In
2004, the Minnesota Legislature adopted a comprehensive law dealing
with the cancellation of residential purchase agreements, codified
as Minn. Stat. §559.217. Modeled
on Minn. Stat. §559.21, the so-called “contract for deed cancellation
statute,” the residential cancellation statute authorized two new
statutory cancellation proceedings applicable to purchase agreements
involving residential real estate.
The first, cancellation with right to cure,1
allows cancellation of a residential purchase agreement after 15 days’
notice if the served party fails to comply with the notice.
The second, declaratory cancellation,2
provides for a 15-day notice to confirm a cancellation that, pursuant
to the terms of the purchase agreement, has already taken place.
Unlike the contract for deed statute, both new procedures apply
to cancellation by reason of failure of a condition and can be invoked
by buyers as well as sellers.3
2005
AMENDMENTS
In
2005, the Legislature made various amendments to Minn. Stat. §559.217,
some substantive and some technical.4 Since the statute covers both cancellation
with right to cure as well as declaratory cancellation, the 2005 amendments
even changed the name of the statute from “Declaratory Cancellation
of Purchase Agreement” to the more apt “Cancellation of Residential
Purchase Agreement.” While
the original statute applies to residential purchase agreements entered
into on or after August 1, 2004, these 2005 amendments
apply only to purchase agreements entered into on or after August 1, 2005.
The most significant change made in the 2005 amendments
relates to the grounds upon which a party can use declaratory cancellation. Under the original legislation, both cancellation
with right to cure and declaratory cancellation can be based upon
either default or a failure of a condition.
Cancellation with right to cure based upon default is, of course,
simply a modified form of the contract for deed statute. However, the original legislation permitted
declaratory cancellation upon the occurrence of a default, which “by
the terms of the purchase agreement” cancels the contract.5 The suggestion that cancellation without an
opportunity to cure would be permitted in the case of a default seemed
in conflict with the teachings of Romain v. Pebble Creek
Partners.6 Romain stands for the proposition
that a definite, noncontingent purchase
agreement cannot terminate by its own terms but must be terminated
under the statutory contract for deed cancellation procedure.
The allowance of declaratory cancellation (without right of
cure) in the case of default therefore raised questions due to the
apparent conflict with Romain.7 Now, under the 2005 amendments to the
statute, default is no longer grounds for declaratory cancellation. Therefore, declaratory cancellation can be used
only in the case of failure of a condition for any purchase agreement
entered into on or after August
1, 2005.
Another significant,
albeit rather technical, change deals with what residential purchase
agreements can be canceled under the statute.
Under its original version, the statute applied only to purchase
agreements that “could be canceled under Section 559.21”8.
The residential cancellation statute does, however, allow cancellation
of purchase agreements that fail solely by reason of unfulfilled conditions
even though such purchase agreements could not be canceled under Section
559.21. The 2005 amendments corrected that misstatement
and the statute will now apply to a purchase agreement “whether or
not the instrument is subject to Section 559.21.”
Changes are also made in the original legislation with
respect to service of the notice under both procedures.
While the notice must still be served on both the party holding
the earnest money and the other party to the purchase agreement,9
the 2005 amendments clarify that the 15-day period for either procedure
runs from service on the other party to the purchase agreement, not
service on the person holding the earnest money.
Also, the form of the notice will change under the amendments.
First, in the case of cancellation with right to cure, the
notice form will be modified to include reference to completion of
unfulfilled conditions (which language was inadvertently omitted in
the original statute). Second,
consistent with the elimination of declaratory cancellation based
upon default, reference to default will be
deleted in the declaratory cancellation notice.
Third, in order to apprise parties of the availability of counter-cancellation,
the notice forms for cancellation with right to cure and for declaratory
cancellation will contain a reference to the availability and effect
of counter-cancellation.
The 2005 amendments also make changes regarding injunctive
relief against a cancellation notice under the statute. In keeping with the language in the original
statute, the amendments define the term “suspend” to mean to restrain
or enjoin a cancellation pursuant to Section 559.211.10 Further, while the right to injunctive
relief was implicit under the original legislation, the 2005 amendments
make explicit the right of either a seller or a purchaser to seek
injunctive relief. Finally,
while the original legislation provided that the award of up to $3,000
in attorneys’ fees to the prevailing party in an action to suspend
a cancellation under the statute was mandatory,11 under the 2005 amendments,
that award of attorneys’ fees will only be permissive.
OUTSTANDING ISSUES
Despite the 2005 amendments, there are still outstanding
issues under the new statute. For
example, “residential real property” is defined as “real property,
including vacant land, occupied by or intended to be occupied by,
one to four families as their residence.”12
The 2005 amendments clarify that definition somewhat
by indicating that the one-to-four family limitation is “in the aggregate.” Thus, a purchase agreement for the sale of property
either currently used or to be developed as five single-family homes
would not come under the statute.
However, the meaning of “occupied, or intended to be occupied” is still not entirely
clear. If the seller resides
on the property, given the use of the disjunctive “or,” it presumably
qualifies as residential even if the buyer did not intend to have
it occupied as residential. If
not already residential, however, it is presumably the intent of the
buyer, not the use of the seller, that matters. Thus,
property not occupied as residential by a seller would be deemed “residential”
as long as the buyer intended to occupy the property as residential.
In addition, the statute would appear to apply to a buyer of
vacant land who intends to construct a residence to be sold or leased
to occupants. Finally, it should
go without saying that mere use of a residential purchase agreement
form does not make the statute applicable.
In addition to the issue of
the statute’s general applicability, there is still uncertainty as
to when the failure of a condition cancels the purchase agreement
“by the terms of the purchase agreement” so as to permit declaratory
cancellation, rather than requiring cancellation with right to cure.
If a party to the purchase agreement has a right to declare
a cancellation upon the failure of a condition by giving notice to
the other party, does that still mean that the failure of the condition
results in cancellation “by the terms of the purchase agreement”? Or does declaratory cancellation apply only
when the cancellation is automatic by reason of the failed condition.13
The form purchase agreement of
the Minnesota Association of Realtors, revised to reflect Section
559.217, seeks to address that issue.
In various clauses the form provides that upon the nonfulfillment
of a condition, the purchase agreement “is canceled,” sometimes without
the need for election (or notice) and sometimes only upon the election
of (and notice by) one of the parties,
The remedies section of the purchase agreement goes on to provide:
Apparently, the theory of this
commonly used form is that whenever the purchase agreement says that
it “is canceled,” it is canceled “by the terms of the purchase agreement”
within the meaning of Section 559.217, subd.
4 and declaratory cancellation may be used.
While the reasoning behind this provision may be somewhat circular,
it does have the advantage of clarity.
CONCLUSION
The residential cancellation statute
is still new and its efficacy is still an open question. Given its wide applicability to the common situation
of “busted” residential transactions, however, it is likely to be
the subject of further legislative and judicial tinkering and examination. c
NOTES
1. Minn. Stat. §559.21, subd.
3.
2. Minn. Stat. §559.21, subd.
4.
3. See generally
Larry M. Wertheim, “Canceling
Residential Purchase Agreements,” Bench & Bar of Minn. (May/June 2004), at 19, (July 2004), at 6; Larry M. Wertheim, “Minnesota’s New Residential Purchase Agreement
Cancellation Statute,” 31
Wm. Mitchell L. Rev. 687 (2004).
4. Minn. Laws 2005, Ch. 119, Sec. 4.
5. Minn. Stat. §559.21, subd.
4(a).
6. Romain v. Pebble Creek
Partners, 310 N.W.2d 118, 122 (Minn.1981).
7. Wertheim,
“Canceling Residential Purchase Agreements,”
supra n. 3 at 21; Wertheim,
“Minnesota’s New Residential Purchase Agreement Cancellation
Statute,” supra n. 3 at
705-710.
8. Minn. Stat. §559.217, subd.
1(b).
9. Minn. Stat. §559.217, subds.
3(a), 4(a).
10. To be codified
as Minn. Stat. §559.217, subd.
1(d).
11. Minn. Stat. §559.217, subd.
6.
12. Minn. Stat. §559.217, subd.
1(c).
13. Wertheim,
“Minnesota’s New Residential Purchase Agreement
Cancellation Statute,” supra n.
3 at 710-713.
14. Miller Davis Co. Form 1519A (2004), lines 116-119.
LARRY WERTHEIM is a partner with Kennedy &
Graven in Minneapolis. He worked on behalf of the MSBA Real Property Law Section to help
refine this legislation.
