are to insure to the family the possession and enjoyment of a home.

These and other similar cases indicate that Della would not have to sign the deed. Della had never lived in Oscar's home; consequently, Oscar, by selling the property, would not be depriving her of "the possession and enjoyment of a home." And of course, Oscar, the only occupant of the home, is delivering possession of the home pursuant to the conveyance.

But again, now change the facts slightly. What if Oscar, the title holder, had abandoned the property? This would obviously be a problem. The Company needs a deed from the title holder before it can insure a sale of the property. One cannot easily abandon title to the land.

And now change the facts again:

Adam and Betty are married. Adam owns a home in DuPage County, Illinois. Betty does not own the home. Because of her job, Betty lives out of state, and she has never lived in Adam’s home. Adam now wants to refinance his purchase money mortgage. Does Betty have to sign the mortgage in order to waive homestead?

Answer: What if Betty eventually moves to Illinois and into Adam’s house a year after he signs the mortgage? And what if, a year later, the mortgage goes into foreclosure? The better practice is that Betty sign the mortgage. In the event of a mortgage foreclosure, Adam’s attorney will probably argue that $15,000, representing Betty’s homestead, should be set aside from the mortgage foreclosure.

The Homestead Checklist

It might be helpful for the closer or examiner to adopt a "checklist" in deciding whether or not a homestead problem exists. Title personnel might want to consider the following "two pronged" test and ask themselves the following:

1. Who owns the property? (Remember, all owners of the property must execute any deed or mortgage. There are no exceptions to this rule).

2. If the fact situation involves a title holding spouse and a non-title holding spouse, does the title holding spouse reside at the property?

a) If the answer to question "2" is "no," then a non-title holding spouse's signature on a deed or mortgage is not necessary.

(b) If the answer to question "2" is "yes," then, generally speaking, the non-title holding spouse should sign the deed or mortgage, conveying or releasing the homestead interest of his or her spouse.

(c) If the title holding spouse resides on the property, but the non-title holding spouse does not, then the individual facts of the situation should be considered before waiving the requirement as to the non-title holding spouse's signature on a deed or mortgage on the basis that the spouse would not be deprived of "the possession and enjoyment of a home." (Factors to consider include whether or not the non-title holding spouse had ever lived in the home, the length of time the couple had been separated, and the nature—permanent or temporary—of the separation.)

Note that part two of the above checklist refers to the requirement of the title holding spouse residing at the property. The question may arise, then: How can homestead be an issue at closing, when, invariably, the purchaser is not yet residing at the property, and hence, not satisfying this requirement of the above two-pronged test? The answer is found in Illinois case law; the purchaser of property, with the intention of occupying it as a homestead, followed within a reasonable time by the actual occupancy thereof as a residence, creates an estate of homestead, even before there is an actual occupancy of the home.

Homestead and the Illinois Land Trust

The Homestead Act is applicable to personal property. 735 ILCS 5/12-901 states:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property. . . .

The statute refers to personal property. The beneficial interest in a land trust is personal property. See Chicago Federal Savings and Loan Association v. Cacciatore, 25 Ill. 2d 535 (1962). Therefore, any assignment of said beneficial interest should contain, if applicable, a waiver of homestead rights.

But assume that title to the land is in an Illinois land trust:

Example: John buys a home. He takes title pursuant to an Illinois trust—the Chicago Title Land Trust Company, as trustee under trust number 12345. A year later John marries Jane. A year after they get married, John and Jane decided to have a mortgage executed of the family home. Does Jane have to sign the mortgage in order to waive homestead?

No, Jane does not have to sign the mortgage. There is, generally speaking, no homestead issue concerning land trust property. The title examiner need not worry about a mortgage or trustee's deed containing a waiver of homestead. The reasons for this are as follows:

• The beneficial interest in a land trust is personal property, and the trustee’s deed conveys real estate.

• Even assuming for the moment that the two-pronged test set forth in 735 ILCS 5/12-901 is applicable, the trustee, not the trust beneficiary, is the owner of the real estate, and he does not qualify for the homestead estate, as he does not occupy the property as his residence.

• The beneficiary, who does, most likely, occupy the property, does not own the property. The beneficiary owns only the beneficial interest in the land trust, which is a personal property interest, not a real property interest.

735 ILCS 5/12-901 sets forth the two requirements necessary in order to possess a homestead estate in real property:

• The individual must "own or rightly possess by lease or otherwise" the property;

• The individual must occupy it as his residence.

Because neither the trustee nor the beneficiary can satisfy both requirements, there is, generally speaking, no homestead issue relating to real estate conveyed via a trustee's deed out of a land trust.

Homestead and the Personal (Living) Trust

For the above reasons, it appears that this "no homestead with a trustee's deed" rule is equally applicable to both commercial land trusts and personal trusts, or living trusts.

Example: Samantha and Darrin own a home. For purposes of estate planning, Darrin owns the home as trustee of the Samantha and Darrin living trust. If Darrin, as trustee, were to convey or mortgage the property, does Samantha have to join in the deed or mortgage?

Because of 735 ILCS 5/12-901, homestead should not be an issue in this type of situation. This section deals with an individual owning land and occupying it as his or her residence. One might reasonably argue that a legal fiction is created here in that Darrin the individual is an entity separate and apart from Darrin the trustee. Darrin the individual occupies the land, while Darrin the trustee owns it. Therefore, both parts of the Section 901 two-pronged test are not met. That is, although Darrin the trustee owns the home, Darrin the individual occupies it. These are legally two separate people.

Remember that any conveyance into either an Illinois land trust or a personal trust must waive or convey any applicable homestead interest. If it does not, any subsequent trustee's deed does not "cure" the problem of the outstanding homestead interest.

Note, though, that many lenders will not allow their mortgages to be executed by land trustees. Their rationale, however, does not involve homestead. Rather, it appears to stem from the legal characteristics of the Illinois land trust. Many lenders are apparently concerned that property can be purchased and mortgaged through a land trust, and later, the beneficial interest can be assigned to a third party, with nothing ever subsequently placed of record in the property's chain of title that will alert the mortgagee that the original "owner/mortgagor" no longer has an interest in the property.

Homestead: Lender Considerations

The issue of homestead involves special considerations for the lender. This is because the problem of an outstanding homestead estate is usually not a major issue for the title insurer. Possession is virtually always surrendered concurrently with delivery of the deed; as stated earlier, this is an effective means of extinguishing any homestead interest.

The problem of an outstanding homestead exemption is, though, a different matter. Assume that John and Jane buy a home. At the closing the seller signs a deed whereby John and Jane take title to the home as tenants by the entirety. John executes the purchase money mortgage, but Jane signs the mortgage only to waive homestead. A few years later, the mortgage is foreclosed. Only then does their attorney realize that the mortgage was improperly executed. Their attorney immediately files a motion in the foreclosure proceeding, asking that the court declare the mortgage to be invalid. The title company that insured the mortgage is immediately tendered a claim.

The Common Homestead Situation Involving a Lender

Adam and Betty are husband and wife. Their friends are Charles and Dianne, who are also husband and wife. The two couples decide to get together and buy investment property. Even though it is not "homestead" property, the "spouses," since they own the property, have to execute any mortgage of the property. Otherwise, in the event of foreclosure, the lender would succeed to only a 50% interest in the property.

Clearly this is not a homestead issue. Since four people own the property, the same four people must mortgage the property. The examiner must remember the first portion of the two-pronged "homestead checklist" mentioned earlier. In any mortgage situation, all owners of the property must execute the mortgage.

The closer must be aware of this situation, as this issue often arises. Usually, the fact situation is something like this:

The Common Example: A Trap for the Unwary Closer

Example Number One:

John and Jane will take title to property as joint tenants. The property may or may not be homestead property. The title company will close the transaction. The lender’s closing instructions state that John is to execute the mortgage but that Jane may sign the mortgage, but just to waive homestead.

Example Number Two:

John and Jane will take title to property as tenants by the entirety. The property may or may not be homestead property. The title company will close the transaction. The lender’s closing instructions state that John is to execute the mortgage but that Jane may sign the mortgage, but just to waive homestead.

Example Number One: 

This is unacceptable because, under Harmes v. Sprague, 105 Ill.2d 215, 473 N.E.2d 930, 85 Ill. Dec. 331 (1984), a mortgage given by one joint tenant of his interest in the property does not sever a joint tenancy. As such, a surviving joint tenant's right of survivorship becomes operative upon the death of the joint tenant who executed the mortgage. Thus, upon the death of the joint tenant who executed the mortgage, the surviving joint tenant becomes the sole owner of the property, and the mortgage executed by the deceased joint tenant does not remain as a lien on the surviving joint tenant's property.

In other words: John and Jane buy a home, taking title in joint tenancy. John executes the purchase money mortgage, but Jane signs the mortgage only to waive homestead. A year later John dies. Jane owns the home as a surviving joint tenant, free and clear of the mortgage.

Insuring a mortgage that is executed in this manner could result in a claim for a title company.

Example Number Two:

This example is equally unacceptable. If John and Jane own their home as tenants by the entirety, then pursuant to 765 ILCS 1005/1c, the mortgage may be completely invalid! This Illinois statute states that “no deed, contract for deed, mortgage, or lease of homestead property held in tenancy by the entirety shall be effective unless signed by both tenants.”

Remember that all owners of the land must always execute the mortgage! This is the case, regardless of the tenancy by which people own property. Thus, if Adam and Betty own the land as tenants in common, joint tenancy, or tenancy by the entirety, both Adam and Betty must execute the mortgage. There are no exceptions to this rule.

Lender Issues: Exceptions to Homestead

There may be instances in which an apparent homestead problem is not really an issue at all. This stems from 735 ILCS 5/12-903:

No property shall [by virtue of the Homestead Act] be exempt. . . for a debt or liability incurred for the purchase or improvement thereof. . . .

In other words: When a transaction involves either a purchase money mortgage or the construction of improvements to vacant land, said transaction falls outside the provisions of the previously-discussed statutes relating to homestead. Consequently, the issue of homestead becomes irrelevant.

One: The Purchase Money Mortgage Exception

A purchase money mortgage is a mortgage executed for the purpose of purchasing property. 735 ILCS 5/12-903 indicates that the non-title holding spouse of a mortgagor who is executing a mortgage used to buy real estate does not have to sign the mortgage to waive homestead.

What is the Rationale for this Statute?

In a purchase money mortgage transaction, the mortgage is executed and disbursed at the same time title is transferred. The facts create a “but for” test. “But for” the mortgage, the buyer would be unable to purchase the property. Thus, the land, when conveyed to the buyer, is transferred, already burdened by the mortgage. Hence, the lien of any homestead interest that would have been created would be subordinate to the lien of the pre-existing mortgage. Because any homestead interest that would have been created would be subordinate to the mortgage, there is no reason for the mortgagor to waive this homestead exemption in said mortgage.

Note that Illinois case law indicates that if one assumes an existing mortgage to purchase property, and the assumption and the purchase are both part of the same transaction, this mortgage assumption is considered a purchase money mortgage.

Rule of Title Practice for the Purchase Money Mortgage Exception

The examiner may want to consider the following guidelines when asked to waive a possible homestead issue on the basis that the mortgage in question is a purchase money mortgage:

The purpose of the loan should be to purchase the residence. All of the mortgage proceeds must be used to buy the property and to pay for charges relative thereto, such as title fees, recording charges, and document transfer stamps. In other words, the buyer cannot directly receive any proceeds from the closing.

Why can’t the buyer receive any proceeds from the closing? The statute provides that the homestead issue is not applicable as to a mortgage for the purchase or improvement of a residence. If a mortgagor takes out a mortgage, one-half of which is used to buy a home and one-half of which is used to buy a car, the mortgage is no longer a "debt or liability incurred for the purchase or improvement [of property]."

Sometimes this doctrine is not easy to understand. Consider this following example:

Example: Adam and Betty are married. Betty is buying the family home, as Adam is out of the country. Betty takes title in her own name. She is getting a mortgage in order to buy the home. Betty made a large earnest money deposit, and as a result, she is getting cash back at closing. The cash she is getting back is less than the amount of the earnest money deposit. Is there a problem?

No, there is not a problem, as long as the amount of cash back is less than the amount of the earnest money deposit. As long as Betty is getting back less than the amount of her earnest money deposit, it is as if the mortgage is still a purchase money mortgage.

The Purchase Money Mortgage/Home Equity Mortgage Combination

Prior to 2008, lenders were funding the purchase of homes with 100% mortgage financing. Consider this example:

Adam and Betty are married. They decide to buy a home with 100% financing. Only Adam takes title to the land. At closing Adam signs two mortgages, a purchase money mortgage and a home equity mortgage. Betty does not attend the closing. Is there a problem?

Yes, there is a problem. Betty does not have to sign the purchase money mortgage because of the statutory exception. But a home equity loan has no such statutory protection. Disbursements from a home equity loan (also called a revolving line of credit) can be made months after closing. Thus, a home equity loan is not a purchase money mortgage. Betty must sign the home equity mortgage.

Two: The Construction of a Residence Exception

As there is no "residence" for the "owner" to "occupy," there is no homestead estate that arises with this type of loan. Thus, a non-title holding spouse does not have to join in the execution of this type of construction mortgage. Any final "end" loan, however, taken out to pay off the new construction mortgage, may require the signature of the non-title holding spouse.

An Issue: The Construction of Improvements to an Existing Residence Exception

Again, 735 ILCS 5/12-903 reads as follows:

No property shall [by virtue of the Homestead Act] be exempt. . . for a debt or liability incurred for the purchase or improvement thereof. . . .

The statute suggests that a mortgage funded for the construction of additional improvements to an existing residence is exempt from the statutes relating to homestead.

Such a conclusion may be erroneous. The purchase money mortgage exception and the construction of a residence exception “make sense.” It does not make sense, however, that a mortgage merely used to pay for additional improvements to an existing residence should be exempt from the homestead statutes. The statute refers to a mortgage for the improvement of property. It is very possible that this statutory language refers to the construction of improvements to vacant land and not to the construction of improvements to an existing home. Therefore, if the purpose of the loan is for the construction of improvements to an existing residence, the non-title holding spouse should join in the mortgage in order to waive a possible homestead interest.

Three: The Vacant Land Exception

There is no statutory exception for the mortgage of vacant land. Clearly, though, homestead is not an issue with vacant land. Therefore, the non-title holding spouse does not have to join in the mortgage of vacant land to waive a possible homestead interest.

The Homestead Trap: When the Non-Title Holding Spouse Must Sign the Mortgage: Example: A Refinance of an Existing Mortgage of a Residence

Assuming that the circumstances give rise to a homestead issue, the non-title holding spouse must join in the signing of the refinancing mortgage of a residence in order to waive the homestead interest. Although purchase money mortgages are exempted from the application of the Homestead Act, the Act makes no such provisions for refinancing mortgages.

Example:

John and Jane are married. In 2015 John and Jane decide to buy a home. Because Jane has credit problems, only John takes title to the home. John buys the home with a purchase money mortgage. At closing, only John executes the mortgage. Jane does not sign the mortgage. This is acceptable, because the mortgage is a purchase money mortgage. In 2019 John and Jane decide to refinance this mortgage. Because there are no homestead exceptions to a refinance mortgage, John must execute the mortgage and Jane must waive homestead.

The Homestead Trap: When the Non-Title Holding Spouse Must Sign the Mortgage: Example: A Second, Third, Etc., Mortgage of a Residence

Assuming that the circumstances give rise to a homestead issue, the non-title holding spouse must join in the signing of a second, third, etc., mortgage of a residence in order to waive the homestead interest. Although purchase money mortgages are exempted from the application of the Homestead Act, the Act makes no such provisions for a second, third, etc. mortgage.

Loan Policy Homestead Endorsements

There are two endorsements available to lenders that relate to homestead. This first endorsement insures the lender against loss in the event that its mortgage is not prior to any outstanding homestead rights of the spouse of the mortgagor. It is sometimes used in a non-purchase money mortgage situation when, for whatever reason, the title company is not requiring the spouse to sign the mortgage:

The Company hereby insures the insured against loss or damage that the insured shall sustain by reason of the entry of a final order of a court of competent jurisdiction, denying the priority of the lien of the mortgage described in Schedule A over any homestead rights of the mortgagor or the spouse of the mortgagor.

This second endorsement is often used when the title company relies on the “purchase money mortgage exception” and does not require the spouse of the mortgagor to sign the mortgage:

The Company hereby insures the insured against loss or damage that the insured shall sustain by reason of the possible outstanding homestead estate in the mortgagor or the spouse of the mortgagor by reason of the failure of the spouse of the mortgagor to sign the mortgage described in Schedule A.

Other Issues

Conveyance to Self and Third Party

Question: Husband owns the home. Husband wants to convey the home to himself and his son. Should Wife join in the conveyance?

Answer: The statute (735 ILCS 5/12-904) states that “if a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.”

But here the conveyance is not being made to the spouse; rather, the proposed conveyance is to the husband and the couple’s son. It would appear, then, that Wife should join in the conveyance.

Dissolution of Marriage

See 735 ILCS 5/12-905: In case of a dissolution of marriage, the court granting the dissolution of marriage may dispose of the homestead estate according to the equities of the case.”

The Homestead Checklist (set forth again for future reference)

1. Who owns the property? (Remember, all owners of the property must execute any deed or mortgage. There are no exceptions to this rule).

2. If the fact situation involves a title holding spouse and a non-title holding spouse, does the title holding spouse reside at the property?

a) If the answer to question "2" is "no," then a non-title holding spouse's signature on a deed or mortgage is not necessary.

(b) If the answer to question "2" is "yes," then, generally speaking, the non-title holding spouse should sign the deed or mortgage, conveying or releasing the homestead interest of his or her spouse.

(c) If the title holding spouse resides on the property, but the non-title holding spouse does not, then the individual facts of the situation should be considered before waiving the requirement as to the non-title holding spouse's signature on a deed or mortgage on the basis that the spouse would not be deprived of "the possession and enjoyment of a home." (Factors to consider include whether or not the non-title holding spouse had ever lived in the home, the length of time the couple had been separated, and the nature—permanent or temporary—of the separation.

Mortgage Execution and Homestead Issues

Part I: The Rule

The number one rule is: If you own it, you have to mortgage it. That is, all owners of the land must execute any mortgage of the land. An owner of the land cannot just sign the mortgage in order to waive homestead.

Example: John and Jane are married. They are buying their first home. The seller is Fred Jones. The closer looks at the deed. The deed indicates that Fred Jones, a bachelor, is conveying the land to John and Jane, husband and wife.

The closer now looks at the mortgage. The first page of the mortgage indicates that the mortgagor is John, a married person. The closer looks at the signature page of the mortgage. The closer sees that Jane is signing the mortgage, but Jane is signing only to waive homestead. Is there a problem?

Yes, there is a problem. This is not a homestead issue; this is a title issue. John and Jane are taking title to their home. All owners of the land must execute the mortgage as borrowers and mortgagors.

Why? The 2006 ALTA loan policy insures the validity of the mortgage. If John and Jane own the land, but if only John executes the mortgage, the lender has a lien on only a 50% interest in the land. If this mortgage were foreclosed, and if a sheriff’s deed were eventually issued, the deed would convey only John’s 50% interest in the land. The lender and Jane would own the home as tenants in common. This is obviously not what the lender intended when it prepared the loan documents for closing.

Court Cases

Phillips v. Phillips, 74 Ill. 2d 27, 383 N.E. 2d 973 (1978); the homestead exemption is not available as between co-tenants, even if one of the owners is otherwise entitled to the homestead exemption.

Miscellaneous

See 735 ILCS 5/12-1003; it appears that a spouse of a deceased homeowner has homestead rights:

When the head of a family dies, deserts or does not reside with the same, the family shall be entitled to and receive all the benefit and privileges which are by Part 10 of Article XII of this Act conferred upon the head of a family residing with the same.

Part II: Homestead: The Short Course

What is homestead? And when is homestead an issue?

Most people think homestead is an inchoate “right of possession” that a non-title holding spouse has in land that is owned by the title holding spouse. That is, they believe that the following example is a valid example of homestead in Illinois:

Example: John and Jane are married. Both of them live in the home that only John owns. In order for John to effectively convey or mortgage his home, Jane must sign the deed or mortgage in order to waive Jane’s homestead rights.

But this is not really the case. 735 ILCS 5/12-901 provides as follows:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence. . . . That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts. . . .

In other words (and broadly speaking), in order to have a homestead interest, one must both own the home and live in the home. A non-title holding spouse who only lives in the home but who has no ownership interest in the home does not have a homestead interest in the home.

The following, then, is an example of homestead:

Example: John and Jane are married. Both of them live in the home that only John owns. In order for John to effectively convey or mortgage his home, Jane must sign the deed or mortgage in order to waive John’s homestead rights.

Note, though, that the net effect is the same in both examples.

Homestead will be an issue when two people are married (or have entered into a civil union), but only one spouse or partner owns the family home in which the two people live. The following question will always be the issue:

Question: In a residential real estate transaction involving a married couple (or two people who have entered into a civil union), and only one spouse or partner owns the family home in which the two people live, does the non-title holding spouse have to sign the deed or mortgage in order to waive any applicable outstanding homestead interest?

Answer: It Depends.

Ideally, and in a perfect world, it is appropriate for the non-title holding spouse to always sign the deed or mortgage.

But we don’t live in a perfect world. And so if that spouse is not at the closing table, here are the general rules:

General Rule for the Sale of Property:

The Rule

Generally speaking, homestead should not be an issue for the sale of a home. The reason for this is not invariably both spouses are giving up possession of the home, and giving up possession is a valid way of releasing one’s homestead interest.

Facts: John and Jane are married. Only John owns the family home. The couple is selling the family home and buying a new home. Only John is at the closing; Jane is at the new home, directing the movers. John and Jane have already moved out of their old home. The old home is completely vacant.

Question: Does Jane have to sign the deed that is conveying the old home to the new purchaser?

Answer: Jane (the non-title holding spouse) does not have to sign the deed. Why? Because she has clearly given up possession of the home. The non-title holding spouse can waive homestead in a deed situation by either signing the deed or by giving up possession of the property when the title holding spouse executes the deed. The Illinois statutes provide for this. See 735 ILCS 5/12-904.

(But if the non-title holding spouse is at the closing, then there is nothing wrong in the closer asking that the non-title holding spouse sign the deed.)

And of course, all owners of property must execute the deed (or a mortgage) of the property. This is a title issue; it is not a homestead issue.

General Rule for the Execution of a Purchase Money Mortgage

The Rule

Homestead should not be an issue when the married title holding spouse is executing a purchase money mortgage and all the mortgage proceeds are being used to purchase the home and pay closing costs, attorney’s fees, etc.

Facts: John and Jane are married. They want to buy their first home. Jane has a $50,000 judgment against her, and so she does not want to take title to the home. Only John will take title to the home. The couple needs to get a “purchase money mortgage” in order to buy the property. (A purchase money mortgage is a mortgage wherein all of the mortgage proceeds are used to purchase property.) Because John will be the owner, John must execute the mortgage.

Question: But does Jane have to sign the mortgage in order to waive homestead?

Answer: Jane does not have to sign the mortgage as long as all the mortgage proceeds are being used to pay for the purchase of the home and to pay for costs relative to the home purchase, such as attorney’s fees and closing costs.

But note: If the mortgage proceeds are being used for other purposes, such as the paying off of a judgment against John, then the mortgage is not a true purchase money mortgage

Under the latter set of facts, why isn’t this mortgage a purchase money mortgage? The mortgage is not a purchase money mortgage because the mortgage money is not being used to purchase property; the money is being used to purchase property and to pay off a judgment. Therefore, Jane (the non-title holding spouse) has to sign the mortgage to waive homestead. (But again, even if the mortgage is a true purchase money mortgage, if the non-title holding spouse is at the closing, it is perfect acceptable to have that spouse sign the mortgage.)

General Rules for a Refinance Mortgage or Second, Third, etc. Mortgage:

The Rule

Homestead will always be an issue when the married title holding spouse is executing a refinance mortgage or a second or subsequent mortgage of the family home.

Facts: John and Jane are married. Their home was purchased in 2014. They have both been living in the home since 2014. At the time the home was purchased, Jane had a $50,000 judgment against her. For that reason, only John took title to their home. Because they bought their home with a purchase money mortgage, only John had to execute the mortgage. Jane did not have to sign the mortgage to waive homestead.

It is now 2019. John and Jane want to take advantage of low interest rates and refinance their existing mortgage.

Question: Does Jane (the non-title holding spouse) have to sign the new mortgage in order to waive homestead?

Answer: Yes. There are no exceptions to this rule, assuming that both John and Jane are living in the home.

Why Must the Non-Title Holding Spouse Sign a Refinance or Second Mortgage?

Review the homestead statute, which is at 735 ILCS 5/12-901:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence. . . . That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts. . . .

Assume that John and Jane and married, but only John owns the family home. John and Jane refinance their existing home. Assume that only John executes the mortgage, and Jane does not sign the mortgage to waive homestead. If that mortgage is later foreclosed, the lender would not obtain all of the foreclosure sale proceeds. $15,000 (representing John’s homestead interest) would have to be set aside from the proceeds of the foreclosure sale.

Furthermore, there is no exception in the statutes for a refinance or second mortgage of homestead property.

General Rule When Both the Husband and Wife Own the Home

When both the husband and wife own the home, both the husband and wife must execute any mortgage of the property and any deed of the property. Homestead is not an issue when both the husband and wife own the home—or any other property. That is, this is a title issue; this is not a homestead issue.

PART III: Mortgage Execution Problems

Part I set forth the basic problem that arises when an owner of the property does not execute a mortgage. But there are other issues, too.

Facts:

John and Jane are married. Both John and Jane own the home in which they live. The closing package is delivered to the title company office, and the lender has prepared the mortgage so that only John will execute the mortgage but Jane will waive homestead.

Question:

What are the problems?

Answer:

The one basic problem is this: Under this set of facts, both spouses own the home. Remember the one important rule, as set forth above: All owners of real estate (not just the family home, but any real estate) must execute the mortgage! It is not enough that one spouse executes the mortgage and the other spouse just signs the mortgage to waive homestead.

The other issues depend in part on how John and Jane own their home:

• If John and Jane own their home as tenants in common, then the mortgage is a lien on only 50% of the land.

• If John and Jane own their home as joint tenants, then the mortgage would also be a lien on only a 50% interest in the land. But if John (the only person who executed the mortgage) dies before Jane, then pursuant to the Illinois Supreme Court decision, Harmes v. Sprague, 105 Ill.2d 215, 473 N.E.2d 930, 85 Ill. Dec. 331 (1984), Jane would not only own the home as a surviving joint tenant, she would own the home free and clear of the mortgage.

• If John and Jane own their home as tenants by the entirety, then pursuant to 765 ILCS 1005/1c, the mortgage may be completely invalid! This Illinois statute states that “no deed, contract for deed, mortgage, or lease of homestead property held in tenancy by the entirety shall be effective unless signed by both tenants.”

Note that the problem of improper mortgage execution is not just a national title claims issue. Consider this court case; this is a DuPage County appellate court case; see Deutsche Bank National Trust Company v. Dolci, 2012 IL App (2d) 111275-U. See also GMAC Mortgage v. Arrigo, 8 N.E.3d 621 (2014).

PART IV: Some Sample Homestead Fact Patterns

Homestead issues can arise in so many different ways. Consider the following examples:

Facts: John and Jane are married. Only John owns the home in which they live. John bought the home before the couple got married, and so the one existing mortgage on the property is a purchase money mortgage that John took out as an unmarried person when he bought the property. What if . . . .

• John and Jane decide to refinance “their” mortgage. Even though only John owns the home, Jane must also sign the new mortgage to waive any outstanding homestead interest. She does not have to execute the mortgage as mortgagor; she only has to sign the new refinance mortgage.

• John and Jane decide to take out a second mortgage. Even though only John owns the home, Jane again must also sign this new second mortgage to waive any outstanding homestead interest.

• John and Jane decide to sell the home. Only John attends the closing. Jane has not pre-signed the deed. In this case, the closer should verify that Jane is delivering possession of the land pursuant to the conveyance— the closer should make sure that Jane (the non-title holding spouse) has willingly moving out of the home. (The closer should always ask to make sure that the non-title holding spouse is giving up possession of the property.) If this is the case, the closer can accept the deed, even though only John has signed it. Jane does not have to execute the deed, and Jane does not have to sign the deed to waive any outstanding homestead interest. However, if Jane, the non-title holding spouse, is at the closing, there is nothing wrong with asking Jane to sign the deed to waive homestead. (But if both John and Jane had owned the home, then both John and Jane would have to execute the deed.)

• John and Jane then decide to buy a new home. Again, only John takes title to the property. At the closing, only John is shown as the mortgagor on the mortgage. In this case, the closer should verify that all loan proceeds are being used to purchase the home and to pay for ancillary closing costs. If this mortgage is a true purchase money mortgage, it is all right if only John executes it. Jane does not have to execute the mortgage and Jane does not have to sign the mortgage to waive any outstanding homestead interest. (But the closer must remember that if John and Jane later decide to refinance or obtain a second mortgage, Jane will have to sign the mortgage in order to waive any outstanding homestead interest. Also, the closer should make sure that the new lender does not have any special requirements concerning Jane signing this purchase money mortgage.)

• Same facts as immediately above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. During the closing, the closer realizes that the mortgage is a revolving credit mortgage. A revolving credit mortgage is not a true purchase money mortgage. Months after the closing, John could draw on this mortgage and obtain additional mortgage funds. Because it is possible that the mortgage money may not be used solely to buy the home, Jane must sign the mortgage in order to waive homestead.

• Same facts as immediately above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. During the closing the closer realizes that there is a first mortgage and a second mortgage in the closing package. Both mortgages are being used to purchase the property. However, the second mortgage is a revolving credit mortgage. The second mortgage may not be a true purchase money mortgage. Even if the second mortgage is totally disbursed at closing, John and Jane could later repay back some of the money that was disbursed at closing. Then, months after the closing, John could draw on this second mortgage and withdraw additional mortgage funds. Because this second mortgage may not be used solely to buy the home, it may not be a purchase money mortgage. Thus, in this situation Jane does not have to sign the first mortgage. However, Jane does have to sign the second mortgage in order to waive any outstanding homestead interest. Why is this the case? The second mortgage is not a true purchase money mortgage.

• Again, same facts as above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. As the closer examines the closing statement, the closer realizes that the closer is being asked to pay off John’s $10,000 IRS lien. As mortgage money will be used in part to pay off the IRS lien (and not just purchase the home), the mortgage is not a purchase money mortgage. Jane must sign the mortgage in order to waive homestead.

• Again, same facts as above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. At the closing the closer realizes that John is getting cash back from the mortgage. Thus, all the mortgage money is not being used to buy the home; some of the money is being given back to John. This is not a purchase money mortgage. Jane must sign the mortgage in order to waive homestead. John’s attorney argues with the closer; the attorney offers to have John pay the excess money back to the lender as a mortgage payment. This won’t solve the problem. A purchase money mortgage is a mortgage used to purchase property; a purchase money mortgage is not a mortgage where part of the mortgage money is used to purchase the property and part of the money is used to make a mortgage payment.

• In the above situation, assume that John was getting back $1,000. Some title people feel that John’s mortgage would still be a purchase money mortgage, except for that $1,000. Thus, they argue, the title risk is a risk of no more than $1,000. Other title people are of the opinion that a mortgage either is or is not a purchase money mortgage; there is no middle ground. To them, the risk is much greater—in this example, the risk would be $15,000, or the amount of the homestead exemption.

• Now change the facts completely. John and Jane were buying a new home, but that transaction fell apart, and they are moving forward, buying a new and different home. John and Jane are taking title in joint tenancy. The lender tells the closer that only John needs to execute the mortgage as a mortgagor, but that Jane simply needs to sign the mortgage “to waive homestead.” This is incorrect. Because both John and Jane are taking title, both John and Jane must execute the mortgage as well. That is, Jane must execute the mortgage and not just sign the mortgage to waive homestead.

Rule of Title Practice: All people who own the property (any property, not just the family home) have to mortgage the property. This really isn’t a homestead issue; it is a title issue. Otherwise, in the example immediately above, the lender has a mortgage on only a 50% interest in the land.

• But again, at the last minute, this transaction also falls through, and now John and Jane decide to buy a new and different home. John and Jane decide to take title to this new home as trustees of a living trust. The mortgage presented at closing shows John and Jane, individually, as mortgagors. This is not correct. The owners’ names must be the same as the mortgagors’ names. Since John and Jane, as trustees, own the home, John and Jane, as trustees, must execute the mortgage.

Rule of Title Practice: When the closer gets the deed and mortgage, the closer must compare the grantee(s) on the deed to the mortgagor(s) on the mortgage. The names must be identical! (But see also the paragraph immediately below.)

• John and Jane’s lender will not allow John and Jane to take title as trustees of a living trust. Therefore, John and Jane decide to take title as John and Jane, individually. The lender is asking that John’s parents, Fred and Ethel, also execute the mortgage. This is acceptable. One can have more borrowers execute the mortgage than there are people who own the land, as long as all the people who own the land mortgage the land. Here, John and Jane own the land, but John, Jane, Fred, and Ethel, are the mortgagors. (But always remember: all the owners of the land must execute the mortgage!)

• But for some reason this entire transaction falls apart, and so a month later John and Jane again decide to buy a new home. But now John and Jane will be the only people who will take title to this home, and only John and Jane will mortgage the home. (In other words: John and Jane take title to the home, and John and Jane execute the purchase money mortgage.) The lender tells the closer that because John makes so much money, he is the only one who has to sign the mortgage note. That is, Jane does not have to sign the note. This is acceptable; you can have fewer people signing the note than own and mortgage the property, as long as you have the approval of the lender. And of course the lender approved this arrangement; the lender is the one who drafted the note. (But it seems that it is possible that the lender is giving up its right to seek a deficiency judgment against the person who did not sign the note in the event of a mortgage foreclosure. But that is not the Company’s concern.) So in this example, because John and Jane will take title, John and Jane must both execute the mortgage. But only John will sign the note. And that is acceptable.

• A few years later, John and Jane move into still another home. John alone takes title to this home. John executes a purchase money mortgage at the closing. Jane gets angry at her in-laws, Fred and Ethel, and Jane moves out of the home. John never hears from her again. Five years later John decides to refinance his mortgage. On a case-by-case basis, with underwriter approval, the examiner may insure this new mortgage without Jane signing the mortgage to waive any outstanding homestead interest. Why is this the case? It appears that Jane has abandoned her home, and thus she has abandoned any outstanding homestead interest in the home. (But remember that if Jane had taken title to the home, then Jane must execute the mortgage. And if John decides to sell the home, and if Jane had taken title to it, then Jane must execute the deed. If both John and Jane take title to their home, and Jane moves out of the home and disappears, a quiet title suit may be John’s only recourse if Jane is nowhere to be found and he wants to sell the home. And even then the court may require that half the sale proceeds be held in an escrow until Jane is declared legally dead.)

This “abandonment of homestead” issue arises many times in many different contexts. And sometimes the issue isn’t one of abandonment. The title person may be told that, “My spouse lives permanently in a different town; she has never lived in this house.” Or, the examiner may be told that, “John and Jane are getting divorced; Jane has moved out of the home.” These and similar fact patterns have to be treated with much deliberation. The examiner has to ask many questions, such as, “How long has Jane been gone? When was the last time you saw Jane? You said that you and Jane are getting divorced; have you filed for divorce yet? Where is Jane living now? If you and Jane have not yet filed for divorce, do you anticipate doing so, and if so, when?”

• John owns the home that he and his wife, Jane, live in. John wants to deed the land to Jane and himself. Jane does not have to sign the deed to waive homestead; see 735 ILCS 5/12-904:

If a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.

This statute suggests that if John wants to deed the home to his wife, or if John wants to deed the home to both himself and his wife, his spouse need not join in the deed to waive homestead. Why? Probably because it is presumed that both John and his wife are already occupying the home as their homestead.

But if John wants to convey the land into the “John and Jane Living Trust,” then Jane would have to sign the deed in order to convey any homestead interest.

• John is married to Jane. John decides to buy the family home with a home equity/revolving line of credit mortgage. (See 205 ILCS 5/5d; see also 815 ILCS 205/4.1 et seq.) Even though the mortgage is being used to buy the home, the revolving line of credit envisions possible post-closing disbursements made months after the closing. Therefore, Jane must sign the mortgage to waive homestead.

Part V: A Final Reminder

Homestead is an issue in both a conveyance situation and also a mortgage situation.

However, because of the “possession given pursuant to the conveyance” provision of 735 ILCS 5/2-904, insuring the sale of land pursuant to a deed executed solely by the title holding spouse should not normally give rise to a title claim.

A misconception as to homestead concerning proper mortgage execution, may, though, result in a title claim.

And so in this regard, the examiner and closer should remember:

• All parties who own the property have to execute any mortgage of the property. The waiving of homestead is not sufficient. Indeed, homestead is not even an issue. The fact that all owners of the land have to execute a mortgage of the land is a title issue; it is not a homestead issue.

• In a situation involving the family home and a title holding spouse and a non-title holding spouse, and the Company is closing a refinance, a second mortgage, or a home equity mortgage, the title holding spouse will have to execute the mortgage. (See the rule immediately above.) The non-title holding spouse will probably have to sign the mortgage to waive homestead.

Judgments and Liens

A judgment is a lien on the debtor's property for seven years from the date the judgment is rendered (not from the date the judgment or memorandum of judgment is recorded). See Schindler v. Watson, 2017 IL App (2d) 160126.

Litigation - Underwriting Court Orders

Underwriting Court Orders: A Guide for Title Examiners and Closers

By

Richard F. Bales

How to Review a Court Order

Introduction

The examiner and closer may be asked to waive pending proceedings based on court orders delivered at closing. This article is designed as a primer to understand when a court order can be used to waive a pending proceeding.

The important statutes to remember are:

735 ILCS 5/2-1301(e)

The court may in its discretion, before final order or judgment, set aside any default, and may on motion filed within 30 days after entry thereof set aside any final order or judgment upon any terms and conditions that shall be reasonable.

Supreme Court Rule 303(a)

The notice of appeal must be filed with the clerk of the circuit court within 30 days after the entry of the final judgment appealed from.

 Supreme Court Rule 304(a)

If multiple parties or multiple claims for relief are involved in an action, an appeal may be taken from a final judgment as to one or more but fewer than all of the parties or claims only if the trial court has made an express written finding that there is no just reason for delaying either enforcement or appeal or both. . . . In the absence of such a finding, any judgment that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties is not enforceable or appealable and is subject to revision at any time before the entry of a judgment adjudicating all the claims, rights, and liabilities of all the parties.

735 ILCS 5/2-1401 is another statute that affects the work of a title examiner and closer. This statute in part provides as follows:

(e) Unless lack of jurisdiction affirmatively appears from the record proper, the vacation or modification of an order or judgment pursuant to the provisions of this Section does not affect the right, title or interest in or to any real or personal property of any person, not a party to the original action, acquired for value after the entry of the order or judgment but before the filing of the petition, nor affect any right of any person not a party to the original action under any certificate of sale issued before the filing of the petition, pursuant to a sale based on the order or judgment.

(f) Nothing contained in this Section affects any existing right to relief from a void order or judgment, or to employ any existing method to procure that relief.

Recent appellate court decisions underscore the impact of this statute. Indeed, because 735 ILCS 5/2-1401 has affected the title industry so significantly, it is clear that this statute warrants discussion in a separate article. 735 ILCS 5/2-1401 will be mentioned, but not discussed, in this article.

Note that two of the three statutes refer to the word, “appeal.” Title companies might use this term without fully understanding its limited meaning. One can only appeal a decision to a higher court. Otherwise, if a party wishes to challenge a ruling entered in, for example, the circuit court, that party normally files a motion to reconsider in the same circuit court proceeding. If the circuit court refuses to change its ruling, that party must then file a notice of appeal in a higher court in order to obtain further relief. In the real estate arena, that higher court would normally be the appellate court.

Note, however, if a party wishes to challenge a ruling in a lower court, that party is not limited to filing a motion to reconsider. Rather, pursuant to Supreme Court Rule 303(a), that party can file an appeal to a higher court. Note that Supreme Court Rule 303(a) indicates that notice of the appeal to a higher court would be filed in the circuit court case.

But having said this, the term “appeal period” is used in this article as a generic term encompassing both the appeal period and the “motion to reconsider” period that is contemplated in Supreme Court Rule 303(a) and 735 ILCS 5/2-1301(e).

Example Number One

Adam owns lot 1. The title commitment for the sale of lot 1 shows a recorded lis pendens for a circuit court proceeding wherein Baker is suing Adam. Baker is claiming that he owns the northwest corner of lot 1 pursuant to adverse possession. The circuit court issues an order dated January 2, dismissing the case. When can the closer close the sale and waive the lis pendens?

If the closer is closing a sale of lot 1 on, for example, January 20 (that is, within 30 days of the order of dismissal), the closer cannot waive the lis pendens. The January 2 order is a final order that is dispositive of the one issue in the case. Pursuant to 735 ILCS 5/2-1301(e), Baker can file a motion to reconsider, thereby challenging the order of dismissal, within 30 days after the order of dismissal is entered. The court may then choose to reconsider its order and may set aside the order of dismissal. (See below; Baker could also appeal the decision directly to the appellate court.)

On the other hand, if the closer is closing a sale of lot 1 on February 15 (more than 30 days after the filing of the order of dismissal), the closer can waive the lis pendens as long as the closer can confirm that there has been no filing of a motion to reconsider (or an appeal, see below). If there has been a filing of a motion to reconsider, and the court has denied that motion, the closer must then wait another thirty days to see if Baker has filed an appeal to the appellate court pursuant to Supreme Court Rule 303(a).

As indicated above, Baker could also appeal the order of dismissal directly to the appellate court. If the closer is conducting the closing on February 15, the closer can waive the lis pendens as long as the closer also confirms that there has been no appeal directly to the appellate court.

Rule of Title Practice

Pursuant to 735 ILCS 5/2-1301(e) and Supreme Court Rule 303(a), a final order that is dispositive of all of the issues of a case can be set aside or appealed from only within 30 days after the order is entered. After 30 days, with no filing of a motion to reconsider or appeal, the closer can close this transaction.

Example Number Two

Charles owns lot 1. The title commitment for lot 1 shows a recorded mechanics lien that was filed by David. The commitment also shows a lis pendens for a proceeding. David’s filed complaint includes two counts for relief. The first count is for breach of contract and the second count is to foreclose the recorded mechanics lien.

Charles wants to modify the mortgage he has on lot 1 with Bank so that he can obtain an additional disbursement of funds. The attorney for Charles brings in a court order dated January 2. The order contains one sentence, which reads as follows: “The mechanics lien filed by David as document 12345 is subordinate to Bank’s mortgage recorded as document 56789.”

It is now March 1. The 30-day appeal period has come and gone. The closer has confirmed that there have been no subsequent court filings in the court case since the above January 2 order was entered. Can the closer waive the mechanics lien and the proceeding from the title commitment and close the transaction, as long as the closer is issuing only a loan policy?

No, the closer cannot waive the mechanics lien and the proceeding. See Supreme Court Rule 304(a). Unlike the facts set forth in Example One, this cause of action contains two counts for relief, not just one. Because the original cause of action contains two counts, and because the court order does not address both counts, and because the court order does not contain the so-called “magic language” of Supreme Court Rule 304(a) (that is, “there is no just reason for delaying either enforcement or appeal or both”), the court order can be appealed, reviewed, challenged, reversed, modified, etc., at any time, not just within 30 days of the date of the order.

Example Number Three

Matt owns lot 1. The title commitment for lot 1 shows a recorded mechanics lien that was filed by Ned. The commitment also shows a lis pendens for a proceeding. Ned’s complaint includes one count for relief; Ned has filed suit to enforce his recorded mechanics lien claim.

Matt wants to modify the mortgage he has on lot 1 with Bank so that he can obtain an additional disbursement of funds. The attorney for Matt brings in a court order dated January 2. The order contains one sentence, which reads as follows: “The mechanics lien filed by Ned as document 12345 is subordinate to Bank’s mortgage recorded as document 56789.”

It is now March 1. The 30-day appeal period has come and gone. The closer has confirmed that there have been no subsequent court filings in the court case since the above January 2 order was entered. Can the closer waive the mechanics lien and the proceeding from the title commitment and close the transaction, as long as the closer is issuing only a loan policy?

The lawsuit in this example involves neither multiple parties nor multiple claims. One might think that as far as the facts of the case concern the lender, the order is dispositive of all of the issues. One might think that that although the case is not dismissed, all substantive issues relating to the lender have been decided in the proceeding; therefore, because 30 days have passed, the closer can waive both the proceeding and the mechanics lien claim.

Such reasoning is erroneous. The closer should not waive the mechanics lien and the proceeding from the title commitment. Supreme Court Rule 304(a) controls. In this example, there has not been a total adjudication of the suit to enforce the mechanics lien claim. The court has stated only that the mechanics lien is subordinate to the bank’s mortgage. The court has not yet addressed the validity of the mechanics lien claim. See again the wording of Supreme Court Rule 304(a): “In the absence of such a finding [that there is no just reason for delaying either enforcement or appeal or both], any judgment that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties is not enforceable or appealable and is subject to revision. . . .”

In this example, the court might determine after March 1 that the mechanics lien was valid. In that event, the lien claimant could file a motion for reconsideration, questioning the January 2 order and the priority of the mortgage over the mechanics lien claim.

Example Number Four

Assume that there is a mortgage foreclosure case, and the Company has issued a title commitment to insure title pursuant to the foreclosure of the mortgage. The foreclosing lender has filed its complaint and served all parties. Two months later, Oliver has filed a counterclaim in the mortgage foreclosure case to enforce his mechanics lien claim. Based on this counterclaim, the title examiner has raised a title exception for Oliver’s mechanics lien claim.

An order is entered in the mortgage foreclosure case dated January 2. The order contains one sentence, which reads as follows: “Oliver’s mechanics lien claim is subordinate to Bank’s mortgage recorded as document 56789.”

It is now March 1. The 30-day appeal period has come and gone. The closer has confirmed that there have been no subsequent court filings in the court case since the above January 2 order was entered. Can the closer waive the mechanics lien from the title commitment?

No, the closer cannot waive the mechanics lien and the proceeding from the title commitment. Oliver has filed a counterclaim to enforce his mechanics lien claim in a mortgage foreclosure proceeding. As such, the court’s January 2 order is not a total adjudication of all the claims of all the parties. That is, the court has stated only that Oliver’s mechanics lien is subordinate to the bank’s mortgage. The court has not yet addressed the claims, rights, and liabilities of the parties relative to the mortgage and the foreclosure of the mortgage. See again the wording of Supreme Court Rule 304(a): “In the absence of [the magic language], any judgment that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties is not enforceable or appealable and is subject to revision. . . .”

Example Number Five

Edward owns lot 1. The title commitment for lot 1 shows a recorded mechanics lien that was filed by Frank. The commitment also shows a lis pendens for a proceeding. Frank’s filed complaint includes two counts for relief; the first count is for breach of contract, and the second count is to enforce Frank’s recorded mechanics lien claim.

Edward wants to sell lot 1 to George. The attorney for Edward brings in a court order dated January 2. The order contains two sentences, which read as follows: “The mechanics lien recorded by Frank as document 12345 is hereby declared null and void. There is no just reason for delaying either enforcement or appeal or both.”

It is now March 1. The 30-day appeal period has come and gone. The closer has confirmed that there have been no subsequent court filings in the court case since the above January 2 order was entered. (That is, the lien claimant has not filed a motion to reconsider or an appeal.) Can the closer waive the mechanics lien and the proceeding from the title commitment and close the transaction, insuring the sale of the land to George?

Yes, the closer can waive the mechanics lien and the proceeding. In this example the proceeding concerned two causes of action, but the court order addressed only the mechanics lien issue. However, the court order also contained the “magic language” of Supreme Court Rule 304(a). Therefore, there is only the 30-day appeal period set forth in 735 ILCS 5/2-1301(e) and Supreme Court Rule 303(a). Because more than 30 days have passed with no subsequent court filing, and because the court order contained the “magic language” of Supreme Court Rule 304(a), the closer can waive both the proceeding and the mechanics lien claim.

Example Number Six

Harold owns lot 1. The title commitment for lot 1 shows a recorded mechanics lien that was filed by Jack. The commitment also shows a lis pendens for a proceeding. Jack’s filed complaint includes two counts for relief; the first count is for breach of contract, and the second count is to enforce his recorded mechanics lien claim.

Harold wants to sell lot 1 to Larry, and so at closing the attorney for Harold sets up a title indemnity with the Company for three times the amount of the recorded lien. A month after closing the attorney comes in with a court order dated January 2. The order contains one sentence, which reads as follows: “The mechanics lien recorded by Jack as document 56789 is hereby declared null and void.”

It is now March 1. The 30-day appeal period has come and gone. The closer has confirmed that there have been no subsequent court filings in the court case since the above January 2 order was entered. Can the closer now release the title indemnity to Harold’s attorney?

No, the closer cannot release the title indemnity money. In this example the proceeding concerned two causes of action, but the court order addressed only the mechanics lien issue. The court order did not contain the “magic language” of Supreme Court Rule 304(a). Therefore, Jack could file a motion to reconsider at any time, even after 30 days have passed from January 2, the date of the order.

Rule of Title Practice: A Summary of the Above

Any order that does not address all of the issues raised in a complaint is a final order that starts the 30 day appeal period if it contains the Supreme Court Rule 304(a) magic language. Otherwise, an order that does not contain the Rule 304(a) magic language must be dispositive of all the issues raised in the complaint to be a final order that triggers the 30 day appeal period.

Creative Underwriting of Court Proceedings

Introduction

The appeal period does not have to stop the closing. Consider the following methods to successfully underwrite the appeal period, even if the last court order in the file is only a few days old.

Release of Land from Lis Pendens

The examiner can waive an exception for a recorded lis pendens upon the recording of a release of land from lis pendens. Although this document would not affect the underlying proceeding, the cause of action would no longer affect the real estate. This document is especially useful in situations where there are alternative means of enforcing a lien. Consider, for example, a mechanics lien foreclosure case. The attorney for the lien claimant could prepare a release of land from lis pendens and a release of the mechanics lien claim, but still continue the litigation to enforce the lien rights of the lien claimant pursuant to a breach of contract action. The examiner could waive the mechanics lien and the lis pendens upon the execution of both documents. After closing, the parties could continue a breach of contract action. Only until a judgment was issued in favor of the lien claimant and the judgment, or memorandum thereof, was recorded, would the judgment lien (but not a mechanics lien) become a lien on the land. Such a judgment would be a post-policy event that would be excluded from title policy coverage.

Agreed Order

Example: Alex sues Bert, arguing that he has an equitable lien against land that Bert owns. Alex records a lis pendens against the land. The examiner shows the lis pendens on the title commitment. At the closing, the examiner is given an agreed order—that is, a court order signed by both the attorneys for Alex and Bert. The order indicates that the cause of action is dismissed. The order is dated January 2. The closing is taking place on January 5. Does the examiner have to wait thirty days before waiving the lis pendens, or can the examiner waive the lis pendens immediately?

The examiner can waive the lis pendens at closing. Because all parties (plaintiff and defendant) are agreeing to the dismissal of the case, the examiner does not have to wait out any applicable appeal period, nor does the agreed order have to contain the “magic language” of Supreme Court Rule 304(a).

An agreed order is like a contract. Therefore, should a party to an agreed order not comply with its provisions after that party executes the order, the remedy for such non-compliance is a breach of contract action.

Underwriting the Appeal to the Appellate Court

Example

The Company has prepared a title commitment. The land search discloses that a notice of foreclosure has been recorded against the property. The attorney for the lender telephones the title examiner and tells him there has been a foreclosure sale, and that the court has issued an order, confirming the judicial sale of the land. He also tells the examiner that the sheriff has just issued a sheriff’s deed to the lender and that the lender will be conveying the land immediately to a third party purchaser. The closing is set for the following day. A review of the court case discloses that the defaulting mortgagor has appealed the circuit court’s order of confirmation to the appellate court. How can this issue be underwritten? (Because this example involves the underwriting of an appeal of a pending proceeding to the appellate court, the examiner should review the Company’s current Authority Parameters Memo and make sure that any decision made concerning this file is made by someone with the proper authority. An underwriter with the requisite authority should be involved in reviewing an appeal to the appellate court.)

Supreme Court Rule 305 relates to the staying of the enforcement of a judgment pending an appeal. Specifically, see Supreme Court Rule 305(b) and 305(k):

(b) Except in cases [concerning the appeal of the termination of parental rights],on notice and motion, and an opportunity for opposing parties to be heard, the court may also stay the enforcement of any judgment, other than a judgment, or portion of a judgment, for money, or the enforcement, force and effect of appealable interlocutory orders or any other appealable judicial or administrative order. The stay shall be conditioned upon such terms as are just. A bond or other form of security may be required in any case, and shall be required to protect an appellee’s interest in property.

(k) If a stay is not perfected within the time for filing the notice of appeal, or within any extension of time granted under subparagraph ( c ) of this rule, the reversal or modification of the judgment does not affect the right, title, or interest of any person who is not a party to the action in or to any real or personal property that is acquired after the judgment becomes final and before the judgment is stayed; nor shall the reversal or modification affect any right of any person who is not a party to the action under or by virtue of any certificate of sale issued pursuant to a sale based on the judgment and before the judgment is stayed.

In the example, the title underwriter wants to be sure that there has been no stay of the order confirming the foreclosure sale. A “stay” is a judicial order, a temporary “halting” of the contemplated action. If a stay order is entered, the enforcement of the decision to confirm the sale is held in abeyance, pending the appeal. A stay can be filed in either the circuit court or the appellate court.

Rule 305(b) refers to a bond, but the underwriter does not have to be too concerned about the bond. The posting of a bond can be excused. The stay is the important item that the underwriter must consider.

Rule 305(k) refers to the “time for filing the notice of appeal.” Rule 303(a) states that the notice of appeal must be filed with the clerk of the circuit court within thirty days after the entry of the final judgment appealed from, or within thirty days after the entry of the order disposing of the last pending post-judgment motion. Note, though, that the time for filing the notice of appeal may be extended by a motion made within the time for filing the notice of appeal. In this regard, see Rule 305(c).

What do these various provisions of the Supreme Court Rules mean to the title underwriter? Simply this: if there is an appeal filed but no stay requested or entered during the appeal period, then a later reversal of the judgment order does not affect the right, title, and interest of someone who acquired the land who was not a party to the original action. The underwriter does not have to wait until the appeal has been adjudicated and disposed of before waiving the proceeding. Rule 305(k) indicates that a reversal or modification of the judgment or order does not affect the rights of a person not a party to the action who acquires the property after the judgment or order becomes final but before the filing of a stay.

The underwriter must remember that the “if there is no stay, then reversal is okay” provisions of Rule 305 are only applicable to one who was not a party to the original action. Thus, these provisions would not be applicable to the foreclosing lender, as the lender was the plaintiff in the foreclosure proceeding. However, the provisions would be applicable to a third party purchaser at the judicial sale or a third party purchaser from the foreclosing lender.

Consider, then, an appropriate title exception for a pending appeal:

Note: Appeal filed _____ in the appellate court, case number _____.

Pursuant to Supreme Court Rule 305(k), the above exception will be waived upon receipt of evidence that there has been no stay entered in either the trial court or the appellate court and upon the recording of a deed to a grantee that is not a party to this action.

What kind of evidence would the underwriter need in order to waive this exception? As noted above, the examiner must check the court file to be sure that no stay has been entered in the proceeding. But if necessary, the underwriter might consider a letter from the attorney for the lender. A stay would require a hearing, and all attorneys would be notified of a pending hearing concerning a party’s request for a stay. Therefore, as a last resort the underwriter could waive the exception for the appeal with a letter from one of the attorneys, stating that he or she has not received any notice of a hearing concerning a motion for a stay.

Underwriting Procedures Concerning the Chicago “Recording of Findings, Decision and Order”

Generally speaking, the law concerning judgments is found in 735 ILCS 5/12-101 et seq. This statute provides as follows:

A judgment is a lien on the real estate of the person against whom it is entered in any county in this State, including the county in which it is entered, only from the time a transcript, certified copy or memorandum of the judgment is filed in the office of the recorder in the county in which the real estate is located.

Because of this statute, examiners know that recorded judgments (or memorandums thereof) should be shown on title commitments for any property owned by the judgment debtor.

But what about a municipality’s “Recording of Findings, Decision and Order?” This is a form of municipal judgment that arises under the Illinois Municipal Code. The title examiner will often see this document when the City of Chicago is the plaintiff. These findings usually (but not always) concern building code matters. The findings are issued by an administrative law officer pursuant to an administrative hearing. (For the Illinois statutes relating to these findings, see Part Nine)

Some title companies have adopted specific underwriting procedures for this document—hereafter called a “Recording of Findings.” This article will discuss those procedures.

When the Defendant is Purchasing, Selling, or Mortgaging the Land

The usual Recording of Findings document will contain a docket number, the name of the defendant, and the name of the plaintiff, which will often be the City of Chicago. The Recording of Findings will disclose both the owner’s name (shown as the defendant) and the “Address of Violation.” The document will have an abbreviated legal description and the permanent index number of the land. The permanent index number will often coincide with the “Address of Violation” shown on the second page of the Recording of Findings.

But the permanent index number shown on the Recording of Findings will not always be the permanent index number for the “Address of Violation” property. The reason for this is that many times defendants own numerous properties in Chicago. Thus, a defendant may own the property identified by a certain permanent index number, but this property may not be the “Address of Violation” property—rather, another property owned by the same defendant may be the land subject to the violation.

A Recording of Findings is in the nature of a judgment. Thus, it will be disclosed in TitlePoint’s name search. When, the defendant named in the Recording of Findings is a purchaser or owner of the land, the Recording of Findings should be shown in the title commitment, even if the Recording of Findings is not recorded against the land being insured. (There will be a legal description on the first page of the Recording of Findings.)

See, for example, Recording of Findings document 1125704112, shown as Exhibit 1. Troy Bryant is the defendant in the proceeding. He is also the owner of the land identified by permanent index number 20-36-421-004. This permanent index number is shown on the Recording of Findings. This permanent index number affects 8515 S. Oglesby Avenue. However, this is not the “Address of Violation” shown on the second page of the recorded document. (The “Address of Violation” is 3329 West Flournoy Street.)

In other words: This Recording of Findings is recorded against 8515 S. Oglesby Avenue, but the “Address of Violation” is 3329 West Flournoy Street.

This document is posted both in TitlePoint’s land search (against permanent index number 20-36-421-004, 8515 S. Oglesby Avenue) and its name search (against Troy Bryant).

If the title company were insuring a sale or mortgage of either 8515 S. Oglesby Avenue or 3329 West Flournoy Street, it should show this Recording of Findings as a Schedule B exception. It is in the nature of a judgment, and the title company would be insuring land owned by the judgment debtor. (The attached documents are used as exhibits only; assume for the moment that their statute of limitations has not expired.)

Clearance for the Purchase, Sale, or Mortgage of the Land

This Recording of Findings performs two functions. One, it acts as a recorded judgment, indicating that the defendant owes money to the municipality. But two, it also acts as a recorded notice of a municipal building code or other municipal code violation—which means that the examiner must be concerned with Covered Risk 5 of the 2006 owner’s policy.

Covered Risk 5 insures against loss or damage by reason of

[t]he violation or enforcement of any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to . . . if a notice, describing any part of the Land, is recorded in the Public Records setting forth the violation or intention to enforce, but only to the extent of the violation or enforcement referred to in that notice.

This Recording of Findings constitutes a Covered Risk 5 notice. But, as noted above, it also functions as a recorded money judgment (or memorandum thereof). Because the Recording of Findings has two functions, the title clearance of a Recording of Findings is equally two-tiered.

Continuing with the above example, note that this Recording of Findings is recorded against 8515 S. Oglesby Avenue, but the “Address of Violation” is 3329 West Flournoy Street.

If the title company were insuring a mortgage or conveyance of 8515 S. Oglesby, then all the clearance that the examiner needs to waive this document is evidence that the money judgment has been paid.

But if the title company were insuring 3329 West Flournoy—the “Address of Violation” property—then the examiner needs both evidence that the money judgment has been paid and also evidence that the building code violation has been remedied before the examiner can waive this document from the title commitment.

When reviewing clearance for waiving the building code violation, the examiner should consider the nature of the violation. Can the violation be cured merely by the cleaning up of debris? If so, the examiner might consider waiving the violation if the examiner is furnished a statement in writing that all the requisite cleanup work has been performed. In this regard, the “department” referenced on the first page of the Recording of Findings that concerns a “cleanup violation” will probably be the “Streets and Sanitation” Department. On the other hand, the “department” concerning a more serious code violation matter will probably be the “Buildings” Department.

When the Defendant’s Property is Being Foreclosed:

An Introduction

Although judgments normally attach to any and all land owned by the judgment debtor, the examiner preparing a “necessary and permissible parties” foreclosure commitment should be concerned about a Recording of Findings only if its “Address of Violation” is the land being foreclosed.

• If the “Address of Violation” is the property being foreclosed, the examiner should show the Recording of Findings in Schedule B of the commitment. The examiner should make the City of Chicago a permissible party to the foreclosure proceeding.

• On the other hand, if the “Address of Violation” is not the property being foreclosed, then the examiner can ignore the Recording of Findings when preparing the “necessary and permissible parties” foreclosure commitment.

Continuing again with the above example, if the title company were issuing a “minutes of foreclosure” title commitment for the land commonly known as 8515 S. Oglesby Avenue, then the examiner should not show this Recording of Findings as a Schedule B exception. The examiner should not make the City of Chicago a permissible party to the foreclosure proceeding.

Why is this so? Even though the document is recorded against 8515 S. Oglesby Avenue, which is the land being insured, 8515 S. Oglesby Avenue is not the “Address of Violation” listed on this Recording of Findings. Therefore, the examiner can disregard this document.

====When the Defendant’s Property is Being Foreclosed: The Two Functions of the Recording of Findings====

As indicated above, the Recording of Findings functions as a recorded money judgment (or memorandum thereof). But it also constitutes a Covered Risk 5 notice. This means that half of this document (the money half) will be eliminated through foreclosure, and half of the document (the notice of violation half) will survive the foreclosure. This is why the City of Chicago should be made a permissible party—to extinguish the “judgment portion” of the Recording of Findings.

Because the Recording of Findings has two functions, the examiner should show this document as two separate title exceptions when examining a “necessary and permissible parties” title commitment and the examiner has to raise the Recording of Findings as a Schedule B title exception: For example:

• One: Judgment for $10,000 in favor of the City of Chicago recorded ____ as document _____.

• Two: Notice of building code violation recorded ____ as document _____.

The first exception can eventually be waived when the lender takes title pursuant to its foreclosure. The second exception, though, will survive the foreclosure. The examiner should not waive this second exception unless and until the code violation or other matter is remedied and some sort of satisfaction is recorded.

What if a Recording of Findings is recorded after the notice of foreclosure is recorded? A memorandum of judgment against a mortgagor being foreclosed that is recorded after the recording of the notice of foreclosure can normally be waived when the title policy is issued. Thus, the judgment portion of the Recording of Findings can be waived upon issuance of the policy. But because the building code violation survives the foreclosure, the notice of building code violation portion of the Recording of Findings cannot be waived. It must remain on the title policy unless satisfactorily underwritten.

Lender-Owned Property

A lender may have acquired several Chicago properties by either foreclosure or deed in lieu of foreclosure. A lender may own these properties in either its own name or in the name of a lender affiliate, such as a limited liability company. These properties may be in dilapidated condition. Thus, a lender may have numerous Recordings of Findings recorded against it.

Assume that the title company is insuring the sale of a home owned by a lender. Assume that the name search discloses five Recordings of Findings recorded against this lender. It is the title company underwriting position that the examiner should not necessarily show all five Recordings of Findings in the title commitment. Rather, when insuring the sale of property owned by a lender or its affiliate, the examiner should show only those Recordings of Findings that list the address of the land being insured as the “Address of Violation.”

However, assume, for example, that a lender that owns a Chicago property on Clark Street that it acquired through foreclosure later conveys the Clark Street property to a real estate development company. Assume that a Recording of Findings has been recorded against another property in Chicago that this company owns, and it names this development company as the defendant. If asked to issue a title commitment on this Clark Street property, the title examiner should show the Recording of Findings as a title exception on the commitment. A Recording of Findings is a judgment against any land owned by the defendant.

The Condominium Building

Cook County document 200710016 is a Recordings of Findings that was recorded against an entire Chicago condominium building. How should the examiner treat this type of document when the examiner has issued a commitment to insure a sale or mortgage of just one of the units in the building?

This type of Recordings of Findings document may have a legal description that affects all of the condominium building. However, the building is merely common elements, and all of the unit owners own fractional interests in the building as part of the common elements.

The issue in this case is not the judgment portion of the Recordings of Findings. After all, the owner named on the recorded document is not the same as the owner of the individual condominium unit that is being insured. Rather, the issue is the building code violation, which is a Covered Risk 5 matter.

In order to address this issue, the title examiner must consider a number of factors:

The economic health of the condominium; The location of the condominium; The number of units in the condominium building; The sales price of the condominium units; Whether a special assessment has already been collected to fix the code violation; The nature and severity of the code violation; Whether building permits have already been issued to fix the code violation; The willingness of the association to give the title company a personal undertaking.

In other words, if the building is in a good location, which suggests that units are selling for a fair market value price and not a fire sale price, and if there are a large number of units, which means that the unit owners can absorb the hit of a special assessment to pay for the repairs, and if the association is well aware of the problem and has already commenced addressing the problem, and if the association is willing to give the title company a personal undertaking, then the examiner should be able to endorse over the Recordings of Findings for the loan policy with an ALTA 34-06 endorsement.

If the examiner is not able to obtain a personal undertaking, the examiner should talk to an underwriter. Depending on the nature of the building violation, the underwriter may be willing to endorse over the building violation if the association has indicated that it is in the processing of fixing the code violation.

The “Release of Lien”

Care should be taken if asked to waive a Recording of Findings based on a so-called “Release of Lien.”

Consider the Cook County Recording of Findings recorded as document 1021726071 and the Release of Lien recorded as document 1504413062, shown respectively as Exhibit 2 and Exhibit 3.

The Release of Lien refers to the acknowledgement of a “satisfaction or release of claim.” This language suggests that only the “money portion” of the Recording of Findings has been satisfied. The examiner will still have to confirm that the building violations have been remedied.

The “Debt Only” Recording of Findings

See the Cook County Recording of Findings recorded as document 1615810006; see Exhibit 4. This document is really in the nature of a conventional judgment, in that it evidences only money owed the City of Chicago. It discloses no building violation.

Miscellaneous

Consider the “Recording of Findings, Decision, and Order” recorded July 20, 2008, as document 0620141118, and shown as Exhibit 5. It is a judgment for $1,025.00. The document indicates that there is a $500 penalty for “tearing up public ways” and a $500 penalty for “pavement restoration.” Assume that the title commitment is for the land described in the “address of violation.” Can this document be underwritten? Can it be waived from the title commitment?

Yes, this document can be waived from the title insurance commitment, even though the title commitment is for the land described in the “address of violation.”

Again, remember that the Recording of Findings performs two functions. One, it functions as a recorded judgment. And two, it acts as a recorded notice of a municipal code violation, thus bringing Covered Risk 5 of the title policy into play.

But in this case, the title commitment was issued ten years after the document was recorded. Thus, the “judgment portion” of the document is no longer in effect, as the judgment is now, “out on time.” See 735 ILCS 5/12-101 et seq.

But what about the code violation portion of the Recording of Findings? In this case, the document indicates that the homeowner was fined for tearing up the public way. (Further inquiry revealed that the homeowner dug up the apron of his driveway.) The document also indicates that the homeowner was fined for the costs of “pavement restoration”—that is, for repaving the driveway. Thus, because the pavement was repaved, there is no longer a code violation.

The judgment is “out on time.” There is no longer a code violation. Because both elements of the Recording of Findings are no longer viable, the examiner can waive the Recording of Findings from the title commitment.

The Statute

Administrative Adjudications (65 ILCS 5/11-31.1-1 et seq.) The City of Chicago will often record a “Recording of Findings, Decision, and Order.” This document is not solely a Chicago document, founded in Chicago municipal law. It has in origin in Illinois statutory law—the Illinois Municipal Code. See, for example, 65 ILCS 5/11-31.1-10, which states in part the following: At the conclusion of the hearing the hearing officer shall make a determination on the basis of the evidence presented at the hearing whether or not a code violation exists. The determination shall be in writing and shall be designated as findings, decision and order. The following statutes and language might be helpful to the examiner. Note that 65 ILCS 5/11-31.1-11.1(b)(1), set forth below, indicates that the judgment has the same effect as a conventional judgment and is enforced in the same way as a conventional judgment. However, the statute does not state that the statute of limitations of the “Recording of Findings, Decision, and Order” is the same as a conventional judgment. Nonetheless, because of the wording of 65 ILCS 5/11-31.1-11.1(b)(1), title companies believe that the statute of limitations of a “Recording of Findings, Decision, and Order” is the same as that of a conventional judgment, which is seven years from the date the judgment is rendered (not from the date the judgment or memorandum of judgment is recorded). See 735 ILCS 5/12-101; Schindler v. Watson, 2017 IL App (2d) 160126. 65 ILCS 5/11-31.1-10 Findings, decision, order At the conclusion of the hearing the hearing officer shall make a determination on the basis of the evidence presented at the hearing whether or not a code violation exists. The determination shall be in writing and shall be designated as findings, decision and order. The findings, decision and order shall include the hearing officer's findings of fact, a decision whether or not a code violation exists based upon the findings of fact, and an order, ordering the owner to correct the violation or dismissing the case, in the event a violation is not proved. If a code violation is proved, the order may also impose the sanctions that are provided in the code for the violation proved. 65 ILCS 5/11-31.1-11.1 Judgment on findings, decision, order (a) Any fine, other sanction or costs imposed, or part of any fine, other sanction or costs imposed remaining unpaid after the exhaustion of, or the failure to exhaust, judicial review procedures under the Administrative Review Law shall be a debt due and owing the municipality and, as such, may be collected in accordance with applicable law. (b)(1) the court shall render judgment in favor of the municipality and against the property owner for the amount indicated in the findings, decision and order, plus costs. Such judgment shall have the same effect and may be enforced in the same manner as other judgments for the recovery of money; and (2) the court may also issue such other orders and injunctions as are requested by the municipality to enforce the order of the hearing officer to correct a code violation. 65 ILCS 5/11-31.1-12 Sanctions applicable to owner—Property The order to correct a code violation and the sanctions imposed by a municipality as the result of a finding of a code violation under this Division shall attach to the property as well as to the owner of the property, so that a finding of a code violation against one owner cannot be avoided by conveying or transferring the property to another owner. Any subsequent transferee or owner of property takes subject to the findings, decision and order of a hearing officer under this Division.

Limited Liability Companies

LIMITED LIABILITY COMPANIES

By

Richard F. Bales

Limited Liability Companies (805 ILCS180/1-1 et seq.)

Part One: The Law

Introduction

As of January 1, 1994, Illinois has had a new form of legal entity. This is the Limited Liability Company. Public Act 99-637 (House Bill 4361), effective July 1, 2017, was a massive revision of the Limited Liability Company Act, which is codified as 805 ILCS 180/1-1 et seq.

A limited liability company, or “LLC,” is a hybrid between a partnership and a corporation. That is, the LLC combines the lower tax burden of a partnership with the liability protection of the corporation. A short explanation of this follows:

Partnerships are flow-through entities; they pay no federal income tax. Rather, each partner pays tax on his percentage share of partnership income. This results in only one level of tax, to be paid by the partner.

C corporations have two levels of tax. First, a C corporation pays tax on its income; furthermore, it is not allowed a deduction for dividends paid to shareholders. Secondly, a shareholder pays tax on dividends he received. Dividends are paid to shareholders on a pro rata basis; they may not be allocated in any other manner.

S Corporations and LLCs are taxed like partnerships. Neither entity pays an entity-level income tax. S corporation shareholders and LLC members merely pay tax on their share of the business’ income. Furthermore, unlike an S corporation, but like a partnership, the profits and losses of a LLC may be allocated disproportionately among the LLC’s members pursuant to agreement.

Partners in a general partnership have unlimited personal liability for the acts of the partnership and of the other partners. A limited partner’s liability in a limited partnership is generally confined to his investment, but only if the limited partner is “passive” and does not participate in the management or control of the partnership. Thus, any partner who actively participates in partnership operations is exposed to unlimited personal liability.

Corporate shareholders are not generally exposed to personal liability. Similarly, members of a LLC are not personally liable for any act, debt, or obligation of the LLC.

To summarize, LLC's have the tax characteristics of partnerships with the limited liability aspects of corporations. That is, it offers its members protection from personal liability for a debt, obligation, or liability of the LLC. See 805 ILCS 180/10-10. It also offers favorable tax treatment, in that only members pay federal taxes; the LLC does not pay taxes.

Also, LLCs offer flexibility in operation in that they can be managed by members, designated managers, or a combination of both.

Originally, a LLC had to have at least two members. This was because it was always intended that a LLC should be taxed as a partnership. But under the 1998 revisions to the Limited Liability Company Act, there can now be single-member LLCs. See 805 ILCS 180/5-1(a). Note that although an S corporation is limited to no more than 35 shareholders, a LLC can have an unlimited number of members.

Before this 1988 revision, an individual usually formed a corporation, as a partnership-type of structure was not an available option. Because of this 1988 revision, one person can now form a LLC. See 805 ILCS 180/5-1(a).

Formation of a LLC

When a new LLC is created, a document called the Articles of Organization must be executed and filed with the Illinois Secretary of State’s office. See 805 ILCS 180/5-5.

This document contains information about the name, principal place of business, purpose of the LLC, and the name of the registered agent.

The LLC must contain one of the following designations in its name: LLC, L.L.C., or Limited Liability Company. See 805 ILCS 180/1-10. The basic information of a LLC noted in the Articles of Organization can also be found at the Illinois Secretary of State’s website, which is www.cyberdriveillinois.com.

This website will indicate whether or not the LLC is in good standing with the State of Illinois. (That is, whether the LLC has paid all of its fees.) The website will also indicate if the LLC is member-managed or manager-managed.

The person who executes and delivers the Articles of Organization is called the organizer. See 805 ILCS 180/5-1(a), 805 ILCS 180/5-5(a)(7).

The LLC must file an annual report form with the Illinois Secretary of State and pay a fee. If it does not, the Secretary of State can dissolve the LLC. See 805 ILCS 180/35-25.

The Operating Agreement

The Limited Liability Company Act requires that only the bare necessities of a business entity be included in the Articles of Organization. See 805 ILCS 180/5-5.

Although the Articles of Organization governs the members of the LLC, it is possible that the members of a LLC will want more detail in how their business is conducted. For this reason the members may wish to execute a document called an Operating Agreement. See 805 ILCS 180/15-5.

The Act, however, does not require this agreement, nor does it require that it be filed with the Secretary of State or be recorded. Nonetheless, the vast majority of LLCs will have operating agreements.

The Operating Agreement usually contains information on topics such as the following:

• Delegation of management responsibilities to persons who may or may not also be members • Capital contributions of members • Methods of financing LLC operations • Distributions of LLC profits • Expansion of membership • Resignation of members • Transfer of membership interests • Dissolution of the LLC

Management of the LLC

A LLC may be managed by its members or managed by a manager. This is traditionally called either member-managed or manager-managed. See 805 ILCS 180/15-1.

Member-managed LLC

Unless otherwise set forth in the operating agreement, management of a LLC defaults to member-managed. See 805 ILCS 180/15-1(a).

Members have equal rights in the LLC management structure. “Majority rules,” with one vote per member, unless otherwise provided for in the operating agreement. See 805 ILCS 180/15-1(a).

Manager-managed LLC

Managers have the authority to conduct business on behalf of the LLC. If there is only one manager, that manager can bind the LLC. If there is more than one manager, then the decision is made by the majority of the managers.

Note that managers do not have to be members of the LLC.

Unanimous Consent of All Members

Some matters, however, require the consent of all the members of both a member-managed LLC and a manager-managed LLC. See 805 ILCS 180/15-1(d). Such matters include:

• Admission of a new member • An amendment to the operating agreement or the Articles of Organization • The sale or lease of all, or substantially, all, of the property of the LLC; see 805 ILCS 180/15-1(d)(10).

Management Issues

Example: Assume that there is a LLC in title to the land. An examiner is performing title clearance on a closing where this LLC will sell the land to a purchaser. The examiner checks the Illinois Secretary of State website, and the examiner concludes that the LLC is member-managed and there are two members. (Or alternatively, the examiner concludes that the LLC is manager-managed and there are two managers.)

Question: All the examiner has at the closing is the deed signed by one person and not two people. Is there a problem?

Answer: Yes, there is a problem. Generally speaking, regardless of how the LLC is managed, majority rules, and a majority of two is two. The examiner needs to determine that the other person (either a member or a manager) has consented to the sale. (But as noted above, some things require the unanimous consent of all members.)

Alternatively, the examiner should obtain and review a copy of the operating agreement. It is possible that the operating agreement contains information such as “The purpose of this LLC is to develop and sell improved lots.” In this case, it is possible that with the approval of such a sale can be effectuated by the consent of only one manager.

Title Insurance Issues

If insuring the sale or mortgage of land owned by an LLC, title companies have to be concerned with two issues:

• The legal existence of the LLC;

• The authority of the members or the managers to bind the LLC.

Title examiners should make sure that the LLC is in legal existence before they ensure a transaction wherein said LLC has executed one or more documents. If the LLC has not been legally formed, a court may set aside the transaction. See Carollo v. Irwin, 2011 Ill. App. (1st) 102765. This is why the examiner should raise an exception on the commitment asking for proof of the LLC’s existence and proof of the manager(s)’ or member(s)’ authority to act. See below for an example of such an exception:

We should be furnished (a) a certification from the Illinois Secretary of State that _____ LLC has properly filed its articles of organization, (b) a copy of the articles of organization, together with any amendments thereto, (c)a copy of the operating agreement, if any, together with any amendments thereto, (d), a list of incumbent managers or of incumbent members if managers have not been appointed, (e) a certification that no event of dissolution has occurred, and (f), a resolution that both authorizes the contemplated transaction and authorizes and names the appropriate signatories to execute the transaction documentation.

• Note: In the event of a sale of all or substantially all of the assets of the LLC, or of a sale of LLC assets to a member or manager, we should be furnished evidence that all members have consented to said sale. (Note that the latter scenario above concerning the sale of assets to a member or manager is not contemplated in the statute; it is a title company underwriting guideline.)

A copy of the articles of organization that are stamped with the Illinois Secretary of State’s file number is sufficient proof of the legal existence of the LLC. Alternatively, the examiner can check the Illinois Secretary of State’s website at www.cyberdriveillinois.com.

===LLC Title exception wording===:

The Company will require the following documents for review prior to the issuance of any title insurance predicated upon a conveyance or encumbrance from the entity named below.

Limited Liability Company:

A copy of its operating agreement, if any, and any and all amendments, supplements and/or modifications thereto, certified by the appropriate manager or member;

If a domestic Limited Liability Company, a copy of its Articles of Organization and all amendment thereto with the appropriate filing stamps;

If the Limited Liability Company is member-managed, a full and complete current list of members certified by the appropriate manager or member;

A current dated certificate of good standing from the proper governmental authority of the state in which the entity was created;

If less than all members, or managers, as appropriate, will be executing the closing documents, furnish evidence of the authority of those signing.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

Summary

805 ILCS 180/15-1 provides the following:

• In a member-managed company, any matter relating to the business of the company may be exclusively decided by the member (if there is only one member), or by a majority of the members, if there is more than one member.

• In a manager-managed company, any matter relating to the business of the company may be exclusively decided by the manager (if there is only one manager), or by a majority of the managers, if there is more than one manager.

However, if the transaction in question is a sale of all of the assets of the LLC, then all members of the LLC (regardless of management) must consent to the sale. See 805 ILCS 180/15-1(d)(10):

The only matters of a member or manager-managed company’s business requiring the consent of all of the members are the following: the sale, lease, exchange, or other disposal of all, or substantially all, of the company’s property with or without goodwill.

The Resolution—Who Signs the Deed or Mortgage?

Title examiners have to be concerned about who is signing the deed or mortgage that is being executed by the LLC. The Operating Agreement will often provide information as to who can sign the deed or mortgage and what conditions, if any, must first be met.

Note: The examiner should review the Operating Agreement. If the examiner is told that there is no operating agreement, the examiner should ask for and review the Articles of Organization. (Although the operating agreement is optional, all LLCs have Articles of Organization. See 805 ILCS 180/5-5; 805 ILCS 180/15-5.)

Although the Act contains no reference to resolutions, limited liability companies often provide resolutions signed by all appropriate parties that authorize the execution of the proposed deed or mortgage. By use of a resolution, all managers or members do not have to sign the documents at closing. Instead, the parties can use a resolution to not only authorize the proposed action, but also appoint a person to sign the documents.

Merger of Entities (805 ILCS 180/37-20 et seq.)

Limited Liability Companies can merge with other entities, such as general or limited partnerships, corporations, or other LLCs. Al property owned by the respective entities automatically vests in the surviving entity.

Each entity that is a party to the merger must execute a form called an Articles of Merger. See 805 ILCS 180/37-25. When the merger becomes effective, all the property owned by each “constituent organization” that ceases to exist vests in the surviving organization. See 805 ILCS 180/37-30(a)(3).

Conversions

On July 1, 2018, the Illinois Entity Omnibus Act came into effect. See 805 ILCS 415/101 et seq. This act permits the conversion of, e.g., a limited liability company into another entity, such as a partnership. (See below)

The Illinois Entity Omnibus Act (805 ILCS 415/101 et seq.)

Introduction:

The Illinois Entity Omnibus Act concerns the following entities, per 805 ILCS 415/102:

Business corporations Medical corporations Nonprofit corporations Professional service corporations General partnerships, including limited liability partnerships Limited partnerships, including limited liability limited partnerships Limited liability companies

Conversion (805 ILCS 415/201)

“Conversion” is not a defined term in the Act. Instead, 805 ILCS 415/102 merely states the following: “’Conversion’ means a transaction authorized by Article 2.”

However, 805 ILCS 415/201 explains what conversion is.

805 ILCS 415/201 authorizes three kinds of conversions:

• An Illinois (i.e., domestic) entity can become a different type of Illinois entity. For example, an Illinois corporation can become an Illinois limited liability company.

• An Illinois entity can become a different type of foreign entity, as long as the conversion is authorized by the foreign jurisdiction. For example, an Illinois corporation can become a Delaware limited liability company, as long as the conversion is authorized by the state of Delaware.

• A foreign entity can become a different type of Illinois entity, as long as the conversion is authorized by the foreign jurisdiction. For example, a Delaware corporation can become an Illinois limited liability company, as long as the conversion is authorized by the state of Delaware.

In addition, 805 ILCS 415/201(c) indicates that a conversion can have the effect of a merger.

The converting entity is the entity that exists before the conversion. The converted entity is the entity that exists after the conversion.

Plan of Conversion (805 ILCS 415/202; 805 ILCS 415/203)

The Act uses the term, “organic.” For example: “Organic law” is the statutes, if any, other than this Act, governing the internal affairs of an entity. See 805 ILCS 415/102. Thus, the Illinois entity must approve a plan of conversion. If a foreign entity is involved in the conversion, the foreign entity must follow the requirements of its state in approving the conversion.

805 ILCS 415/203 indicates that the plan of conversion must be approved by all appropriate parties.

805 ILCS 415/205 states that a statement of conversion must be signed on behalf of the converting entity and filed with the Illinois Secretary of State. This statement must contain, among other things, the name and type of the converting entity and the name and type of the converted entity.

Effect of Conversion (805 ILCS 415/206)

Once there is a conversion, the converted entity exists without interruption, just as if it were still the converting entity.

All property of the converting entity continues to be vested in the converted entity without assignment, reversion, or impairment. This statement indicates that any real property owned by the converting entity continues to be owned by the converted entity without the necessity of a deed. Will that be a problem for the title company if it is asked to insure a subsequent conveyance of land by the converted entity?

No, that should not be a problem. Remember that 805 ILCS 415/205 states that a statement of conversion must be signed on behalf of the converting entity and filed with the Illinois Secretary of State. This is no different than, for example, the way the Company handled mergers prior to July 1, 2018, the effective date of this Act.

Any mortgages and other liabilities of the converting entity continue as liens of the converted entity.

Domestication (805 ILCS 415/301)

“Domestication” is not a defined term in the Act. That is, the term is merely defined as, “a transaction authorized by Article 3.”

However, see 805 ILCS 415/301(a), which states: “Except as otherwise provided in this Section, by complying with this Article, a domestic entity may become a domestic entity of the same type in a foreign jurisdiction if the domestication is authorized by the law of the foreign jurisdiction.”

For example, an Illinois corporation can become a Delaware corporation as long as the transaction is authorized by the State of Delaware.

Similarly, 805 ILCS 415/301(b) states that a foreign entity can become a domestic (i.e., Illinois) entity of the same type as long as the “domestication” is authorized by the law of the other state.

For example, a Delaware corporation can become an Illinois corporation, as long as the transaction is authorized by the State of Delaware.

Definitions

A domestic entity is an entity whose internal affairs are governed by the law of the State of Illinois.

A domesticating entity is the domestic entity that approves a plan of domestication or the foreign entity that approves a domestication pursuant to the law of its jurisdiction of organization.

A domesticated entity is the domesticating entity as it continues in existence after a domestication.

What is the difference between conversion and domestication?

Conversion involves Illinois and foreign entities of different types. Domestication concerns Illinois and foreign entities of the same type:

Examples of Conversion

An Illinois corporation can become an Illinois limited liability company. A Delaware corporation can become an Illinois limited liability company.

Examples of Domestication

An Illinois corporation can become a Delaware corporation. A Delaware corporation can become an Illinois corporation.

Plan of Domestication (805 ILCS 415/302; 805 ILCS 415/303)

An Illinois entity may become a foreign entity in a domestication by approving a plan of domestication. The plan must contain certain information, such as the name and type of the “domesticating entity.” See 805 ILCS 415/302. In approving the domestication, the foreign entity must follow the laws of its state. See 805 ILCS 415/301(b); see also the definition of “domesticating entity,” which is set forth below:

“’Domesticating entity’ means the domestic entity that approves a plan of domestication pursuant to Section 303 or the foreign entity that approves a domestication pursuant to the law of its jurisdiction of organization.” (See 805 ILCS 415/102)

Statement of Domestication (805 ILCS 415/305

A statement of domestication must be signed on behalf of the domesticating entity and be filed with the Illinois Secretary of State. The statement of domestication must include, among other things, the name, jurisdiction of organization, and type of the domesticating entity and the name and jurisdiction of organization of the domesticated entity. (Again, the domesticating entity is the entity that exists prior to the change. The domesticated entity is the entity that exists after the change.)

Effect of Domestication (805 ILCS 415/306)

Once there is a domestication, the domesticated entity exists without interruption, just as if it were still the domesticating entity.

Pursuant to 805 ILCS 415/306, all property of the domesticating entity continues to be vested in the domesticated entity without assignment, reversion, or impairment. Just as with conversion, this statement indicates that any real property owned by the domesticating entity continues to be owned by the domesticated entity without the necessity of a deed.

Will this be a problem for the title company if it is asked to insure a subsequent conveyance of land by the domesticated entity? No, it will not. As indicated above, 805 ILCS 415/305(a) provides that a statement of domestication must be filed with the Illinois Secretary of State. A filed statement of domestication provides evidence of the domestication.

Any mortgages and other liabilities of the domesticating entity continue as liens of the domesticated entity.

Dissolution and Dissociation (805 ILCS 180/35-1 et seq.)

The Illinois Secretary of state may administratively dissolve a LLC for failing to file its annual report and for nonpayment of the annual fee. See 805 ILCS 180/35-25(1). The members of a LLC can also agree to bring about a dissolution. See 805 ILCS 180/35-1(a)(2).

If a member leaves a LLC, this is called a dissociation. See 805 ILCS 180/35-45. Certain events can cause a member’s dissociation. These are outlined at 805 ILCS 180/35-45. An example is the member’s expulsion from the LLC or the death of the member.

Winding Up the Limited Liability Company

“Winding Up” a Limited Liability Company is the orderly termination of the business affairs of a LLC. In this regard, see 805 ILCS 180/35-1.

805 ILCS 180/35-3 makes it clear that a LLC continues after the LLC is dissolved, but only for the purpose of winding up the LLC. Thus, for purposes of winding up its business affairs, a dissolved LLC can convey property.

Question: A deed from a LLC to a grantee is recorded in 2017. At the time the deed was recorded, the LLC was dissolved. Does that mean that the deed was invalid?

Answer: No, it does not. Because of the winding up provisions of the statute, a deed from a dissolved LLC is valid. See 805 ILCS 180/35-3(a): “Subject to subsections (b), (c), and (d) of this Section, a limited liability company continues after dissolution only for the purpose of winding up its business.”

Question: A LLC is dissolved pursuant to 805 ILCS 180/35-25(1) in that it has failed to pay its requisite fees to the Illinois Secretary of State. The LLC owns one parcel of land, and it is prepared to deed this land to a purchaser for value. Does the LLC have to pay these fees prior to the execution and recording of this deed?

Answer: No, the LLC does not have to pay these fees. The Act allows the LLC to convey its land as part of the winding up process. The Act does not require that these fees be paid as a condition to the execution and recording of the deed. If a LLC is conveying land as part of the winding up process, the LLC could prepare a resolution that both authorizes the proposed action and also appoints a person to sign all appropriate documents. This resolution should also indicate that the conveyance is part of the winding up process.

But now change the facts slightly:

Assume that a LLC is dissolved. The LLC wants to refinance its mortgage. It checks with the State of Illinois, and the state tells the manager of the LLC that it will cost $1800.00 to reinstate the LLC. The manager has an idea: It will execute a deed wherein it conveys the land to a land trust, and then the land trust will execute the mortgage. Is there a problem here?

Yes, there is. The issue is authority. The LLC does have the authority to convey the land as part of the winding up process. However, the LLC is dissolved, and thus the LLC does not have the authority to convey land when the intent is to deed the land into a land trust and then execute a mortgage.

The Death of the One Member of a Single Member LLC

Example: A single member LLC is in title to the land. That member is deceased. The examiner is asked to insure a conveyance from the LLC. What does the examiner do?

It would appear that the death of the only member of the LLC would dissolve the LLC.

805 ILCS 180/35-1 is entitled, “Events causing dissolution and winding up of company’s business.” Strangely, this section does not specifically address the possibility of a sole member dying. However, it does refer in section 35-1(a)(1) to “An event or circumstance that causes the dissolution of a company by the express terms of the operating agreement.” It seems likely that the operating agreement would mention the possibility of a member dying.

805 ILCS 180/35-1(a)(4) also refers to a situation when a judicial decree determines that “it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement.” The death of the sole member of a LLC seems to meet this test.

The Act does, however, at least suggest that the death of the sole member of a LLC causes the dissolution of the LLC. See 805 ILCS 180/35-4(b): “If a dissolved limited liability company has no members, the legal representative of the last person to have been a member may wind up the business of the company.”

But who is the so-called “legal representative?” referred to in 805 ILCS 180/35-4(b)? Is a heir a legal representative? This is possibly the case, assuming that the title company reviewed an affidavit of heirship and all heirs consented to the winding up of the LLC. Thus, a legal representative of the deceased member could sign a deed conveying any real estate of the LLC. In the alternative, a court-appointed executor or administrator would be a “legal representative.”

As indicated above, when a LLC is dissolved, the business just does not cease to exist. Rather, someone must “wind up” the LLC. See 805 ILCS 180/35-3.

The Death of One Member of a Multi-Member LLC

Example: A member-managed LLC owns the land. The two members are Adam and Ben. Adam dies. The examiner has been asked to underwrite the sale of land owned by this LLC. What does the examiner do?

The death of a member of a LLC that is composed of more than one member does not automatically dissolve the LLC. See 805 ILCS 180/35-1.

However, the operating agreement might provide otherwise. That is, the operating agreement might provide that the LLC dissolves upon the death of a member. See 805 ILCS 180/35-1(a)(1).

Alternatively, the death of the member might ultimately result in a judicial decree that “the economic purpose of the company has been or is likely to be unreasonably frustrated.” See 805 ILCS 180/35-1(a)(4)(A).

The operating agreement might provide that the legal representative of the deceased member has the right to exercise all of the member’s rights for the purpose of settling his estate and administering his interest in the LLC.

Note, though, that a member is dissociated from the LLC upon the death of said member. See 805 ILCS 180/35-45(8)(A).

Rule of Title Practice:

A member-managed LLC owns the land. The two members are Adam and Ben. Adam dies. An examiner has been asked to underwrite the sale of land owned by this LLC. What does the examiner do?

The examiner should review the operating agreement, if any, to determine if the operating agreement gives any rights to the legal representative of the deceased member as to the administration of the real estate.

For example, the operating agreement might contain language such as this:

If a member who is an individual dies, the member’s executor, administrator, guardian, conservator, or other legal representative may exercise all of the member’s rights for the purpose of settling his estate or administering his property.

Note, though, that the Act does not give the representative any rights to the real estate owned by the LLC. Indeed, it is doubtful that an operating agreement would give a representative any rights to real estate that is owned by the LLC.

If the operating agreement gives no such rights to the legal representative of the deceased, then the examiner may proceed to underwrite the transaction in the traditional manner. Note that at closing the proceeds check should be made payable to the LLC in title.

Foreign Limited Liability Companies (805 ILCS 180/45-1 et seq.)

If a LLC is organized under the laws of another state, the Act requires that before transacting business in Illinois, any such foreign LLC be admitted to do business in Illinois. Admission is accomplished by filing certain documents specified in the Act with the Secretary of State. See 805 ILCS 180/45-5.

Examiners, however, should not be that concerned about this issue. First of all, merely owning, buying, mortgaging, or even selling real estate may not, in and of itself, constitute doing business in Illinois. For a list of “activities that do not constitute transacting business,” see 805 ILCS 180/45-47(a).

For example, 805 180/45-47(a)(7) lists “Owning, without more, real or personal property. 805 180/45-47(a)(8) notes “Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature. “

Secondly, years ago, title companies were concerned about corporations and LLCs being admitted to do business in Illinois because, in the event of a claim, the entity would only be able to maintain a law suit in Illinois (through the subrogation provisions of the title policy) if it were admitted to do business in Illinois.

However, realistically, that does not seem to be that big a concern now. After all, if it did become a problem, the Company would merely insist that the insured entity be admitted to do business in Illinois.

Therefore, when examining a title commitment of land that is owned by a foreign LLC, the examiner should raise this exception:

We note that _____ LLC is a foreign LLC, as defined in 805 ILCS 180/45-1 et seq. Relative thereto, we should be furnished (a) evidence of the legal existence in the LLC’s home state, and (b) certification that no event of dissolution has occurred. In addition, we should be furnished (c) a copy of the articles of organization, together with any amendments thereto, (d) a copy of the operating agreement, if any, together with any amendments thereto, (e), a list of incumbent managers or of incumbent members if managers have not been appointed.

Note: In the event of a sale of all or substantially all of the assets of the LLC, or of a sale of LLC assets to a member or manager, we should be furnished evidence that all members have consented to said sale.

But if the foreign LLC is actually transacting business in Illinois, and the examiner is concerned about the foreign LLC being admitted to do business in Illinois, the examiner can accept evidence that the Illinois Secretary of State has filed the foreign LLC’s application for admission to transact business in Illinois as a foreign LLC. See 805 ILCS 180/45-5(c).

Series LLCs (805 ILCS 180/37-40)

Pursuant to Public Act 94-607, and effective July 1, 2005, a new type of business entity was created in Illinois. This entity might formally be called a “series of limited liability company interests.” See 805 ILCS 180/37-40(a). This term will hereafter be called a “series.” (Examiners may sometimes call this (somewhat inaccurately) a “series LLC.”)

For many people the limited liability company is a preferred means of holding title to real estate. The reason for this is that the LLC can isolate liability from other assets of the owner that are not included within that specific LLC.

Example: Developer owns three subdivisions and an “environmentally challenged” factory site. Developer creates four LLCs, one for each parcel. If Developer were sued and a judgment was entered against him for cleanup costs of the factory, his liability would be limited to the assets of the LLC that owns the factory. His other land is protected against the lien of the judgment.

This is why (prior to July 1, 2005) people have traditionally formed separate LLCs for each parcel that they own. But series now changes this practice.

A series is like a sub-set of a LLC. It may be confusing to understand, because the word “series” denotes a plural connotation, when it actually is singular.

Example: The examiner should think of a series in this manner. A series is like a one-drawer file cabinet. In that one-drawer file cabinet are ten file folders. Each file folder is one (singular) series. Each file folder can hold one piece of property. Thus, if a developer owns ten properties, he can create one LLC (the one-drawer file cabinet) and have ten file folders in that one drawer. The developer can then have ten series; each series can own one property.

Compare series to owning land with a “regular” LLC. A developer who owns ten properties would have two choices with a “regular” LLC:

• The developer would have one LLC; this LLC would own all ten properties. (In other words, the one-drawer file cabinet would contain no file folders; the properties would all be tossed together into the one-drawer file cabinet.)

• The developer would have ten LLCs; each LLC would own one property. (The developer would have ten one-drawer file cabinets, all stacked on top of each other. Inside each one-drawer file cabinet would be one property.)

Creation of a Series

To create a series, the underlying limited liability company must be properly created. Form LLC-5.5(S) must be filed with the Illinois Secretary of State’s office. This form is the Articles of Organization. See https://www.cyberdriveillinois.com/publications/pdf_publications/llc55s.pdf.

There must be language in the operating agreement that either establishes a series or makes provision for a series in the future. See 805 ILCS 180/37-40.

The Benefit of the Series

A series in essence provides “double insulation.” That is, the liens of the individual LLC member do not attach to the land. Secondly, the debts and liabilities of a particular series shall be enforceable against the assets of that series only and not against the assets of the limited liability company or any other series.

This is set forth in Section 37-40(b) of the Act. This is also set forth in paragraph 7 of Form LLC-5.5(S):

The operating agreement provides for the establishment of one or more series. . . . When the company has filed a Certificate of Designation for each series, which is to have limited liability pursuant to Section 37-40 of the Illinois Limited Liability Company Act, the debts, liabilities, and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the Limited Liability Company generally or any other series thereof, and unless otherwise provided in the operating agreement, none of the debts, liabilities, obligations, and expenses incurred, contracted for or otherwise existing with respect to this company generally or any other series thereof shall be enforceable against the assets of such series.

805 ILCS 180/37-40(b) describes the steps that are necessary in order to obtain this “double insulation” of liability:

• The operating agreement must create one or more series;

• Separate and distinct records must be maintained for any such series and the assets of the series must be held separately from other assets of the LLC;

• Notice of this limited liability must be set forth in the Articles of Organization of the LLC;

• The LLC must file a form called a “Certificate of Designation” for each series with the Illinois Secretary of State.

See 805 ILCS 180/37-40(b):

(b) Notwithstanding anything to the contrary set forth in this Section or under other applicable law, in the event that an operating agreement creates one or more series, and if separate and distinct records are maintained for any such series and the assets associated with any such series are held (directly or indirectly, including through a nominee or otherwise) and accounted for separately from the other assets of the limited liability company, or any other series thereof, and if the operating agreement so provides, and notice of the limitation on liabilities of a series as referenced in this subsection is set forth in the articles of organization of the limited liability company and if the limited liability company has filed a certificate of designation for each series which is to have limited liability under this Section, then the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and unless otherwise provided in the operating agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series. The fact that the articles of organization contain the foregoing notice of the limitation on liabilities of a series and a certificate of designation for a series is on file in the Office of the Secretary of State shall constitute notice of such limitation on liabilities of a series.

The Name of the Series

805 ILCS 180/37-40(c) provides that “the name of the series with limited liability must commence with the entire name of the limited liability company, as set forth in its articles of organization, and be distinguishable from the names of the other series set forth in the articles of organization.”

What does this mean? For example, assume that the name of the LLC is Aurora LLC, an Illinois Limited Liability Company. Assume that there are three series LLCs.

Thus, the names of the series might be:

• Aurora LLC, an Illinois Limited Liability Company—Maple Street Condominium Series

• Aurora LLC, an Illinois Limited Liability Company—Oak Avenue Condominium Series

• Aurora LLC, an Illinois Limited Liability Company—Birch Blvd. Condominium Series

The Series—Administrative Information

805 ILCS 180/37-40(d) provides as follows: “Upon the filing of the certificate of designation with the Secretary of State setting forth the name of each series with limited liability, the series' existence shall begin.”

A series may be managed by either the member or members or manager or managers, as provided in the operating agreement. Unless otherwise provided in the operating agreement, the management of a series shall be vested in the members associated with such series. See 805 ILCS 180/37-40(h).

A series will be deemed to be in good standing as long as the LLC is in good standing. See 805 ILCS 180/37-40(e).

Unless otherwise stated in the operating agreement, the dissolution of a series does not dissolve any other series, nor will it dissolve the LLC. However, the dissolution of the LLC will dissolve any and all series. See 805 ILCS 180/37-40(m).

The operating agreement of the LLC may associate different members with each series. See 805 ILCS 180/37-40(a).

Example: Assume that the LLC has four members and ten buildings.

• Members A and B may be associated with series 1, 3, 5, and 7, taking charge of the operation of those specified buildings.

• Members C and D may be associated with series 2, 4, 6, and 8, taking charge of the operation of those specified buildings.

• Members B and C may be associated with series 9, and Members A and D may be associated with series 10.

Title insurance Underwriting of a Series

The examiner will need to obtain a double layer of clearance. The examiner will need the “normal” clearance items required of an LLC. This includes the following issues:

• The examiner should make sure the Articles of Organization is filed with the Secretary of State and that the LLC is in good standing

• Does the operating agreement allow for the series to be created? Does the operating agreement limit the series in any way?

• If the operating agreement allows the series to be created, was the series created?

• The examiner will need evidence that the LLC is not dissolved. In this regard, see the website of the Illinois Secretary of State: www.cyberdriveillinois.com

The examiner will also need to consider clearance issues relative to the series. This includes the following issues:

• Is a certificate of designation for the series on file with the Illinois Secretary of State? 805 ILCS 180/37-40(d) states that the certificate of designation must contain “the name of each series with limited liability.” This section also states: “If different from the limited liability company, the certificate of designation for each series shall list the name and business address of all of the managers and any member having the authority of a manager.”

• The examiner will need evidence that there has been no dissolution of the series.

• Who manages the series? Is it member-managed or manager-managed? This information will allow the examiner to determine who signs the closing documents.

• The examiner will need evidence, such as a resolution, that the members or managers, as the case may be, have authorized the series to enter into the transaction.

Title Insurance Underwriting of a Foreign Series LLC

As indicated above, 805 ILCS 180/37-40(d) provides that a series is created once the certificate of designation is filed with the Illinois Secretary of State.

But this statute is for Illinois series that are created pursuant to Illinois law. The examiner should not, for example, expect that a Delaware series file a certificate of designation with the Illinois Secretary of State.

Transferring Assets to One or More Series

What if title to land is already held in a LLC, and the attorney wants to transfer an asset to one or more series? How does the attorney accomplish that? The Illinois statute provides no guidance in this area. Nonetheless, the following course of action seems to be sound:

• The attorney has to amend the operating agreement;

• The attorney has to file an amended articles of organization;

• The attorney has to file a certificate of designation for each of the series;

• The attorney has to create the series;

• The attorney has to deed the asset to the series; the appropriate series should be the grantee.

For more information on series, see Examiners Bulletin 498.

The Personal Liability of a LLC

The title examiner should be concerned about accepting any kind of personal undertaking or personal indemnity that is executed solely by the LLC. What if the LLC dissolves the next day? The examiner should not accept personal undertakings or personal indemnities that are executed solely by a LLC. A natural person or persons should also execute such a document.

Miscellaneous Issues

A LLC is manager-managed. The manager of the LLC is another LLC. In this instance the examiner must “peel away the onion,” obtaining the normal clearance for this manager LLC.

And what if this “other” LLC was involuntarily dissolved for failing to pay fees to the Illinois Secretary of State? In this case, the “manager LLC” will have to be reinstated. This is not a “winding up” situation.

Question: Is a deed from a LLC to a series a transfer tax taxable event?

Answer: Possibly, see 35 ILCS 200/31-10; see also Todd M. Turner and Stephen J. Bochenek, “Significant Changes in Real Estate Transfer Taxes Explained,” Real Property, vol. 50, no. 4 (February 2005), pp. 7-8.

Question: Does a deed to a LLC terminate title policy coverage?

Answer: Under the old 1992 ALTA owner’s title insurance policy, a deed to a LLC might have terminated title policy coverage. See Butera v. Attorneys’ Title Guaranty Fund, Inc., 321 Ill. App. 3d 601, 747 N.E.2d 949 (2001). However, this may not necessarily be the case with the 2006 ALTA owner’s policy. See Condition 1, “Definition of Terms,” Item (d), the expanded definition of “Insured” in the 2006 ALTA owner’s policy.

Summary

An examiner is underwriting a closing involving the sale of land owned by Acme LLC. What does the examiner need? What should the examiner do?

The examiner should ask for a copy of the Articles of Organization or review the LLC on the Illinois Secretary of State’s website, which is www.cyberdriveillinois.com. This website will indicate whether the LLC is in good standing with the State of Illinois. It will also indicate if the LLC is member-managed or manager-managed.

The examiner must make sure that the LLC is legally in existence. A deed or mortgage executed by a LLC when the examiner is merely assured that “the documents will be filed tomorrow) is an invalid deed or mortgage. See Carollo v. Irwin, 2011 Ill. App. (1st) 102765.

If the Illinois Secretary of State’s website indicates that the LLC is member-managed, and the member is a corporation, the examiner will need information concerning the corporation’s legal existence.

The examiner should review the LLC’s operating agreement, if there is one. The operating agreement will provide information on who has the authority to authorize the conveyance or mortgage of LLC real estate. For example, the operating agreement may limit the authority of managers in a manager-managed LLC.

The examiner should ask for a copy of the resolution. The resolution will authorize the proposed transaction and it will indicate who will sign the deed or mortgage. The examiner should review the resolution. For example, are there any inconsistencies between what the resolution provides and the Illinois Secretary of State’s website?

The examiner should be prepared for inconsistencies. For example, the Illinois Secretary of State’s website may show that the LLC has three members. The operating agreement may show that the LLC has three members. But the examiner may be furnished documentation that indicates that the LLC has only two members. In that even the examiner will need proper evidence that the structure of the LLC has been changed from three members to two members. Ultimately, however, in the event of an inconsistency otherwise not explained, the Illinois Secretary of State’s website should be treated as controlling.

But note that there may be instances where the examiner does not have to review a resolution. For example, if the LLC is member-managed, and all of the members will be executing the documents, there would be no reason to look at a resolution. Similarly, if the operating agreement gives all of the authority to buy and sell real estate to a manager, and that manager is executing the documents, the examiner would not need a resolution.

If a proposed sale is a sale of all, or substantially all, the assets of the LLC, then all of the members of both a member-managed and a manager-managed LLC have to consent to the sale.

In a member-managed LLC, the examiner will need the consent of a majority of the members. In a manager-managed LLC, if there is more than one manager, then the examiner will need the consent of a majority of the managers.

New Developments

Public Act 101-553 was effective on January 1, 2020. It adds new section (a-5) to the Act immediately after section (a). (See 805 ILCS 180/10-10(a-5).

This new section states that being a member or manager of an LLC does not automatically shield a member or manager from personal liability for their acts. Only time will tell if this new provision will lessen the popularity of LLCs in Illinois.

The two new sections are below.

§ 10–10. Liability of members and managers.

(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

(a–5) Nothing in subsection (a) or subsection (d) limits the personal liability of a member or manager imposed under law other than this Act, including, but not limited to, agency, contract, and tort law. The purpose of this subsection (a–5) is to overrule the interpretation of subsections (a) and (d) set forth in Dass v. Yale, 2013 IL App (1st) 122520, and Carollo v. Irwin, 2011 IL App (1st) 102765, and clarify that under existing law a member or manager of a limited liability company may be liable under law other than this Act for its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company. This subsection is therefore intended to be applicable to actions with respect to which all timely appeals have not exhausted before the effective date of this amendatory Act of the 101st General Assembly as well as to all actions commenced on or after the effective date of this amendatory Act of the 101st General Assembly.

Note: Dass v Yale was a fraud case. Dass purchased a condo unit from an LLC of which Yale was the managing member. Plaintiffs named Yale as a defendant, suing him for common-law and statutory fraud. Yale filed a motion to dismiss the claims against him pursuant to sections 2–619(a)(5) and (a)(9) of the Code, claiming that he was insulated from liability under section 10–10 of the LLC Act

Carollo v. Irwin was a contract case. The defendant signed a real estate purchase contract on behalf of an LLC.

Authority Issues

Introduction

When insuring the deed or mortgage executed by a limited liability company, the title examiner must be concerned with a variety of authority issues. These issues are outlined in Part Two of these materials.

Limited Liability Company (manager-managed)

Statute:

• 805 ILCS 180/1-1 et seq.

Clearance:

• When insuring the sale or mortgage of land owned by an LLC, title companies have to be concerned with two issues: One, the legal existence of the LLC; two, the authority of the members or the managers to bind the LLC.

• Title examiners must make sure that the LLC is in legal existence before they insure a transaction wherein said LLC has executed a deed or mortgage. If the LLC has not been legally formed, a court may set aside the transaction. See Carollo v. Irwin, 2011 Ill. App. (1st) 102765.

• To verify that the LLC is legally in existence, see www.cyberdriveillinois.com.

• Note that Public Act 99-637 creates default member management of a LLC. That is, unless the operating agreement provides to the contrary, a LLC shall be member-managed and not manager-managed. See 805 ILCS 180/15-1(a).

• Limited liability companies are required to have articles of organization. Articles of organization are necessary for the creation of a limited liability company. See 805 ILCS 180/5-5(b).

• Articles of organization may contain provisions that may otherwise be set forth in an operating agreement. See 805 ILCS 180/5-5(a)(8).

• Both articles of organization and the operating agreement may limit the authority of the members to act on behalf of the LLC. See 805 ILCS 180/5-5(a)(8); 805 ILCS 180/15-5(a).

• But limited liability companies are not required to have operating agreements; operating agreements are only optional. See 805 ILCS 180/15-5(a).

• If the examiner checks the Illinois Secretary of State’s website and verifies that the LLC is legally in existence, and if the examiner is given a copy of the LLC’s operating agreement, the examiner does not have to ask for and review a copy of the LLC’s articles of organization.

• If the examiner checks the Illinois Secretary of State’s website and verifies that the LLC is legally in existence, but if the examiner is told that the LLC has no operating agreement, the examiner should ask for and review a copy of the LLC’s articles of organization.

• Sometimes the examiner will find that the management provisions of the LLC, as set forth in the Illinois Secretary of State’s website, are inconsistent with the management provisions of the LLC’s operating agreement. In that event, the examiner should investigate further. This investigation may entail talking to the customer or reviewing the LLC’s articles of organization. Note, however, that generally speaking, if there is an inconsistency between the management provisions of the operating agreement and the management provisions of the Illinois Secretary of State’s website, the examiner should presume that the website controls.

• Assuming that there are no limitations set forth in either the articles of organization or the operating agreement, then unless the transaction is a sale or lease of all, or substantially all, of the property of the LLC, any matter relating to a real estate transaction of the LLC may be decided by the manager (if there is only one manager) or by a majority of the managers (if there is more than one manager). See 805 ILCS 180/15-1(c)(2); 805 ILCS 180/ 15-1(d)(10).

• Unless the articles of organization or the operating agreement provide otherwise, if the transaction is a sale or lease of all or substantially all of the property of the LLC, then all the members (note, not the managers) must evidence their consent to the sale. See 805 ILCS 180/15-1(d)(10).

• 805 ILCS 180/13-5(c) formerly stated that unless the articles of organization limit a manager’s authority, any manager of a manager-managed company may sign the deed. Public Act 99-637 deletes this provision from the Act. Therefore, the examiner cannot rely on this statute when determining whether a deed is properly executed. Rather, the examiner should obtain a resolution. For further details concerning this resolution, see below. Alternatively, the examiner may rely on a recorded statement of authority. For further details, see below.

• The title examiner may not know if the transaction is a sale of all (or substantially all) of the property of an LLC. As described above, different types of approval may be needed, depending on the nature of the transaction. This is another reason why the examiner should obtain a resolution. (There are, though, some exceptions to this general rule. See the section below entitled, “Execution of the deed or mortgage.”)

• 805 ILCS 180/13-15 provides for the creation of a statement of authority. This document may set forth the authority, or limitations on the authority, of a manager or member to execute a deed or mortgage of LLC property. Generally speaking, a statement of authority is filed with the Illinois Secretary of State. However, 805 ILCS 180/13-15(e) provides that if a certified copy of a statement of authority that authorizes or limits the transfer of LLC property is recorded, that statement of authority can be relied on by a third party who gives value in reliance on the statement of authority, provided the third party has no knowledge to the contrary. If the authority stated or limited in the articles of organization conflicts with the authority stated or limited in a statement of authority that is filed with the Illinois Secretary of State, then the statement of authority takes precedent.

• 805 ILCS 180/13-20 provides for the creation of a statement of denial. Like a statement of authority, generally speaking, a statement of denial is filed with the Illinois Secretary of State. However, 805 ILCS 180/13-20(2) provides that if a certified copy of a statement of denial is recorded after a statement of authority has already been recorded, the statement of denial shall be deemed to be a limitation on the statement of authority.

• If the transaction is a sale or conveyance to a manager or member of the LLC, then all other managers of the manager-managed LLC should execute the deed. (Note that this scenario is not contemplated in the Act; it is a title company underwriting guideline.)

Execution of the deed or mortgage:

• In all transactions, one should obtain a resolution signed in accordance with the above consent requirements that are set forth in 805 ILCS 180/15-1(c)(2) and 805 ILCS 180/ 15-1(d)(10). That is, unless the transaction is a sale or lease of all, or substantially all, of the property of the LLC, any matter relating to a real estate transaction of the LLC may be decided by the manager (if there is only one manager) or by a majority of the managers (if there is more than one manager). Any resolution should be similarly prepared and executed. That is, generally speaking, the resolution should be executed by the manager (if there is only one manager) or by a majority of the managers (if there is more than one manager). Although 805 ILCS 5/8.50 allows one officer of a corporation to certify a corporate resolution, there is no such similar statute in the Limited Liability Company Act. Furthermore, see 805 ILCS 180/13-5(a): “A member is not an agent of a limited liability company solely by reason of being a member.”

• This resolution should one, authorize the action that the LLC will be taking (deeding or mortgaging the land of the LLC) and two, indicate who will be signing the deed or mortgage on behalf of the LLC.

• In the alternative, the examiner may rely on a recorded statement of authority that authorizes the execution of a deed or mortgage of LLC property, as long as there is no recorded statement of denial that limits said authority.

• In the alternative, the examiner may rely on a deed or mortgage that is executed by all of the managers of the manager-managed LLC.

• In the alternative, if the operating agreement gives specific guidelines as to the number of managers required to bind the LLC, the examiner may rely on the operating agreement and not require a resolution.

• Can a LLC use a power of attorney to close a transaction? Yes, it can; see 805 ILCS 180/1-30(10); this statute allows a LLC to appoint agents. (Note that the statute makes it clear that the LLC is the principal; a manager, individually, is not the principal.)

Limited Liability Company (member-managed)

Statute:

• 805 ILCS 180/1-1 et seq.

Clearance:

• When insuring the sale or mortgage of land owned by an LLC, title companies have to be concerned with two issues: One, the legal existence of the LLC; two, the authority of the members or the managers to bind the LLC.

• Title examiners must make sure that the LLC is in legal existence before they insure a transaction wherein said LLC has executed a deed or mortgage. If the LLC has not been legally formed, a court may set aside the transaction. See Carollo v. Irwin, 2011 Ill. App. (1st) 102765.

• To verify that the LLC is legally in existence, see www.cyberdriveillinois.com.

• Note that Public Act 99-637 creates default member management of a LLC. That is, unless the operating agreement provides to the contrary, a LLC shall be member-managed and not manager managed. See 805 ILCS 180/15-1(a).

• Limited liability companies are required to have articles of organization. Articles of organization are necessary for the creation of a limited liability company. See 805 ILCS 180/5-5(b).

• Articles of organization may contain provisions that may otherwise be set forth in an operating agreement. See 805 ILCS 180/5-5(a)(8).

• Both articles of organization and the operating agreement may limit the authority of the members to act on behalf of the LLC. See 805 ILCS 180/5-5(a)(8); 805 ILCS 180/15-5(a).

• But limited liability companies are not required to have operating agreements; operating agreements are only optional. See 805 ILCS 180/15-5(a).

• If the examiner checks the Illinois Secretary of State’s website and verifies that the LLC is legally in existence, and if the examiner is given a copy of the LLC’s operating agreement, the examiner does not have to ask for and review a copy of the LLC’s articles of organization.

• If the examiner checks the Illinois Secretary of State’s website and verifies that the LLC is legally in existence, but if the examiner is told that the LLC has no operating agreement, the examiner should ask for and review a copy of the LLC’s articles of organization.

• Sometimes the examiner will find that the management provisions of the LLC, as set forth in the Illinois Secretary of State’s website, are inconsistent with the management provisions of the LLC’s operating agreement. In that event, the examiner should investigate further. This investigation may entail talking to the customer or reviewing the LLC’s articles of organization. Note, however, that generally speaking, if there is an inconsistency between the management provisions of the operating agreement and the management provisions of the Illinois Secretary of State’s website, the examiner should presume that the website controls.

• Assuming that there are no limitations set forth in either the articles of organization or the operating agreement, then unless the transaction is a sale or lease of all, or substantially all, of the property of the LLC, any matter relating to a real estate transaction of the LLC may be decided by a majority of the members. See 805 ILCS 180/15-1(b)(2); 805 ILCS 180/15-1(d)(10).

• Unless the articles of organization or the operating agreement provide otherwise, if the transaction is a sale or lease of all or substantially all of the property of the LLC, then all members (note, not the managers) must evidence their consent to the sale. See 805 ILCS 180/15-1(d)(10).

• 805 ILCS 180/13-5(c) formerly stated that unless the articles of organization limit a member’s authority, any member of a member-managed company may sign the deed. Public Act 99-637 deletes this provision from the Act. Therefore, the examiner cannot rely on this statute when determining whether a deed is properly executed. Rather, the examiner should obtain a resolution. For further details concerning this resolution, see below. Alternatively, the examiner may rely on a recorded statement of authority. For further details, see below.

• The title examiner may not know if the transaction is a sale of all (or substantially all) of the property of an LLC. As described above, different types of approval may be needed, depending on the nature of the transaction. This is another reason why the examiner should obtain a resolution. (There are, though, some exceptions to this general rule. See the section below entitled, “Execution of the deed or mortgage.”)

• 805 ILCS 180/13-15 provides for the creation of a statement of authority. This document may set forth the authority, or limitations on the authority, of a manager or member to execute a deed or mortgage of LLC property. Generally speaking, a statement of authority is filed with the Illinois Secretary of State. However, 805 ILCS 180/13-15(e) provides that if a certified copy of a statement of authority that authorizes or limits the transfer of LLC property is recorded, that statement of authority can be relied on by a third party who gives value in reliance on the statement of authority, provided the third party has no knowledge to the contrary. If the authority stated or limited in the articles of organization conflicts with the authority stated or limited in a statement of authority that is filed with the Illinois Secretary of State, then the statement of authority takes precedent.

• 805 ILCS 180/13-20 provides for the creation of a statement of denial. Like a statement of authority, generally speaking, a statement of denial is filed with the Illinois Secretary of State. However, 805 ILCS 180/13-20(2) provides that if a certified copy of a statement of denial is recorded after a statement of authority has already been recorded, the statement of denial shall be deemed to be a limitation on the statement of authority.

• If the transaction is a sale or conveyance to a manager or member of the LLC, then all other members of the member-managed LLC should execute the deed. (Note that this scenario is not contemplated in the Act; it is a title company underwriting guideline.)

Execution of the deed or mortgage:

• In all transactions, one should obtain a resolution signed in accordance with the above consent requirements that are set forth in 805 ILCS 180/15-1(b)(2) and 805 ILCS 180/15-1(d)(10). That is, unless the transaction is a sale or lease of all, or substantially all, of the property of the LLC, any matter relating to a real estate transaction of the LLC may be decided by a majority of the members. Any resolution should be similarly prepared and executed. That is, generally speaking, the resolution should be executed by a majority of the members. Although 805 ILCS 5/8.50 allows one officer of a corporation to certify a corporate resolution, there is no such similar statute in the Limited Liability Company Act. Furthermore, see 805 ILCS 180/13-5(a): “A member is not an agent of a limited liability company solely by reason of being a member.”

• This resolution should one, authorize the action that the LLC will be taking (deeding or mortgaging the land of the LLC) and two, indicate who will be signing the deed or mortgage on behalf of the LLC.

• In the alternative, the examiner may rely on a recorded statement of authority that authorizes the execution of a deed or mortgage of LLC property, as long as there is no recorded statement of denial that limits said authority.

• In the alternative, the examiner may rely on a deed or mortgage that is executed by all of the members of the member-managed LLC.

• In the alternative, if the operating agreement gives specific guidelines as to the number of members required to bind the LLC, the examiner may rely on the operating agreement and not require a resolution.

• Can a LLC use a power of attorney to close a transaction? Yes, it can; see 805 ILCS 180/1-30(10); this statute allows a LLC to appoint agents. (Note that the statute makes it clear that the LLC is the principal; a member, individually, is not the principal.)

Limited Liability Company (dissolution; winding up)

Statute:

• 805 ILCS 180/35-1 et seq.

Clearance:

• Upon dissolution of a limited liability company, title to the land remains in the name of the LLC. See 805 ILCS 180/35-3.

• A member of a LLC is “dissociated” (i.e., taken out of the LLC) when that member dies or leaves the LLC. The dissociation of a member does not automatically dissolve the LLC. See 805 ILCS 180/35-45(1); 805 ILCS 180/35-45(8)(A); 805 ILCS 180/35-55.

• Subject to two exceptions, a LLC continues after dissolution only for the purpose of winding up its business. See 805 ILCS 180/35-3(a); 805 ILCS 180/35-30(c).

• Exception: The members of the LLC may unanimously waive the right to have the business of the LLC wound up and the LLC terminated. In that case, the LLC continues its business as if the dissolution had never occurred. See 805 ILCS 180/35-3(b).

• Exception: If there are no members of the LLC, the legal representative of the last remaining member may, within one year after the occurrence of the event that caused the dissociation of the last remaining member, agree in writing to continue the limited liability company. If this happens, the legal representative or its nominee will be admitted to the LLC as a member and the LLC will not be dissolved or its business wound up until the occurrence of a future event of dissolution, if any. See 805 ILCS 180/35-3(c).

• After dissolution, a member who has not wrongfully dissociated may participate in winding up the business of a LLC. See 805 ILCS 180/35-4(a).

• A legal representative of the last surviving member of a LLC may wind up the business of a LLC. See 805 ILCS 180/35-3(c); 805 ILCS 180/35-4(b).

• A person winding up the business of a dissolved LLC may preserve the LLC’s business or property as a “going concern” for a reasonable time. This person may “dispose of and transfer the company’s property,” distributing the company’s assets pursuant to 805 ILCS 180/35-10. Thus, although this person has the authority to convey the real estate of a dissolved LLC, it does not appear that this person has the authority to mortgage the real estate of a dissolved LLC. See 805 ILCS 180/35-4(c).

• In winding up the business of a dissolved LLC, the assets of the LLC must be used to pay off the creditors of the LLC. Thus, it appears that the real estate of a dissolved LLC cannot be conveyed to a member or manager of a LLC unless said member or manager is a creditor of the LLC. See 805 ILCS 180/35-10.

Execution of the deed:

• In all transactions, one should obtain a resolution that sets forth the details of the transaction. The transaction should be underwritten in accordance with the principles outlined above. This resolution will one, authorize the conveyance of the land of the LLC; two, identify who will be signing the deed on behalf of the LLC; and three, indicate that the deed is part of the “winding up” process of the LLC.

Limited Liability Company (death of a member)

Statute:

• 805 ILCS 180/35-1 et seq.

Clearance:

• Assuming that the operating agreement does not provide otherwise, it appears that the death of one member of a LLC that contains more than one member does not dissolve the LLC. See 805 ILCS 180/35-55.

• On the other hand, it appears that the death of the only member or the last remaining member of a LLC does dissolve the LLC (assuming that the operating agreement provides for this occurrence). See 805 ILCS 180/35-1(a)(1); 805 ILCS 180/35-1(a)(4)(C).

• A member of a LLC is “dissociated” (i.e., taken out of the LLC) when that member dies. See 805 ILCS 180/35-45(8)(A).

• A dissociated member of a LLC has no right to participate in the management and conduct of the LLC. The examiner should review the operating agreement of the LLC to see if the operating agreement gives any rights to the estate or legal representative of the deceased member as to the administration of the real estate of the LLC. See 805 ILCS 180/35-55(a)(1).

• A legal representative of the last surviving member of a LLC may wind up the business of a LLC. Although this person has the authority to convey the real estate of said LLC, it does not appear that this person (the legal representative of the last surviving member of a LLC) has the authority to mortgage the real estate of said LLC. See 805 ILCS 180/35-4(b); 805 ILCS 180/35-4(c); 805 ILCS 180/35-10.

• On the other hand, because the death of one member of a LLC that contains more than one member does not dissolve the LLC, it appears that a LLC in this particular instance could mortgage its real estate. See 805 ILCS 180/35-55.

• The articles of organization or the operating agreement may contain a provision that provides for the admission of a new member to the LLC after there is no longer a remaining member of the LLC. See 805 ILCS 180/35-3(c).

• For more details concerning dissolved limited liability companies, see the previous section.

Execution of the deed or mortgage:

• Generally speaking, one should obtain a resolution that sets forth the details of the transaction. The transaction should be underwritten in accordance with the principles outlined above. This resolution will one, authorize the action that the LLC will be taking (deeding or mortgaging the land of the LLC) and two, indicate who will be signing the deed or mortgage on behalf of the LLC.

• However, when dealing with a sole member LLC, and that member is deceased, the legal representative of that member can convey the property without a resolution. Consider the following language to describe the grantor: “_____, legal representative of _____ LLC, pursuant to authority set forth in 805 ILCS 180/35-4(b), 805 ILCS 180/35-4(c), and ___ County Circuit Court Case No. __P_____, hereby conveys and quit claims to. . . .”

Limited Liability Company, Foreign (a state other than Illinois)

Statute:

• 805 ILCS 180/45-1 et seq.

Clearance:

• If an LLC is organized under the laws of another state, the Act requires that before transacting business in Illinois, any such foreign LLC be admitted to do business in Illinois. See 805 ILCS 180/45-5(a).

• Admission to do business in Illinois is accomplished by filing certain documents specified in the Act with the Secretary of State. See 805 ILCS 180/45-5.

• However, title companies should not be that concerned about this issue. Merely owning real estate, in and of itself, does not constitute doing business in Illinois. See 805 ILCS 180/45-47(a)(7). For a list of so-called “[a]ctivities that do not constitute transacting business”, see 805 ILCS 180/45-47(a).

• “Owning, without more, real or personal property” is not transacting business in Illinois. “Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature” is not transacting business in Illinois. See 805 ILCS 180/45-47(a)(7); 805 ILCS 180/45-47(a)(8).

• Is the selling, buying, and mortgaging of several lots in a series of closings transacting business? Perhaps it is. If the examiner is concerned about a foreign LLC transacting business in Illinois, the examiner can accept proof that the Illinois Secretary of State has filed the foreign LLC’s application for admission to transact business in Illinois as a foreign LLC as evidence that the LLC can transact business. See 805 ILCS 180/45-5(a); 805 ILCS 180/45-5(c).

• The examiner should review the articles of organization and the operating agreement. These documents may limit the authority of the managers or members to act on behalf of the LLC.

• Assuming that there are no limitations set forth in either the articles of organization or the operating agreement, then unless the transaction is a sale or lease of all, or substantially all, of the property of the LLC, any matter relating to the business of the LLC may be decided by a majority of the managers or a majority of the members, as appropriate. See 805 ILCS 180/15-1.

• Unless the articles of organization or the operating agreement provide otherwise, if the transaction is a sale or lease of all or substantially all of the property of the LLC, then all managers or members (as appropriate) must evidence their consent to the sale. See 805 ILCS 180/15-1.

• If the transaction is a sale or conveyance to a manager or member of the LLC, then all other managers of the manager-managed LLC or all the members of the member-managed LLC (as appropriate) should execute the deed. (Note that this scenario is not contemplated in the Act; it is a title company underwriting guideline.)

Execution of the deed or mortgage:

• In all transactions, one should obtain a resolution signed in accordance with the above consent requirements. This resolution will one, authorize the action that the LLC will be taking (deeding or mortgaging the land of the LLC) and two, indicate who will be signing the deed or mortgage on behalf of the LLC. (See, however, the previous sections on manager-managed LLCs and member-managed LLCs for exceptions to this general rule.)

Limited Liability Company (Series LLC)

Statute:

805 ILCS 180/37-40

Clearance:

• The operating agreement must establish or provide for the series. See 805 ILCS 180/37-40(a). Illinois Secretary of State Form LLC-5.5(S), which is the Articles of Organization, must be filed with the Secretary of State.

• The certificate of designation that is filed with the Illinois Secretary of State will disclose the names of all of the series. See 805 ILCS 180/37-40(b); 805 ILCS 180/37-40(d). An operating agreement will also disclose this information. See 805 ILCS 180/37-40(a). Form LLC-5.5(S) does not disclose the names of the series.

• A form called a “certificate of designation” for each series must be filed with the Secretary of State. As indicated above, this certificate must contain the name of each series. See 805 ILCS 180/37-40(b); 805 ILCS 180/37-40(d).

• The series does not legally exist until the certificate of designation is filed with the Secretary of State. Therefore, the examiner must be furnished a file-stamped copy of the appropriate certificate of designation. See 805 ILCS 180/37-40(d). In the alternative, the examiner may confirm the legal existence of the series by reviewing the Illinois Secretary of State’s website, www.cyberdriveillinois.com.

• In order to insure a mortgage or deed executed by a “series LLC” (the statute uses the term, “a series of a limited liability company”), the examiner must obtain and review both the operating agreement and a file-stamped copy of the certificate of designation. In lieu of obtaining a file-stamped copy of the certificate of designation, the examiner may confirm the legal existence of the series by reviewing the Illinois Secretary of State’s website, www.cyberdriveillinois.com.

• Generally, the name of the series must commence with the entire name of the limited liability company, as stated in the articles of organization, and be distinguishable from the names of the other series set forth in the articles of organization. See 805 ILCS 180/37-40(c).

• Consider, for example, these three series:

ABC LLC, an Illinois Limited Liability Company—Maple Street Development Series;

ABC LLC, an Illinois Limited Liability Company—Oak Avenue Development Series;

ABC LLC, an Illinois Limited Liability Company—Elm Road Development Series.

• The certificate of designation for each series shall list the names of all of the managers and the name any member having the authority of a manager. See 805 ILCS 180/37-40(d).

• A series may be managed by either the member or members associated with the series or by a manager or managers chosen by the members of such series, as provided in the operating agreement. Unless otherwise provided in the operating agreement, the management of a series shall be vested in the members associated with such series. See 805 ILCS 180/37-40(h).

• A series will be deemed to be in good standing as long as the limited liability company is in good standing. See 805 ILCS 180/37-40(e). Similarly, the dissolution of the LLC will dissolve any and all series. See 805 ILCS 180/37-40(m).

• The examiner will have to review two sets of clearance materials. That is, the examiner will need to look at the “normal” clearance associated with a LLC. But the examiner will also need to review the clearance associated with the series.

For example: The LLC may be called, Montgomery Property, LLC. There may be two series:

Montgomery Property, LLC—1909 Orchard Road Series Montgomery Property, LLC—1981 Jericho Road Series

The examiner will have to conduct clearance on both the limited liability company and the series in question. 805 ILCS 180/37-40(a) indicates that a limited liability company that establishes a series will have an operating agreement, as the operating agreement provides for the establishment of the series.

• Questions that the examiner must address include: Is the LLC in good standing? (The examiner should obtain either a filed articles of organization or look at www.cyberdriveillinois.com. Remember, though, that 805 ILCS 180/37-40(d) provides that the series does not legally exist until a certificate of designation is filed with the Illinois Secretary of State.) Does the operating agreement allow for the series to be created? Does the operating agreement limit the series in any way? Is a certificate of designation for each series filed with the Secretary of State? Does the certificate of designation disclose the name of the series? What does the operating agreement indicate as to the management of the series? Is the management information that is contained in the operating agreement consistent with the management information contained in the certificate of designation? Is the series member-managed or manager-managed? (This information will be instrumental in deciding who will sign the deed or mortgage.)

• Note that one of the features of a series is limited liability. In this regard, see 805 ILCS 180/37-40(b):

Notwithstanding anything to the contrary set forth in this Section or under other applicable law, in the event that an operating agreement creates one or more series, and if separate and distinct records are maintained for any such series and the assets associated with any such series are held (directly or indirectly, including through a nominee or otherwise) and accounted for separately from the other assets of the limited liability company, or any other series thereof, and if the operating agreement so provides, and notice of the limitation on liabilities of a series as referenced in this subsection is set forth in the articles of organization of the limited liability company and if the limited liability company has filed a certificate of designation for each series which is to have limited liability under this Section, then the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and unless otherwise provided in the operating agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series.

In other words, if both the articles of organization and the operating agreement provide for limited liability, then the debts of both the limited liability company and another series are not enforceable against the series in question.

Execution of the deed or mortgage:

• The examiner should obtain a resolution signed by all of the members of the series (if member-managed) or signed by all of the managers of the series (if manager managed). This resolution will one, authorize the action that the series will be taking (deeding or mortgaging the land of the LLC) and two, indicate who will be signing the deed or mortgage on behalf of the series. (See, however, the previous sections on manager-managed LLCs and member-managed LLCs for exceptions to this general rule.)

New Construction

Change Orders / New Subs

Here are some insights into a situation where a contractor was listed on a sworn statement and then removed - if no funds have been disbursed and no work was ever done

We would ask for the change order confirming the new subcontractor that is listed for that trade and we would also ask for an acknowledgment from the previous sub (or supplier) on company letterhead confirming that they do not have (or no longer have) a contract with said GC/Owner for said property and no funds are due. We would also ask that the acknowledgement be notarized (we don’t require anything formal or fancy). In this case we can’t really get a lien waiver because a lien waiver for $0 is irrelevant. Take a recent example one of my other agents just passed along: I just had this situation with a flooring supplier. I spoke to the supplier on the phone and confirmed but we had also been in contact previously. I asked that they send me an email for my file. I pasted it below just as an fyi. I know this isn’t quite as formal as you are looking for, but it is all circumstantial as you know . I guess you could add this language to the change order as well.

Also, if the GC removes the sub from the sworn statement and you are providing IMLA or ALTA 32/33 coverage, then you are not insuring undisclosed contracts and that would fall under that category so I think an acknowledgment along with the change order would be sufficient to defend a lien if they were undisclosed as having a contract. The GC provided a sworn statement as such.

Notary & Acknowledgments

Acts prohibited

(5 ILCS 312/6-104) (from Ch. 102, par. 206-104)

   Sec. 6-104. Acts prohibited.
   (a) A notary public shall not use any name or initial in signing certificates other than that by which the notary was commissioned.
   (b) A notary public shall not acknowledge any instrument in which the notary's name appears as a party to the transaction.
   (c) A notary public shall not affix his signature to a blank form of affidavit or certificate of acknowledgment.
   (d) A notary public shall not take the acknowledgment of or administer an oath to any person whom the notary actually knows to have been adjudged mentally ill by a court of competent jurisdiction and who has not been restored to mental health as a matter of record.
   (e) A notary public shall not take the acknowledgment of any person who is blind until the notary has read the instrument to such person.
   (f) A notary public shall not take the acknowledgment of any person who does not speak or understand the English language, unless the nature and effect of the instrument to be notarized is translated into a language which the person does understand.
   (g) A notary public shall not change anything in a written instrument after it has been signed by anyone.
   (h) No notary public shall be authorized to prepare any legal instrument, or fill in the blanks of an instrument, other than a notary certificate; however, this prohibition shall not prohibit an attorney, who is also a notary public, from performing notarial acts for any document prepared by that attorney.
   (i) If a notary public accepts or receives any money from any one to whom an oath has been administered or on behalf of whom an acknowledgment has been taken for the purpose of transmitting or forwarding such money to another and willfully fails to transmit or forward such money promptly, the notary is personally liable for any loss sustained because of such failure. The person or persons damaged by such failure may bring an action to recover damages, together with interest and reasonable attorney fees, against such notary public or his bondsmen.
   (j) A notary public shall not perform any notarial act when his or her commission is suspended or revoked, nor shall he or she fail to comply with any term of suspension which may be imposed for violation of this Section.

(Source: P.A. 100-81, eff. 1-1-18; 100-809, eff. 1-1-19.)

PACA

While it is not clear that every court would impose a lien on a piece of real property in a PACA claim, the title insurance company has indicated that PACA affidavit and indemnity agreements will be required going forward for the sale of any property owned or leased by a potential PACA dealers. Under the broad language of PACA, many tenants are or could be considered “dealers” under the terms of PACA. Common retail entities subject to PACA trust duties include grocery stores, “big box” stores, and any retailer purchasing produce in “wholesale or jobbing quantities.”6 It is possible that other operations, including table-service and fast-food restaurants, catering companies, mini-marts, convenience stores or even the local coffee or donut shop may be subject to PACA trust duties, if they are purchasing produce in “wholesale or jobbing quantities.”

I don’t think in this instance it hurts to get the following affidavit executed. You can have your examiner string together a B-I exception along this line:

The Company should be provided an affidavit and indemnity that it is not the subject of, nor does it anticipate to have imposed, any lien under the Perishable Agricultural Commodities Act (“PACA”) and the Packers and Stockyards Act (“PASA”) as those regulations are set forth in 7 U.S.C. Section 499a, et. seq. and 7 U.S.C. Section 181 et. seq..

Partnerships

Last effective date: October 10, 2019

PARTNERSHIPS

By

Richard F. Bales

Introduction

Illinois has enacted two statutes that govern partnerships

• The Uniform Partnership Act, which is found at 805 ILCS 206/100 et seq. This statute was first enacted in 1997. The current version has been in effect since 2003.

• The Uniform Limited Partnership Act, which is found at 805 ILCS 215/101 et seq. This statute was first enacted in 2001. The current version has been in effect since 2005.

Definitions

A partnership is an association of two or more persons to carry on as co-owners a business for profit. See 805 ILCS 206/101(f).

Generally speaking, there are two kinds of partnerships in Illinois: general partnerships and limited partnerships.

In a general partnership all of the partners share in the profits and losses of the partnership. All partners are general partners in that they all take an active role in the management of the partnership and have unlimited personal liability for the debts of the partnership.

A limited partnership consists of at least one general partner and at least one limited partner. The general partner(s) manages the partnership and has unlimited liability for partnership debts. See 805 ILCS 215/102(13). The limited partner(s) only contributes capital. A limited partner does not participate in the management and operation of the company and therefore assumes no liability for partnership debts beyond the limit of his capital contribution. See 805 ILCS 215/303.

Basic Concepts in the Uniform Partnership Act

805 ILCS 206/103 makes it clear that partnership issues are governed by the partnership agreement. Note, though, that 805 ILCS 206/103(b)(3)(ii) states as follows:

The partnership agreement may not: eliminate or reduce a partner’s fiduciary duties, but may . . . specify the number or percentage of partners that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate these duties.

Under previous partnership law, it was always clear that a general partner could bind the partnership as long as the partner’s act could be construed as carrying on the usual business of the partnership. This is no longer the case. This statute means that now a partner can be restricted from, e.g., mortgaging or deeding land.

This statute has a significant effect on the title examiner. The statute refers to the partnership agreement limiting the actions of the partner. Thus, when insuring a partnership transaction, the examiner should do what he has traditionally done—he should ask for a copy of the partnership agreement and all amendments thereto. The examiner should make sure that the partner that will execute the deed or mortgage is a general partner, has the authority to act, and that the partner’s authority has not been expressly restricted or limited by the partnership agreement.

The Act does not require the partners to enter into a partnership agreement. Therefore, if there is no agreement, the partners will be governed solely by the Act. But for most commercial partnerships, there will be a partnership agreement.

The Act does not require that the partnership agreement be recorded.

The Statement of Partnership Authority (805 ILCS 206/303)

As noted above, the examiner can review the partnership agreement to see if there are any limits on the authority of a partner. But the examiner will also have notice of any limitations on a partner’s authority by determining if a Statement of Partnership Authority has been recorded. See 805 ILCS 206/303(d)(2); 805 ILCS 206/303(e).

This statement can supplement or curtail the normal authority of specific partners. For example, perhaps the members of a four-partner partnership want to designate two partners as the only authorized signatories on a conveyance or mortgage of partnership property. Although the Act provides for a Statement of Partnership Authority to be filed in the Illinois Secretary of State’s office, to be effective in a real estate transaction, the Statement of Partnership Authority must be recorded in the county in which the partnership real estate is located. See 805 ILCS 206/105(a); 805 ILCS 206/303(d)(1); 805 ILCS 206/303(d)(2).

805 ILCS 206/303(a) sets out the matters that must be in a Statement of Partnership Authority. One item is the “names of the partners authorized to execute an instrument transferring real property held in the name of the partnership.”

Unless canceled earlier, a Statement of Partnership Authority terminates by operation of law five years after the date on which it (or its latest amendment) was filed with the Secretary of State. See 805 ILCS 206/303(g).

Statement of Denial (805 ILCS 206/304)

A partnership may also file a Statement of Denial with the Secretary of State. This statement denies a person’s authority or status as a partner. A Statement of Denial might be used when a partner transfers his or her partnership interest or leaves the partnership.

Example: Adam is a general partner of ABC Partnership. He decides to leave the partnership and work for a law firm in Chicago. The remaining two partners, Baker and Charles, file a Statement of Denial, denying Adam’s authority as a partner.

If real estate is involved, a certified copy of a filed Statement of Denial must also be recorded with the Recorder of Deeds, as set forth in 805 ILCS 206/303(d)(2).

Partnership Property

When is Real Estate Partnership Property? (805 ILCS 206/203, 805 ILCS 206/204)

Real estate is partnership property when:

• The real estate is acquired in the partnership name. See 805 ILCS 206/203; 805 ILCS 206/204(a)(1).

Example: The real estate is conveyed to: ABC Partnership

• The real estate is acquired in the name of one or more partners with an indication in the deed of the grantee’s capacity as a partner or of the existence of a partnership (even if the deed does not name the partnership). See 805 ILCS 206/204(a)(2).

Example: The real estate is conveyed to Adam, general partner

• The real estate is acquired in the name of one or more partners with an indication in the deed of the grantee’s capacity as a partner, and the deed names the partnership. See 805 ILCS 206/204(b)(2).

Example: The real estate is conveyed to Adam, general partner of ABC Partnership

• The real estate is purchased with partnership assets, even if the deed does not identify the grantee as a partnership or the grantee as a partner in a partnership. See 805 ILCS 206/204(c).

Example: The real estate is conveyed to Adam (Adam bought the land with partnership money.)

• If real estate is acquired in the name of one or more partners, and there is no indication in the deed of the grantee’s capacity as a partner, and the deed does not indicate the existence of a partnership, and if the land is not acquired with partnership assets, then the property is presumed to not be partnership property, even if the property is used for partnership purposes. See 805 ILCS 206/204(d).

Example: Adam is a partner in the ABC Partnership. Adam uses his own money to buy an office building. The land is conveyed to simply, “Adam.” Even though the partnership moves into the office building, the property is presumed to not be partnership property.

Example: ABC Partnership owns lot 1, and its offices are on lot 1. Adam, a partner, buys lot 2, the lot next door, with his own money. The grantee on the deed reads merely “Adam.” The partnership builds an addition to its office building on lot 2. Lot 2 is presumed to not be partnership property.

Rule of Title Practice: These examples show the possible potential for ambiguity in deeds. If the deed is ambiguous, the examiner should ask for an affidavit from the owner of the land as to whether partnership funds were used for the acquisition of the property or whether the property was intended to be a partnership asset. But note that even with an affidavit, the examiner may still need one or more deeds from all appropriate parties.

In the above example concerning lot 1 and lot 2, Adam was the named grantee on the deed of lot 2. But assume that the partnership has been paying taxes on lot 2 for the last ten years. As noted above, the partnership’s office building addition has been constructed on lot 2. If asked to insure a conveyance of lot 2, the examiner may need a deed from both Adam and the partnership.

When insuring the sale or mortgage of partnership property, the examiner should ask for a copy of the partnership agreement, including any amendments. The examiner should search the Recorder’s Office for any recorded Statements of Partnership Authority, Statements of Denial, or any amendments or cancellations of statements.

Rights of Partners

Years ago, under the old Partnership Act, title company examiners would raise exceptions as to the rights of the partners in and to the real estate. Title examiners no longer have to raise these exceptions for partnerships. 805 ILCS 206/203 makes it clear that title to partnership property is held by the partnership and not by the partners. The statute states as follows: “Property acquired by a partnership is property of the partnership and not of the partners individually.”

Also, 805 ILCS 206/502 indicates that a partner’s interest in the partnership is a share in profits and losses and the right to receive distributions. This statute states that this interest is personal property, not real property.

However, examiners should continue to raise exceptions on partnership owner’s policies for the terms of the partnership agreement and for any recorded statements of partnership authority or statements of denial.

Judgments against Partners

Years ago, some title company examiners searched the public records for judgments and other general liens against partners. These examiners believed that a judgment against an individual partner, if based on an obligation of the partnership, was a lien on the partnership’s real estate. In order to waive this exception, the title company would want evidence that the judgment was not based on a partnership debt.

But now, under the Uniform Partnership Act, this practice is obsolete. 805 ILCS 206/504 makes it clear that a judgment creditor of a partner can only reach a partner’s “transferable interest” in the partnership, and this is personal property pursuant to 805 ILCS 206/502.

“Transferable interest” is defined in 805 ILCS 206/502 as “the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions. The interest is personal property.”

The judgment creditor of a partner, though, could foreclose on the debtor’s transferable interest in the partnership. Although the statute does not state that a foreclosing creditor could be a partner, the creditor would be entitled to the debtor partner’s distributions and would be able to seek a judicial dissolution and “winding up” of the partnership. See 805 ILCS 206/503.

However, the judgment creditor of a partner cannot obtain a lien on partnership real estate. The judgment creditor of a partner can only obtain a lien on a partner’s interest in the partnership, which is personal property. This means that an examiner has to be concerned about a judgment creditor of a partner only in the event of a foreclosure on a partner’s interest in the partnership or when there is a transfer of a partner’s interest in lieu of foreclosure.

Note that either situation would be evidenced by a court proceeding. This means that in the event there is no such proceeding in the chain of title (as evidenced by a recorded lis pendens), the examiner does not have to be concerned about judgments against partners attaching to partnership property.

The enforcement of a judgment against a partner’s interest in the partnership or a transfer of a partner’s interest in lieu of foreclosure will not result in a lien on the land owned by the partnership. Nonetheless, the title examiner must still be concerned. The issue is not that the judgment is a lien on the land. Rather, the issue is the possibility that the enforcement of the judgment might result in a dissolution of the partnership.

805 ILCS 206/504(a) and 805 ILCS 206/504(b) provides as follows:

(a) On application by a judgment creditor of a partner or of a partner’s transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment.

(b) A charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.

805 ILCS 206/503 details the rights of a transferee, which include the right to the debtor partner’s distributions and the right to seek a judicial dissolution and winding up of the partnership.

The Authority to Execute Documents

805 ILCS 206/302 contains the rules for a valid transfer of partnership property. If title to partnership real property is vested in the partnership’s name, then any general partner may execute the deed, unless:

• The partnership agreement provides otherwise;

• A recorded Statement of Partnership Authority provides otherwise;

• A recorded Statement of Denial provides otherwise.

Example: Seller conveys land to the ABC Partnership. This Partnership consists of Adam, Baker, and Charles. Assuming that there are no statements of partnership authority or statements of denial to the contrary, and assuming that the partnership agreement imposes no limits on the men’s authority, then any of the three men may execute a deed of partnership property. See 805 ILCS 206/103; 805 ILCS 206/302, 805 ILCS 206/303; 805 ILCS 206/304.

If title to partnership property is held in the name or names of partners, and the deed indicates that they are partners or the deed indicates the existence of a partnership, but the deed does not name the partnership, then the deed must be executed by the record individual title holder(s). See 805 ILCS 206/302. This is the case, even if the grantees are shown as partners of a partnership.

Example: Seller conveys land to “Adam and Baker, general partners.” Adam and Baker must execute a subsequent deed of the land. They may sign the deed either as partners or just as individuals.

If title to partnership property is held in the name or names of partners, but the deed does not indicate that they are partners, and the deed does not indicate the existence of a partnership, then the deed must be executed by the record individual title holder(s). See 805 ILCS 206/302.

Example: Seller conveys land to “Adam and Baker.” Adam and Baker must execute any subsequent deed of the land. They may sign the deed either as partners or just as individuals.

805 ILCS 206/302(d) provides as follows:

If a person holds all of the partners’ interests in the partnership, all of the partnership property vests in that person. The person may execute a document in the name of the partnership to evidence vesting of the property in that person and may file or record the document.

Example: Adam is a general partner of the ABC Partnership. The partnership’s only asset is the partnership’s office building. Adam had taken title to the office building in his own name. If he wants to, he can then execute a deed from ABC Partnership to himself and then record the deed.

Rule of Title Practice

When insuring the sale or mortgage of property owned by a partnership, the examiner must examine the partnership agreement and all recorded statements (Statement of Partnership Authority; Statement of Denial) in order to verify who can sign the deed or mortgage. If in doubt, the examiner should consult an underwriter.

Generally speaking, if title to the real estate is vested in the partnership, then any partner can execute the deed. But see below for limitations on this general authority.

The question of who can sign is fairly simple when the partnership is made up of two or more individuals. But what if the partners are several different kinds of business entities?

Example: A general partnership is formed by two individuals, one corporation, one limited liability company, and one limited partnership. Who signs the deed transferring the partnership property?

805 ILCS 206/302(a)(1) indicates that, generally speaking, any one partner can sign the deed.

The examiner must still examine the partnership agreement and any recorded statements for any limitations on partnership authority:

• 805 ILCS 206/103(b)(3)—A partnership agreement may limit a partner’s authority.

• 805 ILCS 206/303—A recorded Statement of Partnership Authority may limit a partner’s authority.

• 805 ILCS 206/304—A recorded Statement of Denial may limit a partner’s authority.

Subject to a review of the partnership agreement and any recorded statements, if an individual partner signs on behalf of the partnership, the examiner need not make any further inquiry.

If the corporation signs, the examiner should get the normal corporate clearance (evidence of good standing; corporate resolution, which will authorize the action and indicate who signs on behalf of the corporation.)

If the limited liability company signs, the examiner should get the normal clearance (certification from the Illinois Secretary of State that the limited liability company has properly filed its articles of organization; a copy of the articles of organization, together with any amendments thereto; a copy of the operating agreement, if any, together with any amendments thereto; and a resolution.)

If the limited partnership signs (limited partnerships are discussed later in these materials), the examiner should get the normal clearance (a copy of the filed certificate of limited partnership for the limited partnership that indicates that it was filed with the Secretary of State’s office, together with all amendments thereto; a copy of the partnership agreement).

If the general partner of the limited partnership is a corporation, the examiner will want the normal corporation clearance as well.

The examiner does not have to perform a search of the names of the individual partners. The examiner does have to perform a search of the partnership, however.

Example: A & B General Partnership owns an office building. The partnership is physically located in this building. It conducts its business from this building. The general partners are Adam and Baker. Can only one general partner execute a deed of partnership property?

805 ILCS 206/302(a)(1) indicates that, generally speaking, any one partner can sign the deed. (This is why the examiner does not need a resolution, like he might need when underwriting the sale of land owned by a corporation.) However, as noted above, the examiner must examine the partnership agreement and any recorded statements for any limitations on partnership authority.

However: A conveyance of all or substantially all the assets of a partnership may terminate the partnership. See 805 ILCS 206/801(5)(ii); see also 805 ILCS 206/801(2)(iii).

Does a partner have the authority to execute a deed, conveying all the assets of a partnership, when the conveyance will terminate the partnership? The partner may not have this authority. In this situation, the examiner should make sure that the proposed conveyance of all or substantially all the assets of the partnership has been approved by all of the partners of the partnership holding title. See 805 ILCS 206/301(2).

Conversions

On July 1, 2018, the Illinois Entity Omnibus Act came into effect. See 805 ILCS 415/101 et seq. This act permits the conversion of, e.g., a partnership into a limited partnership. (See below)

The Illinois Entity Omnibus Act (805 ILCS 415/101 et seq.)

Introduction:

The Illinois Entity Omnibus Act concerns the following entities, per 805 ILCS 415/102:

Business corporations Medical corporations Nonprofit corporations Professional service corporations General partnerships, including limited liability partnerships Limited partnerships, including limited liability limited partnerships Limited liability companies

Conversion (805 ILCS 415/201)

“Conversion” is not a defined term in the Act. Instead, 805 ILCS 415/102 merely states the following: “’Conversion’ means a transaction authorized by Article 2.”

However, 805 ILCS 415/201 explains what conversion is.

805 ILCS 415/201 authorizes three kinds of conversions:

• An Illinois (i.e., domestic) entity can become a different type of Illinois entity. For example, an Illinois corporation can become an Illinois limited liability company.

• An Illinois entity can become a different type of foreign entity, as long as the conversion is authorized by the foreign jurisdiction. For example, an Illinois corporation can become a Delaware limited liability company, as long as the conversion is authorized by the state of Delaware.

• A foreign entity can become a different type of Illinois entity, as long as the conversion is authorized by the foreign jurisdiction. For example, a Delaware corporation can become an Illinois limited liability company, as long as the conversion is authorized by the state of Delaware.

In addition, 805 ILCS 415/201(c) indicates that a conversion can have the effect of a merger.

The converting entity is the entity that exists before the conversion. The converted entity is the entity that exists after the conversion.

Plan of Conversion (805 ILCS 415/202; 805 ILCS 415/203)

The Act uses the term, “organic.” For example: “Organic law” is the statutes, if any, other than this Act, governing the internal affairs of an entity. See 805 ILCS 415/102. Thus, the Illinois entity must approve a plan of conversion. If a foreign entity is involved in the conversion, the foreign entity must follow the requirements of its state in approving the conversion.

805 ILCS 415/203 indicates that the plan of conversion must be approved by all appropriate parties.

805 ILCS 415/205 states that a statement of conversion must be signed on behalf of the converting entity and filed with the Illinois Secretary of State. This statement must contain, among other things, the name and type of the converting entity and the name and type of the converted entity.

Effect of Conversion (805 ILCS 415/206)

Once there is a conversion, the converted entity exists without interruption, just as if it were still the converting entity.

All property of the converting entity continues to be vested in the converted entity without assignment, reversion, or impairment. This statement indicates that any real property owned by the converting entity continues to be owned by the converted entity without the necessity of a deed. Will that be a problem for the title company if it is asked to insure a subsequent conveyance of land by the converted entity?

No, that should not be a problem. Remember that 805 ILCS 415/205 states that a statement of conversion must be signed on behalf of the converting entity and filed with the Illinois Secretary of State. This is no different than, for example, the way the Company handled mergers prior to July 1, 2018, the effective date of this Act.

Any mortgages and other liabilities of the converting entity continue as liens of the converted entity.

Domestication (805 ILCS 415/301)

“Domestication” is not a defined term in the Act. That is, the term is merely defined as, “a transaction authorized by Article 3.”

However, see 805 ILCS 415/301(a), which states: “Except as otherwise provided in this Section, by complying with this Article, a domestic entity may become a domestic entity of the same type in a foreign jurisdiction if the domestication is authorized by the law of the foreign jurisdiction.”

For example, an Illinois corporation can become a Delaware corporation as long as the transaction is authorized by the State of Delaware.

Similarly, 805 ILCS 415/301(b) states that a foreign entity can become a domestic (i.e., Illinois) entity of the same type as long as the “domestication” is authorized by the law of the other state.

For example, a Delaware corporation can become an Illinois corporation, as long as the transaction is authorized by the State of Delaware.

Definitions

A domestic entity is an entity whose internal affairs are governed by the law of the State of Illinois.

A domesticating entity is the domestic entity that approves a plan of domestication or the foreign entity that approves a domestication pursuant to the law of its jurisdiction of organization.

A domesticated entity is the domesticating entity as it continues in existence after a domestication.

What is the difference between conversion and domestication?

Conversion involves Illinois and foreign entities of different types. Domestication concerns Illinois and foreign entities of the same type:

Examples of Conversion

An Illinois corporation can become an Illinois limited liability company. A Delaware corporation can become an Illinois limited liability company.

Examples of Domestication

An Illinois corporation can become a Delaware corporation. A Delaware corporation can become an Illinois corporation.

Plan of Domestication (805 ILCS 415/302; 805 ILCS 415/303)

An Illinois entity may become a foreign entity in a domestication by approving a plan of domestication. The plan must contain certain information, such as the name and type of the “domesticating entity.” See 805 ILCS 415/302. In approving the domestication, the foreign entity must follow the laws of its state. See 805 ILCS 415/301(b); see also the definition of “domesticating entity,” which is set forth below:

“’Domesticating entity’ means the domestic entity that approves a plan of domestication pursuant to Section 303 or the foreign entity that approves a domestication pursuant to the law of its jurisdiction of organization.” (See 805 ILCS 415/102)

Statement of Domestication (805 ILCS 415/305

A statement of domestication must be signed on behalf of the domesticating entity and be filed with the Illinois Secretary of State. The statement of domestication must include, among other things, the name, jurisdiction of organization, and type of the domesticating entity and the name and jurisdiction of organization of the domesticated entity. (Again, the domesticating entity is the entity that exists prior to the change. The domesticated entity is the entity that exists after the change.)

Effect of Domestication (805 ILCS 415/306)

Once there is a domestication, the domesticated entity exists without interruption, just as if it were still the domesticating entity.

Pursuant to 805 ILCS 415/306, all property of the domesticating entity continues to be vested in the domesticated entity without assignment, reversion, or impairment. Just as with conversion, this statement indicates that any real property owned by the domesticating entity continues to be owned by the domesticated entity without the necessity of a deed.

Will this be a problem for the title company if it is asked to insure a subsequent conveyance of land by the domesticated entity? No, it will not. As indicated above, 805 ILCS 415/305(a) provides that a statement of domestication must be filed with the Illinois Secretary of State. A filed statement of domestication provides evidence of the domestication.

Any mortgages and other liabilities of the domesticating entity continue as liens of the domesticated entity.

Mergers

• 805 ILCS 206/905 permits the merger of a partnership with one or more partnerships or limited partnerships.

• 805 ILCS 206/908 permits one or more partnerships to merge with or into one or more limited liability companies.

===Discussion of Conversions and Mergers===

Because title vests in these new entities pursuant to statute, the recording of deeds will not be necessary. This means that evidence of the conversion or merger will probably not appear in the public records.

Note, though, that a statement of conversion must be filed with the Illinois Secretary of State. See 805 ILCS 415/205.

A statement of merger must also be filed with the Illinois Secretary of State. See 805 ILCS 206/907.

Example: Assume that the last deed in the chain of title vests title to the land in a partnership. Now the seller wants to sell the property, but he claims that the owner is a limited partnership with a similar name.

Question: How does the examiner underwrite this transaction?

Answer: The examiner will need two sets of clearance:

• The examiner will need evidence that establishes that there was a merger into the limited partnership. This evidence is set forth in the Act at 805 ILCS 206/905.

• The examiner will also need the general clearance that one would obtain when a limited partnership deeds (or mortgages) real estate. In this case the examiner will need a copy of the filed certificate of limited partnership. The copy should indicate that it was filed with the Illinois Secretary of State’s office. The examiner will also need a copy of the partnership agreement and all amendments to the agreement and any recorded statements.

Partner’s Dissociation (805 ILCS 206/601 et seq.)

Dissociation from the partnership (that is, leaving the partnership) can result from a partner’s withdrawal, expulsion, bankruptcy, or death. But the dissociation of a partner does not necessarily mean that the partnership is terminated. See 805 ILCS 206/603 and 805 ILCS 206/701.

Dissolution and Winding Up: An Introduction (805 ILCS 206/ 801 et seq.)

805 ILCS 206/801 indicates when a partnership is dissolved and its business wound up (i.e., terminated). For example:

• When all the partners agree;

• When the express term of the partnership has expired;

• When the specific purpose of the partnership has been accomplished.

Example: A partnership is formed to manage an office building. The partners decide to sell the office building. The building is sold five months later. 805 ILCS 206/ 801(2)(iii) indicates that the partnership should be dissolved. This statute reads as follows:

A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events: (iii) the expiration of the term or the completion of the undertaking.

The death, legal disability, or insolvency of a partner does not automatically cause a dissolution of the partnership unless the partnership agreement provides otherwise. However, a partnership is dissolved if within ninety days of a partner’s dissociation, at least half of the remaining partners agree to dissolve the partnership. See 805 ILCS 206/801(2)(i).

In the event of a dissolution of a partnership, a partnership may file (and if appropriate, record) a Statement of Dissolution. See Section 805 of the Act.

The terms of a filed and recorded Statement of Dissolution take priority over a previously filed and recorded Statement of Partnership Authority. See Section 805(b) of the Act.

It appears that the recording of a Statement of Dissolution is not mandatory. Therefore, a search of the public records will not always reveal any indication that a partnership is dissolved. When insuring the sale or mortgage of partnership property, the examiner may consider the following exception if circumstances indicate that the partnership may be dissolved:

We should be advised whether any event has caused a dissolution of the partnership shown in Schedule A.

Note that 805 ILCS 206/802 indicates that a partnership continues after dissolution, but only for purposes of winding up the business of the partnership. Thus, the partnership will be the grantor of a conveyance of property owned by a dissolved partnership.

See 805 ILCS 206/802(a). This statute, set forth below, mentions “subsection (b) of this Section.” This refers to the waiving of the right to wind up the affairs of the partnership and the right to terminate the partnership.

Subject to subsection (b) of this Section, a partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed.

Winding up the Partnership

The partnership is terminated when the process of winding up its business (i.e., settling its affairs) is finished. See Section 802(a) of the Act.

But at any time between dissolution and termination, all partners may agree to cancel the dissolution and resume the partnership business as if the dissolution had not occurred. See Section 802(b) of the Act.

In winding up its business, a dissolved partnership will liquidate its assets. It may sell its real property to third parties, or it may distribute its real property to the partners in proportion to their respective partnership shares. See Section 803(c) of the Act.

Deeds are required for conveyances of real estate to third parties. Deeds would also be necessary for real estate distributions to partners. When insuring these deeds, the examiner should review the partnership agreement and all statements to make sure that the conveyances are authorized.

805 ILCS 206/807 refers to the “settlement of accounts,” but neither this section nor the Act in general address the situation in which a partnership is terminated without conveying its real estate or without documenting a distribution of its real property to its partners. In this situation, it is possible that title to partnership real estate has devolved to the partners as tenants in common in proportion to their respective partnership shares.

Example: Adam and Baker are partners of the AB Law Firm, an Illinois partnership. They hit it big at the local casino and decide to retire, and therefore, terminate the partnership. They give their active files to another attorney (Charlie) that they know. The two men own their own building, and they decide to rent the building and office equipment to Charlie.

Question: The partnership is terminated, but how do Adam and Baker own the real estate and the office equipment?

Answer: See again 805 ILCS 206/802(a):

Subject to subsection (b) of this Section, a partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed.

The statute makes it clear that the partnership is terminated. It appears that Adam and Baker now own the real estate and the office equipment as tenants in common.

Partnership Title Exceptions

When the Company is insuring the mortgage or acquisition of land by a partnership, several exceptions should be raised.

For example, the partnership agreement must be examined to make sure that the party who will be executing the proposed deed or mortgage has the authority to do so. In that regard, consider the following exception:

The partnership agreement that established the partnership of (name of partnership), together with all amendments thereto, should be produced for our inspection. This commitment is subject to such additional exceptions, if any, as may be deemed necessary after our review of this agreement.

When title to property is held in a partnership, this ownership is governed by the partnership agreement. Therefore, the following exception should appear on any title commitment or owner’s title policy. The exception can be waived for the loan policy.

Terms, conditions, and provisions of the partnership agreement under which title to the property is held.

When the partnership agreement has been recorded, consider this exception:

We should be furnished copies of all amendments, if any, to the partnership agreement establishing the partnership of (name of partnership) recorded ___ as document ___ as well as any statements that limit the authority of a partner.

If there is uncertainty as to whether or not the property in question is actually part of the partnership assets, consider this exception:

We should be informed as to whether the property in question comprises a portion of the assets of the partnership of (name of partnership). This commitment is subject to such further exceptions as may then be deemed necessary.

If there is an issue as to who has the authority to sign the proposed deed or mortgage, consider an exception like the following:

If less than all of the partners in the partnership shown in Schedule A are going to execute the proposed deed or mortgage, we should be furnished evidence that they have the authority to bind the partnership.

805 ILCS 206/302 makes it clear that a partner can transfer partnership property. However, a conveyance of all the major assets of a partnership may terminate the partnership. See 805 ILCS 206/801(5)(ii) and 805 ILCS 206/801(5)(iii). Does only one partner in a partnership have the authority to do this? Probably not. Therefore, if the examiner has reason to believe that the proposed conveyance is of all, or substantially all, the assets of the partnership, the examiner should consider raising an appropriate exception:

If the proposed conveyance will make it impossible to carry on the ordinary business of the partnership, we should be furnished evidence that said conveyance has been authorized by all of the partners of the partnership holding title.

The following example illustrates how this situation may arise:

Example: The partnership agreement indicates that Adam, Baker, and Charles have formed a partnership to purchase and lease an office building commonly known as 123 Elm Street, Aurora, Illinois. The partnership is now selling this office building.

Title Searching Issues

Is a judgment, federal tax lien, or other general lien against an individual general partner a lien against the partnership?

Example: ABC Partnership is in title. Adam, Baker, and Charles are the general partners of the partnership. The examiner searches the general lien indices and finds a judgment against Adam. Does the examiner show the judgment on the title commitment?

As noted above, this was a concern under the old Act. Now, though, it is clear that a partner’s interest in the partnership is personal property. See 805 ILCS 206/502. Therefore, the examiner can ignore the judgment. The examiner does not have to show the judgment on the title commitment.

Underwriting the Sale or Mortgage of Partnership Property—A Summary

Question: What does the examiner do when he is asked to insure a sale or mortgage of partnership property?

Answer: The examiner should examine the partnership agreement and all recorded statements (statement of partnership authority; statement of denial) in order to verify who can sign the deed or mortgage. If in doubt, consult an underwriter.

Generally speaking, if title to the real estate is vested in the partnership, then any general partner can execute a deed or mortgage of partnership property. See 805 ILCS 206/302(a)(1). However, the partnership agreement, a recorded statement of partnership authority, or a recorded statement of denial may limit a partner’s authority to execute a deed or mortgage of partnership property.

The examiner does not have to perform a name search of the names of the individual partners.

If the proposed conveyance is of all, or substantially all, of the assets of the partnership, then the examiner should make sure that the proposed conveyance has been approved by all of the partners of the partnership holding title.

Limited Partnerships (805 ILCS 215/1 et seq.)

Introduction

Public Act 93-967, which created the current Uniform Limited Partnership Act, was effective on January 1, 2005. The format of this act is very similar to the current Uniform Partnership Act. See 805 ILCS 215/101 et seq.

Definitions

A limited partnership is an entity having one or more general partners and one or more limited partners. See 805 ILCS 215/102(13).

A limited partner cannot bind the limited partnership. See 805 ILCS 215/302. A limited partner is not responsible for the acts of the limited partnership. See 805 ILCS 215/303. A limited partner in some respects is simply a contributor of money. See 805 ILCS 215/306.

A limited partner is like an investor. The limited partner can invest money in the partnership and receive distributions, but it is not responsible for the acts of the limited partnership. See 805 ILCS 215/306.

The Creation of a Limited Partnership

In order to form a limited partnership, a certificate of limited partnership must be executed and filed in the office of the Illinois Secretary of State. See 805 ILCS 215/201.

The certificate must include, among other things, per 805 ILCS 215/201(a), the following items:

• The name of the limited partnership;

• The name and address of each general partner.

• If a new general partner is admitted to the partnership, or if a general partner is dissociated, an amendment to the certificate must be filed. See 805 ILCS 215/202(b).

When insuring a deed or mortgage executed by a limited partnership, the examiner should raise the following exception:

We should be furnished a certificate of limited partnership for _____ Limited Partnership, together with all amendments thereto, as set forth in Section 201 of the Uniform Limited Partnership Act (805 ILCS 215/101 et seq.), and our commitment may then be subject to additional exceptions after our review of this certificate and any amendments thereto.

The name of the limited partnership must contain the words “limited partnership” or the abbreviation “L.P.” See 805 ILCS 215/108(b).

Dissolution of the Limited Partnership

Example: A family sets up a limited partnership. The mother is the general partner and her three adult children are the limited partners. The limited partnership owns the family home. The mother dies. The three children now want to sell the home. How is this done?

See 805 ILCS 215/801(3)(B); 805 ILCS 215/803(c). The limited partners can appoint someone to wind up the activities of the dissolved limited partnership.

Limited Liability Partnerships (805 ILCS 206/1001 et seq.)

Illinois has had limited liability partnerships, or LLPs, since 1994. These are partnerships designed to protect the personal assets of partners not involved in wrongdoing by other members of the partnership who have been sued.

Until 1994, all partners’ assets were jointly subject to attack, regardless of individual blame. Note, though, that commentators to the 1994 amendments to the Uniform Limited Partnership Act have noted that this protection is no more than what businesses have already enjoyed by incorporating as a corporation. These partnerships are sometimes called registered limited liability partnerships.

With certain exceptions, a partner in a limited liability partnership is not liable for the debts, obligations, and liabilities of or chargeable to the partnership by another partner or an employee, agent, or representative of the partnership. The Act, however, does not protect a partner from the consequences of his own negligence or wrongful acts.

To become a limited liability partnership, the partnership must file a statement of qualification with the Illinois Secretary of State. See 805 ILCS 206/1001(c).

When insuring a deed or mortgage of a limited liability partnership, the examiner should raise this exception:

We should be furnished evidence that the _____ Limited Liability Partnership is currently in good standing with the Illinois Secretary of State. However, having said that, note that limited partnerships and limited liability partnerships can be searched on the website of the Illinois Secretary of State. See the link below:

https://www.cyberdriveillinois.com/departments/business_services/LP_LLP_LLLP/lpsearch.html

Because of the inherent nature of the limited liability partnership, and because of the nature of the Uniform Partnership Act, as discussed above, the examiner needs to search only the name of the partnership in the general lien indices; the examiner does not have to search the names of the individual partners.

Rule of Title Practice

Because of the limited liability of the limited liability partnership, the examiner should not accept a personal undertaking from a general partner of a limited liability partnership. The obligations of the personal undertaking would be hard to enforce, as the general partner is by definition not liable for the obligations of the partnership; he is only liable for his own acts.

Foreign Limited Liability Partnerships (See 805 ILCS 206/1101 et seq.)

Foreign limited liability partnerships (i.e., non-Illinois limited liability partnerships) are governed by the law of the state under which the partnership is organized. See 805 ILCS 206/1101(a).

Before doing business in Illinois, a foreign limited liability partnership must file a certificate of qualification in Illinois. See 805 ILCS 206/1102(a). If the foreign limited liability partnership does not file a statement of qualification, the foreign limited liability partnership doing business in this state cannot maintain a legal action or proceeding in Illinois. See 805 ILCS 206/1103.

But is owning or mortgaging property in Illinois doing business in Illinois? For a list of activities that do not constitute doing business in Illinois, see 805 ILCS 206/1104(a). Note, e.g., that Section 1104(a)(7) lists “owning, without more, real or personal property.” Section 1104(a)(8) lists “conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature.” (Mortgaging the real estate that the partnership owns seems to fall in this category of activities that do not constitute doing business in Illinois.)

Rule of Title Practice

If the examiner is not sure if the foreign limited liability partnership is transacting business in Illinois and thus has to file a statement of qualification, the examiner should consult an underwriter. But relative thereto, the examiner should keep in mind that just the owning or mortgaging property, by itself, does not constitute the transacting of business. However, if the partnership took an active role in running a business on the property, then that might be transacting business.

When insuring the deed or mortgage of a foreign limited liability partnership that is transacting business in Illinois consider the following exception:

We should be furnished evidence of the authority of (name of foreign limited liability partnership) to transact business in Illinois.

Note, though, that the exception may not be appropriate if the foreign limited liability partnership only owns the Illinois property and is not otherwise in Illinois. If that is the case, the examiner should simply consider this exception:

We should be furnished evidence that (name of foreign limited liability partnership) is in good standing in its home state.

Foreign Limited Partnerships (805 ILCS 215/901)

Foreign limited partnerships (i.e., non-Illinois limited partnerships) are governed by the law of the state under which the partnership is formed. See 805/ILCS 215/901.

Before doing business in Illinois, a foreign limited liability partnership must file a certificate of authority to transact business in Illinois. See 805 ILCS 215/902.

Is owning or mortgaging property in Illinois doing business in Illinois? For a list of activities that do not constitute doing business in Illinois, see 805 ILCS 215/903(a).

• Section 903(a)(7) describes “creating or acquiring indebtedness, mortgages, or security interests in real or personal property.”

• Section 903(a)(8) describes “securing or collecting debts or enforcing mortgages or other security interests in property securing the debts, and holding, protecting, and maintaining property so acquired.”

• Section 903(a)(9) lists “conducting an isolated transaction that is completed within thirty days and is not one in the course of similar transactions of a like manner.”

• Section 903(a)(10) lists “transacting business in interstate commerce.”

Note, though that simply “owning real property” is not listed in 805 ILCS 215/903(a) as being something that does not constitute transacting business in Illinois.

Furthermore, see 805 ILCS 215/903(b), which states as follows:

(b) For purposes of this Article, the ownership in this State of income-producing real property or tangible personal property, other than property excluded under subsection (a), constitutes transacting business in this State.

Rule of Title Practice

When one reviews all the above statutory provisions, it appears that the sale or mortgage of non-income producing Illinois real estate by a foreign limited partnership does not constitute the transaction of business in Illinois. The examiner should consult an underwriter if he believes that the foreign limited partnership is transacting business in Illinois and thus has to file a statement of qualification. Relative thereto, consider these guidelines:

• Just owning or mortgaging non-income producing real property, by itself, does not constitute the transacting of business.

• If, however, the foreign limited partnership is taking an active role in running a business on the property, then that would be transacting business.

• When insuring the deed or mortgage of a foreign limited partnership that is transacting business in Illinois, consider the following exception:

We should be furnished evidence of the authority of (name of foreign limited partnership) to transact business in Illinois.

• Note, though, that this exception may not be appropriate if the foreign limited partnership only owns the real property and is not otherwise in Illinois. If the foreign limited partnership is not transacting business in Illinois, consider this exception:

We should be furnished evidence that (name of foreign limited partnership) is in good standing in its home state.

Other Partnerships

Illinois also has limited liability limited partnerships and foreign limited liability limited partnerships. See 805 ILCS 215/102(11).

Partnership Title Policy Endorsements

In 1985 a title company denied coverage under an owner’s title policy by reason of the fact that the partners constituting the insured partnership had changed.

The title company successfully argued that the partnership insured under the policy no longer existed and that the partnership consisting of the new partners was not the insured under the terms of its policy. See Fairway Development Co. v. Title Insurance Co. of Minn., 621 F.Supp. 120 (N.D. Ohio 1985).

Because of the Fairway case, years ago title insurance customers asked title companies for endorsements that counter the effects of this case. These endorsements were commonly called “Fairway endorsements.”

Note, though, that Condition 1 of the 2006 owner’s title insurance policy expands the definition of Insured. The definition of “insured” now includes successors upon the conversion of a named Insured entity to another entity. The definition also includes successors to an insured upon dissolution, merger, and consolidation. It seems clear that this expanded definition of “Insured” in the 2006 owner’s policy eliminates the “Fairway” problem. Requests for this endorsement should no longer be necessary.

Partnership Title Exceptions

These are the Softpro exceptions relating to partnerships:

CPR111: The record is unclear as to the legal nature of _____. The Company should be furnished evidence as to the legal status of this entity. If it is a corporation, we should be furnished a current certificate "of good standing" and directors' resolutions which authorize the contemplated conveyance or mortgage. If it is a partnership, we should be furnished a copy of the partnership agreement and any amendments thereto. If it is an unincorporated association, its ability to hold title is questionable and, in this regard, we should be furnished the governing regulations of said association and a resolution that authorizes the contemplated conveyance or mortgage. This commitment is subject to such further exceptions, if any, as may be deemed necessary after our review of these materials.

PTR1: The Company will require the following documents for review prior to the issuance of any title insurance predicated upon a conveyance or encumbrance from:

Name: _____.

A complete copy of the partnership agreement and all amendments thereto.

If less than all partners are executing documents, furnish evidence of the signing partners’ authority, unless the authority is granted in the agreements referred to above.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

PTR100: Rights of _____, partners composing the firm of _____, and of all parties claiming thereunder.

Terms, Powers, Provisions and Limitations of the Partnership Agreement under which title is held.

All amendments, if any, to the Partnership Agreement establishing the partnership in title which have been adopted since should be furnished, together with satisfactory evidence that such partnership has not been dissolved.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

PTR101: All amendments, if any, to the partnership agreement establishing the partnership of _____ which have been adopted since , should be furnished, together with satisfactory evidence that such partnership has not been dissolved, and this commitment is subject to such further exceptions, if any, as may be deemed necessary.

PTR102: The Company should be furnished evidence that the Certificate of Limited Partnership of the proposed insured has been filed with the Illinois Secretary of State in compliance with 805 ILCS 215/201 et seq.

PTR2: Furnish for recordation a Certificate of Partnership, Partnership Agreement and Memorandum of Partnership Agreement.

Name of Partnership: _____.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

PTR3: Furnish for recordation an amended Certificate of Partnership, Partnership Agreement, Addendum to Partnership Agreement and Memorandum of Partnership Agreement

Name of Partnership: _____.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

PTR4: The Company will require the following documents for review prior to the issuance of any title assurance predicated upon a conveyance or encumbrance from the entity named below.

Name: _____.

A complete copy of the limited partnership agreement and any amendments and restatements thereto.

Evidence that the partnership was validly formed, is in good standing and authorized to do business in its state of origin.

If less than all general partners are executing documents, furnish evidence of the signing partner(s) authority, unless authorized in the documents referred to above.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

PTR5: The Company will require the following documents for review prior to the issuance of any title assurance predicated upon a conveyance or encumbrance from the limited partnership named below.

Name:_____, a limited partnership

A complete copy of the limited partnership agreement and all amendments thereto.

Satisfactory evidence that the partnership was validly formed and is in good standing.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

PTR6: The Company will require the following documents for review prior to the issuance of any title assurance predicated upon a conveyance or encumbrance from the limited liability partnership named below.

Name: _____, a limited liability partnership

A complete copy of the partnership agreement and all amendments thereto.

The Company reserves the right to add additional items or make further requirements after review of the requested documentation.

Joint Ventures

A joint venture is defined as an association of two or more persons to carry out a single enterprise for profit. See Bachewicz v. American National Bank and Trust Co., 111 Ill. 2d 444 (1986).

A joint venture is similar to a partnership, but while a partnership is used to carry on a general type of business, a joint venture is formed to conduct one specific type of business or enterprise.

A joint venture is an entity that is not capable of acquiring or transferring or mortgaging property in its own name. See Peabody-Waterside Development, LLC v. Islands of Waterside, LLC, 2013 IL App (5th) 120490; Fitzgerald v. VanBuskirk, 16 Ill. App. 3d 348, 306 N.E.2d 76 (1974). Rather, title to joint venture property is considered to be in the names of the individual joint venturers as tenants in common.

Joint venture property should be acquired, sold, or mortgaged as:

Abby and Baker, doing business as Abba Enterprises, a joint venture.

When insuring joint venture property, the names of the individual joint venturers and the names of their company must be searched in the general name indices.

A deed of joint venture property signed by the individual joint venturers without reference to the joint venture and/or without reference to the status of the individuals as joint venturers is still valid.

Unless a written joint venture agreement provides to the contrary, the death of a joint venturer will dissolve a joint venture.

Note, though, that unlike a partnership, there does not appear to be any right in the surviving joint venturers to wind up the joint venture enterprise as a joint venture.

As the joint venturers hold title to property as tenants in common, consider the estate rules of descent and distribution relative to this type of tenancy. See 755 ILCS 5/2-1, a portion of which is set forth below:

755 ILCS 5/2-1 Rules of descent and distribution. The intestate real and personal estate of a resident decedent and the intestate real estate in this State of a nonresident decedent, after all just claims against his estate are fully paid, descends and shall be distributed as follows: (a) If there is a surviving spouse and also a descendant of the decedent: 1/2 of the entire estate to the surviving spouse and 1/2 to the decedent's descendants per stirpes. (b) If there is no surviving spouse but a descendant of the decedent: the entire estate to the decedent's descendants per stirpes. (c) If there is a surviving spouse but no descendant of the decedent: the entire estate to the surviving spouse. (d) If there is no surviving spouse or descendant but a parent, brother, sister or descendant of a brother or sister of the decedent: the entire estate to the parents, brothers and sisters of the decedent in equal parts, allowing to the surviving parent if one is dead a double portion and to the descendants of a deceased brother or sister per stirpes the portion which the deceased brother or sister would have taken if living.

Rule of Title Practice

If the conveyance is to a joint venture, then ideally each member of the joint venture must be named individually as a grantee in the deed.

If the conveyance is from a joint venture, then ideally each member of the joint venture must be named individually as a grantor in the deed. Each member should then sign the deed.

If the conveyance is to a joint venture, and the deed vests title in the joint venture and not the individual joint venturers, the examiner should obtain a copy of the joint venture agreement. If the agreement allows for title to be held in this fashion, then the examiner can insure it accordingly. If there is no such agreement, the examiner should consult an underwriter.

Example: The title commitment shows that Abba Enterprises, a joint venture, is in title. The Company has been asked to insure a sale of the land to a purchaser for value. There is a joint venture agreement that indicates that Abby and Baker are the joint venturers. With a deed wherein the grantor is Abba Enterprises and executed by Abby and Baker, the Company should be able to insure the sale of the land, even though title to the land was originally conveyed to the joint venture and not the two joint venturers.

Example: The last recorded deed in the chain of title is a deed to Abba Enterprises, a joint venture. There is no joint venture agreement. The Company has been asked to insure a mortgage executed by Abba Enterprises of this property. Abby and Baker claim to be the two joint venturers of this joint venture. However, there is no joint venture agreement that supports their argument. The examiner may not be able to insure the mortgage, as the legal existence of the joint venture appears to be questionable.

Plats & Subdivisions

Statutes and Cases Relating to Subdivision of Land

Building Lines

55 ILCS 5/5-13001; a county can regulate building lines

65 ILCS 5/11-14-1; a municipality can regulate building lines; this statute states that “the corporate authorities in each municipality have power by ordinance to establish, regulate and limit the building or setback lines on or along any street. . . .[These powers] shall not be exercised so as to deprive the owner of any existing property of its use or maintenance for the purpose to which it is then lawfully devoted.” This statute seems to suggest that in order to abrogate a building line, the parties benefited as well as burdened must join in the agreement. A building line violation may render a home unmarketable, even if a title company agrees to endorse over it; in this regard, see Nelson v. Anderson, 286 Ill.App.3d 706, 676 N.E.2d 735, 221 Ill.Dec. 932 (5th Dist. 1997).

Plats (but not including the Plat Act)

35 ILCS 200/9-50; the chief county assessment officer may make or purchase maps and plats.

35 ILCS 200/9-55 requires plats of “subdivision, dedication, or dedication” to be signed by the county clerk, affirming that there are no delinquent taxes or special assessments.

35 ILCS 200/9-55; requires owner of land to survey and plat land if it can only be described by metes and bounds; requires plats of subdivision to be signed by the county clerk, affirming that there are no delinquent taxes or special assessments. See also 35 ILCS 200/22-70; a tax buyer at a tax sale cannot extinguish a previously created easement.

35 ILCS 200/9-65; whenever acreage property has been subdivided into lots and the plat has been recorded, the lots shall be reassessed and placed upon the assessor’s books.

35 ILCS 200/10-30; under certain circumstances, the platting and subdivision of property does not increase the assessed valuation of the property.

35 ILCS 200/10-31; under certain circumstances, the platting and subdivision of property does not increase the assessed valuation of the property.

35 ILCS 200/10-35; assessment of common areas; e.g., common areas that are used for recreational or similar residential purposes and which are assessed to a separate owner and are located on separately identified parcels shall assessed at one dollar per year.

55 ILCS 5/3-5029 states that “no person shall offer or present for recording or record any map, plat or subdivision of land situated in any incorporated city, town or village, nor within 1 ½ miles of the corporate limits of any incorporated city, town or village which has adopted a city plan” unless it has been approved by the corporate authorities, pursuant to 65 ILCS 5/11-15-1.

55 ILCS 5/3-5029 provides that the subdivision plat must be “under the seal of a registered Illinois land surveyor.”

55 ILCS 5/3-5029 provides that a plat of subdivision of any lands “bordering on or including any public waters of the State “must be approved by the Department of Natural Resources.

55 ILCS 5/3-5029 provides that no person shall record a plat without indicating whether any part of the land is located within a special flood hazard area as identified by the Federal Emergency Management Agency.

55 ILCS 5/5-1037; a county board may change the name of any town plat.

55 ILCS 5/5-1041; this statute provides that any subdivision plat of property not within any city, village or incorporated town must be submitted to the county board or its designated officer for approval.

55 ILCS 5/5-1042; this statute provides a listing of the matters that county boards may regulate, by ordinance or resolution, in reviewing or approving plats of subdivision of land not within any incorporated town, village or city.

55 ILCS 5/5-1109; preparation of assessment maps in counties of less than 1,000,000.

65 ILCS 5/7-1-24; 65 ILCS 5/7-1-25; 65 ILCS 5/7-1-40; see also 765 ILCS 205/1.02; plats of annexation and disconnection from annexation

65 ILCS 5/11-12-6; concerns a map of a municipality’s official comprehensive plan.

65 ILCS 5/11-12-8; concerns the procedures for municipal approval of plats of subdivision and resubdivision.

65 ILCS 5/11-12-9; jurisdictional boundary line between corporate authorities

65 ILCS 5/11-14-1 states that “the corporate authorities in each municipality have power by ordinance to establish, regulate, and limit the building or set-back lines on or along any street. . . . “[These powers] shall not be exercised so as to deprive the owner of any existing property of its use or maintenance for the purpose to which it is then lawfully devoted.”

65 ILCS 5/11-15-1 provides the following: “If any municipality has approved a subdivision ordinance pursuant to [65 ILCS 5/11-12-4 et seq.], all subdivision plats shall be submitted for approval and approved in the manner provided in such ordinance. Until approved by the corporate authorities, or such officer designated by them, no such map, plat or subdivision plat shall be entitled to record in the proper county, or have any validity whatever.”

225 ILCS 330/44; a surveyor is entitled to have his plats recorded; plats are prima facie evidence in a court of law.

615 ILCS 5/7; the Department of Natural Resources must review and approve any subdivision plat bordering or including any public waters of the State of Illinois.

765 ILCS 5/30; plats and other documents that are authorized to be recorded do not take effect as to creditors and subsequent purchasers without notice until they are recorded.

765 ILCS 5/35c; notarization of plats and other documents; see also 765 ILCS 5/19 et seq., 765 ILCS 5/31; 765 ILCS 5/35; 765 ILCS 205/2. See also King v. The DeKalb County Planning Department, 394 Ill. App. 3d 699, 917 N.E.2d 36, 334 Ill. Dec. 439 (2nd Dist. 2009); Federal National Mortgage Ass’n v. Kuipers, 314 Ill. App. 3d 631 (2000).

765 ILCS 210/1 et seq.; Judicial Plat Act; the Act provides that when a decedent’s land is to be partitioned off into parcels and sold, a surveyor must prepare a survey of the land that sets forth the parcels of land.

Illinois Administrative Code, Title 68, section 1270.56(d)(1); a surveyor may delay putting in lot corner monumentation if the surveyor feels that the monuments would be destroyed by grading or utility installation. The monuments must be in place within twelve months of the recording of the plat.

Plat Act

Plats; the Plat Act (765 ILCS 205/1 et seq.)

765 ILCS 205/1; generally speaking, a plat must be prepared whenever the owner of land subdivides it into two or more parts, any of which is less than five acres in size.

The plat must show all angular and linear data along the exterior boundaries of the tract of land being subdivided, the names and width of all public streets and all known and permanent monuments. The lots, blocks, or parcels must be numbered by progressive numbers. The dimensions of the lots, blocks, or parcels must be shown. The plat must set forth all “ways for utility services.” See also Ruble v. Sturhahn, 348 Ill.App.3d 667, 810 N.E.2d 278, 284 Ill. Dec. 625 (4th Dist. 2004).

765 ILCS 205/1.005; when an owner records a plat, the owner must submit with the plat a notarized statement indicating, to the best of the owner’s knowledge, the school district in which the land lies.

765 ILCS 205/2; the plat must be acknowledged by the owner of the land; submitted to the city council or board of trustees of the municipality; and be subject to certain approvals. The plat must be recorded. Except in municipalities with a population of 1,000,000 or more, the plat must be approved by the Illinois Department of Transportation when roadway access is via a state highway. The plat must show the mailing address of the person submitting the plat for recording. The recorder shall not record a plat unless the plat is at least 8 and ½ inches by 14 inches but not more than 30 inches by 36 inches. In counties of 1,000,000 or more in population, the recorder must not record a plat until 6 copies of the plat are delivered to the recorder.

765 ILCS 205/2; The plat must be recorded by the land surveyor who prepared the plat, or a person designated by that land surveyor, or upon the death, incapacity, or absence of that land surveyor, by the owner of the land or his or her representative.

765 ILCS 205/3 states: “The acknowledgment and recording of a [plat created under the Plat Act] shall be held in all courts to be a conveyance in fee simple of such portions of the premises platted as are marked or noted on such plat as donated or granted to the public. . . and the premises intended for any street, alley, way, common or other public use in any city, village or town, or addition thereto, shall be held in the corporate name thereof in trust to and for the uses and purposes set forth or intended.”

765 ILCS 205/6 states: “Any plat may be vacated by the owner of the premises at any time before the sale of any lot therein, by a written instrument to which a copy of the plat is attached, declaring it to be vacated.” See Ruble v. Sturhahn, 348 Ill.App.3d 667, 810 N.E.2d 278, 284 Ill. Dec. 625 (4th Dist. 2004)

765 ILCS 205/7; a portion of a plat may be vacated pursuant to 765 ILCS 205/6. See Ruble v. Sturhahn, 348 Ill.App.3d 667, 810 N.E.2d 278, 284 Ill. Dec. 625 (4th Dist. 2004)

765 ILCS 205/8; when a plat is vacated, the recorder shall, upon the recording of the vacation, write across the plat or the part so vacated the word, “vacated.”

765 ILCS 205/9; when a party lays out, locates, opens, widens, extends, or alters, a highway, road, street, alley, public ground, toll road, railroad, reservoir, or canal, the party must prepare a plat. The provisions of this section do not (in part) apply to a railroad.

765 ILCS 205/11; any unauthorized person who removes a survey marker shall be guilty of a Class A misdemeanor.

Plat Act (court cases)

In Heerey v. City of Des Plaines, 225 Ill.App.3d 203 (1992), the court held that a plaintiff who was merely seeking to remodel his building, and not subdivide it or sell it, did not have to first have the property subdivided. In other words, the court determined that the Plat Act was not applicable.

In Orrin Dressler, Inc. v. Village of Burr Ridge, 173 Ill.App.3d 454 (1988), the owner of the land felt that the proposed subdivision of his land was exempt from the Plat Act, as it was a “division into no more than two parts of a particular parcel or tract of land existing on July 17, 1959. . . .” The plaintiff felt that the transaction was exempt, since the original parcel was divided into two parts, but then the lot line between two of the resulting parts was merely "relocated." The court disagreed.

Plats And Streets

Dedications (in general)

5 ILCS 70/1.16; a highway, road, or street may include any road laid out by authority of the United States, or the state of Illinois, or any town or county of Illinois, and all bridges upon any highway, road, or street.

65 ILCS 5/11-61-1; municipalities have the right to acquire property by condemnation, “including property in unincorporated areas outside of but adjacent and contiguous to the municipality where required for street or highway purposes by the municipality.”

65 ILCS 5/11-61-2: “The corporate authorities of each municipality may vacate, lay out, establish, open, alter, widen, extend, grade, pave, or otherwise improve streets, alleys, avenues, sidewalks, wharves, parks, and public grounds. . . .”

65 ILCS 5/11-90-2: “The corporate authorities shall not grant the use of or the right to lay tracks in any street of the municipality to any railroad or street railway corporation except upon the petition of the owners of record of the land representing more than one-half of the frontage of the street. . . .”

70 ILCS 805/6; a forest preserve may dedicate a road.

605 ILCS 5/2-202; any road that has been used by the public for fifteen years as a highway becomes a public highway. (But such a public highway would be a common law dedication and hence an easement interest.) See Village of Cypress v. Green, 154 Ill.App.3d 119; 506 N.E.2d 762 (5th Dist. 1987); City of Des Plaines v. Redella, 365 Ill. App. 3d 68, 847 N.E.2d 732, 301 Ill. Dec. 722 (1st Dist. 2006).

605 ILCS 5/4-501; land for roads can be obtained by purchase or by condemnation.

605 ILCS 5/6-301 et. seq.; the “laying out, widening, altering or vacating township and district roads.” Generally speaking, all township and district roads shall be not less than forty feet in width.

605 ILCS 5/6-315; this statute was amended in 2003 by Public Act 93-183 to counteract the holding in Klose v. Mende, 329 Ill. App. 3d 543, 771 N.E.2d 960, 265 Ill. Dec. 1 (3rd Dist 2001). The statute now reads as follows: “An entry in the records, ledger, or official minute book of the district clerk, stating that there has been a dedication of a public highway according to statutory requirements shall be prima facie evidence in all cases that there was a dedication of a public highway and that the dedication complied with all statutory requirements, regardless of whether supporting records or documentation of the dedication is available.”

765 ILCS 205/3 states: “The acknowledgment and recording of a [plat created under the Plat Act] shall be held in all courts to be a conveyance in fee simple of such portions of the premises platted as are marked or noted on such plat as donated or granted to the public. . . and the premises intended for any street, alley, way, common or other public use in any city, village or town, or addition thereto, shall be held in the corporate name thereof in trust to and for the uses and purposes set forth or intended.”

765 205/6; a vacation of a plat eliminates any dedications created on said plat.

765 ILCS 205/9; when a road or highway is “laid out, located, opened, widened, or extended, or its location altered,” a plat must be prepared and recorded.

Township of Jubilee v. State of Illinois, 2011 IL 111447, 960 N.E.2d 550, 355 Ill. Dec. 668 (2011); statutory dedication of public square; quiet title suit; no adverse possession.

Dedications (fee simple or easement interest, court cases)

Carter Oil v. Meyers, 105 Fed2d 259 (7th Circuit, 1939); Village of Riverside v. MacLain, 210 Ill. 308 (1904); Village of Joppa v. Chicago and Eastern Illinois Railroad, 51 Ill.App.3d 674 (1977); Grimming v. Ferris, 79 Ill.App.3d 546, 399 N.E.2d 141 (1979); Road King Petroleum Products, Inc. v. Village of Wood Dale, 23 Ill.App.3d 181, 318 N.E. 2d 710 (1974); City of Chicago v. Rumsey, 87 Ill. 348 (1877); Owen v. Village of Brookport, 208 Ill. 35, 69 N.E.952 (1904); Village of Auburn v. Goodwin, 128 Ill. 57 (1889); Ingraham v. Brown, 231 Ill. 256, 83 N.E. 156 (1907).

Klose v. Mende, 329 Ill. App. 3d 543, 771 N.E.2d 960, 265 Ill. Dec. 1 (3rd Dist. 2001), but then see Public Act 93-183, which amends 605 ILCS 5/6-315, which counteracts the holding in Klose v. Mende, thereby creating a super dedication.

Urbaitis v. Commonwealth Edison, 143 Ill.2d 458 (1991); this Illinois Supreme Court case offers an excellent discussion of dedications and easement interests v. fee simple interests.

Private Rights-of-Way Disclosed on Plats

605 ILCS 5/2-202; streets and alleys may be created as private rights-of-way on a plat of subdivision. However, if the public has been using the right-of-way for more than 15 years, then the right-of-way may have expanded to a public right-of-way.

City of Chicago v. Hogberg, 217 Ill. 180 (1905); the court ruled that if a plat of subdivision creates private streets; these streets are easements in favor of all the lot owners.

General Auto Service Station v. Maniatis, 328 Ill.App.3d 537, 765 N.E.2d 1176, 262 Ill. Dec. 568 (1st Dist. 2002); a private road generally arises when someone subdivides land and sets aside a portion of it as a private road (or private alley).

Illinois District of American Turners, Inc. v. Rieger, 329 Ill. App. 3d 1063, 770 N.E.2d 232, 264 Ill. Dec. 338 (2nd Dist. 2002); a private road can be lost by adverse possession.

Bigelow v. The City of Rolling Meadows, 372 Ill. App. 3d 60, 805 N.E.2d 221 (1st Dist 2007); if there is no clear intent to dedicate a right-of-way to the public, a private use is created.

Utility Easements in Rights-of-Way

65 ILCS 5/11-135-7; allows for the construction of water mains along, upon, under and across highways and street.

605 ILCS 5/9-113; a public utility has the right to install underground utilities in roads that are statutory dedications. Such underground installations are regarded as being within the easement for highway purposes, in favor of the public. But 605 ILCS 5/9-113 provides limitations on the right to put underground utilities in roads that are common law dedications. This statute indicates that the consent of the underlying fee owner of the land is a necessary prerequisite to the installation of any utilities. Note that Public Act 93-357, effective January 1, 2004, adds new subsection (h-1) to 605 ILCS 5/9-113 and drastically amends subsection (l). This new subsection, although ambiguous, suggests that if the tax assessing officials have exempted that portion of the landowner’s land that falls within the highway, the public utility does not have to obtain the landowner’s consent to the location of utility equipment in that portion of the owner’s land that falls within the highway.

605 ILCS 5/9-113(a); the “written consent of the appropriate highway authority” is needed for the installation of any utilities in or along a highway or township or district road.

Benno v. Central Lake County Joint Action Water Agency, 242 Ill. App. 3d 306, 609 N.E.2d 1056 (2nd Dist. 1993)

Richard F. Bales, “New Legislation Concerning Utilities and Rights-of-Way,” Illinois State Bar Association’s Real Property newsletter, May 2004.

Howard Samson, “Road Conveyancing after Benno,” Illinois State Bar Association’s Real Property newsletter, May 2004.

Right-of-Way Vacations

65 ILCS 5/11-61-2: “The corporate authorities of each municipality may vacate, lay out, establish, open, alter, widen, extend, grade, pave, or otherwise improve streets, alleys, avenues, sidewalks, wharves, parks, and public grounds. . . .”

65 ILCS 5/11-91-1; generally speaking, when a street or alley is vacated, ownership of the vacated parcel splits equally to the adjoining landowners. See Piper v. Reder, 44 Ill. App.2d 431 (1963); Prall v. Burckhartt, 299 Ill. 19 (1921). But in 1997 Public Act 90-179 amended 65 ILCS 5/11-91-1. This act provided that with a vacation of a street or alley, if only one abutting landowner makes payment, then the entire width of the street or alley could inure to the benefit of that one landowner. In 1999 the Illinois Supreme Court in Chavda v. Wolak, 188 Ill.2d 394, 721 N.E.2d 1137 (1999), ruled that the statute was constitutional. 65 ILCS 5/11-91-1 also provides for the reservation of utility facilities in the vacated street or alley.

65 ILCS 5/11-91-2: “Except in cases where the deed, or other instrument, dedicating a street or alley, or part thereof, has expressly provided for a specific devolution of the title thereto upon the abandonment or vacation thereof, whenever any street or alley, or any part thereof, is vacated under or by virtue of any ordinance of any municipality, the title to the land included within the street or alley, or part thereof, so vacated, vests in the then owners of the land abutting thereon, in the same proportions and to the same extent, as though the street or alley has been dedicated by a common law plat (as distinguished from a statutory plat) and as though the fee of the street or alley had been acquired by the owners as a part of the land abutting on the street or alley.”

70 ILCS 805/6; a forest preserve may vacate a road.

605 ILCS 5/5-109; a county board may vacate a county highway or part of a county highway. This statute also provides for the reservation of utility facilities in the vacated county highway or part of a county highway.

605 ILCS 5/5-110; when the county board vacates a county highway or part of a county highway, the county board shall have a legal description of the vacated land recorded.  The recorder shall mark any recorded plat of the highway in a manner that shows the vacation.

605 ILCS 5/6-301 et. seq.; the “laying out, widening, altering or vacating township and district roads.”

605 ILCS 5/6-302: “The highway commissioner of any road district may in his discretion reduce the width of any existing township or district road to a width of 40 feet, if the reduction is petitioned for by a majority of the landowners along the line of such road within the district. When possible the land vacated by reducing the width of the road shall be taken equally from each side of the road. In cases of natural obstruction on one side of the road or where the road extends along the right-of-way of any railroad, river or canal, the commissioner is authorized to reduce the width of road on one side only.” In other words: Assume that there are subdivided lots that adjoin a street. Assume that on the other side of the street there is a creek, river, or railroad tracks. Upon the vacation of the street, if the vacation ordinance is otherwise silent as to the devolution of title, then the entire street vacates in favor of the subdivided lots; none of the street goes to the creek, the river, or the railroad tracks.

605 ILCS 5/9-127(a): “Except as provided in subsections (b), (c), and (d) and in cases where the deed, or other instrument, dedicating a highway or part thereof, has expressly provided for a specific devolution of the title thereto upon the abandonment or vacation thereof, whenever any highway or any highway or any parts thereof is vacated under or by virtue of any Act of this State or by the highway authority authorized to vacate the highway, the title to the land included within the highway or part thereof so vacated, vests in the then owners of the land abutting thereon, in the same proportions and to the same extent, as though the highway had been dedicated by a common law plat (as distinguished from a statutory plat) and as though the fee of the highway had been acquired by the owners as a part of the land abutting on the highway except, however, such vacation shall reserve to any public utility with facilities located in, under, over or upon the land an easement for the continued use, if any, by such public utility.”

765 ILCS 5/7a; since October 3, 1969, when a street or alley is vacated, and when the land adjacent to this vacated right-of-way is conveyed, the vacated right-of-way does not have to be specifically included in the deed in order for the vacated right-of-way to be conveyed. As long as the deed does not specifically exclude the vacated right-of-way, the deed conveys the vacated right-of-way as well.

Releases/Satisfactions

Forged Satisfactions Bulletin

We issued this back in 2015

https://wfgunderwriting.com/wp-content/uploads/filebase/national/bulletins/NB%202015-10%20-%20Satisfactions%20-%20Naked%20-%20Fraudulent%20-%20Red%20Flags.pdf

Right of Way Dedications and Vacations

A PRIMER ON RIGHT-OF-WAY DEDICATIONS AND VACATIONS

By

Richard F. Bales

Introduction

The law concerning right-of-way dedications and vacations is scattered throughout numerous statutes and court cases. This article will attempt to bring together and summarize the law in these areas.

The Dedication

A dedication of land for right-of-way purposes involves two elements--offer and acceptance. That is, there must be an offer to the municipality to set aside the land for public use, and there must be an acceptance of the offer. See Village of Riverside v. MacLain, 210 Ill. 308, 71 N.E. 408 (1904).

There are two types of dedications: statutory and common law. A statutory dedication is a dedication that is in strict conformity to the Plat Act. Thus, a statutory plat (a plat of subdivision that strictly conforms to the Plat Act) will create a statutory dedication of a right-of-way. See 765 ILCS 205/1 et seq; see especially 765 ILCS 205/3; see also Terwelp v. Sass, 111 Ill.App.3d 133, 443 N.E.2d 804, 66 Ill. Dec. 878 (4th Dist., 1982); First Illinois Bank of Wilmette v. Valentine, 250 Ill. App. 3d 1080, 619 N.E.2d 834, 189 Ill. Dec. 133 (2nd Dist., 1993). A plat that is not a statutory plat (i.e., a plat that does not conform to the Plat Act) is called a common law plat.

With a statutory plat, the fee simple ownership of any street dedicated on the plat vests in the public. With a common law plat, the public obtains only an easement interest; title to the right-of-way remains in the adjoining landowner. See Grimming v. Ferris, 79 Ill.App.3d 546, 399 N.E.2d 141, 35 Ill. Dec. 307 (1979); Ingraham v. Brown, 231 Ill. 256, 83 N.E. 156 (1907); see also 765 ILCS 205/3, which provides that, the acknowledgment and recording of a [plat created under the Plat Act] shall be held in all courts to be a conveyance in fee simple of such portions of the premises platted as are marked or noted on such plat as donated or granted to the public . . . and the premises intended for any street, alley, way, common or other public use in any city, village or town, or addition thereto, shall be held in the corporate name thereof in trust to and for the uses and purposes set forth or intended.

Creating the Statutory Plat

There must be strict compliance in order to qualify as a statutory plat. The following cases show how difficult (if not impossible) it is for a title examiner to determine if a plat is a statutory plat or a common law plat:

● In City of Chicago v. Rumsey, 87 Ill. 348 (1877), the court concluded that the plat in question was a common law plat because the plat was not properly acknowledged. See also Owen v. Village of Brookport, 208 Ill. 35, 69 N.E.952 (1904).

● In Thompson v. Maloney, 199 Ill. 276, 65 N.E. 236 (1902) the plat was said to be a common law plat because it was executed by an attorney in fact.

● In Village of Auburn v. Goodwin, 128 Ill. 57, 21 N.E. 212 (1889), the court said that a plat was a common law plat because it was prepared by a deputy surveyor and not the county surveyor.

● In Road King Petroleum Products, Inc. v. Village of Wood Dale, 23 Ill.App.3d 181, 318 N.E. 2d 710 (1974), the court ruled that there was no statutory dedication of a platted fifty foot strip because the owner signed the plat before words of dedication were added by the surveyor.

● And in Ingraham v. Brown, supra, the court held that a plat “not made by the owner of the lands covered by said plat . . . is therefore, at most, a common law plat. . . .” 231 Ill. at 258, 83 N.E. at 157.

The Title Company Dilemma

Title companies are sometimes asked to determine the ownership of dedicated and platted rights-of-way. But the judicial decisions outlined above indicate that it is virtually impossible to conclusively determine whether a plat is a statutory plat or a common law plat. Indeed, it is likely that a large number of plats of subdivision are common law plats. For example, title examiners often review plats of subdivision that are signed by the apparent beneficiary of a title holding land trust and not the actual land trustee. In light of the holding in Ingraham v. Brown, supra ( and 765 ILCS 205/2, which provides that the plat must be acknowledged by the owner of the land), it would appear that all such plats are common law plats.

The method of identifying lots on the plat may also render the plat a common law plat. For example, 765 ILCS 205/1 refers to the “numbering [of] all such lots, blocks or parcels by progressive numbers. . . .” If a parcel of land in a plat of subdivision is identified as “Outlot A,” then it seems that this plat would be a common law plat, as it does not conform to the Plat Act lot numbering requirement.

The Super Dedication

Recent legislation may have blurred the line between statutory and common law dedications. In Klose v. Mende, 329 Ill. App.3d 543, 771 N.E.2d 960, 265 Ill.Dec. 1 (3rd Dist. 2001), the plaintiffs claimed that they owned fee simple title to some roadways in LaSalle County. The defendant, who was the Commissioner of Highways, produced a ledger that indicated that the two roads had been dedicated to Meriden Township in 1856. The plaintiffs, however, maintained that the dedications were invalid in that they failed to conform to the statute (1851 Ill. Laws 35).

The appellate court agreed with the plaintiffs, stating that,

In this case the 1856 dedications cannot be shown to be valid. While the absence of the record of a personal examination by the town commissioner is an excusable error, the dedications fail to meet even the most basic requirements of the Act. Since there was no order or petition in the town clerk’s records, there was no valid evidence that could support the bare ledger entry and, therefore, establish the dedication of the two roads as public highways. Defendant’s proffered ledger entry does not, without more, satisfy [the statute’s] requirements. Accordingly, we cannot find that the 1856 dedications were valid. 329 Ill. App.3d at 547, 771 N.E.2d at 964, 265 Ill.Dec. at 5.

The court went on to indicate that the defendant had acquired an easement by prescription over the road then currently in use.

Public Act 93-183, effective July 11, 2003, is intended to counteract the holding in Klose. The act changes the means of proving that land has been dedicated to the public for highway purposes. This act amends Section 6-315 of the Illinois Highway Code (605 ILCS 5/6-315) to read as follows:

An entry in the records, ledger, or official minute book of the district clerk, stating that there has been a dedication of a public highway according to statutory requirements shall be prima facie evidence in all cases that there was a dedication of a public highway and that the dedication complied with all statutory requirements, regardless of whether supporting records or documentation of the dedication is available. (Emphasis added)

Section 6/315 of the Illinois Highway Code is applicable to township rights-of-way and road district rights-of-way.

It appears that a possible unintended consequence of Public Act 93-183 is a tremendous broadening of the definition of a statutory dedication. As previously mentioned, a statutory plat is a plat that has been drafted in conformity with the Plat Act. Public Act 93-183, however, now leap frogs over the common law dedications in City of Chicago v. Rumsey, Owen v. Village of Brookport, and the other cases noted above by creating a new super statutory dedication for township and road district rights-of-way. The plats described in Rumsey and the above court cases were recorded plats, but they were still only common law plats. Under a strict interpretation of 605 ILCS 5/6-315, the mere entry in a ledger book can create a statutory dedication; indeed, the statute suggests that one can have a statutory dedication without even having a recorded document!

Right-of-Way Statutes

There are many statutes that concern right-of-way issues. Those of particular interest to the real estate attorney include the following:

● 65 ILCS 5/11-135-7 allows for the construction of water mains along, upon, under, and across rights-of-way.

● 605 ILCS 5/2-202; Any road that has been used by the public for fifteen years as a highway becomes a public highway.

● 605 ILCS 5/4-501; 65 ILCS 5/11-61-1; Roads can be created by purchase or by eminent domain.

● 605 ILCS 5/9-113; A public utility has the right, with limitations, to install underground utilities in a statutory dedicated road. Note that Public Act 93-357, effective January 1, 2004, adds new subsection (h-1) to 605 ILCS 5/9-113 and drastically amends subsection (l).

● 765 ILCS 205/1 et seq.; The Plat Act

Right-of-Way Vacations

Generally speaking, when a street or road is vacated, ownership of the vacated parcel splits equally to the adjoining landowners. See 65 ILCS 5/11-91-2; see also Piper v. Reder, 44 Ill. App.2d 431, 195 N.E.2d 224 (1963); Prall v. Burckhartt, 299 Ill. 19, 132 N.E. 280 (1921).

This simply illustrates the concept set forth earlier. In a common law plat, the owners of the lots own to the center of the street, but subject to an easement in favor of the public. Thus, once the street is vacated, said lot owner still owns to the center of the street, but now in fee simple, as the easement no longer exists. It is virtually lifted away, leaving the lots still owned by them, but now no longer subject to the easement. (See Figure 1)

The vacation of a right-of-way within a statutory plat would have the same result. 65 ILCS 5/11-91-2 provides that upon vacation, the roadway “vests in the then owners of the land abutting thereon, in the same proportions and to the same extent, as though the street or alley has been dedicated by a common law plat (as distinguished from a statutory plat) and as though the fee of the street or alley had been acquired by the owners as a part of the land abutting on the street or alley.”

But there are exceptions to this rule. For example, if a street runs between two lots in two different subdivisions, and only one subdivision created the street, then upon vacation, the entire street vacates in favor of the lot in the subdivision that created the street. Although there is no basis in statutory law, many title insurance professionals feel that if a subdivided lot is on one side of a street, and on the other side there is no subdivision, but instead there is a creek, river, or railroad lines, then upon vacation, the entire street would vacate in favor of the subdivision; none of the street would inure to the creek, the river, or the railroad tracks. Indeed, this conclusion is suggested in 605 ILCS 5/6-302.

Chavda v. Wolak

In 1997 Public Act 90-179 amended the Illinois Municipal Code (65 ILCS 5/11-91-1). It provided that if only one abutting landowner makes payment in consideration for the vacation of a street or alley, then the entire width of the street or alley inures to the benefit of that one landowner. This amendment is contrary to years of common law and statutory law, which, as noted above, provides that in the event of such a vacation, title would, generally speaking, split down the middle between abutting landowners.

Consequently, when this amendment became law, title companies refused to follow it, arguing that it was probably unconstitutional under the 5th and 14th amendments, in that it amounted to a taking of land without just compensation and without due process. But in 1999 the Illinois Supreme Court in Chavda v. Wolak, 188 Ill.2d 394, 721 N.E.2d 1137, 242 Ill. Dec. 606 (1999), ruled that the statute was constitutional. As a result, title companies now insure such right-of-way vacations. Title companies will closely review the vacation ordinance to make sure that it conforms to the statute, as amended. For example, the title company will request evidence that any required compensation has been paid. As the vesting of the vacated right-of-way depends on the nature of this compensation, it will make sure that this compensation is consistent with the devolution of title. If the vacation ordinance provides that compensation is to be paid by only one abutting owner, then title to the vacated street or alley must vest fully in that one abutting owner. If the vacation ordinance provides that compensation is to be paid by more than one but less than all abutting owners, then title to the vacated street or alley must vest fully in these abutting owners. If the vacation ordinance provides that compensation is to be paid by all abutting owners, then title to the vacated street or alley must vest fully in all these adjoining owners. If the vacation ordinance provides that no compensation is required, then title to the vacated street or alley must vest fully in all abutting owners.

Vacation Statutes

There are many statutes that address right-of-way vacations. These may be of particular interest to the real estate attorney:

● 55 ILCS 5/5-1036; Vacation of town plats

● 65 ILCS 5/11-61-2; 65 ILCS 5/11-91-1; 65 ILCS 5-11-91-2; Municipal vacations

● 605 ILCS 5/5-109; 605 ILCS 5/5-110; County right-of-way vacation

● 605 ILCS 5/6-301 et. seq.; Township or district road vacation

● 70 ILCS 805/6; Forest Preserve right-of-way vacations

● 605 ILCS 5/9-127; Highway vacations

● 765 ILCS 5/7a; Legal description of land appurtenant to vacated right-of-way

● 765 ILCS 205/6; 765 ILCS 205/7; Plat vacations

Vacating “Future” Streets

A plat may contain language indicating that one or more strips of land are a “future street” or “future alley.” In such instances an ordinance of vacation would be a rejection of an offer to dedicate. Under the strict letter of the law, title to the strip after such a purported vacation would remain in the developer’s name unless the strip was expressly conveyed by the developer to the adjoining lot owner or owners. However, it is possible that a title company would insure that the adjoining neighbor or neighbors own the strip after the vacation without requesting a deed from the developer or his or her heirs, especially if the plat had been prepared many years before the vacation and no intervening documents affecting the “future” right-of-way had been recorded since the plat was recorded.

Vacation of Roads Adjoining Irregularly-Shaped Parcels

There does not appear to be a statute or court decision in Illinois that offers a definite rule for determining how all shapes and sizes of vacated streets are apportioned to their adjacent lands. The only statute that is of any help is 65 ILCS 5/11-91-2, which provides, as indicated above, that upon vacation the roadway “vests in the then owners of the land abutting thereon, in the same proportions and to the same extent, as though the street or alley has been dedicated by a common law plat (as distinguished from a statutory plat) and as though the fee of the street or alley had been acquired by the owners as a part of the land abutting on the street or alley.” (Similar wording is contained in 605 ILCS 5/9-127)

Tracy v. City of Chicago, 24 Ill. 500 (1860) concerns the vacation of a right-of-way near the Chicago River and how the vacated land should be apportioned to the adjoining irregularly-shaped lots. The court determined that the lot lines should be extended along said lines and not run at right angles to the river. However, this decision was based on the court’s perceived intent of Chicago’s common council in passing the vacation ordinances, as gleaned from a parsing of the ordinances, and not on some general principle.

The rule set forth in 65 ILCS 5/11-91-2 is easy to apply when the lots are square or rectangular. See Figure 1. But problems arise when the adjoining lots are not square or rectangular and when the sidelines are not parallel to each other.

Figure 2 and Figure 3 demonstrate differing ways of apportionment where lot lines are not parallel and the sidelines intersect the street lines at sharp angles.

Figure 2 shows apportionment by extending the lot lines in their own direction. (This is similar to the holding in Tracy v. City of Chicago, supra.) However, this may give adjacent lot owners a greater or lesser share of the vacated street than their frontage would justify.

In Figure 3, the lot lines are extended perpendicular to the sidelines of the street, as opposed to extending the sidelines of the lot in their own direction.

An entirely different problem develops when the lots abut a curved street that is vacated. In such a case, the sidelines of the vacated parcels might be determined by extending the sidelines radially to the center of the curved street. The sidelines are the radii of the curve of the street extended from the center of the curve to the center of the vacated street. See Figure 4; see also Curtis M. Brown, Walter G. Robillard, and Donald A. Wilson, Boundary Control and Legal Principles, 3rd ed. (New York: John Wiley and Sons, 1986), pp. 189-96.

Because of the problems inherent in the vacation of irregular lots, the title company may refuse to insure title to the vacated street in the owner of an adjacent irregular lot, unless the boundaries of the vacated street have been adjusted between the various lot owners by a private agreement or by court order. If surveyors are asked to prepare a plat of vacation of an irregularly shaped parcel, they should consult with the municipality as to how the parcel is to be divided.

Utilities in Vacated Rights-of-Way

When insuring vacated roads and streets, title insurance companies have traditionally wrestled with the problem of determining whether utility facilities remain in said rights-of-way. Unless the municipality and the various utility companies provide the title company with information about the possible existence of utility facilities within the vacated street, road, or alley, the title company would historically raise a title policy exception for possible unrecorded utilities falling in the vacated area. Does a relatively recent statutory amendment provide the impetus for a modification of title company procedure?

Effective July 9, 2004, 65 ILCS 5/11-91-1 was amended to change an operative word from “may” to “shall”:

[A]nd if there are any public service facilities in such street or alley, or part thereof, the ordinance shall (formerly “may”) also reserve to the municipality or to the public utility, as the case may be, owning such facilities, such property, rights of way and easements as, in the judgment of the corporate authorities, are necessary or desirable for continuing public service by means of those facilities and for the maintenance, renewal and reconstruction thereof. (See also 605 ILCS 5/9-127(a).)

Thus, if the vacation ordinance was enacted after July 9, 2004, and did not reserve any utility easements in the land in question, will the title company choose to rely on the statute and assume that there are no operating utilities remaining in the right-of-way? That is, is it possible that the title company would be willing to insure the vacated street, road, or alley without raising a title policy exception for possible utilities falling within the vacated right-of-way? This is a fairly risky proposition and should be discussed with the title company, who will probably decide this issue on a case-by-case basis. Factors it would consider include whether the ordinance specifically states that there are no utilities within the right-of-way.

Selling or Conveying the Vacated Right-of-Way

Public Act 94-476, effective August 4, 2005, amends section 9-127 of the Illinois Highway Code; see 605 ILCS 5/9-127(d). The statute, as amended, provides that when a highway authority vacates a highway or part thereof, it may sell the vacated land to any third party at fair market value if the authority has a fee simple interest and if a right of first refusal at a fair market value has been given to the adjoining landowners.

But how does one determine that the highway authority has a fee simple interest in the land? This might be a simple matter if the authority were deeded the property. But what if the land in question were dedicated to the authority in a plat of subdivision? As discussed above, in the absence of a judicial finding, it is difficult, if not impossible, to conclusively determine that a plat of subdivision is a statutory plat. Also, insuring “around” a right of first refusal is always a risky proposition for the title company. How many days notice should be given the adjoining landowners? What if these land owners refuse to execute a release of their rights of first refusal? The court in Crestview Builders, Inc. v. Noggle Family Ltd. Partnership, 352 Ill.App.3d 1182, 816 N.E.2d 1132, 287 Ill. Dec. 921 (2d Dist., 2004) ruled that a right of first refusal that did not specify either a price or a method by which the price could be determined was unenforceable. Does that mean that a right of first refusal that does not meet this threshold test is not an effective right of first refusal under this statute?

When insuring the conveyance of a lot and its appurtenant portion of a vacated right-of-way, the title company will probably request that the deed include the legal descriptions of both parcels. However, since October 3, 1969, when a street or alley is vacated, and when the lot adjacent to this vacated parcel is conveyed, the vacated parcel does not have to be specifically included in the deed in order for it to be conveyed. As long as the deed does not specifically exclude the vacated parcel, the deed conveys the vacated parcel as well. See 765 ILCS 5/7a.

Streets

Street Clause - Metes & Bounds

We must take exception to it on all metes and bounds because the streets may have either shifted over time or more land is being used for it than how large the road legally is. The only way to remove it would be to require a staked survey that accurately depicts the road and research the roads chain to see if it can be removed.

Abandonment & Vacation

add an exception for the vacated street/alley even though they had an exception for the Notice vacating them. Sometimes, the vacation ordinance will grant an easement to public utilities, sometimes not. It’s always a good idea to add:

Rights, if any, of public utilities installed in vacated ________________ Street and the vacated, unnamed alley prior to the vacation thereof together with the right to enter onto the Land for the purposes of maintaining, repairing and replacing said utilities.

In some states, adjoining landowners may have a statutory easement for ingress/egress if the vacation would land lock them though it’s rare that you’ll have that situation.

Taxation And Tax Titles

Forfeited Taxes / Scavenger Sale

When taxes are offered to tax buyers at the original tax sale and no one bids on them they turn into forfeited taxes. The forfeited taxes then get offered again at a later time at the scavenger sale. If the tax buyer buys them at the scavenger sale the taxes turn into an estimate of redemption.