by: Brad Boyd, Esq, MNAR Legal Counsel


There continue to be many questions raised to the MNAR by members curious about where they can find the disclosure form for a commercial transaction. A disclosure statement for commercial properties is no longer offered by the MNAR, due to the Commercial Forms Committee making the decision several years ago to cease maintaining such a form. There are several reasons you see a comprehensive disclosure form offered by the MNAR for residential transactions, but not for commercial.


First, the issues that sellers typically disclose in commercial transactions tend to be unique to the property and the type of transaction, rather than the common disclosure issues in residential properties that are conducive to a standardized disclosure form. Consequently, the commercial disclosures tend to be more issue-specific, and crafted specifically for the transaction.


Second, the material fact disclosure requirements of MN Statute 513.52-513.60 apply specifically to sellers of residential property, and there is not an equivalent statutory disclosure responsibility for sellers of commercial property. That law exists in large part to ensure that sellers of homes identify to the prospective buyer any facts that may impact a buyer's use or enjoyment of the home. In commercial transactions, there is presumption (rightly or wrongly) that the parties to the transaction are more "savvy" or sophisticated; they more often have an attorney involved in the transaction; and the buyer can make his or her own informed judgment about the property, and will take steps necessary to ensure they understand the condition of the property.


For the same reason just identified, commercial transactions often involve more elaborate and sophisticate inspections than one might find in a residential purchase. In many instances, the buyer or seller will have a Phase I or Phase II environmental study done, in addition to site inspections and more "due diligence" by buyer to determine the condition of the property. Many times there is a due diligence/inspection contingency period written into a commercial purchase agreement, affording the buyer ample opportunity to identify facts he/she wants to know about the property.


Finally, commercial properties are quite different from residential properties in their use and intended use. In many residential property sales, the seller is a homeowner who has lived in the home personally, and who has significant first-hand knowledge of the property. It would seem logical that that seller is in the best position to identify the potential problems or past history of the property, and that the buyer would want to be armed with the information known to the seller. In commercial property sales, by contrast, the property very well may be strictly an income-producing property, which the seller may not have ever occupied as a tenant. In many instances, the information the buyer might want to know about the property is as readily available to the buyer as it might be to the seller.


That said, there are still disclosures that must be made by sellers of commercial properties, and their agents. Sellers will still have to comply with the federal and state laws requiring disclosure of items such as wells, septic systems, methamphetamine production, airport zoning regulations, as well as common law duty of disclosure that is not as specific as the statutory duties applicable to sellers of residential real estate.


It is for the reasons explained above that the MNAR, with the concurrence of the Commercial Forms Committee, determined that the Commercial Disclosure Form was unnecessary. Since many commercial transactions involve an attorney and a commercial seller who deals more regularly with the sale of property, the association decided that offering a disclosure form for commercial transactions was not as useful, practical or necessary as it was for residential transactions.


Keep in mind, however, the licensing laws of MN Statute Chapter 82 do require that all licensees (i.e., commercial and residential real estate agents and brokers) disclose material facts that the licensee is aware of, which could aversely and significantly affect an ordinary purchaser's use or enjoyment of the property. Therefore, it is important to be sensitive to the disclosure obligations you may have, separate and distinct from the seller's obligations.

by: Brad J. Boyd, Esq, MNAR Legal Counsel


We encounter periodic questions from members who ask whether an "electronic signature" or an "electronic contract" is binding in the context of a residential real estate purchase agreement. It is possible for a party to use an electronic signature, an electronic contract or an electronic transmission to crete a binding agreement for the sale of real estate, but there are some issues of concern that can make such a method less straightforward or less certain than the traditional process of utilizing a written purchase agreement with written signatures.


Traditional contract formation
Let's first consider the basics of contract formation, as applied to a residential real estate purchase agreement. The following elements are critical to having an effective contractual agreement for the sale of real estate:

  1. A written contract containing essential terms; AND 

  2. Signatures by all parties on the agreement which reflect final agreement on the terms; AND

  3. Delivery of the agreement, once accepted, to the party whose offer or counteroffer is being accepted.

Traditionally, a buyer might present a written offer to a seller, signed by the buyer. If the seller agrees with the terms presented, the Seller might sign that offer and deliver it back to the buyer or the buyer's agent, creating a binding and enforceable agreement. Courts and the real estate industry have typically recognized both this "traditional" method, as well as the use of fax transmission to facilitate the delivery or transmittal of the offer and acceptance.


Applying electronic or technological advances to contract formation issues
Although caselaw on whether email is an acceptable and recognized transmission/delivery method continues to evolve, in this author's judgment it is reasonable to expect that a court would likely recognize email transmittal as acceptable as a fax transmittal. Key to that determination may be having a record that the email was received (similar to a fax confirmation), so having a delivery/read receipt or requesting that the recipient acknowledge receipt of the email would be advisable.


In the above analysis, we are suggesting that if a buyer prepares and signs an offer, scans a conforming copy of the offer and transmits that conforming scanned copy to the seller by email, then the seller accepts the terms of the offer by printing, signing and re-scanning the signed contract and delivering that accepted copy to the buyer by email, such a process should create an enforceable contract that it is difficult to challenge.


Hurdles, limitations, and restrictions informing an enforceable purchase agreement using electronic signatures or electronic records
After starting from the premise above, a question that arises from time to time is whether an "electronic signature" or "electronic contract" is binding and enforceable.


The controlling law in Minnesota is the Uniform Electronic Transactions Act ("UETA"). This act is somewhat involved and complex, and it defines "electronic record", "electronic signature", and various related terms.


UETA applies only to transactions between parties who have "agreed to conduct transactions by electronic means". MN Stat. 325L.05(b). Determining whether the parties have agreed to conduct business by electronic means "[...] is determined from the context and surrounding circumstances, including the parties' conduct." Id.


Since the provision above limits the scope of the act's application, it is advisable to have a written agreement between the parties to conduct the transaction electronically, should the parties so choose. Even in such an instance, parties to such a transaction would be well advised to discuss further issues or concerns with their own legal counsel.


The determination of "whether an electronic record or electronic signature has legal consequences is determined by [UETA] and other applicable law." MN Stat. 325L.05(e). This provision underscores that there is subjective or interpretive component to whether an electronic signature or electronic record is binding.


There is a scarcity of Minnesota appellate court decisions issued interpreting UETA, so the law in this area is still quite unsettled and untested.


Despite the restrictions or limitations identified above, the intended scope of UETA and enforceability of electronic records, contracts and signatures is intended to be broad. See MN Stat. 325L.07. For example, the act indicates that "a record or signature may not be denied legal effect or enforceability solely because it is in an electronic form." Id. Similarly, a contract cannot be denied enforceability "solely because an electronic record was used in its formation." Id.


In conclusion, the simple answer to the broad question of whether an electronic signature or electronic record may be used in the creation of an enforceable real estate purchase agreement is yes, subject to some limitations as outlined. Additionally, anyone wishing to cut new ground in this area has to recognize that until the caselaw interpreting UETA as it is applied to real estate purchase agreements is more definitive, there will be a degree of risk for the parties transacting business using this medium. Any contest over whether the agreement is enforceable may be more open to scrutiny and interpretation than in a "traditional" contract formation dispute where no electronic means or mechanism is used.

Can a buyer perform intrusive testing on a property they are interested in purchasing?
The MNAR Forms Committee added language to the Inspection Contingency Addendum prohibiting a buyer from performing intrusive testing without the prior written authorization from the Seller. The Inspection Contingency Addendum allows the Seller to choose whether they DO or DO NOT agree to the buyer to perform intrusive testing.

Legislation requires sellers of real property, before signing an agreement to sell or transfer real property, to disclose in writing to the buyer or transferee if, to the seller's or transferor's knowledge, methamphetamine production has occurred on the property. If methamphetamine production has occurred on the property, the disclosure shall include a statement to the buyer or transferee informing the buyer or transferee: 1) whether an order has been issued on the property; 2) whether any orders issued against the property have been vacated; or 3) if there was no order issued against the property and the seller or transferor is aware that methamphetamine production has occurred on the property, the status of removal and remediation on the property.


Unless the buyer or transferee and seller or transferor agree to the contrary in writing before the closing of the sale, a seller or transferor who fails to disclose, to the best of their knowledge, at the time of sale any of the facts required, and who knew or had reason to know of methamphetamine production on the property, is liable to the buyer or transferee for: 1) costs relating to remediation of the property according to the Guidelines and best practices; and 2) reasonable attorney fees for collection of costs from the seller or transferor. An action against the seller must be commenced within six years after the date on which the buyer or transferee closed the purchase or transfer of the real property where the methamphetamine production occurred.


This statutory language pertaining to real property and methamphetamine production preempts all local ordinances relating to the sale or transfer of real property designated as a clandestine lab site.


The MN Department of Health is required under the statute to post contact information for each local community health services administrator on their web site. In addition, each local community health services administrator is required to maintain information related to property within the administrator’s jurisdiction that is currently or was previously subject to an order prohibiting the use or occupation of property. The information maintained by the community health services administrator must include: 1) the name of the owner; 2) the location of the property; 3) the extent of the contamination; 4) the status of the removal and remediation work on the property; and 5) whether the order has been vacated. The administrator shall make this information available to the public either upon request or by other means.

For the Methamphetamine Disclosure Requirement, if the Seller checks NO on the Seller's Property Disclosure Statement indicating they are not aware of any methamphetamine production occurring on the property, does the Seller still need to complete the Methamphetamine Production Disclosure Statement?
No. The new Methamphetamine Disclosure Statement only needs to be completed in the event the Seller has knowledge that methamphetamine production has in fact occurred on the property. It could also be used to make the appropriate disclosure by the seller in the event the Seller’s Property Disclosure Statement is not being utilized in the transaction, I.e. new construction.

Can I use up old versions of the MNAR forms before purchasing the new revisions?
MNAR recommends that all REALTOR® members use the most current revision of all MNAR approved forms since we are continually making clarifying changes to the forms in response to legal inquiries and/or court cases in order to reduce your risk of liability. In addition, many of the changes made to the MANR forms are a result of statutory changes that need to be reflected in the forms.

There seems to remain some confusion about the MN Association of REALTORS® position pertaining to personal property being transferred in conjunction with the transfer of real property. MNAR has NOT taken a position that REALTORS® should not assist with the transfer of personal property, rather MNAR's position pertains to how you assist clients with the transfer of personal property.


Specifically, MNAR continues to receive requests for a "personal property addendum" to the Purchase Agreement. Such an "addendum" is not necessary, since the current MNAR Purchase Agreement allows for the transfer of personal property on lines 24-26.


Lenders, seeing the personal property listed on those lines in the Purchase Agreement, are frequently demanding that the personal property be removed from the Purchase Agreement since lenders are refusing to lend on the personal property and will lend only on the real property.


Unfortunately, many REALTORS® continue to be misguided by loan officers who demand that the personal property be taken out of the Purchase Agreement and placed on a "personal property addendum" to the Purchase Agreement. An "addendum" to the Purchase Agreement is one in the same as including the language directly in the Purchase Agreement, thus a separate "addendum" is not necessary.


Additionally, REALTORS® are often instructed by loan officers not to include this "addendum" when they forward the Purchase Agreement to the lender. Such action would result in misrepresentation to the lender and should not be condoned. REALTORS® should absolutely not withhold pages of the Purchase Agreement from the lender.


MNAR continues its position that REALTORS® can and should assist their clients in transferring personal property in conjunction with the sale of real property however, it must be done appropriately. The personal property which the lender has refused to allow to be transferred with the real property must be transferred separately from the real property. To transfer the personal property separately, you can utilize a "personal property agreement" (not an "addendum" to the Purchase Agreement) or a "bill of sale". Additionally, the price of the personal property being transferred should reflect its appropriate market value.


The MNAR has a long-standing position to limit the forms offered strictly to the transfer of real property. For this reason, MNAR has not offered a "personal property agreement" or "bill of sale". Therefore, if your brokerage and its agents have chosen to assist buyers and sellers with the transfer of personal property, you may want to obtain either a "personal property agreement" or "bill of sale" for use by your brokerage.

One of the major changes made by the Forms Committee to the MNAR Purchase Agreement in fiscal year 2004 and clarified again in 2005 occurred on page 1 of the 8/05 revision.


Before the change, this section addressed the calculation of the purchase price as an exact dollar amount.


For example:
Earnest Money + Cash Payment + Financing = Purchase Price; or
$5,000 Earnest Money + $20,000 Cash Payment + $100,000 Financing = $125,000


The revised language, rather than calculating an exact dollar amount, addresses the buyer's payment as a percentage of the case payment and the amount to be financed.


For example:
Earnest Money + Cash Payment = x% of Purchase Price (x + x = 100%)


Your calculation process: $5,000 Earnest Money + $20,000 Cash Payment = $25,000 ÷ $125,000 Purchase Price = 20% + $100,000 Financing ÷  $125,000 Purchase Price = 80% (20% + 80% = 100%)


Fully financed purchases: Earnest Money + Cash Payment = 0% Financing 100% (0% + 100%)


There were several reasons that the MNAR Forms Committee decided to make this significant change. First, there are an increasing number of transactions occurring in the market where buyers are choosing to fully finance their purchase (80/20 or 80/10/10 loans) which were not being reflected accurately in the Purchase Agreement. Furthermore, the MNAR Purchase Agreement did not previously have template language to address this type of financing.


Finally, the Forms Committee understood that buyers often change the actual dollar amount of what they put down in cash and what they finance before the closing. Such a change previously necessitated a change in the terms of the Purchase Agreement by recalculating the actual dollar amounts for earnest money, cash payment and financing to total the purchase price.

The MNAR Forms Committee  worked with Lisa Brecount of Burnet Title, Sara Batzlaff of Rochester Title and Kevin Dunlevy of the Minnesota State Bar Association to update the Title & Examination language of the Purchase Agreement to comply with RESPA.


Historically, Minnesota Purchase Agreements itemized and identified which party paid for the various title related fees that were itemized on the HUD-1 Settlement Statement (Charged on the 1100 section of the HUD-1 Settlement Statement). Typically, sellers were charged for items like updating abstracts, title searches, title examinations, assessment searches and judgment searches, and buyers were charged for items like title examinations, plat drawing fees, name searches, title insurance premiums and recording service fees. When negotiating a Purchase Agreement, buyers and sellers had the ability to negotiate these charges.


As of 2010, RESPA defines all of these charges as "title service fees" (See RESPA Rules USC 3500.2) and no longer allows itemization of title service fees on the HUD-1 Settlement Statement. RESPA now requires that title service fees be "bundled" in the buyer's title service fee as disclosed on the Good Faith Estimate (GFE) and included in the charges to the buyer on the HUD-1 Settlement Statement. One exception is that RESPA allows separate itemization of a seller's closing fee as a seller's expense (Title service fees do not include government fees and taxes such as recording, mortgage registration, state deed tax or conservation fee. Government fees and taxes are itemized in the 1200 section of the HUD-1 Settlement Statement). The change in RESPA was made to standardize how lenders give estimates for title service fees so consumers could better compare fees from various lenders and title companies.


In response to these changes, MNAR revised the Title & Examination section of the Purchase Agreement (effective 9/10) to eliminate the itemization of title service fees. The new language shifts to the buyer the obligation to pay certain title service fees previously paid by seller. Buyers and sellers may determine who pays for all or some of these fees by negotiating a seller contribution in the Seller's Contributions to Buyers Costs Addendum. Any seller contribution will be a lump sum credit to the buyer on page 1 of the HUD-1 Settlement Statement at closing.


The 2010 Purchase Agreement no longer requires sellers to update the abstract. For transactions that use abstracts as title evidence, early communication with the buyer's title company and lender is crucial when estimating the abstracting transactions expense for inclusion in the GFE and for calculating any allowable seller's contributions to the buyer. In all other transactions, early communication with the title company and lender will be important.


RESPA does not typically apply to cash or contract for deed transactions. However, the Purchase Agreement still identifies title service fees and buyers  and sellers in cash and contract for deed transactions still need to consider negotiating title service fees and using the Seller's COntributions to Buyer's Costs Addendum.

Why doesn't MNAR have buyer and seller initial lines on each page of the Purchase Agreement?
The MNAR did have initial lines on the first page of the Purchase Agreement many years ago. We learned from many licensees at that time those initial lines increased broker and salespersons' liability since the initial lines were often overlooked and not appropriately completed. This of course led to confusion and litigation.


There is no need to have initial lines on each page of the Purchase Agreement. The signature lines on the last page of the Purchase Agreement constitute acceptance of the entire Purchase Agreement. Just before the signature lines on the Purchase Agreement, the buyer(s) and seller(s) acknowledge that they, "accept this Purchase Agreement and have reviewed all pages of this Purchase Agreement."


Real estate licensees should be numbering all pages of the Purchase Agreement, including all addenda. The Purchase Agreement states "Other addenda may be attached which are made a part of this Purchase Agreement. (Enter total number of pages of this Purchase Agreement, including addenda, on line two (2) of page one (1)."


NOTE: DO NOT include separate disclosures and/or agreements in the numbering of pages to the Purchase Agreement. (e.g. Seller's Property Disclosure Statement or Arbitration Disclosure and Real Property Arbitration Agreement.)


In addition, real estate licensees are required by MN Statute 82.37, Subd. 4 to furnish to the parties to the transaction at the time the documents are signed or become available a true and accurate copy of any record, instrument or document that is material to the transaction and that is in the licensee's possession.


What should I do if another party began initialing the Purchase Agreement?
One of two options; 1) make sure all of the parties have initialed in every place; or 2) demand a new Purchase Agreement with no initials.

The MNAR approved Seller's Disclosure Alternatives form was created by the Forms Committee to provide REALTORS® with a standardized format to address the circumstance when a seller chooses an alternative disclosure option allowed under MN Stat. 513.52-513.60.

Seller Disclosure Options

The revised form offers two options in the event the seller has chosen not to provide a written material fact disclosure of which ONE needs to be selected when this form is utilized.

Qualified Third-Party Inspection

The first option allows a seller to provide the prospective buyer with a written report prepared by a qualified third party that discloses material information relating to the property, in place of making a disclosure themselves regarding that specific information.

Please note however, that a seller would still be required to disclose such material facts known by the seller that contradict any information included on the written report. In addition, the seller would also be required to disclose such material facts known by the seller that were not included in the written report. (E.g., if the written report discloses material information regarding the furnace, the seller would still be required to disclose if they had a wet basement or a leaky roof.)

Waiver

The second option would allow a buyer to agree to a waiver of the seller disclosure requirements under MN Stats. 513.52-513.60.

Such a waiver must be in writing signed by the buyer and the seller.

PLEASE NOTE: a waiver of the disclosure requirements of MN Stats. 513-52-513.60 does not waive, limit or abridge any obligation for seller disclosure created by any other law. There are numerous other federal, state and local government disclosures required to be given by property owners at time of sale. Some examples include septic system, wells, valuation exclusion, lead-based paint and local government disclosure requirements. A seller dies not have the ability to waive these disclosure requirements and must provide the appropriate disclosure to prospective buyers regardless of whether or not the buyer agreed to waive the seller disclosure requirements under MN Stats. 513.52-513.60.

1. To the extent that the seller is contemplating the use of the waiver alternative, the seller should be reminded that their liability for disclosure of such material facts is limited to facts known to the best of their knowledge at the time of disclosure.

2. This is a relatively new law and is untested by the courts. We do not know with certainty how a court of law would rule on the scenario where the seller clearly knew of a significant problem with the physical condition of the property and convinced a buyer to sign a waiver of the seller disclosure requirements for the purpose of not having to disclose that material fact. However, there is likelihood that a waiver would not protect a seller in this example.

3. When a seller demands a waiver from the buyer of their statutory seller disclosure obligations, such a demand may have an adverse impact on the marketability of the home. In other words, it may send a "red flag" to prospective buyers that there is something wrong with the home that the seller does not want to disclose.

We understand that there are some circumstances that will necessitate such a waiver. Some examples may include an absentee property owner, estates and the sale of a foreclosed property by a lender. However, even in these circumstances, the seller would still only be required to disclose material facts regarding the physical condition of the property TO THE BEST OF THEIR KNOWLEDGE and it is in the REALTORS® interest to have the seller disclose material facts of which they are aware.

There is no like waiver for real estate licensees. MNAR successfully pursued this legislation requiring seller's to disclose material facts pertaining to adverse physical conditions in the property since, to a large degree, REALTORS® must rely on sellers to know material facts regarding the property. All real estate licensees must disclose ALL material facts of which they are aware that could adversely and significantly affect an ordinary purchaser's use or enjoyment of the property or any intended use of the property of which they are aware on all types of properties.

We have received several requests over time from REALTORS® which have related to short sales and the process relating to the same. As a response, the MNAR Forms Committee has decided to release a Short Sale Contingency Addendum.


The following serves solely as an information outline pertaining to the process involved with a short sale transaction.


A potential short sale may occur when the current market value of the property is not sufficient to pay all debts and obligations secured by any liens on the property. A short sale requires the seller to enter into short sale agreements with each creditor who has a lien against the subject property and the same should include a release of the creditor's liens for a payment of less then the amount they are owed. A contingency pertaining to short sales must be included within any offer accepted on a property in which the same applies. Lender approval must be included as part of the contingency which must be given in regard to the transaction. A seller may still be liable for any unpaid portion of debt against the property even though the leinholder releases the lien.


The amount which is forgiven by a lender in a short sale may be taxed as income. The lender must submit Form 1099C to the Internal Revenue Service. The form must state the amount of forgiven debt.


The seller should explain their hardship before listing a property by submitting a hardship letter to the lender. The hardship letter may include job loss verification, medical statements, disability documents or any other information relating to the hardship.


The seller may be required to supply requested documentation to the lender's loss mitigation department which includes financial documents pertaining to the seller and the property, accepted offers to purchase, a listing contract, an appraisal or market analysis, or a statement of need or hardship. Lender forms must be completed in a manner which follows exact lender requirements. The broker may assist the seller by providing a market analysis to the lender pertaining to the property. The seller should then submit a letter to the lender authorizing the listing agent to deal directly with the lender if the seller so desires.


The seller and/or the listing agent should contact the Loan Mitigation Department of the lender. The lender will send the file to a negotiator at the mortgage company/bank after satisfying the requests from the Loan Mitigation Department, including the purchase agreement and all other related documentation.


The seller and seller's creditor(s) must finalize a short sale agreement pertaining to the subject property. The lender has the ability to approve, condition, reverse or reject the short sale. The seller shall promptly notify the buyer if the short sale agreement cannot be finalized. The buyer may then, at the buyer's option, declare the purchase agreement cancelled as there has been a default pertaining to the short sale contingency. The buyer and seller shall immediately sign a cancellation of the purchase agreement directing release of the earnest money to the buyer.