Facts
- Carl and Nancy Pickles purchased, by land contract, a small parcel with a three-unit apartment building from William and Martha Messerly to use as income-producing rental property.
- Unknown to both sides, a prior owner had installed an unpermitted septic system that violated the county health code.
- After the sale, raw sewage seeped onto the property; the county board of health condemned the premises and obtained a permanent injunction prohibiting human habitation until the sewage system complied with the sanitation code.
- The condemnation made the property effectively unusable for lawful residential rental and substantially impaired its value for the buyers’ intended purpose.
- The land contract included a typed “as is” provision stating the purchaser examined the property and agreed to accept it “in its present condition,” and it contained an integration term disclaiming additional understandings.
Issues
- Whether a mutual mistake about a basic assumption of the contract (lawful habitability and income-producing capacity) entitled the purchasers to rescind the land contract.
- Whether the contract’s “as is” clause allocated the risk of the unknown septic defect to the purchasers, barring rescission despite the mutual mistake.
- Whether failure of consideration provided a basis to avoid the contract under these facts.
Decision
- The Michigan Supreme Court reversed the Court of Appeals and denied rescission.
- The Court agreed a mutual mistake existed concerning the property’s suitability for rental use, but held equitable relief was not warranted.
- The “as is” clause, coupled with the absence of fraud and the purchasers’ opportunity to inspect, allocated the risk of the unknown defect to the purchasers.
- Foreclosure and the sellers’ contract remedies, as ordered by the trial court, were effectively reinstated.
Legal Principles
- Mutual mistake may permit avoidance only if (1) the mistake concerns a basic assumption, (2) materially affects the exchange, and (3) the party seeking relief did not assume the risk of the mistake.
- Rescission is equitable and discretionary; it is not automatic upon proof of mutual mistake, particularly where both parties are innocent.
- Risk of mistake may be allocated by agreement; an “as is” clause can place the risk of latent, unknown defects on the purchaser.
- Modern mutual mistake analysis focuses on risk allocation under Restatement (Second) of Contracts §§ 152–154 rather than rigid “substance versus quality” characterizations.
Conclusion
Even though both parties were mistaken about a severe, preexisting septic defect that eliminated the property’s lawful rental use, the purchasers could not rescind because the contract’s “as is” term allocated the risk of unknown defects to them and there was no fraud or misrepresentation by the sellers.