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Real Estate Law FLASHPOINTS June 2020

June 15, 2020Print This Post Print This Post

Michael J. Rooney | 312-401-3454 | E-mail Michael J. Rooney

The Same, Only Different

In last month’s edition of FLASHPOINTS, I wrote an article critical of the U.S. Court of Appeals for the Seventh Circuit based on its decision in Abellan v. Lavelo Property Management, LLC, 948 F.3d 820 (7th Cir. 2020). In that case, a California buyer of an Illinois commercial property sued the New York seller for breach of a seller’s warranty that the Arizona tenant was not in breach of its lease. The Arizona tenant was supposed to have “repurposed” the property from its former use to open a fast-food franchise location. The Arizona tenant had, in fact, abandoned the project, and the buyer had expected to purchase the property with a paying tenant that generated income for the buyer. The Seventh Circuit held the buyer could sue the seller on the seller’s express warranty that the tenant was not in default under a lease, but made no mention of Illinois law regarding the buyer’s duty to inquire of one in possession of the real estate.

During my own due diligence in preparing the article, I called my friend Kymn Harp to inquire about his opinion with regard to “due diligence” on the part of buyers of commercial property. After all, I said that the law in Illinois is that purchasers are bound to inquire what rights are claimed by persons in possession of real property that the buyers propose to purchase. Buyers take their interests subject to those interests, even if the buyers do not make the inquiry. Further, the buyers take their interests subject to any further rights the possessors may claim. Kymn was not convinced that was the law in Illinois, and he wrote an article for the June 2020 ISBA Real Property Newsletter arguing that the Seventh Circuit opinion is correct and that the buyer in the case could successfully sue for breach of warranties given by the seller that the tenant was not in default under the lease.

“After review” (as they say in the NFL), I think Kymn and I are both right. Kymn points out that a buyer can sue a seller for breach of warranty even if the buyer did not reasonably rely on that warranty. Further, the Seventh Circuit opinion also expressly so holds and discusses that provision of Illinois law (with citations for those who are curious). As long as the warranty was given to induce the buyer to enter into the agreement, a buyer may sue the seller for breach of that warranty without the necessity to prove reliance, much less reasonable reliance, on it. My original gripe about the Seventh Circuit opinion is that it did not so much as hint at, much less mention, what I think is established Illinois law about the buyer’s obligation to visit the property being purchased and make inquiry of those in possession of it concerning what rights they claim.

Kymn pointed out that the cases I cited for the proposition are contained in the IICLE® CLASSICS: WARD ON TITLE EXAMINATIONS 2005 Edition (Including 2009 Supplement), and he said Abellan is a commercial contract case, not a case about titles. True enough. But possession is not always about title, either. Sometimes possession is about leases and whether a tenant is or is not in default under a lease, as in Abellan. But then I was curious and wondered whether I had quoted the alleged requirement so frequently and for so long that I had convinced myself that it was the law when maybe, just maybe, it was not. So, novel thought here, I went back and actually read the Illinois Supreme Court opinions in detail. Here’s what I found.

Both of the cases cited in WARD ON TITLE EXAMINATIONS cite to the earlier case Miller v. Bullington, 381 Ill. 238, 44 N.E.2d 850 (1942). That case was a suit in ejectment, so it was a matter related to the title to the premises (ejectment tries title, while eviction (formerly forcible entry and detainer) merely tries possession). The plaintiff, an attorney, attempted to purchase a home from Mr. and Mrs. Nolan, receiving a quitclaim deed from them executed on February 1, 1941, and recorded February 3, 1941. It turned out that Mr. and Mrs. Nolan had purchased the property from Mr. and Mrs. Barry and had given the grantors a purchase money mortgage on which they later defaulted. Mr. and Mrs. Barry foreclosed and received a certificate of purchase for the property that was recorded and a master’s deed that, although dated August 8, 1935, was not recorded until April 8, 1941, some two months after Miller’s deed from Mr. and Mrs. Nolan.

According to the attorneys who handled the foreclosure, the master’s deed had in fact been delivered in 1935 and was kept in the law firm’s files rather than having been recorded at or around the time of delivery. Following the foreclosure, title to the real estate was conveyed to the children of Mr. and Mrs. Barry, and the parents subsequently died. The children leased the property to the defendant, who disclaimed any interest other than as a tenant, and the children claimed to be the owners of the fee.

Miller, the lawyer, argued that the master’s deed had not been recorded and that he, as a subsequent purchaser without notice of the interests of the children or their tenant, took free and clear of those interests. However, the Illinois Supreme Court held that possession of the property by the grantee in a deed is notice to the world, even when the deed itself is not recorded. The court might have explored the recording of the certificate of purchase and whether that fact put Miller on notice, but the court did not even discuss that theory. The court also held explicitly that the possession of a tenant is notice of the landlord’s rights in the premises. Further, the court said, “One having notice of facts which would put a prudent man on inquiry is chargeable with knowledge of other facts which he might have discovered by diligent inquiry. Whatever is notice enough to excite attention and put the party on his guard is notice of everything to which such inquiry might have led and every unusual circumstance is a ground of suspicion and demands investigation.” [Emphasis added.] Miller, supra, 44 N.E.2d at 852. Here, the possession of the tenant put Miller on notice of the ownership interests claimed by the children, and since Miller did not make any inquiry at all of the tenant, he could not claim the protection of the recording laws as a bona fide purchaser for value. Possession equals recording!

In Ambrosius v. Katz, 2 Ill.2d 173, 117 N.E.2d 69 (1954), the plaintiff was an elderly woman whose adopted daughter and the daughter’s husband had allegedly defrauded her into conveying property to them and they, in turn, conveyed it to the defendant. The plaintiff filed a suit to set aside the deeds as clouds on her title. The court found that the daughter and her husband owed fiduciary duties to the plaintiff and that any transaction between them was presumed to be fraudulent unless the presumption was rebutted by clear and convincing proof the transaction was not fraudulent. Such proof did not exist, according to both the trial court and the Supreme Court. But the defendant claimed to be a bona fide purchaser for value who was entitled to the protection of the recording act.

Again, both the trial court and the Supreme Court held that possession by the plaintiff, even after being defrauded into conveying the property, put the purchaser on notice of her rights. After citing the general rule that the purchaser is bound to inquire of the person in possession by what right such possession is claimed (citing Miller, supra), the Supreme Court opinion continued: “The purchaser cannot excuse himself by merely obtaining information as to how possession was obtained or inquiring of the grantor or of other persons as to the rights of the person in possession, but he is bound to inquire of the person in possession by what tenure he holds and what interest he claims. Open possession is sufficient to charge such purchaser with notice of all legal and equitable claims of the occupant.” 117 N.E.2d at 74. A general inquiry is not sufficient to protect the purchaser. Rather, the purchaser must inquire directly of the person or persons in possession of the property.

Stein v. Green, 6 Ill.2d 234, 128 N.E.2d 743 (1955), is cited in WARD ON TITLE EXAMINATIONS §11.4 along with Ambrosius, supra, for the proposition that “a purchaser of real property is bound to make a physical inspection of the property to determine whether any parties are in possession other than the person claiming ownership.” That language is perhaps stronger and broader than is justified by the holding in Stein, supra. The defendant, Green, was permitted by the owner of real estate to place a $200 building on a portion of a lot and use it as a sandwich shop. There was a written lease that required the tenant to pay $10 per month in rent as long as both parties mutually agreed to continue the lease and that described the land subject to the “Rental Contract” as being only sufficient space to conduct the tenant’s business, not the entire lot.

The plaintiff in the case was an adjoining landowner who owned a floral shop and bought the entire lot (of which the sandwich shop occupied only a portion) in order to construct a greenhouse. When the buyer told the tenant that the buyer wanted to build the greenhouse and that the tenant would have to vacate, the tenant (Green) declined and alleged he was entitled to stay because of the “Rental Contract” and further because his landlord (the grantor to the neighbor) had entered into a contract with the tenant to make a will devising the lot to the tenant. The trial court found in favor of the purchaser and awarded damages in the amount of $300.

The Illinois Supreme Court reversed the trial court award of damages to the buyer, but affirmed the trial court decision granting possession to the buyer, so the tenant lost the appeal. The court cited both Ambrosius, supra, and Miller, supra, for the proposition that a purchaser is bound to inquire of persons in possession of the real estate by what tenure they hold and what interest they claim and is put on notice of all claims such an inquiry would disclose. Further, the court found that the purchaser knew of the tenant’s possession and yet did not make such inquiry. Nevertheless, the tenant lost for two reasons. First, the “Rental Contract” was for only such period as was mutually agreeable to both landlord and tenant, and the landlord (who was now the buyer following the purchase) clearly no longer agreed to continue the lease. Second, the court found that there was never any “contract” under which the former owner agreed to make a will to leave the fee title to the tenant. Thus, in this case the tenant’s possession of the property did not secure victory — even though the subsequent purchaser made no inquiry at all of the person in possession of the real estate.

Both Stein and Abellan are the exceptions that prove the rule. In other words, yes, the purchaser is bound to inquire of the persons in possession of real estate by what right they claim possession and what interest or interests they claim. And again, as in the NFL, “upon review” that turns out to be only the first part of the examination that is required. So what if the purchaser makes no inquiry at all of the person in possession? In Stein, the purchaser who made no inquiry won because the rights the person in possession claimed were not proven (no contract to make a will) or were subject to cancellation (“Rental Contract” only for as long as mutually agreeable). In Abellan, the purchaser who made no inquiry won because he was able to convince the seller of the property to give an express warranty that the tenant under the lease was not in default under its lease and there is no “reasonable reliance” requirement in Illinois in order to sue on that warranty.

I still disagree with the Seventh Circuit for not exploring this principle of Illinois law. With all the cases in mind, however, I think I will now state the Illinois rule a little differently. The purchaser being bound to inquire, or the so-called duty to inquire of the possessor, is less an affirmative duty and more a risk that the purchaser who does not inquire is at risk for what could have been learned. This is analogous to the recording act. No statute or case requires that a purchaser of real estate conduct a title search. Rather, not conducting a title search (or doing so incompetently) opens the purchaser to a risk of loss due to title defects that may have been discovered by doing a competent title search. Similarly, not inquiring of one in possession of real property puts the purchaser at risk of loss due to any facts that a diligent inquiry would have discovered.

The same — only different.

For more information about real estate, see TITLE INSURANCE: LAW & PRACTICE (IICLE®, 2019). EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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