Legal Case Studies: July 2021

Legal Case Studies: July 2021


Legal case studies in this issue:

Lisa Harms HartzlerResearch and analysis by Lisa Harms Hartzler,
Sorling Northrup Attorneys

Bank was subject to Consumer Fraud Act in sale of historic building but did not violate it or breach “as is” contract

In Solwest, LLC v. Fifth Third Bank, 2021 IL App (1st) 192350, the defendant bank sold its historic 18,816-square-foot building in Cicero for $1.1 million to the plaintiff, a law firm, in 2013. Four years after the closing, the building’s air conditioning failed to start up. Plaintiff was advised by the company doing maintenance that it was time for an infrastructure upgrade. The company provided plaintiff with the same proposal for a $660,000 replacement it had given to the bank in 2008.

The first issue was whether the Consumer Fraud Act applied to the transaction, which was an in-state sale of real estate between two sophisticated corporate entities. The court held that the statute was applicable because the Plaintiff filed a suit against the bank alleging the bank had violated the Consumer Fraud Act for failing to disclose at the time of sale known defects in the building’s heating, ventilation, and air conditioning system (HVAC) and for breach of contract for failing to disclose the replacement proposal it had received in 2008.

Act defines protected parties to include companies and section 1(f) extends protections to “trade and commerce,” which include the sale of real property no matter the location. When the bank listed the building for sale and sold it to plaintiff, the bank engaged in trade and commerce.

However, even though plaintiff could bring an action under the Consumer Fraud Act, the evidence was insufficient to prove that the bank knew of any defects or conditions with the HVAC system warranting disclosure under it. The first element a plaintiff must show to maintain an action is a “deceptive act or practice by the defendant.”

In this case, the bank’s decision to seek proposals in 2008 for the HVAC system’s complete replacement did not demonstrate that it knew about defects. Although the system was antiquated and required regular maintenance, which the bank always completed, both the bank and the company providing the proposals viewed them as options for future budgeting, not an assessment that the system needed total replacement. No testimony revealed any need to replace the HVAC system in 2008. The system worked and was repairable with proper upkeep. Further, the bank’s decision to move to a smaller building in 2010 was related to industry and consumer changes requiring less need for space, not because of any concern about the HVAC system.

Because plaintiff failed to present evidence that the bank knew of a material defect at the time of sale, the court upheld summary judgment on the Consumer Fraud Act claim in favor of the bank.

Plaintiff’s second claim for breach of contract also failed. The contract did require the bank to disclose all “soil studies and reports, geological and engineering studies or reports.” However, the court held that the 2008 proposal for replacing the HVAC system was just that—a list of options for long-term planning. It was neither a technical analysis of the existing system in 2008 nor a reflection of its condition in 2013, nearly five years later. The bank had not been required to disclose the proposal.

Further, the sale contract contained an “as-is, where-is, and with-all-faults” clause that eliminated all seller’s representations about the condition of the building. “As-is provisions control as long as they are both expected and part of the bargain.” The contract clause in this case was fully negotiated and the buyer had full access to inspect the building before the contract was final. Plaintiff’s breach of contract claim failed as a matter of law.

Adding video gaming terminals to restaurant/bar did not violate purpose clause of lease

In Uncle Tom’s, Inc v. Lynn Plaza, LLC, 2021 IL App (1st) 200205, the plaintiff tenant in 1978 leased unimproved property at the corner of a Wheeling, Illinois strip mall owned by the defendant. The tenant built and successfully operated a restaurant and bar on the premises.  In 2014, the tenant obtained a video gaming license and installed five terminals in the bar area.

When the original 35-year lease was set to expire, the tenant exercised an option to extend the lease for another 15 years but could not agree with the landlord on the terms. Their relationship soured. The landlord subsequently filed a forcible entry and detainer action against the tenant, claiming the tenant had violated the use clause of the lease by installing video gaming terminals.

The first section of the lease stated that the property was leased “for the purposes of conducting thereon a restaurant and liquor lounge business and for no other purpose.” Another section required the tenant to comply with all applicable laws. The trial court found that the purpose clause was a use restriction and that video gaming was an entirely different activity than the sale and consumption of meals and liquor. It ruled that the tenant’s gaming terminals violated the lease.

The appellate court disagreed. “The purpose of an establishment is different than the uses or activities that may occur in that space” and “a corporation’s ‘purpose’ is the business activity that it is chartered to engage in.” The only real use restriction the appellate court found in the lease was the one requiring the tenant to comply with all applicable laws. The court noted that bars in Illinois are now legally allowed to host video gaming terminals. In fact, only bars, restaurants and other similar establishments can host a limited number of gaming terminals.

Consequently, adding five terminals to the tenant’s bar did not suddenly transform the business into the operation of a video gaming business. It was still a restaurant and bar with just an added activity. The tenant did not take on another “purpose” in violation of the lease.

The trial court’s decision was reversed in favor of the tenant.

Broker’s commission was not payable when sales contract was signed after licenses lapsed

In Ridgewalk Holdings, LLC v. Atlanta Apartment Investment Corporation, 856 S.E.2d 75 (Ct. App. Georgia, 2021), the plaintiffs and defendants signed an agreement in 2000 giving plaintiffs the exclusive right to sell property within a large tract of commercial property (“Ridgewalk”) in Georgia. The plaintiffs were development firms holding real estate broker licenses. Their agent was also licensed.

In 2013 the agent was approached by a local broker about the possibility of Costco buying a portion of Ridgewalk. In the meantime Horizon, an investment firm, acquired a controlling interest in the original Ridgewalk owners, who fell on financial hard times. In 2014 Horizon began to freeze out the plaintiffs’ agent and prevented him from participating in negotiations with Costco. Costco signed a purchase agreement in October of 2015. Neither Horizon nor defendants paid any brokerage commissions when the sale closed in 2017.

Plaintiffs sued to recover a commission. Defendants argued that the plaintiffs were not the procuring cause of the sale. However, the court did not find it necessary to reach that issue. The court stated that the rule in Georgia was that a broker may not bring an action to collect a commission without alleging and proving that he and anyone acting on his behalf “was duly licensed in Georgia at the time the alleged cause of action arose.”

The evidence showed that one plaintiff’s license lapsed on November 1, 2014; the other plaintiff’s license lapsed on September 1, 2015; and their agent’s license lapsed in mid-2015. Negotiations for the sale began in 2014, a contract between Costco and the defendant was signed in October 2015 and the closing occurred in 2017.

The question was, therefore, when did the plaintiffs’ cause of action arise?

The plaintiffs argued that their cause of action for a commission arose in 2014, when Horizon began to freeze out their agent. However, the court held that a commission is earned only when a broker finds a purchaser who is ready, able, and willing to buy and who actually offers to buy on the terms stipulated by the owner. Accordingly, a real estate broker who is unlicensed at the time the purchase contract is signed has no right to recover a commission.

In this case, the court held that the plaintiffs were not due any commission under Georgia law because their licenses had lapsed prior to when their cause of action arose.

Claims of constitutional violations fail in down-zoning case

Strauss v. City of Chicago, 2021 IL App (1st) 191977, demonstrates the continued difficulty in bringing successful constitutional challenges to legislative actions affecting real property, even in what could appear to be egregious circumstances.  In this case the plaintiff Strauss owned a large building on Milwaukee Avenue in Chicago. The first floor contained a music venue rented out to Double Door Liquors. The upper floors housed 11 apartments.

After Strauss evicted Double Door, the City of Chicago enacted a zoning ordinance limiting the kinds of establishments that were allowed in the building. This “down-zoning” ordinance was applicable only to Strauss’s building. All remaining property in the area continued to enjoy the zoning classification previously applied to the Strauss building.

Strauss filed suit against the City, claiming that the alderman for his ward, Proco Joe Moreno, engaged in a course of conduct designed to punish Strauss for evicting Double Door. Moreno had a financial interest in Double Door and allegedly attempted to coerce Strauss into retaining Double Door as a tenant by introducing several different down-sizing ordinances that caused the market value of the building to drop and that persuaded several would-be buyers of the building to cancel their contracts with Strauss.

Strauss argued, among other things, that the down-zoning violated the substantive due process and equal protection clauses under the Illinois Constitution.

The court stated that the constitutional declaration that private property shall not be taken without due process of law is subordinated to the interests of the public welfare as expressed through the exercise of the police power of the State, which includes zoning laws. Further, a property owner does not have a right to a particular zoning classification and cannot reasonably rely on the indefinite continuation of a classification. Any infringement on an owner’s ability to use real property as he or she wants is subject to the rational basis test. A zoning ordinance will be upheld if it bears a rational relationship to a legitimate legislative purpose and is neither arbitrary nor unreasonable.

In this case, the court found that Strauss’s complaint itself provided a rational basis for the ordinance: he alleged that the music venue housed in the building had caused numerous problems, including consistently high noise levels disturbing to neighbors, illicit drug and alcohol abuse by its patrons, and property damage. Although these problems were likely the basis for Double Door’s eviction, the court seized them as providing a rational basis for down-zoning the property and affirmed the dismissal of Strauss’s due process claim. Strauss got rid of Double Door and the City made sure no similar tenant could move in.

Similarly, Strauss’s claim that the City violated the State Constitution’s equal protection clause also failed. Strauss argued that the City targeted a single property owner in a dense corridor of similarly situated properties with an irrational ordinance that applied only to him. The building had long been zoned for its previous use, none of the other properties were down-zoned, and the down-zoning was out of harmony and completely inconsistent with the existing zoning and uses of other buildings in the community. Straus also claimed discrimination based on Alderman Moreno’s alleged pattern of retaliation for evicting Double Door.

Again, the court applied the rational basis test and found the City reasonably enacted the ordinance to eliminate the various problems associated with Double Door. “That Alderman Moreno allegedly advocated for the zoning change out of revenge does not mean that the zoning committee and city council endorsed those motives.” The City was the defendant, not Moreno. The court held the dismissal of the equal protection claim was proper.

Failure to follow procedures doomed condominium board’s eviction action against unit owner

In Board of Directors of Winnitt Park Condominium Association v. Bourdage, 2021 IL App (1st) 192536, a condo board filed a suit to evict a unit owner based on unpaid fines and attorney fees imposed for violations of association bylaws and regulations. The defendant, Bourdage, challenged the eviction, claiming that the fines were improperly assessed because she had not been given proper notice of the board’s hearing on the alleged violations and did not have an opportunity to defend herself.

Under the Condominium Property Act, a board has the power, after giving the owner notice and an opportunity to be heard, to levy reasonable fines for violations of the association’s declaration, bylaws, and rules and regulations. An association may maintain an eviction action against a unit owner who fails to pay any lawfully owed expense.

In order to prevail in an eviction action against a condominium unit owner under the Illinois Forcible Entry and Detainer Act, a plaintiff must prove (1) common expenses or “other expense lawfully agreed upon” were owed; (2) the owner failed to pay; and (3) the amount owed.  Consequently, when the board’s claim to possession in this eviction action was based on nonpayment of assessments, whether the fines assessed against Bourdage were properly imposed was an issue properly raised by her.

Although the board sent Bourdage a notice of violation on June 22, 2017, regarding her alleged violations for “harassing, defaming and using profanity and confrontational words against” another unit owner “as well as threatening violence and sending emails with false statements,” it then failed to comply with its own procedures for scheduling and conducting the hearing it eventually held on August 24, 2017, without Bourdage. The board claimed that the defendant was offered the opportunity to appear but chose not to. The court disagreed.

The June notice of violation offered Bourdage two possible dates for a hearing, should she want one, both at 6:30 p.m. It also stated that “[o]nce your request [for a hearing] is received, we will advise you of the date, time and location of the hearing; reasonable accommodation will be made if requested within a reasonable time.” Bourdage timely replied to the notice that she “couldn’t wait” for a hearing but that she worked until 7 p.m. Once Bourdage informed the board of her work hours, the board appeared to conclude that Bourdage was refusing a hearing altogether.

The board then did not choose either of the dates provided to Bourdage but chose a third, completely different, date, without informing Bourdage that her hearing would be held on that date. Instead, the only notice that Bourdage received was a general e-mail notice sent to all unit owners that vaguely noted that the board would “hear a violation matter” at a general board meeting held in two days, on August 24, at 6:30 p.m.  Reading between the lines, Bourdage again reminded the board that she worked until 7 p.m. and told them that she was out of town on that date, both things that Bourdage said she had “repeatedly told the board.” Despite Bourdage’s clear interest in participating in the matter, the board nevertheless ruled on the violations on August 24.  It then proceeded to initiate an eviction action for Bourdage’s failure to pay the fines and attorney fees levied for her violations.

The court concluded that the board’s actions did not provide Bourdage with adequate “notice and an opportunity to be heard” as required by the Condominium Property Act. Accordingly, the board did not properly impose the fines that served as the basis of the eviction action. Since the fines were not owed, the trial court had correctly declined to issue an eviction order.

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