"Undoing" a Real Estate Sale -- the Remedy of Rescission

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Sometimes when real estate contracts go bad -- really bad -- and fraud or mistake is involved, suing for damages is not enough. This scenario occurs when a recently-bought/sold property is not fit for the buyer's intended purpose, is not as described in the contract, or otherwise would result in an unjust enrichment to the non-complaining party to the contract.  Under these circumstances, the equitable remedy of RESCISSION may be be appropriate as a cure for a breach of contract.

"Rescission is an equitable remedy that seeks to set aside an otherwise legal contract due to fraud, mistake, or for some other reason when it is necessary to avoid unjust enrichment of the non complaining party to the contract, so that the parties thereto may be restored, insofar as is possible, to the status or position they were in prior to execution of the contract." City of The Colony v. North Tex. Mun. Water Dist., 272 S.W.3d 699, 732 (Tex. App. Fort Worth 2008, pet. dism'd)(citations omitted). As an equitable remedy for breach of contract, rescission serves to "undo" the contract in lieu of monetary damages that would be inadequate to compensate the complaining party. Id. (discussing rescission as a contract remedy); Humphrey v. Camelot Ret. Cmty., 893 S.W.2d 55, 59 (Tex. App.-Corpus Christi 1994, no writ) ("Rescission is an equitable remedy that operates to set aside a contract that is legally valid but is marred by fraud, mistake, or for some other reason, the court must set it aside to avoid unjust enrichment."); see also Nelson v. Najm, 127 S.W.3d 170, 176 (Tex. App.-Houston [1st Dist.] 2003, pet. denied) ("Texas courts have long held under general principles of common-law fraud that one who is induced by fraud to enter into a contract has a choice of remedies: he may either recover his monetary damages flowing from the fraud or he may elect the equitable remedy of rescission in lieu of damages and demand a return of any amount paid.")

"Restitution," means the act of restoring or a condition of being restored. WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY.  Rescission is merely the "common, shorthand name" for the composite remedy of rescission and restitution. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 54 cmt. a (2011). Rescission is a form of restitution that applies if the transaction may still be unwound; if it cannot, a plaintiff may sue for damages. See id. § 37 cmt. a. Thus, "[r]escission is one of the principal asset-based remedies in restitution," and it "restore[s] the parties to the status quo ante by unwinding the contractual exchange instead of pressing it forward." Id.

But rescission is not a one-way street. It requires a mutual restoration and accounting, in which each party restores property received from the other. Id.§ 37 comment d. "Rescission is mutual: a plaintiff seeking to be restored to the status quo ante must likewise restore to the defendant whatever the plaintiff has received in the transaction."); see also Kennedy, 143 S.W.2d at 585.  Thus, it is generally limited to cases in which counter-restitution by the claimant will restore the defendant to the status quo ante. RESTATEMENT § 54(3).

In a real estate context RESCISSION generally refers to a conveyance (by deed) of real property from the Buyer back to the Seller, and a refund by the Seller of the Buyer's purchase money.  In this regard, the sale has been "undone" or "unwounded," and the parties are restored to their positions immediately preceding the sale.

Obtaining an award of (or agreement for) rescission can be complicated. And, like all equitable remedies, the party seeking rescission must have "clean hands," and must timely request the remedy.