On September 12, 2011, in Robert G. Dimke, et al. v. Naomi Farr, et al, the Minnesota Court of Appeals held that an “unfulfilled condition” of a purchase agreement (“PA”) is a threshold requirement that permits either a buyer or seller to invoke declaratory statutory cancellation of a PA for residential real property under Minn. Stat. § 559.217, subd. 4. The Court held that absent an unfulfilled condition of the PA, a declaratory cancellation of a PA for residential real property is ineffective.
Here is brief recap on statutory cancellation under MN law: If a buyer and seller of a residential PA cannot agree to mutual cancellation of a PA, either party may serve notice of cancellation of the PA per Minn. Stat. § 559.217, subd. 3 and 4. In both scenarios (Cancellation with Right to Cure and Declaratory Cancellation) if the other party does not seek an injunction or if the other party does not “cure” ( in the event of a Cancellation with Right to Cure) within 15 days after service of notice, the PA is cancelled and the earnest money is refunded to the party who served the notice of cancellation. However, if the other party also attempts a statutory cancellation (often referred to as a “cross-cancellation”) during the 15-day time period, the PA is cancelled and the return of earnest money becomes a litigation issue.
In Dimke v. Farr, the Farrs listed their property and entered into a binding PA with a party named Muir. The Farr-Muir PA was to close on June 11, 2010, but failed to close. Muir attempted to mutually cancel the PA, but the Farrs declined. The Farrs re-listed the property subject to the cancellation of the Farr-Muir PA. The Farr-Muir PA was never cancelled. Shortly afterwards, the listing agent for the Farrs showed the property to another party, the Dimkes, and advised the Dimkes that the Farr-Muir PA would be cancelled when the Dimkes entered into a PA with the Farrs (despite having not yet initiated any efforts to cancel the Farr-Muir PA). The Farrs and Dimkes entered into a second PA for the property which contained language requiring the Farrs “to use their best efforts to provide marketable title by the date of closing” and if the Farrs could not provide marketable title within 30 days after closing, either party has the right to cancel the Farr-Dimke PA. After the execution of the Farr-Dimke PA, Muir came back and stated that he intended to close on the Farr-Muir PA. The purchase price of the Farr-Muir PA was significantly higher than the Farr-Dimke PA. The Farrs attempted to cancel the Farr-Dimke PA due to inability to provide marketable title to the Dimkes. After the expiration of the 30-day period to provide marketable title, the Farrs served a notice of declaratory cancellation on the Dimkes per § 559.217, subd. 4. The Dimkes did NOT seek injunctive relief as required by the statute but instead sued the Farrs for specific performance, damages, breach of contract and breach of the implied covenant of good faith and fair dealing. Each party moved for summary judgment seeking to dismiss the respective claims against them. The District Court granted summary judgment in favor of the Farrs on the ground that Farr-Dimke PA was void at the expiration of the 15-day period due to the Dimkes’ failure to seek injunctive relief.
The Dimkes appealed the District Court’s decision on the grounds that § 559.217, subd. 4, was inapplicable because the required “unfulfilled condition” did not exist to cancel the PA. The Court, in analyzing the plain language of the statute, determined that an unfulfilled condition of the PA must exist before notice of cancellation may be served on the other party, and as a result, the District Court erred in granting summary judgment without first determining whether the cancellation notice was even effective. The Court of Appeals noted that the Dimkes took “immediate action” in the case by initiating a lawsuit within 5 days after service of declaratory cancellation, even though the Dimkes did not seek injunctive relief as required by the statute. The District Court’s decision was reversed and remanded to reinstate the Farr-Dimke PA and determine whether the declaratory cancellation was effective under § 559.217, subd. 4.
This recent decision raises important questions regarding the enforceability of declaratory cancellation per § 559.217, subd. 4. Specifically, does this case mean that even if a party does not seek injunctive relief suspending an action for declaratory cancellation, that the PA may still be valid due to a different election of remedies? How will this decision affect parties’ future ability to cancel residential PA’s per § 559.217, subd. 4? Stay tuned for the District Court’s determination on remand…
This blog entry is written by Sarah Bennett, an associate attorney at Thomsen Nybeck. Sarah practices in both the transactional and litigation area of the firm with a primary focus on real estate and business transactions, townhome and condominium law, real estate brokerage law and civil litigation.