Hinson v. Jefferson

[Plaintiff sued to recover the purchase price of $3,500 paid by the plaintiff to the defendants for a parcel or lot of land in Farmville Township, Pitt County, North Carolina. The parcel of land was 200 by 300 feet and was restricted to residential use. The defendants and the plaintiff contemplated that the plaintiff would construct a home or residence on the lot and that in order to build a residence, the lot would require the use of a septic tank or an on-site sewage disposal system. However, construction of the home was prevented pursuant to an examination by the Health Department, which found that the lot would not support a septic tank or on-site sewage disposal system on account of a drainage problem and that the land was subject to flooding. The only way to remedy the land would be through channel improvements to Black Swamp and Little Contentnea Creek at a prospective cost of several hundred thousand dollars. There was no allegation of fraud or misrepresentation and it was stipulated that neither party knew of the underlying condition at the time of the sale of the land.

The trial court directed entry of judgment in favor of defendants. The Court of Appeals held that plaintiff was entitled to rescind the contract on the grounds of “mutual mistake of material fact” couple with a “total failure of consideration.”]

OPINION BY: COPELAND

Plaintiff states in her sole assignment of error that she relies on the following legal points in support of her exception to the judgment:

"1. That the stipulated facts show that there was a mutual mistake of an existing material fact, common to both parties, and by reason thereof each has done what neither intended, coupled with a failure of consideration.

"2. That in a conveyance of land by deed containing restrictions therein which restrict the use of the property for a certain purpose, the grantor thereby warrants that the property so conveyed and restricted can be used for the specific purpose to which its use is restricted by the deed of conveyance."

In general, we are bound by the findings of fact unless such facts are not supported by any competent evidence. Here the facts are conclusive since no exception was taken by either party to the court's findings. On the other hand, we are not precluded from reviewing the trial court's view of the applicable law arising on the facts. Hence, in the interest of justice, we deem it appropriate to proceed to determine the proper legal conclusions to be drawn from the trial court's findings.

Based on these uncontroverted facts, the Court of Appeals held that plaintiff was entitled to rescind the contract on the grounds of "mutual mistake of material fact" coupled with a "total failure of consideration." Assuming, arguendo, that the Court of Appeals was correct, and that this is a true mistake case, then it is one that must necessarily involve a mistaken assumption of the parties in the formation of the contract of purchase. In these mistaken assumption cases, unlike other kinds of mistake cases, the parties communicate their desires to each other perfectly; they intend to complete a sale, or a contract of sale, and their objective acts are in accord with their intent. Difficulties subsequently arise because at least one of the parties has, either consciously or unconsciously, mistaken beliefs concerning facts that make the sale appear more attractive to him than it actually is.

In attempting to determine whether the aggrieved party is entitled to some kind of relief in these mistaken assumption cases, courts and commentators have suggested a number of factors as relevant. E.g., was the mistake bilateral or unilateral; was it palpable or impalpable; was one of the parties unjustly enriched; was the other party unjustly impoverished; was the risk assumed by one of the parties (i.e., subjective ignorance); was the mistake fundamental or collateral; was the mistake related to present facts or to future expectations; etc.

Our research has failed to disclose a prior North Carolina case applying the doctrine of mutual mistake pertaining to a physical condition of real property as a ground for rescission. However, we have found a few cases from other jurisdictions.

In Blythe v. Coney, the court allowed rescission where the vendor and purchaser of a residence were mistaken as to the adequacy of water pressure. The court declared that a contract may be rescinded for a mutual mistake regarding a material fact and that the mistaken assumption of the parties could be characterized as such a mistake in view of the evidence that the water meter in the home was unconnected at the time it was shown to the purchasers so that neither party was aware of the water shortage until after the sale.

Likewise, in Davey v. Brownson, the court relied on the doctrine of mutual mistake of a material fact in rescinding the sale of, inter alia, a 26-unit motel that, unknown to either party at the time of signing the contract, was infested with termites, a condition that could only be corrected by substantial structural repair. The court, quoting from Lindeberg v. Murray, stated: "We think it is elementary that, where there is a clear bona fide mistake regarding material facts, without culpable negligence on the part of the person complaining, the contract may be avoided, and equity will decree a rescission. We take it that the true test in cases involving mutual mistake of fact is whether the contract would have been entered into had there been no mistake. . . ."

One court has held that there were sufficient grounds for rescission of a sale of realty where both the vendor and the vendee were mistaken as to the suitability of the soil or the terrain for agricultural purposes. Suffice it to say, all four decisions appear to be contra to the traditional doctrine of caveat emptor.

The closest mistaken assumption case we have found to our fact situation is A & M Land Development Co. v. Miller. In that case, the court held that the trial judge was correct in refusing to rescind the sale of 42 building lots slated for subdivision and development, because of mutual mistake regarding the poor absorptive qualities of the soil that resulted in a tentative refusal of septic tank permits to the subdivider. The court concluded that, assuming there was a mutual mistake, to grant rescission would be improper since the purchaser received the property for which he contracted, notwithstanding that it was less attractive and less valuable to him than he had anticipated.

There are, however, several important distinguishing factors between the Miller case and our case. First, the purchaser in Miller was a developer-speculator; in our case the purchaser is a consumer-widow. Second, the property in Miller was not rendered valueless for its intended use, but only rendered less valuable because it could not be developed as densely as originally anticipated; in our case the property was rendered totally valueless for the intended use.

In our view, the difficulty with the above listed factors and with the decisions we have examined is that in any given case several factors are likely to be present, and each may point toward a different result. For example, in A & M Land Development Co. v. Miller, supra, the mistake appears to have been mutual and it also appears to have been induced by misrepresentations of the vendor (i.e., vendor furnished reports of privately engaged engineers and local public sanitation officials indicating that the character of the soil was suitable for the use of individual septic tank systems). Yet, the court held that rescission would be improper since the purchaser received the property for which he had contracted. Perhaps the court felt that since the vendee was a developer-speculator he assumed the risk of soil defects. In short, the relation of one factor to another is not clear. In any event, because of the uncertainty surrounding the law of mistake we are extremely hesitant to apply this theory to a case involving the completed sale and transfer of real property. Its application to this type of factual situation might well create an unwarranted instability with respect to North Carolina real estate transactions and lead to the filing of many non-meritorious actions. Hence, we expressly reject this theory as a basis for plaintiff's rescission.

Is plaintiff therefore without a remedy? Did plaintiff buy this property "at the end of the halter" (an expression of horse traders)? At this moment, plaintiff has naked legal title to a tract of real estate whose use to her is limited by the restrictive covenants and by the facts as stipulated to what she calls "the dubious pleasure of viewing the same." On the other hand, defendants have $ 3,500 of plaintiff's money. There can be no question but that the parties to this transaction never contemplated this particular use of the subject property. In fact, the deed, by its very terms, makes it clear that the intended use was for the construction of a single-family residence, strictly limited as to costs and as to design. The stipulation further indicates that both prior to and at the time of the conveyance neither defendants nor plaintiff knew that the property would not support a septic tank or on-site sewage disposal system.

In the face of these uncontroverted facts, defendants rely upon the doctrine of caveat emptor as a legal defense to plaintiff's action for rescission. The common law doctrine of caveat emptor historically applied to sales of both real and personal property. Its application to personal property sales, however, has been restricted by the Uniform Commercial Code. Over the years, as to real property, the number of cases that strictly apply the rule of caveat emptor appears to be diminishing, while there is a distinct tendency to depart therefrom, either by way of interpretation, or exception, or by simply refusing to adhere to the rule where it would work injustice.

In recent years the rule of caveat emptor has suffered severe inroads in sales of houses to be built or in the course of construction. Today, it appears that a majority of the states imply some form of warranty in the purchase of a new home by a first purchaser from a builder-vendor.

During the course of this litigation, and subsequent to the oral arguments of this case in the Court of Appeals, this Court decided the case of Hartley v. Ballou. In that case, this Court, in an opinion by Chief Justice Bobbitt, approved the "relaxation of the rule of caveat emptor" in respect of defects of which the purchaser of a recently completed or partially completed dwelling was unaware and could not discover by a reasonable inspection, and substituted therefore, for the first time in this State, an implied warranty defined as follows:

"[I]n every contract for the sale of a recently completed dwelling, and in every contract for the sale of a dwelling then under construction, the vendor, if he be in the business of building such dwellings, shall be held to impliedly warrant to the initial vendee that, at the time of the passing of the deed or the taking of possession by the initial vendee (whichever first occurs), the dwelling, together with all its fixtures, is sufficiently free from major structural defects, and is constructed in a workmanlike manner, so as to meet the standard of workmanlike quality then prevailing at the time and place of construction; and that this implied warranty in the contract of sale survives the passing of the deed or the taking of possession by the initial vendee." At the same time, Hartley made it clear that such implied warranty falls short of "an absolute guarantee." "An implied warranty cannot be held to extend to defects which are visible or should be visible to a reasonable man . . . ." As to what constitutes a "reasonable inspection" under diverse factual situations.

We believe that many of the mutual mistake cases discussed supra were in fact embryo implied warranty cases. For example, in Davey v. Brownson, supra, the purchaser obtained rescission because of termities on the ground of mutual mistake. Although the court denied its decision was based on implied warranty, it is difficult to understand the application of the mutual mistake doctrine. In this context, Hartley could easily be classified as a mutual mistake case, i.e., both parties assumed that the basement wall was sufficiently free from structural defects so as to prevent any water leakage. But, in Hartley we recognized the implied warranty as a limited exception to the general rule of caveat emptor; if we had elected to totally abolish the doctrine, then perhaps application of the mutual mistake theory would have been appropriate. Hartley is not an abrogation of the doctrine of caveat emptor; on the contrary it is only a well-reasoned exception.

Concededly, this is not the Hartley fact situation. Hartley involved a builder-vendor of new homes and a consumer-vendee. Nonetheless, we believe that Hartley provides the legal precedent for deciding this case. The basic and underlying principle of Hartley is a recognition that in some situations the rigid common law maxim of caveat emptor is inequitable. We believe this is one of those situations. As a result, we hold that where a grantor conveys land subject to restrictive covenants that limit its use to the construction of a single-family dwelling, and, due to subsequent disclosures, both unknown to and not reasonably discoverable by the grantee before or at the time of conveyance, the property cannot be used by the grantee, or by any subsequent grantees through mesne conveyances, for the specific purpose to which its use is limited by the restrictive covenants, the grantor breaches an implied warranty arising out of said restrictive covenants.

Defendant contends that if plaintiff is permitted to rescind, then any contract or conveyance can be set aside under a set of circumstances rendering the land no longer attractive to a purchaser. If we applied the mutual mistake doctrine, then there might be some merit to this argument. But, under the rule we have announced, a purchaser is bound by patent defects or by facts a reasonable investigation would normally disclose. In the instant case, it is clear that a reasonable inspection by the grantee either before or at the time of conveyance would not have disclosed that the property could not support a septic tank or on-site sewage disposal system.

Therefore, under the facts of this case, we hold that defendant grantors have breached the implied warranty, as set out above, and that plaintiff, by timely notice of the defect, once it was discovered, is entitled to full restitution of the purchase price; provided that she execute and deliver a deed reconveying the subject lot to defendants. The judgment of the Court of Appeals, as modified herein, is thus affirmed.