‘Lifetime’ Verbal Agreement To Share in Real Estate Profits Barred by Statute of Frauds – IL 1st Dist.

I previously summarized an Illinois case illustrating the Statute of Frauds’ (SOF) “one-year rule” which posits that a contract that can’t possibly be performed within one year from formation must be in writing.

Church Yard Commons Limited Partnership v. Podmajersky, 2017 IL App (1st) 161152, stands as a recent example of a court applying the one-year rule with harsh results in an intrafamily dispute over a Chicago real estate business.

The plaintiff (a family member of the original business owners) sued the defendant (the owners’ successor and son) for breach of fiduciary duties in connection with the operation of family-owned real estate in Chicago’s Pilsen neighborhood.  The defendant filed counterclaims to enforce a 2003 oral agreement to manage his parents’ realty portfolio in exchange for a partnership interest in the various entities that owned the real estate.   The trial court dismissed the counterclaim on the basis that the oral agreement equated to a “lifetime employment contract” and violated the SOF’s one-year rule.  Defendant appealed.

Result: Counterclaim’s dismissal affirmed.

Reasons:

The SOF’s purpose is to serve as an evidentiary safeguard: in theory, the Statute protects defendants and courts from proof problems associated with oral contracts since “with the passage of time evidence becomes stale and memories fade.”  (¶ 26; McInerney v. Charter Golf, Inc., 176 Ill.2d 482, 489 (1997).

An SOF defense is a basis for dismissal under Code Section 2-619(a)(7).

Section 1 of the SOF, 740 ILCS 80/1, provides: “No action shall be brought…upon any agreement that is not to be performed within the space of one year from the making thereof” unless the agreement is in writing.

Under this one-year rule, if an oral agreement can potentially be performed within the space of one year (from creation), regardless of whether the parties’ expected it to be performed within a year, it does not have be in writing.  As a result, contracts of uncertain duration normally don’t have to comply with the one-year rule – since they can conceivably be performed within a year.

What About Lifetime Employment Contracts?

Lifetime employment agreements, however, are the exception to this rule governing contracts of unclear duration.  Illinois courts view lifetime contracts as pacts that contemplate a permanent relationship.  And even though a party to a lifetime agreement could die within a year, the courts deem a lifetime agreement as equivalent to one that is not to be performed within a space of a year.  As a result, a lifetime employment contract must be in writing to be enforceable.

Here, the 2003 oral agreement involved the counterplaintiff’s promise to dedicate his life to furthering the family’s real estate business.  It was akin to a lifetime employment agreement.  Since the 2003 oral agreement was never reduced to writing, it was unenforceable by the counterclaim under the SOF one-year rule. (¶¶ 30-31)

What About the Partial Performance Exception?

The Court also rejected counter-plaintiff’s partial performance argument.  In some cases, a court will refuse to apply the SOF where a plaintiff has partially or fully performed under an oral contract and it would be unfair to deny him/her recovery.  Partial performance will only save the plaintiff where the court can’t restore the parties to the status quo or compensate the plaintiff for the work he/she did perform.

Here, the Counterplaintiff was fully compensated for the property management services he performed – it received management fees of nearly 20% of collected revenue.

Afterwords:

This case validates Illinois case precedent that holds lifetime employment contracts must be in writing to be enforceable under the SOF’s one-year rule.  It also makes clear that a party’s partial performance won’t take an oral contract outside the scope of the SOF where the party has been (or can be) compensated for the work he/she performed.  The partial performance exception will only defeat the SOF where the performing party can’t be compensated for the value of his/her services.

 

 

 

Commercial Landlord Not Obligated to Accept Substitute Tenant Where No Sublease Offered – IL 1st Dist.

When a commercial tenant’s business is failing, it’s fairly common for the tenant to tender a sublessee to the landlord as a way to avoid a future damages lawsuit and judgment.

Gladstone Group I v. Hussain, 2016 IL App (1st) 141968-U, examines when a non-breaching landlord must accept a proposed sub- or new tenant from a defaulting lessee and what conduct satisfies the landlord’s duty to mitigate damages.

When the corporate tenant’s barbecue restaurant foundered, the landlord sued the lease guarantors to recover about $60K in unpaid rent.  At trial, the guarantors provided written and oral evidence that it offered three potential subtenants to the landlord – all of whom were refused by the landlord.

The trial court found that the landlord violated the lease provision prohibiting the landlord from unreasonably refusing consent to a sublease offered by the tenant.  Critical to the trial court’s ruling was the fact that the tenant proposed a subtenant who offered to pay $7,500 per month – only about $800 less than the monthly sum paid by the defaulting tenant.

The landlord appealed.  It argued that the lease did not require landlord to accept an offer that wasn’t an actual sublease or to agree to accept less rent than what a breaching tenant owed under a lease.

Held: Reversed

Reasons:

The critical fact was that no prospective tenant contacted by the defendant submitted a sublease to the landlord.  Instead, all that was given were “offers” to lease the premises. There was no evidence that any of the businesses that submitted offers were ready willing and able to step into defendant’s shoes.  While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.

While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.

Since the tenant failed to carry its burden of proving the subtenant’s present ability to take over the lease, the Court found that the landlord was within its rights to refuse the different subtenant’s overtures.  The appeals court remanded the case so the trial court could decide whether the landlord satisfied its duty to mitigate since the evidence was conflicting as to the landlord’s post-abandonment efforts to re-let the premises. (¶¶ 23-25)

The dissenting judge found that the landlord failed to satisfy its duty to mitigate damages.  It noted trial testimony that for several months from the date tenant vacated the property, the landlord did nothing.  It didn’t start showing the property to prospective tenants until several months after the tenant’s abandonment.

The dissent also focused on the landlord’s refusal to meet with or follow-up with the three prospects brought to it by the defaulting tenant.  It cited a slew of Illinois cases spanning nearly five decades that found a non-breaching landlord met its duty to mitigate by actively vetting prospects and trying to sublease the property in question.  Here, the dissent felt that the landlord unreasonably refused to entertain a sublease or new lease with any of the three businesses introduced by the defendant.

Afterwords:

There is a legally significant difference between an offer to sublease and an actual sublease.  A defaulting tenant has the burden of proving that its subtenant is ready, willing and able to assume the tenancy.  If all the tenant brings to a landlord is an offer or a proposal, this won’t trigger the landlord’s obligation not to unreasonably refuse consent to a commercially viable subtenant.

A landlord who fails to promptly try to re-let empty property or who doesn’t take an offered subtenant seriously, risks a finding that it failed to meet its duty to mitigate its damages after a prime tenant defaults.

 

Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.