Commercial Tenant Can’t Share in Shopping Mall Condemnation Award

strip-mallIn Village of Palatine v. Palatine Associates, LLC, 2012 IL App (1st)  102707, an eminent domain (condemnation) suit, the defendant owned a shopping center and was a lessor on several commercial leases – all of which contained provisions that said in the event of condemnation proceedings, the tenant would share in any award.  The plaintiff Village filed a condemnation suit about two years into a ten-year lease between the defendant landlord and a commercial tenant.  The condemnation suit eventually settled with the landlord getting nearly $5M in proceeds to the exclusion of the tenant.  Tenant appealed.

Held: Affirmed:

Basis: The First District agreed with the trial court that the landlord terminated the tenant’s lease before the condemnation award.  The Court rejected tenant’s argument that the landlord’s 5-day notice was deficient and that the landlord waived the notice by accepting partial payment.  In Illinois, acceptance of rent in a commercial lease setting is not a waiver if the notice explicitly gives the landlord the right to accept partial payment. Palatine Associates, ¶¶ 73-75. 

The Court also discarded the tenant’s fraud in the inducement defense.  The Court enforced the lease’s “non-reliance” clause, through which the tenant certified that it wasn’t induced to enter the Lease by any landlord representations.  Id., ¶ 79.  The non-reliance clause precluded the, tenant from establishing justifiable reliance – a required fraud in the inducement element.  The court also rejected tenant’s claim that the non-reliance clause was an unenforceable exculpatory clause that immunized the landlord for wilful and wanton conduct.  The reason: the lease text said nothing about insulating the landlord from intentional torts.  (¶¶ 82-83).

Conclusion

Palatine Associates provides a good summary of Illinois contract formation, interpretation and enforcement rules in the commercial lease context.  Though its  serpentine procedural history is hard to follow, the general rules gleaned from the case are simple.  For lessors, the case reaffirms the importance of both 5-day notices and that a lease specifically state that only full payment will waive a lease default.  The case also shows that in commercial lease context, integration and non-reliance clauses are enforceable against tenant defenses based on pre-lease representations by a landlord.

For tenants, the case cautions to be leery of lease terms that allow landlords to accept partial payments without waiving the default as well as lease integration and non-reliance clauses.  An integration clause will bar any evidence of a landlord’s oral representations that conflict with the written lease.  A non-reliance provision will preclude a fraud in the inducement claim.   

Condo Assessment Liens And Slander of Title

Section 9 of the Illinois Condominium Property Act (765 ILCS 605/9) allows a condominium association to place a lien on a unit for unpaid assessments.    

But what if an association records an inflated assessment lien against a unit owner? Does the unit owner have any recourse? 

The First District answered these questions in Kurtz v. Hubbard, 2012 IL App (1st) 111360.

The plaintiff, a Gold Coast condo unit owner, filed a multi-count action against her condo association alleging slander of title and the tort of presenting someone in a false light when the association sued for possession of plaintiff’s unit and recorded a lien two weeks later.

The plaintiff sued the association, alleging the lien was false and impaired the unit’s marketability and placed her in a false light before the community since the lien was a public record.

The lien stated that the plaintiff owed over $15,000 in delinquent assessments.  Plaintiff eventually paid off the lien (under protest) and then filed suit.  The  trial court dismissed all claims on the association’s 2-619 motion.  Plaintiff appealed dismissal of the false light and slander of title claims.

The First District reversed the dismissal of the slander of title and false light claims.  It first held that unlike court pleadings (which are absolutely privileged), assessment liens don’t merit th same level of protection.  Assessment liens are only qualifiedly privileged.  A qualified privilege can be defeated by a showing of malice.  Malice means knowledge of a statement’s falsity or a reckless disregard as to its truth or falsity. ¶¶ 10, 22.  Otherwise, the court wrote, “unscrupulous condominium associations could record fraudulent assessment liens against homeowners with impunity.”  ¶ 18. 

Yeah?  So?

Kurtz teaches important lessons for associations and unit owners alike.  It vindicates the power that associations have to record liens and sue to evict defaulting unit owners.  But the case also cautions associations to lien the proper amount.  Otherwise, the owner may have valid slander of title and false light claims against the association.  However, the unit owner will still have the burden of proving the association’s knowledge of the lien’s falsity or reckless disregard as to the lien’s accuracy.

Mechanics’ Lien Enhancement Rule – Post-Cypress Creek

Section 16 of the mechanics lien statute (770 ILCS 60/17), which codifies the enhancement rule (please see prior post), was recently amended in the wake of 2011’s LaSalle National Bank v. Cypress Creek 1, LLP decision:

http://www.state.il.us/court/Opinions/SupremeCourt/2011/February/109954.pdf

In Cypress Creek, the Illinois Supreme Court severely diluted contractor’s lien rights by allowing a construction lender to trump contractors’ rights to sale proceeds.  The Court accomplished this by allowing the lender to take priority to the amount of property improvements it funded – even funds paid to contractors that didn’t record liens.  Essentially, as Justice Freeman said in his detailed dissent, the Court put lenders that fund property improvements on a par with contractor lien claimants and conferred lien creditor status on the lender by “judicial fiat”.  This resulted in the lender getting the lion’s share of sale proceeds while the contractors received only a  fraction of the monies. 

Another pro-lender, anti-contractor holding of the Cypress Creek was that lien claimants only took priority for the specific value of their individual improvements; as opposed to proportionally taking priority to the total value of all contractor improvements to the land. The result: banks and lenders were thrilled; contractors were furious.

After public outcry and warring legislative bills, the legislature passed H.B. 3636, and the bill was signed into law on February 11, 2013 as P.A. 97–1165.  It essentially reverses Cypress Creek and provides that a lender has priority only to the value of the land at the time of the owner-general prime contract and that lien claimants (contractors) take priority for the value of all improvements constructed after the prime contract (not just the specific improvements performed by an individual contractor).

770 ILCS 60/16 of the Act now reads:

When the proceeds of a sale are insufficient to satisfy the claims of both previous incumbrancers and lien creditors, the proceeds of the sale shall be distributed as follows: (i) any previous incumbrancers shall have a paramount lien in the portion of the proceeds attributable to the value of the land at the time of making of the contract for improvements; and (ii) any lien creditors shall have a paramount lien in the portion of the proceeds attributable to the value of all subsequent improvements made to the property.

 At this point it’s too early to tell what impact HB 3636 will have on construction lending and mechanics lien law in Illinois.  Stay tuned.

PBP