Residential Purchase Agreement
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, 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
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
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.
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.
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
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).
6. Romain v. Pebble Creek Partners, 310 N.W.2d 118, 122 (Minn.1981).
“Canceling Residential Purchase Agreements,”
supra n. 3 at 21; Wertheim,
10. To be codified
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 &