Question

13.2 Unilateral Mistake

The County of Contra Costa, California, held a tax sale in which it offered for sale a vacant piece of property located in the city of El Cerrito. Richard J. Schultz, a carpenter, saw the notice of the pending tax sale and was interested in purchasing the lot to build a house. Prior to attending the tax sale, Schultz visited and measured the parcel, examined the neighborhood and found the houses there to be “ very nice,” and had a title search done that turned up no liens or judgments against the property. Schultz did not, however, check with the city zoning department regarding the zoning of the property.

Schultz attended the tax sale and, after spirited bidding, won with a bid of $ 9,100 and received a deed to the property. Within one week of the purchase, Schultz discovered that the city’s zoning laws prevented building a residence on the lot. In essence, the lot was worthless. Schultz sued to rescind the contract.

Can the contract be rescinded?

Answer 1

OPINION

• Defendants State of California, County of Contra Costa and tax collector, County of Contra Costa, appeal from the judgment of the Contra Costa County Superior Court which rescinded a contract between defendants and plaintiff Richard J. Schultz for the purchase of realty at a tax sale. The court ordered that each party restore to the other the consideration received under the contract. Defendants contend:

(1) there was no statutory right to rescission of the tax deed;

(2) contract rules of rescission are inapplicable to a deed; and

(3) even if contract rules of rescission are applicable, plaintiff may not rescind on the basis of either failure of consideration or unilateral mistake. We affirm, Plaintiff, who had never before been to a tax sale, was the highest bidder for a lot in El Cerrito. Plaintiff joined in the bidding and won a bid of $9,100 and received a deed for the property.

• Plaintiff, a carpenter, planned to build a residence for himself on the lot. Prior to the sale, he obtained a map of the parcel from the tax collector's office and examined the neighbourhood and the lot. He measured the parcel, noting that it was the size of a small building lot.. The buyer was "bound to inform himself of the regularity of the tax proceedings," and assumed the risk of error. (Id, at p. 493.) The Routh holding is no longer viable because current Revenue and Taxation Code sections 3725-3731 provide a remedy for a purchaser at an invalid or irregular tax sale. These three cases consider distinguishable fact situations applying stringent responsibilities of an antiquated era.

• The statement is part of the court's general discussion of the law pertinent to the invalidity of tax sales in other states, in particular South Dakota, Minnesota, and Oklahoma. (Anderson v. King County , supra, 200 Wash. at pp. 361-364.) The Washington court did not apply the above-stated rule in the Anderson case because Washington statutes provided no recovery for the purchaser at a void or invalid tax sale; on that basis, the Washington court applied the doctrine of caveat emptor. (Id, at pp. 360-361, 364.)
• Defendants contend that because Revenue and Taxation Code sections 3725-3731 provide a remedy for a purchaser at an invalid or irregular tax sale, and because Revenue and Taxation Code sections 3518 and 3711 provide that a duly acknowledged or proved tax deed is conclusive evidence of the regularity of tax sale proceedings, except as against actual fraud, that invalidity or irregularity of the proceedings, or fraud, are the only avenues for recovery by a tax sale purchaser. Defendants' contention that a deed is not subject to contract laws of rescission, because it merely conveys title, is without merit. Plaintiff's complaint prayed for a rescission of his purchase and the trial court's judgment rescinded the contract for purchase. [3] Although the trial court held that there was a failure of consideration, "[i]t has long been the rule that: 'The fact that the action of the court may have been based upon an erroneous theory of the case, or upon an improper or unsound course of reasoning, cannot determine the question of its propriety. No rule of decision is better or more firmly established by authority, nor one resting upon a sounder basis of reason and propriety, than that a ruling or decision, itself correct in law, will not be disturbed on appeal merely because given for a wrong reason.

[2b] Mistake of fact includes "a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in: explained in the Restatement Second of Contracts section 152, comment a "[b]efore making a contract, a party ordinarily evaluates the proposed exchange of performances on the basis of a variety of assumptions with respect to existing facts." Where a party's assumption or belief is not in accord with existing facts, and the erroneous belief is material to the party's evaluation of the contractual exchange, the party has made a mistake of fact. (See id, § 151, com. a, p. 383.) Plaintiff believed he was purchasing land on which to build a home for himself. His belief was erroneous because he in fact received a lot which was unbuildable; therefore, plaintiff mistakenly evaluated the contractual exchange. Plaintiff's mistake of fact was material.

Defendants contend that plaintiff's mistake resulted from his own negligence. Defendants argue that despite plaintiff's mistake, the contract must be enforced because plaintiff's outward manifestations of expression never conveyed his purpose in contracting to purchase the land. Two of the cases cited by defendants do not apply this rule in the context of a rescission suit Thus, where rescission on the ground of mistake is considered, as here, the outward manifestations of the parties, which resulted in the formation of the contract, are not controlling. Plaintiff did not argue that the Restatement Second of Contracts section 153, subdivision (b) applies, for there was no evidence introduced which would support a contention that defendants knew of plaintiff's mistake. Counsel for defendants stated, at oral argument, that plaintiff's predecessor-in-interest's home had been demolished because the lot was located in a slide area. Prior to the tax sale, defendants removed a demolition lien encumbering the property. If this information had been in evidence below, another ground for rescission may have existed under the Restatement Second of Contracts section 153, subdivision (b). Defendants received more value than the lot was worth. Thus, rescission is equitably suitable in the instant case because enforcement of the contract would result in a substantial burden on plaintiff.I dissent because the sole remedies for a purchaser of real property at a tax sale are those provided in the Revenue and Taxation Code. The Legislature has never changed the historic rule that the doctrine of caveat emptor, let the buyer beware, applies to purchasers of real property at tax sales which take place at public auction.

Historically, the purchase of title to property at a tax sale was viewed as a speculative act; tax titles were often invalidated for minor procedural errors. If a person succeeds in voiding the tax title because the tax sale was invalid or irregular, the purchaser of the tax title is entitled to reimbursement from the county. However, these legislative changes have not otherwise changed or eliminated the applicability of the doctrine of caveat emptor to purchasers of tax titles at public auction.

There is no statutory or case authority which provides recovery because the purchaser's undisclosed purpose in buying the property cannot be carried out.

In the instant case, appellant purchased a perfectly valid tax title. He neither alleged nor showed actual fraud in the tax sale, nor does he claim the tax sale was invalid or irregular, so he cannot recover under reimbursement provisions of the Revenue and Taxation Code. He claims he is entitled to rescind his purchase under general contract principles because he did not know the land was "unbuildable." Appellant raises an issue of first impression --whether a purchaser at a tax sale is entitled to rescind the sale due to his unilateral "mistake" where no misrepresentation or concealment can be charged to the state or county.

The policies behind the caveat emptor rule in tax sales justify its application here. Each bidder at a tax sale has his or her own undisclosed plans, foreseeable or unforeseeable, for use or development of the property. It is reasonable to require bidders to verify that these plans are legally permissible under local zoning and building regulations and physically feasible on the property. It is a minimal burden on bidders to require them to obtain information about the property from public agencies before they bid. If appellant had consulted the City of El Cerrito Building Department before he bid at the tax sale, he would have discovered, as he did by making such an inquiry one week later, that the property was unbuildable.

In the instant case, the City of El Cerrito Building Department, long before the tax sale, had imposed a prohibition on development on this parcel. There is no evidence the state knew or should have known of this prohibition. fn. 1 The state obtains tax-sold property by operation of law. Unlike private owners, the state has no interest in restrictions on the potential use of property or its development; its sole interest is the recovery of back taxes. The burden should be on buyers at tax sales at public auction, in advance of the sale, to take all steps necessary to assure themselves that the use and development of the property which they have in mind will be permitted by local government. It is onerous, if not impossible, to require the state or county to physically examine real property prior to a tax sale and, further, to dispel any undisclosed mistaken beliefs of bidders. The burden should be left to the most interested parties, the bidders.

The majority misses the mark when it concludes that "[t]he instant plaintiff's error related to a permanent defect in the lot which would not have been cured by later inspection." While a physical inspection of the property would not have shown it was unbuildable, plaintiff could have discovered this information before the tax sale by reasonable investigation through the public regulatory agencies. There was nothing that precluded him from obtaining the same information prior to the tax sale which he obtained one week thereafter.

Because I believe the doctrine of caveat emptor properly places the risk of mistake on potential buyers at tax sales, I would reverse the judgment.

FN 1. Section 154 of the Restatement Second of Contracts reads: "A party bears the risk of a mistake when

"(a) the risk is allocated to him by agreement of the parties, or

"(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

"(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so."

Section 154 would apply to a situation where, for example, it was known that the purchaser of realty was speculating as to the existence of oil beneath the surface of the land. In that case, the purchaser would have incorporated the risk into the basic assumptions on which he or she entered into the contract of purchase. Here, plaintiff's purpose was ordinary: He desired to build a residence on a vacant lot in an established residential neighbourhood.

CONCLUSION

The majority notes that the county removed a demolition lien on the property prior to the tax sale. There was no evidence that this was an irregular procedure or that the county knew the reason for the demolition which resulted in the lien.