If a debtor is unable to perform under the land security agreements to which he or she is a party, the rights of the debtor and other involved parties are determined by state law depending on the type of security agreement involved. Minnesota law is very specific with respect to the foreclosure of real estate mortgages. Specific time periods are provided by the statutes and must be followed exactly by the creditor attempting to foreclose its security interest.

What Constitutes Default?
A typical real estate mortgage includes terms requiring the mortgagor (purchaser) to do more than make the necessary periodic payments. For example, the mortgagor is required to maintain insurance on the premises, pay all real estate taxes, and maintain the premises for the benefit of both the mortgagor and the mortgagee (lender). In addition, mortgages may include a provision prohibiting the sale of all or any portion of the premises without the prior written consent of the mortgagee. Such provisions are known as due on sale clauses. If the mortgagor fails to abide by any of the terms in the mortgage, he or she is in default.

Mortgagee's Option Upon Default
Once a default has occurred, the mortgagee has several available options.

The mortgagee can negotiate an arrangement with the mortgagor by which the mortgagor conveys the premises to the mortgagee in satisfaction of the underlying debt. Such a procedure is known as the mortgagor giving the creditor a deed in lieu of foreclosure. When a mortgagor undertakes such action, he or she is voluntarily surrendering redemption or reinstatement rights (discussed below). Because such an action results in the transfer of ownership and the right to possession, Minnesota courts have long held that such transactions are subject to close scrutiny to protect the mortgagor from oppression by the mortgagee. For such an agreement to be upheld in court, it must not result from any oppressive means or overreaching on the part of the mortgagee, and adequate consideration must be given.

A second course of action for the mortgagee is bringing a lawsuit on the underlying debt based on the promises of the mortgagor contained in the promissory note. A mortgage generally will be granted by a mortgagor to secure the performance of the promises of payment contained in a promissory note. If the value of the real property is less than the amount due under the mortgage, the mortgagee may elect to bring an action seeking the payment of the amount due under the promissory note. Such a course of action, however, may not be attractive to a mortgagee unless the mortgagor has other nonexempt assets that can be reached to satisfy the underlying debt.

Methods of Mortgage Foreclosure
Under Minnesota law, there are two methods of foreclosing a real estate mortgage, with foreclosure by advertisement being the most common. An alternative method, foreclosure by action, requires the creditor bring an action in court to determine its right to foreclose prior to any foreclosure sale. It is therefore more costly and time consuming for the lender and is rarely used.

When a mortgage encumbers agricultural real estate, Minnesota's farmer-lender mediation statute generally requires the lender to offer mediation of the debt to the borrower prior to beginning foreclosure proceedings. The farmer-lender mediation statute began requiring mediation in 1986. Generally, the statute requires, among other things, that a mortgagee seeking to enforce a mortgage on agricultural real estate, either by advertisement or action, first send notice to the mortgagor and offer the mortgagor the opportunity to mediate a resolution to the debt prior to beginning such action. If the mortgagor elects to mediate the debt, the mortgagee's enforcement of the mortgage can be suspended for a period of up to 90 days pending completion of the mediation. If the debt involved has been scheduled by the mortgagor in a bankruptcy or involved in a previous farmer-lender mediation, the debt is not subject to the farmer-lender mediation statute and the mortgagee can enforce its mortgage without first offering mediation.

Foreclosure by Advertisement
To initiate foreclosure by advertisement, the creditor must prepare a notice of mortgage foreclosure sale. Such a notice must specify the name of the mortgagor and the mortgagee, the original principal amount secured by the mortgage, the date of the mortgage, when and where it was recorded, the amount claimed to be due under the mortgage including taxes paid by the mortgagee, a description of the mortgaged premises, the time and place of sale, and the time allowed by law for redemption by the mortgagor. Once the notice has been prepared by the creditor, it must be published in a qualified newspaper in the county where the mortgaged property is located for a period of six weeks prior to the sale.

The notice must be personally served upon the person in possession of the mortgaged premises at least four weeks before the sale. It must be served in a manner similar to that required for service of a summons initiating a civil action. If the property is homestead property, a homestead designation notice must be served. If the property is agricultural, an agricultural designation notice must be served. These notices disclose the rights of the mortgagor to designate for separate sale and redemption the homestead area of the total property, and to similarly designate one or more separate tracts of agricultural property within the total property.

After the foreclosure notice has been prepared and publication has begun, the debtor may reinstate the mortgage. This right to reinstate is guaranteed by Minnesota law even though the creditor may have accelerated the balance due under the mortgage prior to the initiation of foreclosure proceedings. To reinstate the mortgage, the debtor must pay to the mortgagee the amount constituting the default at the time the mortgage foreclosure proceedings were initiated and all costs of foreclosure to the date of reinstatement, including half of any attorney's fees allowed by law or $150, whichever is greater. If the debtor reinstates the mortgage, the foreclosure proceeding is annulled. To reinstate the mortgage, however, the required payment must be made prior to the sheriff's sale, which is provided for by foreclosure proceedings.

Following publication and service of the required notice of mortgage foreclosure sale, the sheriff of the county in which the mortgaged premises are located conducts the foreclosure sale. The sheriff's sale is conducted as an auction. The mortgage holder is the seller; the sheriff acts as the auctioneer. If a party other than the mortgagee bids at the foreclosure sale, he must pay cash. The sale is made to the highest bidder. In most cases, the highest bidder at the foreclosure sale will be the mortgagee, and in many cases, the mortgagee will bid the amount due the mortgagee. Following the sale, the mortgagee's costs of sale are reimbursed and the debt owed to mortgagee is paid to the extent covered by the sale price. Any bid in excess of the amount owed the mortgagee is a surplus and may be reached by junior lien holders. If no such holders exist, the surplus must be returned to the mortgagor. Any shortage is a deficiency. When, as in most cases involving agricultural property, the redemption period is twelve months, the mortgagee can obtain a deficiency judgment in the amount of the difference between the fair market value of the property and the amount remaining unpaid on the mortgage by initiating a lawsuit within 90 days following the foreclosure sale.

Upon completion of the sale, the sheriff prepares a certificate of sale, which operates as a conditional conveyance of the mortgaged premises subject to the debtor's rights of redemption. This certificate must be recorded within 20 days of the sale. Following the sale, the mortgagor has the right under Minnesota law to redeem from the sale. Such a redemption annuls the sale. If there are any junior liens, however, they are revived by the redemption by the mortgagor.

The mortgagor must redeem within six months of the date of the sale unless one or more of the following applies, in which case the redemption period is twelve months:

1. The mortgage was executed prior to July 1, 1967.
2. The amount claimed due and owing as of the date of the notice of foreclosure sale is less than 66-2/3 percent of the original principal amount amsecured by the mortgage.
3. The mortgage was executed prior to July 1, 1987, and the mortgaged property, as of the date of the execution of the mortgage, exceeded ten acres in size.
4. The mortgage was executed prior to August 1, 1994, and the mortgaged property, as of the date of the execution of the mortgage, exceeded ten acres but did not exceed 40 acres insize and was in agricultural use as defined by Minnesota statute.
5. The mortgaged property, as of the date of the execution of the mortgage, exceeded 40 acres in size.
6. The mortgage was executed on or after August 1, 1994, and the mortgaged property, as of the date of the execution of the mortgage, exceeded ten acres but did not exceed 40 acres in size and was in agricultural use, as defined by Minnesota statute.

To redeem from the sale, the mortgagor must pay to the mortgagee the sum of money for which the mortgaged premises were sold, with interest from the sale date at the rate provided in the mortgage, plus additional amounts advanced by the mortgagee for expenses, including insurance, taxes, and assessments.

During this redemption period, the mortgagor is entitled to remain in possession of the property. He is therefore entitled to the rents, income, and profits from the property unless he has made an assignment of an interest in them. No assignment of rents and profits contained in a mortgage is enforceable under Minnesota law unless it was executed after August 1, 1977; it secured an original loan in excess of $100,000; and it is not a lien on property entirely homesteaded as agricultural property.

When the foreclosed real estate is agricultural and the mortgagee is a government agency, limited partnership, or corporation, Minnesota law provides the mortgagor with certain rights of first refusal upon the resale of the property by the mortgagee. The mortgagee cannot offer the property for sale or lease until it has provided written notice to the mortgagor at least 14 days in advance. When a third party buyer or lessee is found, the mortgagee must then offer to sell or lease the property to the mortgagor upon the same terms as the offer made by such third party. The mortgagor has a defined period of time within which to exercise his or her right of first refusal to either buy or lease the property on such terms. For leases, it is within 15 days of the mortgagee's written offer to the mortgagor. For sales, it is within 65 days of the mortgagee's written offer to the mortgagor. If the mortgagor exercises right of first refusal, he or she must fully perform the terms of the sale or lease within ten days of such exercise.

The mortgagor can elect to purchase or lease a portion of the total property involved, but only when the portion is of a size, configuration, and location that does not unreasonably reduce access to or the value of the remaining property. The mortgagor is not allowed to resell the property if the sale was arranged prior to his or her exercise of the right of first refusal. When the mortgagor resells the property within 270 days of exercising the right of first refusal, there is a presumption, subject to proof to the contrary, that the sale was arranged ahead of the exercise of the right of first refusal. When violating this prohibition, the mortgagor is liable for damages and attorneys' fees.

In addition to Minnesota law's provision for rights of first refusal, applicable federal law creates similar rights of first refusal in certain circumstances. The mortgagee must be part of the Farm Credit Services system. 1996 changes to this federal law have significantly limited the applicability of the federal law rights of first refusal.

Foreclosure by Action
Foreclosure by advertisement is the preferred method of foreclosure for mortgagees because it does not require legal action and is therefore less time consuming than foreclosure by action. Foreclosure by action may be required in some instances, however. No foreclosure by advertisement may be maintained unless the mortgage itself authorizes, by means of a power of sale clause, such a foreclosure proceeding. If a power of sale clause is not part of the mortgage, foreclosure by action is required. Foreclosure by action also may be elected by the mortgagee for technical reasons such as erroneous descriptions, mistaken release of the mortgage, or if an issue of priority with another lien holder must be resolved. To initiate a foreclosure by action, a summons and complaint must be served according to the Minnesota Rules of Civil Procedure. The complaint will name as defendants all present owners of the property, other lien holders, and those with a right to possession of all or a portion of the premises. If no party defends the action, the mortgagee may obtain a determination from the court that it has a valid mortgage. If, however, any of the defendants objects, a trial may be necessary to establish the right of the mortgagee to foreclose.

Once the court has made its decision, the sheriff will publish a notice of sale for a six-week period. In addition, if the debtor is a resident of the county in which the mortgaged premises are located, a copy of the judgment of the court and the sheriff's notice of sale must be served upon the debtor. Finally, after serving the notice of sale on the debtor, the sheriff must post the notice of sale for six weeks. At the sale, the sheriff may sell the property to cash bidders only, except for the mortgagee, which can bid its total debt. Following the sale, the sheriff reports the sale to the court, which will then confirm the sale. Once the court has confirmed the sale, the statutory period of redemption for the debtor begins. The time periods for redemption are the same as for foreclosure by advertisement.

Under either method of foreclosure, junior lien holders may redeem from the foreclosure sale if the mortgagor fails to do so. Such junior lien holders may redeem if, before the expiration of the mortgagor's redemption period, they have filed for record a notice of intention to redeem. The junior lien holders are each given a period of five days within which to redeem, based on the priority of their claims or liens, against the property.

If the amount realized at the sale is less than the amount due on the underlying debt, the creditor may be able to obtain a deficiency judgment against the mortgagor. If the statutory redemption period is six months, however, such a deficiency judgment can be obtained against the mortgagor only if foreclosure was by action. No deficiency judgment can be obtained against the mortgagor if the redemption period is six months and foreclosure was by advertisement. If the redemption period is twelve months, however, a deficiency judgment can be sought. Finally, even if the redemption period is six months, a deficiency judgment can be sought against any guarantors of the promissory note.

In the case of farming operations, it is common for a single real estate mortgage to cover several separate tracts of land. If the mortgaged premises consist of separate and distinct farms or tracts, the sheriff must, upon demand of the mortgagor, sell such tracts separately. If the mortgaged premises include the homestead, upon demand by the mortgagor, the sheriff must first sell the nonhomestead premises.

Following the expiration of the redemption period, the mortgagor's ownership rights to the property are terminated. However, with respect to certain foreclosures of agricultural property, the mortgagor retains certain rights of first refusal upon resale of the property by the mortgagee, as discussed above with respect to foreclosure by advertisement.

Conclusion
Procedures under Minnesota law for foreclosure and termination of real estate security agreements are complex and detailed. They prescribe specific time periods within which both parties must take certain actions. Such time periods are critical for both parties and any person involved in such procedures should carefully examine the specific provisions of state law that apply.

To order other publications in this series, contact the University of Minnesota Extension Service Distribution Center, 20 Coffey Hall, 1420 Eckles Avenue, St. Paul, MN 55108-6069, e-mail: order@extension.umn.edu or credit card orders at 800-876-8636 or (612) 624-4900 (local calls).

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