Getting out of a bad deal!

A new case out of the Arkansas Court of Appeals, T-1 Construction v. Tannenbaum Development gives us some insight into how a real estate contract can be undone when the seller realizes he made a big mistake.

Tannenbaum Development had 5 lakefront lots in Cleburne County it wanted to sell. It listed them with a realtor, and in the listing agreement it stated a total offering price for the 5 lots of $75,000. After they went on the market, T-1 Construction made an offer of $70,000 for all 5, which was accepted by Tannenbaum via its owner. The purchase contract was drafted by T-1 and its real estate agent, presumably on the standard Arkansas Realtors form contract.

Two days before the closing, Tannenbaum’s owner realized that the sales contract said $70,000 total for all 5 lots, rather than $70,000 for EACH lot. He refused to close the deal, so T-1 sued.

The circuit court found that while the mistake was all Tannenbaum’s (a unilateral mistake), it would be unconscionable to force them to close given the price and rescinded the contract. T-1 appealed this decision.

The Court of Appeals laid out the rules for recission (breaking) of a contract due to a unilateral mistake:

(1) the mistake must be of so great a consequence that to enforce the contract as actually made would be unconscionable;
(2) the matter as to which the mistake was made must relate to a material feature of the contract;
(3) the mistake must have occurred notwithstanding the exercise of reasonable care by the party making the mistake;
(4) it must be able to get relief by way of rescission without serious
prejudice to the other party, except for loss of his bargain.

Looking at these, the Court first noted two appraisers presented testimony that the value of the 5 lots in total was between $325,000 and $400,000, and the tax assessor valued the lots at $100,000 per lot. The Court then noted a US Supreme Court case from the 1800s which defined an unconscionable contract as “such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.” The Court of Appeals thought that phrase fit the bill for the first element, unconscionableness, of the T-1 – Tannenbaum contract.

There was no argument that the price was a material feature of the contract, so the second element was not in dispute.

The third element, reasonable care by the person making the mistake, was in dispute, with T-1 saying that Tannenbaum’s owner had not taken reasonable care to ensure everything was correct. However, the Court cited to testimony by Tannenbaum’s owner that he thought the agent had him it was $70,000 per lot, even though she claimed she was clear that it was $70,000 total in the listing agreement. (Frankly, if the realtor had any experience at all, she would almost certainly have been explicit to her client on this point, for she had to know this was way undervalued). The Court also noted that Tannenbaum’s owner and realtor made several changes to the listing agreement, including retaining mineral rights and negotiating her commission. This was apparently enough to excuse him not paying closer attention to the actual sales contract.

With respect to the last element, T-1 didn’t argue it on appeal, so apparently it felt that there was no other harm it would suffer other than losing out on a great deal. Which, since the deal wasn’t closed, was probably correct. Had they started building on them, however, they might have been able to make more hay out of this part.

Taking all that into consideration, the Court of Appeals agreed to permit Tannenbaum to get out of the contract, saying:

The totality of the evidence supports the circuit
court’s finding that it would be inequitable and unconscionable to enforce the contract because of the damages that would be incurred by appellee [Tannenbaum] if the contract were enforced.

So is the moral of this story that you can get out of a bad deal even if it’s all your mistake? Not really. What this case stands for is that you can get out of a bad deal if, despite taking care to make sure things are right, you accidentally enter into a contract that essentially gives away your property.

For example, if you’re hard up for cash and you agree to dump some property, but before you close the deal you come into some money and now want out of the contract, that’s not going to cut it. Likewise if you just sign a sales contract without thinking, or at least attempting to pay attention to the terms, as Tannenbaum had done in negotiating some of the terms of the listing agreement, that’s not going to cut it. Nor do I think you’ll convince a court to get out of a deal with a 10% error in the price. You’re going to have to be a pretty conscientious seller, or for that matter buyer, who just made a fundamental mistake despite some due diligence.