Loss of Foreclosure Redemption Period as a Result of Damaged Property

By 2013 Public Act No. 104, the Michigan Legislature significantly amended the statutory period of redemption following foreclosure by advertisement sale. Effective as of January 10, 2014, a borrower may lose the period of redemption (typically 6 or 12 months) if the foreclosing lender proves the foreclosed property is “damaged.”

Until this amendment was enacted, borrowers retained the right to posses the property during the 6- or 12-month period of redemption following foreclosure sale. The borrower had the right to pay the lender what the lender bid at foreclosure sale, by refinancing, sale, or other means. If such a “redemption” was timely made, the borrower retained title, and the lender no longer retained the mortgage against the property. MCL 600.3240(13), which will become effective January 10, 2014, creates a new exception to these general principles. It provides that, following a foreclosure sale and “periodically throughout the redemption period,” the lender “may inspect the exterior and interior of the property and all ancillary structures.” If the “inspection is unreasonably refused” or “if damage to the property is imminent or has occurred,” the lender may commence an eviction action in district court or “file an action for any other relief necessary to protect the property from damage.”

If the lender proves “damage” to the property, the district court may then award the lender possession of the property. If such a judgment for possession is entered, the amendment to the statute provides, “The right of redemption is extinguished and full title to the property vests” in the lender. The amendment does provide, however, that the district court shall not enter such a judgment for possession if, before the hearing for possession, the borrower repairs any damage to the property that was the basis for the action.

What constitutes “damage” under the statute? The statute defines “damage” to include, but not be limited to:

1. The failure to comply with local ordinances regarding maintenance of the property if the failure is the subject of enforcement action by the appropriate government unit.
2. A boarded up or closed off window or entrance.
3. Multiple broken and unrepaired window panes.
4. A smashed through, broken off, or unhinged door.
5. Accumulated rubbish, trash, or debris.
6. Stripped plumbing, electrical wiring, siding, or other metal material.
7. Missing fixtures, including, but not limited to, a furnace, water heater, or air conditioning unit.
8. Deterioration below, or being in imminent danger of deteriorating below, community standards for public safety and sanitation.
9. A serious and continuing health hazard which the person in possession willfully or negligently causes, discovered within the prior 90 days.

The statutory definition of “damage” is not limited to damages caused by the borrower. Damage justifying a judgment of possession – and cutting off the statutory period of redemption – may arise by vandalism, tenant action, or unknown third parties. There is no requirement that the borrower be culpable for the damage. There is no requirement that the damage be substantial, as is perhaps best illustrated by the examples given in the statute.

These provisions will challenge both lenders and borrowers, as well as title companies. Most borrowers will likely not grant access to the property. Borrowers may defend such district court litigation by claiming that the right of inspection was reasonably refused, due to the time, frequency, or circumstances of the request made. If a borrower intends to “stall off” a lender’s discovery of damages, claiming a reasonable refusal to inspect, the borrower should document all requests for access.

Lenders will likely counter by filing a motion for access to the property. The statute presumes that the district court will have the right to order the borrower to grant the lender access. Since the lender has the burden of proving “damage,” the lender should photograph any damage to the property, and be prepared to introduce the pictures as evidence. Further, to refute the borrower’s expected claim that any damage was repaired prior to the hearing for possession, the lender must literally re-inspect the property on the way to the hearing for possession!

What if the damage is covered by insurance, and the insurer has not completed the repairs before the hearing for possession? The statute does not contain any requirement that a hearing be held within a defined period of time. It is likely that the court will adjourn the hearing for possession based on the borrower’s representations of insurance coverage.

What if the borrower loses the hearing for possession, and appeals the district court’s ruling to the circuit court? The statute simply says, “If a judgment for possession is entered in favor of the [lender], the right of redemption is extinguished and full title to the property vests in the [lender].” Given that language, any borrower losing at the district court must seek a judicial determination that the period of redemption continues pending the borrower’s appeal.

Should the lender file an action in district court for possession, the lender will have to consider whether the lender will also name as defendants all junior lien holders and others whose interests in the property will be extinguished upon the running of the period of redemption. Only those who are named parties would be bound by a judgment by the district court cutting off redemption rights because of proven “damage.” If third parties are not named, their redemption rights continue, even if the borrower’s redemption rights are terminated by this new provision.

Lenders obtaining a judgment for possession should record it, so that title companies are willing to insure the sheriff deed holder’s absolute title to the property.

This statutory amendment will likely result in a flood of eviction actions filed in district court. What property is “damage” free? These district court proceedings will be protracted, as the district court will struggle with resolving whether the claimed “damage” warrants the borrower’s loss of the right to remain in possession for the remainder of the 6- or 12-month period of redemption, and the likely conflicting testimony of the parties as to whether the “damage” was repaired immediately before the hearing for possession.