Defendant appeals from a judgment of the trial court granting plaintiffs request for rescission of a contract

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Defendant appeals from a judgment of the trial court granting plaintiff’s request for rescission of a contract for the sale of real property. As relevant to this appeal, plaintiffs Vernon and Janene Lesher, purchasers of an 18-acre parcel of property in Josephine County (the subject property), sought rescission of the contract under theories of a mutual mistake of fact or an innocent misrepresentation of fact regarding the existence of water rights appurtenant [belongs to] to the property. The trial court granted rescission on those grounds. * * * [W]e affirm.

   In May 1995, plaintiffs agreed to purchase the subject property from defendant with the intention of using it to raise horses. In purchasing the subject property, they relied on their impression that at least four acres of the subject property had a right to irrigation from Slate Creek. The earnest money agreement to the contract provided:

‘‘Water Rights are being conveyed to Buyer at the close of escrow. * * * Seller will provide Buyer with a written explanation of the operation of the irrigation system, water right certificates, and inventory of irrigation equipment included in sale.’’ (Bold in original.)
The earnest money agreement also provided:
‘‘THE SUBJECT PROPERTY IS BEING SOLD ‘AS IS’ subject to the Buyer’s approval of the tests and conditions as stated herein. Buyer declares that Buyer is not depending on any other statement of the Seller or licensees that is not incorporated by reference in this earnest money contract.’’ (Bold in original.)

   Before signing the earnest money agreement, defendants presented to plaintiffs, through their mutual realtor, a 1977 Water Resources Department water rights certificate and a map purporting to show an area of the subject property to be irrigated (‘‘area to be irrigated’’ map). The 1977 water rights certificate * * * [showed that the property] carries a four-acre water right with a priority of 1892. * * *

   Vernon Lesher testified that, at the time plaintiffs purchased the subject property, he believed that the subject property carried four acres of appurtenant water rights by virtue of the 1977 certificate and ‘‘area to be irrigated’’ map. Defendant’s representative, Sally Doss, agreed that, at the time of the conveyance, Doss believed that a 1892 four-acre irrigation right was appurtenant to the subject property andthat, if it was not, she was mistaken. Vernon testified that before buying the subject property, plaintiffs owned property with two irrigated acres. Vernon testified that plaintiffs intended to and, in fact, did sell the two-acre water right property and sought the subject property to expand their ability to raise horses. In particular, plaintiffs needed to have adequate acreage for pasturing the horses. Vernon testified that irrigation was necessary for creating pasture. He stated that, without a right to irrigate four acres, plaintiffs would not have purchased the property. * * *

   After purchasing the subject property and before establishing a pasture, plaintiffs learned that the property might not carry a four-acre water right. * * *

* * *

   * * * [The trial court] found that both plaintiffs and defendant believed at the time of the sale that the right was appurtenant to the property and that the supply of adequate irrigated land was an essential part of the bargain for plaintiffs. In the alternative, the court found that defendant innocently misrepresented to plaintiffs that those rights existed appurtenant to the subject property. It found that plaintiffs reasonably relied on the representations and documents provided to plaintiffs pertaining to the water rights, and that plaintiffs’ belief about the water rights was a material inducement to their purchase of the subject property. The trial court found that a mutual mistake of a material fact by plaintiffs and defendant ‘‘and/or’’ an innocent misrepresentation of fact by defendant merited rescission of the contract.

   On appeal, defendant argues that plaintiffs are not entitled to rescission, because they have not proven by clear and convincing evidence that a mistake of fact occurred about the water rights. In the alternative, defendant argues that plaintiffs unjustifiably relied on defendant’s representation about the water rights because defendant’s representation was extrinsic to the contract and because plaintiffs were grossly negligent in relying on the 1977 certificate and the ‘‘area to be irrigated’’ map to conclude that four acres of irrigation water rights with an 1892 priority date were appurtenant to the subject property.

   Grounds for rescission on the basis of a mutual mistake of fact or innocent misrepresentation must be proved by clear and convincing evidence. [Citations.] An innocent misrepresentation of fact renders a contract voidable by a party if the party’s ‘‘manifestation of assent is induced by * * * a material misrepresentation by the other party upon which the recipient is justified in relying[.]’’ [Citations.] A mutual mistake of fact renders a contract voidable by the adversely affected party, ‘‘where the parties are mistaken as to the facts existing at the time of the contract, if the mistake is so fundamental that it frustrates the purpose of the contract,’’ [citation], and where the adversely affected party does not bear the risk of the mistake, [citation]. A mistake ‘‘is a state of mind which is not in accord with the facts.’’ [Citation].

   Even though it appears that the trial court did not apply the clear and convincing standard, * * * , we find that plaintiffs’ evidence meets that standard. Both defendant and plaintiffs testified that they believed that the four acres of water rights were appurtenant to the subject property. Defendant does not dispute that the 1977 water rights certificate and the ‘‘area to be irrigated’’ map are her representation about the water right.

* * *

   Plaintiffs also established by clear and convincing evidence that the existence of the four-acre water right was material and essential to the contract. Vernon testified that the motivation for the purchase was to expand his ability to raise horses from property they already owned where they had a two-acre irrigation right and that the subject property’s water right was essential to the contract. Certainly, a smaller water right would limit, not expand, plaintiffs’ ability to raise horses. The mistake, therefore, goes to the very essence of the contract.

   We next consider defendant’s arguments that plaintiffs bore the risk of that mistake. The Restatement (Second) of Contracts § 154 explains that a party bears the risk of a mistake, in part, if the risk is allocated to the party by agreement of the parties, or if the risk is allocated to the party ‘‘by the court on the ground that it is reasonable in the circumstances to do so.’’ We find nothing in the contract that would allocate to plaintiffs the risk of a mistake as to the existence of a four-acre water right.

   Defendant argues in the alternative that plaintiffs’ mistake of fact is the result of defendant’s misrepresentation, on which plaintiffs could not reasonably rely. An ‘‘innocent misrepresentation may support a claim for rescission of a real estate agreement if the party who relied on the misrepresentations of another establishes a right to have done so.’’ [Citations.]

   Defendant argues that her representations about the fouracre water right were extrinsic to the contract and that the contract’s ‘‘as is’’ clause expressly excluded reliance on such extrinsic representations. * * * The ‘‘as is’’ clause specifically contemplated reliance on any statements by the seller that were ‘‘incorporated by reference’’ in the earnest money agreement. The earnest money agreement specifically referred to the conveyance of water rights.

* * *

   Plaintiffs have established that both a mutual mistake of fact and an innocent misrepresentation of fact entitle them to rescission of the deed of sale.

   Affirmed.

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Smith and Roberson Business Law

ISBN: 978-0538473637

15th Edition

Authors: Richard A. Mann, Barry S. Roberts

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