Contract-for-deed evictions are governed by the same statute that governs regular rental evictions: Minnesota Statute 504b.285.  In almost all cases, regular Minnesota service of process and the standard procedure apply, and the vendor can reclaim the property within a couple of weeks of the cancellation  from even the most stubborn of vendees.

In this case (Paul Kammann v. Tami Lynne Cox, 27-CV-HC-13-1574), however, the buyer had muddied things a bit.  When she first signed the contract for deed, she represented to the seller that she wished to purchase in a trust.  Her stated reason for this was in order to make herself harder to find by an abusive ex-husband.  While this is a legitimate use for a trust (many Hollywood celebrities purchase in trusts for this very reason), this buyer had another motivation: to make her more difficult to evict.

Once a cancellation of contract for deed is complete, the buyer loses the right to occupy the property. Those rights revert by operation of law to the vendor, the original seller.  Usually, that is the end of it; the buyer turns over the keys and walks away.  In this case, the buyer was looking to extend her free ride, and she forced the seller to file an eviction by refusing to vacate.  The vendee – the party against whom the cancellation took place – was a trust; but the occupant was a human.  The eviction has to be effective against the human.

Somehow, this contract had been recorded in with the trust alone as the vendee, and not the trustee –  leaving questions of whether it was a valid transfer in the first place. Ownership in trust does not confer an ownership interest upon the trust itself – a trust is not an entity, a trust is an agreement.  More precisely, a trust is an agreement to split the legal ownership from the equitable (in this case, the right of occupancy) ownership of an asset.  The trustee holds the legal ownership, and the beneficiary holds the equitable ownership.  The actual trust holds nothing. Further complicating this case was the fact that the trustee of the trust was an LLC created by the buyer, and that the LLC had been administratively terminated by the state for a failure to renew.  So, at the time of the eviction, the trust was without a trustee.

That aside, once the cancellation took place, both the legal (ownership) and the beneficial (occupancy) interests were extinguished.  At this point, it didn’t matter whether they had been properly conveyed in the first place.  Ms. Cox should have immediately moved out.   Instead, looking to extend her fraud, she attempted to hide behind Mn. Stat. 504b.285 (subd 1b) which says that:

For any eviction action commenced on or before December 31, 2014, the person entitled to the premises may recover possession by eviction when any person holds over real property after termination of contract to convey the property, provided that if the person holding the real property after the expiration of the time for termination was a tenant during the termination period under a lease of any duration and the lease began after the date the contract for deed was executed but prior to the expiration of the time for termination, and the person has received:

(1) at least two months’ written notice to vacate no sooner than one month after the expiration of the time for termination, provided that the tenant pays the rent and abides by all terms of the lease; or

(2) at least two months’ written notice to vacate no later than the date of the expiration of the time for termination, which notice shall also state that the sender will hold the tenant harmless for breaching the lease by vacating the premises if the contract is reinstated.

This statute was enacted to protect unwitting tenants of landlords who lose the property to foreclosure, and in most cases, it works as designed.   In this case, the occupant (who is also the sole member of the LLC that is the trustee, and both the settlor of the trust and its only beneficiary) was given notice in her official capacity as the “manager” of the defunct LLC, but not as a tenant.  It would appear that she has an argument for another two month’s occupancy for the deficiency of notice of her as a tenant.

But think back to the definition of a trust: an agreement to split the beneficial and the legal interest.  The trustee holds only the legal interest, so the trustee is unable to rent the property out.  That right belongs to the beneficiary, who got the equitable ownership interest in the split created by the trust.  Only the beneficiary, then, can convey that interest to another during the life of the trust.  The beneficiary – as an individual – can rent the property out to anyone she likes – but not to herself.   Because you cannot be your own tenant,  Ms. Cox was not entitled to the protections afforded by the statute.

Contracts-for-deed are deceptively tricky animals, and they get much trickier where there are non-person entities involved. If you are considering entering into a C-for-D, have a talk with a real estate attorney first.

The recent uptick in the use of the Contract-for-Deed to finance real estate purchases (see my blog post here)  has an inevitable corollary: a future uptick in the need to cancel some of those contracts and recover the properties by the owners.  While not particularly complicated as legal processes go, getting your property back from a deadbeat buyer does require making certain good choices early on:

1. Set a goal.  The Notice of Cancellation, which is the document that gets served on the buyer and recorded against the property to start the cancellation, contains a complete recitation of the costs that the buyer is going to have to pay in order to prevent the cancellation.  All arrearages owed to you appear in this document, and it is important that they be accurate – but if your goal is to encourage the buyer to get the payments current, instead of to get them out of the property, you may want to consider arriving at a number that is within the buyer’s ability to pay.  You don’t forfeit additional dollars owed, and you can always file another Notice of Cancellation if the buyer doesn’t get up to speed.  Of course, if your goal is to hit the “reset” button on the buyer, you will want to make sure you have every dollar owed in the Notice.

1. Check for secondary defaults. If a buyer is not paying you, they probably aren’t paying other costs associated with the property that they had agreed to in the contract.  Condominium association fees, property taxes, insurance, and municipal (water) bills are common ones to watch for.  While you may not be able to recover these costs in the event of a full cancellation, you will want to protect your position in the property by ensuring that they are paid, and to incorporate them in your cost to cure.

1. Stick to your timeline. Filing a notice and then pretending everything is a message to the court that you really aren’t serious.  If you made the decision to cancel and recover the property, don’t let “Minnesota Nice” cloud your judgment.

1. Get a preliminary title search.  If your cancellation progresses all the way to the end, the buyer’s interest is extinguished when you recover the property.  With some exceptions, you may be unwittingly inheriting some of the buyer’s bad debt at the same time.  Sometimes these problems don’t make themselves known until years later, when you go to sell the property and find that there is a title “cloud” obligating you to pay thousands of dollars on a judgment that you didn’t purposefully incur.

If the time has come to cancel a Minnesota contract for deed, we can help.  Typically, these kinds of cases are not expensive (they run around $500 in legal fees) and a trusted adviser can steer you clear of much more expensive obstacles.  I you’d like to speak with us about your contract for deed cancellation, click on the “connect with us” link at the top of the page.

For all its reputation as a last resort, the lowly C for D is actually our oldest form of real estate financing.  Rewind a few hundred years, and you will find the “land contracts” that were the ancestors of our modern C for D in use across the country – and throughout England – to convey agricultural land from one family to another.    One difference you might notice is that, unlike today, often the buyer did not receive the right of tenancy until the whole of the contract was paid.  Imagine watching someone else farm your property for thirty years, and you’ll see why this practice has disappeared. *

Today’s contracts for deed, while they are governed by a small body of law, nonetheless bear some of the Wild West DNA of their forefathers.   Almost anything can be incorporated into a Contract for Deed, and enforcement of the terms of the agreement is entirely up to the parties involved.   Because of their minimal oversight, they are often the vehicle of choice to finance transactions of questionable value.  For that reason, real-estate professionals and consumers alike are well-advised to approach their use with a little extra caution.  Here are a few simple questions to help with the smell test:

1. Is there another party involved? In particular, is it a bank?  A C for D gives rise to an interest in land – the buyer has a bona-fide, recordable ownership interest, subject to the interests that preceded hers in time.  If one of those interests happens to be a mortgage that the seller is not planning to pay off, loud bells should start ringing.  Almost every mortgage originated in the past twenty years has a “due on sale clause” that triggers full payment of the mortgage balance immediately if the property is sold. A sale on a C for D is considered a sale for purposes of this clause, which means that the mortgage lender can – at any time, and without warning – demand that the seller of the property pay the outstanding balance.  Where this becomes a problem is if the seller doesn’t happen to have enough cash available, and the lender forecloses the loan.  The buyer is under no obligation to relieve the seller in this scenario, but because the mortgage was recorded before the sale, the buyer’s only recourse is to pay off the entire mortgage amount if she wants to keep her equity in the property.  Most C for D buyers – by their very nature – aren’t going to have that kind of cash sitting around.

1. Is anyone agreeing to break the law? The question sounds ridiculous, but a failure to record a C for D is actually misdemeanor – and legislation is afoot to attach even more severe penalties.  Not only is it a crime, it is a very bad idea.  Consider the scenario above, where the seller is not paying off the underlying mortgage.  Some buyers and sellers agree not to record the C for D, so as not to notify the lender of the sale.  Apart from the seller’s liability for mortgage fraud, both the seller and the buyer incur grave risk where the contract is not recorded.  For instance, this buyer has no right to redeem if the seller stops paying the mortgage; this buyer’s heirs or devisees will have a difficult time accessing the equity that the buyer may have built in the property; this buyer may get stuck with judgments or other liens that the seller incurs during the tenancy.  The seller will continue to incur tax liability, the potential for the buyer’s liens to attach to the property, and the potential for premises liability in the case of an injury.  No real estate professional should be involved in a C for D transaction that contains a promise not to record.

1. Are there planned improvements? Even in the case of a duly recorded C for D, there is the potential for a seller who recovers the property after a default to be stuck with the bills for ill-advised improvements to the property.  Mechanic’s liens, unless proper and timely notice is given to the workers that the fee owner disclaims liability, survive the recovery of the property by the vendor.  A frank discussion of contemplated improvements and an indemnification clause protecting the vendor should be standard practice in any transaction.

1. Is the C for D really just a lease on nicer paper? Recently, the Minneapolis Star Tribune published a story about would-be landlords dodging that city’s exorbitant rental licensing fees by “selling” their properties on a C for D to the same people to whom they would have rented them.  While probably legal, at least for the time being, the practice borders on the unethical, and should be approached with suspicion by licensees and consumers alike.  Any situation in which the vendor is planning to recover the property again and again is not a sale in good faith, and is an invitation to litigation.  The Minnesota legislature is already working on a proposal to put limits on the number of properties an individual may sell in a calendar year without professional representation, so it is likely that more and more of those engaged in this practice will be seeking licensee help.

I bought my first house on a Contract for Deed in 1992, and nobody blew up.  I made the payments, paid off the balloon, and everybody involved walked away happy.  They are a legal, valid, and sometimes essential tool for certain parties and properties to participate in a market that would otherwise be closed to them.  All the same, if you find yourself in a transaction involving a C for D, you’d do well to get a professional opinion to guard against some of the traps inherent in this type of financing.  If you’d like to talk with someone at Thomas Law Group about your contract for deed, just click on the “connect with us” link at the top of this page.

* Even more bizarre was the practice of “recording” the sale by means of a “birching boy”.  A young boy was brought to the site of the property, told about the transaction, and then beaten with a birch stick.  The rationale was that a while a paper record may not survive, the boy would remember the transaction for the rest of his life.  Thankfully, this too has fallen out of favor.

#1. An eviction solely for failure to pay rent won’t necessarily rid you of an undesirable tenant.  Although in practice it rarely happens, tenants actually have the right to show up on court day, pay the outstanding balance (coupled with your expenses) and hang on to their tenancy.  That’s right: non-payment of rent alone is not sufficient to kick them out, as long as they eventually pay the rent.  So, if you really need to clean house, you may want to look over your lease and include some other provision that the tenant has defaulted on in your complaint.  That way, on court day, you have a much better chance of leaving with a writ. *

#2. A failure to properly notify the tenant of their rights can automatically shoot down your eviction.  Minnesota law requires that tenants receive notice of the following well in advance of an eviction:

a. The name and address of the person authorized to manage the premises; and

b. The name and address of the landlord of the premises or an agent authorized by the landlord to accept service of process and receive and give receipt for notices and demands.

c. Notice that there is a document written by Attorney General addressing tenant’s rights, and that it is available by request.

In some cities, all of this information is contained on a rental license which is required to be posted anyway.  To be safe, I provide clients with the form reproduced below.  Put your contact information in, paste it above the laundry machines (the law says it has to be in a “conspicuous place”) and you are covered.   (Another way to meet this requirement is to include the information in your lease, but if you found this post because you are looking for eviction information, it may be a little late for that.)

#3. Eviction filings are expensive.  In Hennepin County, for example, electronic filing of an eviction case is $327.00.  Service of process, which is the proper notification to the tenant that they are being evicted, can run $150 or more, particularly if they choose to hide inside their unit and not answer the door.  Court appearances and write fees easily push a do-it-yourself eviction into $600+ territory.

If you decide you are going to tackle this by yourself, there is a comprehensive guide here: http://www.mncourts.gov/district/4/?page=277 .  If you’d rather hand the job off to a professional, we do flat rate evictions in Hennepin County for $765.00, including filing fees.  For that price, you don’t even need to go to court; you just hand the file over to us, and we do the rest.   Click on the “connect with us” link at the top of this page of this website to get started.

* What the heck is a writ? A writ of recovery of premises is the document from the court telling the sheriff to physically ensure the removal of the person from the property.  It is the last step in the court’s eviction process.  Lots of evictions don’t need to go this far, but where a tenant is stubborn, you want law enforcement there to do the dirty work.

______________________________________________________________________________

Pursuant to Mn. Stat § 504B.181, the following

NOTICE

Is provided to tenants residing in this building:

This property is owned and managed by:

_______________________________

_______________________________

_______________________________

The following person is authorized to accept service of process for matters and receive and give receipt for notices and demands involving this property:

_______________________________

_______________________________

_______________________________

The Minnesota Attorney General has published information regarding tenant’s rights which can be accessed by visiting the following website:

http://www.ag.state.mn.us/Consumer/Housing/LT/default.asp

I spend a lot of time working with real estate agents and brokers in Minnesota, and I have noticed that a large number of them also have an investment property or two.   When I ask what they do with security deposits on their own properties, I cringe when I learn that they deposit them in their personal or business checking accounts.   That works fine for residential property – but it can get you into trouble if the property has a commercial use.

Minnesota law (Mn.  Stat. § 82.75, subd. 10) requires anyone with a real estate license to place those deposits in a trust account – even if the property is their own.  Where a broker is a one-person shop, this isn’t such an imposition; he or she already has a trust account.  But where a salesperson is part of a large office, the broker or office manager isn’t likely to welcome the accounting burden of  agent’s routine deposits and withdrawals.  In many cases, brokers aren’t even aware that their agents own commercial rental property.  As a result, they are at risk of running afoul of the law.

Fortunately, there is an exception to this requirement, and all it takes is a simple agreement between the landlord and the tenant to protect yourself.    The agreement needs to state that the funds would otherwise be deposited in a trust account, and that the landlord and the tenant have agreed that it is acceptable for the funds to be placed into the landlords personal or business account instead.  Get a signature from your tenant, and keep the agreement on file along with your lease.

I have pasted a copy of the agreement that I use to the bottom of this post as an example – feel free to cut and paste if you like.  If you are a broker with multiple salespeople, it might be worth a few minutes of your time to e-mail your agents and make certain that they are aware of this requirement;  you may even want to add a paragraph to your agent policies manual.  If you are a solo licensee/landlord, it will relieve a little of your trust account stress.

Tenant security deposit agreement

___________________________________________________________________________________

This agreement is between _________________________________________________(“Tenant”) and _____________________________________________________(“Landlord”),  and governs the disposition of security deposit monies received by Landlord for the property located at: ______________________________________________________________________(“The Property”).

Minnesota law requires a landlord who also holds a real-estate license to place deposit funds in a special account called a “trust account”, unless the landlord and the tenant agree otherwise.   Because maintaining such an account is an administrative burden which Landlord is unwilling to undertake, Landlord has elected to make this agreement an integral part of the agreement to rent The Property to Tenant.

Landlord and Tenant hereby agree that security deposit monies held by Landlord, which would otherwise be deposited in a real estate trust account pursuant to Minnesota Statute 82.75  may, at Landlord’s option, be commingled with Landlord’s other funds in Landlord’s ordinary personal or business bank account at any time.

Nothing in this agreement shall be construed to divest Tenant of rights or processes to recover deposit monies at the end of the tenancy.

__________________________________                       ______________________________________

Tenant                                                                                       Date

__________________________________                       ______________________________________

Landlord                                                                                    Date

Usually, when a person enters your property without your permission and does some damage to it, you have an action in the tort of trespass. Whatever the cost of repairing the damage is the measure of what you are entitled to in court. Had this been, for instance, the removal of the homeowner’s windows instead of his trees, ordinary trespass law would apply. The homeowner would be entitled to the cost to replace the windows – nothing more.

Things are different in the case of trees, however. Historically, trees were considered a cultivated crop, and law evolved around protecting them from removal as a commodity. Because they grow in such large areas, and because they are so difficult to monitor for theft, some states enacted laws to provide extra harsh penalties for those caught removing them. Treble (triple) damages became the norm, but the damages were limited to the market value of the logs removed, with no consideration for the effect on the land itself. When Minnesota’s timber trespass statute, Mn. Stat. § 561.04 was enacted in 1927, the measure of damages had evolved to be recognized as the difference in market value of the land itself from before the cutting to after the cutting. Because a piece of property might be worth more without its trees – a future shopping mall site, for instance – the method provided for little relief in urban areas.

All that changed for Minnesotans in 1975, when the Minnesota Supreme Court decided the case of St. Christopher’s Episcopal Church v. McCrossan, 235 N.W.2d 609 (Minn. 1975). Construction had damaged the trees, shrubs, and landscaping around a church, rendering it much less attractive. The church argued that, because of the aesthetic value of fully gown trees and landscaping, the cost to replace the trees was the proper measure of the damage done by the plaintiff. The court agreed, and the legal landscape changed forever.

These days, the law is less likely to find application in the timber forest, and more likely to be used to recover for the loss of trees in the urban forest. Residential yards and city parks have limited mature trees, and they don’t grow overnight. Add the prospect of treble damages to the punitive damages that are available in timber trespass cases, and you have a powerful deterrent for thoughtless chain-saw wielding.

Imagine that you remodeled a house in 2009 in the city of Minneapolis. For energy-efficiency, you sprung for high-end replacement windows; wanting to preserve the look of the house, you kept the window sizes exactly as they were. All work was done with permits and in compliance with the state building code, and the City of Minneapolis’ own inspectors signed off on everything.

Fast forward to 2012. Unable to sell the house, you decide to rent it out. Not only is Minneapolis going to nick you a thousand dollars for their ‘conversion inspection’, but they are going to have some bad news for you: you have to take out all the bedroom windows, throw them in a dumpster, cut big holes in your house, and install oversize windows in their place. Your architectural integrity? Gone. Your long-term investment in energy efficiency? Gone. Your faith in the integrity of the city’s own inspectors? Gone.

So don’t do it.

Minnesota statute 326B.121,subd 2(c) says that “A municipality must not by ordinance, or through development agreement, require building code provisions regulating components or systems of any structure that are different from any provision of the State Building Code.” One meaning of this language is that the city cannot enact a code for purposes of new construction that is more restrictive than the State Building Code – for instance, they cannot require you to put bigger windows, larger doors, steeper stairs in a new house that you are building. The reason for this is plain: if every city had a different building code, construction would be more expensive and complex than it already is; a uniform building code ensures efficient, quality construction at uniform cost.

But what about existing houses? Much of Minneapolis was built in the early part of the last century, before there even was a State Building Code. Can the city make you change things in those houses that are not up to today’s code?

In 2008, the Minnesota Supreme Court said no. In Morris v. Sax Investments, Inc., they concluded that State Building Code “regulates the post-construction use of buildings by specifically allowing the occupancy of an existing building to continue without complying with current code requirements.” In simple language, that means that a building that was compliant once is compliant forever. Again, the logic of this is evident: if every structure in the state had to incorporate every code change retroactively, we would all be remodeling constantly.

The Court, in the same decision, concluded that because windows are built into a building, they are considered “components” of that structure. Look at the statute quoted above – it says “components”. This word choice is no accident on the part of The Court; they are specifically ensuring that any city regulations regarding windows will be barred by the statute. There is no room for interpretation.

Which is not to say that somebody won’t try. In 2009, The City of St. Paul enacted a policy requiring all egress windows to be of a certain size. There was an exception to the rule for windows that were already installed, but if those windows failed and needed replacing, they had to be replaced with the larger size. The Builder’s Association sued, and last week, the Minnesota Court of Appeals in Builders Association of Minnesota v. City of St. Paul struck down the policy, re-affirming the Supreme Court’s reasoning that if it’s good enough for the State Building Code, it’s good enough.

The city of Minneapolis is able to regulate the business of rental housing – in fact, they seem to take perverse joy in it. And they are well within their rights to make you fix peeling paint, broken windows, and worn out flooring. What they can’t make you do is change the structure – the windows, doors, heating or electrical – as long as those components are still functional and were once compliant. Any time they require a change to a rental property that would not also be required of a homeowner, you should be seeing red flags.