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Although farm real estate is occasionally transferred without a land security agreement (transfers by gift, inheritance, or cash purchases that do not involve financing), most transfers of farm real estate involve financing. Farm real estate purchases are commonly financed with either a contract for deed or a mortgage. Mortgages can be made to the seller or to a third party lender. The following information explores the legal differences between the mortgage and contract for deed in Minnesota.

Determining which financing option—contract for deed or mortgage—is best depends on several factors, including the seller's rights in the event of a default by the buyer. The rights of parties to real estate security agreements are discussed in more detail in the fact sheet, Termination of Security Interests in Personal Property.

Mortgages
In a mortgage transaction, the land purchaser (also known as the mortgagor) signs a note, executes a mortgage on the land to the lender (also known as the mortgagee), and pays the property seller in full. The buyer obtains a deed to the property, but the lender retains a lien—or claim—on the property as documented in the mortgage.

If the buyer deals directly with the seller rather than a lender, the seller finances a portion of the sales price with a mortgage. In such cases, the buyer makes a down payment on the land and executes a mortgage with the seller for the balance of the purchase price. This type of mortgage is known as a purchase money mortgage. The purchase money mortgage agreement entered by the buyer at the time he or she takes possession of the deed takes priority over any other claim to the property as a result of the buyer's ownership of the property. Thus any liens, such as pre-existing judgment liens, related to the buyer and attached to the interest the buyer acquires in the land, are subordinate to the lien of the mortgage given by the buyer to secure payment of the purchase price. This is an exception to the general rule in Minnesota whereby priority of real estate interests is determined, in the absence of actual knowledge, by the date the mortgage was recorded.

A real estate mortgage is a conveyance of security for monetary payment or the performance of some duty. The conveyance is nullified upon delivery of payment or performance of prescribed duty. Thus, when the loan secured by a mortgagee is paid in full, the interest, or lien, of the lender is extinguished.

Under Minnesota law, a mortgage is a conveyance, but legal title to the mortgaged property is not transferred to the lender. Minnesota is classified as a lien theory state. In lien theory states, the mortgagee has no right to possess the property, only the power to sell the property in connection with a foreclosure. Thus, as a general rule, a mortgagee is not entitled to rents derived from mortgaged property. Minnesota law, however, allows a mortgagor of agricultural property to assign rents from the property to a lender as additional security for debts secured by the mortgage if the assignment was executed, modified, or amended after August 1, 1977; if it secures an original principal loan of $100,000 or more; and if it is not a lien on property homesteaded entirely as agricultural property.

Agricultural real estate disputes can arise with respect to whether a mortgage covers personal property that has become affixed to the real estate. Whether such personal property (such as storage bins, silos, milking equipment or slurry-store systems) has become so attached to the real estate as to become part of the real estate and thus nonremovable is a question that must be determined by a court based on the facts and circumstances of each case. In general, the primary consideration will be the involved parties' intentions, determined by evaluating the nature of the property that has become attached to the real estate, the method of attachment, and the extent to which the property is tied to the use of the real estate. If the court determines that the personal property has become attached to the real estate property (and is therefore a fixture), the lien interest of the mortgagee will attach to the personal property even though the personal property is not specifically described in the mortgage. To avoid such disputes, parties to a real estate mortgage should stipulate in the mortgage whether certain items of personal property will become part of the real estate subject to the mortgage.

Closely related to the issue of fixtures is the question of whether a mortgage covers crops growing on land subject to a real estate mortgage. To obtain a lien on crops, a lender must comply with the provisions of the Uniform Commercial Code (UCC). These requirements are set forth in detail in another fact sheet in this series, Security Interests in Personal Property. Unless a lender complies with the rules relating to such liens, a lien against crops cannot be based on the real estate mortgage.

A mortgage generally provides that upon default of the mortgagor, the mortgagee has the option to accelerate the indebtedness, foreclose the mortgage, sell the mortgaged premises, and use the proceeds to pay the debts secured by the mortgage. The procedures in Minnesota for foreclosing a real estate mortgage are detailed in the fact sheet, Mortgage Foreclosures. A mortgage also generally includes a provision known as a power of sale clause which allows the mortgagee to foreclose without a lawsuit. Without such a clause in a mortgage, the mortgagee must initiate a lawsuit to foreclose its mortgage.

Besides the power of sale, a real estate mortgage typically includes an acceleration clause that provides for the acceleration of the debt in the event of default. Such clauses are contained in both the promissory note and the real estate mortgage securing the note. A promissory note and a mortgage are separate instruments and differ in nature and purpose. They are enforceable independently of each other on their own terms. Thus a lender may enforce the promissory note independently of the mortgage and in doing so is not required to first foreclose the real estate mortgage. Action can be brought against the mortgagor based on promises contained in the promissory note to make the payments required by the note.

Most mortgages also contain clauses known as due on sale clauses which permit acceleration of the debt in the event that the mortgagor transfers interest in the property without prior consent of the mortgagee. Such due on sale clauses can be used to prohibit the assumption of the loan by a subsequent borrower.

When the mortgage debt is paid, the mortgage is discharged and the mortgagee has no further interest in the land. At this point, the mortgagor is entitled to a satisfaction of the mortgage which must be recorded with the county recorder so as to extinguish the mortgage in the county records. Until this is done, the recorded mortgage remains a cloud on the title.

Occasionally, when a tract of land consisting of divisible lots or parcels is mortgaged to secure a single debt, the mortgagor may sell some of the property to one or more buyers. Unless a partial release of the mortgage is obtained, buyers of the separate parcels take title to the property subject to the first mortgage. In the absence of an agreement in the mortgage or an agreement between the mortgagor and mortgagee providing for partial releases, the mortgagor has no right to compel the mortgagee to give a partial release of a portion of the real estate from the mortgage.

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. The statute requires a creditor seeking to collect on agricultural property debt, including real estate and certain personal property, to offer the borrower the opportunity to mediate a resolution to the debt prior to the lender's resorting to collection action against agricultural property. Such action can include mortgage foreclosure, contract for deed cancellation, seeking possession of personal property, or executing a judgment. When the debt involved has been scheduled by the borrower in a bankruptcy or involved in a previous farmer-lender mediation, the debt is not subject to the farmer-lender mediation statute and the lender can seek collection remedies without first offering mediation.

Contracts for Deed
Whereas a mortgage is widely used when a commercial lending institution is involved, a contract for deed is frequently used in transactions between private parties. The reason being, at least on the surface, the contract for deed is relatively simple to understand and appears to afford the seller a quick method of canceling the transaction in the event of default. Contract cancellation procedures are detailed in another fact sheet in this series, Termination of Contracts for Deed.

In general, the seller (also known as the vendor) can retake the land, retain the payments made, and benefit from any improvements that have been made on the premises by the buyer (also known as the vendee). The seller may alternatively elect to sue the buyer on the contract.

The contract for deed is attractive to the buyer because he or she can often purchase the property with a relatively low down payment. Also, in the event of default, the buyer need only bring payments current within the time period provided by state law to preserve equity in the property. In many cases, buyers enter into such a contract because without such an arrangement they would not be able financially to make such a purchase.

The contract for deed is a contract and many of the rights and remedies of the parties are based solely on the provisions contained in it. Such provisions as time, place, and amount of payment indicate the continuing contractual relationship between the parties. Under a contract for deed, the purchaser acquires an equitable estate in the land. Although it is generally accepted that the seller retains legal title to the land, courts have consistently held that the seller has only a security title and the buyer is the equitable owner of the property. As such, the relationship is the same as that created by a deed and a mortgage.

Under a standard contract for deed, the seller agrees to convey the property to the buyer by a specified form of conveyance, usually a warranty deed, and to furnish an abstract evidencing good title in the seller at the time the contract for deed is executed. The buyer agrees to pay a purchase price for the property as specified. The buyer also agrees to pay real estate taxes and assessments, and to maintain insurance on the premises, including insurance for the benefit of the seller. The buyer also agrees that all buildings and improvements currently on or subsequently added to the land may not be removed, but will remain on the property until the contract is fully performed.

Many other contract for deed provisions, such as due on sale clauses, are similar to those contained in a mortgage. It may, however, be more common to find a provision in a contract for deed prohibiting the purchaser from prepaying all or any portion of the contract ahead of schedule. The seller may be looking to the contract for deed payments as a source of retirement income and may not desire early payment.

Acceleration clauses are much less common in contracts for deed. There is, however, no legal restriction against acceleration clauses in contracts for deed. Without an acceleration clause, a seller wanting to forego his claim against the land must bring action for each installment as it comes due under the contract for deed. The seller cannot accelerate the balance due under the contract.

Once the total purchase price has been paid to the seller, the buyer is entitled to the type of conveyance provided for in the contract. Generally this requires execution and delivery of a warranty deed to the buyer. When the real estate title is transferred by a warranty deed, the seller is guaranteeing that he or she has full legal title in the property subject only to those exceptions noted on the deed. In contrast, a quit claim deed transfers all rights in the property of the seller, but provides no guarantee that others do not have prior claims. Once the purchase price has been paid, the seller must convey legal title to the buyer. If the seller has died or is otherwise unable to make the conveyance, it is the duty of his or her heirs or representatives to furnish the proper conveyance without any additional cost to the buyer.

As previously noted, improvements made by the buyer may be lost if he or she defaults on the contract. In the event that the buyer plants crops, the crops may likewise be lost if the seller terminates the contract for deed. It is therefore important for a farmland buyer to make provisions for paying the contract installments during the time he or she has crops on the land. Without such provisions, such crops could be forfeited to the seller.

As with foreclosure of a mortgage, cancellation of a contract for deed affecting agricultural real estate triggers the provisions of the farmer-lender mediation statute, and may afford the borrower the right to mediate the debt prior to the lender's starting contract cancellation proceedings.

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

• Security Interests in Personal Property (FO-7292).
• Mortgages and Contracts for Deed (FO-7293).
• Termination of Contracts for Deed (FS-7294).
• Bankruptcy: Chapter 7 Liquidations (FO-7295).
• Bankruptcy: Chapter 11 Reorganizations (FS-7296).
• Mortgage Foreclosures (FO-7297).
• Termination of Security Interests in Personal Property (FO-7298).
• Rights of Unsecured Creditors (FO-7299).
• Tax Considerations in Liquidations and Reorganizations (FO-7300).
• Bankruptcy: Chapter 12 Reorganizations (FO-7301).
• Agricultural Production Contracts (FO-7302).
• Financing the Farm Operation (FS-2589).
• Contracts, Notes and Guaranties (FS-2590).
• Farm Leases (FS-2593).
• Bankruptcy: The Last Resort (FO-2598).

The fifteen publications are also available as a package: Farm Legal Series (PC-7291).

This publication is designed to provide accurate information in regard to the subject matter covered. It is published with the understanding that the authors and the University of Minnesota are not engaged in rendering legal, accounting or other professional services. If legal advice or other professional assistance is required, the services of a competent professional should be sought.

Produced by Communication and Educational Technology Services, University of Minnesota Extension.

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