Facts: A buyer enters into purchase negotiations with a seller for a single family residence (SFR). The seller represents to the buyer the property is connected to a public sewer system which is not subject to rules or fees imposed by any sort of homeowners’ association (HOA). The buyer purchases the home and begins extensive renovations after taking possession. The city later sends a notice of abatement to the seller’s new address, indicating the sewer system needs repairs. The seller does not forward the information to the buyer. Several months later, the buyer discovers the home is connected to a private sewer system, imposing financial responsibility for sewer maintenance on the buyer.

Claim: The buyer seeks money losses and a rescission of the purchase agreement, claiming the seller committed fraud since they misrepresented the sewer system as public and free of HOA maintenance costs.

Counterclaim: The seller claims the buyer may not rescind the purchase agreement since the buyer made extensive renovations to the property, thus lowering the property’s value.

Holding: A California court of appeals holds the buyer may rescind the purchase agreement and is entitled to money losses regardless of their renovation to the property since the seller committed fraud by misrepresenting the nature of the property’s sewer system. [Wong v. Stoler (May 26, 2015) ___CA4th___]

Editor’s note – A seller is required to disclose any known material defects which negatively affect the property’s value and desirability and are not readily observable upon inspection. The disclosure needs to occur before a negotiated price is agreed to and an offer accepted. [See first tuesday Real Estate Practice: Chapter 24]

Further, a buyer may rescind a sale if their consent was obtained through fraudulent representation by the seller. If a court unilaterally rescinds a contract, the buyer is entitled to “complete relief” in the form of both cancellation of the purchase agreement and a return of the purchase price and subsequent money losses. [Calif. Civil Code §§1689, 1692]

Read the text of the case.