Another Significant Amendment to the Michigan Foreclosure by Advertisement Statute Imposes Obligations on Borrowers, But Better Protects Borrowers’ Rights of Redemption

By 2014 Public Act No. 125, the Michigan Legislature significantly amended the foreclosure by advertisement statute. Effective June 19, 2014, the amended statute imposes new obligations on the borrower whose property is sold at foreclosure sale. As more fully described below, in most cases, if the borrower fails to provide the successful bidder at foreclosure sale with notice of the borrower’s intent to vacate the property, or fails to surrender control of the property to the lender in a manner designated by the lender, a rebuttable presumption will arise that the borrower is liable to the purchaser at foreclosure sale for all damage to the property that occurs before the expiration of the period of redemption. The statute also gives the purchaser the right to inspect the property. Finally, the amended statute makes it more difficult for a foreclosure sale purchaser to terminate the borrower’s right of redemption for damage to the property.

New notice following foreclosure sale. MCL 600.3237 now includes a new post-foreclosure sale notice that all lenders will likely send. The notice identifies the successful purchaser at foreclosure sale, details the purchaser’s rights of inspection, and specifies the “method for surrendering control of the property” should the borrower vacate the property during the period of redemption.

Borrower’s obligation to provide purchaser with notice of intent to vacate. As a general rule, a borrower is liable to the foreclosure sale purchaser for any physical injury to the property other than normal wear and tear that occurs during the period of redemption following foreclosure sale if the physical injury is caused by or at the direction of the borrower. Under the new amendment, once the lender provides the new post-foreclosure sale notice, MCL 600.3278(2) requires the borrower to inform the purchaser at foreclosure sale of the borrower’s intent to vacate the premises, such notice to be provided at least ten (10) days before moving, so that the property may be secured. If the borrower fails to provide such notice, the statute provides for a “rebuttable presumption” that the borrower is liable to the purchaser for all damage to the property that occurs before the expiration of the redemption period. If, on the other hand, the borrower does provide such notice of intent to vacate, there is a rebuttable presumption that the borrower is not liable for damage to the property that occurs after the borrower surrenders control of the property.

Borrower’s obligation to surrender control of the property in a manner that “reasonably provides the purchaser with an opportunity to secure it.” The initial notice sent by the purchaser at foreclosure sale described above is required to provide notice of “one or more methods for surrendering control of the property in a manner that reasonably provides the purchaser with the opportunity to secure it.” If the borrower fails to surrender control of the property in such a manner, once again a rebuttable presumption arises that the borrower is liable for all damage to the property that occurs before the expiration of the redemption period. On the other side of the coin, if the borrower does surrender control of the property in a manner that reasonably provides the purchaser with the opportunity to secure it, there is a rebuttable presumption that the borrower is not liable for damage to the property that occurs after the borrower surrenders control of the property.

The statute is unclear on how a borrower failing to surrender control of the property in such a manner can be liable, because the general rule limits the borrower’s liability to physical damage “caused by or at the direction of” the borrower.

Once the initial notice is sent, the purchaser also has the right to inspect the property. MCL 600.3238 provides that, once the purchaser at foreclosure sale sends the initial post-sale notice described above, the purchaser has the right to inspect the interior of the property if a second notice is sent. The second notice, which must be given at least 72 hours in advance of the proposed inspection, shall set the time of the inspection at what the statute describes as a “reasonable time of day, in coordination with the mortgagor if possible.” After the initial inspection, the purchaser may request once per month, but no more than three times in any six months, information on or evidence of the condition of the interior of the property. The limitation on the number of requests made does not apply if the purchaser “has reasonable cause to believe that the damage to the property is imminent or has occurred.” The borrower has five business days to respond. If the borrower does not do so, another physical inspection may occur. If the borrower fails to consent to an inspection or comply with a request for information on the condition of the property, once again there is a rebuttable presumption that the borrower is liable for all damage to the property that occurs during the period of redemption. The same rebuttable presumption of non-liability applies if the borrower cooperates.

If an inspection is “unreasonably refused” or if the purchaser at sale views interior or exterior “damage,” as defined by the statute, the purchaser may commence a proceeding in district court, seeking a cutoff of the borrower’s six or twelve month statutory right of redemption.

Before commencing such an action, the purchaser must provide the borrower by certified mail, physical posting, or any other manner “reasonably calculated to achieve actual notice,” that the purchaser intends to file such action if the damage is not repaired or corrected within seven days after the borrower’s receipt of the notice. If the damage is not repaired within such seven day period, or such period of time as otherwise agreed between the parties, the purchaser at foreclosure sale may seek a court determination extinguishing the borrower’s right of redemption.

Prior to this amendment, the purchaser’s ability to extinguish a borrower’s rights of redemption for “damage” was significant. Prior to June 19, 2014, a lender only needed to prove a single boarded up window, accumulated rubbish and trash, or multiple missing fixtures. The statutory definition of “damage” was a very low hurdle. See Mika Meyers Business Counselor, August 1, 2013 “Loss of Foreclosure Redemption Period as a Result of Damaged Property.” Upon further review, the Michigan legislative reconsidered the prior law’s harsh result, and by Public Act 125, substantially watered down the lender’s right to extinguish the period of redemption for “damage.” Now, “damage” is defined as an exterior condition that presents a significant risk to the security of the property, stripped plumbing, electrical wiring, siding, or other “metal material,” or missing or destroyed structural aspects or fixtures. The statute requires the district court judge to consider “the totality of the circumstances surrounding the damage” including but not limited to the cause of the damage, whether the borrower has taken appropriate steps to repair the damage, whether the borrower has contacted the purchaser at foreclosure sale and any property insurer regarding the damage, and whether any delay in repairs is or was affirmatively caused by the purchaser of the property or property insurer.

Given the new “totality of the circumstances” test, including the vague standards of “cause,” appropriate steps to repair, and the like, it is now more likely than not that borrowers will be afforded their full statutory rights of redemption following foreclosure sale.

Summary. In short, the amendments impose new obligations on the borrower to provide notice of the borrower’s intent to vacate the property during the period of redemption and surrender the property in a manner that reasonably provides the lender with an opportunity to secure the property. If the borrower fails to do so, the borrower will be presumptively liable for damage that occurs to the property during the period of redemption, subject to the possible defense that the borrower can only be liable for physical injury “caused by or at the direction of” the borrower. The Michigan Legislature did back pedal away from the relatively easy loss of the redemption brought on by Public Act No. 104 of 2013. As a result, most Michigan borrowers losing their homes to foreclosure will have the right to maintain possession of their property through the full six or twelve month period of redemption, as the case may be, but must be vigilant and provide notice of intent to vacate and surrender control of the property to avoid presumptive damages claims.