JULY 2002 Letter of the Law PUBLICATION 1576
A Reprint from Tierra Grande, the Real Estate Center Journal
The Way Out
Contract Rescission Under the DTPA
By Judon Fambrough
M
ention the Deceptive Trade contract voidable, such as fraud, undue
Practices Act (DTPA) and real influence, mutual mistake of fact, illegality
estate licensees immediately of the subject matter, failure of consider-
conjure up images of lawsuits filed by ation or lack of mental capacity. The
dissatisfied buyers. Most of these cases center statute of limitations is four years. The
on whether the seller or broker failed to dis- plaintiff cannot recover damages and
close an essential fact about the property. rescind the contract; the two remedies are
The DTPA is generally viewed as a way mutually exclusive. Generally, the plaintiff
for a wronged party to recover damages, must offer to restore to the defendant any
but the act also contains a less-known, less- property received before filing the suit or
used remedy — contract rescission. Contract offer to do so in the petition filed with the
rescission refers to the rescinding or can- court.
celing of the contract. It is an effective way The DTPA modifies the common-law
for a buyer to get out of a real estate rules. To sue under the DTPA, the plaintiff
sales contract when guile and deceit is (the buyer in this scenario) must prove three
evident. things.
Consider the following scenario. The • The plaintiff is a consumer as defined
buyer finds an attractive property for sale. by the DTPA.
The listing broker is familiar with the • The defendant (the sellers) employed
property, having listed and sold it to the a false, misleading or deceptive
present owners. The buyer and seller en- act or practice; breached an ex-
ter a contract, and the buyer places press or implied warranty; or pur-
$5,000 in escrow. The transaction moves sued an unconscionable action in
smoothly until the buyer attempts to the sale of the property.
purchase insurance. • The defendants’ (sellers’) actions
As it happens, a couple of years earlier, were the procuring cause of the
the property suffered extensive hail dam- plaintiff’s (buyer’s) economic dam-
age. The current owners received mon- ages or mental anguish. (For more in-
etary payment from the insurance com- This situation is a good illustration of formation on each of these elements,
pany for a new roof. Instead of making the when the DTPA can be used to rescind the see Center publication 1114, “The
repairs, the owners pocketed the money contract before closing. Rescinding the DTPA Protects Consumers and Defen-
and did not tell the current buyer. The fail- contract after closing is possible, but it is dants.”)
ure to replace the roof rendered the prop- more practical to do so before closing. The Under the DTPA, plaintiffs face a two-
erty uninsurable unless the buyer was will- buyers could also close and then sue for year statute of limitations. Also, a strict
ing to replace the roof at his own expense. damages under the DTPA. reading of the statute allows recovery of
The broker also remembered that the cur- Contract rescission cancels marred con- damages along with rescission of the con-
rent owners experienced $20,000 in flood tracts. The contract is cancelled, but more tract. Section 17.50 of the act lists recov-
damage in another incident but does not importantly, the plaintiffs are restored le- eries in the following order:
know what the owners did with the insur- gally and financially to the position they • damages (triple damages in some
ance proceeds. maintained before entering the contract. cases),
When the buyer confronts the sellers Both parties must return any property re- • injunction (to keep the defendant from
with these nondisclosures, they do not deny ceived and the value of any benefits de- repeating the practice) and (not “or”)
the allegations. They state that the roof rived from the contract. • contract rescission.
B
never leaked, so they saw no need to dis- oth common law and statutory law The DTPA apparently allows the three
close. As to the previous flooding, they say recognize contract rescission, but remedies in the same lawsuit. Thus, dam-
those damages were remedied, and there there are procedural differences. Un- ages and rescission are not mutually exclu-
was no need to disclose that the property der either, the mere breach of contract is sive remedies under the DTPA. However,
was prone to flooding. insufficient to support rescission (Jim case law limits the damages to those nec-
The buyer wants out of the contract and Walter Homes v. Samuel, 701 SW2d 351). essary to restore plaintiffs to the economic
the escrow money returned. The sellers feel More must be proven. positions they held prior to the contract.
they have done nothing wrong and demand Under common law, the plaintiff must In two cases the court allowed limited
the buyers close. prove something that would render the recovery of damages for reimbursement of
expenses incurred because of the contract of the property was in the floodplain. They “Each consumer who prevails shall be
(Ridco Inc. v. Sexton, 623 SW2d 792, and sued the seller and broker to rescind the awarded court costs and reasonable and
LaChalet Inc. v. Nowick, 787 SW2d 101). contract for failing to disclose this fact. necessary attorneys’ fees.” Apparently,
This was needed to fully restore the plain- While the court granted the buyers cer- court costs and attorney fees are recover-
tiffs financially. In the present scenario, if tain damages, rescission was denied. All able when the contract is rescinded.
the contract is rescinded, the plaintiff needs parties appealed the denial. The appellate Contract rescission is not a popular rem-
reimbursement for the loan application court upheld the trial court, stating that edy, perhaps because aggrieved buyers are
fees, inspection fees, the cost of the survey, contract rescission cannot be granted if the more attracted to the possible triple dam-
and other costs related to the transaction plaintiffs have “unclean hands,” meaning ages the DTPA offers. Perhaps buyers are
to be fully restored financially. rescission cannot be granted when the plain- not aware of this remedy because attor-
Another case limited the circumstances tiffs are at least partly at fault. Had the neys do not promote it. Or perhaps they
in which contract rescission can be granted plaintiffs investigated the floodplain issue become aware of the remedy after closing,
even if all requirements of the DTPA are during the 15 days allocated in the con- when it is less attractive than before clos-
met (Schenck v. Ebby Halliday Real Es- tract, the lawsuit would not have occurred. ing. But contract rescission under the DTPA
tate, Inc., 803 SW2d 361). In this case, the The DTPA generally requires a 60-day should not be overlooked by purchasers
contract gave buyers 15 days after the con- notice before filing a lawsuit. This notice who were deceived or misled and want to
tract was signed to investigate whether is required only if the lawsuit is for dam- get out of a contract before closing.
any of the property lay in the floodplain. If ages (Section 17.505 [a]). It does not apply
Fambrough (judon@recenter.tamu.edu) is a
any did, the contract could be terminated. to rescissions.
member of the State Bar of Texas and a lawyer
The buyers did not investigate the issue, Can plaintiffs recover attorney fees un-
with the Real Estate Center at Texas A&M
and the contract closed. der the DTPA when the court grants a con-
University.
Later, when the buyers attempted to re- tract rescission? Section 17.50(d) states,
sell the property, they discovered that part
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Advisory Committee
Jerry L. Schaffner, Lubbock, chairman; Celia Goode-Haddock, College Station, vice chairman; Joseph A. Adame, Corpus Christi; David E. Dalzell, Abilene;
Tom H. Gann, Lufkin; Joe Bob McCartt, Amarillo; Catherine Miller, Fort Worth; Nick Nicholas, Dallas; Douglas A. Schwartz, El Paso;
and Larry Jokl, Brownsville, ex-officio representing the Texas Real Estate Commission.
Tierra Grande (ISSN 1070-0234), formerly Real Estate Center Journal, is published quarterly by the Real Estate Center at Texas A&M University, College Station,
Texas 77843-2115. Subscriptions are free to Texas real estate licensees. Other subscribers, $20 per year.
Views expressed are those of the authors and do not imply endorsement by the Real Estate Center, the Lowry Mays College & Graduate School of Business
or Texas A&M University.