Opinion ID: 1659383
Heading Depth: 1
Heading Rank: 2

Heading: the fair rental value credit

Text: It is generally recognized that in an action for rescission of a contract in a court of equity, the court applies equitable principles in an attempt to restore the status quo or place the parties in their respective positions at the time of the sale. Bates v. Simmons, 259 Ark. 657, 536 S.W.2d 292 (1976). The equitable objective of a return to the status quo as the result of a rescission is consistent with the equitable maxim he who seeks equity must do equity. The practical meaning of this maxim is that whatever the nature of the remedy sought, the court will not give equitable relief to one seeking it unless he will admit and provide for all of the equitable rights, claims and demands of his adversary growing out of, or necessarily involved in, the subject matter of the controversy. Sample v. Sample, 250 Ark. 731, 466 S.W.2d 935 (1971). Having determined that rescission is the proper remedy in this case, it is incumbent upon this Court to assess the propriety of the lower Court's approach to restoring the status quo. Without question, our previous holdings make plain that a purchaser entitled to rescission has some obligation to the vendor for the purchaser's possession and/or use of the property in question. In Bates v. Simmons, cited supra, we endorsed the proposition that, in a rescission action, the requirement that the purchasers pay rent to the seller for the time the property is occupied is equitable. In Dunham v. Phillips, 154 Ark. 87, 241 S.W. 361 (1922), we held that where a buyer of a fruit orchard was entitled to rescind the purchase and recover the purchase money, he had a duty to restore the land and account for the rents and profits. In Dunham , the rescinding purchaser was ordered to pay the vendor the value of the crop raised and sold on the property while the land was in the purchaser's possession. The problem we face in this case is how to quantify what a rescinding purchaser owes to the vendor in attempting to restore the status quo. In contrast to the facts in both Dunham and Bates , the property here was only partially occupied during the purchaser's possession. The income generated from that partial possession is readily known and without question must be returned to the vendor (NBA) to restore the status quo. The lower Court properly so ordered. However, the lower Court's additional award of $194,374.87 to the vendor NBA as reasonable rental value of the unoccupied portion of the property during Bond's time of possession, even though the evidence showed that at all times this portion of the property was unimproved, unoccupied and had never generated any rentals, is troublesome. A review of the Arkansas land sale rescission cases reveals no instance where the restoration of the status quo resulted in the award to the vendor of reasonable rentals where the property in question was, as here, unoccupied and unimproved before, during and after the sale. Further, exhaustive research in other jurisdictions has failed to turn up any similar holding. However, guidance on this issue can be found in the Restatement of Restitution. Section 157 of the Restatement of Restitution states: (1) A person under a duty to another to make restitution of property received by him or of its value is under a duty: (a) to account for the direct product of the subject matter received while in his possession, and (b) to pay such additional amount as compensation for the use of the subject matter as will be just to both parties in view of the fault, if any, of either or both of them. According to comment b of Section 157, direct product means that which is derived from the ownership or possession of the property. Thus, a person who has a duty to make restitution of the title to land is under a duty to restore amounts received by him as rent upon a lease existing before he acquired title. This is true regardless of the relative fault as between the parties. In land transactions, where the recipient of the land is not more at fault than the vendor, the recipient is under no duty to pay for the value of the use of the land unless it was actually used. If actually used, he is required to pay the reasonable value of the use or what he received therefrom, at his election (see comment d, Section 157). This approach does find support in cases from other jurisdictions, although these cases do not exactly mirror the fact pattern of the present case. For example, in a rescission case involving misrepresentation, the Oregon Court in LeTrace v. Elms, 40 Or.App. 561, 595 P.2d 1281 (1979) stated that buyers were only chargeable to the extent of the benefit actually derived from the use of the land during their occupation. It should also be noted that in a myriad of rescission cases involving actual fraud, Courts of other jurisdictions have held that a rescinding purchaser, in addition to restoring the vendor to the property which was the subject of the sale, had a duty to reimburse the vendor only to the extent that the purchaser has profited by his possession of the property. See e.g., Zimmerman v. Kent, 31 Mass.App.Ct. 72, 575 N.E.2d 70 (1991); West v. McCoy, 70 Cal. App.3d 295, 138 Cal.Rptr. 660 (1977). We believe the rule to be that in a case requiring restoration or return to the status quo, we must apply equitable principles in each case so as to best accomplish the undoing of wrong (See Bates v. Simmons, cited supra). We think that the parameters of this duty to balance as set forth in the Restatement of Restitution, and recounted above, best prescribe the equitable resolution of the present case. Accordingly, we reverse that portion of the Chancellor's Decree below which granted NBA credit for the reasonable rental value of the property beyond the actual rents received, which the Court found to be $194,374.87. In our view, the equities of this case do not support the award to NBA of the reasonable rental value of the property. The evidence showed that the unimproved portion of the property had never generated income and to award NBA credit for theoretical rentals unjustly rewards NBA and places it in a better position than it had been in at the time of the sale. Similarly, we note that had NBA remained the owner of the land (and that is the theoretical effect of rescission), the taxes for 1988-90 (and pro rata 1991) would have been its obligation and it should not benefit by being relieved of that burden. As we view it, there is no evidence to indicate that NBA would have received $194,000 (or anything near) had it remained the owner and possessor of the property throughout and it would have had to pay the taxes. The theory of rescission is to accomplish that result as nearly as possible and we think our holding does that.