Legal Case Studies: November 2021

Writen by Lisa Harms Hartzler |

Published: October 28, 2021 |

Reading Time: 15 min

Text messages did not constitute “signed” commission contract in New Jersey

In Tayyib Bosque, Corp. v. Emily Realty (17 Civ. 512 (ER), S.D. N.Y., June 17, 2019), the plaintiff (“Bosque”) was a real estate and business broker in New York. The defendant (“LaFrieda”) owned two residential care homes and a boarding house in New Jersey. In March of 2015, LaFrieda agreed to retain Bosque as a business broker to sell his businesses. Bosque, who was not licensed in New Jersey, spent some time viewing the property and took at least three potential buyers to see them. In March of 2016, one of the potential purchasers, Rosenburg, made an offer of $5 million. During this time, Bosque was aware that LaFrieda was working with another broker and entertaining offers from other buyers. Around the end of March, LaFrieda told Bosque that he had another offer and that “the first one with a contract and a deposit ‘wins’”. Also during this time, Bosque and LaFrieda negotiated by text messaging Bosque’s commission and apparently settled on $500,000.

On April 25, Rosenburg wired LaFrieda a $250,000 earnest money deposit and requested financial information for the businesses, including tax returns, profit and loss statements, and proof of the social security deposits that covered the tenants’ rent. He also proposed 150 days for closing and a mortgage contingency. However, LaFrieda balked at some of the proposed terms. Bosque urged La Frieda to reach a reach a decision and texted, “Look, close the deal you owe me $500k my money. Don’t close send deposit back you owe me nothing.”

LaFrieda ultimately sold the properties to another buyer through a different broker. Bosque sued in federal court for his commission under a breach of contract theory and other remedies.

The court first held that Bosque did not act as a real estate broker for which he was not licensed in New Jersey. The state recognized “business brokers” and “finders” who were not required to be licensed. Citing the financial records that the prospective purchasers requested, the court concluded that the sale of the two nursing homes and the boarding house were primarily sales of businesses that included real estate. Although Bosque did more work than a mere “finder,” he did act as a business broker who would be due a commission if a valid contract between him and LaFrieda existed.

To determine whether a valid contract existed, the court analyzed the text message exchanges between Bosque and LaFrieda under the requirements of the New Jersey Statute of Frauds. That statute required the authority of the broker to be expressed (1) in a writing (2) signed by the seller and (3) stating either the amount or the rate of commission.

An electronic record, such as a text message, can satisfy the writing requirement of the Statute of Frauds. The court held that the text messages exchanged between Bosque and LaFrieda from March through April did satisfy the writing requirement. Further, the texts evidenced an agreement between the two that the commission would be $500,000.

The next question was whether the texts were “signed” for purposes of the Statute of Frauds. The term “electronic signature” means “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” An electronic signature can also satisfy the signature requirement of the Statute of Frauds. For example, an email chain in which a party ends an email by typing his name, title, and contact information would be a valid signature under the statute. In this case, however, Bosque failed to establish any text message regarding his commission was signed in such a manner. The court held that the “unsigned” text message did not constitute a signature and that Bosque did not have a valid commission contract.

In any event, even if the court ignored the Statute of Frauds issue, Bosque could not point to any agreement explicitly providing that Bosque would be entitled to a commission on sales he did not cause. Bosque was fully aware that LaFrieda was shopping the properties with another broker and even admitted in a text that if he did not close the sale LaFrieda would owe Bosque nothing. The court granted summary judgment in favor of LaFrieda on these and all of the other issues presented to the court.

Kayaking on non-navigable stream prohibited without abutting owners’ consent

In Holm v. Kodat, 2021 IL App (3d) 200164, the plaintiffs owned 9.2 acres along the Mazon River in Grundy County that was accessible by road, but an additional 33-acre parcel downstream was landlocked. The plaintiffs operated a fossil hunting business on both parcels and routinely kayaked downstream from their accessible parcel to the landlocked parcel. They then kayaked again to a bridge where they disembarked.

The defendants owned property abutting the river between the plaintiffs’ accessible land and their landlocked acreage and between that parcel and the bridge. At least one defendant owned land on both sides of the river. The named defendant operated a competing fossil hunting business and organized his neighbors to object to the plaintiffs using the river to kayak past their properties.

The plaintiffs filed a lawsuit asking for a declaratory judgment that, as owners of property abutting the river, they had the right to use the whole of the river free of trespass claims by other abutting owners. The appellate court applied over a century of legal precedent regarding riparian rights to rule in favor of the defendants.

Generally, riparian rights are “the rights of an owner of land that borders on a body of water or watercourse to the use of the water.” These rights are equal among all owners of property abutting the same body of water and no one owner can prevent another similarly situated owner from exercising the same rights. For rivers and streams, a riparian owner has the right to the flow of the water, which cannot be diverted, increased, diminished or polluted without consent or due process.

A landowner whose property abuts a river owns the stream bed to the center of the river, while an owner who owns land on both sides owns the whole stream bed. For rivers and streams that are navigable, however, an owner’s riparian rights are subject to a public easement to use the river for navigation. “A river or stream is navigable in fact if it naturally, by customary modes of transportation, is of sufficient depth to afford a channel for use for commerce.” Whether the waterway can accommodate rowboats or other types of watercraft is not relevant to the issue of navigability for the purpose of establishing an easement for use by the public. This customary use for commerce must be satisfied to impose any public burden.

The appellate court discussed a 1988 Illinois Supreme Court case holding that ownership of part of the bed of a private, non-navigable lake entitled the owner and the owner’s licensees to the reasonable use and enjoyment of the entire lake surface, provided there was no undue interference with the reasonable use of the water by other owners and their licensees. “Restricting the use of a lake to the water overlying the owner’s lake bed property could only frustrate the cooperative and mutually beneficial use of that important resource.” The appellate court distinguished this precedent and decided that it should not be extended to a river because, although it was too difficult on a lake to establish and obey definite property lines, that was not true with a river where the middle of the riverbed could be determined.

Because the Mazon River was non-navigable in fact, the appellate court held that the defendants owned the river to the center of the stream bed and could lawfully bar any and all trespassers from the segment of the river abutting their properties.

Constructive eviction of tenant releases obligation to pay rent

In Ivanhoe Shoppes, LLC v. Bauspies, 2021 IL App (2d) 200582, the defendant tenant rented space in a shopping center for a fitness center containing elliptical trainers, treadmills, and weight-lifting devices. Beginning in 2018, the tenant failed to pay full rent and by August 2019 had accumulated nearly $21,000 in back rent and late fees. Plaintiff landlord issued several notices regarding the rent owed.

One of a landlord’s remedies under the Illinois Eviction Act (735 ILCS 5/9301) is to issue a “distress warrant” to seize a tenant’s personal property for rent. “Illinois law grants a landlord a common-law lien on a tenant’s personal property for the nonpayment of rent, and that lien is perfected by the filing of a distress warrant and an inventory with the clerk of the court.”

The landlord in this case issued a distress warrant and entered the fitness center to take an inventory of the equipment. However, it went one step further. The landlord was worried that the tenant would move or sell the machines before the landlord could sell them. And yet, because the equipment was too large and heavy to easily move, the landlord believed that removing and storing the machines elsewhere would have involved considerable expense, which it did not want to incur. Consequently, the landlord changed the locks on the fitness center and deprived the tenant access.

The distress warrant and inventory was filed in court the next day. The landlord also moved to accelerate all rent due under the lease.

The appellate court first considered whether changing the locks on the fitness center exceeded the landlord’s authority under the Eviction Act. Under the law, a landlord can seize property or take reasonable steps to prevent a tenant from moving or selling property covered by a distress warrant. However, self-help by force, which includes changing the locks, is prohibited by the Eviction Act. Consequently, the landlord in this case engaged in “unlawful self-help” by depriving the tenant of the enjoyment of the premises. The result was a constructive eviction. The court noted that if the landlord did not want to remove the fitness equipment itself, it could have employed reasonable alternatives, such as monitoring the equipment with cameras or other technology.

The appellate court held that “it is well settled that a constructive eviction relieves a tenant of the obligation to pay rent.” In this case, that relief included accelerated rent under the lease.

When contract is silent, plaintiff has the burden of persuasion

In New West, L.P. v. Fudge, — F.4th – (No. 211372, 7th Cir., September 20, 2021), the Department of Housing and Urban Development had contracted with plaintiff New West to manage a housing development. HUD provided rent subsidies that accounted for nearly all of the money for operating the housing development. It also established a maintenance and repair fund of $2.7 million in the event New West defaulted on its obligations to tenants or HUD.

The City of Joliet condemned the housing development and paid HUD $15 million for it. New West requested payment of the maintenance fund but HUD refused and held the fund for the benefit of Joliet. New West filed suit to obtain payment, alleging it owned the money.

New West argued that because the contract establishing the maintenance contained a stated goal of providing security for repairs and maintenance, once the project’s ownership passed to someone else, the money must belong to New West, the manager of those repairs and maintenance. The court did not buy that argument at all. A stated general objective in no way resolved who owned the money, which could include a number of potential owners—the Treasury (who provided the money); the tenants (who were the beneficiaries of the fund); or the new owner (Joliet). HUD contended that the fund should pass with the property to the new owner. The trial court agreed.

A “plaintiff bears the risk of persuasion.” Because New West failed to cite any contract language indicating that it owned or should own the maintenance fund, it failed to persuade the Seventh Circuit that the district court had wrongly awarded the money to Joliet. The court affirmed district court’s decision to award summary judgment in favor of HUD (and therefore the city).

Illinois appellate court extends privity of contract requirement to claim for breach of implied warranty of habitability against general contractor

In 1400 Museum Park Condominium Association by Its Board of Managers v. Kenny Construction Company, 2021 IL App (1st) 192167, an appellate court was asked to extend an Illinois Supreme Court decision from 2018 regarding claims for breach of implied warranty of habitability. That decision (the Sienna Court decision) concluded that such a claim was a “creature of contract, not tort” and, therefore, the buyer of a newly-constructed condominium could not pursue a breach of implied warranty of habitability against a subcontractor when the subcontractor had no direct contractual relationship with the purchaser, as is usually the case. The question in 1400 Museum Park was whether the same principles should be applied to the general contractor of a condominium development.

In this case, the defendant contractor began construction of a 260-unit condominium building at 100 E. 14th St in Chicago under a contract with a developer operating as a separate LLC. Construction was completed in 2008 and units were sold by the developer until 2011, when it apparently dissolved, and unit owners formed a condominium association. Sometime in 2013, the association learned of leaks in the building’s hot water supply riser. Further investigation revealed latent defects in the design, materials, and construction of the building’s plumbing riser system, which cost over $1 million to repair.

The condo association sued the general contractor for breach of implied warranty of habitability and breach of contract. The general contractor moved to dismiss the suit under the 2018 Sienna Court decision, which the trial court granted.

The appellate court began its analysis with a lengthy discussion of the history of the claim for breach of implied warranty of habitability. Under the common law doctrines of “caveat emptor” and “merger,” a purchaser of a newly constructed home took the property at his or her own risk. If a new owner failed to discover latent defects in the home’s design or construction before the time of sale, they could not maintain an action against the builder for the defects.

The “merger doctrine” provides that all provisions in a contract for the sale of real property are merged into a subsequently executed deed, so that the deed becomes the only binding instrument between the parties. If there are no reservations of rights in the deed, then merger prevents any relief to an aggrieved buyer. “Merger evolved to protect the security of land titles and brings finality to real estate contracts” and traditionally has “operated to enforce the rule of caveat emptor.”

Under the doctrine of caveat emptor a seller of real property is not liable to purchasers for damages resulting from defects in the design or condition of the property existing at the time of sale, absent express warranty, fraud, or misrepresentation. “It is rooted in the notion that the seller and buyer possess similar skills and are engaged in an arm’s length transaction.”

Courts eventually recognized, however, that modern home buyers are usually dependent upon the competency and honesty of a builder rather than on the buyer’s own ability to discern latent defects. A home purchaser is also usually making the largest single investment of his or her life. Further, fairness requires that repair costs of defective construction should be borne by the builder-seller who created the latent defects.

These rationale and policy considerations led to the creation of the implied warranty of habitability, which would lessen the harshness of caveat emptor and the doctrine of merger and protect homeowners from latent defects affecting habitability. The implied warranty has been treated as an independent undertaking to the covenant to convey that survives the delivery of the deed. It “is limited to latent defects attributable to the builder’s design or construction that interferes with the purchaser’s legitimate expectation that the house he or she is purchasing will be reasonably suited for its intended use as a residence.”

Now, in the Sienna Court case, the Illinois Supreme Court made clear that the implied warranty of habitability arises from contract law. An action under a contract for economic loss requires the plaintiff to be in “contractual privity” with the defendant. The purchaser of a newly constructed condominium unit may not pursue a claim for breach of implied warranty of habitability against a subcontractor who had no contractual relationship with the purchaser.

“Privity of contract” is a mutual or successive relationship to the same rights of property. Such a relationship can arise by voluntary or involuntary transfer and can also accompany “a valid assignment of the contact that puts the assignee in the shoes of the assignor.”

In this case, the condominium association argued that it stepped into the shoes of the developer, which had sales contracts with individual unit buyers and promised to construct the building in accordance with the plans and specifications and it was the developer who hired the subcontractor who constructed the risers. The appellate court found, however, that nothing in the sales contracts established privity between those individual unit owners and the general contractor. The general contractor was not a party to the sales contracts. In addition, the condo association argued that the developer delegated or assigned its obligations and liabilities under the sales contracts to the general contractor so that the individual unit owners had privity with the general contractor in that way. Again, the court found no evidence to support this argument of assignment by the developer to the general contractor.

With no privity of contract with the general contractor, the condominium association and the individual unit owners could not pursue a claim for breach of implied warranty of habitability. The appellate court affirmed dismissal of the suit against the general contractor.

About the writer: Lisa Harms Hartzler is Of Counsel at Sorling Northrup Attorneys in Springfield. She graduated from the American University Washington College of Law in 1978 and began her legal career in Chicago. She has provided legal support for the Illinois REALTORS’ local governmental affairs program since she joined Sorling in 2006 and focuses her practice on municipal law, general corporate issues, not-for-profit health care law, and litigation support.

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