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  • WisBar News
    September 19, 2013

    Home Defect Case Highlights Option-to-Purchase Pitfall Under Mutual Mistake Doctrine

    Sept. 19, 2013 – A couple who designed and built a home containing defects is not liable to the couple who bought the home, a state appeals court has ruled. The ruling is a contract warning for home buyers who lease homes with an option-to-purchase.

    Buyers Niksa and Kelly Ivancevic brought mutual mistake and breach of contract claims against sellers Ronald and Debra Reagan after purchasing a home with a faulty roof and ventilation system, which led to second floor water leaks around windows.

    Pre-purchase inspections found no defects. After purchase, an architect said the home’s ventilation system was faulty and did not meet building code standards.

    The lease, which governed the landlord-tenant relationship before purchase, had stated that the home would be “delivered in clean condition and good repair, free of mold and toxic substances, suitable for habitation in compliance with all laws.”

    The Ivancevic’s sued, asking for damages and recission of the option to-purchase contract, but circuit court ruled in favor of the Reagans. The court denied the breach of contract claim because the Reagan’s never represented the residence to be defect-free.

    The circuit court also denied the Ivancevic’s mutual mistake claim, and a three-judge appeals court panel affirmed in Ivancevic v. Reagan, 2012AP2294 (Sept. 17, 2013).

    The doctrine of mutual mistake allows reformation of contracts in cases where “both parties of a contract are unaware of the existence of a past or present fact material to their agreement,” the panel explained, citing prior caselaw.

    The Ivancevic’s argued that both parties were unaware of ventilation problems, so the sales contract should be reformed. But the three-judge panel rejected this argument.

    “[T]he Ivancevics, as the party seeking reformation, were required to present evidence of the possibility that the parties were mutually unaware of a fact material to their agreement at the time they entered into it,” Judge Kitty Brennan wrote.

    The Ivancevics, the panel ruled, did not present evidence that a faulty ventilation system would be material to the sales agreement, because the agreement did not require the home to be free of defects.

    “In fact, the circuit court dismissed the Ivancevics’ contract claim, which was based on their argument that the Reagans represented that the Residence would be defect-free, and the Ivancevics did not appeal that dismissal,” Judge Brennan wrote.

    The panel also rejected the Ivancevics’ argument that the ventilation system violated building code, as indicated by the architect who inspected the home after purchase, and the Reagans promised to deliver the residence in compliance with all laws.

    In doing so, the panel separated the “lease” from the “option-to-purchase” contract. The lease promised to deliver the residence in compliance with all laws. The purchase agreement did not, and the purchase agreement did not incorporate lease terms.

    “[T]he plain language of the Option to Purchase makes it clear that the terms of the lease are not part of the sales contract,” Judge Brennan wrote. “In short, the Ivancevics’ reliance on the language in the Lease is misplaced.”

    The panel noted that the sales contract included a “buyer due diligence” clause that urged the buyer to perform appropriate inspections before purchasing the home.

    Finally, the panel rejected the Reagans’ counter claim for sanctions. Seeking attorney fees, the Reagans said the Ivancevics filed a frivolous lawsuit and a frivolous appeal.

    “While the substance of their mutual-mistake claim is not strong, it is not meritless,” Brennan wrote. “There is very little caselaw on when to apply the mutual-mistake doctrine to sales contracts; the parameters of the doctrine in this context are not well-defined.”

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