Minnesota Residential Real Estate Purchase Agreements – Default and Remedies

Minnesota Residential Real Estate Purchase Agreements - Default and Remedies

Minnesota Residential Real Estate Purchase Agreements – Default and Remedies

The consequences for default by either a buyer or a seller – identified in lines 170-180 of the 2012 version of the Minnesota Association of Realtors (hereinafter, the “Association”), primary purchase agreement (hereinafter, the “Association’s Agreement”) – comprise one of the most important sections of the Association’s Agreement, but use legal terms, and address legal concepts, which may not be well understood by the parties to the Agreement.

Buyer Default – Option #1 – “Voluntary” Cancellation

Lines 170-171 of the Association’s Agreement provide that if the buyer defaults in the terms of the agreement, the seller may:

  • cancel” the purchase agreement, and
  • keep any payments which had been made, including any earnest money, as “liquidated damages”,

and buyer and seller shall “affirm” such cancellation by each signing a written cancellation agreement.

(i)    Cancel

The term “cancel” – when used with respect to the Association’s Agreement – presumably means the action of the seller to terminate the buyer’s interest in the purchase agreement.

However, it is not clear from the Agreement whether a seller may unilaterally:

  • cancel the agreement without the buyer’s consent, and
  • keep the Earnest Money

– at least when the Earnest Money is being held by a Minnesota real estate broker.

(ii)    Liquidated Damages

The term liquidated damages generally refers to the amount of money that a seller may keep as a compromise of the seller’s damages, in lieu of any claim that the seller may have for a larger amount, or any other recovery.

(iii)    Affirm

The term affirm, when used with respect to the cancellation of the Association’s Agreement, apparently means the actions of both the buyer and the seller in signing a written cancellation of the Agreement – which acknowledges the seller’s right to retain the Earnest Money.

The above described course of action constitutes the easiest identified seller remedy in the event of the buyer’s default – but it requires the buyer’s cooperation.

Perhaps not surprisingly, some buyers do not cooperate in the forfeiture of their Earnest Money.

(iv)    Voluntary Cancellation

The procedure identified in Lines 170-171 of the Association’s Agreement can be fairly summarized as a “voluntary cancellation” – since it contemplates:

  • the execution by each party of a written cancellation agreement, and
  • the forfeiture of the buyer’s Earnest Money to the seller.

However, since a voluntary cancellation requires the cooperation of the buyer – it may not always be available.

Buyer Default – Option #2 – Termination Pursuant to M.S. 559.21

Lines 173-174 of the Association’s Agreement provide that if the buyer defaults in the terms of the Agreement, the seller may “terminate” the purchase agreement pursuant to Minnesota Statutes, Section 559.21.

Minnesota Statutes, Section 559.21 is primarily used to terminate the rights of a contract-for-deed purchaser in the event of the purchaser’s default in the terms of the contract-for-deed.

However, the same statutory procedure may also be used with respect to the cancellation of a purchase agreement in the event of a buyer’s default in the terms of the purchase agreement.

The primary difference between the procedures is that:

  • a contract-for-deed can be terminated 60 days after service of a written notice to the purchaser,
  • while a purchase agreement can be terminated 30 days after service of a written notice to the buyer.

A legal consequence of a successful “termination” pursuant to M.S. Section 559.21 of:

  • the buyer’s interests in a purchase agreement, or
  • the purchaser’s interest a contract-for-deed,

is that the seller will be allowed to keep any payments which had been made, including any Earnest Money received, as “liquidated damages”.

Lines 173-174 of the Association’s Agreement fail to identify that termination of a purchase agreement pursuant to Minnesota Statutes, Section 559.21 will likely require the assistance of an attorney at law in order to:

  • prepare and serve the required forms, and
  • if necessary, obtain the court’s approval of the termination,

With respect to registered property where either:

  • a contract-for-deed, or
  • evidence of a purchase agreement,

had been filed with the County Registrar of Titles, the approval of the County Examiner of Titles will be required.

The termination procedure identified in Minnesota Statutes, Section 559.21 is only available to a seller.

Buyer or Seller Default – Cancellation pursuant to M.S. 559.217 Subd. 3

If:

  • a voluntary cancellation is not achieved due to a lack of cooperation from the buyer, and
  • a seller does not want to pursue termination of a purchase agreement pursuant to Minnesota Statutes, Section 559.21,

there is another statutory remedy available under Minnesota Statutes, Section 559.217, Subd. 3.

Likewise, if:

  • the buyer is looking for a remedy upon the default of the seller, or
  • an unfulfilled purchase agreement condition exists after a date specified for fulfillment of the condition,

there is a statutory remedy available under Minnesota Statutes, Section 559.217, Subd. 3.

Accordingly, lines 174-176 of the Association’s Agreement provide that if:

  • either the buyer or the seller defaults, or
  • there exists an “unfulfilled condition” after any date specified in the purchase agreement for the fulfillment of such condition,

either the buyer or the seller may “cancel” the purchase agreement pursuant to Minnesota Statutes, Section 559.217, Subd. 3 – unless the other party:

  • cures the default, or
  • satisfies the condition.

Unfulfilled Condition

The phrase “unfulfilled condition” presumably means the state of affairs where some condition of the purchase agreement protecting either the buyer or the seller from having to fulfill the terms of the purchase agreement has not been satisfied.

One example of a failure of an “unfulfilled condition” after a date specified in the Association’s Agreement for the fulfillment of such condition can be found in lines 121-122, which address the situation where a seller fails to provide marketable title to the buyer within 30 days after the scheduled date of closing.

After such date, either of the parties may declare the purchase agreement canceled by written notice to the other party, in which case, pursuant to the terms of the purchase agreement:

  • the purchase agreement shall be deemed to be canceled, and
  • both parties shall have an obligation to sign a cancellation of purchase agreement directing that the Earnest Money be refunded to buyer.

However, such a procedure:

  • is a cancellation remedy required by the terms of the purchase agreement, and
  • not a cancellation under Minnesota Statutes, Section 559.217, Subd. 3.

Cancel

The term cancel in this situation, refers to the statutory procedure identified in Minnesota Statutes, Section 559.217, Subd. 3 for terminating the effectiveness of a purchase agreement.

Lines 174-176 of the Association’s Agreement fail to identify that termination of the purchase agreement pursuant to Minnesota Statutes, Section 559.217, Subd. 3 will likely require the assistance of an attorney at law in order:

  • to prepare and serve the required forms, and
  • if necessary, subsequently obtain a court’s order directing the distribution of the earnest money.

The cancellation procedure identified in Minnesota Statutes, Section 559.217 Subd. 3 is available to either a buyer or a seller.

The standard purchase agreement for residential real property produced by the Minnesota State Bar Association Real Property Section also expressly allows for cancellation thereof pursuant to Minnesota Statutes, Section 559.217 Subd. 3 – although either party should have such a statutory cancellation right even in the absence of an express purchase agreement provision.

Buyer or Seller Default – Cancellation Pursuant to M.S. 559.217 Subd. 4

If the remedy provided by Minnesota Statutes, Section 559.217 Subd. 3 is not appropriate for any given situation, Lines 176-177 of the Association’s Agreement may provide another remedy for either the buyer or the seller:

Whenever it is provided in the purchase agreement that the purchase agreement has been “canceled” by its own terms, such provision shall be deemed to authorize a “Declaratory Cancellation” under Statutes, Section 559.217, Subd. 4.

The term Declaratory Cancellation refers to the statutory procedure identified in Minnesota Statutes, Section 559.217, Subd. 4 for terminating the effectiveness of a purchase agreement.

Lines 176-177 of the Association’s Agreement fail to identify that cancellation of a purchase agreement pursuant to Minnesota Statutes, Section 559.217, Subd. 4 will likely require the assistance of an attorney at law in order to:

  • prepare and serve the required forms, and
  • if necessary, subsequently obtain a court’s order directing the distribution of the earnest money.

The cancellation procedure identified in Minnesota Statutes, Section 559.217 Subd. 4 is available to either a buyer or a seller.

The standard purchase agreement for residential real property produced by the Minnesota State Bar Association Real Property Section does not expressly allow for cancellation thereof pursuant to Minnesota Statutes, Section 559.217 Subd. 4 – although either party should have such a statutory cancellation right even in the absence of an express purchase agreement provision.

The Minnesota State Bar Association Real Property Section may have reason to believe that the cancellation procedure identified in Subd. 4 is too legally unsettled to be relied upon.

Buyer or Seller Default – Additional Remedy Options

If the remedies provided by the previous sections are not appropriate for any particular situation, Lines 179-180 of the Association’s Agreement identify additional remedies which may be available to either the buyer or the seller:

If the purchase agreement is neither canceled nor terminated by the terms of the purchase agreement, either the buyer or the seller may seek:

actual damages” for breach of the purchase agreement, or

specific performance of the purchase agreement.

Any action for specific performance must be commenced within six months after such right of action arises.

Actual Damages

The phrase “actual damages” generally means the actual out-of-pocket loss of money to either the buyer or the seller resulting from a breach of the purchase agreement by the other party – including perhaps, any lost profits from the pending transaction.

Specific Performance

The phrase “specific performance” generally means a legal action to force either:

  • the seller to sell, or
  • the buyer to purchase,

the particular real property which is the subject of the purchase agreement.

Lines 179-180 of the Association’s Agreement fail to identify that obtaining the benefit of the above remedies will likely require the assistance of an attorney at law in order to:

  • prepare and serve the required forms, and
  • obtain the court’s approval of the requested remedy – since legal action would be required.

Conclusion – Minnesota Residential Real Estate

Purchase Agreements: Default and Remedies

Please contact Minnesota Attorney Gary C. Dahle for assistance with:

  • the preparation or interpretation of any Minnesota Real Property Purchase Agreement, or
  • upon any default in the terms of a Minnesota real property purchase agreements, or in the event of any unfulfilled condition in such purchase agreement, which may allow for a statutory cancellation of the purchase agreement, or other negotiated settlement.

If you have an e-mail account, and a good Internet connection, Attorney Gary C. Dahle can assist you in any Minnesota County.

Copyright 2017 – All Rights Reserved

Gary C. Dahle – Attorney at Law

2704 County Road 10, Mounds View, MN 55112

Phone:  763-780-8390    Fax: 763-780-1735

gary@dahlelaw.com

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