Rescission as a Remedy to Parties Where a Business or Real Estate Contract has Been Entered Into Based on Duress, Fraud or Mistake

Generally speaking, rescission is a statutory and equitable remedy which restores the parties to the condition they were in prior to execution of the agreement.

Rescission occurs by mutual consent or following unilateral notice with an offer to restore from the rescinding party under certain statutory conditions. Civil Code § 1689.

Rescission rights are most often used as a remedy by a dissatisfied buyer in a real estate transaction, particularly in a flat or declining real estate market.

A. Rescission by Mutual Consent

A contract can be rescinded by the consent of all parties, regardless of its express terms. See Civil Code § 1689(a); Rackliff v. Coronet Constr. Co. (1958) 157 Cal.App.2d 419, 424-425.

“The law is well settled that the giving of notice and the conduct of the parties thereafter may amount to a rescission by mutual consent.”

Holmes v. Robarts (1929) 102 Cal. App. 53, 56. (citing D. Ghirardelli & Co. v. Students' E. & T. Co., 175 Cal. 427, 430; Newell v. E. B. & A. L. Stone Co. (1919) 181 Cal. 385, 388)

Mutual consent to terminate a contract has been construed where a respondent repossesses motor scrapers after an appellant demands that he do so, contrary to the terms of a contract which provides that appellant was to return motor scrapers to the respondent’s yard. Rackliff, supra at. p. 424.

Mutual consent has been found where lessee communicates a desire not to renew a five year least after only the first year where lessor accepts and acts upon this request and leases the property to another lessee. Ghiradelli & Co, supra, at p. 430

No mutual consent has been found where buyer of grocery business rescinded and seller was forced due to exigencies to retake property and sell perishable items. Holmes, supra, at p. 55.

No mutual consent was found where vendor of installment land sale agreement gave notice to vendee of cancellation of contract pursuant to contractual terms due to default of vendee. Newell, supra, at p. 387.

No case law has yet been identified which likens the service of a notice of acceptance of rescission on plaintiffs suing for rescission and in the alternative, damages, to mutual consent which would bind the plaintiffs.

However the filing of a lawsuit for rescission does not bar the finding of mutual consent against the interest of plaintiffs under Rackliff, supra.

B. Unilateral Rescission

A party to a contract may rescind the contract in the following cases:

“(1) If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party.

(2) If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds.

(3) If the consideration for the obligation of the rescinding party becomes entirely void from any cause.

(4) If the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause.

(5) If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault.

6) If the public interest will be prejudiced by permitting the contract to stand.

(7) Under the circumstances provided for in Sections 39, 1533, 1566, 1785, 1789, 1930 and 2314 of this code, Section 2470 of the Corporations Code, Sections 331, 338, 359, 447, 1904 and 2030 of the Insurance Code or any other statute providing for rescission.

Civil Code § 1689(b).

An agreement may be rescinded if the rescinding party’s consent is based on a mistake or misunderstanding of facts or law and the other party either shares the misunderstanding or contributes to it by misrepresentation, even if innocently. Civil Code section 1689(b)(1); Crocker-Anglo Nat’l Bank v. Kuchman (1964) 224 Cal.App.2d 490.

To effect rescission a party must provide notice and an offer to restore everything of value received under the contract upon discovering facts which entitle him to rescind. Civil Code § 1691.

The service of a pleading in a Court action or proceeding that seeks relief based on rescission shall be deemed to be such notice or offer or both. Civil Code § 1691.

The notice must be prompt. Doctor v. Lakeridge Construction Company (1967) 252 Cal.App.2d 715, 720-721. And the party must restore to the other party everything of value which he has received. Id. at p. 720.

The plaintiff cannot be compelled to make an election of remedies - as to whether he or she seeks rescission or damages - before or during the course of trial until the case is submitted to the judge or jury. Roam v. Koop (1974) 41 Cal.App.3d 1035; Stockton v. Newman (1957) 148 Cal.App.2d 558; see also Karapetian v. Carolan (1948) 83 Cal. App. 2d 344, 355.

Despite not having pled fraud, to prove fraud, plaintiffs must show “a material representation was made; that it was false; that defendants knew it to be untrue or did not have sufficient knowledge to warrant a belief that it was true; that it was made with intent to induce plaintiff to act in reliance thereon; that plaintiff reasonably believed it to be true; that it was relied on by plaintiff, and that he suffered damage thereby. Doctor, supra, at p. 718 (citing Hobart v. Hobart Estate Co., 26 Cal.2d 412, 422).

By its very terms, the real estate transfer disclosure statement required by Civil Code § 1102.6 is not a part of any contract between a buyer and seller.

Thus, in an action by the buyers of residential real property against the seller for breach of contract, the trial court properly ruled that the disclosure statement filled out by the seller, in which he stated he was unaware of any building code violations, could not be relied on as part of the purchase contract between the parties. Brasier v Sparks (1993) 17 Cal App 4th 1756, 22 Cal Rptr 2d 1.

Civil Code § 1102.6, must be liberally interpreted so that a buyer will be fully informed on matters affecting the value of the property to be purchased.. Alexander v McKnight (1992, 4th Dist) 7 Cal App 4th 973, 9 Cal Rptr 2d 453.

C. Measure of Recovery

If a buyer rescinds a contract, the recovery is the purchase price paid plus various

items of consequential damages under Civil Code section 16 92, less an offset for the reasonable rental value for the period the buyer was in possession. Kent v. Clark (1942) 20 Cal.2d 779.

Items of consequential damages under Civil Code section 1692 may include: interest on payments made to the seller, Potter v. Contra Costa Realty Co. (1934) 220 Cal 31; value of improvements made by the buyer, Kent v. Clark (1942) 20 Cal.2d 779; expenses incurred in preparing the property for the buyer’s intended use, e.g., architect’s fees and costs of a sales program, see Perkins v. Ketchum (1962) 211 Cal.App.2d 245; even if they do little to increase the value of the property, see Younis v. Hart (1943) 59 Cal.App.2d 99; escrow and closing costs, Snelson v. Ondulando Highlands Corp., (1970) 5 Cal.App.3d 243; operating losses during the buyer’s maintenance of the property, Williams v. Marshall (1951) 37 Cal.2d 445, 455-456; payments made to reduce existing encumbrances on the property, Younis v. Hart, supra; and the seller may also be required to assume payments on an existing obligation and to execute a hold harmless agreement as additional protection for the rescinding buyer, Snelson v. Ondulando Highlands Corp., supra..

The buyer may be relieved of a rent offset if the seller refuses to reassume possession. Smith v. Rickards (1957) 149 Cal.App.2d 648.

A party prevailing an action for rescission of the contract may obtain an award of attorneys fees if the contract provides for them. Code of Civil Procedure section 1021; Hastings v. Matlock (1985) 171 Cal.App.3d 826 (prevailing party entitled to fees under Civil Code section 1717 on rescission if contract does not limit available relief to particular cause of action).

N.B. The contents of this Article do not constitute legal advice or create an attorney-client relationship, and you may NOT rely on it without seeking legal advice regarding your particular, unique situation from a competent Business lawyer or Real Estate Law attorney.
Please also note that factual situations vary, and statutes, regulations and case law are frequently changing and evolving, and these materials thus also may be or become outdated or incorrect.
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