By Angela Veda, Esq.

As seen in REOMAC Update, September/October 2009

With REO properties on the rise, cities across Michigan are enacting Vacant Property Registration Ordinances (VPRO) in an attempt to maintain a current point of contact for owners of vacant properties, mitigate damage to communities and recover costs often associated with the monitoring, upkeep and maintenance of vacant properties.  Generally, VPROs require the owner of a vacant or abandoned property to register the property with the city within a specified time frame of the property becoming vacant.  The exact registration requirements vary from city to city, but typically require the owner to include not only its complete contact information, but also the contact information for a local agent authorized by the owner to handle the affairs of the property.  In addition, the ordinance usually requires the local agent’s information to be posted at the property stating who to contact if an issue is present.  The costs for registration and the inspections vary from city to city but range from free to $250.  Failure to register the property will result in penalty or fines for noncompliance - some as high as $500 per violation depending on the city.  A majority of the ordinances allow for unpaid fines to be recovered through a transfer to the taxes.

Although registration of the property seems relatively straightforward, each city has adopted varying requirements beyond those generally stated above.  Some of the additional requirements incorporated by select cities contain problematic features.  One such feature is the definition of “owner” set forth in several of the more recently passed ordinances.  The ordinances define an owner as “any person with a legal or equitable ownership interest in the property.”  In Michigan, a mortgagee and grantee in the Sheriff’s Deed hold an equitable interest in the property both pre-foreclosure and during the redemption period.  Therefore, as a party with an equitable interest, the mortgagee/grantee falls within the purviews of the ordinance and depending upon the city, must register a vacant property either prior to a default in the mortgage or during the foreclosure proceeding.

Another problematic feature built into several ordinances relates to property inspections.  Under the ordinances passed by the City of Redford and City of Ypsilanti, once an owner registers a property as vacant, a city inspection must be scheduled.  If the inspection reveals any violations, the owner must take appropriate action to correct the existing violations, order a reinspection within 90 days, and again annually thereafter.  Along similar lines, the cities of Bloomfield Hills, Farmington, Keego Harbor, Southfield and West Bloomfield have implemented ordinances specifically requiring that a mortgagee who commences a foreclosure action must inspect the property within five days of publication.  If the property is found vacant, the mortgagee is then required to register the property within a specified time frame following their initial inspection.  Additionally, upon registration, the property must be inspected by the city.  Not only do property inspections increase the cost and burden upon the REO owner by requiring the property be brought up to code, it arguably opens equitable owners up to liability since they have no possessory rights in the property prior to acquiring fee simple title in the property.

In addition to the registration and inspection process, three Michigan cities (Birmingham, Grosse Pointe Woods, and Warren) require permits for any property that remains vacant for an extended period of time.  In Birmingham and Grosse Pointe Woods, the permit is valid for four months; in Warren, the permit is valid for six months.  Each city allows the permit to be renewed only once for an additional 90 days provided the owner demonstrates good faith attempts to sell the property.  The ordinances further provide that failure to obtain a permit will result in demolition of the building.

Taking the above into consideration, it is essential that lenders and servicers set up processes to ensure timely compliance with the various ordinances.  It is more important than ever for lenders/servicers to employ real estate agents early in the default process to determine and communicate vacancy status with all parties, including the foreclosure or REO attorney.  Since most of the VPRO’s that include parties with an equitable interest within the definition of owner and/or require foreclosure registration are relatively new, it remains to be seen how the cities intend to enforce the registration requirements and whether a court would uphold the ordinance if challenged.  We do recommend however, that if any property is found vacant during the foreclosure process, the lender/servicer take immediate action to commence abandonment proceedings and determine whether the property is located in a city that requires registration by an equitable owner.  If registration is required during the foreclosure process, the agent chosen to register the property should take special care to communicate the cancellation or redemption status of the foreclosure to the city.  Likewise, where applicable, lenders/servicers should register all vacant properties upon redemption expiration or completion of a lockout following eviction proceedings.

It is likely that with the increased scrutiny placed on the mortgage industry, the number of cities enacting vacant property registration ordinances will continue to grow.   Communication between the lender/servicer, listing agent, and attorney will be vital to ensuring compliance with the ever-growing list of cities implementing registration requirements.  For a complete list of cities within Michigan that have enacted a vacant property registration ordinance, or for more information, please contact Angela Veda at aveda@potestivolaw.com.