real estate

Cancel sale for lack of mental capacity?

Steve McLindenDear Real Estate Adviser,
My aunt recently suffered a head injury. Very soon after she got out of the hospital, a nephew approached her with a contract to purchase her house, accompanied by a "lawyer," who turned out to be a guy who worked with his girlfriend. My aunt, who in my opinion wasn't in her right mind at the time, signed it with no witnesses or legal advice. Other family members, who weren't notified until after the sale, want to know if this was a legitimate transaction and what they can do about it.
-- Angelo

Dear Angelo,
It may not be a legal transaction, but the burden of proof would be on her or the family, or both. The question will be: Did your aunt have the "capacity to contract" at the time she signed the agreement? Oftentimes, an alleged victim can have a contract voided if it can be shown that he or she lacked mental capacity at the time of signing -- even if that incapacity was temporary.

However, laws that define the mental capacity of a contract signee, as well as their interpretations, can vary greatly by state. More commonly, cases are decided using a "cognitive test" that determines the degree to which a person understood the effect and meaning of a contract's wording before signing. However, other states have an "affective test," which asks whether the other party (the nephew in this case) had reason to know of the signee's mental condition. Others have a "motivational test," which measures the signee's ability to judge whether to enter into an agreement.

In support of such cases, there can be an "undue influence" element considered, which hinges on whether there was some type of improper persuasion that caused the alleged victim to enter into an unfair transaction. This is particularly applicable if the victim had a close, trusting relationship with the buyer that had made her believe he would not act against her interests -- which could be the case here.

Certainly, the best defense strategy will have to be determined by a qualified attorney. That attorney will want to know if your aunt is unhappy with the transaction now that she has recovered, presumably, and is back in her right state of mind again and wants to initiate litigation. If she is not contesting the deal, there's probably no sense in the rest of the family getting involved. If she is indeed seeking to rescind it, she will likely need to produce some kind of medical determination supporting her condition after her injury. And I hate to mention this, but if your aunt sold the house to that relative at a significantly discounted sum, there may be gift tax implications for her this tax year.

Also, your nephew's pal should know it's illegal to practice law without a license in all 50 states. If the girlfriend's co-worker identified himself as an attorney and was not one, he was breaking the law. In most cases though, a person may talk legal jargon, look the part and even carry a briefcase, but will be careful not to actually identify himself or herself as a lawyer.

By the way, the best way loved ones -- particularly older ones -- can protect themselves in the event of incapacitating illness or injury is to assign a power of attorney to a trusted individual who can make decisions on their behalf.

At face value, it does sounds like the nephew and a couple others may have conspired to weasel your aunt out of more money for the home. If that's the case, I can only hope they don't benefit from that effort and are served an appropriate dose of karma.

Good luck!

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