Insights

It is no secret that local municipalities have been hit hard by the economic recession that started in 2007 and swept like a slow-motion tsunami over communities across the country. As homeowners lost their jobs, they fell behind on their mortgage payments, eventually abandoning their largest asset when it became clear they could never catch up. The sharp increase in the number of foreclosures – coupled with irregularities in the foreclosure process that created logjams in courts of justice – resulted in scads of properties sitting vacant and unkempt, creating a burden on communities being asked to maintain those properties in an era of dwindling budgets and tax bases.

Chicago, like most major municipalities, has felt this burden heavily. And Chicago, like most major cities, has a housing code that requires owners of properties to maintain those properties in accordance with appropriate standards of habitability. Recently, Chicago enacted an ordinance to expand the definition of “owner” in the housing code to include executors, administrators, managers, guardians, trustees, and mortgagees. This change allows the city to hold banks responsible for vacant homes before the foreclosure process results in a change of legal ownership, a good move for communities because it allows those communities to require someone with an interest in the property to secure the property safely. Vacant houses have long posed a problem for municipalities, as they attract crime and other nuisances and generally contribute to the decline of communities.

The ordinance passed the City Council unanimously. In a statement applauding the ordinance, newly elected Mayor Rahm Emanuel stated that “[w]ith this ordinance, Chicago is leading the way in protecting residents, neighborhoods, and communities from the devastating impact of foreclosures.”

According to the mayor’s press statement, the city spent more than $15 million to deal with vacant buildings in 2010. Specifically, the Department of Buildings demolished or boarded up more than 500 buildings at a cost of $13.7 million, and the Department of Streets and Sanitation performed general upkeep on 1,963 vacant properties and demolished 345 vacant garages at a cost of $1.8 million. The ordinance requires mortgagees to implement routine maintenance on properties such as boarding entrances to a building, responding to complaints related to the building, cutting grass, and shoveling snow.

Banks opposed the ordinance, arguing that they should not be held responsible for properties they do not yet own, citing potential unconstitutionality. Richard Gottlieb, chair of Dykema’s Financial Industry Group, said the ordinance requirements are overly broad because the ordinance isn’t narrowly tailored enough to meet a legitimate government interest without violating the rights of lenders that may be listed as mortgagees on properties, but are not the official owners of title.

The Chicago ordinance that makes it clear that “owner” includes entities with a security interest in the property is not a new concept; other smaller municipalities have adopted similar legislation in the past. Additionally, municipalities in other jurisdictions, including Baltimore City, have gone after entities with security interests in properties for years, relying on a theory of “equitable ownership.” This theory acknowledges that although the bank is not the legal owner, it has an interest in the property as indicated by its security interest. In code enforcement cases, city attorneys have required such secured parties to release their security interests in exchange for dropping code enforcement cases.

Municipalities will continue to grapple with these kinds of solutions to their economic pain as they work through the vacant properties plaguing their communities.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com.