It is an all too common scenario these days with mortgage foreclosures still commonplace in Chicago: someone leases a single family home or condominium unit (used for residential purposes) from the then owner of the property. Subsequent to this lease being executed and the tenant taking possession, the owner goes into default on his or her mortgage, the owner’s lender, i.e., a bank, files a judicial foreclosure action and, as is often the case, the bank becomes the owner of the property. Typically in these scenarios the bank will have a court appointed receiver manage the property during the foreclosure process and/or hire a manager subsequent to the foreclosure process to manage the property and address any tenant issues.
As the lease nears expiration, the tenant, who is likely aware of the foreclosure, inquires of the former owner and the bank, as to the status of his or her security deposit (which, for higher-end properties in Chicago, can easily exceed $5,000.00). The former owner, if they respond at all, tells the tenant about the foreclosure and that the former owner has no assets in any event, and that the tenant should contact the bank to get their security deposit. Upon contacting the bank, the bank responds that the former owner’s security deposit was never transferred to it during the course of the foreclosure or at any other time, and that the tenant should seek the return of their security deposit from the former owner. A conundrum is afoot. Is the tenant simply out of luck? The answer to this question has not been specifically addressed by the Illinois courts; however, the Chicago Residential Landlord and Tenant Ordinance (RLTO) likely gives us the answer, and it is not good for the bank.
The RLTO has long been the bane of many landlords’ existence in the City of Chicago, but it could quick become a thorn in the side of foreclosing lenders as well.
According to the City, the purpose of the RLTO is “to protect and promote the public health, safety and welfare of [the City of Chicago’s] citizens, to establish the rights and obligations of the landlord and the tenant in the rental of dwelling units, and to encourage the landlord and the tenant to maintain and improve the quality of housing.” (RLTO, Section 5-12-010).
In our situation above (which is, by the way, a real life situation), the tenant realizes that his former landlord is still liable under the RLTO for the security deposit. At the same time, however, the tenant understands that the former landlord is unlikely to have the security deposit and unlikely to have the assets to satisfy a judgment if the tenant were to sue the former landlord under the RLTO. Therefore, the tenant looks to the bank for the return of his or her security deposit.
Unfortunately for the bank, the RLTO does appear to cover this set of facts and subject the bank to liability for the return of the security deposit. In fact, not only can the bank be liable to the tenant for the return of his or her security deposit but, like any landlord, the bank can be subject to severe penalties should it fail to comply with the relevant terms of the RLTO with respect to the security deposit. The liability stems from the RLTO defining “landlord” as including the original landlord’s successor in interest, i.e., the bank in this instance.
Based on the provisions of the RLTO, whether or not the bank received the security deposit from the original landlord, it would be liable to the tenant for the maintenance and return of the security deposit.
Section 5-12-80(e) of the RLTO further provides that:
[t]he successor landlord shall, within 14 days from the date of such transfer, notify the tenant who made such security deposit by delivering or mailing to the tenant’s last known address that such security deposit was transferred to the successor landlord and that the successor landlord is holding said security deposit. Such notice shall also contain the successor landlord’s name, business address, and business telephone number of the successor landlord’s agent, if any. The notice shall be in writing.
If the bank fails to follow these precise requirements, it would further violate the RLTO. In terms of penalties for violation of the RLTO, the bank is subject to strict liability damages in an amount equal to two times the security deposit plus interest and attorneys’ fees and costs.
The bank is now left with the option to defend a lawsuit initiated by the tenant, which the tenant has a likelihood of winning and to then being awarded his or her attorneys’ fees and costs, or coming out of pocket for the security deposit, thereby hopefully being able to negotiate with the tenant to avoid the severe penalties imposed by the RLTO.
Any lender foreclosing on a property covered by the City of Chicago RLTO would be well-advised to become familiar with the ordinance and do everything possible to comply with its terms.
For more information, please contact:
Jonathan Weis at: firstname.lastname@example.org or 312-368-0100.
“For the times they are a-changing’.” Illinois Supreme Court rules that the Implied Warranty of Habitability does not apply to subcontractors.
For over 30 years, since Minton v. Richards Group of Chicago, 116 Ill.App.3d 852 (1st Dist. 1983), subcontractors in Illinois have been potentially liable to homeowners for breach of the implied warranty of habitability even though there was no contract between the subcontractor and owner. The implied warranty of habitability is a judicially created doctrine used to protect residential homeowners and buyers from construction latent defects that interfere with the habitability of their home. Specifically, this implied warranty was created to protect an innocent homeowner’s expectations of a defect free property by holding a contractor or its subs accountable for latent defects that made the premises uninhabitable.
That all changed on December 28, 2018. In Sienna Court Condominium Ass’n v. Champion Aluminum Corp., 2018 IL 122022, the Illinois Supreme Court set aside over thirty years of established law and held that the implied warranty of habitability does not apply to a subcontractor unless it has a direct contractual relationship with the homeowner or buyer.
Sienna Court was a dispute regarding the habitability of a two-building 111 residential unit development located in Evanston, Illinois. The units and common areas in the building contained several latent defects that affected the habitability of the units and common areas. The condominium association filed suit against several parties including subcontractors, for breach of the implied warranty of habitability. The condominium association did not have a direct contractual relationship with the subcontractors. The trial and appellate courts allowed the lawsuit to proceed on this theory of liability following Illinois law under the Minton case.
On appeal, the Illinois Supreme Court ruled that the implied warranty of habitability had its genesis in contract law as opposed to tort law. Accordingly, for the condominium association to proceed on a theory of a breach of the implied warranty of habitability against a subcontractor, there would have to be a contractual relationship between the parties. Because no such contractual relationship existed between the condominium association and the subcontractor, the claim for breach of the implied warranty of habitability was dismissed.
The times have now changed. Subcontractors no longer need to be fearful of being sued by a homeowner or buyer under the implied warranty of habitability for latent defects to a property unless they have an actual contract with the party – something that is rare.
For more information regarding construction litigation, please contact:
Roenan Patt at: (312) 368-0100 or email@example.com.
Sometime in 2021, the most important benchmark for setting interest rates on commercial (and many variable rate residential) loans will be eliminated. Trillions of dollars of such loans are governed by LIBOR, which is short for the London interbank offered rate. LIBOR is determined on a daily basis and is the interest rate that London banks would use to borrow amongst themselves. There is a separate LIBOR rate determined for different time periods (e.g., a 30 day LIBOR rate, 1 year LIBOR rate, etc.). A lender making a variable rate loan based upon LIBOR will determine its interest rate by adding an agreed-upon spread to the applicable LIBOR rate on a particular date. For example, the interest rate may be equal to the 30-day LIBOR rate in effect on the first business day of each month plus a spread of 5%. The advantage of this method of calculation is that the LIBOR rate is publicly disclosed on a daily basis and the corresponding interest rate under the loan is easily calculated.
Unfortunately, LIBOR has proven to be susceptible to manipulation. In response, bank regulators have called for the index to be eliminated. Given its pervasive use in capital markets, regulators determined that the rate cannot be abruptly replaced. Accordingly, regulators have given the industry a long lead time to establish alternative indices, however, that lead time will be coming to an end in 2021. To date, there is no consensus as to what index will become the predominant replacement for LIBOR.
New loans initiated today are still using a LIBOR benchmark. However, for loans which have a maturity date beyond the 2021 LIBOR phase out, there is a question as to what benchmark will be substituted by lenders. Most loan documents contain generic language to the effect that if LIBOR can no longer be determined, that the lender has the discretion to pick a substitute index. However, it is important for borrowers to make sure that there are limits on the lender’s method of replacing LIBOR. While it should be relatively easy for lenders to pick a replacement index that is relatively stable and easily determined, there needs to be some consideration as to how that index compares to the corresponding LIBOR rate. For example, if the replacement index is 0.25% higher than the LIBOR in effect as of the transition, it is important that the spread be adjusted so that the corresponding interest rate under the loan will be equivalent to the rate established by LIBOR. Otherwise, a borrower could face an increased interest rate solely on account of the change in index.
Although the elimination of LIBOR is still some two years away, it is important for borrowers and lenders to address its implications in new loans with a maturity date that extends beyond the elimination of LIBOR. Similarly, existing loans may have language that attempts to address the issue; however, those provisions may not have received much attention when the parties negotiated the loan documents. As such, it is important for lenders and borrowers to review outstanding loan documents to determine if the language addressing the absence of LIBOR will lead to a fair and adequate substitute index and method for determining variable interest rates.
For further information regarding the consequences of the elimination of LIBOR and commercial lending in general, please contact:
Jeffrey M. Galkin: firstname.lastname@example.org or 312-368-0100.