‘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.

 

 

 

The Statute of Frauds ‘One-Year Rule’ (IL Law Basics)

SOFThe Statute of Frauds (SOF) requires certain contracts to be in writing to be enforceable.  (See earlier post here).  740 ILCS 80/1; 810 ILCS 5/2-201 (UCC analog).

The SOF’s “one-year rule” posits that any contract that can’t possibly be performed within the span of one year from the date of making must be in writing.  The purpose of the one-year rule is to protect against stale memories and evidence.

Typical settings for the one-year rule defense include multi-year leases and “lifetime” employment contracts (i.e., plaintiff sues an employer claiming breach of a promise to employ the plaintiff for life).

In Chiappe-Kay v. Barthel, 2013 IL App (2d) 120975-U, the plaintiff sued the defendant after the defendant failed to transfer a Personal Seat License that allowed the defendant (and would now allow the plaintiff) to buy Chicago Bears season tickets for life.

The plaintiff sued for specific performance and defendant moved for summary judgment based on the one-year rule: the oral football tickets agreement was defeated because  it couldn’t be performed within the space of a year.

Siding with the defendant, the Court described the one-year rule’s purpose as barring actions “based upon nothing more than loose verbal statements.”  It held that the parties’ agreement couldn’t be performed within the space of a year since the agreement was that the plaintiff would receive season tickets for life based on defendant’s PSL. (¶ 16).

The Court also found that the one-year rule barred plaintiff’s claim because the Bears instituted a one-year ban on the transfer of PSLs when the Bears first issued the PSL to the defendant.  As a result, there was no way for the defendant to perform – by transferring the PSL – to the plaintiff within a one-year time span.  (¶¶ 19-21).

Farmers and Merchants v. Hulett, 2012 IL App (3d) 120022-U, involves an oral agreement between a former land trustee and the beneficiary for that beneficiary to rent a house (owned by the land trust) for the beneficiary’s lifetime.

When the successor trustee assumed control of the trust, it sent a notice terminating the tenancy and sued to evict the beneficiary tenant.  The tenant opposed the eviction suit and argued that he was allowed to live in the house for his lifetime.  The Court entered summary judgment for the successor trustee and found that the defendant’s claim to a lifetime tenancy was unenforceable since it wasn’t in writing.

The Court noted that the written land trust agreement was silent on the defendant’s right to occupy the house.  Because of this, the tenant had, at most, an oral lease agreement with the prior trustee.

In Illinois, an oral lease for a period exceeding a year – such as a lifetime lease – is treated as a year-to-year lease.  A year-to-year lease can be terminated on a landlord’s sixty-day written notice.  735 ILCS 5/9-205 (year-to-year lease is terminable on 60 days’ notice).

The Court found the successor timely terminated the oral lease under the Illinois forcible detainer statute.

Hulett also provides good reading on the topics of promissory estoppel (which usually is not an exception to the SOF) and equitable estoppel (which is). (¶¶ 14-15).

Promissory estoppel applies where someone takes action in reliance on a verbal promise by the defendant.  Equitable estoppel involves some element of calculated misconduct or deception by the defendant.

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