Rescission For Real Estate Misrepresentations Is Back

by | Jul 8, 2015 | Firm News

If undisclosed defects are bad enough that the buyers really don’t want the property, rescission should be available and may be a better remedy than selling the property at a large loss and then waiting to see whether the loss can be collected from the sellers. In some cases, like the June 23, 2015 case of Wong v. Stoler, when the property is unsalable, because of the nature of the undisclosed defect, rescission may be the best and even only realistic remedy. In many cases, the judge, the mediator and the lawyers give up on rescission as impractical. After Wong v. Stoler, rescission is again a realistic remedy.

Rescission is supposed to be available in cases of fraud or intentional misrepresentation. It requires the seller to take back the property and return the purchase price. In most cases, the seller will already have spent the money, either paying off debts or reinvesting the money in another property. Liquidating the seller’s replacement investment cause the seller to incur taxes, commissions and may include an expensive prepayment penalty on a loan. These costs may appear too severe.

The buyer must return the property. In many cases, the fraud is discovered when the buyer opens up the walls or roof or digs into the land to do improvements or repairs. Some or even all of the property may no longer be habitable until at least some of the work is completed. Is the buyer returning the same property the seller delivered?

In Wong v. Stoler, the Court of Appeal held both that the court should be less interested in returning to the deceitful buyers the identical property they gave up, than in making sure that their “nefarious practices shall result in no damage to the plaintiffs” [buyers], and that as long as “insurmountable obstacles” are not present, that the appropriate remedy is complicated should not be allowed to prevent fully returning the victims to their situation prior to the fraud.

In the Wong case, the judge was faced with all these challenges. The Stolers had spent part of the money, invested the rest in a replacement home, and claimed their new home had gone down in value. The Wongs had spent a lot of money on alterations the Stolers argued had no value, and had demolished a large portion of the interior of the home. Instead of ordering the Stolers to take back the property, no matter what it cost them, the trial court ordered the Stolers to indemnify the Wongs against all costs and expenses they would incur as a result of the undisclosed problem with the property for ten years.

The undisclosed problem was not only going to cost a lot of money, but it also will require a lot of personal time and effort by whoever owns the home. Specifically, 13 homes share a private sewer connecting the homes to the nearest public sewer line. It needs to be completely rebuilt, not just replaced, and then arrangements need to be made to properly maintain and repair it in the future and pay for all those repairs, and the neighbors are not cooperating.

The Court of Appeal held all of that was the natural consequence of the Stolers’ deceit. It ruled that the court must do all it can to return the buyers to their position prior to the fraud by the sellers. The court should choose remedies and procedures which might minimize the cost to the sellers, but only to the extent that any such choices do not result in the buyers not being fully compensated for the harm caused by the sellers. The Court of Appeal said specifically that the trial court had given too much weight to the difficulties for the deceitful sellers and not enough consideration to fully restoring the buyers to their positon prior to the wrongs by the sellers.

Rescission is not limited to real estate fraud. It applies to all contract fraud, including car sales. That the dealer has already sold the buyer’s trade-in or that the undisclosed defect which the dealer knew about and hid, caused substantial damage to the car, does not rule out rescission as a remedy, maybe the best remedy.

If you or someone you know is the victim of a substantial misrepresentation about something significant enough that the victim wants to give the property back, rescission is a valid and realistic remedy as a result of this case. The sooner they talk to an experienced attorney who knows about this subject, the sooner they are likely to get some remedy and the more complete that remedy will be.