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Revisiting Inquiry Notice

By D. Albert Daspin
July 28, 2006

A recent Illinois Appellate Court decision should lead to increased underwriting and due diligence inquiries by purchasers (and title insurers) of shopping center outparcels (that is smaller parcels at the center's perimeter that the shopping center owner intends to sell or lease for high-traffic uses) and may redefine appropriate inquiry notice throughout the retail industry. In Murray's Discount Auto Stores, Inc. v. USRP Texas, L.P. and First American Bank, Case No. 1-02-3434, the Appel-late Court of Illinois, First Judicial District, held that the purchaser of a shopping center outparcel had knowledge of facts sufficient to put it on inquiry notice as to the existence of a no-build restriction contained in an unrecorded lease at adjacent shopping center property. In so doing, the appellate court sent a loud and clear message that shopping center easement rights and restrictions will be exalted at the expense of buyers who fail to take additional due diligence inquires that may be warranted under the circumstances.

In Murray's Discount Auto, plaintiff Murray's Discount Auto Stores, Inc. ('Murray's'), succeeded to the interest of Trak Auto Corporation, as tenant, pursuant to a lease agreement dated November 1995 (the 'Lease') between the original shopping center developer and Trak Auto Corporation, a memorandum of which was recorded against the shopping center property in June 1996. A lease assignment and assumption was executed in connection with the bankruptcy of Trak Auto Corporation and was approved by the bankruptcy court in January 2002. The Lease included a so-called no-build restriction pursuant to which 'no buildings, kiosks or building type structures' were to be constructed within the designated 'Protected Area.' Subsequent to the initial demise of the leased premises, the shopping center property was conveyed on two separate occasions, the last of which occurred in 1999. Sandwiched between the separate sale transactions, the shopping center owner conveyed an outparcel to American Chartered Bank and, as part of such outparcel sale transaction, the parties entered into a reciprocal easement agreement pursuant to which certain reciprocal easement grants and rights were established. In July 2001, American Chartered Bank conveyed the outparcel to First American Bank, and as part of such transaction, the parties amended the original reciprocal easement agreement.

The outparcel was located at the corner of the shopping center adjacent to the leased premises. Shortly after Murray's took possession of the leased premises, First American Bank commenced construction of a branch banking facility on the outparcel. Murray's filed suit to enjoin construction based upon interference with the easement rights in the common areas demised pursuant to the Lease, specifically claiming that First American Bank constructed a retaining wall that entered a portion of the Protected Area in violation of the Lease and that First American Bank intentionally interfered with Murray's easement rights.

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