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Plaintiffs Allowed to Rescind Real Estate Contract and Obtain Refund of Purchase Money

In a recent Tennessee real estate case involving the sale of a lot, the plaintiffs/buyers alleged that the defendants/sellers made misrepresentations that the lot would have the ability to connect to the sewer. Not only did the court order that the real estate contract be set aside and that the buyers be refunded the full purchase price, but also, it awarded the buyers their attorney’s fees under the Tennessee Consumer Protection Act (“TCPA”).

Here are the key facts:

  • The buyers (a husband and wife) were interested in buying a lot, for investment purposes, in a development called the Preserve at English Mountain
  • An agent for the real estate agency which had the exclusive listing for the Preserve showed the husband buyer the lot in early June of 2006
  • Husband buyer testified that the agent who showed him the lot represented that the lot would be able to connect to the sewer
  • The agent disputed that she had told the husband buyer this
  • It was undisputed that, when husband buyer visited the lot, there was a sewer manhole cover adjacent to the property
  • It was also undisputed that, at the time the husband buyer viewed the lot, the MLS listing clearly stated that the lot had sewer and that the website set up for the Preserve stated that each lot had city sewer
  • On June 8, 2006, unbeknownst to the buyers until three years later, the county health department had issued a certification for the lot, but only for a septic system serving a maximum of two bedrooms
  • On June 16, 2006, the buyers signed a contract for $124,000 to buy the lot
  • The sale was closed on June 30, 2006
  • At the closing, the buyers signed a disclosure statement indicating that the lot did not have public sewer
  • Three years after closing, the buyers discovered that any house to be built on the property was limited to two bedrooms

The buyers filed a misrepresentation lawsuit. They alleged that they would never have purchased the lot had they known that any house to be built on it had to be limited to two bedrooms. The buyers sought to have the real estate contract rescinded and for their purchase money to be returned.

The trial court held for the buyers. It also held that the buyers were entitled to attorney’s fees under the TCPA because the agent who signed as agent for the buyers failed to disclose that he had an ownership interest in the LLC which sold the lot to buyers.

The Court of Appeals of Tennessee upheld the trial court’s judgment in all respects. It pointed out that the un-rebutted evidence of several misrepresentations by the sellers that the lot would have sewer outweighed the only evidence that it would not have sewer which was the disclosure statement signed by the buyers at closing.  The court noted that the disclosure statement which was presented to the buyers at the closing had been signed over three months earlier by the seller’s agent, and that it was never presented to the buyers until the closing.

As far as the award to buyers of their attorney’s fees, the Court of Appeals affirmed based on section 104(b)(3) of the TCPA which provides that it is a deceptive practice to cause “likelihood of confusion or misunderstanding as to affiliation, connection, or association with, or certification by, another.” Because the agent had not disclosed his ownership interest in the LLC which was selling the lot to the buyers, while ostensibly acting as their agent, the court held that the defendants had engaged in a deceptive act warranting an award of attorney’s fees.

It is difficult in many real estate lawsuits to convince a court to rescind the contract. Rescission is not a remedy that is applied freely in Tennessee real estate cases.  Here, fortunately for the buyers, the misrepresentations were memorialized.  I doubt the case would have turned out the same if it had been a “he said, she said.”