Doing Deals in Illinois

 

 

 

Lawyer: Irwin I. GzeshFirm: Neal, Gerber & Eisenberg LLP
Email: igzesh@ngelaw.com
Telephone: 312.269.8082
Location: Two North LaSalle Street, Chicago, Illinois 60602
Web Address: www.ngelaw.com

 

Overview of Selected Considerations for Doing Deals in Illinois

I. GENERAL PROPERTY CONSIDERATIONS
1. Estates. Joint tenancy with right of survivorship can only be created by express declaration that estate must pass in joint tenancy “and not as tenancy in common.” Tenancy by entirety is available only for a single homestead of husband and wife together during marriage.

2. Illinois Condominium Property Act applies to all condominiums. Provisions in condominium declaration inconsistent with Act are void. A few specific noteworthy provisions include that “developer” may manage “property” prior to election of first unit owner board of managers. First unit owner board must be elected within 60 days after conveyance of 75% of “units” or three years after “declaration” is recorded, whichever is earlier. “Add-on condominiums” are authorized by Act.

3. Local Condominium Ordinances. Many municipalities, including Chicago, have enacted local ordinances with respect to condominiums. Chicago ordinance requires that developer prepare a detailed “Property Report” for distribution to prospective purchasers which discloses specified information. Also, requires developer to give notice to tenants in buildings undergoing condominium conversion at least 120 days prior to recording declaration. During 120 day period after notice has been given (180 days if tenant is over 65, blind, deaf or handicapped) tenant may continue to occupy unit and is granted right of first refusal to purchase.

4. Illinois Land Trusts. While not specifically authorized by statute, land trusts were once widely used in Illinois, especially for commercial properties, but are increasingly less common. Land trusts are defined under Illinois common law as an arrangement (typically per a written land trust agreement) under which legal and equitable title to real property is held by a trustee (with the interest of the beneficiary constituting personal property under Illinois law), and under which beneficiary (or any person designated in writing by beneficiary) has exclusive power to direct or control trustee in dealing with title. Beneficiary also retains exclusive control of management, operation, leasing and disposition of trust property together with exclusive right to all earnings, avails, and proceeds derived from the same, Beneficiary, and not trustee, is liable for any injuries sustained on trust property.

II. PURCHASE AND SALE TRANSACTIONS
1. Typical Allocations of Closing Costs. Seller usually pays for preparation of deed and recording of mortgage releases and other documents necessary to clear title. Buyer pays for deed recordation. Seller often pays for Owner’s Title Insurance Policy and survey. Buyer pays to record new Mortgage and for its Lender’s Title Insurance Policy.

2. Tax Prorations. Real estate taxes are assessed on a calendar year basis. Owner on January 1st is liable for taxes for that year which constitute a lien not yet due and payable on that date. Taxes are not determinable, however, and are not paid until the following calendar year. Accordingly, re-proration agreements are quite common.

3. Deeds.
(a) General Warranty. Words “convey and warrant” convey fee simple title, with all general warranty covenants deemed included as follows: (1) that grantor was, at execution of deed, seized with an indefeasible estate in fee simple, with full power to convey; (2) that property was then free from all incumbrances; (3) that grantor warrants to grantee, its heirs and assigns, quiet and peaceable possession, and will defend title against all persons who may lawfully claim same. After-acquired interests of grantor will inure to grantee.
(b) Limited or Special Warranty. A deed that uses the words “grants, bargains and sells” in place of “conveys and warrants” conveys fee simple title, with only the following covenants: (1) That grantor was seized with an indefeasible estate in fee simple, free from encumbrances done or suffered by grantor, except rents or services reserved; (2) quiet enjoyment against the grantor, his heirs and assigns.
(c) Quitclaim. Quitclaim deed uses the words “conveys and quitclaims . . . all interest in” in substitution for “conveys and warrants to . . .” and conveys in fee all existing legal or equitable rights of the grantor, if any.

4. Uniform Purchaser Vendor Risk Act has been adopted in Illinois.

5. Bulk Sales. Article VI of UCC has not been adopted in Illinois. However, Illinois and City of Chicago have their own so-called “bulk sale” statutory schemes that, where applicable, make the property buyer liable for the seller’s unpaid State and City tax liabilities (up to the value of the acquired property) unless a prescribed pre-clearance notice of sale and stop order procedure is followed. Bottom line: Buyer Beware!

6. Transfer Taxes.
State Stamp Tax. Tax at rate of 50¢ for each $500 of value or fraction thereof is imposed on transferring title to real estate, including transfers by deeds, beneficial interests in real property which is subject of land trust, lessee interest in ground lease that provides for term of 30 or more years when all options to renew or extend are included; or indirect interest in real property by way of controlling interest in real estate entity (more than 50% of fair market value of all ownership interests). If transferred subject to mortgage, amount of mortgage outstanding at time of transfer is not included in basis for computing the tax. Tax is collected by Recorder of Deeds through sale of revenue stamps.
Exemptions include: property acquired from, by or between governmental or tax exempt corporations; which secure debt or other obligation; correction or supplementary deeds; actual consideration under $100; tax deeds; release deeds; partition deeds; pursuant to mergers, consolidation, or sale pursuant to plans of reorganization; or by subsidiary to parent corporation in exchange for cancellation or surrender of subsidiary’s stock; exchange deeds except to extent of money difference; deeds issued to holder of mortgage pursuant to mortgage foreclosure proceeding or pursuant to transfer in lieu of foreclosure; deed or trust document related to purchase of principal residence under Home Ownership Made Easy Act.

County Stamp Tax. County Boards similarly may (and most, if not all, do) impose transfer tax at rate of 25¢ for each $500 of value or fraction thereof as stated in declaration of value for State transfer tax purposes. If real estate is transferred subject to mortgage, amount of mortgage outstanding at time of transfer is excluded from determination of value. Tax is collected prior to recording deed or registering title. Real estate exempt from State transfer tax is also exempt from county tax. Cook County imposes tax on assignment of beneficial interest in land trust.

Local Stamp Tax. Many home-rule municipalities impose local tax on transfer of real property or beneficial interest in real property. Chicago imposes a local transfer tax on the Buyer of $3.75 per $500 of transfer price or fraction thereof and a local transfer tax on the Seller of $1.50 per $500 of transfer price or fraction thereof on transfer of title or assignment of beneficial interest in land trust. Tax is collected by City Department of Revenue through sale of revenue stamps. Declaration which states full consideration for property must be presented together with certificate from Commissioner of Water certifying that water and sewer assessments have been paid in full at time stamps are purchased. Certain transactions are exempt.

III. MORTGAGES

1. Trust deeds and Mortgages are both in use, but Mortgages are clearly prevalent.

2. Reverse Mortgages. Bank, savings and loan association or credit union may make “reverse mortgages” on basis of existing equity in homestead property. Mortgagee may add deferred interest to principal or provide for interest on interest. Additional provisions made for nonrecourse reverse mortgage loans available only to homeowners who are at least 62 years of age.

3. Revolving Credit Loans. Banks, savings and loan associations or credit unions may make revolving credit loans secured by mortgages or deeds of trust on real property or by security assignments of beneficial interest in land trusts. Lien arising thereunder includes existing indebtedness and such future advances as are made within 20 years from date thereof.

4. Tax Escrows. Absent agreement, no interest is due on such funds.

5. Future Advances. The lien includes all moneys thereafter advanced or applied on account of the principal indebtedness or authorized to be advanced by the provisions of the mortgage or by law; but as to subsequent purchasers and judgment creditors the mortgage is, as to moneys advanced or applied on account of the principal indebtedness, a lien only from the time such moneys are advanced or applied, unless such advancement or application occurs within 18 months of the date of recordation, or unless the mortgagee is required by contract to make it. Future advances clauses must set upward limit to be advanced or lose protection.

6. Foreclosure and Sale. There is no non-judicial foreclosure in Illinois. Power of sale is ineffective, and mortgages must be foreclosed in accordance with Mortgage Foreclosure Law. Common law remedy of strict foreclosure is still available in Illinois. Due on sale clauses are enforceable. Deed in lieu of foreclosure terminates mortgagor’s interest and lender’s acceptance of same statutorily releases mortgagor’s personal liability unless otherwise expressly agreed.

7. Mortgage Tax is nonexistent in Illinois.

8. Assignment of Rents. Under Illinois law, in order to enforce an assignment of rents, lender is required to (i) take actual possession of the mortgaged property, (ii) take constructive possession of the mortgaged property by obtaining court authorization to collect rents from tenants or (iii) move for the appointment of, and obtain an affirmative ruling appointing, a receiver for the mortgaged property.

IV. LANDLORD AND TENANT
1. Notice of Non-payment of Rent. Any time after rent due, under Illinois law, landlord may demand payment and serve written notice that unless payment made within time stated in notice (not less than five days after service) lease is terminated. If rent not paid within time stated, landlord may sue for possession.

2. Eviction of Tenant. After tenancy terminated by aforementioned written demand for rent (“five day notice”), landlord may sue for possession by forcible entry and detainer action or maintain ejectment action. Claim for rent may be joined in complaint.

3. Holding Over. If tenant willfully holds over after written demand by landlord, tenant is liable under Illinois law for double rent while possession withheld. If tenant pursuant to lease gives notice of intention to quit but fails to do so, then Tenant is liable for double rent. Statutory double rent remedy excludes right to recover other damages in tort by reason of willful holdover. It does not, however, affect enforceability of liquidated damages provisions in lease.

4. Mitigation of Damages. Landlord required under Illinois law to mitigate damages recoverable against defaulting tenant. If former tenant tenders “suitable” replacement tenant, landlord must either accept the same or credit former tenant with amount which would have been paid by new tenant.

5. Exculpatory Clauses. Provisions exempting lessor from liability for own negligence are void under Illinois law except provision in nonresidential lease exempting lessor from liability for property damage.

6. Chicago Residential Landlord and Tenant Ordinance only applies to certain residential leases.