Tool Box for Clearing Title Defects and Transaction Glitches- Parts 1 and 2

Presented by Igor S. Lenzner and David J. Meyers Rinke Noonan- St. Cloud

• Example - Meyers has signed a purchase agreement for the purchase of development land from Innocent Seller. Meyers knows Innocent Seller has scheduled another closing for the afternoon where Innocent Seller intends to take the proceeds of her sale and spend them on a new property. At closing, Meyer says, “I just went by the property again and I am shocked at some of the slopes that I am going to have to deal with. I had no idea. The dirt work is going to cost me at least $250,000. This was entirely unanticipated. I can’t close.” Innocent Sellers needs this to close today!

Tools: • Negotiation • Cancellation • Avoidance

– Earnest Money – Seller – Timing of Due Diligence Deadlines

Transaction Glitch: Refusal to Close

Tools: • If shown in Abstract or Title Commitment check original document • Sign Corrective Instrument

– Explain error – Reference existing instrument by document number

• Example: “This deed corrects the spelling of Grantee’s name in deed document no. 12345.”

• File an Amendment – May work for Mortgage or other nontitle transfer

• Example: Correct legal description or error in name. • Caution: 1) Mechanic’s Lien must be filed within 120 days of last date of work; and

2) Filing a new mortgage could change priority.

Title Defect- Error in Instrument

Tools: • If not recorded, may be able to correct with Grantee/Grantor’s Written

Consent

• If recorded, ask the Recorder to allow a change or correction

Title Defect- Error in Instrument, cont.

Each ≠ East

Tools: • Affidavit • Title Standards No. 11, 22, 54 and 85 • Identify

– Example: “Jon Smith is the same person as John Smith, scrivener’s error.” • Disclaim – caution on using a deed • Correct / Explain - limited

Title Defect- Error in Instrument, cont.

• Action to Reform Instrument – Must Show

• Agreement • Instrument Failed to Express Real Intent • Failure was a mutual mistake • Action must be brought by parties to instrument or those in privity • Slindee v. Fritch Investments, LLC, 760 N.W.2d 903 (Minn. App. 2009). • Evidence must be “clear and consistent, unequivocal and convincing”

Nichols v. Shelard Nat. Bank, 294 N.W.2d 730 (Minn. 1980).

Title Defect-Error in Instrument, cont.

Title Defect-Error in Instrument, cont.

• Torrens – Directive or Certification – check with Examiner of Titles

– Proceedings Subsequent – cures most any problem

• Abstract – Action to Determine Adverse Claims based upon possession (i.e.

quiet title)

Title Defect-Error in Instrument, cont.

• Example - Client Meyers is buying a commercial property as a real estate investment. The property has a single commercial building (restaurant) which is leased to an unrelated party.

• The land is a pad site which is part of a large shopping center. The building is about 25 years old the owner is in a different state and has not paid much attend except to collect the rent checks. Meyers has the standard inspection contingencies. You are told by Meyers after his inspection that “everything looks good”.

• As time on the contingencies runs steadily past, Meyers is working with his broker on the due diligence items.

• The sands in the hour glass continue toward the end of the due diligence period. The last grain of sand drops; immediately Meyers calls you.

• Meyers just realized the tenant has never paid rent on time at any time during the past 5 years, that the rents have been steadily decreasing by agreement of the current owner, and he worries that the tenant will likely never have the money to complete the necessary building maintenance and replacements which are the tenant’s responsibility (the lease is absolute triple net).

• Previously, Meyers was okay with the fact that the building needed a new roof and other work because the lease allocated these costs to the tenant. Meyers figures this is a big issue and he needs to either get out of the deal or to renegotiate.

Transaction Glitch: Due Diligence Period Expired

Tools:

– Title Objections and Response Timing

– Other Defaults

– Tort Claims

– Avoidance • Extensions For Due Diligence • Estoppel Certificates • Representations and Warranties

Transaction Glitch: Due Diligence Period Expired, cont.

Tools: – Recheck Tract Index

– Get Copies of Documents

– Problem is on Certificate of Title

• Directive or Certification May Correct

– If Land is Abstract and Torrens, Check Both Indexes

Title Defect: Problem in Abstract or Title Commitment

Tools: – Minn. Stat. § 505.174 – Surveyor corrects own error

– Minn. Stat. § 505.175 – Surveyor corrects other’s error

– Not allowed for Auditor’s Plat or Registered Land Survey

Title Defect: Error in Plat

• Example - Meyers walked into a Dairy Queen in July and

decided to buy it. He forgot to ask about February sales. The purchase agreement has quick deadlines for due diligence since Meyers is anxious to get started. Meyers tells you, “this place has been here for thirty years and owned by the same family forever - there are no issues.” Title work looks clean, and Meyers closes on the “deal.” A month after closing, the Department of Transportation stops by the DQ and mentions an upcoming road project. DOT shows Meyers construction plans and ask what he plans for his drive-thru. It turns out, the plans show the edge of the highway easement runs to the foundation of the building, the entire drive-thru, four parking stalls, and the DQ sign are all in the right-of-way.

Transaction Glitch: Right-of-Way Covers Property

Tools: – Adverse Possession? – Estoppel? – Mistake of Survey? – Warranties in the Purchase Agreement? – Acquisition – Negotiate – Political Solution? – Avoidance

• ALTA Survey • GIS Review • Purchase Agreement Warranties

Transaction Glitch: Right-of-Way Covers Property, cont.

Tools: – Curative acts

• Minn. Stat. §§ 582.25 (Advertisement) and 582.26 (Action) • Minn. Stat. § 582.27 – Applies one year after redemption period

(P.O.A. – 10 years) • Example: Strict Compliance, Hunter v. Anchor Bank, N.A., 842

N.W.2d 10 (Minn. App. 2013). Foreclosure void – not voidable (separate tracts bid as single)

• But see: Minn. Stat. § 582.25(4) – Sale validated if separate tracts sold together as one parcel to one bidder

• See also: Ruiz v. 1st Fed. Loan Servicing, LLC, No. A11-1081 (Minn. App. March 12, 2012) (Assignment not recorded prior to commencement of foreclosure) – sale void

Title Defect: Error in Mortgage Foreclosure

Tools: – 15 Year time limit

• Minn. Stat. § 580.21 “No such sale shall be held invalid unless the action . . .”

– Re-foreclose by Action • Ask Court to set aside defective foreclosure • If needed, reform or correct mortgage

– If Torrens, try to correct in Proceedings Subsequent – Deed in Lieu

• Use non-merger language

Title Defect: Error in Mortgage Foreclosure, cont.

• Example - Meyers calls again. He wants to buy a warehouse overlooking I94. “It is great” he tells you because it has a ton of surplus land where he can add pavement for display of his hand made sculptures, taking advantage of the I94 visibility. You look on google and see that on either side are developed industrial/highway business properties, to the south is a road and corn field, and north is Interstate 94. Two months after Meyers purchases the property you receive a call from Meyers. Meyers recently discovered that a small lake lies north on the other side of the Interstate. It happens to be within 1,000 feet of the Meyers’ property. The County is now telling Meyers his property is within shoreland zoning. Shoreland zoning has impervious surface limitations which are significantly greater than Meyers had anticipated, and Meyers won’t be able to use the property as expected. He is looking for somebody to blame - you are in his contact list.

Tools: – Call you carrier? – Request a Variance – Avoidance

• Zoning Endorsements • Government Website GIS (shows zoning overlay) • Warranties in Purchase Agreement

Transaction Glitch: Zoning is Not What you Thought

Tools: • Ancillary probate • Proceedings Subsequent – if Torrens • Action to determine adverse claims or title registration

• An heirs interest in real estate vests upon death of interstate. No probate is required. In Re Beachside Homeowners Ass’n, 802 N.W.2d 771 (Minn. App. 2011).

• Certificate of Possessory Title • Caution: State Medical Assistance Liens – Minn. Stat. §§

514.980-.985

Title Defect: No Probate or Deed Mistakenly Does Not State “Joint Tenants”

• Example: Meyers is buying part of an old car dealership property. The portion of the property Meyers is buying is vacant land. In Schedule B II of the title commitment there is an exception for a “Memorandum of Agreement.” You review the exception document - it is one page, recites the existence of an agreement concerning drainage, recites that “agreed upon” engineering plans exist, and contains waivers of liability. You object to the exception with the caveat that you need to see the agreement before you can release your objection. Seller is a wealthy group of trusts. Sellers’ attorney tells you they don’t know anything about the agreement, but they will look for a copy. They never do any more about it and could care less whether your client purchases the property.

• Tools: – Cancel the Purchase Agreement – Title Insurance – Quiet Title Action or Registration – Risk Assessment – reasonable inquiry

Transaction Glitch: Recorded Memorandum of Agreement

Tools: – Valid for 10 years – Minn. Stat. § 557.021 – Void after 2 years if case is not brought to trial – Minn. Stat. § 557.02 – Recorded Final Judgment - Title Standards, White Page, II-H-1

Title Defect: Filed Notice of Lis Pendens

• Example - Meyers decides to buy a hotel. Meyers is buying it based upon his analysis of the income it will generate. He has reviewed all the expenses and the current income (and like all buyers thinks he can both reduce expenses and increase income). You notice listed in Schedule B II of the title commitment an exception relating to a tax increment financing development agreement for the property. The agreement is ten years old. You send an email to Meyers asking about the agreement. Meyers tells you that, “the Seller got some money when they built the building, but that is not part of this deal.” Meyers closes and not only was he able to increase revenues but he lowered expenses by going to the County Assessor and convincing her that he had overpaid for the property (i.e. he got the Assessor to reduce the value). There was not a minimum assessment agreement that you often see with Tax Increment deals (and you feel relief when you go back and check post closing).

• A few weeks later, the City calls. They pulled their file after hearing about the tax assessment reduction. It turns out that the Development Agreement has a “minimum tax payment” provision and also requires that the owner obtain City approval prior to any transfer of the property. The City also wants to know who is paying for the past eight years when the minimum tax payments were not met.

Transaction Glitch: The Tax Increment And Similar Agreements

Tools: – Call your carrier? – Statute of Limitations – Warranties in Purchase Agreement?

• Avoidance – Estoppel Agreement – Review Exception Documents – Purchase Agreement Warranties

Transaction Glitch: The Tax Increment and Similar Agreements, cont.

Tools: – Certificate of Release by title/closing company (Minn.

Stat. § 507.401) – 15 Year Statute (Minn. Stat. § 541.02) – Quiet Title or Proceeding Subsequent

Title Defect: Paid Mortgage Not Satisfied in Title Records

Tools: – Your Legs - RUN! – Require Seller to Act – Buyer Acts Before Closing – Title Insurance Endorsements?

Transaction Glitch: Non-Functioning Homeowners Association

Tools: – Minn. Stat. § 282.01, Subd. 6

• Conveyance has “Effect of a Patent” • Subject to: . . .“Easements and Restrictions of Record . . .”

– Underlying Covenants and Restrictions? • Terminate by Amendment to delete all • Use lots and units per underlying covenants

– Quiet Title – Minn. Stat. Ch. 284 – If Torrens, Proceedings Subsequent – 30 year Statute Minn. Stat. § 500.20

Title Defect: What Survives a Real Estate Tax Forfeiture Sale

• Example: Meyers gets his best “deal” ever on a busy street – vacant commercial property. A national coffee chain with crazy high rent is for certain (in Meyers’ mind). After closing, Meyers goes in for site plan approval and is informed the property does not have access directly onto the main traveled roadway.

Tools: – Ask (very nicely) the Authority for Permit – Warranties in Purchase Agreement – Avoidance

• ATLA Survey • Review Exception Documents • Access Endorsement (be specific) • Cartway - Minn. Stat. § 164.08 (Townships) and § 435.37 (City)

Transaction Glitch: Property Does Not Have Access as Anticipated

Tools: – Does Farmer Mediation Apply?

• Minn. Stat. § 583.24 • Applies to individuals and corporations Minn. Stat. § 500.24 • Does not apply: over 60 acres or over $20,000 gross sales from

agriculture • Minimum eligible debt less than $15,000

– Waivers are Generally Not Allowed – Minn. Stat. § 583.305

– Does the Right of First Refusal apply? – Minn. Stat. § 500.245 • Hold up sale and give notices

Title Defect: Failure to Mediate Farm Foreclosure or Contract for Deed Cancellation, or Failure to Offer Agricultural Land to Prior Owner

Tools: – Curative Act Minn. Stat. § 559.215 (one year after last day

of reinstatement) – Re-cancel – Deed in Lieu

• Caution on liens or encumbrances

Title Defect: Error in Cancellation of Contract for Deed

• Example - Meyers buys a farm along the interstate because he needs a place to use that tractor he bought at a neighborhood auction. There is a billboard on the property, but Meyers is okay with it. The title work shows a 10 year lease for the billboard which was signed 8 years ago. A week before closing the Seller calls. The billboard company wants to know about closing and when they are getting their notice concerning their right-of-first refusal.

Tools: – Estoppel Agreement Avoidance

• Review Entire Exception Document • Contact Billboard Company Directly

Transaction Glitch: Billboard Leases and Similar Documents

• Example - Meyers is about to purchase a “cheap property.” He does not want to get a survey based upon cost and that, “this place has been here forever and the owner tells me there are no issues.” Title work shows just the standard exceptions. Meyers found this place on-line and has been in Europe touring for the past few months.

• Meyers closes and then you get the call. “I want to build a fence and the neighbor claims I can’t because it will block his driveway.” You say to wait while I pull this up on google earth. Sure enough, the neighbor’s driveway runs clearly and unequivocally over the property Meyers bought. Turns out the neighbor built this driveway 30 years ago and has been using it ever since. Meyers smartly says “well I can take it out because nothing has been recorded.”

Tools – Title Insurance - – Warranties Avoidance

• In Person Inspection • Reasonable Inquiry (the party in possession) • Survey • Internet Inspection

Transaction Glitch: Parties In Possession

• Avoidance Issues: – Exclusives

• Remedies – Termination of lease (but what about your investment in the space) – Reduced rent during violation – Damages

– Adjacent and Other Uses • Example – medical (what about marijuana, methadone clinics,

etc.) • Impacts on parking – gyms, hair salons, super popular restaurants,

etc. • Smells (example cigar shop)

Transaction Glitch: Leasing Issues

– HVAC Replacement • Is it clear who does what? • What is repair vs replacement

– Late Billings • forgotten cam charges and rental increases • Time limits on charges not billed

– Maintaining Access and Visibility • Protect access • Protect visibility

– Default • Early out • Liquidated damages • Assignment • Mitigation

Transaction Glitch: Leasing Issues, cont.

Tools: • Re-plat

– Will land use rules allow? • Deed exchange

– Need consent of mortgagee • Amend mortgage • Release mortgage • Title insurance

Title Defect: Survey reveals home was constructed over the boundary – assume neighbors agree to adjust boundary

• Quiet Title – Boundary – Minn. Stat. § 559.23 – Assent or Consent – Judicial Monuments – Minn. Stat. § 559.25 – Torrens

• Torrens

– Registered Land Survey • CPT

Title Defect: Survey reveals home was constructed over the boundary – assume neighbors agree to adjust boundary

Tools: • Difference is minor – ignore

• Basis of bearing (what is North?) – ask surveyor

• Government Corner - relocated

Title Defect: Survey does not match legal description of record (deed v. measured)

Problem: • 2002 – Jane Hanson – fee owner of real property in Morrison County • 2004 – Deed: Jane Boe F/K/A Jane Hanson To: Jane Boe, John Boe, Sally M. Bensen (daughter), Joint Tenants • 2011 – Deed: Sally M. Bensen, single to John Boe and Jane Boe • 2013 – Jane Boe dies • MNCIS search of Sally Marie Bensen = marriage dissolution, Wright

County, in 2010

Tools: ?

Title Defect: Extent of title search – TMI?

Thank you!

• Igor S. Lenzner Rinke Noonan Suite 300 US Bank Plaza Building 1015 W. St. Germain St. P.O. Box 1497 St. Cloud, MN 56302-1497 (320) 656-3517 Email: Ilenzner@RinkeNoonan.com

• David J. Meyers Rinke Noonan Suite 300 US Bank Plaza Building 1015 W. St. Germain St. P.O. Box 1497 St. Cloud, MN 56302-1497 (320) 656-3517 Email: Dmeyers@RinkeNoonan.com