The 2008 Minnesota Legislative Session Brings Many Real Estate Law Changes
By: BRIAN D. CLARK, SUMMER ASSOCIATE, MARY S. RANUM & BRIAN S. MCCOOL
In 2008, the Minnesota Legislature passed numerous laws that affect real estate developers, lenders, property managers, owners, and investors. Unless otherwise specified, the legislation described in this article is effective August 1, 2008.
The consequences of the mortgage foreclosure crisis in Minnesota led the Legislature to adopt a number of reforms. Some new provisions are intended to clarify the significant reforms adopted in the 2007 session, and a number of new laws were also adopted.
Clarifying Application of Mortgage Fraud Statute
The Legislature has clarified a number of provisions relating to the regulation of mortgage lenders and brokers.
- The definitions of residential mortgage loans and residential real estate were amended to include all loans on one-to-four family properties, whether owner-occupied or not. This broadens the application of the mortgage fraud statute. Minn. Stat. § 58.02.
- Minnesota law now requires residential mortgage lenders and brokers to retain records of complaints, trust accounts, and business records for 60 months. Minn. Stat. § 58.14.
- The $100,000 limit for contracts for deed subject to usury interest rate restrictions was raised to $300,000 effective January 1, 2009. The limit for mortgage loans remains $100,000. Minn. Stat. § 47.20.
- Lenders are prohibited from making loans without verifying a borrower’s reasonable ability to pay. Lenders must consider thirteen factors in assessing a borrower’s “reasonable ability to pay.” Minn. Stat. § 58.13. The lenders may also rely on criteria established by the Department of Veteran Affairs or Department of Housing and Urban Development to provide streamlined or reduced interest loans or any criteria authorized by the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
- Effective immediately, the statute now clarifies that under the private attorney general statute, borrowers injured by a mortgage broker’s failure to act in good faith under Minn. Stat. § 58.161 have a private right of action against the broker. Minn. Stat. § 58.18.
Notice of Foreclosure Counseling
As a prerequisite for foreclosure, Minnesota law now requires notification to homeowners of the availability of foreclosure counseling. Minn. Stat. § 580.02. The foreclosing party must also inform the homeowner that it will transmit the homeowner’s name, address, and telephone number to a foreclosure counseling agency so that the agency may contact the homeowner. Renters living in the home must also receive a notice of the pending foreclosure to explain that they do not have to immediately move out of the home and must continue to comply with the terms of their lease. The notice also provides the renters with contact information for government agencies and nonprofits that can provide more information about the foreclosure process. The statute provides mandatory language for both notices. Minn. Stat. §§ 580.022, 580.042.
Foreclosure notices must include the property’s physical street address and tax identification number, the name of the foreclosing party, and the name of its agent. This information will help the State of Minnesota more accurately study foreclosure trends, which was difficult in the past, because of incomplete or inaccurate information regarding the properties.
Recording of Deeds
Minnesota law now provides that no contract for deed or deed conveying fee title to real estate may be recorded unless it provides the legal name of the grantee and the grantee’s residential or business address. Minn. Stat. § 507.092.
Under Minnesota law, redemption is the opportunity for a borrower whose home has been sold at a sheriff’s sale after default on a mortgage to repurchase the property. Generally, the borrower has a six-month period to pay to the sheriff’s certificate holder the redemption price. Previously, even when the holder of the sheriff’s certificate agreed to accept less than the full amount necessary to redeem, some sheriffs had refused to accept less than the full amount due under the sheriff’s certificate. The statute now explicitly directs sheriffs to accept payment of less than the full amount due for redemption, provided the holder of the sheriff’s certificate provides documentation stating that it will accept less than full payment. Minn. Stat. § 580.23(15). Delivery of redemption funds now must occur between 9 a.m. and 4 p.m. on weekdays.
Leasing Financially Distressed Residential Properties
Landlords who have received a contract for deed cancellation or notice of a mortgage foreclosure sale may not enter into new month-to-month leases longer than two months or the time remaining in the contract cancellation period or mortgagor’s redemption period—whichever is less. A fixed-term lease shorter than the cancellation or redemption period remains allowable. Landlords must also notify prospective tenants that the landlord has received notice of a contract for deed cancellation or notice of mortgage foreclosure and the date on which the cancellation or foreclosure period ends. Longer lease periods are allowed only if the contract for deed seller or mortgage holder agrees not to terminate the lease for at least one year and the lease does not require prepayment of rent beyond the potential contract for deed cancellation or mortgage redemption period. Minn. Stat. § 504B.151.
Two changes were also made to the complex statute governing eviction of existing tenants by mortgage holders. First, tenants must now be given two months’ notice, instead of only one, if the mortgage holder intends to require the tenant to vacate the property prior to or following the expiration of the mortgage redemption or contract for deed cancellation period. Second, the statute has been narrowed and now applies only to tenants who entered into a lease after notice of mortgage foreclosure or contract for deed cancellation, but before the expiration of the time for redemption or cancellation. Minn. Stat. § 504B.285.
Redemption by Junior Creditors or Borrowers
Minnesota law now requires creditors to give notice of their intent to redeem at least one week before the borrower’s redemption period expires. Minn. Stat. § 580.24. Redemption by creditors or borrowers is now subject to a six percent interest rate from the time of sale, unless the certificate of sale specifies a different rate. Minn. Stat. § 581.10.
Individuals or companies redeeming property no longer have to provide a certified copy of a court record or deed giving them the right to redeem, but may instead provide an uncertified copy. Minn. Stat. § 580.25.
Redemption Priority Disputes
Disputes concerning the relative priority of liens no longer prevent a party with the right to redeem from making payment before final judgment is rendered in the dispute. Parties may deposit payment with the sheriff, who holds the payment until the dispute is resolved. Minn. Stat. § 580.28. In the past, the redeeming party had to obtain a temporary restraining order to allow redemption to occur while the dispute was pending.
Limitation of Purchaser Fees and Costs on Redemption
As a condition of redemption, holders of sheriff’s certificates of sale may only require payment of certain expenses specified by an exclusive statutory list:
- Taxes upon which penalties would be incurred.
- Hazard insurance.
- Costs incurred to reduce the borrower’s redemption period to less than six months.
- Fees paid to the county recorder, registrar of titles, or sheriff.
- Reasonable fees paid to real estate broker for price opinions or licensed appraisers for appraisals.
- Deed taxes.
- Reasonable attorney fees incurred after the foreclosure sale, but no more than half the statutory limits on such fees.
- Costs incurred in maintaining the property, and any interest paid on any other mortgage on the property due during the redemption period.
Holders must submit an affidavit itemizing these allowable costs within the redemption period. Holders who claim expenses for nonexistent fees or costs or unreasonably high cost for a particular item will be liable for treble damages. Minn. Stat. § 582.03.
Reinstatement allows a borrower whose property is in foreclosure to pay the full amount of back payments plus accrued costs and stop the foreclosure proceedings before a sale occurs. By statute, borrowers may obtain reinstatement figures – information regarding the amount of money due to the lender to reinstate their mortgage – through the sheriff. Minnesota law now requires reinstatement figures to specifically include the current payoff amount, an itemized schedule of payments, and the identity of a lender’s agent the borrower may contact. Minn. Stat. § 580.30.
Right of Entry into Vacant Homes
Effective May 18, 2008, statutory permission is granted to holders of mortgages or sheriff’s certificates to enter vacant or unoccupied properties during the borrower’s redemption period to prevent the properties “from falling below minimum community standards for public safety and sanitation” and to make “reasonable periodic inspections.” The statute previously only allowed entry to prevent “waste” and install security measures, such as new locks, security systems, or plywood over windows. Now holders may engage in a broader range of activities, such as mowing the lawn and repairing unsightly defects. These costs may be added to the redemption price. As a result of abuse of resident caretaker costs, though, such fees are no longer authorized. Minn. Stat. § 583.031.
Amendments to statutes governing the sale of manufactured homes parallel those of residential homes, including notice of the availability of foreclosure counseling and reinstatement procedures. Minn. Stat. § 327.64. Additionally, a private cause of action is now provided for violations of statutorily defined practices, including churning, violating a duty of reasonableness, charging excessive aggregate interest rates and fees, violating other standards of fair conduct, and granting negative amortization loans when the only repayment options offered to the borrower are insufficient to satisfy accruing interest. Minn. Stat. § 327B.12.
Changes to Homestead Law
Three unrelated changes were made to Minnesota homestead protections.
Homestead Owners Receiving Rent
Owners of a home who occupy the home or allow a relative to live there can receive lower property tax rates by filing an application to classify it as a homestead. Effective July 1, 2008, these homesteads are subject to a new registration requirement if the home generates rental income. Homestead owners who receive rental income for more than 31 consecutive days must register their property in the city where it is located within 60 days after the initial rental period began. The requirement only applies if the city has a population over 25,000 and the city must maintain a file of the property registrations that is open to the public. Minn. Stat. § 273.124. The requirement creates a new level of oversight of relative-occupied homesteads, but the reasons for the statute and its full impact of are not yet clear.
Homesteads Passing by Trust at Death
The Minnesota Legislature amended the Uniform Probate Code to exempt homesteads transferred to trusts from responsibility for taxes and debts owed by the deceased. However, to qualify for the exemption, the trust must be for the sole benefit of a surviving spouse or descendants. Minn. Stat. § 524.2-402.
Closing Loophole for Creditors
A new amendment closes a potential loophole that would have allowed consumer credit companies to include waivers of homestead protections in their standard contracts. Minn. Stat. § 510.05. The statute now clarifies that a recent amendment to limitations on the homestead exemption is only applicable to attorney liens.
Transfer on Death Deeds
This session the Minnesota Legislature provided an important new way for families to transfer real estate. Minn. Stat. § 507.071, et seq. A transfer on death deed enables property to pass to another party effective only upon the death of the property owner, without having to go through probate. Transfer on death deeds are exempt from deed tax and may be recorded even if delinquent taxes are owed on the property. After a transfer on death deed is executed by recording the deed, the transferring party may revoke or change it at any time by recording a revocation. Upon the transferring party’s death, the transferee of the interest must simply provide an affidavit that the transferee survived the death to obtain title to the property.
Acknowledgements Made in a Representative Capacity
Minnesota law now specifically requires that deeds be recorded when signed in a representative capacity for an organization or trust, so long as they comply with statutory certification requirements. Minn. Stat. § 358. Previously when a person acting in a representative capacity signed a deed, some county recorders inquired into the representative’s authority to acknowledge the instrument. The amendment now simplifies the process, removing any ambiguity.
Doctrine of Practical Location of Boundaries
Registering a piece of property is a way to ensure the owner has full title. After a property is registered via a court proceeding, no third party may claim an interest in the land’s title. However, the courts developed the legal doctrine of practical location of boundaries as an exception to registered property when there was a mistake or preexisting dispute over the property boundaries. Minnesota law now specifically states the doctrine of practical location of boundaries applies to registered property and provides that judicial proceedings may be used to establish the boundary. Minn. Stat. §§ 508.02, 508A.02.
Electronic Recording of Deeds
The Minnesota Real Property Electronic Recording Act grants permission to use an electronic signature to comply with the requirements of statutes that instruments affecting real property be signed. The new Electronic Real Estate Recording Commission is charged with adopting standards for electronic signatures. Minn. Stat. § 507.0941, et. seq.
New Certificate of Real Estate Value Filing Requirements
Certificates of Real Estate Value (CRVs) must be filed with a county auditor whenever property is sold for more than $1,000. Effective June 30, 2008, CRVs must indicate any proposed change in the use of the property that would alter the property’s value on the CRV. CRVs must also indicate if the property is obtained as part of a “1031 exchange,” which is a type of land exchange that results in deferral of tax on gain or real property. Minn. Stat. § 272.115.
Residential Property Taxes
For taxes levied in 2008 through 2010, Minnesota law will cap residential property tax increases by counties at 3.9 percent per year. Minn. Stat. § 275.71.
A number of amendments were made to the Minnesota Green Acres program that prevents high tax assessments from forcing farmers to sell their land. Minn. Stat. § 273.111. First, farm ownership requirements were narrowed to exclude most limited-liability entities. Second, land already enrolled in the Reinvest in Minnesota Program and federal Conservation Reserve Program land is now ineligible for Green Acres tax treatment. Third, the Commissioner of Revenue will determine new uniform values for agricultural land to account for nonagricultural factors that may increase the value of property, such as land located along a lake. All newly enrolled, transferred, or sold property is subject to the new amendments.
Minnesota law now exempts from real property taxation $150,000 of the value of a 70-percent disabled veteran’s homestead and $300,000 of a 100-percent disabled veteran’s homestead. Minn. Stat. § 273.13.
Public Use Exception to Deed Tax
The deed tax for tax-forfeited land dropped to $1.65 if the land is conveyed to a governmental subdivision for authorized public use or redevelopment. Minn. Stat. § 287.2205.
Deed and Mortgage Registration Taxes Reauthorized for Ramsey & Hennepin Counties
Authorization for Ramsey and Hennepin Counties to impose additional deed and mortgage registration taxes expired on January 1, 2008. The Legislature reauthorized Ramsey and Hennepin Counties to collect an additional deed tax of 10 cents per $1,000 of consideration and an additional mortgage registration tax of 10 cents per $1,000 of debt secured. The changes are effective for transfers or mortgages executed on or after July 8, 2008. Minn. Stat. § 383A.80.
Well Disclosure Filing Fees
Well disclosure filing fees increase from $40 to $45 effective July 1, 2008, for any deed executed on or after that date. Minn. Stat. § 103I.235.
A statutory amendment removes a restriction limiting the duration of wind energy easements or leases to seven years if commercial operation of a wind energy project had not begun by then. Minn. Stat. § 500.30. The Legislature enacted the restriction last session because of concerns that wind easements and leases would allow developers to tie up land for long periods of time without actually progressing with development, but wind energy proponents feared it would hinder the competitiveness of Minnesota’s wind energy resources because seven years may not be sufficient time in which to develop a project. A working group, established by the Legislature to analyze the development period restriction, is to report to the Legislature on January 15, 2009, and additional changes to the statute are expected to be made before the amendment’s effective date of June 1, 2010.
Public Pool Drains
In response to the serious injury of a child in a wading pool in Minnesota, the Legislature passed the Minnesota Pool Drain Law. It requires that all public pools have drains that are either unblockable, have at least two suction outlets connected in parallel with suction outlet covers that meet ASME or ANSI standards, have a gravity drain or outlet, or use another device approved by the Department of Health. Minn. Stat. § 144.1222. The law is effective January 1, 2009, for pools less than four feet deep, such as wading pools or hot tubs, and January 1, 2011, for all other pools.
Two new laws affect the rights of property owners with pets. Cities may now adopt ordinances allowing dogs to accompany their owners to the outdoor patios of restaurants. Minn. Stat. § 157.175. Individuals who have prior convictions for owning a dangerous dog are now prohibited from owning a dog. Minn. Stat. § 347.542.