You buy a house and then discover that the seller didn’t disclose a material fact about the property—say, the sewage system you thought was owned by the city was actually owned by 13 different residents in the area, and you’re now on the hook for maintenance costs. Compounding matters, the house’s value has dropped significantly since you bought it. What do you do? Try to rescind the sale contract.
The facts above happened in Wong v Stoler (2015) 23 CA4th 1375, and the buyers were able to rescind the contract and seek restitution for the purchase price. CC §1692. This was definitely better than suing for damages, which would’ve been limited to the difference between the price paid and the value of the property received. CC §3343.
Although rescission makes particular sense when recouping the purchase price is more important than living in the house, it’s not always available. If you find a client in this situation, check if one of these common grounds for rescission in the real property sales context applies:
Mutual Consent. A purchase contract may be rescinded by the consent of all parties, regardless of its express terms. CC §1689(a). Mutual consent doesn’t require cause and needn’t to be in writing; it may be implied from the parties’ conduct. Cancellation of each sides’ executory rights and obligations constitutes sufficient consideration for mutual rescission.
Mistake. A purchase agreement may also be rescinded if the rescinding party’s consent is based on a factual or legal mistake. CC §§1577-1578, 1689(b)(1). A mistake of fact may be either mutual or unilateral. Rescission based on mutual mistake of fact is proper as long as the mistake is material. CC §1689(b)(1). If it’s a unilateral mistake, the other party must have known or should’ve known of the mistake or otherwise contributed to it. But a unilateral mistake is unreasonable if the rescinding party could’ve ascertained the truth by exercising reasonable diligence and the other party hasn’t contributed to the mistake. The unilateral mistake must be material and can’t arise from the rescinding party’s own neglect of a legal duty.
Similarly, a mistake of law must be material to warrant rescission; in fact, a material, mutual mistake of law is automatically grounds for rescission. A mistake of law is mutual only when the parties are mistaken in the same way. If the legal mistake is unilateral, rescission is appropriate only when the mistake was known or caused by the other party and that party does nothing to rectify the misunderstanding. CC §1578(2).
Fraud. A party may also rescind a contract based on actual or constructive fraud. CC §1689(b)(1). Actual fraud requires intent and can arise in an arm’s-length, non-confidential relationship. CC §1572. By contrast, constructive fraud arises from the breach of a duty by one party to gain an advantage over the other and doesn’t require fraudulent intent. CC §1573.
Undue Influence, Duress, and Menace. An agreement may be rescinded if consent was obtained through duress, menace, or undue influence. CC §1689(b)(1). Undue influence consists of (CC §1575):
- Using a confidential relationship, or a real or apparent authority over a person, to get an unfair advantage over that person;
- Taking advantage of another’s weakness of mind; or
- Taking a grossly unfair advantage of another’s necessities or distress.
Duress consists of the unlawful confinement or detention of a person or property that compels assent through fear. CC §1569. Menace is the threat of duress or injury to a person, property, or character of another, which can include threatening criminal prosecution. CC §1670.
Failure of Consideration. A purchase contract may be rescinded if the consideration of the rescinding party’s obligation fails due to the fault of the other party; becomes entirely void for any reason; or fails in a material respect before being rendered to the rescinding party. CC §1689(b)(2)-(4). This may occur, for example, when the seller fails to tender marketable title when the purchase and sale agreement matures.
Illegality; Prejudice to Public Interest. Rescission is also available if the purchase agreement is unlawful for reasons not apparent in its terms and if the parties aren’t equally at fault. CC §1689(b)(5). Similarly, rescission is appropriate when the enforcement of a contract would prejudice the public interest. CC §1689(b)(7).
In the real property context, there are also statutes that expressly provide for the right to rescission in various circumstances. See e.g., CC §1689.6 (home solicitation contracts); CC §§1102.3-1102.3a (residential purchase and sale contracts); Bus & P C §11238 (purchase of time-share).
For more information on rescission in the real property sales context, including procedural and tactical considerations, check out CEB’s California Real Property Remedies and Damages, chap 1; California Mortgages, Deeds of Trust, and Foreclosure Litigation, chap 13; and CEB’s CLE program The Basics 2015: Sale Remedies, available On Demand.
Other CEBblog™ posts you may find useful:
- New Year, New Laws for Real Property Practitioners
- Preying on the Predatory Lenders
- Helping Real Estate Brokers Stay Clear of Fraud
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