Verma v. Stuhr (10/29/2009)

November 3, 2009

Arizona Court of Appeals Division One Holds That Under A.R.S. § 33-422 a Buyer May Rescind a Land Purchase Contract If the Seller Has Not Made the Required Disclosures, Subject to the Affirmative Defenses of Waiver, Estoppel, and Laches.

Kuldip and Binu Verma (“Buyers”) entered into contracts with three separate sellers to purchase three parcels of land.  Each of the parcels was located in a federal flood easement, which the Buyers knew within the time allowed for due diligence under the purchase contracts.  The Buyers did not cancel the contracts upon learning of the federal flood easement.  The Buyers did attempt to rescind each of the contracts by invoking A.R.S. § 33-422, which requires a seller to furnish a written affidavit of disclosure to a buyer at least seven days before the property is transferred, specifies the particular disclosures the seller must make, and allows rescission by the buyer within five days of receiving the affidavit.  The trial court entered summary judgment in favor of the Buyers in each case. 

The Court of Appeals first rejected the Sellers’ arguments that A.R.S. § 33-422 did not apply to parcels larger than 160 acres and that the statute was unconstitutional because it was vague and impaired contract rights.  The Court then held that the statute’s disclosure requirements are mandatory.  An erroneous affidavit, however, does not render the seller noncompliant with the statute.  Instead, a buyer may invoke ordinary contract and tort remedies when the buyer is harmed by erroneous disclosures. 

With respect to the first seller, Tilley Farms, the Court concluded that although Tilley Farms had not complied with the statute because its affidavit did not include all of the required disclosures, the Buyers were estopped from rescinding the contract on that basis.  The Buyers’ representative had provided the outdated form to Tilley Farms, and the Buyers formally accepted Tilley Farms’ affidavit and continued with the deal after receiving it.  With respect to the second seller, the Court held that the Buyers had lost their statutory right to rescind the deal because they waited until after the transaction had closed before invoking the right.  Under the statute, the right to rescind is good only for five days after the seller furnishes the affidavit, and the affidavit must be furnished at least seven days before closing.  The right, therefore, does not survive closing.  The Court affirmed the summary judgment in favor of the Buyers on the third deal, however.  In that case, the Buyers had properly exercised the right within the required period.  The Court noted that, contrary to the claims of the Seller, the “right to rescission is not contingent upon the buyer’s prior knowledge or lack of knowledge about any aspect of the property, and its exercise need not be based on the content of any disclosure in the affidavit.”

Judge Swann authored the opinion; Judges Orozco and Irvine concurred