Tag: sale

Purchaser Collection of Pre-Closing Rent Deficiency

In the purchase and sale of real property which is leased to tenants, sellers and purchasers must pay particular attention to the allocation of rent collected both before and after the closing.  A typical purchase and sale agreement will include, among other things, language addressing the allocation of rent by the parties for the current period as well as the collection of delinquent rent after closing which is attributable to the seller’s period of ownership prior to closing.  In negotiating a contract, the parties will need to determine whether the purchaser is responsible for attempting to collect pre-closing delinquent rents and the rights of the seller to pursue tenants after closing for any such pre-closing delinquent rents.

Collection of pre-closing delinquent rent can be a complicated issue for purchasers and sellers to resolve.  On the one hand, the purchaser may be reluctant to allow the seller to undermine the financial condition of a tenant by pursuing lawsuits against a tenant that may be paying current rent to the new landlord.  On the other hand, a former owner does not have a full range of typical landlord remedies at its disposal to effectively induce tenants to pay delinquent rent as the former owner cannot assert an eviction action against a tenant and terminate the tenant’s right of occupancy.

The tension between purchasers and sellers with respect to pre-closing, delinquent rent is further complicated by a recently decided opinion issued by the Illinois Appellate Court in 1002 E. 87th Street LLC v. Midway Broadcasting Corporation (2018 IL.) App. 1st 171691, June 5, 2018).  In that case, the Court upheld a lower court ruling that Illinois law does not permit the purchaser of real estate to pursue claims against a tenant for pre-closing, unpaid rent under a lease assigned to the purchaser at closing.  The purchase and sale agreement between the purchaser and seller in that case contained standard provisions confirming that the “landlord” under the lease included any successors and assigns.  It also provided that all obligations and liabilities of the original landlord were binding on the purchaser, as successor landlord.  That would include any pre-closing landlord defaults that remained uncured.  Notwithstanding the successor landlord’s assumption of the lease, including, potential liability for pre-closing defaults of its predecessor, the Court ruled that the successor landlord did not have the right to recover pre-closing rent.  The Court specifically stated that the rule in Illinois is that rent in arrears is not assignable.

The lesson to be learned from the 1002 E. 87th Street case is that it is important to negotiate and set the expectations of the parties with respect to pre-closing delinquent rents at the time of contract.  Since a predecessor landlord may have little power other than initiating litigation (which is not desired by the successor landlord) against a tenant for delinquent rent and the successor landlord is unable to maintain an action for that delinquent rent, parties must give careful thought to the method of addressing the collection of pre-closing delinquent rent.  Fortunately, there are a number of different approaches that the parties may employ to coordinate and enhance the collection of pre-closing, delinquent rent.

For further information regarding the purchase and sale of commercial real estate as well as matters involving the rights of sellers, purchasers and tenants, please contact:

Jeffrey M. Galkin at:

jgalkin@lgattorneys.com or 312-368-0100.

Successor Liability-Beware

Often, buyers are advised to buy the assets of a business that is for sale, not the ownership interests.  That is based on the general principle that if you buy the assets of a business, then you are not liable for the business’s obligations unless you expressly agree to satisfy obligations.

However, an exception to this general rule is founded upon “successor” liability.  That is, if the buyer’s newly formed business can be found to be a successor of the seller’s business, then the buyer’s business may be found to be liable for the obligations of the seller’s business.  Such liability can be for the seller’s taxes, employment obligations and even union liabilities.

A recent case in California found that the buyer who set up a new business was a successor employer and therefore liable for the withdrawal liability of a prior business under the Multiemployer Pension Plan Amendments Act.  In this situation, the “buyer” only purchased certain assets of the “seller” at a public liquidation sale but was found to be liable for some of the “seller’s” liabilities.

The prior business, Studer’s Floor Covering, Inc. (“Studer’s”) was in the construction industry.  It ceased doing business on December 31, 2009.  At that time, it was party to a collective bargaining agreement, pursuant to which it made contributions to a multiemployer defined benefit pension plan (the “Fund”).

The owner of Studer’s announced to its sale staff that Studer’s would go out of business in a couple of months.  A member of Studer’s sales staff formed a new company (“Michaels”) two months prior to Studer’s going out of business. Michaels obtained a lease for the same storefront Studer’s operated its business, effective January 1, 2010.  Michael put up a sign “Michaels/Studer’s” on the storefront, obtained the same telephone numbers and purchased 30% of Studer’s tools, equipment and inventory at a public liquidation sale.  He did not obtain the customer list since the owner had personal knowledge of most customers.  Michaels employed eight installers (of whom five had been Studer’s employees) and used mainly independent contractors.

The Appellate Court held that the court should consider “continuity of the workforce” as a major factor.  Continuity could be found to exist if a majority of the new employer’s employees were employees of the old employer.  The court held that the changes in ownership here did not affect successor liability.  An important factor was substantial continuity as measured by customer retention.  The Court also was swayed by the new business using the same telephone numbers, the same location and the sign that incorporated the name of the prior business.

Where putative successors do rely on insider knowledge, similar public presentation (signs, location) to corner their predecessor’s market store, and have a continuity of the work force, courts may find the successor doctrine to apply.  New businesses that are concerned about the liabilities of the prior businesses should carefully consider these factors.

Levin Ginsburg has represented and provided counsel for many buyers and sellers of businesses.  If you have any questions regarding successor liability or any other aspect of your business, please contact:

Morris R. Saunders at:

msaunders@lgattorneys.com or 312-368-0100.

Recent Illinois Supreme Court Case Clarifies That Prescriptive Easements Do Not Require Exclusive Possession

An easement is a right or privilege to enter and use land which is in possession of another. For example, if there are two parcels of land, owned by two separate property owners and one of the properties does not have access to the road, the property owner of the accessible land may grant the owner of the non-accessible land an easement to use a particular portion of the accessible property to reach the road. Another example is when a utility company desires particular access on, or over, or under a piece of property, the property owner will grant the utility company an easement. There are various types of easements, including express easements (which may be “granted” or “reserved” in a deed or other legal instrument), implied easements (which courts typically determine when there is a claim brought, and which involves an analysis of the intentions of the parties and takes into account the practices and customs for the use of the property) and easements by necessity (situations where a court determines if the easement is absolutely necessary, e.g., where a property is completely without access to a public way).

There is another kind of easement, an easement by prescription – which is the subject of the Illinois Supreme Court’s September 18, 2014 decision in Nationwide Fin., LP v. Pobuda, 2014 IL 116717, reh’g denied (Nov. 24, 2014). The plaintiff, Nationwide Financial, LP (“Nationwide”) became the owner of a parcel of land which was adjacent to a lot owned by the defendants, the Pobudas (the “Pobudas”). The Pobudas alleged that they consistently traveled over the northwest corner strip of Nationwide’s newly acquired property during the 22 year period prior to Nationwide’s ownership of the property. The prior owner had observed them using the strip and never raised an issue. Nationwide filed suit against the Pobudas, seeking a declaratory judgment that the Pobudas’ use of the strip amounted to trespass and the Pobudas’ counterclaimed, alleging that they enjoyed a prescriptive easement to travel over the strip.

According to the Court,  for the Podudas’ to establish an easement by prescription, “the use of the way in question must have been—for a 20-year period—adverse, uninterrupted, exclusive, continuous, and under a claim of right. Nationwide argued to the Court that the Podudas were required to prove that they “exclusively used” the easement property and “altogether dispossessed” the titleholder for the 20-year period. The concept of adverse possession is often confused with the concept of prescriptive easement. Adverse possession is when a party acquires ownership of land after meeting certain requirements, including  possession of the land of another, denoting physical control over the property. Therefore, when it comes to adverse possession, two people cannot possess the same thing. An easement is only one party’s limited right to use the servient land – there is not an element of ownership or control. The Court in Nationwide held that that for a prescriptive easement to exist, there is a lesser interest at stake, and therefore, two parties can simultaneously use the same strip of property over the 20-year period, and the property owner does not have to be totally deprived of possession in order for a prescriptive easement to arise or exist.

The outcome of Nationwide has various implications on real estate law and the practical issues which may arise in the purchase or sale of property, not only for residential properties but for commercial and industrial properties as well. Perhaps the most important of which is that a purchaser of property should investigate whether or not there could be a prescriptive easement (and for that matter, an implied easement) which may affect the land it wishes to purchase. While express easements may be recorded and be revealed in a title commitment, an implied easement or a prescriptive easement may exist due to practice, custom, or fulfillment of a prescriptive easement’s requirements, which may only be ascertained by visiting the property and/or speaking with the current property owners and/or neighboring property owners directly.

If you have any questions or concerns relating to easements in connection with real estate, or if you are interested in purchasing or selling property for residential, commercial or industrial purposes and would like to discuss legal issues relating to that purchase or sale, please contact:

Eli Korer at: ekorer@lgattorneys.com or 312-368-0100

or

Jeffrey M. Galkin at: jgalkin@lgattorneys.com or 312-368-0100

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