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Mutual mistake dooms real estate transaction

House with "for sale" sign in front

A circuit court judge granted a defendant’s demurrer in a case over a real estate sales contract after finding both parties to the contract mistakenly believed the defendant seller was the only person to have title to the property the plaintiff sought to buy.

The plaintiff purchaser had no claim for specific performance, breach of contract or quiet title/partition action.

The property in question, three Norfolk residential properties, were co-owned by the defendant and his wife. Following their 2010 divorce, the defendant never was formally transferred full ownership of the property despite a stipulation agreement stating the defendant would own the properties “as his sole and separate property.”

The judge also dismissed the defendant’s son, who held 50% interest in the property following his mother’s death, from the suit after finding he is not a proper party to the lawsuit.

Norfolk Circuit Court Chief Judge David W. Lannetti authored the decision in Joshua Britt Homes LLC v. Sloop Jr., et al. (VLW 022-8-051).

Properties for sale

In January 2022, Max Sloop entered separate one-page contracts to sell three Norfolk residential properties to Joshua Britt Homes LLC, or Britt Homes. The contracts said the conveyed titles to the properties would be “free, clear, and unencumbered” and closing would occur “on or before February 25, 2022.”

Max initially acquired the properties along with his wife in 1996 and held the properties as joint tenants until their 2010 divorce. The pair entered into a stipulation agreement in September 2009, which was incorporated into their divorce decree. It stated that Max “would own the Properties ‘as his sole and separate property.’”

But no deeds transferring Sloop’s ex-wife’s interest in the properties were ever recorded. The original first deed of trust is still in place.

Sloop’s ex-wife died in 2018, transferring her interest in the property to her son Jacob Sloop, her sole heir. The fact that Max did not have full title of the properties was discovered after Britt Homes hired Beach Title to research the properties’ titles to obtain a title insurance policy.

Because Jacob had interest in the properties, the title insurer required his signature on applicable conveyance documents to transfer the title to Britt Homes. As of the Feb. 25 contractual closing date, Jacob had not signed the conveyance documents. The sale was unable to close.

Britt Homes filed suit on March 3, seeking specific performance of the contracts against Max, asking the court to compel him to convey title or appoint a special commissioner to sell the properties, and seeking a “quiet title” action against Jacob “based on the doctrine of equitable conversion.”

Mutual mistake

Per the opinion, the defendants argued that both parties to the contract believed Max had exclusive title to the properties, and Jacob’s interest in the properties was only discovered after the contracts were executed during Beach Title’s title search.

“They argue that this mutual mistake in fact — that Max had full title — precludes specific performance and that Max cannot force Jacob to transfer his interest in the Properties,” Lannetti wrote.

The defendants asserted that, upon their divorce, Max and his ex-wife each owned a 50% interest in the properties, with the ex-wife’s 50% interest passing to her son following her death. As Max did not have full ownership, which the defendants argued “were conditions precedent to him receiving full title,” the defendants asserted it was “impossible for Max to transfer full title to Britt Homes.”

Furthermore, the defendants argued Britt Homes was precluded by law from being entitled to the damages sought and that any action against Jacob was invalid because he was not a party to the contracts.

In response, Britt Homes argued Max “had a contractual obligation to convey ‘free, clear, and unencumbered’ title to the Properties on the contractual closing date.” That obligation, according to Britt Homes, included “a duty to cure any title defects associated with the Properties prior to closing.”

Britt Homes also said no mutual mistake of fact existed, claiming Max was aware at the time of contracting that his ex-wife never transferred her interest to him, and that he “formed a plan to convey his interest… to his son… with the purpose of hindering and frustrating Britt Homes.”

The plaintiff claimed Max “was entitled to enforce the Contracts against Jacob Sloop at the time of closing by either voluntary signature or action to quiet title.”

Demurrer sustained

In evaluating the arguments, Lannetti first held that specific performance was unavailable “because there was a mutual mistake of fact underlying the contracts.”

“Although Britt Homes suggested at the Hearing that Max knew that he did not have full title to the Properties at the time of contracting, there are no related allegations in the Complaint,” Lannetti said.

The judge added that the complaint stated it was Beach Title’s title search, conducted after execution of the contracts, that revealed Jacob’s claim to the properties.

Lannetti wrote that any alleged plan between the Sloops “with the purpose of hindering and frustrating Britt Homes” is implied to have occurred after execution of the contracts.

“[T]he Court finds that there was a mutual mistake of fact, i.e., a belief that Max had full title to the Properties, and that there are no allegations of fraud at the time of contracting,” the judge wrote.

Additionally, Lannetti said specific performance was unavailable in this case because “Max does not have full title to the Properties to convey.”

“[T]he appropriate remedy when there is a mutual mistake in fact underlying a contract is recission,” Lannetti explained, which would return the parties to their precontract positions.

The court declined to view Jacob’s interest in the properties “as a cloud on title” or compel him to convey his interest in the properties to his father.

Lannetti also refused to declare Max as already having equitable full title resulting from the stipulation.

“It is undisputed that Max does not have full title to the properties,” the judge wrote, adding that Max’s full title was subject to certain conditions, including refinancing the properties in just his name, that were not met.

“Here, there is no allegation that the required conveyance… was ever made or recorded. Moreover, Britt Homes has not alleged that all required conditions were fulfilled in order to transfer title to the Properties,” Lannetti said.

He continued that Jacob’s interest in the property “is a legitimate legal interest” and the language in the complaint did not properly allege a quiet title action. Further, the judge found “insufficient allegations to support” Britt Homes’ standing to seek partition of the properties.

Finally, Britt Homes did not allege a viable breach of contract claim, again due to the mutual mistake in fact making the contract unenforceable. Because Britt Homes “includes no allegation in the Complaint that it has paid any purchase money,” there would be no damages to recover even if the contracts were enforceable, the judge said.

Lannetti sustained the defendant’s demurrer, finding “Britt Homes’s complaint alleges facts that constitute a mutual mistake of fact between Britt Homes and Max Sloop at the time of contracting.”

Because he was not party to the contract, Jacob was dismissed from the suit.