Paul Porvaznik - Business Litigator

Case Notes and Summaries of Recent Cases (State and Federal Courts - Illinois Focus)

CRE

The Illinois Commercial Real Estate Broker’s Lien Statute: A Top 10 List

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The Illinois Commercial Real Estate Broker’s Lien Act, 770 ILCS 15/1 (the “Act”), provides a broker whose owed commission money with a strong remedy against a breaching property owner, buyer or tenant. Here are some of the Act’s key provisions:

1. What It Applies To:

“Commercial real estate.”  This is defined as any real estate in Illinois other than (i) real estate containing one to six residential units, (ii) real estate on which no buildings or structures are located, or (iii) real estate classified as farmland under the Property Tax Code.  770 ILCS 15/15

2. What It Doesn’t Apply To:

Real estate that isn’t “commercial”, including single family residential units like condominiums, townhouses, or homes in a subdivision when sold conveyed on a unit-by-unit basis.

3. Is Written Agreement Required? Yes.  770 ILCS 15/10.

4. When Does it Attach?:
The lien attaches when two things happen: (1) the broker becomes entitled to a fee or commission under a written instrument signed by the owner, buyer, tenant (or their agent); and (2) the broker records a notice of lien in the Recorder’s Office of the county where the commercial real estate is located.

5. Does the Lien Relate Back? No.   Unlike mechanics liens, the broker lien does not relate back to the date of contract between broker and owner (or buyer or tenant).  770 ILCS 15/10.

6.  Timing/When To Record:  In the case of a lease, the lien must be recorded within 90 days after the tenant takes possession of the premises,  Exception: if broker is given written notice of the planned lease signing at least 10 days before the intended signing date, the lien claim must be recorded before the lease signing date.

For a purchase, the lien must be recorded before the property is transferred to a buyer. The broker has 10 days from the recording date to mail a copy of the recorded lien to the owner of the property by registered or certified mail, with return receipt requested, or to personally serve the notice on the owner.  The broker’s lien shall be unenforceable if mailing of the copy of the notice of lien recording does not occur at the time and in the manner required by this Act. 770 ILCS 15/15.

7.  How to Enforce the Lien:  The broker enforces the lien by filing suit to foreclose it.  The broker must sue in the Circuit Court for the county where the property is located by filing a complaint and sworn affidavit that the lien has been recorded.  The lawsuit must be filed within 2 years after recording the lien.

8. Contents of the Lien Notice:  The lien notice shall state the name of the claimant, name of the owner, a description of the property upon which the lien is being claimed, the amount for which the lien is claimed, and the real estate license number of the broker.

9.  Q: Can the Liening Broker Recover Her Attorneys’ Fees?  A: Yes. The losing party must pay the winning party’s attorneys’ fees, costs, and prejudgment interest.

10.  Q: What About Priority? A: Prior recorded liens and mortgages against the property shall have priority over a broker’s lien.  770 ILCS 15/15.  These prior recorded liens include mechanics liens recorded after the broker’s lien notice but which relates back to a date prior to the lien recording date and prior recorded liens securing revolving credit and future advances of construction loans as described in Section 15-1302 of the Mortgage Foreclosure Statute.

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

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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

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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.