Pre-Development Survey Work Is Lienable and Illinois Statutory Interest On Contracts (Part II of II)

Young v. CES, Inc., 2014 IL App (2d) 131090-U also provides clarity on which services are lienable and which aren’t.  The lienable vs. non-lienable distinction is an important one to grasp because if a contractor tries to affix a lien for work that didn’t improve the property, his lien can be defeated.  Obvious examples of lienable work include building a house or other physical structure on a piece of land.  Work that plainly isn’t lienable includes vacuuming, sweeping or property maintenance.

The tricky issues and resulting litigation emerge in the middle ground between the polar opposites of work that’s obviously lienable and work that’s clearly not.

The Young court held that the engineering firm lien claimant’s (the “Firm”) preparatory survey and construction drawing services were lienable – even though the properties remained undeveloped.

Reasons:

Section 1(a) of the Mechanics’ Lien Act (the “Act”) provides that anyone who contracts with a landowner (or with someone whom the owner authorized to contract) for property improvements can lien the property.  770 ILCS 60/1(a).

To “improve” under the Act means to perform services as an architect, structural engineer, professional engineer, land surveyor or property manager for a piece of property.  But this list isn’t exclusive: “[a]ny person who does improvement work on the land under a contract with the owner can assert a mechanic’s lien.”

– The main focus in assessing the validity of a mechanic’s lien is whether the work actually enhanced the value of the land or benefitted the landowner.

– the Act’s purpose is to require a person with an interest in real property to pay for improvements or benefits which have been induced or encouraged by its own conduct

services that merely maintain rather than improve property are nonlienable;

– where a lien claimant can’t separate lienable from nonlienable work, the entire lien claim must fail

(¶¶ 131-132)

Pre-Development Work Is Lienable

Under these guidelines, the court found the Firm’s services were lienable improvements to the two properties.  The evidence at trial showed that the Firm prepared preliminary development plans and installed an underground sewer main beneath the sites.

Moreover, the developer testified that the Firm’s pre-development engineering work improved the properties’ values because the municipality approved the project subject to final engineering.  There was also testimony that thanks to the Firm’s work, the property will change from agricultural to residential use; making it more valuable.

Another factor in finding the Firm’s services were lienable was that its preliminary engineering work would not have to be redone in the future and that the survey and engineering services altered the sites so they could be developed in the future.  The court wrote: “[i]t remains that[Plaintiff’s] work moved the projects in the direction of becoming… developable.”  This clearly conferred a monetary benefit on the landowner. (¶¶ 137-138) .

Pre-judgment Interest

The court also held that the engineering firm could recover prejudgment interest – even though there was no written contract between it and the plaintiff property owner.

In Illinois, prejudgment interest is allowed where it’s authorized by statute, agreement of the parties or warranted by equitable considerations.  Illinois law allows creditors to recover interest at the rate of five (5) percent on moneys after they become due on “instruments of writing.”  815 ILCS 205/2. (¶ 144)

Here, even though there was no contract between the Firm and the landowner, the Firm did have a written contract with the developer – who the court ruled was the plaintiff/owner’s agent.  This satisfied the statute’s “instrument of writing” requirement so that the Firm could recover prejudgment interest.

Afterwords: Pre-development work that makes it easier to develop property in the future can be lienable; especially where there is witness testimony that the preparatory work improved the land and increased its value.  Also, prejudgment interest can be recovered absent a written contract between a plaintiff and defendant as long as plaintiff has a written contract with an agent of the defendant or where there is some writing that tangentially connects plaintiff to the dispute.

Pre-Development Surveying Work Is Lienable: Illinois 2d District (Part I of II)

survey (photo credit: google images; www.state-engineering.com (visited 11.5.14))

In October 2014, the Second District expanded on the Illinois mechanics’ lien act’s (the “Act”) substantive and timing requirements and also examined Illinois agency law and discussed what services are and aren’t lienable in Young v. CES, 2014 IL App (2d) 131090-U. 

Plaintiff owned two parcels of farm land that were going to be developed into residential subdivisions. He hired a real estate developer to develop the property. That developer, in turn, hired the defendant engineering firm to perform preparatory surveying, grading, storm and sewer work along with construction drawings and elevations for both sites.  There was no direct contract between the plaintiff and the engineering firm.

The two developments stalled and the owner plaintiff filed a quiet title suit.

After a bench trial, the court found for the engineering firm in its mechanics lien countersuit against the owner and entered a foreclosure judgment on the firm’s two mechanics’ liens totaling nearly $150,000 on the two parcels.

The owner appealed arguing that the lien was facially invalid, that he didn’t authorize the developer to hire the engineering firm and that the engineering firm sought to recover for nonlienable services.

Held: Foreclosure judgment affirmed

Reasoning:

Upholding the judgment for the engineering firm, the Court stated and applied some recurring mechanics lien and agency law principles:

 Mechanics liens exist to permit a lien on property where a benefit has been received by a property owner and where value of the property has been augmented due to the furnishing of labor or materials;

– To establish a valid lien claim, the contractor must show (1) a valid contract, (2) with the property owner, (3) to furnish services or materials, and (4) the contractor performed pursuant to the contract or had a valid excuse for nonperformance;

– A contractor must file its lien within four months after completion of the work, verify the lien, include a statement of the contract, set forth the balance due and describe the liened property;

– Section 1 of the Act provides that anyone who authorizes or knowingly permits an agent to contract to improve land may have a lien attach to the land;

– To “knowingly permit” (an agent to contract for an owner) under Section 1 of the Act means to be aware of or to consent to property improvements;

– Illinois agency law has two key elements: (1) the principal has the right to control the manner and method of the agent’s work; and (2) the agent has the power to subject the principal to personal liability;

– The parties don’t have to use the word ‘agency’ nor characterize their relationship as a principal-agent one for a court to find an agency arrangement;

A principal doesn’t have to actually control the agent for a court to find an agency relationship; all that’s required is the principal has the right to control the agent;

– A course of dealing that is ratified by a principal can lead to an agency relationship finding

(¶¶ 99-115, 122-123)

Finding for the engineering firm, the court first held that the defendant’s description of the contract was sufficient under the Act.  Even though the firm made a technical mistake by saying its contract was with the owner (it was actually with the developer), the court still found the engineering firm’s lien was valid where it correctly identified the property, the property owner and because the owner was the developer’s principal (and the developer was the owner’s agent).

In finding an agency relationship between the owner and the developer, the court pointed to the two contracts between the owner and the developer for work on the two sites as well as the owner’s deposition testimony that he completely relied on the developer to handle all aspects of the properties’ improvements.

The court also credited the developer’s testimony that he believed he had expansive authority to handle all aspects of the properties’ development including hiring and scheduling the engineering, surveying and related activities completed by the plaintiff engineering firm. ¶¶ 115-116.

Key Lessons:

(1) An owner’s right to control is all that is required for an agent to bind the owner to a contract affecting the owner’s real estate; (2) Hyper-precision in a recorded lien’s contract description isn’t required for the claim to be valid.  As long as the Act’s other required information (property description, contract price, completion date, etc.) is accurate, the lien will likely comply with the Act; (3) if there is evidence that a landowner knows a third party has worked on  property coupled with proof of communications between an owner and the third party, a court will likely find for the lien claimant against a lack of privity (“we have no contract”) defense.

Diminution in Value Is Proper Damages Measure in Tree Cutting Case (IL 1st Dist)

tree (photocredit: gettysburgdaily.com (visited 11.2.14)

Geise v. Neal, 2014 IL App (1st) 133914-U, discusses how to measure damage caused by unauthorized tree cutting on private property.

The plaintiff rented out his deceased mother’s home to the defendants under a two-year lease.  After they took possession, the defendants cut down over 50 trees on the lot.  

When plaintiff found out, he terminated the lease, sued for possession of the home and sought damages under the Wrongful Tree Cutting Act, 740 ILCS 185/1 et seq. ( the “Act”), a statute that allows a plaintiff to recover triple the value of trees that are purposefully cut down.

While the lawsuit was pending, plaintiff sold property to a third party for about $65K less than the property purchase option price.

After a bench trial, the trial court entered judgment in plaintiff’s favor for almost $150K – the replacement value of the fifty-plus trees chopped down by the defendants.  The  defendants appealed on the basis that the court applied the wrong damages standard.

Held: Reversed. Trial court should have applied diminution in value standard instead of replacement value.

Q: Why?

A: The court pronounced the operative damages rules:

–  compensatory damages are designed to compensate the injured party for damage to his property and to restore the injured party to his pre-injury position;

– tort damages to real property are typically measured by the difference between the market value of the property before the injury and its value after the injury;

– diminution in value may be inadequate where the property is held for personal use – such as a family residence – and the damage can be repaired with a reasonable expenditure;

– the proper damages measure for injuries to land depends on (1) whether its residential or commercial, (2) the severity of the claimed injury, (3) whether the damaged item has value apart from the realty, and (4) whether the repair or replacement exceed the property value;

– the ‘cost of repair’ damages standard is typically applied to residential property damage and where the repairs are economically feasible;

– where damage to the property is permanent, and repairing the damage is cost-prohibitive, the damage measure is market value of property before injury minus market value after injury;

– where the property damage is temporary or partial, the proper damage measure is the cost of restoration

¶¶ 21-23.

 The court found that the diminution in value was the proper damages standard.  The court noted that the property was held purely for investment purposes: plaintiff didn’t live on the property and he rented it to defendants for $2,300 per month.

In addition, there was no evidence that the chopped-down trees had any sentimental value to the plaintiff or that plaintiff was forced to sell the property due to the destruction of the trees.  The plaintiff admitted that his intention was to sell the property all along regardless of whether the trees were cut down or intact.  

The Court also found that replacement of the trees was no longer possible since plaintiff had already sold the property to a third party.  As a result, awarding the plaintiff the repair costs of the trees would have given plaintiff a windfall.  ¶¶ 31-32.

Afterwords: 

– A damage award to a real estate owner should make him whole; it shouldn’t give him a windfall or double-recovery;

– If property is destroyed or damaged beyond repair, the proper damage measure is diminution in value;

– If property is only partially damaged, and repair is economically practical, cost of repair is the proper damage amount.