Recently, the Illinois legislature passed two new laws that could affect real estate development. One involves the ability of banks to seek to subordinate mechanics liens and the other concerns the ability to sue condominium developers.
As many people in the construction industry may recall, the Illinois legislature recently amended the Mechanics Lien Act in order to eliminate the construction lender’s right to a shared security interest in the value added to a property by an improvement constructed on the property. In response, lenders sought new ways to protect their security interests for advances made to pay for the construction of improvements. One option was to seek an agreement from the contractors on the project to subordinate their mechanics lien interests to the security interest of the lender in the property and the improvements.
This option, however, was recently limited by an amendment to Section 1 of the Illinois Mechanics Lien Act. Effective July 16, 2014, any agreement to subordinate a mechanics lien is deemed to be against public policy unless the agreement to subordinate the lien is made after 50% of the construction loan has been disbursed to fund the improvements to the property. The likelihood that a contractor will agree to subordinate its mechanics lien interest at that point in the project is remote and, thus, lenders should proceed carefully.
With regard to the second issue, the Illinois legislature is seeking to make it harder for a condominium developer to limit the ability of a condominium board to seek redress against the original developer. Prior to the change, which takes effect January 1, 2015, a condominium developer could require the consent of a large majority of the unit owners, or require mediation and arbitration, before the board could file suit against the developer. Proceeding against the developer under such clauses is difficult, as oftentimes the developer owns enough units to block any consent before the statute of limitations on the claim expires or the process is cost ineffective.
The amendment to the Illinois Condominium Act, Section 18.8, dictates that any provision requiring the consent of unit owners before the board of managers can take any action, including the institution of a court proceeding, is void as against public policy. In addition, requiring the board of managers to arbitrate or mediate a dispute with the developer or the declarants under the condominium instruments before it can file suit is also void as against public policy.