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Agricultural Business Management

FARM LEGAL SERIES June 2015 Mortgages and for Phillip L. Kunkel, Jeffrey A. Peterson, Jason Thibodeaux Attorneys, Gray Plant Mooty

INTRODUCTION Purchases of farm real are commonly Mortgages are typically recorded in the office financed with a for deed or of the county recorder where the is mortgage. The choice between a mortgage located. Recording gives notice to the public and contract for deed depends on a number of the mortgage. If mortgage is not recorded of factors, including the rights of the lender properly, the lender’s rights in the property or seller in the event of a default by the with respect to other creditors may be at buyer. This fact sheet explores the legal risk. differences between the use of to finance debt through mortgages and Seller as Mortgagee contracts for deed in Minnesota. For a The mortgagee is not always third-party discussion on the use to lender but may be the seller. If the seller finance debt see fact sheet Security Interest in agrees to finance a portion of the sales price Personal Property. by means of a mortgage, the buyer will usually make a down payment on the land MORTGAGES and execute a mortgage with the seller for In a typical mortgage transaction, the buyer the balance of the purchase price. In such a of the land (also known as the mortgagor) case, this mortgage is known as a purchase signs a promissory note, which is a promise money mortgage. A purchase money to pay money, to finance the purchase. For a mortgage given by the mortgagor at the same detailed discussion on promissory notes see time he takes a deed from the seller, has Contracts, Notes, and Guaranties. As priority over any other claim attaching to the for the note, the buyer executes a property as a result of his in the mortgage on the land to the lender (also property. Thus any , such as preexisting known as the mortgagee) and the lender pays judgment liens, that relate to the purchaser the seller of the property in full. The buyer and attach to the interest he acquires in the obtains a deed to the property, but the lender land are subordinate to the of the has a lien—or claim—on the property as mortgage given by him to secure payment of documented in the mortgage. The mortgage the purchase price. This is an exception to on the land give the lender the ability to the general rule in Minnesota whereby foreclose on the property if the buyer priority of interests in is defaults on the note. For a detailed determined, in the absence of actual discussion of the process see knowledge, by the date when the mortgage Mortgage . was recorded.

Legal personal property even though the personal Under Minnesota , even though a property is not specifically described in the mortgage is a conveyance, legal title to the mortgage. To avoid such issues, the parties mortgaged property is not transferred to the to a real estate mortgage should stipulate in lender. Minnesota is classified as one of the the mortgage whether certain items of so-called lien theory states. In lien theory personal property will become part of the states, the mortgagee has no right to possess real estate subject to the mortgage. the property, but merely has the power to sell the property in connection with a Crops foreclosure. Closely related to the issue of attached property is the question of whether a Rents mortgage covers crops growing on land that As a general rule, a mortgagee is not entitled is subject to a real estate mortgage. Crops are to the rents derived from mortgaged personal property, or “goods”, and are property. Minnesota law, however, allows a usually not covered by a mortgage or mortgagor of agricultural property to assign contract for deed. To obtain a lien on crops, a the rents to a lender as additional security lender must comply with the provisions of for the debts secured by the mortgage if the the Uniform Commercial Code with respect was executed, modified or to such claims. These requirements are set amended after August 1, 1977; if it secures forth in detail in another fact sheet in this an original principal loan of $100,000 or series, Security Interests in Personal Property. more; and if it is not a lien on property that Unless a lender complies with the rules was homesteaded entirely as agricultural relating to such liens, a lien against crops property. cannot be based on the real estate mortgage.

Attachments Default Issues can arise in the case of agricultural The terms of the mortgage define what real estate with respect to whether a constitutes a default. In general, a buyer will mortgage covers personal property that has be in default by failing to make a mortgage become attached to the real estate. Whether payment, failing to pay or such personal property (such as silos or dairy insurance, or failing to use the property in a piping systems) has become so attached to way specified by the mortgage. the real estate as to become part of the real estate and thus nonremovable is a question Options upon Default that must be determined by a based on A mortgage generally provides that upon a the facts and circumstances of each case. In default of the mortgagor under the terms of general, the controlling will be the mortgage, the mortgagee has the option the intentions of the parties, which are to accelerate the indebtedness, foreclose the determined by evaluating the nature of the mortgage, sell the mortgaged premises and property that has become attached to the use the proceeds from the sale to pay the real estate, the method of attachment and debts secured by the mortgage. The the extent to which the property is tied to the procedures in Minnesota for foreclosing a use of the real property. If the court real estate mortgage are discussed in detail determines that the personal property has in the fact sheet, Mortgage Foreclosures. become attached to the real property, the lien interest of the mortgagee will attach to the

A mortgage generally includes a provision interest in the land. At this time, the known as a power of sale clause. This clause mortgagor is entitled to a “satisfaction of the allows the mortgagee to foreclose without mortgage” certificate. The lender must instituting a lawsuit. Without such a clause in provide the certificate to the buyer within ten a mortgage, the mortgagee must initiate a days of its request. This satisfaction lawsuit in order to foreclose its mortgage. certificate should be recorded with the county recorder so that the mortgage will be Besides the power of sale, a real estate extinguished in the county records. Until this mortgage will typically include an is done, the recorded mortgage will remain as acceleration clause that provides for the a cloud on the title. acceleration of the debt in the event of default in payment. Such clauses are Divisible Lots contained in both the promissory note and Occasionally, when a tract of land consisting the real estate mortgage that secures the of divisible lots or parcels is mortgaged to note. A promissory note and a mortgage are secure a single debt, the mortgagor may sell separate instruments that are different in some of the property to one or more buyers nature and purpose. They are enforceable who take title to the land. Unless a partial independently of each other on their own release of the mortgage is obtained, the terms. Thus, should a lender desire to do so, buyers of the separate parcels take title to it may enforce the promissory note the property subject to the first mortgage. In independently of the mortgage, and it is not the absence of an agreement in the mortgage required to first foreclose the real estate or an agreement between the mortgagor and mortgage. An action can be brought against mortgagee providing for partial releases, the the mortgagor based on the promises con- mortgagor has no right to compel the tained in the promissory note to compel the mortgagee to give a partial release of a payments required by the note. portion of the real estate from the mortgage. Most mortgages also contain clauses known as due on sale clauses which permit accel- Farmers-Lender eration of the debt in the event the Where a mortgage encumbers agricultural mortgagor transfers an interest in the real estate, Minnesota’s farmer-lender property without the prior consent of the mediation generally requires the mortgagee. Such due on sale clauses can be lender to offer mediation of the debt to the used to prohibit the assumption of the loan borrower prior to beginning foreclosure by a subsequent borrower. proceedings. The farmer-lender mediation statute began requiring mediation in 1986, and Satisfaction with the statute’s expiration date being A real estate mortgage is a conveyance as extended in the years following original security for the payment of money or the passage. Generally, the statute requires that a performance of some duty. The conveyance creditor seeking to collect a debt affecting may be nullified upon the payment of money agricultural property, including real estate or the performance of the prescribed duty. and certain personal property, to offer the Thus, when the loan that is secured by a borrower the opportunity to mediate a mortgage is paid in full, the interest, or lien, resolution to the debt prior to the lender’s of the lender is extinguished. When the resort to collection action against agricultural mortgage debt is paid, the mortgage is property. Such action can include mortgage discharged and the mortgagee has no further foreclosure, contract for deed cancellation,

seeking of personal property or discussed above. costs, origination executing a judgment. Where the debt fees, and application costs are nonexistent. involved has been scheduled by the borrower in a bankruptcy or was involved in a previous Risk to the Buyer farmer-lender mediation, the debt is not A contract for deed does not come without subject to the farmer-lender mediation risk for the buyer. Because the seller keeps statute and the lender can seek collection legal title to property until the contract price remedies without first offering mediation. is paid in full, the buyer does not become the owner of the property until he completes his CONTRACTS FOR DEED payment obligations and receives title from the seller. If the buyer defaults on the Whereas the mortgage is widely used when a contract, the buyer runs the risk of losing all lending institution is involved, the contract of the money that he has paid on the for deed is frequently used in transactions contract. between private parties. A contract for deed is also known as a “” or Benefits to the Seller “installment land contract.” In a contract for At least on the surface, the contract for deed deed, the seller, rather than a lending is attractive to seller because it is relatively institution, finances the buyer’s purchase of simple to understand and appears to afford the property. The buyer takes immediate the seller a quick method of canceling the possession of the property and agrees to pay transaction in the event of a default. Contract the purchase price of the property in cancellation procedures are set forth in detail monthly installment. The seller retains the in another fact sheet in this series, legal title to the property until the last Termination of Contracts for Deed. In general, payment is made and the contract is fulfilled. if the buyer defaults on an installment, the Benefits to the Buyer seller (also known as the vendor) can cancel the contract, retake the land, retain the This type of arrangement is attractive to payments made and benefit by any buyers who might not otherwise qualify for a improvements that have been made on the traditional loan. In many cases, a buyer will premises by the buyer (also known as the enter into such a contract because, without vendee). The seller may do this without a such an arrangement, they would not be in a foreclosure sale or judicial action. financial position purchase the property. The Alternatively, the seller may elect to sue the buyer may also be able to purchase the buyer on the contract. property with a relatively low down payment. Also, in the event of a default in payments, Risks to the Seller the buyer need only bring payments current Contracts for deed also places some risk on within the time period provided by state law the seller. The seller runs the risk of not to preserve his in the property. This is completing ridding itself of the land for in contrast to most promissory notes many years. If the buyer defaults, the seller containing acceleration clauses, in which will have to take action and may end up upon default the buyer is responsible for the taking back the land. entire amount remaining under the loan. Contracts for deed are also faster and less costly to finalize than traditional mortgages

Recording contract for deed payments as a source of The buyer must record the contract for deed retirement income and may not desire early with the county recorder where the land is payment. located within four months after the contract Acceleration clauses are much less common is signed. Contracts for deed must provide in contracts for deed. There is, however, no the legal name of the buyer and the buyer’s legal restriction against including an address. Buyers who fail to record the acceleration clause in a contract for deed. contract within that time are subject to a civil Without an acceleration clause, if a seller penalty equal to 2 percent of the principal wants to forego his claim against the land, he amount of the contract debt. must bring an action for each installment as it comes due under the contract for deed. He Contractual Rights and Remedies cannot accelerate the balance due under the The contract for deed is a contract and many contract. of the rights and remedies of the parties are based solely on the provisions contained in Nature of the Relationship it. Provisions such as the time, the place and Under a contract for deed, the buyer does not the amount of payment indicate the own the land but rather acquires an equitable continuing contractual relationship between estate in the land. This allows the buyer to the parties. occupy and farm the land. Although it is The seller agrees to convey the property to generally considered that the seller retains the buyer by a specified form of conveyance, legal title to the land and is so treated for usually a , once all of the many purposes, the have consistently payments are made under the contract, and held that the seller has a security title only to furnish an evidencing good title in and that the buyer is the equitable owner of the seller at the time the contract for deed is the property. As such, the relationship is in executed. substance similar to that created by a deed and a mortgage. The buyer agrees to pay a purchase price for the property as specified. He also agrees to Completion of the Contract pay real estate taxes and assessments and to When the total purchase price has been paid maintain insurance on the premises, to the seller, the buyer is entitled to the type including insurance for the benefit of the of conveyance provided for in the contract. seller. The buyer also agrees that all Generally this will require the execution and buildings and improvements currently on or delivery of a warranty deed to the buyer. subsequently added to the land may not be When the title to real estate is transferred by removed, but will remain on the property a warranty deed, the seller is guaranteeing until the contract is fully performed. that he has full legal title in the property Many other provisions, such as due on sale subject only to those exceptions specifically clauses, contained in a contract for deed are noted on the deed. In contrast, a quit claim similar to those contained in a mortgage. It deed transfers all rights in the property of may, however, be more common to find a the seller, but provides no guarantee that provision in a contract for deed that others do not have prior claims. Once the prohibits the purchaser from prepaying all or purchase price has been paid, the seller must any portion of the contract ahead of convey legal title to the buyer. If the seller schedule. The seller may be looking to the has died or is otherwise unable to make the

conveyance, it is the duty of his heirs or As with the foreclosure of a mortgage, the representatives to furnish the proper cancellation of a contract for deed affecting conveyance without any additional cost to agricultural real estate triggers the provisions the buyer. When the buyer has received the of the farmer-lender mediation statute, and deed from the seller, he should file the deed may afford the borrower with the right to with the county recorder in the county where mediate the debt prior to the lender’s the land is located. starting contract cancellation proceedings.

Improvements CONCLUSION As noted earlier, improvements a buyer The choice between a mortgage and contract makes on the property may be lost if he for deed depends on a number of factors, defaults on the contract. In the event the including the rights of the seller in the event buyer plants crops, the crops may likewise be of a default by the buyer. A farmer should lost if the seller terminates the contract for carefully assess the benefits and risks of deed. It is therefore important for a buyer of both financing methods prior to choosing farmland to make provisions for paying the between a mortgage and a contract for deed. contract installments during the time that he

has growing crops on the land. Otherwise For more information: such crops could be forfeited to the seller. extension.umn.edu/agriculture/business

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