Michigan is currently experiencing tough economic times that put financial pressure on property sellers and buyers. Given these factors, it is likely that a growing number of Michigan land contract vendees will fall into default on their land contract payments. Therefore, one can expect an increase in the number of land contract vendors who will be seeking attorney assistance in recovering their property.
Foreclosure and forfeiture are the two principal remedies in Michigan for recovering possession of real property sold on a land contract that has gone into default. Most cases will go the route of forfeiture, which generally provides the vendor with a faster and less expensive procedure. This article outlines the basic steps for handling a land contract forfeiture action under Michigan's Summary Proceedings Act (the "Act"). MCL 600.5701 et seq.
A vendor that opts for forfeiture, as opposed to foreclosure, gains expediency in exchange for the chance to collect the full sale price. This is because the Act mandates an election of remedies. The vendor is allowed to pursue a relatively fast track procedure for recovering the property, but is generally barred from collection of the full contract balance. MCL 600.5756 & 600.5750. The alternate remedy of foreclosure enables the vendor to accelerate the entire debt (if allowed by the contract), and collect a deficiency if the price paid at the foreclosure sale is less than the accelerated balance. See generally MCL 600.3101 et seq. However, foreclosure can be a lengthy process, in which just getting to trial may take up to a year. Forfeiture cases, on the other hand, usually come to trial within weeks after filing.
It makes sense more often than not to go the more expeditious path of forfeiture. Typically, vendees stop paying because they do not have the money, and a deficiency judgment obtained through foreclosure will likely be uncollectible. The vendor's best bet is to utilize the forfeiture process to recover the property as quickly as possible so that it may be resold to a (hopefully) more solvent vendee. The drawback of forfeiture is that the vendee usually can reinstate by paying just the current arrearage. Multiple forfeiture actions may be required to recover property from a serial defaulter.
The choice of which remedy to pursue will usually turn on practical considerations such as the vendee's collectibility, the value of the property, and the amount of the unpaid contract balance and how much the vendee has already paid. The land contract must also allow forfeiture as a remedy for non-payment or other material breach. MCL 600.5726. Assuming that forfeiture makes legal and practical sense and that the land contract provides for the remedy, the vendor's lawyer is ready to proceed.
Basic Reference Points
The primary sources of law and procedure governing forfeiture actions are the Act, Michigan Court Rule 4.202, and the State Court Administrative Office ("SCAO") forms issued for use in forfeiture cases. The Act establishes preconditions to bringing a forfeiture action. It also sets forth the relief the court may grant and forfeiture's impact on other types of remedies. The court rule spells out the procedural nuts and bolts on subjects such as the contents of pleadings and other papers, joinder of parties and claims, and appeals.
The SCAO forms dovetail with the requirements of the Act and the court rule. They provide a "fill in the blanks" method of ensuring that pleadings and other papers are correct in both content and form. Another reason to use the SCAO forms is that the personnel of the district courts, which have virtually exclusive jurisdiction over land contract forfeiture proceedings, tend to be familiar with the forms and prefer them for ease of handling.
A final reference to be checked is the local rules and practice of the district court where the property is located, which is generally the required venue for a land contract forfeiture action. MCL 600.5706. A number of Michigan's district courts have adopted local court rules specifically dealing with aspects of land contract forfeiture proceedings. Some courts and even individual judges also have preferences and procedures (some written and some unwritten) concerning scheduling, use of the carbon paper SCAO forms, and other subjects.
Basic Time LineThe vendor who is advised to choose forfeiture for reasons of expediency will naturally want to know just how quickly the process will move. A forfeiture action consists of four principal phases: (1) notification; (2) trial; (3) the redemption period; and (4) eviction. A number of variables can impact the duration of each.
The process begins with sending written notice of forfeiture. The notice advises that the contract is in default, and that the vendee or other party in possession must either cure the default or vacate the property. The Act requires giving fifteen days to cure, unless the contract specifies a longer cure period. MCL 600.5728. The cure period begins to run on the date of delivery if the notice is personally served, or if service is by mail, on the next day of mail delivery after the date of mailing. MCL 600.5730. If personal service or service by mail cannot be made, service may be accomplished by publication over three weeks. MCL 554.301 & 554.302.
If the vendee fails to cure or move out within the cure period, the next step is to file and serve the complaint. Under the Act, trial is to be scheduled within thirty days after issuance of the summons. MCL 600.5735(2)(a). The Act allows courts to adopt a local rule requiring the defendant to appear in ten days, and a number of courts have done so. MCL 600.5735(4)(a); see, e.g., First Judicial District Court Local Rule 4.201 (Monroe County); Twelfth Judicial District Court Local Rule 4.201 (Jackson County); Eighty-Second Judicial District Court Local Rule 4.201 (Alcona, Oscoda and Ogemaw Counties). These courts set the trial date when the defendant appears. If the defendant does not appear, a default may be entered. The Act also prohibits adjournments of more than seven days except upon stipulation of the parties. MCL 600.5735(6).
Assuming the vendor prevails at trial and judgment for possession is entered, the vendee has the right to redeem by paying the delinquent amount and/or curing non-monetary breaches. The redemption period runs for ninety days if less than one-half the purchase price has been paid as of the entry of the judgment. MCL 600.5744(3). Six months to redeem is allowed if more than one-half of the purchase price has been paid. Id.
An appeal may extend the process. Appeals are heard in circuit court as of right. MCL 600.5753. A claim of appeal must be filed within ten days after the entry of judgment or the denial of a motion for a new trial or similar relief. MCR 4.202(L) & 7.101(B). The vendee pursuing an appeal is permitted to toll the redemption period by posting a stay bond. MCL 600.5744(5).
If the vendee does not timely redeem, the vendor may apply for an order of eviction. MCL 600.5744(1); MCR 4.202(K)(1). If any part of the judgment amount has been paid, the application must be scheduled for a hearing with notice to the vendee. MCR 4.202(K)(2). A court officer carries out the actual eviction. The timing of the eviction will depend on how fast the order makes its way through the court and the officer's availability. In non-payment situations where a hearing is not required, this stage usually can be completed in a week or two.
In summary, the length of the process is mainly dependent upon the vendee's willingness and/or ability to contest the issue and ultimately to redeem. In the run of the mill case, where the vendee cannot pay, but will not move, possession may be recovered in as little as four to five months, assuming the vendee is entitled to only the ninety-day redemption period. Vigorously contested proceedings, appeals, and cases involving the six-month redemption period will take longer.
A note about self-help: possession may be recovered almost immediately in the case of vacant land, or if the vendee has abandoned the property. If the vendor is able to do so without physically dispossessing the vendee, the vendor can reoccupy the property as soon as the notice of forfeiture is served and the cure period has expired. Day v Lacchia, 175 Mich App at 373. However, a vendee that loses possession in this manner may file an action seeking equitable relief to resurrect its right to redeem. In such a case, the maxim that "equity abhors a forfeiture" comes into play, and success for the vendor is not preordained. Instead, the court will weigh the competing equities of the parties, such as the vendee's payment history, the amount of equity the vendee stands to lose, the existence of any waivers, acquiescence in late payments or other grounds for estoppel against the vendor, and other potentially mitigating factors. Consequently, the vendor taking possession based on a notice of forfeiture alone remains subject to having the dispossessed vendee contest title in the future. Indeed, title insurers may balk at insuring marketable title for a vendor that has recovered its property without prosecuting a forfeiture action to conclusion. Under the Act, entry of judgment, expiration of the redemption period, and the issuance of an order of eviction must all take place to extinguish "any equitable right of redemption." MCL 600.5744(7).
Getting ready to handle a land contract forfeiture involves the usual preparatory steps for any contract-based litigation, i.e., gathering documents, factual investigation, and review with the client. The land contract should be carefully examined to verify that forfeiture is allowed as a remedy for default, to ascertain notice requirements, and to determine the exact nature of the parties' obligations. The vendor's attorney should also obtain an accurate accounting of vendee's payment history and all past due amounts. These figures will be needed for the notice of forfeiture, the complaint, and the judgment. A review of the parties' correspondence or other communications will be useful to give a "heads up" on potential defenses.
Notice of Forfeiture
The Act requires that the notice of forfeiture be in writing and contain specified information about the contract, the property, and payments. See MCL 600.5728. Under the Act, the notice must "declare forfeiture of the contract" and inform the vendee of the past due amount, the nature of any non-monetary breaches of the contract, and the period allowed to cure. SCAO form DC101 ("Forfeiture Notice") contains all the language the Act generally requires, plus spaces to add all the necessary information that is specific to the transaction. The form should be utilized to ensure the notice complies with the Act.
Service is also prescribed by statute, and may be accomplished by: (1) direct personal service on the vendee; (2) delivery to a member of the vendee's "family or household or an employee, of suitable age and discretion" with a request for forwarding to the vendee; or (3) service by mail to the vendee's last known address. MCL 600.5730. If service cannot be made by those methods, there is an available statutory procedure for service by publication. MCL 554.301 and 554.302.
If the vendees are a married couple, both spouses must be served with the notice. Reinecke v Sheehy, 47 Mich App 250; 209 NW2d 460 (1973). The original vendee may have sold or otherwise assigned the contract. If so, any known assignees should be served with notice. Tenants and others "holding possession under the vendee" must also get the notice. MCL 600.5730.
Commencing the Action-The Complaint
If the vendee fails to cure as specified in the notice, the forfeiture action is commenced by filing a complaint in the district or municipal court with jurisdiction over the property's location.
MCR 4.202(C) specifies that necessary parties defendant are: (1) the vendee (including both spouses if holding as tenants by the entireties); (2) any person claiming under the vendee (e.g., assignees or mortgagees); and (3) any person in possession of the property (unless that person has previously been released from liability). The rule also requires the complaint to "comply with the general pleading requirements," and MCR 4.202(D) and (E) set out a list of additional requirements for the complaint and the summons, respectively. Use of SCAO forms DC103 for the complaint and DC104 for the summons, which have blanks, boxes, and preprinted text for all the necessary information, is recommended. If the facts warrant pleading details beyond the contents of the complaint form, additional pages may be attached. A copy of the notice of forfeiture and proof of its service must be attached to the complaint.
In preparing the complaint, questions can arise concerning election of remedies and joinder of claims. Generally, the Act's remedy for recovery of possession is "in addition to, and not exclusive of, other remedies, legal, equitable or statutory," and a judgment for possession will not merge or bar other claims. MCL 600.5750. This rule is, however, subject to two important exceptions: (1) entry of a judgment for possession of the property bars any claim to recover money "due or in arrears under the contract at the time of trial;" and (2) if an order of eviction is issued following entry of the judgment for possession, the vendor may not seek payments that would have become due after the issuance of the order. Van Elsacker v. Erzberger, 137 Mich App 552; 357 NW2d 891 (1984). The consequence of these provisions is that the vendor recovering possession under the Act forgoes claims to recover contract payments falling due both before and after entry of the judgment.
As noted above, the Act preserves other remedies. For example, a vendor that has regained possession through a forfeiture action may sue the vendee to recover damages for waste. Ames, 157 Mich App 75. The Act also allows the vendor to bring a civil action "for damages from the time . . . of the notice of forfeiture . . . " This provides a means to recover the reasonable rental value of the property where a vendee in default has refused to relinquish possession. Durda v Chembar Development Co, 95 Mich App 706; 291 NW2d 179 (1980) (allowing recovery of rental value from the end of the cure period stated in the notice of forfeiture until the property was vacated) Such damages claims may be joined in the forfeiture complaint, but may be subject to removal to circuit court if they exceed the district court's jurisdictional limit. MCL 600.5739(1); MCR 4.202(I)(1) & (4).
Equitable claims may also arise in a forfeiture action, particularly disputes concerning the validity of assignments, liens, or other title issues. Although Michigan district courts generally cannot try equitable matters, MCL 600.8302(3) sets up an exception that allows a district court hearing a summary proceeding under the Act to make equitable determinations concerning title issues. This grant of limited equitable jurisdiction provides a means for resolving all claims pertaining to the property in the context of the forfeiture action.
Trial and Judgment
The Act's requirements concerning the content of the summons in a forfeiture action set the basic timetable for scheduling the forfeiture trial. Generally, the summons must set a date for trial within thirty days after its issuance, and must be served at least ten days prior to the trial date. MCL 600.5735(2)(a). As noted above, individual courts may, by local rule, require the defendant to appear within ten days after service of the summons. MCL 600.5735(4). The trial date may not be adjourned more than seven days unless the parties so stipulate. MCL 600.5735(6).
A defendant may respond with a counterclaim in addition to an answer. If an award on the counterclaim would impact the amount required to reinstate the contract (e.g., by set off), MCR 4.202(I)(3) requires the counterclaim to be tried at the same time as the claim for possession. Otherwise, the court has the option of trying money claims and counterclaims separately from the summary proceeding on the claim for possession.
All parties have a right to a trial by jury. MCL 600.5758. On the claim for possession, the issues to be tried will be: (1) whether there is an uncured breach of contract entitling the vendor to possession; and (2) the amount that must be paid to reinstate the contract. Under MCL 600.5741, this amount must be stated in the judgment. The judgment must also set the length for the redemption period, and provide that an order of eviction shall be issued if the amount required to redeem is not timely paid. The SCAO judgment form number DC106 has the necessary text and spaces to fill in.
The length of the redemption period depends on how much of the contract price the vendee had paid before going into default. If less than 50 % of the principal amount of the purchase price was paid, the redemption period lasts ninety days from the date the judgment is entered. A vendee that has paid more than 50 % of the contract principal is allowed six months to redeem. MCL 600.5744(3).
Questions may arise as to whether amounts over and above the principal amount of the purchase price appearing on the face of the contract should be taken into consideration in determining whether the 50 % threshold has been met. In Entingh v Grooters, 236 Mich. App 458; 600 NW2d 415 (1999), the Court of Appeals stated that the benchmark was the "actual sales price," which the court held to be the principal price stated on the face of the contract. In that case, the vendee had defaulted, inter alia, on its responsibility to pay real estate taxes. The vendor paid the taxes and contended, based on the language in the contract, that those tax payments should be added to the principal balance, which would have put the vendee below the 50 % mark. The Court of Appeals rejected the vendor's argument.
On the issue of how to redeem, Michigan courts have adopted what amounts to a "perfect tender" rule. The payment must be delivered in the full amount required in the judgment and without conditions or contingencies. Karakas v Dost, 67 Mich App 161; 240 NW2d 743 (1976). The payment may be delivered to the vendor, the vendor's attorney, or the clerk of the court. Mailing payment to the vendor's attorney on the last day of the redemption period has also been held sufficient. Birznieks v Cooper, 405 Mich 319; 275 NW2d 221 (1979). On the other hand, a vendee that placed the payment in escrow and conditioned its release on the delivery of discharges of mortgages encumbering the property was held to have failed to effectively redeem. Flynn v Korneffel, 451 Mich. 186; 547 NW2d 249 (1996).
If a vendee against whom judgment has been entered timely moves for a new trial or files an appeal, and posts a bond, the redemption period is tolled until the disposition of the motion or the appeal. MCL 600.5744(5).
If the vendee does not redeem within the period specified in the judgment, the vendor may apply to the court for an order of eviction, which directs a court officer to remove the vendee from the property. The SCAO form for the order, form no. DC107, should be filled out and submitted to the court once the redemption period has run. On the form, the vendor must indicate whether any portion of the judgment amount has been paid. If nothing was paid, the order will be issued without a hearing. Otherwise, a hearing will be scheduled. MCR 4.202(K)(2).
When the court enters the order, the vendor's attorney will then need to work with the court officer to conduct the eviction. Local practice on this aspect of the proceeding varies widely. In some localities, the court officer will handle logistics, such as lining up labor to remove the vendee's belongings and a locksmith to change the locks (all at the vendor's expense, of course). In other places, the vendor or the vendor's attorney will need to make the necessary arrangements. It is advisable for the vendor or a representative to be present at the eviction to record the condition of the property when it is vacated, and to ensure the property is secured.
In most situations, the procedures specified in the Act and MCR 4.202, coupled with the use of SCAO forms and adherence to local court practice, will provide a relatively expeditious method for recovering possession of real property subject to a defaulted land contract. However, pitfalls are present, such as the rules concerning election of remedies. The Act's relatively detailed procedural and documentation requirements also need to be strictly followed. The vendor's attorney must recommend the proper course of action in light of the client's particular situation, and follow through by correctly executing the Act's procedures.
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