On December 27, 2016, the Minnesota Court of Appeals affirmed a borrower’s waiver of the statutory right to redeem property foreclosed by advertisement is unenforceable. See U.S. Bank, Nat’l Ass’n, et al. v. RBP Realty, LLC, 888 N.W.2d 699 (Minn. Ct. App. 2016), rev. denied (Minn. Apr. 18, 2017). The borrower’s $7.5 million loan had been sold into a commercial mortgage-backed security and was controlled by a special loan servicer. The attempted redemption waiver was part of a pre-negotiation letter the borrower had signed after default but before the foreclosure sale had occurred.
The court’s holding follows the statutory scheme that allows redemption from foreclosed property and permits modifications from the presumptive six- or twelve-month redemption period only in specified circumstances. While the statutes are silent on whether an outright waiver of the statutory right to redeem is permitted, the court noted several reasons that silence may not be permissive.
First, that the legislature chose certain methods of reducing or modifying the presumptive redemption period shows that other potential changes, including elimination of the redemption right, was not intended. Otherwise the statutory modifications would be meaningless if parties could simply contract around them.
Second, shortly after statehood, Minnesota used to allow the waiver of statutory redemption (when the redemption period was three years), but since the statutes have long since changed, the legislature must have intended that statutory redemption may no longer be waived or modified except as specified by statute.
Third, a contractual waiver of the statutory right to redeem contradicts other statutory provisions that presume the right to redeem. For instance, the sheriff’s notice of sale and certificate of sale must specify a redemption period, and the statutes contemplate no sheriff’s notice or certificate omitting a redemption period.
Finally, there is an important distinction between statutory, post-foreclosure redemption and the equitable, pre-foreclosure right of redemption. The Minnesota Supreme Court, as in other jurisdictions, has permitted the pre-foreclosure right of redemption to be bargained or waived under certain circumstances. The post-foreclosure, statutory right to redeem following a foreclosure sale, however, serves a different purpose than the pre-foreclosure equitable right of redemption and may not be waived or modified except by statute.
The opinion leaves open whether there would be any difference had the redemption waiver been executed before a foreclosure by action, rather than by advertisement, or for a sheriff’s execution on real property based on a judgment lien. There likely would be no principled difference, since the statutory right to redeem protects borrowers (or judgment debtors) from having their property sold for an unfair price. If the credit bid or purchase at the sale is lower than the property’s value, the borrower should be allowed to find financing and redeem, and that is relevant in a foreclosure by action where a deficiency judgment is allowed against the borrower. The court’s opinion, however, addressed only a foreclosure by advertisement.
Lenders are not to be discouraged by this ruling, since the Voluntary Foreclosure Act provides a mechanism to reduce a borrower’s redemption period to two months. Further, a deed-in-lieu is a common agreement borrowers and lenders reach, whereby the borrower, who is in default, simply conveys title to the lender for the lender not foreclosing on the property and typically agreeing to consider the debt satisfied. Further, a redemption waiver executed post-foreclosure sale, for consideration and for the transfer of a deed, would likely be enforceable, and the purchaser at the foreclosure sale could obtain title without waiting for the redemption period to expire.