By Larry M. Wertheim
The new Minnesota contract for deed legislation,1 which generally took effect August 1, 2024, constitutes the most significant changes in contract for deed law in almost 40 years. While there are literally dozens of new provisions, the most significant changes affect contracts on residential property and, in particular, a type of contract for deed on residential property where the seller is deemed an “investor seller.”
But a number of the new provisions apply to all contract for deed transactions. And since, on its face, a contract for deed does not normally reveal the nature of the seller or whether it is residential property, all contract for deed transactions will be impacted by the new legislation. This article will provide a brief overview of the new legislation and how it will affect various contract for deed transactions.
Entering into all residential contracts for deed
Commencing August 1, 2024, all sellers entering into residential contracts for deed have a non-alterable obligation to pay any delinquent real estate taxes on the property and to record the contract within four months of execution. Failure to timely do so means that, in the event of a purchaser default, a seller cannot use statutory cancellation to terminate the contract.2 In order to avoid the effects of these provisions, it is incumbent on the seller under a contract for deed not involving residential property to include a statement in the contract that “The property is not residential property.” Under the terms of the new legislation, such a statement will constitute prima facie evidence that the no-statutory-cancellation-of unrecorded-contracts rule does not apply to that particular contract for deed.3
Entering into investor seller contracts for deed
Where the seller qualifies under the special category of being an “investor seller,” contracts for deed on residential property entered into on or after August 1, 2024, are subject to a wide-ranging set of requirements and remedies.4 The legislation begins with a broad definition of “investor seller” and postulates that any seller under a residential contract for deed is an “investor seller” unless the contract seller qualifies for an exemption under one of 11 statutory exceptions. These exemptions from being an “investor seller” include, most importantly, having owned and occupied the residence for at least one year. They also include being a relative, trust beneficiary, P.R., devisee, or TODD transferee of such owner-occupant; selling to a relative; and selling to a long-term tenant.5
If the seller on a contract for deed executed on or after August 1 is an “investor seller,” the investor seller is required to provide to the purchaser a detailed disclosure notice that, among other things, specifically highlights all balloon payments under the contract and the amount that the investor seller (or a related party) paid to acquire the property, and the investor seller is also required to provide to the purchaser a detailed amortization schedule.6 Moreover, regardless of whether there is a separate purchaser agreement before entering into the contract for deed, there is a required, non-waivable 10-day cooling-off period after giving the disclosure before any contract for deed can be executed. And prior to executing the contract for deed, the purchaser can terminate the transaction without cost.7 Further, where the investor seller contract is subject to a senior mortgage containing a due-on-sale clause, the investor seller must procure from the mortgagee a consent to the sale or an agreement to waive that clause, the contract for deed itself must disclose the existence of the mortgage, and the investor seller must represent to the purchaser that the seller has made the requisite arrangements with the mortgagee.8 Finally, the new legislation contains a prohibition on an investor seller entering into a new contract for deed where the seller (or related parties) had frequently or repeated sold on contracts and then cancelled those contracts—conduct that the statute defines as “churning.” In that respect, the legislation designates certain specific prior conduct by an investor seller as creating a rebuttable presumption of churning.9
In order to avoid these disclosures (and the other investor seller requirements as discussed below), starting August 1, it is incumbent on the attorney for the seller on all contracts for deed not on residential property or on residential property but not with an investor seller to include a statement in the contract that “The property is not residential property” or “The seller is not an investor seller.” Either of those statements will constitute prima facie evidence that these investor seller statutory provisions (and the other investor seller statutory requirements discussed below) do not apply and may be relied on by a title examiner to conclude that the investor seller statutes do not apply to the particular contract for deed.10
Remedies for violations regarding investor seller contracts for deed
The new legislation creates significant and powerful remedies for the purchaser on a contract for deed with an investor seller during the term of the contract for deed for:
- violations of the disclosure requirements (including material omissions or misrepresentations);
- execution of the contract for deed within the 10-day cooling-off period; and
- churning.11
In the case of a violation of these investor seller protections, the contract for deed purchaser has a claim against the investor seller for rescission of the contract for deed during the two-year period after execution of the contract. As part of that remedy, the purchaser will be awarded a judgment against the investor seller for all monies paid under the contract (including payments to third parties) and the value of improvements made by the purchaser, less the fair rental value of the home during the period the purchaser was in possession, plus other damages and reasonable attorneys’ fees.12
In order to protect the free alienability of investor seller contracts, however, the legislation creates holder-in-due-course protection for the original investor seller’s successors in interest against the purchaser’s rescission claim as long as the contract for deed purchaser has not filed a lis pendens and the successor in interest did not have prior knowledge of the violation, as proved by clear and convincing evidence.13
Residential purchaser transfers exempt from anti-assignment clauses
The new legislation also addresses an issue that has been the subject of apparently inconsistent court of appeals decisions—the right of a seller to exercise cancellation for violation of an anti-transfer clause in the contract in the case of certain death-related purchaser transfers.14 Now, effective for all contracts for deed on all residential property entered into on or after August 1 (including non-investor seller contracts), regardless of the language in the contract, the seller cannot cancel the contract based upon involuntary transfers arising from the purchaser’s death (including transfer on death deeds and inheritance); transfers arising from marriage dissolution; intra-family transfers; or transfers to the purchaser’s living trust.15
Cancellation of contracts for deed
The 2024 legislation establishes certain new rules regarding cancellation of residential contracts for deed, including special rules regarding cancellation of investor seller contracts for deed. Thus, as mentioned above, any contract for deed on residential property executed on or after August 1, that is not recorded within four months of execution cannot be terminated by means of statutory cancellation.16
In addition, in the case of contracts for deed by an investor seller, the actual cancellation process is different from that of all other contract for deed cancellations. First, prior to serving the notice of cancellation on the purchaser, the seller must initially give the purchaser a 30-day informal mailed notice of default.17 Second, and more significantly, the notice period under the cancellation statute for an investor seller contract for deed is 90, rather than 60, days.18 Third, under the new legislation, the contract for deed purchaser’s right to a rescission remedy for an investor seller’s violation of the investor seller protections regarding disclosure and churning is, ipso facto, grounds for injunctive relief tolling the cancellation under the contract for deed injunction statute.19
As discussed above, as long as either a contract for deed is on non-residential property or a seller is not an investor seller and the seller has included a statement in the contract for deed that “The property is not residential property” or “The seller is not an investor seller,” these statements are prima facie evidence that all the special investor seller cancellation provisions do not apply. For example, where the statements are included in the actual contract, a title examiner reviewing cancellation documents can pass title where the seller’s cancellation notice was for 60 (and not 90) days.20 If, however, a seller of non-residential property or a seller of residential property who is not an investor seller failed to include such a statement in the original contract for deed, the legislation still allows the seller to cancel the contract without complying with the special investor seller cancellation rules as long as certain care is taken. Thus, such seller (or their agent or attorney), as part of their cancellation papers, can file an additional affidavit, based upon personal knowledge, that “The property is not residential property” or “The seller is not an investor seller,” either of which statements will constitute prima facie evidence that the special cancellation rules for investor seller contracts did not apply to this particular cancellation.21
Aside from these special rules in connection with statutory cancellation for either residential contracts for deed or for contracts for deed with investor sellers, the new legislation enacts certain new cancellation provisions applicable to all contracts for deed, regardless of the type of property or nature of the seller. First, in a reversal of prior law, cancellation papers can now be recorded for any cancellation even if the real estate property taxes are delinquent.22
Second, as a benefit to all cancelling sellers on contracts for deed executed on or after August 1, 2024, the seller’s attorneys’ fees that the purchaser must pay as a cost of curing the cancellation has been increased from $500 to $1,000.23 Third, effective for all contract cancellation commenced on or after August 1, 2024, for all contracts for deed whenever executed, the cancellation injunction statute has been amended to provide that (1) the court may award reasonable attorneys’ fees and costs in connection with the grant of a temporary injunction or restraining order (but only if the seller made an appearance at the hearing for such relief), and (2) if the court issues permanent relief to the purchaser or determines by final order or judgment that the cancellation notice was invalid or the purchaser asserted a valid defense, the court is required to award to the purchaser reasonable attorneys’ fees and costs.24
Finally, in what was probably the most contested provision in the new legislation, the new law requires a possible refund of a portion of the purchaser’s down payment by an investor seller who entered into a contract for deed on or after August 1, 2024, and who, within four years of execution of the contract, cancelled the contract for deed. Specifically, in those circumstances, the investor seller is required to refund to the cancelled contract purchaser that portion of the down payment that exceeded 10 percent of the full contract purchase price. But the seller is allowed to offset against such refund an amount equal to what would have roughly constituted a “hypothetical cure” of the cancellation: Thus, the seller can offset against the sum to be refunded for the down payment in excess of 10 percent of the purchase price the following items: (1) unpaid real estate taxes for the period prior to termination, (2) unpaid insurance premium and utilities for the period prior to termination incurred by the investor seller, (3) reasonable costs of repair for damages caused by the purchaser, beyond ordinary wear and tear, incurred by the investor seller, (4) seller’s attorneys’ fees incurred in the cancellation not to exceed $1,000, and (5) one-half of unpaid monthly contract installment payments (exclusive of balloon payments) accrued prior to termination.25
Conclusion
The hope is that this new legislation hits a sweet spot between providing necessary protection for unwary purchasers and preserving for the future Minnesota contracts for deed.
Larry M. Wertheim is a shareholder in Kennedy & Graven, Chtd. and the editor of Minnesota Practice Series: Real Estate Law (Thomson Reuters) as well as the author of the contract for deed chapter. He was instrumental in crafting Minnesota’s 2024 contract for deed legislation.
Notes
1 2024 Minn. Laws, Ch. 123, art. 16, §§1-17. For simplicity’s sake, all citations to the legislation will be to the statutory provisions as amended or to be codified.
2 Minn. Stat. §§507.235, subd. 1a and 559.21, subd. 4b. Under Section 507.235, subd. 1a(d), there is a limited carve-out from that prohibition in the case where the contract cannot be timely recorded despite the seller’s good faith efforts.
3 Minn. Stat. §§507.235, subd. 1a(c).
4 Minn. Stat. §§559A.01-.05. Unlike the prior multiple seller statute, Minn. Stat. §§559.201-.202, which was triggered by multiple contract sales over 12 months and which the new legislation repeals, the new investor seller statute is triggered by any single contract for deed sale by an investor seller and there is no exemption for situations where the purchaser is represented by an attorney or a buyer’s agent.
5 Minn. Stat. §559A.01, subd. 5.
6 Minn. Stat. §559A.03. These items were among the new disclosures not required under the prior multiple seller statute. In addition, if the transaction was advertised or primarily negotiated in a language other than English, the disclosure must be given in that language. Minn. Stat. §559A.03, subd. 7. Like the prior multiple seller statute, the new investor seller legislation requires that the seller provide annual detailed accounting of the purchaser’s payments upon the purchaser’s request. Minn. Stat. §559A.04, subd. 3.
7 Minn. Stat. §559A.04, subd. 2.
8 Minn. Stat. §559A.04, subd. 1.
9 Minn. Stat. §§559A.01, subd. 3, 559A.04, subd. 4.
10 Minn. Stat. §559A.02.
11 Minn. Stat. §559A.05, subd. 1.
12 Minn. Stat. §559A.05, subd. 2(a). A similar, but not identical, remedy of rescission is given to a residential contract for deed purchaser from an investor seller if the investor seller’s assurances regarding the due-on-sale clause in the senior mortgage are not as promised. Minn. Stat. §559A.05, subd. 3.
13 Minn. Stat. §559A.05, subd. 2(b). As a result, all prospective successors in interest should examine title. If a contract purchaser’s rescission action against the holder of the investor sellers’ interest is barred by this holder-in-due-course protection, the purchaser still has a remedy against the original investor seller for the greater of actual damages or $5,000, plus reasonable attorneys’ fees. Minn. Stat. §559A.05, subd. 2(c).
14 Compare Woodard v. Krumrie, 2020 WL 996746, *2-6 (Minn. App. 2020) (unpublished opinion) (upholding cancellation of contract for deed based upon transfer on death deed to grandson of vendors) with Kuhn v. Dunn, 990 N.W.2d 491 (Minn. Ct. App. 2023) (invalidating cancellation of contract for deed based upon transfer by intestate succession to deceased purchaser’s three-year-old child). Shortly after passage of the new legislation, the Minnesota Supreme Court reversed the court of appeals decision in Kuhn v. Dunn and upheld cancellation based upon the transfer by intestate succession. Kuhn v. Dunn, ____ N.W.2d ____, 2024 WL 3168349 (Minn. 2024).
15 Minn. Stat. §559.21, subd. 4a. The purchaser transfer protections in the Minnesota statute were largely adopted from the federal Garn-St. Germain Act, Pub. L. No. 97-320, 96 Stat. 1469 (1982) (codified at 12 U.S.C. §1701j-3(d)), which imposes similar limitations on the exercise of due-on-sale clauses in virtually all conventional mortgages on residential property. The prohibition in the federal act applicable to conventional mortgages on residential property against the use of a transfer restriction in the case of the mortgagor’s granting a subordinate mortgage, i.e., junior financing, 12 U.S.C. §1701j-3(d)(1), was not incorporated into the Minnesota statute. It should also be noted that the new legislation would not have applied to the situation in those two Minnesota appellate cases (note 14, supra) as both involved agricultural property and the new legislation’s definitions exclude contracts for deed on agricultural property. Minn. Stat. §§507.235, subd. 1a(e)(1) and (2) (definition of “contract for deed” applies only to “residential real property,” the definition of which excludes property subject to Farmer-Lender Mediation Act), 559.21, subd. 4a (incorporating definition of “contract for deed” from §507.235, subd. 1a)).
16 Minn. Stat. §559.21, subd. 4b. As mentioned supra, there is a limited “good faith” exception to this rule.
17 Minn. Stat. §559.21, subd. 4(f). If the cancellation is completed, the investor seller (or their agent or attorney) will need to file an affidavit reciting that this 30-day notice was given, and the affidavit will be prima facie evidence of compliance. Minn. Stat. §559.21, subd. 9. The requirement of this initial 30-day notice does not, as a practical matter, really extend the process for an investor seller cancellation beyond what is required for all cancellations. Under a longstanding provision applicable to all cancellations, no attorneys’ fees can be required as a condition for the purchaser’s cure unless the contract has been in default for at least 30 days prior to service of the formal notice, a necessary delaying step that most cancelling sellers regularly observe. Minn. Stat. §559.21, subd. 2a(5).
18 Minn. Stat. §559.21, subds. 2a and 4(a).
19 Minn. Stat. §§559.211 and 559A.05, subd. 4. A fourth special rule regarding cancellation of an investor seller contract for deed is discussed infra.
20 Minn. Stat. §559A.02.
21 Minn. Stat. §559.21, subd. 9.
22 Minn. Stat. §§272.12, 559.213.
23 Minn. Stat. §559.21, subd. 2a(5).
24 Minn. Stat. §559.211, subd. 1(c) and (d).
25 Minn. Stat. §559A.04, subd. 5. It should be noted that this is only a hypothetical cure as there is no actual cure of the default and the contract for deed remains cancelled. Also, the offsets are allowed even though they were not raised or payable under the actual notice of cancellation.