The Appellate Court of Illinois, Second District, recently reversed a trial court’s order appointing a receiver as to a portion of real estate collateral being foreclosed by a mortgagee.
In so holding, the Appellate Court found that the entire property, and not only the dwelling portion, constituted “residential property” under the Illinois Mortgage Foreclosure Law, and the property’s multipurpose use did not affect the categorization as residential real estate.
Because the Court found that the property constituted residential real estate, the borrowers had a presumptive right to possession, while also giving the mortgagee an opportunity to rebut the presumption.
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/2ndDistrict/2140399.pdf.
The property at issue was primarily used as farmland. The produce grown on the farmland was either consumed by the borrowers or donated. There was only one building on the property.
The borrowers used the building for various purposes. They operated a bakery out of the first floor and used the property to maintain tractors and other vehicles. Finally, the building contains a 750-square-foot apartment, which the borrowers used as their primary residence at all times relevant to this case.
In 2010, the borrowers defaulted on their mortgage, and the mortgagee initiated foreclosure proceedings. The mortgagee also moved for the appointment of a receiver, which the trial court granted.
The trial court granted the motion as to all portions of the property except for the living quarters, or “dwelling unit,” in which the borrowers maintained their primary residence. The trial court’s decision was based on its finding that the majority of the property (excepting the dwelling unit) was nonresidential real estate.
The borrowers appealed the trial court’s ruling.
The borrowers challenged the trial court’s interpretation of the statutory term “residential real estate.” They argued that the Illinois foreclosure statute instructs that the entire property, not just the dwelling unit, should be classified as residential real estate. Therefore, the borrowers asserted, they enjoy a presumptive right of possession.
The borrowers requested that the Appellate Court remand the cause to the trial court in order that mortgagee may seek to rebut the borrowers’ presumptive right to possession or, otherwise, concede possession to the borrowers.
The Appellate Court agreed that the Illinois foreclosure statute defines the entire property as residential real estate, because the statutory condition that would limit the residential status of the property to the dwelling unit had not been met.
As you may recall, under Illinois law, whether a presumptive right to possession belongs to the mortgagor or the mortgagee depends upon the property’s classification. 735 ILCS 5/15-1701. If the property is classified as residential real estate, the presumptive right to possession belongs to the mortgagor. Id.
If the mortgagee seeks possession, it must establish: (1) good cause to possess the property despite the presumption; (2) authorization by the terms of the mortgage agreement that it may do so; and (3) a reasonable probability of prevailing on a final hearing of the cause. Id. If the property is classified as nonresidential real estate, the presumptive right to possession belongs to the mortgagee. 735 ILCS 5/15-1701(b)(2). If the mortgagee is entitled to possession and requests a receiver, the court shall appoint one. 735 ILCS 5/15-1702(a).
Section 15-1219 of the Illinois Code of Civil Procedure defines “residential real estate” as meaning:
“[A]ny real estate, except a single tract of agricultural real estate consisting of more than 40 acres, which is improved with a single family residence or residential condominium units or a multiple dwelling structure containing single family dwelling units for six or fewer families living independently of each other, which residence, or at least one of which condominium or dwelling units, is occupied as a principal residence either[:] (i) if a mortgagor is an individual, by that mortgagor, that mortgagor’s spouse[,] or mortgagor’s descendants, or (ii) if a mortgagor is a trustee of a trust or an executor or administrator of an estate, by a beneficiary of that trust or estate or by such beneficiary’s spouse or descendants[,] or (iii) if a mortgagor is a corporation, by persons owning collectively at least 50 percent of the shares of voting stock of such corporation or by a spouse or descendants of such persons. The use of a portion of residential real estate for non-residential purposes shall not affect the characterization of such real estate as residential real estate.”
735 ILCS 5/15-1219.
Section 15-1701(b)(1) limits the above definition of “residential real estate” for the purposes of establishing the presumptive right to possession, and the accompanying right to have a receiver appointed. It states that “[i]f the residential real estate consists of more than one dwelling unit, then for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by persons described in clauses (i), (ii)[,] and (iii) of Section 15-1219.” 735 ILCS 5/15-1701(b)(1).
The Appellate Court next looked to section 15-1202.5 of the Code, which defines a “dwelling unit” as: “For the purposes of [inter alia, section 15-1701], ‘dwelling unit’ means a room or suite of rooms providing complete, independent living facilities for at least one person, including permanent provisions for sanitation, cooking, eating, sleeping, and other activities routinely associated with daily life.” 735 ILCS 5/15-1202.5 (West 2012).
The parties disagreed as to how the above-quoted provisions should be harmonized to classify the instant property. Again, section 15-1219 essentially states that, so long as the property includes a qualifying residence, the entire property is classified as residential; “[t]he use of a portion of residential real estate for non-residential purposes shall not affect the characterization of such real estate as residential real estate.” 735 ILCS 5/15-1219.
Section 15-1701(b)(1), however, places a limitation on section 15-1219’s broad definition of “residential real estate” for the purposes of creating the presumptive right to possession in foreclosure actions. That limitation states that, where the property contains more than one dwelling unit, only the dwelling unit in which the mortgagor maintains his or her primary residence will qualify as residential real estate so as to provide the mortgagor with the presumptive right to possession.
The Appellate Court agreed with the borrowers that the section 15-1701(b)(1) limitation was not invoked, because the Appellate Court held that the statutory requirement that there be more than one dwelling unit on the property was not met (“[i]f the residential real estate consists of more than one dwelling unit, then for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by [the mortgagor]” (735 ILCS 5/15-1701(b)(1)).
The Court acknowledged that there is only one dwelling unit on the property. The property is improved with a large building that, in addition to the one dwelling unit in which the borrowers live, contains a show room, meeting rooms, and a maintenance area and is used for various ventures such as a bakery and a vehicle service area. According to the Appellate Court, none of these improvements showed the existence of more than one dwelling unit, equipped for independent living purposes, as statutorily required.
The Court also recognized that the mortgagee appeared to concede that the property has been improved with a qualifying structure—the residence in which the borrowers live—to make (in its view, at least a portion of) the property residential for the purposes of section 15-1219 cooking, eating, sleeping, and other activities routinely associated with daily life.” 735 ILCS 5/15-1202.5. The Court noted that no person aside from the borrowers lives on the property, and they live in the property’s only dwelling unit.
The improvements within the building to which mortgagee referred—the show room, the meeting rooms, the maintenance area—demonstrate that the property was used for purposes other than residential. However, the Court returned to the plain language of section 15-1701(b)(1) conditions the limitation (on what can qualify as residential real estate so as to provide the mortgagor with the presumptive right to possession) on the presence of more than one dwelling unit, not more than one use.
The Court noted that the Illinois legislature expressly defined “dwelling unit.” Moreover, the Court noted that the legislature expressly directed that its definition of “dwelling unit” be applied when considering whether section 15-1701 operates to limit the portion of residential real estate over which the mortgagor is given the presumptive right to possession.
There was only evidence of one dwelling unit. Therefore, per section 15-1701(b)(1), the condition limiting the definition of “residential real estate” to the unit occupied by the mortgagor did not apply. Rather, the general definition of residential real estate controls and, again, that definition states that “[t]he use of a portion of residential real estate for non-residential purposes shall not affect the characterization of such real estate as residential real estate.” 735 ILCS 5/15-1219.
Per the general definition of residential real estate, the property’s multipurpose use does “not affect” the categorization as residential real estate, and, accordingly, the entire property is residential real estate.
Where the entire property is residential real estate, the mortgagor has the presumptive right to possession. Because the Appellate Court held that the property here is residential real estate, the borrowers have the presumptive right to possession, and the mortgagee has the burden of establishing that: (1) it has good cause to possess the property despite the presumption; (2) there is authorization by the terms of the mortgage agreement that it may do so; and (3) it has a reasonable probability of prevailing on a final hearing of the cause. See 735 ILCS 5/15-1701(b)(1).
The mortgagee’s main argument, with which the trial court appears to have agreed, is that section 15-1701(b)(1)’s controlling phrase is “for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by [the mortgagor].” 735 ILCS 5/15-1701(b)(1) (West 2012). In the mortgagee’s view, this narrow phrase should control over the general definition of residential real estate set forth in section 15-1219. However, as discussed by the Court, the mortgagee’s desired reading does not account for the conditional “if” (i.e., “[i]f the residential real estate contains more than one dwelling unit, then for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by [the mortgagor]”).
Therefore, the Appellate Court rejected the mortgagee’s assertion that the latter portion of section 15-1701(b)(1) may be read in isolation so as to control the outcome of this case.
The mortgagee next argued, for the first time on appeal, that, in any case, there is more than one dwelling unit on the property. The court summarily rejected that argument.
Accordingly, the Court reversed the trial court’s ruling and remanded.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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