Termination of Contracts for Deed
Phillip L. Kunkel, Attorney
Scott T. Larison, Attorney
Hall & Byers, P.A.
St. Cloud, MN
Copyright © 2005 Regents of the University of Minnesota. All rights reserved.
If a farm debtor is unable to perform under the land security agreements to which he or she is a party, the rights of the debtor and the other parties are determined by state law, depending on the type of security agreement involved. Minnesota law is specific with respect to the termination of contracts for deed, providing specific time periods which must be followed exactly by the creditor attempting to foreclose its security interest.
What Constitutes Default?
Creditor's Options Upon Default
A second course of action for the creditor is bringing a lawsuit on the underlying debt based on the promises of the debtor contained in the contract for deed. If the value of the real property is less than the amount due under the contract for deed, the creditor may well elect to bring an action seeking payment of the amount due.
A significant difference between a mortgage and a contract for deed may be realized if the lender decides to sue. Promissory notes and mortgages typically include acceleration clauses, but the standard form contract for deed in use in Minnesota does not. As a result, the seller under a contract for deed, should he or she elect to sue the purchaser for the purchase price, must do so for each installment payment as it comes due. That is, without such a clause, he or she cannot bring one lawsuit for the entire balance due under the contract for deed. This limitation may make such an alternative less attractive to a creditor unless the purchaser has other nonexempt assets that can be reached to satisfy the underlying debt.
When a contract for deed involves agricultural real estate, Minnesota's farmer-lender mediation statute generally requires the seller to offer mediation of the obligation to the purchaser prior to beginning contract for deed cancellation proceedings. The farmer-lender mediation statute began requiring mediation in 1986. Generally, the statute requires, among other things, that the seller seeking to cancel the contract for deed on agricultural real estate first send notice to the purchaser and offer the purchaser the opportunity to mediate a resolution prior to beginning such action. If the purchaser elects to mediate the obligation, the seller's cancellation of the contract for deed can be suspended for a period of up to 90 days pending completion of the mediation. When the debt involved has been scheduled by the purchaser in a bankruptcy or involved in a previous farmer-lender mediation, the debt is not subject to the farmer-lender mediation statute and the seller can initiate cancellation proceedings without first offering mediation.
Steps in Termination of
For contracts for deed executed on or after May 1, 1980, the notice also must state that the purchaser must pay any additional payments due the seller under the contract for deed through the date payment is made. For contracts for deed executed on or after August 1, 1985, the notice must state that the purchaser is further required to pay two percent of the amount in default at the time of service of the notice, not including balloon payment, taxes, assessments, mortgages, or prior contracts assumed by the purchaser.
For the seller to recover attorney's fees under a contract for deed executed on or before July 31, 1985, some part of the conditions of default must have existed for at least 45 days prior to the date of service of the notice. For contracts for deed executed on or after August 1, 1985, this period of default is reduced to 30 days. The period allowed to cure the defaults and the conditions of a contract for deed varies depending on the date on which the contract was executed and on the percentage of the purchase price that has been paid by the purchaser as follows:
The notice must be served upon the purchaser in the same manner as a summons according to the Minnesota Rules of Civil Procedure. Three weeks' published notice is equivalent to personal service of the notice upon the purchaser provided that certain procedures are followed. The cure period is expanded to 90 days when service is by publication. Besides serving the purchaser, serving other partiessuch as mortgagees, judgment creditors, or other lien claimantsmay be required.
The right of the purchaser to reinstate the contract is absolute, provided that he or she complies with the payment of all sums required. If the purchaser fails to comply with the notice, the contract terminates. Upon termination, the purchaser will lose all sums that have been paid on the contract, the right to possession of the property, and the right to assert any claims or defenses against the sellers. He or she may be evicted from the premises by the seller. Once termination has been completed, however, the seller can no longer maintain any action for a deficiency judgment against the purchaser.
When the seller of real estate subject to contract for deed cancellation is a government agency, limited partnership, or corporation, Minnesota law provides the purchaser with certain rights of first refusal upon the resale of the property by the seller. The seller cannot offer the property for sale or lease until it has provided written notice to the purchaser at least 14 days in advance. When a third party buyer or lessee is found, the seller must then offer to sell or lease the property to the purchaser upon the same terms as the offer made by such third party. The purchaser has a defined period of time within which to exercise his or her right of first refusal to either buy or lease the property on such terms. For leases, it is within 15 days of the seller's written offer to the purchaser. For sales, it is within 65 days of the seller's written offer to the purchaser. If the purchaser exercises his or her right of first refusal, he or she must fully perform the terms of the sale or lease within ten days of such exercise.
The purchaser can elect to purchase or lease a portion of the total property involved, but only when the portion is of a size, configuration, and location that does not unreasonably reduce access to or the value of the remaining property. The purchaser is not allowed to resell the property if the sale was arranged prior to his exercise of the right of first refusal. If the property is resold by the purchaser within 270 days of exercising the right of first refusal, there is a presumption, subject to proof to the contrary, that the sale was arranged ahead of the exercise of the right of first refusal. In violating this prohibition, the purchaser becomes liable for damages and attorneys' fees.
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