POST CLOSING REMEDIES. Residential Real Estate Transactions from Listing through Closing ILLINOIS STATE BAR ASSOCIATION.

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1 POST CLOSING REMEDIES Residential Real Estate Transactions from Listing through Closing ILLINOIS STATE BAR ASSOCIATION Lombard, Illinois Samuel H. Levine KUBASIAK, FYLSTRA, THORPE & ROTUNNO, P.C. 20 South Clark Street 29 th Floor Chicago, Illinois (312) COMMON:CLE:Programs:15 Spring:Real Estate :materials:Levine, Samuel.docx

2 Post-Closing Remedies I. Breach of Contract A. Sample Contract Language Seller warrants to Buyer that all fixtures, systems and personal property included in the Contract shall be in operating condition at possession, except:. A system or item shall be deemed to be in operating condition if it performs the function for which it was intended, regardless of age, and does not constitute a threat to health or safety. Neppl v. Murphy, 316. Ill. App. 3d 581 (1 st Dis; 2000) B. Case Law 1. Lanterman v Edwards, 294 Ill. App. 3d 351 (5 th. Dist, 1988)2. An air conditioning unit which was not operating within two days of Buyers moving in was not in operating condition on the day of closing. 2. Neppl v. Murphy, 316 Ill. App. 3d 351 (1 st Dist., 581). A defective furnace was redtagged by the gas company on the day of closing as a threat to health and safety. The court found that a provision in a real estate contract that provided plaintiff with a warranty as to the quality of the mechanical systems was a collateral undertaking which did not merge with the deed upon delivery. 3. Mitchell v. Skubiak, 248 Ill.App, 3d 1000 (1 st Dist. 1993). The purchasers noticed cracks in the ceiling. The court found that the seller actively misled the purchaser by telling him that the defect was due to something other than its actual cause. Because the purchaser inquired as to the cracks in the roof, the seller had a duty to speak. A buyer is not relieved of his or her duty to disclose defects when the buyer hires an inspector to investigate premises. II. Implied Warranty of Habitability A. Peterson v. Hubschman, 76 Ill. 2d 31 (1979). An implied warranty of habitability arises by virtue of the execution of an agreement between the vendor and vendee. B. Redarowicz v. Ohlendorf, 92 Ill. 2d 171 (1982). The court eliminated the requirement of privity. Subsequent purchasers of a new home were granted relief against the builder who was not the vendor to the plaintiffs for latent defects which manifested themselves within a reasonable time after purchase of the home. C. Park v. Sohn, 89 Ill. 2d 453 (3 rd Dist. 1982). The implied warranty of habitability applies to a builder-vendor who had only built and sold one house. The court looked at the commercial nature of the sale rather than casual personal one. 2

3 D. Hoke v. Beck, 224 Ill. App. 3d 674 (1992). Non-builder is not subject to implied warranty of habitability. A wife of the builder-vendor who was also a vendor was held to be liable. E. Harmon v. Dawson, 175 Ill. App. 3d 846 (4 th Dist. 1988). Both husband and nonvendor wife impliedly warranted repairs they agreed to perform as part of the agreement with purchasers. F Pratt Condominium Ass n v. Platt Construction Group, Inc... (Pratt I); 404 Ill. App 3d 611 (1 st Dist ). The Court dispensed with the requirement that the builder of the home also be the seller. The implied warranty of habitability extended to the builder who was not involved in the sale of the home. (Pratt II ), 2012 IL App (1 st ) As long as the general contractor remained solvent, an owner cannot pursue the subcontractor, (Pratt III), 3013 IL. App (1 st ) The relevant date for determining the insolvency of the general contractor for purposes of the exception in Minton allowing a subcontractor to be pursued when a general contractor is insolvent is the date a complaint or the last amended complaint is filed against the general contractor. G. Damages for Breach. Costs of correcting defective conditions unless defects could only be corrected at cost unreasonably disproportionate to benefit the purchaser or correcting costs would entail unreasonable destruction to builder s work. Then, the measure of damages is reduction in value of property. Park v. Sohn, 89 Ill. 2d Loss of use of portion of dwelling rendered uninhabitable. Nisbet v. Yelnick, 124 Ill. App. 3d 466 (1 st Dist. 1985). H. Statute of Limitations. Construction defect claim premised on implied warranty of habitability is subject to a four-year limitation period set forth in Section of Code of Civil Procedure. The four-year period commences within four years from the time the person bringing an action, or his or, her privity knew or should have reasonably known of such act or omission. The Statute of Limitation commences as to a condominium association when the unit owners have elected a majority of the members of the board of managers. III. Residential Real Property Disclosure Act A. 765 ILCS 77/55 states that (a) person who knowingly violates or fails to perform any duty prescribed by a provision of this Act or who discloses any information on the Residential Real Property Report that he knows to be false shall be liable in the amount of the actual damages and court costs, and the court may award reasonable attorney fees incurred by the prevailing party. B. Woods v. Pence; 301 Ill. App. 3d 573 (3 rd Dist 1999): The purchasers noticed water marks on the ceiling of the defendant homeowner s house, but the leaky roof was not mentioned on the Disclosure Report. In fact, it was discovered that defendants had the roof patched three times, and were told that the roof would 3

4 soon have to be replaced. Issues of fact precluded summary judgment. The court found that the prior fixes raised at least an inference of a chronic condition that had never been permanently eliminated. C. Curtis Investment Firm Ltd. Partnership v. Schuch, 321 Ill. App. 3d 197 (2001). A purchaser s right to receive a disclosure cannot be waived. The seller who failed to provide a disclosure form was liable for failing to disclose a defective supply system. D. Miller v. Bizzell. Either party may be awarded attorney s fees. A party is required to show bad faith by the opposing party, the likelihood, the award would deter others in similar circumstances, and the relative merits of each party s position in regard to the facts. IV. Fraud and Misrepresentation A. Fraudulent Misrepresentation Addison v. Distinctive Homes, Ltd., 359 Ill. App. 3d 997 (1 st Dist. 2005) (1) A false statement of material fact by the defendant, (2) the defendant s knowledge that the statement to be false, (3) the defendant s intent that the statement induce plaintiff to act (4) the plaintiff s reliance on the truth of the statement, and (5) damages resulting from reliance on the statement. The plaintiff must allege with specificity and particularity, facts from which fraud is the necessary or problem inference including what representations were made, who made the, and to whom. B. Fraudulent Concealment (1) concealment of material facts; (2) concealment intended to induce false belief, under circumstances creating duty to speak; (3) an innocent party could not have discovered the truth through reasonable inquiry or inspection, or was prevented from making reasonable inquiry or inspection, and relied upon silence as misrepresentation that the fact did not exist; (4) concealed information was such that injured party would have acted differently had it been aware of it; and (5) reliance by person from whom fact was concealed. The seller did not conceal a material fact that there was no proof that sellers knew a structural report was erroneous. 4

5 V. Breach of Warranty of Title Midfirst Bank v. Abney, 365 Ill. App. 3d 636 (2 nd Dist. 2006). This is a classic case discussing the warranty of title. The original owner, David Forshey, purchased property at a foreclosure sale. He transferred the property to Rodney Abney. The deed failed to except the existence of an outstanding first mortgage. The title agency which examined the title for the closing failed to disclose the mortgage in its title report. The lender which the title report missed, Midfirst bank, subsequently filed a foreclosure action against Forshey, Abney and others. Abney filed a counterclaim against Forshey for breach of warranty of title. The title company, as the grantee s subrogee, filed an action against the owner for monies paid out under the title insurance policy. The court entered judgment against the original owner/grantor for breach of warranty of title under the warranty deed even though the grantee was aware of or contributed to the lien. Illinois law holds that (t)he obligation of a covenant does not depend upon the knowledge, or want of knowledge, of the parties to a deed. The court noted that the original owner failed to obtain a title search or title insurance policy when he purchased the property at a foreclosure sale.. VI. Breach of special Warranty Deed. Chicago Title Insurance Company v. Waterside Partners, LLC 2013 IL App. (1 st ) Plaintiff s complaint alleging that defendant breached the special warranty deed by which it conveyed certain property to. plaintiff s insured did not state a cause of action since the encumbrance arising from a tax sale prior to defendant s ownership of the property was not warranted against in the special warranty deed. The grantor of a special warranty deed, unlike a general warranty deed, does not warrant against defects in title that existed before grantor was deeded the property. The nature of a special warranty deed does not require a grantor to extinguish all encumbrances on a property at the time the property is conveyed through a special warranty deed. VII. Negligent Misrepresentation. First Midwest Bank, N.A. v. Stewart Title Guaranty Co., 219 Ill (2006) The title commitment at issue failed to disclose a recorded building restriction that prohibited use of the property for commercial purposes. The insured lender sought recovery for negligent misrepresentation based on the inaccurate title insurance commitment. The court denied recovery based on the Moorman Doctrine which bars recovery in tort for purely economic losses, but provides an exception for a claim of negligent misrepresentation where the defendant is in the business of supplying information for the guidance of others in their business transactions. A title insurer is not in the business of supplying information when it issues a title commitment or policy of title insurance. VII. Breach of Chicago Municipal Code 5

6 The Henderson Square Condominium Association v. LAB Townhomes, LLC 2014 Ill. App. (1 st ) No There is a cause of action for breach of Section of the Chicago Municipal Code s prohibition against misrepresentation of material facts, in the course of market and selling real estate. A municipal ordinance prohibiting the misrepresentation of material facts in the course of marketing and selling real estate created a cause of action separate from common law fraud, which was not limited to pre-existing facts, but could be based on representations made prior to completion of construction. 6

REMEDIES FEBRUARY 2017 CALIFORNIA BAR EXAM QUESTION #2

REMEDIES FEBRUARY 2017 CALIFORNIA BAR EXAM QUESTION #2 Steve agreed to convey his condominium to Betty for $200,000 in a written contract signed by both parties. During negotiations, Steve told Betty that,