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Courts May Not Consider Prejudice to Liable Party in Granting Rescission of Purchase Contract

After the Wongs bought a $2.35 million home, they discovered that they and 12 of their neighbors were connected to a private sewer system rather than the city of San Carlos’s public system.  The Wongs had remodeled the home, expending about $300,000.  They sued the sellers (Wong v. Stoler) for non-disclosure, seeking, among other things, rescission.  They also sued the real estate agents involved, and settled with them for $200,000.  The trial court found the sellers recklessly misrepresented that the house was connected to a public sewer system, but it declined to effectuate the rescission, which would have returned the home to sellers and refunded the purchase amount to the Wongs.  The court reasoned that doing so would place an undue burden on the sellers, who had already used the sales proceeds to purchase a new home and finance improvements, and that it would be too complicated to unwind the deal.  Instead, the court ordered the sellers to pay the Wongs for sewer maintenance and repair costs beyond the $200,000 settlement until 10 years had passed or the Wongs sold the house, whichever came first.

 

Rescission extinguishes the contract and restores the parties to their former positions, or as near as possible to their positions before entering into the contract.  If the court agrees there are grounds for rescission, the rescinding party is entitled to recover “complete relief,” including damages and the return of benefits provided.  In real estate cases, this means the seller must refund the purchase price to the buyer in exchange for return of the property.  If the court finds the contract has not been rescinded, it may grant other relief appropriate under the circumstances.

 

Here, the Court of Appeal, First Appellate District, reversed the San Mateo County Superior Court, finding that the contract was rescinded and the court improperly considered prejudice to the sellers. In refusing to effectuate rescission, the remedy fashioned by the trial court was not “complete.”  The trial court also improperly relied upon the hardship rescission would cause to the sellers, who had just been found liable for negligent misrepresentation, a species of fraud.  The need for rescission was effectively the fault of sellers, who as a result of their failure to disclose “must sustain the necessary inconveniences thereby entailed.”  Moreover, although untangling the sale might not be easy, there were not insurmountable obstacles to doing so.  Thus, the case was remanded to effectuate the rescission and award any other consequential damages (such as real estate commissions, escrow payments, interest on sums paid to the other party, and costs of improvements) needed to return the Wongs to the status quo. The court was also directed to determine whether the Wongs were entitled to attorney’s fees as part of their complete relief.

 

Wong v. Stoler (2015) 14 C.D.O.S. 6633

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