The California State Board of Equalization (BOE) recently wrote a letter summarizing how a real estate owner can rescind a recorded deed that gave rise to a reassessable change in ownership. When real estate deeds are recorded, unless at least one of several exemptions from reassessment applies, the property is reassessed for tax purposes and the current owner’s taxes will be increased. But what if a deed was recorded by mistake and you want to undo the mistake so as to avoid the assessor’s tax reassessment? What can be done? If you qualify, you simply rescind the deed.
When you record a grant, quitclaim deed or other written instrument that conveys or transfers title to real property, it is done on a voluntary basis. A voluntary transfer of title to property is an executed contract which is subject to all the rules and laws dealing with contracts in general. As a result, since deeds are considered executed contracts that are subject to the rules applicable to contracts, they are subject to the California Civil Code. The Civil Code spells out the basis for which a contract can be rescinded.
California Civil Code Section 1688 provides that a contract is extinguished by its rescission. A contract may be rescinded either mutually if all the parties consent and if all parties are restored to their original position before the execution of the contract, or unilaterally under certain circumstances such as fraud, mistake or duress. Upon rescission, “the contract becomes a nullity; it and each of its terms and provisions cease to be subsisting or enforceable against the other party.” Section 1691 explicitly requires the restoration of the parties to the status quo for unilateral rescission. Although the Civil Code contains no similar explicit requirement for mutual rescission, case law is supportive of a requirement to return the parties to the status quo for mutual rescission. Also, since a mutual rescission has the effect of nullifying the contract, it follows that the parties to an executed contract should return each other to the position they were in prior to the execution of that contract.
Upon discover the facts which allow one to rescind, a rescission requires that a party to the contract must give notice of rescission to the other parties and to restore or offer to restore to the other party benefits received from the contract. The right to rescind must be exercised promptly within a reasonable time (depending on the facts and circumstances and whether the parties have availed themselves of the benefits under the contract).
By definition, and as a principle of logic, it follows that if a transfer meets the Civil Code requirements for a valid rescission, an assessor must accept the rescission as valid. However, an assessor has discretion to determine whether a transfer is, in fact, a valid rescission. If the parties to a contract to transfer real property have failed in fact to meet a requirement for rescission provided in the Civil Code, the assessor has the discretion to deny the rescission for property tax purposes.
Civil Code section 1689, which lists the reasons for which a contract may be rescinded, does not limit rescissions to those not motivated by property tax benefits. In other words, if requirements for a valid rescission are met, the motive for rescinding a contract is inconsequential to its validity. Thus, for instance, if parties contract to transfer real property and subsequently discover that the transfer results in an unintended change in ownership, the parties may rescind the contract in order to avoid the change in ownership reassessment if all statutory requirements are met. A mutual rescission should be recognized if all parties to the transaction consent, all parties are restored to their original positions before the transfer, the rescission is made promptly and within a reasonable time (to be determined on a case-by-case basis) with consideration given to whether the parties have availed themselves of the benefits under the contract, and the rescission agreement does not include terms different from a return to the status quo.
Once a transfer of real property is rescinded and the parties ate placed in the same position they were in before the contract was executed, the value of the real property reverts to its previous adjusted base year value prior to the transfer. However, the liabilities established while the contract was in existence are not extinguished. Therefore, PLACING THE PARTIES IN THE POSITION THEY HELD BEFORE THE TRANSFER WILL NOT RESULT IN A REFUND OF TAXES PAID WHILE THE CONTRACT WAS IN EFFECT.