Legal case studies this issue: Real estate company liable for value of adjacent lot buyers thought they were purchasing; Licensee disciplined for acting as attorney and broker in same transaction; “Rent-to-Own” contract held an installment contract, but court could not award title in eviction suit; and Tenant held liable for constructive holdover under lease provision.

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

Real estate company liable for value of adjacent lot buyers thought they were purchasing.

In Briggs v. Kidd & Leavy Real Estate Co., Michigan Court of Appeals, No. 340713 (September 25, 2018) (unpublished), prospective buyers engaged defendant brokerage firm and its agent, Kyle, to show them homes in the Petoskey, Michigan area. Buyers were drawn to a home adjacent to a “garden lot” that was extensively landscaped. The MLS contained information that three lots were included in the transaction and showed photographs of the garden lot. Kyle specifically represented that the garden lot was included in the sale. Unfortunately, however, the sellers had sold the garden lot for $100,000 to their neighbors the year before. Their listing agent, Michael, had failed to update the MLS and remove the pictures of the garden lot. When the buyers questioned the discrepancy in the preliminary title report showing only two lots to be conveyed, Kyle emailed that a white house on a third lot past the cedar hedges had been previously sold. This information turned out to be simply incorrect—the white house was on a fourth lot. The subject house was actually built on two lots, as accurately reflected in the title report. The sale did not include the garden.

The buyers closed on purchasing the house, which they thought included the garden lot, for $517,500. Just hours later they discovered the mix-up. They sued the defendant (Kyle’s company) and the sellers, who filed a third-party complaint against Michael and his company. When the case went to trial, only the buyer’s claims against the defendant for fraud and negligent misrepresentation remained.

The defendant argued that the purchase agreement in this case unambiguously described the two lots that the buyers agreed to purchase. It asserted that the parole evidence rule barred any variance of the contract. The court agreed that under contract law, evidence of contract negotiations, or of prior or contemporaneous agreements that contradict or vary the written contract, is not admissible. The practical justification for the rule lies in the stability that it gives to written contracts. There are several exceptions to the rule, of course, but the Court held that the rule was inapplicable in this case because the buyers were not suing the sellers on the contract. They sued their agent under tort law for fraud and negligent misrepresentation.

One of the elements of fraud is that the plaintiff must have acted in reliance upon a fraudulent misrepresentation. Similarly, a claim for negligent misrepresentation must show that the plaintiff justifiably relied to his detriment on information prepared without reasonable care by one who owed the relying party a duty of care. In this case, the Court found that the buyers justifiably relied on Kyle’s statements that the garden lot was included in the transaction. Further, even when the buyers questioned the number of lots being sold, Kyle allayed their concerns with incorrect information. Consequently, the Court affirmed the trial court’s award of $100,000 to the buyers.

Licensee disciplined for acting as attorney and broker in same transaction.

In Curielli v. Department of Financial and Professional Regulation, 2018 IL App (2d) 170832‑U, an Illinois Appellate Court, in an unusually lengthy and factually-detailed opinion, upheld the Department’s determination that a licensee violated the Real Estate License Act of 2000. Section 20(a)(34) of the Act (as in effect in 2013) gave the Department power to discipline a licensee who is also an attorney for “acting as the attorney for either the buyer or the seller in the same transaction in which the licensee is acting or has acted as a broker or salesperson.”  According to the Court, the Legislature’s purpose in enacting this section was to protect the general public from representation that carries the potential for a conflict of interest because “the incentives prompting a broker to close the deal are not aligned with—and in fact may be in opposition to—the motivations of an attorney who has a duty to safeguard his [or her] client’s interests.”

The Court had to determine whether the Department was not “clearly erroneous” when it found that the licensee, who was also an attorney, had practiced law in the same transaction in which he was also acting as the buyers’ broker. No mechanistic formula exists for determining whether certain actions constitute the practice of law. Rather, the focus must be on “whether the activity in question required legal knowledge and skill in order to apply legal principles and precedent.”  In the real estate area, the execution of an offer or preliminary contract involving filling in forms is properly done by real estate licensees, but drafting deeds, mortgages and other legal instruments requires the peculiar skill of a lawyer and constitutes the practice of law. Obviously, other work also constitutes the practice of law, such as representations and arguments about what a contract provides or requires, how a contract might limit a choice of options, and to what extent it is binding.

The Court focused on two emails sent by the licensee. One email was directed to the seller’s attorney. In it, the licensee made several points that the Court found only an attorney could state to another attorney with any authority:  that there were no separate rules for short sales, that the contract was legally binding, and that none of the terms in the contract’s addendum changed the terms of the contract. “These statements required legal knowledge and skill in order to apply legal principles and precedent” and were not simply statements relaying a sophisticated client’s desired changes. The second email was directed to the title company and concerned tax prorations on a HUD‑1 form. It contained the licensee’s attorney-signature block, which the Court found to be careless and contributed to the impression by others that he was acting as an attorney in the transaction, but it was not determinative. More problematic was a directive as to who should receive attorney fees, which only an attorney would have authority to issue. The Court concluded that the licensee did engage in the practice of law in the same transaction in which he acted as broker and, therefore, violated the Act.

The Department sanctioned the licensee by indefinitely suspending his license for no less than one year and imposing a $9,500 fine. Based on its review of administrative sanctions in other circumstances, the court upheld the fine because it was only $2,100 more than the licensee’s commission, which he should not have received if he was acting as attorney. However, because the licensee had never previously been sanctioned and his improper actions consisted only of two emails in one transaction, the court believed the indefinite suspension was overly harsh and ordered it eliminated.

“Rent-to-Own” contract held an installment contract, but court could not award title in eviction suit.

In Cushing v. Willis, 2018 IL App (5th) 170444, plaintiff filed a forcible entry and detainer action against defendants, claiming defendants failed to make payments under a “rent-to-own” contract that converted into a lease when the defendants missed payments. The contract provided that starting in June 2010 defendants would pay plaintiff $300 every month until $15,000 was paid in full, that the property was being sold “as is,” that defendants were responsible for all repairs, that plaintiff would pay property taxes until the contract price was paid in full, and the property would not be “taken” unless defendants were two months behind in rent. Defendants paid $13,750 between 2010 and August 2017, when plaintiff issued a notice of termination because of missed payments. Defendants immediately gave plaintiff money orders totaling $1700 to complete payment under the contract.

The trial court found that the defendants had missed a number of payments throughout the contract term, but that plaintiff continued to accept payments without notifying defendants that the contract was being terminated. Upon notice of termination, defendants paid off the contract in full. The trial court, at a bench trial, denied plaintiff’s eviction request and ordered them to refund the defendants $450 as overpayment. The defendants’ attorney then asked the judge to order the plaintiff to provide a deed to the property, which was granted.

The appellate court affirmed the judgment in favor of the defendants on the eviction because the contract clearly met the definition of an installment contract under the Dwelling Unit Installment Contract Act, 765 ILCS 75/1(e). That section defines installment contract as one in which “a contract seller agrees to sell and a buyer agrees to buy a dwelling structure, wherein the consideration for such sale is payable in installments for a period of at least one year after buyer takes possession of the dwelling structure and the contract seller continues to have an interest” in that property. There was nothing in the contract between plaintiff and defendants indicating that it was only an option to purchase after a term of years, as plaintiff asserted. Further, plaintiff pointed to no legal authority distinguishing a rent-to-own contract from a contract for deed or holding that the contract automatically converted into a rental agreement upon the buyers’ alleged noncompliance.

Nevertheless, the appellate court reversed the trial court’s order to the plaintiff to provide defendants with title. An action in forcible entry and detainer involves the right to possession. It does not involve a question of title. “If defendants wanted the court to determine the question of title and to award them affirmative relief under the terms of the rent-to-own contract, defendants must have filed a counterclaim raising these issues and seeking such relief.”  In this case, defendants successfully defended the eviction suit but failed to file a counterclaim to obtain title.

Tenant held liable for constructive holdover under lease provision.

In Crystal Lake Ltd. Partnership v. Baird & Warner Residential Sales, Inc., 2018 IL App (2d) 170714, plaintiff Crystal Lake owned a shopping center and a nearby “outlot” building that it first leased to defendant Baird & Warner (B & W) in 1988. Over the years, the lease was extended and other leases were created as B & W expanded its activities. The leases all contained provisions requiring the defendant (1) upon termination to surrender the premises in good order, condition , and repair, except ordinary wear and tear; (2) to pay additional rent and other costs as liquidated damages if the tenant holds possession of the premises after termination, whether by lapse of time or otherwise; and (3) if the tenant made alterations or additions, to restore the premises to the condition they were in before the lease commenced.

The 2008 Great Recession caused B & W to close offices and lay off employees throughout the Chicago suburbs. It asked plaintiff for a reduction in rent or a smaller space, but the parties could not reach an agreement. B & W then notified plaintiff that it would leave the shopping center at the end of its leases on May 31, 2009. Plaintiff invoked the alterations or additions clauses of the leases and demanded that B & W restore the premises to pre-alteration, 1988 condition, which was four “vanilla box” units, each with a separate bathroom and separately metered utilities. B & W ignored the demand. The plaintiff then invoked the holding-over provisions of the leases and demanded a year’s additional rent. It also advertised the premises for rent.

During the ensuing years, acrimony developed between the parties, although initially there were negotiations for returning the premises to its original condition. Plaintiff filed suit against B & W in November 2011 alleging breach of contract and holdovers on the leases. The jury in the case awarded plaintiff over $111,000 in damages for failure to restore the premises and nearly $114,000 under the holdover claims. On appeal, the appellate court characterized the trial court proceedings as “bizarre,” as B & W filed four post-trial motions, the trial court changed its mind three times about the proper measure of damages, and B & W succeeded in getting the court to grant judgment in its favor on the holdover claim despite the jury verdict (a “judgment NOV”).

A court may enter a judgment NOV only when all of the evidence, viewed in the light most favorable to the nonmovant, so overwhelmingly favors the movant that no contrary verdict could stand based on the evidence. In this case, the appellate court held the judgment NOV was improperly granted. The court found that there was evidence showing B & W, which had physically vacated the premises, “constructively” held over the leases by (1) at various times asserting that it would restore the premises; (2) instructing plaintiff not to do the work; (3) hiring a contractor; (4) submitting plans, although they did not conform to the original floor plan; and (5) instructing its contractor to obtain a building permit. These facts were sufficient for a jury to conclude that B & W held constructive possession after the lease terminated. The appellate court reversed the judgment NOV and reinstated the jury’s award on the holdover claim.