Real Estate Legislative Update - 2007 Minnesota Legislative Session

By: MARY S. RANUM, ESQ. & KATIE BURKHART, SUMMER ASSOCIATE

July 2007

This issue of FredNEWS: Real Estate contains information on new developments in real estate law from the 2007 Minnesota legislative session that affect real estate developers, lenders, property managers, owners, and investors. Unless otherwise specified, the legislation described below is effective August 1, 2007.

Disclosures Regarding Airport Zoning

A recent Minnesota statute that imposed a duty on property sellers to disclose information about airport zoning regulations has been amended to specify that a seller of property is not required to disclose information regarding airport zoning regulations that affect the property. If no disclosure is made, however, the seller must provide written notice to the buyer that a copy of the airport zoning regulations can be reviewed at the county recorder’s office where the zoned area is located. This notice must be provided in a timely manner. Minn. Stat. § 82.22(8).

Predatory Lending

The Minnesota Legislature focused heavily this session on prohibiting predatory lending practices. The following sections highlight the major changes and additions to the law:

Churning

Recently amended statutes prohibit “churning,” which is defined as intentionally making a residential mortgage loan that does not provide a reasonable, tangible benefit to the borrower. A court will determine whether churning occurred by considering the totality of the circumstances, including the terms of both new and refinanced loans, the cost of the new loan, and the financial circumstances of the borrower. Minn. Stat. § 58.13(a)(24).

Verification of Borrower’s Ability to Pay; Disclosure Requirements

Lenders making residential mortgage loans must verify the borrower’s ability to make payments of principal, interest, insurance, taxes, and assessments. Minn. Stat. § 58.13(a)(23). The first time the mortgage lender informs a borrower of the periodic payment for the mortgage loan, the lender must inform the borrower that an additional amount will be due for taxes and insurance and disclose to the borrower the amount of the anticipated payments. Each time the loan payment changes, the lender must make the same disclosure, including tax and insurance amounts. Minn. Stat. § 58.13(a)(25).

Mortgage Broker Duties of Agency

Under the amended predatory lending statutes, a mortgage broker is considered to be in an agency relationship with the borrower. Special fiduciary duties and obligations come with this agency relationship. A broker must act in good faith and in the borrower’s best interest, carry out all lawful instructions the borrower gives the broker, and disclose to the borrower all material facts that might reasonably affect the borrower’s interest in obtaining a mortgage loan. The broker must also account to a borrower for all the borrower’s money and property that the broker receives as an agent. Minn. Stat. § 58.161(3).

Subprime Loans

Residential mortgage lenders may no longer enter into subprime loans that impose a penalty in the event the loan is prepaid in whole or in part. Minn. Stat. § 58.137(a)(4)(c).

Private Right of Action for Borrowers

A recently amended Minnesota statute creates a private right of action for borrowers to bring suits against lenders who have engaged in certain predatory lending practices. With a successful claim, borrowers may recover actual, consequential, and incidental damages as well as statutory damages equal to the amount of all lender fees included in the principal amount of the loan. Borrowers may also recover punitive damages, if appropriate, court costs, and reasonable attorneys’ fees. A borrower may bring an action in the public interest under the private attorney general statute against persons engaged in predatory lending. Minn. Stat. § 58.18(1).

Residential Mortgage Fraud

The Minnesota Legislature added a section to the predatory lending statute that prohibits residential mortgage fraud. Residential mortgage fraud occurs when any person knowingly makes, causes to be made, or uses or facilitates the use of a material misstatement, misrepresentation, or omission during the mortgage lending process intending that it be relied on by a lender, borrower, or any other party involved in the lending process. Violators of this new section will be sentenced based on the economic loss suffered, but the maximum sentence of imprisonment may not exceed two years. A person convicted of residential mortgage fraud must pay restitution to those injured. Minn. Stat. § 609.822(2)-(3).

Automatic Stay in Eviction Actions

Often, a foreclosed-upon homeowner conveys his or her redemption rights to a predatory lender in reliance on the promise that the lender will lease the foreclosed property back to the homeowner with an option to re‑purchase. When the foreclosed-upon homeowner falls behind in lease payments, the predatory lender will evict the homeowner from the home they used to own. The Minnesota Legislature amended a statute to provide that a court hearing an eviction action against a foreclosed-upon homeowner must stay an eviction action without requiring the posting of a bond if the homeowner shows the following:

1. The homeowner conveyed title to the foreclosed residence to a third party upon a promise that the homeowner would be allowed to occupy the residence and that the residence would be the subject of a “foreclosure reconveyance” transaction;
2. The homeowner owned the foreclosed residence;
3. The homeowner commenced a foreclosure reconveyance action and asserts a defense that the property is the subject of an illegal foreclosure reconveyance, or asserts a defense of fraud, false promise, misrepresentation, misleading statement, or deceptive practice;
4. The homeowner has continuously occupied the residence since the conveyance.

Minn. Stat. § 325N.01(6).

Commercial General Liability Insurance Required for Residential Contractors and Remodelers

The Minnesota Legislature modified insurance requirements for licensed residential building contractors, residential remodelers, manufactured home installers, and roofers of residential real estate. Licensees must have commercial general liability insurance that includes premises and operations insurance and products and completed operations insurance with limits of at least $100,000 per occurrence, $300,000 aggregate limit for bodily injury, and property damage insurance with limits of at least $25,000 or a policy with a single limit for bodily injury and property damage of $300,000 per occurrence and $300,000 aggregate limits. Contractors must keep on file with the Commissioner of Commerce a certificate of insurance providing that the insurance will not be canceled without giving 15 days’ notice to the commissioner. Minn. Stat. § 326.94

Revised Requirements for Plat Format and Contents

A Minnesota statute has been modified to outline the specifics for plat format and contents in an effort to provide consistency across counties. The plat sheet size must be 22 inches by 34 inches, a new uniform standard across all counties. Minn. Stat. § 505.021(1). There are new requirements for details on the plat such as the plat name, statements of ownership interest, certifications, and the dedication statement and their placement on the plat sheet. If there is a discrepancy between the plat name in the dedication statement and the plat name appearing in other portions of the plat, the name in the dedication statement controls. Minn. Stat. § 505.021(2).

Regarding signatures required for plats, mortgage holders may consent to the plat by a separate written acknowledgement in lieu of the mortgage holder’s signature appearing on the plat. Minn. Stat. § 505.021(3). Also, to address illegibility issues created by the use of notary stamps, a notary stamp is not necessary to record a plat if a certificate of a notarial act—a signed writing that the notary performed the act—contains the requisite information. Minn. Stat. § 505.021(3).

Plat boundaries must be designated in accordance with the legal description and survey, and the plat must include all mathematical data, dimensions, and symbols as well as public ways, easements, and water boundaries. All plats prepared for recording must be approved and contain a certification by the county surveyor. Minn. Stat. § 505.01-.03. Local governments have the authority to approve plats subdividing land, and they may require official plats instead of surveyor’s maps for minor subdivisions. Minn. Stat. § 503.03(3).

The legislature repealed the statute prohibiting the disposition of land before the plat is recorded. Now, sellers may enter into contracts to lease or sell land by reference to the plat before the plat is recorded without being subject to a statutory fine. Minn. Stat. § 505.04(7).

Smoking Bans and Regulations

The Minnesota Legislature adopted the Freedom to Breathe Act of 2007, which eliminates smoking in public places, places of employment, and public transportation. Minn. Stat. § 144.412. The statewide smoking ban will take effect October 1, 2007. Any person or entity that owns, leases, or controls the use of a public place or a place of employment must take reasonable steps to prevent smoking on the property. Required measures include posting appropriate signs, asking any person who smokes where smoking is prohibited to refrain from doing so, and not providing smoking equipment. Minn. Stat. § 144.4167. A public place means any enclosed, indoor area used by the general public, including restaurants, bars, stores, educational facilities, common areas of rental apartment buildings, and other commercial spaces. A place of employment is any indoor area where two or more people perform any type of service for payment under any type of contractual relationship. Minn. Stat. § 144.413. A person or entity that owns, leases, or operates an area where smoking is prohibited and fails to comply with the Freedom to Breathe Act is guilty of a petty misdemeanor. Minn. Stat. § 144.417.

Homestead Judgment Enforcement

The Minnesota Legislature amended a number of statutory sections dealing with homestead judgment enforcement.

Homestead Exemption Amount Increased; ½ Acre Area Limit in Platted City Property Omitted

The exemption amount for a homestead, whether claimed by one or more debtors, increased from $200,000 to $300,000. If the homestead is used primarily for agricultural purposes, the exemption amount is now $750,000. Minn. Stat. § 510.02(1). The area limitation of ½ acre for homestead property located within a platted portion of a city has been struck from the statute, resulting in just one (1) applicable area limitation for homestead property of 160 acres.

New Requirements for Order to Execute on Homestead

In order to clarify the issues arising from an execution sale of marital property addressed in Kipp v. Sweno , new legislation requires that before a judgment creditor consents on a homestead, it must obtain an order from a district court judge determining (1) whether the real property is the homestead of a nondebtor; (2) the amount of the debtor’s homestead exemption; and (3) whether the fair market value of the real property exceeds the debtor’s homestead exemption and the present encumbrances. Minn. Stat. § 550.175(1). The court is to order a sale if it determines there is no nondebtor (such as a spouse) with a homestead interest in the real property and the market value of the property exceeds the exemption and the present encumbrances. The creditor must record a copy of the order directing the sale of the homestead with the county recorder before the first date of publication of the notice of sale. Minn. Stat. § 550.18(3).

Any person wishing to produce evidence that the real property sold was not homestead property may submit an affidavit contesting the status of the property. The affidavit will be recorded by the county recorder. Minn. Stat. § 550.22.

Joint Tenancy and Life Tenancy Interests

The Minnesota Legislature amended the homestead exemption statute to provide that a homestead is not subject to execution if there is a nondebtor with homestead rights or rights in the homestead property as a joint tenant or life tenant. Minn. Stat. § 550.175(6). This amendment codifies the Minnesota Supreme Court’s ruling in Kipp v. Sweno, where the Court held that a debtor’s homestead property, held in joint tenancy with his nondebtor spouse, could not be unilaterally severed through an execution sale to satisfy a judgment.

Distribution of Proceeds from Homestead Execution Sale

Legislators amended the execution sale statute to provide that the debtor will receive money from the execution sale of a homestead when the debtor vacates the property or the redemption period expires, whichever occurs first. Minn. Stat. § 550.206

Priority for Redemption

A Minnesota statute was amended to provide that the order of redemption for judgment creditors in a foreclosure setting is determined by the order that the creditors’ judgments were entered on the certificate of title for the foreclosed torrens property or docketed in the office of the district court administrator if the property is not torrens property. This new rule for priority applies regardless of the homestead status of the property. Minn. Stat. § 580.24.

Ban on the Use of Mercury-Containing Thermostats, Switches, and Relays

Minnesota law now prohibits the sale, distribution, or installation of a product or device that uses a mercury switch to sense and control room temperatures through communication with heating, ventilating, or air-conditioning equipment. Minn. Stat. § 116.92(8d). The sale, distribution of mercury switches, or mercury relays individually or as part of another product is also prohibited. This prohibition does not apply if a switch or measuring device is used to replace a switch or measuring device that is part of a larger product in use prior to January 1, 2008, provided the owner of the equipment has made every reasonable effort to determine that no compatible nonmercury replacement component exists. Minn. Stat. § 116.92(8j).

Fair Market Value in Dedication Proceedings

The Minnesota Legislature clarified the method of determining the fair market value in municipal park dedications. A municipality may choose to accept a cash fee set by local ordinance from an applicant for new lots created in the subdivision. Minn. Stat. § 462.358(2b). This cash fee will be based on the average fair market value of the unplatted land for which park fees have not already been paid that is to be served by municipal sanitary sewer and water service or community septic and private use. For purposes of redevelopment on developed land, the municipality may choose to accept a cash fee based on the fair market value of the land no later than the final approval.

Closure or Conversion of Mobile Home Parks

At the end of the 2007 legislative session, the Minnesota Legislature established the Minnesota Manufactured Home Relocation Trust Fund. The purpose of the fund is to reimburse manufactured home owners who rent space in mobile home parks and are required to relocate upon the conversion or closure of mobile home parks. Minn. Stat. § 462A.40. At least nine months prior to the conversion or closure of a mobile home park, the park owner must prepare a closure statement and provide a copy to the commissioners of health and the housing finance agency, the local planning agency, and each impacted resident of a manufactured home. The closure statement must contain specified language informing the impacted residents that they may be entitled to compensation from the Minnesota Manufactured Home Relocation Trust Fund. Upon announcement of the closure of a mobile home park, the governing body of the affected municipality must hold a public hearing to review the closure statement and the impact that the park closing will have on displaced residents. At the hearing and in the notice for the hearing, displaced residents must be informed that they may be eligible for payments from the relocation fund for reasonable relocation costs. The municipality will appoint a neutral third party to act as paymaster and arbitrator in the process of closure or conversion. Minn. Stat. § 327C.095(4).

If a manufactured home owner is required to move due to a conversion of all or a part of a manufactured home park to another use or due to the closure of a park, the park owner must pay to the fund the lesser of the actual costs of moving or purchasing the manufactured home or $3250 for each single-section home and $6000 for each multisection home, provided that the manufactured home owner has made application for payment of relocation costs. The park owner must make the payment within 60 days of receipt of an invoice from the neutral third party. The park owner does not have to pay if (1) the park owner relocates the manufactured home park at the park owner’s expense; (2) the home owner is vacating and has informed the park owner prior to the delivery of the closure statement; (3) the home owner has abandoned the manufactured home; (4) the home owner has a pending eviction action for nonpayment of rent that was filed prior to the date of the closure statement; (5) the conversion or closing is the result of a public taking or exercise of eminent domain; (6) the owner of the home is not a resident of the park. Minn. Stat. § 327C.095(12). The maximum amount of actual relocation expenses that the park fund will pay to a manufactured home owner is $4000 for a single-section home and $8000 for a multisection home. Minn. Stat. § 327C.095(13).

Changes in the Minnesota Construction Code

The Minnesota Legislature made a number of amendments to the construction code. The following are the important and noteworthy changes:

Annual Operating Permit for Elevators

Minnesota law now requires any person who operates an elevator to obtain an annual operating permit from the municipality or department of administration. “Elevator” means moving walks and vertical transportation devices such as escalators, passenger elevators, freight elevators, dumbwaiters, handpowered elevators, endless belt lifts, and wheelchair platform lifts, but does not include external temporary material lifts or temporary construction personnel elevators at construction sites of new or remodeled buildings. The fee for obtaining the permit is $100, and the permit must be renewed each year. Minn. Stat. § 16B.747.

Electrical Inspection Fees Increased

The state electrical inspection fee was increased from $20 to a $35 minimum for each separate inspection of an installation, replacement, alteration, or repair in a residential or commercial building. Minn. Stat. § 326.2441(2). Additionally, the legislature increased individual inspection fees for services, generators, circuits, and other power supply sources as well as inspection fees for one- and two-family dwellings, multifamily dwellings, manufactured home park lots, and transitory projects. See Minnesota Statute § 326.2441 for the detailed fee schedule.

Written Contracts Required

Minnesota law now requires all licensed residential contractors, remodelers, roofers, and home installers (licensees) to put into writing all agreements between a licensee and a customer for the performance of a licensee’s services. Agreements requiring written contracts include proposals, estimates, bids, quotations, contracts, purchase orders, and change orders. The written contracts must be signed by the licensee and the customer and must contain a detailed summary of the services to be performed, a description of the specific materials to be used, and the total contract price or a description of the basis on which price will be calculated. The licensee must provide to the customer a signed and dated document at the time the licensee and customer sign the document. Minn. Stat. § 326B.809.

Changes to the Contractor’s Recovery Fund

The legislature increased the renewal fees that each contractor must pay to the Contractor’s Recovery Fund. Each contractor who renews a license must pay $100 upon renewal for gross receipts under $1 million, $150 for receipts between $1 and $5 million, and $200 for receipts over $5 million. The legislature also specified the various items that an owner or lessee must include on the verified application to be eligible for compensation from the fund. See Minn. Stat. § 326B.89(6). The statute now provides that the Commissioner of Commerce will arrange for an administrative hearing if the applicant requests one. The Commissioner will have the right of subrogation to all of the rights and interests in the owner or lessee’s final judgment if the Commissioner pays compensation from the fund. Minn. Stat. § 326B.89.

Radon Control

The Commissioner of Labor and Industry will adopt rules for radon control that will affect all new residential buildings. The rules will incorporate the radon control methods found in the International Residential Code, with amendments to coordinate with other Minnesota construction codes. Minn. Stat. § 16B.61.

Statute of Limitation Established for Breach of Warranty and Contribution or Indemnity Actions

The Minnesota Legislature clarified the application of statutes of limitation and/or repose to a claim for contribution or indemnity action arising out of a breach of statutory or express written warranty brought by a general contractor against a subcontractor or material supplier for a defective and unsafe condition of an improvement to real property. This clarification ameliorates the harsh impact of the Minnesota Supreme Court’s 2006 ruling in Weston v. McWilliams, where the court held that the statute’s plain language provides that a contribution or indemnity action does not accrue until the principal claim has been paid. As a result, the two year statute of repose would bar a claim for contribution or indemnity during the course of pending litigation. Now, an action for contribution or indemnity by a general contractor against a subcontractor or material supplier arising out of a defective and unsafe condition of an improvement to real property may be brought no later than two (2) years after payment of a final judgment, arbitration award, or settlement arising out of the improvement, even if that occurs after the otherwise applicable statute of repose. Minn. Stat. § 541.051(4).

Termination of Wind Easements, Options, and Leases

A Minnesota statute has been amended to limit the length of wind easements, options, and leases. Specifically, a wind easement, an easement to install wind turbines on real property, an option, or a lease of wind rights shall terminate after seven years from the date the easement is created or the lease is entered into if the wind energy project on the property does not begin commercial operation within the seven-year period. This new limitation was effective May 26, 2007, and it applies to wind easements created and wind rights leases entered into on and after May 26, 2007. Minn. Stat. § 500.30(2).

Uniform Environmental Covenants Act

The Minnesota Legislature enacted the Uniform Environmental Covenants Act (UECA), which authorizes creating, enforcing, and modifying environmental covenants that impose limits on the use of contaminated real estate. Previously, no uniform set of rules governed environmental use restrictions and some commentators feared legitimate restrictions would “roll off” title records by operation of law.

Contents of Environmental Covenants

An environmental agency, such as the Minnesota Pollution Control Agency for example, must approve an environmental covenant before it may be recorded under UECA. An environmental covenant must contain a description of the real property subject to the covenant, describe the activity and use limitations on the real property, identify and be signed by every holder, and identify the name and location of any administrative record for the environmental response reflected in the covenant. Minn. Stat. § 114E.15. A “holder” is the person who holds the rights in an environmental covenant and can be a governmental unit, for example. Minn. Stat. § 114E.05 and .10. A holder’s interest, by statute, is an interest in real property.

Duration, Modification, or Termination

An environmental covenant runs with the land, and its duration is perpetual unless the covenant itself limits the term to a specific time period or it is terminated or modified by consent or a foreclosure or, in some circumstances, by eminent domain. Minn. Stat. § 114E.40. The environmental agency that approved an environmental covenant may determine whether to terminate or reduce the burden on real property and must provide notice of such action to each person with a current recorded interest in the property subject to the covenant. Id.

Enforcement of Environmental Covenant

A civil action for injunctive or other equitable relief for violation of an environmental covenant may be brought by any party to the covenant, the environmental agency that signed the covenant, any person whose interest in the real property may be affected by the alleged violation, or the political subdivision where the real property is located. Minn. Stat. § 114E.50.

Priority of Environmental Covenants

An interest in real property that has priority under another law (such as a mortgage, for example) is not affected by an environmental covenant. Minnesota law does not require a person that owns a prior interest to subordinate that interest to an environmental covenant. An agreement by a person to subordinate a prior interest to an environmental covenant affects the priority of that person’s interest, but it does not impose an affirmative obligation on the person with respect to the covenant. Minn. Stat. § 114E.10.