Seller Misrepresentation in Real Estate? Use Rescission with Precision

Posted by Charles H. Van Horn on

In prior posts, I have examined facets of a real estate sale, including selecting a broker and due diligence. In today’s blog, let’s examine how to address a transaction when a party feels it was misled.  A purchaser who suspects a seller misrepresented the condition of the property must quickly take action to assess available remedies.

Of note is the “Entire Agreement” clause, which is included in most real estate contracts.  These clauses limit a purchaser from claiming it relied on any representations not contained within the purchase contract and often include the following language: “This Agreement contains the entire agreement between the parties.  No representation not included in this Agreement shall be binding on any party. This Agreement may not be amended or modified except by written agreement of the parties.”

When a clause like this appears in a purchase contract (and virtually every real estate contract will have a phrase like this), the buyer’s ability to complain to the seller about an undisclosed problem becomes much more difficult. That is because the only representations the purchaser can rely on are those spelled out in the contract; specifically excluding any statements made prior to entering into the contract.

When a contract includes an entire agreement clause, the purchaser has two remedies when it believes the seller fraudulently induced it to enter into the contract: (1) affirm the contract and sue for damages; or (2) demand rescission of the contract, returning the parties to their starting point as if the contract had never happened.  The latter is the undoing of the purchase contract. 

If choosing to rescind, it should be in writing and demand (without reservation or condition) that the seller unwind the transaction. This allows an aggrieved purchaser to point to evidence of misrepresentations broader than the narrow language in most purchase contracts.

If electing rescission, it must be demanded as soon as the facts that support the claim are discovered.  Of course, evaluating whether a party rescinded a contract promptly is a fact-intensive inquiry. In examining “how long is too long” before rescinding, Georgia courts have found that delays of more than six months are unreasonable as a matter of law. For example, if a purchaser discovers flooding problems at the property and suspects the seller knew of the flooding problem and misrepresented the condition, then the purchaser must rescind soon after learning of the property’s propensity to flood.

A purchaser who seeks to rescind needs to refrain from or limit any actions that an owner would typically do. For example, courts have determined remodeling a home indicated affirmation of a contract and barred a purchaser’s rescission attempt.  In another example, a purchaser who applied for a refund of an overpayment of property taxes was ineligible for rescission.

Undoubtedly, rescission is a potent remedy for purchasers that believe they were misled.  It is a process that needs to be navigated swiftly and carefully. In these situations, it is important to understand the difference between rescinding and terminating. In either case, a purchaser will benefit greatly from the counsel of an attorney to determine the best course of action for the particular situation.