Lenders and Loan Servicers Take Note: You Must Now Secure and Maintain Vacant Buildings Under New Chicago Ordinance

On July 28, 2011, the Chicago City Council amended an existing ordinance to compel lenders, loan servicers and their agents to secure and maintain vacant buildings in Chicago. Formerly, this requirement applied only to property owners. The recent amendment, which is expected to go into effect September 18, redefines "owner" to include the following:

• Lenders holding a mortgage against the vacant building
• Loan servicers servicing loans for those lenders
• Other agents working for those lenders or servicers

(Note: For simplicity, the term "lenders" collectively refers to lenders, loan servicers and their agents.)

This amendment imposes extensive—and expensive—new legal duties on lenders, including strict financial penalties for those that fail to comply. Among other things, lenders must:

• Register each vacant building with the City of Chicago;
• Pay a registration fee for each property;
• Secure and maintain each property;
• Insure each property; and
• Post a surety bond with the City of Chicago

If city officials consider a vacant building to be "unsafe or dangerous," they may impose the following fines on a lender with a mortgage against that property, as well as the servicers and agents working with the lender:

• Up to $1,000 per day, until the building is repaired or knocked down
• $5,000 per day if city officials consider the vacant building a "public nuisance"

As a result, lenders face a difficult dilemma: in order to comply with this amendment, they must also trespass on the borrower's property. Under the amendment, lenders face fines if they leave a mortgaged building vacant, unsafe, dangerous or as a public nuisance. But because lenders don't actually own these buildings, they have no right under Illinois law to enter, repair or demolish them. Therefore, taking any of these actions before the lender has an order of possession or a post-foreclosure sheriff's deed is trespassing—a criminal offense and a tort that may entitle a borrower to damages.

Compounding the lender's dilemma, while a property may appear vacant or abandoned, often it is not. Even if the borrower is not residing in or occupying the building, it may still be monitoring the property and will likely insist that the building has not been abandoned. Subsection (e) of the ordinance further complicates matters with the following definition: "…a residential property shall not be deemed vacant if it has been used as a residence by a person entitled to possession for a period of at least three months within the previous nine months and a person entitled to possession intends to resume residing at the property…"

In effect, this confusing definition obliges lenders to hire an inspector to determine whether a property otherwise believed to be vacant is currently being "used as a residence." If it is not, they must then determine whether it was a residence within the last nine months, and whether it has been used as a residence for at least three of those months. Complicating things even more, Subsection (e) fails to identify which three of the last nine months are relevant. For example, can it be any three of the nine, or must those three months be consecutive? And then the lender must consult a lawyer to identify whether someone using the building for three of the last nine months was "entitled to possession."

Not surprisingly, this amendment has aroused intense controversy. Critics contend that it will raise fees and interest rates for loans secured by Chicago buildings. Lenders, they observe, will need to charge more for the increased risk and cost of loans secured by Chicago buildings. And those costs will include higher fees that loan servicers will charge to defray their own costs from exposure to fines under the ordinance, as well as trespass claims by borrowers, tenants and others. Some critics even suggest that originating lenders will suspend making loans secured by Chicago buildings and the secondary market will shun those loans, further prompting higher fees and interest rates. To the chagrin of property owners and tax authorities alike, the limited purchase money and refinancing loans that are available will likely be insufficient to promote a robust recovery in the Chicago real estate market or an upward trend in home values.

Although some critics have suggested judicial challenges to enjoin the City of Chicago from enforcing this amendment, others have called for less costly, less controversial alternatives. For example, accelerated court procedures would allow lenders to rapidly get an order of possession for, appoint a property receiver for, and foreclose against a vacant Chicago building.

For lenders, loan servicers and their agents, one thing is clear regarding mortgaged property in Chicago. The amended ordinance creates new—and potentially costly—requirements regarding vacant buildings, with real repercussions for noncompliance. If you have questions or concerns about what the amendment means for you, contact one of the authors or your Much Shelist attorney.