Effects of Rescinding a Real Estate Purchase Contract By Mutual Consent

Arizona law recognizes a distinction between the cancellation and the rescission of a real estate contract. A rescission goes beyond a mere termination or cancellation, and actually unwinds the contract. Rescission should return parties to their position before entering into the contract.  If a contract for real estate is rescinded by mutual consent, the rights of either party to assert a claim for any relief based on the rights under the contract, including specific performance. are extinguished.  This is true even if a party previously breached the contract.

The case of Reed v. McLaws, 110 P.2d 222, 56 Ariz. 556, (1941) discusses this issue. There, the sellers and buyer entered into a contract for the sale of a parcel of real estate. The buyer took possession of the real estate, assumed seller’s mortgage, and began making payments.  Then buyer abandoned the property and never returned.

A few months later, the property was destroyed by a fire.  The insurance company payed the lender and then took over lender’s lien rights, all consistent with the terms of the mortgage.  The insurance company then foreclosed the mortgage. Meanwhile, sellers filed suit for breach of contract against the buyer, alleging that the buyer failed to make full payment of his obligations.

The buyer defended the lawsuit claiming sellers failed to satisfy certain requirements under the contract, such as drilling wells on the property. He stated he told the sellers he was returning the property to them due to such failures, and alleged they had accepted the property, resulting in a mutual rescission of the contract.

On appeal, the Arizona Supreme Court addressed the impact of a mutual rescission of a contract. It noted that a rescission resulted in a waiver of all breaches of contract, and that no action can be maintained relating to such as breach or otherwise arising out of the contract. In other words, the contract will be treated as if it never existed.

The only action that can be maintained in this situation is one that will restore a party to the status quo ante, their position before they entered into the contract. Each party will be required to give back anything they received under the contract, returning everyone to their pre-contract position.

This distinction between a rescission and a termination or cancellation is important, as an agreement to rescind a contract will likely result in a waiver of claims for breach of contract. Consult a real estate attorney before deciding to terminate or rescind any contract to be sure you are not accidentally waiving any causes of action.