Illinois Law
Illinois Commercial Real Estate Law
- Commercial Real Estate Law
Commercial Real Estate Law
Terminology
Assessment
An assessment is a value placed on real property for purposes of levying local property taxes. Real estate taxes are calculated by multiplying the assessed value of a piece of property by the tax rate. Most properties are reassessed periodically, but a property's assessed value may not be the same as its actual market value.
Co-Ownership
Co-ownership is ownership of property by more than one person. The two common ways in which two or more parties can co-own a piece of property are joint tenancy and tenancy in common, both discussed below. Although there are advantages to co-owning property, there are drawbacks as well. If co-owners cannot agree on use, sale, or possession of a piece of property, they may have to go to court to resolve the matter in a partition action. In a partition action a joint tenant or tenant in common asks the court to split the property in a fair and just manner. Because real property may be difficult to divide and partial interests may be difficult to sell, a court will usually order that the property be sold and proceeds from the sale distributed to the co-owners in relation to their interests.
Deed
A deed is a written instrument that transfers the title of property from one person to another. The two most common types of deeds are general warranty deeds and quitclaim deeds, both of which are discussed below.
Deed Restriction
Deed restrictions are usually imposed on a buyer of land when the property is sold, and the restrictions are included in the seller's deed to the buyer. Restrictions are generally imposed by a property developer to maintain certain standards. Restrictions may include limits on the color a building may be painted, what kind of trees may be planted, or the size of structures that may be built on the property. Deed restrictions may also be known as covenants or conditions.
Easement
An easement is the right to use another person's land for a particular purpose. There are many forms of easements. Public utility companies frequently have utility easements that permit them to run gas, water, or electrical lines through particular property they do not own. The owner of property on a lake shore might sell to the owner of an adjacent lot without lake access an easement to cross over to the shore. A person who owns property that is landlocked may receive an easement from an adjacent land owner to have access in and out of the property. This kind of easement is also called a right-of-way.
Encumbrance
An encumbrance is an obligation attached to a piece of real property. It is not an ownership interest, but is a right or interest held by a party who is not the owner of the property. Property may be bought and sold even though there are encumbrances attached to the property. Because encumbrances attach to property, not to property owners, a person who buys property with an encumbrance is bound by the encumbrance. Easements and deed restrictions are examples of encumbrances.
General Warranty Deed
Generally, in Illinois, title is transferred by general warranty deed. A general warranty deed provides a great deal of protection to the purchaser because the seller pledges or warrants that he or she legally owns the property and that there are no outstanding liens, mortgages, or other encumbrances against it. A warranty deed is also a guaranty of title, which means that the seller may be held liable for damages if the buyer discovers that the title is defective. A warranty deed is no substitute for title insurance, however. A warranty from a seller who later dies or goes bankrupt may have little, if any, value.
Joint Tenancy
Joint tenancy is a form of co-ownership. Although it is a common way for a husband and wife to own property, there is no requirement that joint tenants be married to one another or that there be only two joint tenants. Each individual owner in joint tenancy has a right to sell, encumber, and possess the entire property. Regardless of the number of joint tenants, when one joint tenant dies, the remaining joint tenants automatically take the deceased joint tenant's share of the property by right of survivorship. In such cases, the surviving joint tenants are required to file a death certificate and an affidavit with the county recorder. A principal advantage of joint tenancy is that it allows the surviving joint tenant to avoid probate, death, or transfer taxes.
Lien
A lien is a charge against property that provides security for a debt or obligation of the property owner. The lien holder does not own the property. The owner of property may voluntarily agree to a lien, such as by taking out a mortgage, or a lien can be imposed, such as for nonpayment of taxes. One of the most common liens is the mechanics lien, which may arise when someone furnishes labor or materials to improve a piece of property. If the worker or supplier is not paid by the property owner, he or she files notice of lien with the county recorder and the property owner and collects the amount owed from a subsequent sale of the property.
Quitclaim Deed
A quitclaim deed is a deed that relinquishes to the buyer whatever interest the seller may have in the property. A quitclaim deed gives the buyer the least amount of protection of any type of deed. If the seller is the sole owner of the property, the quitclaim deed is enough to transfer title, but the buyer takes a risk by accepting a quitclaim deed because it offers the buyer no guarantee that the title is valid. Quitclaim deeds are used frequently during the property settlement phase of a marriage dissolution.
Recording
In Illinois, real estate records are kept in each county. Owners and other parties with real estate interests are required to file all documents affecting their property interest in order to give public notice of the interest. Documents are filed in the county in which the property is located. Since 1992, titles in Illinois are transferred under the abstract system. An abstract of title is a record of all the interest entries for that property. Abstract records go back hundreds of years.
Special Assessment
A special assessment is a tax levied on a piece of property to pay for improvements that benefit the particular property, such as streets, sidewalks, and street lighting. Special assessments are liens on the property until they are paid.
Sublease
Subleasing is having someone else take over a tenant's rights and obligations under a lease before the original lease expires. A tenant has a right to sublet a unit if the lease does not prohibit doing so. If the new tenant does not pay rent, damages the unit, leaves before the lease expires, or breaches any condition of the lease, the landlord holds the original tenant responsible. The original tenant has a right to sue the new tenant for those costs.
Tenancy in Common
Tenancy in common is a form of co-ownership. Tenants in common, like joint tenants, share the right to possess, sell, and encumber the property. Unlike joint tenants, tenants in common do not have a right of survivorship. Upon the death of a tenant in common, that person's ownership interest passes to his or her heirs as part of his or her estate.
Title
Title to real estate is the right to, or ownership of, property. Title may refer to the actual ownership or to the documentary evidence of that ownership. In order to sell a piece of property, all title matters must be cleared. Usually, this is accomplished through a title search, in which a diligent search is made of all records relating to the property to determine whether the owner is authorized to sell the property and whether there are any claims against it. If any defects in title are discovered during the title search, the seller usually is given time to cure the defect. Title insurance is often taken out to protect against any hidden defects in the title. There are two types of title insurance, one that protects the lender's interest in the property, and one that protects the owner's interest.
Purchasing Real Estate
Of increasing concern to businesses are environmental hazards that may come with acquiring real estate. Leaking underground oil storage tanks or hazardous emissions, for example, may become the cleanup responsibility of a new owner under state and federal environmental laws. Even a new owner who neither contributed to nor knew of the contamination may be required to pay for the cost of cleanup.
Leasing Real Estate
For example, parties may agree to a month-to-month lease without specifying the number of months the tenant will stay. The lease continues until one party terminates it. Most periodic leases state how much notice is required and the form the notice of termination must take. If the periodic lease does not state when or how notice is to be given, the parties must follow state law. Illinois law requires that a party to a year-to-year lease give 60 days' notice, a party to a week-to-week lease give one week's notice, and a party to any other periodic lease give 30 days' notice. All notices must be written.
A term lease is a rental agreement with a definite time period. Term leases almost always are written. If the parties to the term lease do not state when and how notice of termination is required, the lease automatically ends on the last day of the time period.
Negotiating a Lease
Many businesses will have specific needs that are not satisfied by a standardized lease agreement, such as the operating expenses provisions of the lease. It is in a property owner's best interest to prepare a written rental agreement that addresses both parties' rights and responsibilities in the event problems arise.
The following items should be addressed in any rental agreement:
- Amount of and conditions for returning the security deposit
- Who is responsible for maintenance of fixtures, appliances, and common areas of the property, and what standards apply
- Renewal rights at the end of the lease
- Cancellation rights
- Circumstances under which the owner can enter leased premises
- Who is obligated to insure the property and which party is named beneficiary under any insurance policy
- Subleasing rights or prohibitions
- Any restrictions on rental of adjacent space
Security Deposit
Landlords have a right to insist that renters pay a security deposit before moving in. The security deposit--also called a penalty deposit--is used to pay for any damage beyond ordinary wear and tear that the tenant might cause to the rental property or to satisfy any debts between the tenant and landlord. There is no limit to how much the landlord may require for a security deposit. The landlord can increase the security deposit at any time during a periodic lease if the tenant is given proper notice--generally, one rental period plus one day. If the lease is a term lease, the landlord may not change the deposit until the lease comes up for renewal or the parties agree otherwise.
At the end of the tenancy, the landlord must return the deposit to the renter. If the landlord rents to 25 or more tenants, the landlord must pay five percent interest on the security deposit. The landlord is allowed to keep some or all of the deposit if there have been damages. If the tenant has paid a penalty deposit, the landlord may keep only the amount necessary to repair damages. The landlord may keep the entire amount of a security deposit, even if the actual damages are not that high. Within 30 days of the termination of the lease, if the landlord plans to keep the deposit he or she must provide the former tenant with an itemized statement of the damages the tenant caused. In any case, the landlord has 45 days to return the deposit to the tenant.
Real Estate Development
Construction Contracts
Construction contracts are a highly specialized subcategory of contract law. Most construction projects involve many parties, each with unique expectations, deadlines, and responsibilities.
Architects, engineers, contractors, subcontractors, and lenders all have to understand their rights and responsibilities. Failure to have an experienced real estate attorney negotiate and draft documents can lead to numerous headaches and unplanned expenses. Good planning includes discussion of mechanics liens, periodic inspections, bonding, timetables, and appropriate rewards or punishments for early or late completion.
Mortgage Financing
Many attorneys practicing real estate law spend a substantial portion of their practices negotiating mortgages secured by real property. These negotiations are often quite complex.
Mortgage financing for new real estate can be as difficult to obtain for an established business as for one that is starting up. To help move the process along, a business often has to give up a degree of control over business decisions that affect the property. A lender may want to impose liabilities for the property onto the borrower, while at the same time retaining a say in how the property is managed. It is important for a borrower to try and retain as much flexibility and control as is possible. For example, a borrower may want to retain control of insurance proceeds in the event of damage to the property so that the property can be restored, while a lender may want to require that such proceeds go toward debt owed.
Foreclosure
Foreclosure is a legal action in which property that has been used as security for a debt is sold in order to pay off that debt. Mortgages provide for foreclosure in order to give lenders the right to recover the money they loaned. Foreclosure is initiated by the grantor of the mortgage, must occur in the county in which the property is located, and must follow a default by the debtor on the terms of the mortgage.
There are various forms of foreclosure available in Illinois. A judicial foreclosure requires a judicial sale to terminate the mortgage. A judicial sale may be conducted by any judge or sheriff. Such a sale follows a court action for foreclosure by the mortgagor. As an alternative to a judicial foreclosure, a mortgagee may agree to a consent foreclosure. Under this foreclosure method, the court enters a judgment satisfying the mortgage indebtedness by vesting absolute title in the mortgaged property in the mortgagee. This method is only available if the mortgagee offers to waive all rights to receive a deficiency judgment against the mortgagor for any balance remaining after a sale of the property and the mortgagor consents. Another method of foreclosure--or actually, of preventing foreclosure--is, third, for the mortgagee to agree to take a deed to the property in lieu of foreclosure. Note, however, that simply because a mortgagor offers a deed in lieu of foreclosure, the mortgagee need not accept it. Finally, a mortgagor and mortgagee can foreclose by common law strict foreclosure. The parties must be careful to follow all the common law rules to foreclose under this method. In some states, mortgages may include a power-of-sale clause that gives the lender authority to conduct a foreclosure without taking the matter to court. Power-of-sale clauses are void in Illinois, and all foreclosures must be done in accordance with state law.
Zoning
Zoning regulations are a particular type of land use control. Their purpose is to control and regulate development and growth of a community in a way that is best for the general public as determined by local government. This is accomplished by dividing a community into areas (zones) that can be used only for certain purposes.
Zones generally fall into four basic categories--residential, commercial, industrial, and agricultural. Most cities further divide property into much more intricate specifications, such as a zone for single-family houses within a residential area, areas zoned for light-industrial and heavy-industrial operations.
It is important to find out exactly how a property is zoned, for this could have serious consequences on how the property can be used both at the present time and in the future. Zoning ordinances are changed through amendments. Such changes can be sought by an individual property owner or by local governments. The changes must be determined to be in the best interest of the community, and the opinions of persons affected must be sought through public hearings.
Another way to seek relief from zoning laws is through a variance permit. Such permits make exceptions for uses of property that are not otherwise allowed under the zoning laws. Other ways around zoning laws include conditional use promises that allow special permission for an inconsistent use that benefits the community, and spot zoning, which re-zones a small area or even one plot of land. Again, this is only allowed if it benefits the community.
Land Use Law
In addition to zoning laws, there are other laws that mandate how a building can be built, how big or small it can be, and where it may be placed on the property. These specifications may be laid out in local regulations or in building codes. Building codes are developed to protect public health and safety. To ensure compliance with building codes, many municipalities require that property owners obtain building permits before they begin any type of construction or development. Another way communities enforce codes is by issuing a certificate of occupancy that allows legal occupancy in buildings that pass code requirements.
On shorelines, the state adds other rules regarding the size and shape of buildings as well as their locations on lots to these local regulations. The additional regulations are intended to avoid adverse environmental consequences resulting from building construction.
Other kinds of land-use regulations serve to protect the environment. Any development that may have an effect on the environment must conform to local, state, and federal regulations. For example, the National Environmental Policy Act is a federal law that requires federal agencies to create environmental impact statements and obtain approval from a developer planning projects that could adversely affect the environment. Such statements detail the effects of projects on areas such as air and water quality, safety, and wildlife. More information about these rules is provided in the Environmental Law Chapter.
Water Law
With the purchase or sale of real estate comes certain air rights, mineral rights, and water rights. Water rights include the use of underground water as well as water that touches the owner's property. Landowners whose property touches flowing water are "riparian owners," which means they have the right to use the bordering water for reasonable and beneficial use, such as boating, swimming, and other recreational purposes. Riparian owners may not, however, legally divert the water to land that does not adjoin the stream or lake. An owner may not use the adjoining water in a way that affects the quality or availability of the water further upstream, downstream, or down the coast, by polluting the water or changing its flow.
Resources
Illinois Department of Human Rights, 222 College South, #101, Springfield, IL 62706, phone: (217) 785-5100, TDD: (217) 785-5125; Illinois Department of Human Rights, 100 Randolph Street West, #10-100, Chicago, IL 60601, phone: (312) 814-6200, TDD: (312) 263-1579.
Illinois Department of Public Health, 535 Jefferson Street West, Springfield, IL 62761, phone: (217) 782-4977.
Illinois Housing Development Authority, 401 Michigan Avenue North, #900, Chicago, IL 60611-4205, phone: (312) 836-5200 or toll-free: 1-800-942-8439, TDD: (312) 836-5222. Contact this office for information or to obtain the free booklets, Bridging the Gap... and Illinois First-Time Homebuyer Program.
Illinois State Bar Association, Illinois Bar Center, 424 South Second Street, Springfield, IL 62701-1779, phone: (217) 525-1760. Call or write for the free pamphlet, Landlord-Tenant.
Commercial Real Estate Transactions, Stuart M. Saft, Shepard's/McGraw Hill, Inc., Colorado Springs, CO, 2d ed., 1995.