Written by Carrie Rossenfeld | San Diego

Be Aware of Buyer’s Right to Rescind

SAN DIEGO—Parties to a contract can rescind, or unwind, the contract if it was consummated based on mistake, CREW San Diego member Ariel Bedell of the Loftin Firm, P.C. tells GlobeSt.com. We spoke exclusively with Bedell about the buyer’s right to rescind, how it affects sellers and what they should do to prevent themselves from getting caught in a legal loophole when it comes to real estate contracts.

GlobeSt.com: How does the seller’s right to rescind work in a real estate contract?

Bedell: In general, parties to a contract can rescind, or unwind, the contract when it was consummated based on mistake, fraud, duress, or undue influence (Civil Code § 1689(b)(1)). When a contract is rescinded, whether by agreement of the parties or by the court, the contract is essentially treated as though it never came into existence, and the parties are placed in the position they were in prior to the contract.

In real estate transactions, after the close of escrow, parties do not likely consider rescission as a potential remedy in a dispute; however, a recent California Court of Appeal case demonstrated that the right to rescind the purchase agreement may be an appropriate resolution.

GlobeSt.com: Tell us about that case.

Bedell: Sellers often rely on two common practices to protect them from potential liability. First, they are generally required to make certain disclosures and assume that the buyer will perform his own extensive investigations of the property, whether commercial or residential. Second, sellers rely on the common “as-is” provision, which provides that the buyer is purchasing the property as is, with all faults. Buyers and sellers generally interpret this provision to mean thatthe buyer will investigate all things concerning the property and will assume the risk for not fully investigating or discovering any necessary facts about the property.

The Court of Appeal’s recent decision in Wong v. Stoler illustrated that a seller’s inaccurate or incomplete disclosure may give rise to the right of the buyer to rescind the contract. In short, the sellers of the property in question (a $2.35-million residential property) disclosed various facts about the property, including that it was connected to the public sewer system and was not part of an owners’ association. After the close of escrow in 2008, and after the buyer substantially demolished the home in preparation of commencing extensive renovations, it was discovered that the home was in fact connected to a private sewer system (which impacted the renovations) and that there was an unofficial owners’ association that was responsible for maintenance of the private system.

The buyers sought to rescind the contract due to the increased risk and costs of ownership due to the private system and the potential decrease in value upon future re-sales because of these issues (as opposed to damages, which would be the generally assumed remedy in this case). It came to light that the sellers negligently disclosed the fact that the home was connected to a public sewer system vs. the private sewer system.

GlobeSt.com: What was the outcome?

Bedell: In this case, the “as-is” provision and the buyers’ own investigation into the home did not prevent the buyers from seeking the remedy of rescission. Ultimately, the court determined that the property should be turned back over to the sellers despite the fact that the unwinding of the transaction would be complicated due to the buyers’ extensive renovations (and that the sellers had moved and renovated a new property).

GlobeSt.com: What’s the takeaway for our readers?

Bedell: Regardless of whether this case is an outlier in terms of the remedy granted by the court, sellers of real property, whether commercial or residential, need to be wary of the disclosures they provide. A seller’s unintentional inaccuracy can lead to unintended consequences, as demonstrated in Wong. Relying on memory or one party’s recollection may not be sufficient. Commercial transactions tend to include an extensive list of disclosures and limitations on those disclosures (including no duty on the part of the seller to investigate the accuracies of the disclosures); but this case raises the question of whether the limitations will ultimately provide protections in the event of inadvertent inaccuracies in the disclosures.

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