Discounted Sale of Minority Interest in Property Not a Mutual Mistake

July 19, 2013 | Roger McEowen

A mutual mistake in the formation of a contract is a material mistake of belief not in accord with the facts that exists at the time the parties formed the contract. Generally, a mutual mistake will allow the party adversely affected by the mistake to void the contract unless the party is the one who bears the risk of the mistake such as through allocation in the agreement or the party knows it has limited knowledge. The existence of a mutual mistake must be proven by clear, satisfactory, and convincing evidence.

In this case, a grandson was given a one-fifth undivided interest in his maternal grandparents’ 80 acre parcel, which included the grandparents’ residence, building, timber, and crop land. The grandson’s siblings were the other four tenants in common. The grandson and his siblings had been raised by these grandparents after their mother died in a traffic accident. Although the grandparents did not legally record a life estate in the property, the family understood that it was intended.

The grandson had a history of substance abuse and lived a bit of an itinerant lifestyle. In 2010, he was broke and unemployed. He offered to sell his one-fifth interest to his paternal uncle. At the time, the grandson was “sober” and “looked pretty good.” The uncle met with the grandson a couple times before purchasing the interest. One time the uncle tried to talk the grandson out of selling his interest. Another time, the uncle offered to trade a house for the real estate. Instead, the grandson viewed the property as an asset, but did not derive any income from it and wanted to sell it. He also did not want to be tied down with the house offered by the uncle.

The grandson set a price of $750 an acre. The sale was discussed several times over several days before reaching an agreement. Also, they spoke to the grandson’s family members to tell them the uncle was thinking about buying the land. No family member objected except one who wanted to buy the property himself. The grandson, however, was estranged from that uncle and refused to sell the property to him.

A deed was drafted by the uncle’s attorney and the grandson went to the attorney’s office to sign the deed and convey the property. The grandson was sober and knew about the land and what he was doing.

Shortly after the conveyance, the grandson’s brother filed a petition for conservatorship of the grandson and alleged the grandson’s decision-making capacity was significantly impaired. Co-conservators were assigned by the district court for the grandson. The Co-conservators brought the current suit to set aside the sale to the uncle.

After trial, the court held that there were no mental deficiencies in the record, that there was no undue influence by the uncle or fraudulent misrepresentations made by the uncle, nor was there any influence of drugs or a lack of mental capacity at the time of the conveyance to overturn the sale. The court concluded, however, that there was a mutual mistake on the part of the grandson and the uncle that the grandson’s minority interest warranted a discounted value so the conveyance should be rescinded. The uncle appealed.

On appeal, the court reversed. It held that the assumption that the grandson’s minority interest warranted a discount in the value of the real estate was an assumption that established a mistake. Evidence was presented by a real estate broker that a parcel held by five persons as tenants in common would be discounted due to the fact four other people were involved in the management of the land. The court also noted that a lack of marketability may warrant a discount and the fact that the grandparents continued to live on the land rent free could also contribute to the issue. Based on these facts, the court held that clear and convincing evidence did not support a finding that there was a mistake in discounting the value of the property because some discount was warranted.

The appellate court also held that a mistake as to whether a partition action was available did not warrant a rescission. The court also noted that even if the purchase price was less than market-value, that fact did not indicate a mistake because the grandson and the uncle could agree to whatever purchase price they chose. The evidence showed there were familial strains, the grandson did not want the land and did not see any benefit to owning it, and he wanted to sell the land and sever ties with that side of his family. The court noted that the plaintiff’s belief that the price was not fair and that the grandson made a bad decision does not rise to the level of a mistake entitling a person to avoid legal obligations.

The court also agreed that no evidence suggested that the grandson lacked mental capacity to convey the property at the time the deed was signed.  Stegen v. Hanson, No. 3-557/12-1980, 2013 Iowa App. LEXIS 776 (Iowa Ct. App. Jul. 10, 2013).