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New York’s highest court has considered whether an attorney exercising a purchase contract’s attorney review clause to cancel a purchase agreement must identify the basis for canceling the agreement.
In December 1995, Mehmet and Susan Erk (“Buyers”) signed an agreement to purchase a home owned by James and Kathleen Moran (“Sellers”) for $505,000. The purchase agreement contained an attorney review clause, giving the attorney for either party the right to void the agreement within three business days after the attorney’s receipt of the agreement. The Buyers had reservations about purchasing the home for the agreed-upon price, and so their attorney voided the contract within the required timeframe.
The Buyers subsequently purchased another home and the Sellers eventually sold their home in 1998 for $385,000. The Sellers filed a lawsuit against the Buyers, seeking the difference in price between the two homes as well as the carrying costs, as the Sellers had moved out of the home in September 1995. Based on New York case law, the trial court ruled in favor of the Sellers and awarded them $234,065.75. The appellate court upheld the ruling, and the Buyers appealed.
The Court of Appeals of New York reversed the lower courts and dismissed the lawsuit. The court first considered the historical purpose of the attorney approval clauses. These clauses existed to prevent real estate professionals from engaging in the unauthorized practice of law. The clause also gives the parties the opportunity to protect their legal interests because it prevents any contractual rights from vesting in either party until after the completion of the attorney review period.
The Sellers argued that the attorney review clause was limited by the implied covenant of good faith and fair dealing that exists in every contract. Because of this covenant, the Sellers argued that the Buyers’ attorney must identify a legitimate reason for canceling the agreement and could not act in bad faith when canceling the agreement. The Sellers pointed to an earlier New York case in support of this conclusion.
The court rejected this argument, finding that the Sellers and lower courts had misunderstood the implied covenant of good faith and fair dealing. This implied covenant prevents parties to a contract from undertaking an action which will prevent the other party from enjoying the “fruits” of the contract. However, the attorney review clause was a contingency contained within the contract, and so the parties had agreed that the contractual “fruits” were contingent upon this clause. The attorney review clause did not require an attorney to identify his or her reason for voiding the contract. Therefore, there was no breach of the implied covenant of good faith and fair dealing when the Buyers’ attorney voided the contract; instead, the Buyers and their attorney were merely exercising their contractual rights.
The court also cited policy arguments in support of reversing the lower courts. First, there needs to be predictability in purchase contracts and creating this “bad faith” requirement would create the possibility for legal challenges whenever a party exercised this clause. The threat of litigation could linger over a party for years, as it did in this case when the Buyers were sued almost three years after exercising their right to void the purchase agreement. Second, creating this bad faith requirement could force courts to investigate confidential attorney/client communications to determine whether the clause was exercised in bad faith or not. For all of these reasons, the court reversed the trial court and dismissed the Sellers’ lawsuit.
Moran v. Erk, 2008 N.Y. Slip Op. 09255, 2008 WL 4975380 (N.Y. Nov. 25, 2008), and Order Reversed by 11 N.Y.3d 452, 901 N.E.2d 187, 872 N.Y.S.2d 696.
Editor’s Note: The New York State Association of REALTORS® Legal Action Fund submitted an amicus curiae brief seeking reversal of the lower court decisions, arguing that an attorney did not need to state a reason for voiding a real estate contract during the approval period.