Thomas R. Lloyd owned and occupied his home in San Francisco, and fell behind on his mortgage payments. In an effort to avoid foreclosure, Lloyd sold his home to equity buyer Jeffrey E. Hoffman and simultaneously signed a leaseback/lease-option agreement under which Lloyd would continue to live in and make lease payments on his home, and for two years would have the right to purchase the home back.

The sales contract did not notify Lloyd of his rights under California’s Home Equity Sales Contract Act ("HESCA"), California Civil Code Section 1695, et seq., which was applicable because his home was in foreclosure at the time of the sale.

HESCA is a statute that protects owners of homes in foreclosure, in part by requiring that equity purchasers inform distressed homeowners of their right to rescind the sale.

Thomas R. Lloyd owned and occupied his home in San Francisco, and fell behind on his mortgage payments. In an effort to avoid foreclosure, Lloyd sold his home to equity buyer Jeffrey E. Hoffman and simultaneously signed a leaseback/lease-option agreement under which Lloyd would continue to live in and make lease payments on his home, and for two years would have the right to purchase the home back.

The sales contract did not notify Lloyd of his rights under California’s Home Equity Sales Contract Act ("HESCA"), California Civil Code Section 1695, et seq., which was applicable because his home was in foreclosure at the time of the sale.

HESCA is a statute that protects owners of homes in foreclosure, in part by requiring that equity purchasers inform distressed homeowners of their right to rescind the sale. A distressed owner/seller’s right to rescind the sale continues until the owner/seller is informed of the right to rescind. Further, HESCA expressly provides that "(a)ny waiver of the provisions of (HESCA) shall be void and unenforceable as contrary to the public policy."

Lloyd defaulted on his lease payments and, in the course of an eviction proceeding, executed a general release of all known and unknown claims.

Several months later, Lloyd filed for bankruptcy and rescinded the foreclosure sale of his home, invoking HESCA. When the home’s buyer and Lloyd’s creditors challenged the rescission, the bankruptcy court ruled in favor of Lloyd on grounds that the buyer never informed Lloyd of his rights under HESCA.

On initial appeal, the district court also ruled in favor of Lloyd, finding that the general release he signed did not release his rights under HESCA, because he was neither aware nor notified of any such rights.

When the buyer/creditor appealed to the next level, the Court of Appeals affirmed the lower court’s ruling. The appellate court referenced the district court’s explanation that "where, as here, an equity purchaser fails to provide a sale contract that complied with the requirements of HESCA, the right to rescind is not extinguished and survives even after the execution of a broad release of all known and unknown claims."

Accordingly, the district court held and the Court of Appeals affirmed, in order to block a distressed seller’s rescission of a sale contract under HESCA, "the court will require evidence that the equity purchaser has notified the equity seller of his right to rescind, and that the seller has actual understanding of the rights he relinquishes under the release."

Because the equity purchaser in this matter was not able to show that he notified or explained Lloyd’s HESCA rights to him at any time, Lloyd’s right to rescind the sale contract endured, and the buyer’s challenge to the rescission failed. The bankruptcy court and district court rulings were upheld.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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