New contract-for-deed legislation passed in the last session of the Minnesota Legislature empowers consumers to make more informed home purchase decisions, requiring disclosures by certain “serial” contract-for-deed sellers and amending the injunction statute as regards cancellation of contracts for deed.
The 2013 Minnesota legislature has passed a new contract-for-deed disclosure statute applicable to sellers who frequently sell residential real estate on contracts for deed.1 The new legislation, which applies only to residential contracts for deed involving a serial contract-for-deed seller and an unrepresented purchaser, will not affect most contracts for deed.
A companion provision amending the existing contract-for-deed injunction statute, discussed later in this article, applies to all contracts for deed and purchase agreement cancellations. Depending on one’s perspective, this amendment to the injunction statute either eliminates some of the previous uncertainty for contract-for-deed cancellations or creates new uncertainty.2
Due in large part to the decline in residential real estate sales prices and the number of homes acquired from foreclosing lenders that are being resold on contracts for deed, there has been a rising concern about abusive or predatory practices by contract-for-deed sellers and the general public’s lack of understanding about how contracts for deed work.3 The disclosure statute, effective for instruments executed on or after August 1, 2013 and modeled in part on the condominium/townhome disclosure statute,4 requires a “multiple seller” of residential real estate selling on a contract for deed to provide certain statutorily mandated disclosures. The statute defines a “multiple seller” as a seller who has entered into four or more contracts for deed for residential property within the past 12 months.5 Thus, typical mom-’n-pop
homeowners and even irregular “flippers” who occasionally sell on a contract for deed need not comply with the statute. In addition, the statute exempts from its ambit any contract-for-deed sale where the buyer is represented “throughout” the transaction by a licensed lawyer or a licensed real estate broker or salesperson.6 Thus, either due to the fact that the seller has not had at least four previous contract-for-deed sales in the past year or because a lawyer or real estate broker or salesperson is representing the buyer, garden-variety sales will be exempt from the disclosure requirement.7 Also as noted, nonresidential contract-for-deed sales are entirely exempt.8
Assuming that the residential transaction involves a “multiple seller” and the lawyer/real estate broker exception does not apply, the statute imposes a disclosure requirement somewhat similar to the condominium/townhome disclosure statute.9 If there is a purchase agreement that is intended to end in a contract for deed, the seller must affix the statutorily required disclosure to the front of the purchase agreement and the contract for deed cannot be executed for at least five business days following the execution of the purchase agreement.10 If the buyer does not timely receive the disclosure, i.e., when the purchase agreement is entered into, the buyer has five business days after receiving the disclosure in which to terminate the purchase agreement by notice to seller.11 However, that right of termination expires upon execution of the contract for deed and failure to give the disclosure does not affect the validity of the resulting contract for deed.12
In many of the contract-for-deed transactions targeted by this legislation, however, the seller and buyer do not enter into the normal purchase agreement, but, rather, skip that step and simply go directly into the contract for deed. In those situations, the statute also provides that the required disclosure must be given by a separate document at least five business days prior to the purchaser executing the contract for deed.13 Like the rule applicable to contracts for deed resulting from a purchase agreement, failure to give timely disclosure prior to executing the bare contract for deed does not affect the validity of the contract for deed.14
The statutory disclosure (which must be in at least 12-point type and signed and dated by the purchaser) provides information about contracts for deed that may not be known to the typical unsophisticated purchaser from a multiple seller: a contract-for-deed purchaser does not have the protections afforded a tenant or by mortgage foreclosure laws; the purchaser will be obligated to pay homeowner’s insurance and taxes and make repairs and perform maintenance; the purchaser will need to refinance at the time the “balloon” comes due; and the statutory cancellation process can be quick and the consequences severe. The disclosure also makes recommendations to, among other things: seek assistance from a lawyer or the Minnesota Home Ownership Center; procure an appraisal; have the property inspected; and examine title.15
Where there has been a failure to timely give the statutory disclosure (either at the time of signing the purchase agreement or at least five business days prior to signing the contract for deed where there is no prior purchase agreement), the statute imposes liability on the part of the multiple seller in favor of the purchaser as a private right of action in an amount equal to the greater of actual damages or statutory damages of $2,500, plus reasonable attorney’s fees and costs.16 Moreover, if there is a “knowing” failure to provide the disclosure, the multiple seller is liable to the purchaser for treble those damages.17 While the statute is silent on the subject, a defaulting purchaser facing a statutory cancellation by a noncompliant multiple seller might seek to apply these damages as an offset against outstanding delinquencies. Under longstanding case law prohibiting the use of unliquidated claims as offsets (discussed below), however, a buyer should not rely on such a claimed offset as curing the default without a judicial determination of seller liability or a temporary injunction against the cancellation.18
Injunctions Against Cancellations
Separate from the disclosure mandate for serial contract-for-deed sellers, the 2013 legislation amends Minn. Stat. §559.211, dealing with injunctions against cancellations. That 1980 statute, a codification of prior common law,19 authorizes a district court to enter an order temporarily restraining or enjoining further proceeding to effectuate a termination of a contract for deed or purchase agreement20 “at any time prior to the effective date of termination of the contract” and provides that that if an injunction is granted, the contract cannot terminate until 15 days after the injunction is lifted.21
A series of cases, particularly Thomey v. Stewart,22 have interpreted the language referencing procuring the injunction “prior to the effective date of termination of the contract” to mean that if the purchaser does not obtain an injunction prior to the period set forth in the cancellation notice, then the purchaser may not subsequently raise any defense to the cancellation, including a defense of waiver.23 Even prior to the enactment of Minn. Stat. §559.211, there was a series of cases, commonly known as the Olson rule, holding that a purchaser cannot raise an unliquidated claim of fraud or misrepresentation as a defense to cancellation and that, if the purchaser does not procure an injunction prior to the running of the notice period, no such defense can even be litigated.24
A blanket rule that a defense to cancellation can never be raised unless an injunction under §559.211 is obtained prior to the end of the notice period is, however, inconsistent with another line of cases, mostly decided prior to the enactment of the injunction statute, invalidating cancellation even though no injunction was either sought or obtained prior to the end of the notice period. Thus, although the cases do not directly address the point, cancellations have been invalidated, notwithstanding the failure to procure an injunction prior to the end of the notice period, in cases where the claim was the notice understated the statutory time for cure,25 the purported contract for deed was in fact an equitable mortgage,26 there was no unpaid amount due,27 there was lack or insufficient service of process,28 or where there was a waiver of the cancellation by reason of acceptance of partial payment before (or after) the running of the notice period.29
Further, in Coddon v. Youngkrantz,30 decided after Thomey, the Minnesota Court of Appeals 1) invalidated a cancellation based upon the fact that the default was an immaterial single payment, and 2) reversed the trial court’s ruling that it lacked jurisdiction to invalidate the cancellation due to the purchaser’s failure to seek judicial relief prior to the running of the notice period.31 Similarly, in the recent case of Dimke v. Farr,32 the Minnesota Court of Appeals invalidated a purported declaratory cancellation of a residential purchase agreement on the ground that there was no unfulfilled condition so as to permit use of that procedure under Minn. Stat. §559.217, subd. 4, despite the fact that the purchaser did not seek an injunction prior to the running of the notice period.
Since the cancellation statute, which codified the common law right to an injunction against cancellation and allowed purchasers the added protection of a 15-day second chance to cure if the defense proved meritless so as to avoid litigating at one’s peril, was intended to benefit purchasers, it would seem somewhat incongruous that the statute should be interpreted to bar post-cancellation claims that were allowed prior to the enactment of the statute. Finally, the Thomey rule presents an insurmountable problem for a purchaser where the basis for the otherwise valid defense, such as waiver, only arises at the last days of the notice period (or after the cancellation period) when there is no time left to obtain an injunction.
In order to address this conflicting authority and to avoid such practical and theoretical problems, the 2013 legislation added language to Minn. Stat. §559.211, subd. 2 to provide that, subject to other statutory provisions that create a prima facie presumption that a statutory cancellation has been effectuated,33 the injunction statute itself does not bar a court from determining the validity, effectiveness, or consequences of a statutory cancellation under either §559.21 or §559.217, or granting other relief in connection therewith, despite the fact that the purchaser did not seek or obtain relief under the injunction statute prior to the end of the notice period. Thus, the new legislation reverses the rule of Thomey and prevents the running of the statutory notice period from being an irrefutable presumption of termination of the contract.
Since the new legislation reverses only a judicial interpretation that the injunction statute itself bars all challenges to a cancellation if an injunction was not timely procured, the new statutory language should not be read as permitting post-notice period challenges to cancellations where they were not allowed prior to the enactment of the injunction statute. Thus, Olsen v. Northern Pac. Rwy. Co.34 and its progeny,35 which bar post-notice period challenges to a cancellation or unliquidated claims against the seller based upon fraud or misrepresentation or other claims under the contract unrelated to the cancellation itself, still remain good law and those defenses or claims cannot be raised unless an injunction is procured prior to the running of notice period. The extent of the reach of the Olson rule has always been open to interpretation and that uncertainty will continue with the new amendment. As a result, both because a purchaser’s right to litigate a cancellation without the benefit of an injunction will often be uncertain and because an injunction provides a second chance to cure the default if the defense fails, purchasers will still almost always be well-advised to, if possible, procure an injunction in connection with contesting the cancellation of a contract for deed or a purchase agreement.
Larry M. Wertheim is a shareholder with Kennedy & Graven, Chartered, Minneapolis, MN. He was involved in the drafting of the 2013 contract for deed legislation. He acknowledges with thanks the contributions to this article of Ron Ellwood and Luke Grundman, of Mid-Minnesota Legal Aid, and Kevin Dunlevy, of Beisel and Dunlevy, P.A., who were also involved in the legislation.
1 Minn. Laws 2013, Ch. 85, Art. VI, §§6-7, as amended by Minn. Laws 2013, Ch. 144, §3, to be codified as Minn. Stat. §559.201-.202. (For ease of reference, citations will be made to the codified provisions.)
2 Minn. Laws 2013, Ch. 85, Art. VI, §8, amending Minn. Stat. §559.211, subd. 2 (2012). (Reference will be made to the statute as amended.) The legislation also repealed that portion of the statute requiring recording of contracts for deed and assignments of contract for deed imposing criminal penalties. Minn. Laws 2013, Ch. 85, Art. VI, §13.
3 See, e.g., “Applying an old tool to sell foreclosed houses,” Star Tribune (01/08/2009); “Seller-financing contracts skyrocket, but so do gripes,” Star Tribune (03/18/2012); “Contract for deed can be house of horror for buyers,” Star Tribune (01/07/2013); “Editorial: Risky housing deals need more scrutiny,” Star Tribune (01/14/2013); “Letter: Contract-for-deed story lacked needed balance,” Star Tribune (01/14/2013).
4 Minn. Stat. §§515B.4-101-515B.4-118.
5 Minn. Stat. §559.201, subd. 4.
6 Minn. Stat. §559.202, subd. 2. However, even if a particular contract-for-deed is exempted under this provision, it still counts for purpose of determining whether a seller is a “multiple seller” for a future contract for deed transaction. Minn. Stat. §559.201, subd. 4.
7 Many of the contract-for-deed sales in the current market are lenders selling foreclosed properties to people who cannot qualify for conventional mortgage financing, particularly in the rural parts of the state. Those lenders may be multiple sellers under the new law.
8 Minn. Stat. §559.201, subd. 8.
9 Minn. Stat. §59.202, subd. 1.
10 Minn. Stat. §59.202, subd. 1(b).
11 Minn. Stat. §559.202, subd. 4(a). Section 559.202, subd. 4(b) requires that the notice of cancellation of the purchase agreement for failure to comply with the disclosure requirements must be in accordance with the provisions for declaratory cancellation of a purchase agreement under Minn. Stat. §559.217, subd. 4, which itself requires a relatively complicated formal statutory notice. Presumably, the failure to give the required disclosure is “an unfulfilled condition” which, “by the terms of the purchase agreement cancels the purchase agreement,” so as to trigger declaratory cancellation under §559.217, subd. 4. Oddly, although the disclosure to be attached to the purchase agreement states that the purchaser has the right to cancel within five business days of receiving the disclosure, (§559.202, subd. 3), according to the actual operative language in the legislation, the right to cancel only applies if the disclosure is not timely given. Therefore, a purchaser properly given disclosure at the time the purchase agreement is signed, in fact, has no right of termination, despite what the disclosure states. Also, curiously, if there is no disclosure whatsoever given, the statute gives no right to terminate the purchase agreement.
12 Minn. Stat. §559.202, subds.
13 Minn. Stat. §559.202, subd. 1(c).
14 Minn. Stat. §559.202, subd. 6.
15 Minn. Stat. §559.202, subd. 3.
16Minn. Stat. §559.202, subd. 5(a). Since the remedy applies only to the failure to timely deliver the required notice, the purchase agreement cannot be cancelled after the contract for deed is signed, and violation of the statute does not affect the validity of the contract for deed, there is no apparent remedy where the purchase agreement contains the required disclosure but the contract for deed is signed prior to the expiration of the five-day period.
17 Minn. Stat. §559.202, subd. 5(b). Presumably, part of the proof of a cause of action under this section for treble damages would require that the seller knew that he or she had sold on at least four prior contracts for deed within the prior 12 months.
18 Under the new legislation, the cause of action for failure to disclose has a four-year statute of limitations. Minn. Stat. §559.202, subd. 5(c). However, despite the fact that this failure to disclose might, in fact, be the cause of the purchaser’s default, there is nothing in the legislation that addresses whether the cause of action survives cancellation of the contract for deed.
19 Follingstad v. Syverson, 160 Minn. 307, 312-13, 200 N.W. 90, 92-93 (1924). Cf., Northwest Hotel Corp. v. Henderson, 257 Minn. 87, 91-92, 100 N.W.2d 493, 496-97 (1959).
20 Although §559.211 references only terminations under Minn. Stat. §559.21, references in Minn. Stat. §559.217, subds. 1(d) and 6 to §559.211 make it clear that §559.211 applies to cancellations of residential purchase agreements under §559.217.
21 Minn. Stat. §559.211, subd. 1 (2012).
22 391 N.W. 2d 533 (Minn. App. 1986).
23 See also, Block v. Litchy, 428 N.W.2d 850, 852-53 (Minn. App. 1988). Relying on Thomey, Block suggested that even a defense that the contract for deed had been paid in full could not be raised unless an injunction was first obtained. See also unpublished cases cited in Roberts, 25 Minnesota Practice Real Estate Law Section 6.20.
24 Olson v. Northern Pac. Ry. Co., 126 Minn. 229, 148 N.W. 67 (1914); Int’l Realty & Sec. Corp. v. Vanderpoel, 127 Minn. 89, 92, 148 N.W. 895, 896 (1914).
25 Tarpy v. Nowicki, 286 Minn. 257, 263, 175 N.W.2d 647, 648 (1970).
26 Albright v. Henry, 285 Minn. 452, 460-61, 174 N.W.2d 106, 111 (1970).
27 Nolan v. Greeley, 150 Minn. 441, 443, 185 N.W. 647, 648 (1921).
28 Guider v. Mayco, Inc., 312 Minn. 493, 498, 252 N.W.2d 601, 604 (1977) (failure to serve mortgagee on vendee’s interest).
29 Odegaard v. Moe, 264 Minn. 324, 328, 119 N.W.2d 281, 283-84 (1962); Credit, Inc. v. Kutzik, 280 Minn. 272, 274-75, 159 N.W.2d 277, 279 (1968).
30 562 N.W.2d 39 (Minn. App. 1997).
31 562 N.W.2d at 44.
32 802 N.W.2d 860 (Minn. App. 2011).
33 Minn. Stat. §559.213 (recording of a notice of default, proof of service and affidavit of noncompliance is prima facie evidence that contract was terminated under §559.21) and §559.217, subd. 7 (affidavit of service of notice of cancellation and noncompliance is prima facie evidence of cancellation of a residential purchase agreement under §559.217 and authorizes release of the earnest money to the party who served the notice).
34 Olson v. Northern Pac. Ry. Co., 126 Minn. 229, 148 N.W. 67 (1914).
35 Brickner v. One Land Dev. Co., 742 N.W.2d 706, 711 (Minn. App. 2007); Hollywood Dairy, Inc. v. Timmer, 411 N.W.2d 258, 259-60 (Minn. App. 1987); Tran v. Estate of Ditzler, 411 N.W. 2d 6, 8 (Minn. App. 1987.