2004 Real Estate Legislative Update

By: KATIE L. COLE, MARY S. RANUM, MARK W. VYVYAN & ELIZABETH C. ZAMZOW

July 2004

During the 2004 legislative session, a session in which the Minnesota legislature was perceived by many to have made little progress, a number of real estate-related amendments and new statutes were adopted. Although these legislative changes did not garner much attention at the time, some of them could potentially have a significant impact on business practices in the real estate industry beginning as early as August 1, 2004. The following is a brief overview and discussion of some of this new legislation.

Purchase and Sale Issues

Cancellation of Residential Purchase Agreements: A New Protection for Buyers and a New Risk for Sellers

A new statute, Minn. Stat. § 559.217, was enacted regarding cancellation of purchase agreements for residential real property. The statute allows either the seller or the buyer to initiate a statutory cancellation under one of two methods. The first option, Cancellation with Right to Cure, applies where there is a default which does not, by its terms, cancel the purchase agreement. In that case, the purchase agreement is cancelled unless, within fifteen days after the service of the notice, the other party either cures the default or secures a court order suspending the cancellation. The second option, Declaratory Cancellation, applies where the default which occurred would cancel the purchase agreement by its terms. In that case, the other party must secure a court order suspending the cancellation in order to prevent cancellation of the agreement.

The buyer or the seller initiates the cancellation by serving the other party with a notice:

1. specifying the real property, including the legal description;
2. specifying the purchase agreement and the default; and
3. stating that the purchase agreement will be cancelled fifteen days after service of the notice unless the other party complies with the condition in default (or stating that the agreement has been cancelled, if the default which occurred cancelled the purchase agreement by its terms).

If a party brings a proceeding to obtain a court order to suspend the cancellation of a purchase agreement, the court will award up to $3,000 in court filing fees and attorney fees to the prevailing party. Any earnest money must also be distributed to the prevailing party. This statute applies to purchase agreements entered into on or after August 1, 2004. This statute obviously shortens the prior thirty-day cure period, and also allows a buyer to initiate the cancellation process if the seller refused to comply with the purchase agreement. However, this provision also creates significant risk for sellers. Under the new statute, buyers who are unhappy with the property may attempt to terminate the purchase agreement by serving a cancellation notice, which will require affirmative action by the seller (i.e., a court order suspending the cancellation) in order to enforce the agreement.

Protecting a Borrower from a Delay in the Loan Application Process

A new statute, Minn. Stat. § 325F.691, deals with the damages that result from a delay in processing a loan application. The statute provides that a lender who causes unreasonable delay in processing a loan application beyond the expiration date of an interest rate or discount point agreement is liable to the borrower for a penalty in the amount of the borrower’s actual out-of-pocket damages or for specific performance of the agreement. Evidence of unreasonable delay may include:

1. failure of the lender to return telephone calls or respond to the borrower’s inquiries concerning the status of the loan;
2. the addition by the lender of new requirements for processing or approving the loan that were not disclosed to the borrower previously; or
3. failure by the lender to take actions necessary to process or approve the loan within a reasonable period of time.

This provision goes into effect as of August 1, 2004, and applies to interest rate or discount point agreements entered into after July 1, 2004.

Strengthening Disclosure Requirements for the Sale of Residential real Property

The legislature amended Minn. Stat. § 513.55 to expand the scope of the conditions which a seller must disclose in connection with the sale of residential real property. Previously, the statute required that the disclosure include “all material facts pertaining to adverse physical conditions in the property” of which the seller was aware and that could adversely affect the buyer’s ordinary use, enjoyment or intended use of the property. The Minnesota Association of Realtors supported an amendment to the statute because it found there were numerous other facts, other than adverse physical conditions of a property, that may be material to a prospective buyer – and, it brings the seller’s requirements in line with the conditions required to be disclosed by real estate professionals. The amendment to the statute broadens the scope of the conditions, and states that the disclosure must include “all material facts” of which the seller is aware and that could adversely affect the buyer’s ordinary use, enjoyment or intended use of the property. Therefore, the new definition encompasses non-physical conditions (which may include disclosure of a crime scene, reports of paranormal activities, etc.) and affords greater protection for the buyer. However, the new standard also creates uncertainty for the seller about the extent of disclosure that will be necessary to satisfy the new requirement because materiality may be more difficult to determine in the context of non-physical conditions. This provision is effective as of August 1, 2004.

Change to Cancellation Period After Receipt of Common Interest Community Disclosure

An amendment was also made to Minn. Stat. § 515B.4-106, which relates to a buyer’s right to cancel a purchase agreement for an interest in a “common interest community,” such as a condominium. The amendment shortens the period during which a disclosure statement must be delivered to a buyer. It establishes that if a buyer is not given a disclosure statement more than five days before execution of the purchase agreement, the buyer may, before conveyance, cancel the purchase agreement within five days after first receiving the disclosure statement. Prior to the amendment, the statute required that the buyer receive the disclosure statement ten days before execution. This provision is effective as of August 1, 2004.

Statute of Limitations for Breach of Home Warranty Claims

Minn. Stat. § 541.051, which deals with the statute of limitations for actions based on breach of warranty under Minn. Stat. § 327A.05, was amended to establish that when a breach of warranty action arises during the ninth or tenth year after the warranty date, a breach of warranty claim may be brought within two years of the discovery of the breach, but no more than twelve years after the effective warranty date. Previously, the statute specified only that the action must be brought within two years of the discovery of the breach.

Equity-Stripping Legislation Creates a New Notice Requirement for all Foreclosures

Legislation to be codified at Minn. Stat. Ch. 325N and Ch. 580, among other provisions, was enacted to protect against various fraudulent schemes identified by the Attorney General as being used to strip equity from homeowners in foreclosure. For example, it prohibits a foreclosure purchaser from entering into a foreclosure reconveyance with a foreclosed homeowner unless the homeowner has a reasonable ability to pay for the subsequent reconveyance, the purchaser obtains a deed or mortgage from the homeowner, the purchaser obtains the written consent of the homeowner to a grant of any interest in the property, and the purchaser complies with the requirements of the federal Home Ownership Equity Protection Act. It also states that a foreclosure purchaser may not enter into repurchase or lease terms as part of the subsequent conveyance that are unfair or commercially unreasonable, or engage in any other unfair conduct. The purchaser may not represent, directly or indirectly, that the he or she is acting as an advisor or assisting the homeowner to “save the house.” In addition, the legislation imposes a new notice requirement on the foreclosure purchaser.

Although the legislation was aimed at equity-stripping schemes, the new notice requirement will affect legitimate lenders and servicers, including commercial lenders.

Effective August 1, 2004, a notice must be delivered along with the notice of foreclosure in connection with Minnesota real property foreclosures. This applies to all foreclosures, not just foreclosures on residential real estate. In addition to the initial delivery, the notice must be delivered with each subsequent written communication regarding the foreclosure mailed to the mortgagor by the foreclosing party up to the day of redemption. A foreclosing mortgagee will be deemed to have complied if it sends the notice at least once every 60-days during the period of the foreclosure process. The notice must be in 14-point boldface type and must be printed on a separate sheet of paper that is a different color than the notice of foreclosure, but the color must not “obscure or overshadow the content of the notice.” The title of the notice must be in 20-point boldface type. Minn. Stat. Ch. 325N outlines the language which must be contained in the notice.

Changes Relating to Purchase Money Mortgages

Changes relating to purchase money mortgages were made within Minn. Stat. Ch. 507 and Ch. 580. Minnesota law generally provides that a non-signing spouse cannot assert marital property rights against a mortgage lender that provided a purchase-money mortgage. The new law clarifies that if any portion of a mortgage loan is used to purchase real property, the entire mortgage is a purchase-money mortgage for the purposes of the statute. If the loan proceeds are used to pay off a contract for deed under which the purchaser had the right of possession, that is not a purchase-money mortgage. In addition, the law sets forth changes to the procedure for junior creditors to redeem real property. These changes are generally effective as of August 1, 2005.

Planning and Zoning

A Move to Align Sewer Charges With Use

Amendments to a Minnesota statute that establishes how municipalities are permitted to charge for storm and sanitary sewer services, Minn. Stat. § 444.075, allow a better match of the use of those services with the charges for them.

Prior to the amendments, charges for both storm and sanitary sewer services could be fixed based on the amount of water consumed on the property, among other factors. A representative of the Minnesota Multifamily Housing Association testified in committee that owners of multi-unit dwellings were charged disproportionate fees for storm sewer services as a result of the water consumption fee basis. Although sanitary sewer services are related to the amount of water consumed on the property, storm water drainage is not. Storm water drainage can be better measured by the area of the property.

After the amendments, the statute provides separate methods for the calculation of sanitary and storm sewer charges. Now, sanitary sewer charges may be based on the amount of water consumed but not the square footage of the property, while storm sewer charges may be fixed based on the square footage of the property but not the amount of water consumed. These changes better match sewer charges with sewer use. The amendment also establishes that the waterworks, sanitary sewer and storm sewer charges may only be used to pay for those facilities. These amendments are effective as of January 1, 2006.

Limiting Developer Fees

The statutes that establish the fees that a municipality may charge a developer, Minn. Stat. § 462.353 and § 462.358, were amended to place stricter limits on developer fees. A municipality may charge developer fees sufficient to defray the cost of reviewing an application for a proposed commercial or housing development and the cost of dedication of land for public infrastructure, conservation, or recreation purposes. The amendments require a connection, or nexus, between the fees that a municipality charges and the local government’s development-related costs.

As to dedication or cash payments in lieu of park dedication, the amendments require that the municipality demonstrate a “rough proportionality to the need created by the project” in order to satisfy the nexus element. In addition, the law disallows use of any money received in lieu of dedication for ongoing operation or maintenance. Instead, any cash payments received by the municipality must be placed in a special fund and used only for the purpose that the money was collected.

The amendments also require the municipality to explain the basis of its fees upon request. In the event of a fee dispute, the developer must pay the fee, which the municipality must hold in a trust account. The developer’s application may then proceed pending a decision regarding the fee on appeal. The developer must appeal within 60 days of the approval of the application and deposit of the fee into escrow. A municipality may not condition approval of a development on an agreement to waive the right to challenge the validity of the fee.

The League of Minnesota Cities, which expressed opposition to the bill, argued that a 2001 law passed by the legislature which required that a municipality’s fees be “fair, reasonable, and proportionate,” covered the same issue. Despite the 2001 law, support for this bill came from the Builders Association of the Twin Cities, which argued that more accountability was needed on how a municipality used the fees.

This provision is effective on August 1, 2004 and applies to ordinances relating to fees, fee schedules, and dedications adopted or amended on or after August 1, 2004.

Prohibiting Long-term Interim Ordinances

An amendment to Minn. Stat. § 462.355 limits the authority of municipalities to adopt moratorium ordinances. The prior law authorized a one-year interim ordinance period, with an option for an extension of an additional 18 months at the city’s discretion. The new law establishes that an extension may only be granted in three different scenarios. The first two permitted reasons allow a 120-day extension if some required federal, state, or regional approval is received less than 30 days before expiration of the moratorium. The third reason allows a one year extension if the city had not adopted a comprehensive plan to address interim ordinances at the time of the moratorium enactment.

Local governments in opposition to this amendment argued that interim ordinances were used for good faith reasons such as allowing time for environmental impact studies and developing comprehensive land use ordinances. However, support for this amendment came from the Builders Association of the Twin Cities, which found that local governments use delay tactics, such as long-term interim ordinances, as a weapon to stop development. This provision goes into effect on August 1, 2004.

Broadening Permissible Non-Conforming Uses

An amendment to Minn. Stat. § 462.357 broadens the permissible uses which do not comply with ordinances by explicitly stating that a nonconforming use “may be continued, including through repair, replacement, restoration, maintenance, or improvement, but not including expansion” except in cases of abandonment or destruction when no new building permit is sought within 180 days of destruction. Prior to the amendment, the statute allowed continued nonconforming use only in the cases of repair and maintenance. In addition, the law authorizes municipalities to permit expansion of a nonconforming use by ordinance. This provision goes into effect on August 1, 2004.

Title Issues

A Step to Simplify the Discharge of Mortgages Which Have Been Refinanced or Sold

A new Minnesota statute, Minn. Stat. § 507.403, is aimed at making it easier to prove that a mortgage has been paid. The statute is meant to address a problem that has arisen from the frequent refinancing and sale of mortgages. Because assignment documents are often not filed with the county records office, difficulties arise in clearing paid mortgages. The bill was supported by the real estate section of the Minnesota State Bar Association.

The new statute calls for the certificate of satisfaction to contain the following information:

1. name of the assignee;
2. name of the mortgagor;
3. name of the original mortgagee;
4. date of the mortgage;
5. date of the recording;
6. volume and page number or document number of the mortgage in the real property records where the mortgage is recorded; and
7. statement that the assignee is the holder, owner, or successor of the mortgagee’s interest in the mortgage.

If the certificate of satisfaction contains substantially all of that information, and it is executed and acknowledged by the assignee in the same manner as a deed, then the mortgage will be discharged even if one or more assignments of the mortgage have not been recorded or filed.

The legislature also created a new statute, Minn. Stat. § 507.413, that states that an assignment, satisfaction, release, or power of attorney to foreclose is entitled to be recorded and is sufficient if:

1. mortgage is granted to a mortgagee as nominee or agent for a third party identified in the mortgage, and the third party’s successors and assigns;
2. subsequent assignment is executed; and
3. the document is in recordable form.

These provisions go into effect on August 1, 2004.

Updating the Farm Products Liens Recording System

An amendment to Minn. Stat. Ch. 336A makes changes to the regulation of farm products liens and financing statements. Farm products liens are non-possessory statutory liens on a debtor’s farm products. Examples include landlord, harvester, and crop liens. Minnesota’s Central Notification System for Farm Product Liens became effective in 1993. The Office of the Secretary of State operates the system.

The revisions to Minn. Stat. Ch. 336A were made to comply with changes made to Article 9 of the Uniform Commercial Code and federal law. The amendments include modification of the language that an effective financing statement or lien notice must contain as well as the filing procedure. The amendments require that a financing statement or lien notice be filed in a computerized filing system. The computerized filing system is to be operated by the Secretary of State and will be available on the web. The amendment also allows the Secretary of State to establish satellite offices within the state to accept financing statements and lien notices. The satellite offices are to file them in the computerized filing system. The party completing the financing statement or lien notice is responsible for choosing and listing the farm product and county codes on the document from the lists provided by the Secretary of State.

As of July 1, 2005, the filing fee will be $15 for each filing made through the Secretary of State website (http://www.sos.state.mn.us) and $20 for each filing submitted in any other manner. The fee for conducting a search and for preparing a report will be $20 per debtor name. If an oral or facsimile response is requested, there will be an additional fee of $5 per debtor name requested.

This provision will be effective August 1, 2004, and will apply to all financing statements and lien notices that are made on or after February 1 following the calendar year in which the U.S. Department of Agriculture approves the central filing system. The amendment also calls for a temporary $10 surcharge to be collected between July 1, 2004 and June 30, 2005 on each financing statement and lien notice filed. The surcharges will be used to offset the cost of implementing the computerized filing system.