Citation. 613 P.2d 608 (Alaska 1980)
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Brief Fact Summary.
One party to a real estate contract unintentionally misrepresented certain material facts to another party upon which that other party relied.
Synopsis of Rule of Law.
"[A] purchaser of land may rely on material representations made by the seller and is not obligated to ascertain whether such representations are truthful." Additionally, "[a] buyer of land, relying on an innocent misrepresentation, is barred from recovery only if the buyer's acts in failing to discover defects were wholly irrational, preposterous, or in bad faith."
In 1975, The Appellees, Devon Walker and his wife (the "Appellees"), purchased a certain parcel of land in Alaska for $140,000. In October 1976, the Appellees attempted to sell the land and in their multiple listing agreement said the property included "580 feet of highway frontage" and based on an engineers report possessed "OVER 1 MILLION IN GRAVEL ON PROP." The Appellees asking price was $245,000. The initial multiple listing agreement expired, and the Appellees signed a new agreement. In the agreement the property was again described as containing "580 feet of highway frontage." However, the gravel content was set at a "minimum 80,000 cubic yds of gravel." The new asking price in the second agreement was $470,000. On December 31, 1976 an appraisal was conducted, but the appraisal value did not take into account the value of the gravel. The appraisal report, however, did mention the ground was "all good gravel base." The Appellant, Wayne Cousineau (the "Appellant"), after seeing the second listing, offered $360,000 for the property. The Appellant was in the gravel extraction business so he wanted all gravel rights transferred to him. In February of 1977, Mr. Cousineau agreed to pay $385,000 for the property. The Appellee's security interest in the property was protected by limiting the amount of gravel the Appellant initially could remove. The Appellant and his business partners shortly after the closing began developing the commercial portion of the property. In doing so they purchased a $12,000 gravel scale. Shortly thereafter, they learned that the actual highway frontage was 415 feet, not 580 feet. Simultaneously, after removing only 6,000 yards of gravel, the gravel supply on the property ran out. In December of 1977 the Appellant and his partners stopped paying for the property. At that time they had paid $99,000. The Appellant brought suit for rescission and restitution. The trial court found that the Appellant did not rely on any misrepresentations and ruled for the Appellees.
Are the Appellants entitled to the recisssion of a contract for the sale of land due to false statements made by the Appellees?
Yes. The court first observes "an innocent misrepresentation may be the basis for rescinding a contract." The court then breaks its analysis into three parts. First, whether the Appellant relied on the Appellees' statement. Second, whether a reasonable person would have treated the statements as important when making their decision to purchase or not purchase the property. Third, whether the Appellant's reliance was justifiable.
• As to the first, the court found that the Appellant clearly relied on the representation in the multiple listing, which said "1 MILLION IN GRAVEL". This is irrespective of the fact that the subsequent listing referenced 80,000 cubic yards of gravel. This second approximation did not "disclaim the earlier statements regarding the amount of gravel." The court also found that the Appellant relied on the Appellee's representations about the highway frontage.
• As to the second, the court first recognized materiality is a mixed question of fact and law. A material fact is one "to which a reasonable man might be expected to attach importance in making his choice of action." The court concluded as a matter of law that the statements concerning "highway frontage and gravel content were material." A reasonable person would take both of these things into consideration when deciding whether to purchase the property.
• As to the third, the court first noted the recent tendency of courts to move away from the doctrine of caveat emptor even where there is an innocent misrepresentation. The court held that "a purchaser of land may rely on material representations made by the seller and is not obligated to ascertain whether such representations are truthful." Further, "[a] buyer of land, relying on an innocent misrepresentation, is barred from recovery only if the buyer's acts in failing to discover defects were wholly irrational, preposterous, or in bad faith." Applying these rules, the court found that although the Appellant arguably demonstrated poor judgment in not investigating further, recovery should not be denied.
This case offers an informative discussion about unintentional misrepresentations of material fact in the context of a real estate transaction.