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Water and wastewater utilities should be careful in the manner by which they acquire mains and facilities from developers or other utilities.
A developer constructed an apartment project on a parcel of land. It also constructed a private sewer line to provide wastewater service for the project. Approximately 90 percent of the sewer line is off-site. Subsequently, the apartment project was sold, apparently without any expressed conveyance of the off-site sewer main.
The developer sued the current owner of the project to recover unpaid fees for use of the off-site sewer main. The owner counterclaimed, asserting that when it acquired the apartment project it also acquired the off-site sewer main.
The trial court held for the current owner. The developer appealed, contending that the current owner acquired only the on-site sewer main. The Appellate Court reversed the trial court, holding that the off-site main did not pass to the current owner. Dimucci Home Builders, Inc. v. Metropolitan Life Insurance Company, 728 N.E. 2d 749 (1st Dist. 2000).
The current owner argued that the off-site main was conveyed to it as an "appurtenance" to the apartment project. An appurtenance is a right or privilege incidental to property conveyed. Upon "conveyance of property the law implies a grant of all incidents rightfully belonging to that property and which are essential to the full and perfect enjoyment of the property." Bishop v. Village of Brookfield, 99 Ill. App. 3d 483, 490 (1981). The current owner argued that the off-site sewer main is essential to the full and perfect enjoyment of the project and, therefore, was conveyed to it.
The Appellate Court found dispositive a prior decision in McPeak v. Thorell, 148 Ill. App. 3d 430 (1986). Thorell sold townhouses as condominium units and charged unit purchasers fees for water and sewer services he was providing. The unit owners sued, arguing that the off-site water and sewer system was an appurtenance transferred to them along with their units.
The Appellate Court in McPeak held that Thorell retained ownership of the water and sewer system, finding that when real property is transferred by deed, only the buildings and appurtenances located thereon are conveyed.
The court determined that the property on which the sewer and water system was located was not sufficiently described as being conveyed in any instrument and, thus, that the water and sewer system did not pass to the unit owners." 728 N.E. 2d at 751.
The Appellate Court in Dimucci relied on McPeak to reject the current owner’s claim. "McPeak holds that a sewer line is only appurtenant to the property on which it is located. Here, the off-site sewer line is located outside the [apartment project] and, thus, it is not appurtenant thereto." 728 N.E. 2d at 751.
An earlier case with a different twist is National Boulevard Bank v. Citizens Utilities Company of Illinois, 107 Ill. App. 3d 992 (1 Dist. 1982). The developer of a large apartment project constructed both on-site and off-site water and sewer lines. The off-site sewer main was 23 feet in length. In 1965, the developer made a written request to a public utility company to provide water and sewer service to the project. The developer granted an easement to the utility and also provided lien waivers. In 1970, the utility paid a refund to the developer of a portion of the cost of the mains, per an oral main extension agreement. Throughout the time period, the developer paid the utility’s billings for water and sewer service.
The project was sold to new owners in 1975, who refused to pay the utility’s sewer billings. The new owners sued for a judgment that they owned both the on-site and off-site sewer mains. They did not contest ownership of the water mains.
The Appellate Court held that both the off-site and on-site sewer mains were fixtures, and therefore, real property. "All of the sewer mains here are clearly annexed to, indeed buried in, the plaintiffs’ property and were installed for the use of the freehold. Under such circumstances, there is a presumption that they are real property and the burden is on the person claiming they are personal property to show that they were not intended to be permanently annexed to the freehold but only to be personal property." 107 Ill. App. 3d 1002.
The Appellate Court went on to say that "there is no evidence that the developer did not intend the mains to be a part of the property; to the contrary, the mains were constructed for the permanent use of the residents of the development. When annexations are made by the owner they are presumed to be made with the design of their permanent enjoyment with the realty. . . . Whether the mains are real or personal property is relevant since in general title to real estate cannot be transferred by parol but can only be transferred by a writing." Id. at 1002.
National Boulevard Bank decision had further implications for the utility. The Illinois Commerce Commission ordered the utility to refund all of the current owner’s payments of sewer service billings from 1975 to 1982, with interest. On appeal, the Appellate Court affirmed, reiterating that the utility had not rendered sewer service since it did not own the sewer mains. Citizens Utilities Company of Illinois v. Illinois Commerce Commission, 157 Ill. App. 3d 201 (1st Dist. 1987).
As confusing as they may be, these decisions illustrate risks that may exist for a water or wastewater utility that seeks to acquire mains or other facilities from a developer or another utility. Clearly, proper documentation of the intended transfer is essential. In the case of an off-site main extension being constructed by a developer, there should be a written main extension agreement that identifies the mains to be constructed and conveyed to the utility. Additional documentation such as a bill of sale, deed and lien waivers should be provided.
One of the more fuzzy issues often is whether on-site mains are to be conveyed to a utility. In some instances, a utility may not want ownership of on-site facilities, particularly where access may be limited or where units are not direct metered. The written main extension agreement should be explicit as to the intent of the parties as to on-site mains.
Finally, there is substantial consolidation occurring in the water and wastewater industry. In the case of asset purchases, utilities should be careful to determine whether facilities are personal property or real property and to acquire title by appropriate documents of transfer. For example, a wastewater treatment plant may be transferable by a deed to the underlying real estate, whereas the collection system may be viewed as personal property transferable by bill of sale.
The cases discussed also illustrate the wisdom of legal research and advice even in the most mundane appearing asset acquisition transaction.
About the Author:
Dan Kucera is a partner in the law firm of Chapman and Cutler, 111 W. Monroe St., Chicago, Illinois 60603–4080, (312) 845–3000.