The Law of Purchase Agreements: Seller’s Remedies for Buyer’s Breach – Minnesota Home Talk Legal Minute

 

The information below originally appeared as part of the Minnesota Home Talk Legal Minute.   To hear an audio version, click here.   You can hear my Legal Minute segments during the show every Saturday on 1500 ESPN at 7 a.m. and On Demand.

In a prior post I described the basic legal principles underpinning a real estate purchase agreement.   This Minnesota Home Talk Legal Minute could be subtitled “When Purchase Agreements Go Bad”, as I touch on legal title vs. equitable title and the reasons why it is necessary to cancel a purchase agreement when a deal dies before closing.

The fundamental legal principle involved with the termination of a real estate purchase agreement is known as equitable conversion.  Equitable conversion is the constructive change of personality into realty or vice versa. Under this doctrine the buyer becomes the equitable owner as soon as a purchase agreement is signed. The seller holds bare legal title as security for payment which is a personal property interest. First and American Nat’l Bank of Duluth v. Whiteside, 207 Minn. 537,292 N.W. 770 (1940); Village of Hibbing v. Commissioner of Taxation, 217 Minn. 528, 14 N.W.2d 923 (1944).

Because termination of the purchase agreement results in loss of the buyer’s equitable interest, Minnesota law requires a “statutory” cancellation procedure when the buyer and seller cannot reach mutual agreement to terminate the purchase agreement:  “If a default occurs in the conditions of a contract for the conveyance of real estate or an interest in real estate executed [date of contract execution] that gives the seller a right to terminate it, the seller may terminate the contract by serving upon the purchaser or the purchaser’s personal representatives or assigns, within or outside the state, a notice specifying the conditions in which default has been made.”  Minn. Stat. § 559.21 Subds. 1 b – 1 d, and 2a.  The statute applies to contracts for deed, earnest money contracts, purchase agreements, and exercised options. Minn. Stat. § 559.21 Subd. 4..

The statute is generally structured to vary the length of notice depending upon the date of the subject contract. But the length of required notice also varies with the type of contract.   Contracts for deed, for example, require 60 days notice if executed after July 1985. Subd. 2a. See Subds. lb – ld regarding contracts for deed executed before that.  But earnest money contracts, purchase agreements, and exercised options may be terminated on 30 days notice unless they contain terms requiring a longer time. That applies regardless of when the instrument was executed. Moreover, it cannot be waived in the document. Subd. 4.

The exact contents of the notice may vary depending on the date on which the parties entered into the purchase agreement. See Minn. Stat. § 559.21 Subds. lb – ld and 2a.

Either the purchaser or the seller may cancel a purchase agreement for residential real property under Minn. Stat. 559.217. If either a seller or purchaser initiates a cancellation under this section and before completion of the proceeding the other party to the purchase agreement initiates a cancellation proceeding under this section, whether under subdivision 3 or 4, the purchase agreement is deemed canceled as of the date of the second cancellation notice is served upon the other party to the purchase agreement under this section. Either party may later pursue legal remedies at law to recover the earnest money. A court shall make a determination of which party is entitled to the earnest money without regard to which party first initiated the cancellation proceeding and may consider the terms of the canceled purchase agreement in making its determination.

Cancellation With Right to Cure

If a default occurs with respect to an unfulfilled condition which exists after the date specified for fulfillment in the terms of a purchase agreement for the conveyance of residential real property, which does not by its terms cancel the purchase agreement, the purchaser or the seller may initiate a cancellation by serving upon the other party to the purchase agreement and any third party that is holding earnest money under the purchase agreement a notice: (1) specifying the residential real property that is the subject of the purchase agreement, including the legal description; (2) specifying the purchase agreement by date and names of parties, and the unfulfilled condition or default; and (3) stating the purchase agreement will be canceled 15 days after service of the notice upon the other party to the purchase agreement unless prior to the cancellation date the party upon whom the notice is served complies with the conditions in default and completes the unfulfilled conditions; including, if applicable, completion of the purchase or sale of the residential real property according to the terms of the purchase agreement.

The notice must be served in the manner provided in section 559.21, subdivision 4, paragraphs (a) and (b). The notice required by this subdivision must be given notwithstanding any provisions in the purchase agreement to the contrary.

The purchase agreement is canceled unless, within 15 days after the service of the notice upon the other party to the purchase agreement, the party upon whom the notice was served fully complies with the conditions in default and completes the unfulfilled conditions or secures from a court an order suspending the cancellation.

Declaratory Cancellation

If an unfulfilled condition exists after the date specified for fulfillment in the term of a purchase agreement for the conveyance of residential real property, which by the term of the purchase agreement cancels the purchase agreement, either the purchaser or the seller may confirm the cancellation by serving upon the other party to the purchase agreement and any third party that is holding earnest money under the purchase agreement a notice: (I) specifying the residential real property that is the subject of the purchase agreement, including the legal description; (2) specifying the purchase agreement by date and names of parties, and the unfulfilled condition; and (3) stating that the purchase agreement has been cancelled.

The notice must be served in the manner provided in section 559.21, subdivision 4, paragraphs (a) and (b).  The cancellation of the purchase agreement is complete, unless, within 15 days after the service of the notice upon the other party to the purchase agreement, the party upon whom notice was served secures from a court an order suspending the cancellation.

A seller or purchaser upon whom the notice is served may commence a proceeding under section 559.211 to obtain a court order to suspend the cancellation of a purchase agreement under this section, and in the proceeding the court may aware court filing fees, attorney fees, and costs of service actually expended to the prevailing party in an amount not to exceed $3,000.

After a cancellation under or a confirmation of cancellation , the purchase agreement is void and of no further force of effect, and, except as provided, any earnest money held under the purchase agreement must be distributed to, and become the sole property of, the party completing the cancellation of the purchase agreement.  When a cancellation under this section has been completed, the party who served the notice, or that party’s attorney, may execute an affidavit stating that the party caused a notice of cancellation to be served upon the other party, that the other party neither complied with the actions required in the notice, if applicable, not obtained a court order suspending the cancellation, and that the property is residential real property.  A copy of the affidavit of cancellation, when attached to a copy of the notice, is prima facie evidence of the facts therein stated.

Except as provided , the affidavit of cancellation, when delivered to a third party holding earnest money under the purchase agreement, is a sufficient basis for that person to release the earnest money to the party initiating and completing the cancellation.

If either a seller or purchaser commences a cancellation proceeding under this section and before completion of the first proceeding the other party initiates a cancellation proceeding under this section, either party or that party’s attorney may execute an affidavit stating that both parties caused the notice of cancellation to be served upon the other party and further specifying the date the second notice of cancellation was served upon the other party. A copy of the affidavit of cancellation, when attached to copies of both notices of cancellation, is prima facie evidence of the cancellation of the purchase agreement and of the effective date of the cancellation of the purchase agreement.

Exception for Contingent Agreements

The general rule is that Minn. Stat. § 559.21 applies to purchase agreements. However, if a purchase agreement is subject to certain kinds of contingencies, it might not be subject to Minn. Stat. § 559.21; for example, if “a term essential to the final bargain is left open for further negotiations or is dependent on a contingency.” Romain v. Pebble Creek Partners, 310 N. W.2d 118 (Minn. 1981); or where the agreement is contingent upon the buyer obtaining financing and the buyer fails to do so. Liebsch v. Abbott, 265 Minn. 447,122 N.W.2d 578 (1963); Chapman v. Salem Lutheran Church, 301 Minn. 486, 221 N.W.2d 129 (1974).

To hear other Legal Minute segments, visit the Minnesota Home Talk page on Jeffrey O’Brien Today.

NOTE:  this post contains excerpts from “Purchasing and Selling Real Property,” Real Property Law in Minnesota, Minnesota CLE (2008).

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