The Village Administrator calls to tell you that the Village has been named a defendant in a mortgage foreclosure suit. Like with most foreclosure suits, some lender is seeking to be repaid through the foreclosure and sale of real property that has been used as collateral. However, with this particular suit, the lender also is seeking to foreclose on all of the Village’s interests and rights in the property, which the Village acquired pursuant to an annexation agreement. The question presented – – whether the terms of the annexation agreement survive the foreclosure?
As an initial matter, this question exposes a conflict in basic principles of law concerning foreclosure and annexation agreements. Below, after outlining the lender’s possible arguments in favor of foreclosure and a municipality’s potential argument against foreclosure, we conclude that the courts should not permit the foreclosure of annexation agreements. However, in light of the conflicting principles of law, we also suggest language for annexation agreements in an attempt to resolve this conflict.
- The Lender’s Position
Pointing to well-settled Illinois common law, the lender confronted with an annexation agreement may argue that at the mortgage foreclosure sale a purchaser acquires the title to property which the mortgagor had at the time that the mortgage was executed. In 1954, the Illinois Supreme Court outlined basic mortgage foreclosure principles which prevail today:
The title acquired by the grantee in the Master’s deed relates back to the execution of the mortgage and the purchase takes the title then existing in the mortgagor divested of sales, liens or leases subsequently made by the mortgagor or those claiming under him . . . Where a party acquires title to land under the foreclosure of a mortgage, it will relate back to the date of the mortgage so as to cut-off intervening equities and rights. . . The mortgage is not affected by the act of the mortgagor in passing any right of his in the premises to third persons, whether by deed or by confession of judgment or otherwise. He cannot bind the mortgagee by any contract or deed prejudicial to this title.
The lender will argue that according to Kling, if an owner or developer executes a mortgage using as collateral a piece of property which later becomes subject to an annexation agreement and, at a later date, the bank forecloses on this property, the purchaser at a foreclosure sale should take title free and clear of the annexation agreement. The principle of law espoused in Kling, however, conflicts with the express language of the Illinois Municipal Code and runs afoul of public policy concerning annexation agreements.
 Kling v. Ghilarducci, 3 Ill.2d 454, 121 N.E.2d 752 (1954).
- The Municipality’s Position
Even though the lender’s argument is supported by common law, courts should reject it for two reasons: (1) the express language of the Illinois Municipal Code and (2) public policy behind annexation agreements.
As an initial matter, Illinois courts have held that the comprehensive statutory scheme provided by the Municipal Code trumps the common law. The Municipal Code provides that annexation agreements “shall be valid and binding for a period of not to exceed 20 years from the date of execution” and “shall be binding upon the successor owners of record of land…” Based on this unambiguous statutory language alone, it can be argued that a lender should not be permitted to foreclose on an annexation agreement, even if the agreement was executed after the mortgage.
Indeed, in the only published case involving the foreclosure of an annexation agreement, the First District Court of Appeals held that the statutory requirement that annexation agreements “shall be binding upon the successor owners of record of the land” includes successor owners who purchase the land pursuant to foreclosure. Although the lender might argue that the holding of the Village of Orland Park should be limited to instances where the execution of the annexation agreement precedes the execution of the mortgage, the Village of Orland Park Court’s reasoning provides insight as to why the timing of the execution of the mortgage is irrelevant.
It can be argued that because of the important governmental purposes served by annexation agreements, no exceptions as to their enforceability should be made. Through the use of annexation agreements, the Illinois Municipal Code provides municipalities with an excellent tool for uniform, economical, and fair municipal development. As the Village of Orland Park Court noted, annexation agreements:
 It should be noted that the Kling holdings would not address the circumstances where the execution of the annexation agreement preceded the execution of the mortgage.
 People v. Gersch, 135 Ill.2d 382, 395, 553 N.E.2d 281, 286 (1990).
 65 ILCS 5/11-15.1-1.
 65 ILCS 5/11-15.1-4.
 Village of Orland Park v. First Federal Sav. and Loan Ass’n. of Chicago, 135 Ill.App.3d 520, 527-28, 481 N.E.2d 946, 951 (1st Dist. 1985).
further important governmental purposes, such as the encouragement of expanding urban areas and to do so uniformly, economically, efficiently and fairly, with optimum provisions made for the establishment of land use controls and necessary municipal improvements including streets, water, sewer systems, schools, parks, and similar installations. This approach also discourages fragmentation and proliferation of special districts. Additional positive effects of such agreements include controls over health, sanitation, fire prevention and police protection, which are vital to governing communities.
Practically speaking, even if a court were to consider foreclosing on an annexation agreement, it is difficult to determine how the court would unravel all of the terms of the annexation agreement. For example, if the annexation agreement is foreclosed is the land then automatically de-annexed? Through a foreclosure proceeding would the zoning change, thus possibly permitting inconsistent zoning for adjacent parcels? Furthermore, would municipalities, school districts, park districts and fire protection districts be required to give back land already dedicated pursuant to the annexation agreement?
There is no disputing that in providing the ability for uniform and comprehensive urban development, the Municipal Code’s provisions concerning annexation agreements serve an important public policy. Annexation agreements allow municipalities to control development in exchange for providing owners and developers the use of essential municipal services. Foreclosure of the agreements could result in a limitation on municipal control over future development in an area. In addition, foreclosing an annexation agreement may present a municipality and its residents with huge financial burdens related to the expansion of municipal services, without the subsequent benefits of well planned and well financed development.
Thus, the express language of the Municipal Code and public policy weigh in favor of a court finding that all subsequent owners of annexed land are subject to an annexation agreement, regardless of how they came into possession.
 135 Ill.App.3d at 526, 481 N.E.2d at 950.
III. Practice Tips for the Municipal Attorney
Although it is our final analysis that lenders should not be permitted to foreclose on annexation agreements, no published case law exists that unequivocally supports this finding in all instances. Therefore, as a practical matter, the authors suggest that municipalities consider adding language to annexation agreements requiring owners and developers to affirmatively state that no mortgages or other security interests affecting title exist. Alternatively, if a mortgage or security interest does exist, the annexation agreement should require written approval of any mortgagee or lien holder that the annexation agreement is superior to such interest. Some possible language might include:
Owners and Developer shall provide Village with written approval(s) satisfactory to the Village of any mortgagee, lien holder or holder of any security interest, affecting title to the Subject Property or any part thereof so that this Agreement shall be superior to any such mortgage, lien, or other security interest and Owners and Developer shall provide same to the Village prior to execution and recording of this Agreement; and
If there are no mortgages, liens, or other security interests affecting title to the Subject Property or any part thereof, then Owners and Developer shall affirmatively state so in said petition(s) for Annexation.
Consistent with the current state of the law regarding the foreclosure of annexation agreements, there is no guaranty that this language is litigation proof. However, with the approval of all parties with an interest in the annexed property, this language arguably closes the door on the argument that the lender had a prior right to clear title to the property.