November 16, 2015 (Originally Published October 2, 2015)

In Illinois, no particular notice to the mortgagor is required before commencing a mortgage foreclosure suit relating to commercial property and many of the rules intended to help keep homeowners in their homes do not apply. But what about the odd situation where an otherwise commercial property is used by the mortgagor as a primary residence? In a cautionary tale for foreclosing lenders, the Appellate Court of Illinois, First District, in Banco Popular North America v. Gizynski, 2015 IL App (1st) 142871, recently held that where an individual mortgagor utilizes a commercial property as his or her principal residence, the lender is required to provide the mortgagor with the notices required under the Illinois Mortgage Foreclosure Law (IMFL) governing residential foreclosures. Thus, even if the mortgaged real estate was never intended to be utilized as a residence or has commercial characteristics, a lender will not be saved from the IMFL’s residential notice requirements.

In Gizynski, while the mortgagor listed the address of the mortgaged property in the Gizynski case as his residence, the property was comprised of a total of four buildings, three of which were used for strictly commercial purposes. Given this, Banco Popular North America filed its mortgage foreclosure complaint as a commercial foreclosure and without providing the mortgagor any of the notices required by the IMFL for residential foreclosures. The bank subsequently filed a motion to appoint a receiver for the mortgaged property, which identified the building that the mortgagor resided in as having a storage/warehouse area in the back, with two floors built as offices with kitchen areas that were currently occupied as residences.

Gizynski filed a motion to dismiss the bank’s complaint, claiming that the mortgaged property met the statutory definition of “residential real estate” contained in section 15-1219 of the IMFL, and therefore, no foreclosure action could be instituted without the bank first mailing the notice required by the IMFL. The IMFL’s definition of “residential real estate” includes structures with six or fewer “single family dwelling units,” where one of the units is occupied by the mortgagor as his principal residence. In support of his argument, Gizynski submitted a total of nine affidavits, including four from other residential occupants of the building and business owners who leased office space in the building. In addition, Gizynski also submitted documents from the tax assessor’s office showing that his homeowner’s exemption had been applied to the subject property.

The trial court found Gizynski’s arguments unpersuasive no fewer than five times when it (1) granted the bank’s motion to appoint a receiver, finding that the property was commercial; (2) denied Gizynski’s motion to dismiss; (3) denied Gizynski’s motion to vacate all orders and dismiss for lack of subject matter jurisdiction; (4) denied Gizynski’s motion for summary judgment; and (5) granted the bank’s motion for summary judgment.

On appeal, the bank argued that the presence of the two nonresidential units prevented the subject property from being considered residential real estate. The appellate court noted that the purpose of the IMFL was to “provide owners of single-family, owner-occupied properties an additional last minute escape valve to rescue their mortgages before the lender files a suit under the [IMFL].” The court cited the various notice requirements lenders had to comply with in cases involving residential foreclosure, particularly the 30-day grace period notice proscribed by section 15-1502 of the IMFL. The court also interpreted the IMFL to define “residential real estate” as being “a structure with six or fewer single family dwelling units, where one of the units is occupied by the mortgagor as his principal residence.”

The court determined that because there were no cases interpreting the term “single family dwelling unit” for purposes of section 15-1219 of the IMFL, “the court must determine how the property is being used.” The court emphasized the following undisputed facts: (1) Gizynski’s property had a total of seven units in the four buildings; (2) at the time of the foreclosure the current and intended use of five of the seven units were as residences; (3) several units had facilities for sanitation and food preparation; (4) the units were being rented to single families as residences or “single family dwelling units”; and (5) two of the seven units did not have such facilities and were leased to businesses as offices.

The court ultimately sided with Gizynski, rejecting the bank’s contention that because a property contained a mix of residential and commercial units it should be considered commercial. “[T]he court does not look at the total project of a multiple-dwelling structure to determine the character of the property for the purposes of determining whether a statutory notice is required.”1 Accordingly, the court reversed the trial court’s grant of summary judgment and remanded the case back to the trial court for further proceedings consistent with its opinion, the practical effect of which is likely the unwinding of the entire mortgage foreclosure and sale.

Gizynski makes clear that Illinois courts are willing to take a hard line to ensure that the mandates of the IMFL relating to owners of single-family, owner-occupied properties are strictly complied with. Lenders are well advised to follow the analysis set forth by the appellate court: “The court looks at the multiple-dwelling structure and first determines whether it contains single-family dwelling units for six or fewer families living independently of each other. The court then determines how only the units are being used and if one unit is being used as a single-family dwelling the unit, the occupant of that unit is entitled to the protections provided to mortgagors of residential real estate by the [IMFL].”2

Lenders should also consider reviewing public records and tax information in order to discern if a property in question is listed as the mortgagor’s primary residence. In addition, lenders should require and keep accurate records of all leases for the property. Where a mortgagor lists a commercial property as their residence, it may be helpful to conduct a “presuit” check to determine if the mortgagee is indeed occupying the premises. The relatively minimal cost of such preventative measures certainly outweighs the alternative — having to recommence an errantly filed commercial foreclosure case and send the notice required by the IMFL. Such an unwinding, besides resulting in a significant delay, could result in the lender having to fund an improperly appointed receiver, the refiling of the complaint, the reissuance of summons and the reservice of the complaint.

  1. 1 Id. at 54.
  2. Id.

This article is republished with permission.

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