Court of Appeal specifies consequences of rescinding contracts

Introduction
Decision
Effects of rescission on sale
Effects of rescission on long-term lease

Introduction

On 10 January 2018 the Court of Appeal ruled in a case concerning the sale of an unfinished apartment by the National Affordable Housing Company (a publicly owned social real estate developer). The property rights at issue consisted of a long-term lease. In exchange for a preferential price, the buyer had agreed to live in the apartment for at least 12 years. However, in contravention of this commitment, the buyer had moved elsewhere and rented the apartment to a tenant.

The seller sued the buyer, seeking to have the contract rescinded.

The first-instance court and the Court of Appeal granted the seller the right to terminate the sale. In so doing, the Court of Appeal set out the consequences of rescinding a contract.

Decision

First, the Court of Appeal recalled the principle that where a contract is rescinded, the parties' obligations must be restored to the state in which they were on the date of the contract's conclusion (retroactive rescission).

The court then observed that the contract in question had been divided into:

• a contract of sale, which was an instant obligations contract; and,
• a lease contract, which was a contract for successive performance.

As such, the court clarified that the retroactive rescission principle would have a different effect on each of the above contracts.

Effects of rescission on sale

The Court of Appeal held that the contract's rescission would have an ex tunc effect on the sale (ie, the contract would be revoked from its completion date). Hence, the parties had to proceed to reciprocal restitution in kind, consisting of:

• the return of the delivered object (ie, the apartment) to the seller; and
• the reimbursement of the sale price of the delivered object to the buyer.

As regards the sale price, this did not represent the apartment's actual value at the moment of the contract's rescission, but rather the price that the buyer had paid on the day of the contract's conclusion. The defaulting buyer was entitled to legal interest on this price, but this would accrue only from the date of the legal claim for interest and not from the date of payment of the sale price (ie, the date of the agreement's conclusion).

Further, when a buyer makes necessary improvements to a property, they may be compensated by the seller for the capital gain incurred by the improvement works rather than the actual costs of these works. Unnecessary expenditures need not be reimbursed.

Finally, the court ruled that the rescission did not nullify the penalty clause. Rather, this had to be maintained, as it had been designed to apply in the event of the contract's rescission due to a fault.

Consequences of rescission on long-term lease

The Court of Appeal made an important point regarding the annual fees of the long-term lease, which were obligations to be performed sequentially. To the extent that a consideration has been properly provided (in this case, the granting of the right to use the apartment by way of a long-term lease), the annual fees paid by the buyer are not reimbursable for the period in which the contract is properly carried out. Rather, the obligation to pay such fees ceases only for future payments.

In other words, if a contract involves sequential performance obligations such as the payment of annual fees, its rescission will be ex nunc (ie, valid only in the future) and these obligations will cease to apply only with regard to future payments.

For further information on this topic please contact Mathieu Laurent or Maurice Goetschy at Luther SA by telephone (+352 27484 1) or email (mathieu.laurent@luther-lawfirm.com or maurice.goetschy@luther-lawfirm.com). The Luther SA website can be accessed at www.luther-lawfirm.com.