ILLINOIS REAL ESTATE LAWYERS ASSOCIATION
Holiday Inn, Rolling Meadows, Illinois
March 14, 2001 - 8:00 am



"RECENT CASES OF NOTE FOR REAL ESTATE LAWYERS ON CONTRACT FORMATION, EARNEST
MONEY, WAIVER, LIQUIDATED DAMAGES AND THE RESIDENTIAL REAL ESTATE DISCLOSURE
ACT - SOME MORE THREADS IN THE ROPE OF THE LAW OF RESIDENTIAL REAL ESTATE
TRANSACTIONS"



By Steven B. Bashaw
Steven B.  Bashaw, P.C.
Suite 1012
1301 West 22nd Street
Oak Brook, Illinois  60523
Tel.: (630) 974-0104
Fax.: (630) 974-0107
e-mail:  sbashaw @bashawlaw.com
     (Copyright 2001 - All Rights Reserved)


A few years ago, a series of cases came down with some fairly dramatic
statements about the law of formation of real estate contracts.  In Olympic
Restaurant Corp. v. Bank of Wheaton, (2nd Dist., 1980), 251 Ill.App.3d  594
, 622 N.E.3d 904 , 190 Ill.Dec. 874, the Second District found that the
exercise of the attorney's approval provision in a contract could be
summarily used to declare a contract null and void based upon the reasoning
that when the clause is evoked the contract reverts back to the stage of
"offer and acceptance".  Then in Groshek v. Frailey, (1st Dist., 1995), 274
Ill.App.3d 566, 654 N.E.2d 467, 211 Ill.Dec. 5,   the First District agreed
and furthered this reasoning with its ruling that the rejection of the
contract by an attorney need not state a basis because the right to
disapprove is within the attorney's judgment; limited only by  good faith.
In Hubble v. O'Conner, (1st Dist., 1997), 291 Ill.App.3d 974, 684 N.E.2d
816, 225 Ill.Dec. 825, the court dealt with modifications to the contract
and stated that the attorney's communication must be clear and unambiguous.
These paths culminated in McKenna v. Smith, (1st Dist. 1998), 302 Ill.app.3d
28, 704 N.E.2d 826, 235 Ill.Dec. 253, where the court held that by
disapproval an attorney did terminate the contract,  and an attorney need
not state a reason for disapproval to comply with "good faith".

These are fairly well recognized as leading cases by  residential real
estate lawyers, and two recent cases that must be added to the "must read
and grasp" list for these same practitioners relating to contract formation
and termination are the Catholic Charities  and Allen v. Cedar Real Estate
cases.


1. REAL ESTATE CONTRACTS:  FORMATION,  EARNEST MONEY,  WAIVER, AND
LIQUIDATED DAMAGES:

In Catholic Charities of Archdiocese of Chicago v. Thorpe, (1st Dist,
December 12, 2000), http://www.state.il.us/court/2000/1991717.html, the
first issue was whether there was a contract in existence before the earnest
money was deposited, and the second issue related to  the enforceability of
a liquidated damages clause relating to that earnest money.

The purchaser, Thorpe, entered into a contract on April 29, 1996 to purchase
property at 1300 South Wabash in the City of Chicago from Catholic
Charities. The contract called for the immediate payment of $10,000 earnest
money to be increased to $25,000 upon acceptance of the contract by Seller.
The initial $10,000 earnest money was deposited by personal check which was
returned NSF.  The original closing date was extended from June 6, 1996 to
June 25, 1996. The purchaser did not appear at the closing, and
consequentially, the seller sold the property to a third party and brought
suit for the total $25,000 earnest money as liquidated damages under the
contract.

The purchasers first argument was that the payment of the earnest money was
a condition precedent to the formation of the contract, and since the
earnest money was never paid, no contract was  formed.  Therefore, they
argued, the  sellers were not entitled to  judgment on the contract.  The
sellers, of course, argued that the payment of earnest money was not a
condition precedent to the formation of the contract, but merely a condition
precedent to the seller's obligation to perform according to the terms of
the contract.  They were ready, willing, and able to perform and appeared at
closing.

The trial court and the First District both agreed with the seller on this
issue.  Citing cases from the D.C. Court of Appeals and Texas,  before
turning  to the language of the contract, the Court states very clearly
that: "All the Illinois cases which our research has disclosed which found a
condition precedent to the formation of a contract contain express language
on the face of the contract to support that construction."  There was no
language in this contract to support the position that it was the intent of
the parties here  that the payment of the earnest money was a condition
precedent to their agreement, but only that the earnest money was to be
increased upon the formation of the contract. "Moreover, even assuming that
the payment of the earnest money is a condition precedent to the formation
of the contract, performance of that condition by Buyer was waived by the
Seller.  A party to a contract may waive performance of a condition by the
other party where the condition precedent is intended for the benefit of the
waiving party."

Since the payment of the earnest money was intended to benefit the seller,
Catholic Charities was able to unilaterally waive the payment, and the
Thorpe's attempts to take advantage of their own failure to perform as the
basis for avoiding further liability under the agreement was rejected.

Turning to the next argument, the Court recognized that the buyer's argument
that the liquidated damages clause in this contract was unenforceable was
based on their decision in Grossinger Motorcorp, Inc. v. American National
Bank & Trust Co., (1st Dist. 1992), 240 Ill.App.3d 737, 670 N.E.2d 1337.  In
Grossinger, the Court held that an optional remedy provision, including
liquidated damages in a contract, "which allows defendant to seek actual
damages or alternatively retain the earnest money as liquidated damages is
unenforceable".  Since the concept of liquidated damages requires an
agreement by the parties that the earnest money is to be fixed as the sum
recoverable under the contract in the event of a breach, if a party retains
the ability to reject that remedy and pursue actual damages, how can it be
said that the parties had reached an agreement?  "We reasoned that this
scheme (preserving the option to pursue actual damages while stating an
agreement to be limited to liquidate damages) distorts the very essence of
liquidated damages...The preservation of an option to alternatively seek the
recovery of actual damages reflects that the parties did not have the mutual
intention to stipulate a fixed amount of their liquidated damages...Such a
clause 'is no settlement at all' as it 'permits the seller to have his cake
and eat it too."  Affirming the reasoning in Grossinger, the Court remanded
the case for a finding of actual damages based on the unenforceability of
the liquidated damage judgment in the trial court.

We leave Catholic Charities with the impression  that payment of earnest
money is not a condition precedent to the formation of most contracts, can
be waived by the seller in order to enforce the contract, but a liquidated
damages provision relating to earnest money may not be enforceable if other
remedies are preserved in the contract.



The second, recent  case for real estate practitioners to consider carefully
comes from the 7th Circuit and interprets Indiana law, but is nonetheless
illustrative of an important distinction in contract formation.

2.  REAL ESTATE CONTRACTS: FORMATION, ENVIRONMENTAL AUDIT AND WAIVER:

Although Thomas K. Allen, Jr. v. Cedar Real Estate Group, LLP, (7th Cir.,
January 3, 2001),
http://www.ca7.uscourts.gov.fox.foxweb.exe/Op3?submit1=showop&caseno+99-4090
http://www.ca7.uscourts.gov.fox.foxweb.exe/Op3?submit1=showop&caseno+99-409
0>  , applies the substantive law of Indiana, its discussion relating to the
distinction between a condition precedent to the formation of a real estate
contract versus a condition precedent to performance of the contract, as
well as the issues of waiver of a condition in a contract for one party's
benefit, make it a perfect case to follow Catholic Charities of Archdiocese
of Chicago v. Thorpe.

Allen  made a written offer to Cedar Real Estate Group to purchase a 6.2
acre parcel of land in Lake County, Indiana which had previously been used
as a trucking terminal. The site had five underground storage tanks ranging
in volume from 500 to 10,000 gallons to store fuel.  Four of the largest of
the tanks had been removed and the fifth was left in place, filled with
concrete, and a "closure report" was filed with the State of Indiana. Allan
made his offer on a preprinted form that specified that the property was to
be sold "as is",  and a typewritten page entitled "Further Conditions" was
attached which stated "This offer to purchase is subject to purchaser's
approval of the following:...purchaser's review of the Environmental
Disclosure Document...a current Phase I and Phase II  Environmental Audit with
soil borings...Cost not to exceed $5,000 and to be split on 50/50 basis
between purchaser and seller."  Although the agreement as drafted gave Allen
the right to investigate the environmental contamination, it did not provide
how the discovery would affect his obligation to buy or the seller's
obligation to sell.  Cedar made a minor change in the offer as drafted and
Allen accepted.  The parties then entered into a four month period of audits
and reviews, Cedar taking the position that the sale would be "as is", and
Allen offering to pay as much as half of  the remediation costs.   After a
number of rounds, Cedar informed Allen that it had received three other
offers, and that all buyers were to communicate their "final and best offer"
to Cedar by noon on October 2, 1998.  On October 1, 1998, Allen's attorney
advise Cedar by letter that there was an existing contract between the
parties and than any attempt to breach the agreement "by entering into
agreements of sale with other parties will be resisted." Cedar directed its
Broker to terminate the agreement and return Allen's earnest money.  Allen
indicated that he was ready to close according to the terms of the contract
and that the property would be submitted to the Voluntary Remediation
Program of the Indiana Department of Environmental Management, with the
costs to be forwarded to Cedar.  Allen file suit in Federal District Court
when Cedar did not respond.

The District Court granted summary judgment in favor of Cedar, finding that
Allen's approval of the environmental audit was an unsatisfied condition
precedent o the existence of a contract.  The Court of Appeals affirmed.
Allen's insertion of language that  his "offer to purchase...subject to
purchaser's approval of the following:",  and setting forth the
environmental audit process,  created a condition precedent that needed to
be fulfilled before an enforceable agreement was formed.  The language used
by Allen indicated a clear intent to condition his offer on an acceptable
environmental report.  The Court felt that "Allen's choice of the word
'offer' " in the "Further Conditions" was telling of his intent and the
frame of mind of the parties: "The only reasonable interpretation of this
language is that Allen intended to be able to opt out of the agreement if
the property turned out to be contaminated....The right to order an
environmental audit would be rendered completely meaningless if Allen had an
obligation to  purchase this property regardless of the results."  Allen was
not willing to purchase the property "as is" and the negotiations between
the parties indicates that there was no agreement.  Even  Allen's argument
that the "as is" provision of the contract was meaningless because under
Indiana law a previous owner/operator could not relieve itself of liability
for clean-up was "not relevant" to the decision of the Court. Noting that
there are many reasons a party would not purchase contaminated property even
if the prior owner was responsible, and whether Allen was misinformed about
Indiana law was immaterial, the Court returned to the fact that "Allen
specifically inserted the condition precedent requiring his approval of the
environmental audit into the contract, and now he must accept the
consequences of his decision.".

Finally, turning to the issue of waiver, the Court found that it was
undisputed that Allen never expressly waived the condition of his approval
of the environmental audit. Accordingly, although he had the right to waive
the condition precedent as one solely for his benefit, there was no
indication that he was willing to or did waive.  The condition precedent was
neither waived nor satisfied, and therefore there was no enforceable
contract.

We leave Allen v. Cedar Real Estate with more instruction, (although based
on Indiana law), on waiver of provisions in contracts, and a good factual
analysis to distinguish between conditions precedent to formation of a
contract and precedent to performance of
a contract.



The law of Residential Real Property Disclosure Act litigation, likewise is
a developing area of the law with which real estate practitioners must keep
abreast.  Beginning with Hirsch v. Feuer, (1st Dist., 1998) 234 Ill.Dec. 99,
702 N.E.2d 265, and Woods v. Pence, (3rd Dist., 1999), 236 Ill.Dec. 977, 708
N.E.2d 563, the courts first enunciated that the Act requires the pleading
and proof that the seller had actual knowledge of a defect, and that this
knowledge was an issue of fact for the trial. Then, in Miller v. Bizzell,
(4th Dist., 2000), 726 N.E.2d 175, 244 Ill.Dec. 579, the court held that the
provision of the Act entitling the "prevailing party" to an award of
attorney's fees  applies to both buyers and sellers, and the decision in
King v. Ashbrook, (4th Dist., 2000), 732 N.E.2d 730, 247 Ill.Dec. 675,
establishes that an action under the Act must be filed within one year from
the earlier of the date of possession, occupancy or recording of the deed of
conveyance. The award for the  buyer in the King case, however, was affirmed
on appeal based not upon the Residential Real Property Disclosure Act count,
but upon the count based upon the contract itself.  This distinction between
an action on the contract and an action under the Residential Real Property
Disclosure Act leads nicely to the most recent case examining whether or not
a closing  has to occur in order to support an action under the Act,
Provenzale v. Forister.


3. RESIDENTIAL REAL PROPERTY DISCLOSURE ACT; NO ACTUAL 'TRANSFER' NECESSARY:

There aren't many cases in the appellate  decisions that end with a mandate
that affirms in part, reverses in part, vacates in part, and remands for
further proceedings to the trial court, but just this occurred in Justice
Rapp's decision in the recent case of  Provenzale v. Forister, (2nd Dist.
January 23, 2001), http://www.state.il.us/court/2001/2000108.html, adding to
the accumulating law in the area of post-closing real estate transactional
law and the Illinois Residential Real Estate Disclosure Act.

The Provenzales filed a complaint after their contract to purchase
residential real estate from the Foristers failed to close.  In October,
1994, the Foristers executed a Residential Real Property Disclosure that
stated that the property was not in a flood plain.  It appears that the
Realtor put that disclosure form in the file and held on to it until May ,
1996, when it was given to the Provenzales as prospective purchasers.
(Another fine example of a Realtor following the form but certainly not the
substance of a disclosure law's intent.)  In July, 1996, relying on the
disclosure, the Provenzales entered into a contract for the purchase of the
property.  When and exactly why the transaction did not close isn't clear,
(although there is reference in the opinion to the fact that Mr. and Mrs.
Forister had separate attorneys, and this implies that they may have been
involved in a divorce), but it didn't close, and  after the Provenzales
filed their third amended complaint, the trial court entered an order
dismissing all counts on a mixed 2-615 and 2-619 motion.  The order also
granted Ruth Forister's motion for forfeiture of the earnest money, and
awarded attorneys fees of $30,483.74 and $13,123.25, respectively, to Ruth
Forister and Harold Forister respectively.

As the  pleadings grew in the trial court, there were a number of factual
allegations that Harold Forester knew that the property flooded,  stated so
orally to the Provenzales, and so admitted in filings challenging the
property's tax assessment before the county board.  Nonetheless, the
ultimately successful motion to dismiss at the trial level was based on the
proposition that since there was no transfer, (remember the contract never
closed), there was no violation under the Disclosure Act.  Section 10 of the
Act states that it applies to "any transfer", and therefore Forister argued
that an actual transfer of the property was a necessary element for a cause
of action.  In support, the Foristers noted that the beginning of the one
year statute of limitation period  in Section 60 of the Act ties directly to
the date of possession, occupancy, or recording of  a conveyance - requiring
a "transfer".  Since there could be no limitation on an action without an
actual transfer, they reasoned,  a cause of action must be predicated on the
occurrence of an actual transfer.  The Provenzales, in rebuttal, argued that
the Act requires the sellers deliver the disclosure report prior to the
signing of the contract, imposes obligations irrespective of the actual
transfer, and therefore "the trial court misinterpreted the word 'transfer'
as a verb rather than a noun..."

The Second District opinion begins by adopting the position that if actual
transfer was intended as an element of a cause of action under the Act, the
provisions  requiring the delivery of the disclosure report prior to the
contract becoming effective  would be meaningless because this is a
pre-transfer duty. Additionally, while "ordinarily the buyer discovers the
material defect after the property is conveyed.", the decision notes that
the buyer's remedies under Section 55 of the Act belong to the "prospective
buyer of real property who discovers false information on the disclosure
report before closing the transaction even though the property was never
transferred."  The Court dismisses the enticing argument that using
"transfer" as a measuring date for limitation purposes is meaningless unless
a sale is closed, by noting that even though there is no measuring date for
limitations without closing, the Code of Civil Procedure provides a general
limitation that all civil actions be commenced within five years after the
cause of action accrued, and therefore these types of situations would not
be in limbo indefinitely.

The decision also reiterates  the law that "an individual who casually sells
his or her own single-family home is not subject to liability under the
Consumer Fraud Act",  and chides the mixing of 2-165 and 2-619 motions, and
concludes by reversing the award of earnest money and attorneys fees.

Accordingly, we are left with the law requiring the filing within 1 year of
the date of possession, occupancy or recording under King's interpretation
of the Residential Real Property Disclosure Act,  but, if there is no
"transfer" of possession, occupancy or recording, the Provenzale case
appears to give the buyer five years to bring an action under the Civil
Practice Act in an action based on the contract.

These then are the "rope" of the developing case law by which practitioners
in the area of residential real estate may either hang themselves or be
pulled to safety; it's a matter of knowing the "rope" and putting it to the
right use.