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Rescission

DEFINITION

Cancellation of a contract that puts parties in the same position they were prior to the formation of the contract.

EXPLANATION

Rescission refers to the legal concept of removing or “un-making” a contract. It brings both parties back the original state they were in prior to the contract’s execution.

Either party may rescind a contract; however, a contract cannot be rescinded simply because one party does not want to perform his or her required duties. Either both parties must agree to rescind the contract, or one party must demonstrate how a provision within the contract makes it worthy of rescission.

Types of Rescission

Mutual rescission is when both parties agree to rescind a contract. In this case, both parties are discharged of all duties and obligations.

Court-ordered rescission is used in instances when one party’s request to rescind a contract was refused by the other party.  In this case, the court determines whether there are grounds for the contract to be rescinded. If there are, rescission results.

Standard real estate mortgages possess a right of rescission clause that gives borrowers the ability to rescind a home loan within three days of the loan’s closing. The right is then granted without question. Its purpose is to protect and empower consumers. A lender is requires to refund associated within 20 days and return full control of their interest.

The amount of time a buyer or a borrower has to employ a right of rescission clause differs in various real estate transactions:

Truth in Lending Act: Buyers have the right to rescind a mortgage within three days of the mortgage’s closing.

Interstate Land Full Disclosure Sales Act: Buyers have the right to rescind an undeveloped land purchase within seven days of closing.

Timeshares: Buyers have three days to rescind a timeshare purchase.

Subdivision Maps Act: Buyers of wrongfully divided land have up to one year to rescind their property purchase. (The Act allows a substantial rescission period due to the financial ramifications of purchasing the wrong property.)

Home Equity Sales: If a lender forecloses using illegal means, or violates any foreclosure statutes, the owner of a foreclosed property that contains 1 to 4 units may have up to two years to rescind the foreclosure.

Undivided Interest Subdivision: Buyers have the right to rescind the purchase of undivided interest subdivision within three days of closing.

Undivided Interest Subdivision: Buyers have the right to rescind the purchase of undivided interest subdivision within three days of closing

Case Law Relating to Right of Rescission

Case Review: Pac Shore Funding vs. Lozo (2006)

The case, Pacific Shore Funding v. Lozo (2006) 138 Cal.4th 1342., involved a lender who violated the Truth in Lending Act.

A borrower (Lozo) was granted a mortgage by a lender (Pacific Shore Funding) in the amount of $28,000. Less than three years later, Lozo used the equity in the property to get another loan from Pacific Shore Funding for $71,600. Lozo used the second loan to pay off the balance of his first mortgage, then rescinded the first loan.

Pacific Shore Funding brought suit against Lozo, alleging that borrowers are not entitled to rescind a first loan after they refinance a second loan with the same lender. Lozo filed a cross complaint. He argued that the first loan was subject to the Truth in Lending Act, which had been violated by the lenders. Lozo contended that Pacific Shore Funding did not disclose required documents and and failed to do other tasks in a timely manner. Therefore, Lozo argued that he was able to rescind the loan.

The Superior Court argued that Lozo’s repayment of the first loan terminated his rights to rescind the loan under the Truth in Lending Act. It ruled in favor of Pacific Shore Funding. Lozo appealed.

The Court of Appeals reversed the lower court’s ruling. It contended that a single violation of the Truth in Lending Act (TILA), whether it be substantive or technical, extended a borrower’s period of rescission. Therefore, Pacific Shore Funding’s failure to provide Lozo with the required disclosure forms extended Lozo’s rescission period from three days to three years, and his notice of rescission was timely. The court ordered Pacific Shore Funding to refund all interest and fees, including loan points, closings costs, and prepayment penalties.

Case Review: Reed v. King (1983)

In the case, Reed v. King (1983) 145 Cal.App.3d 261., an elderly woman brought legal suit against her real estate agent for failing to disclose a homicide that had occurred in the home she purchased.

Reed bought a property from her real estate agent (King). After the purchase, she learned from a neighbor that a family of five had been murdered in the new home she purchased. King had not disclosed this information. Reed sued King for damages and the rescission of the sale.

The Superior Court ruled that Reed had not stated a cause of action, and ruled in favor of King. Reed appealed. The Court of Appeals overturned the lower court’s ruling. It contended that King had been aware of the murders at the time of the sale. (The value of the property had actually been reduced because of the murders.) Thus, King had had a fiduciary duty to disclose this information to Reed. The court ruled in favor of Reed and charged King with fraud.

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