If proper procedure is not used to disapprove a real estate contract, you and your client could be stuck with a binding contract
Attorney review clauses have long been fixtures in transactions where a Realtor has drawn up the agreement of sale, yet there are still misunderstandings and misinterpretations of the clause’s meaning. Here’s a primer on how to accomplish attorney review for your client without endangering the real estate transaction or placing yourself in jeopardy.
Let’s start with the wording. N.J.A.C. 11:5-6.2 sets out the text of the attorney review clause required in every Realtor contract:
- Study by Attorney: The Buyer or the Seller may choose to have an attorney study this Contract. If an Attorney is consulted, the attorney must complete his or her review of the contract within a three-day period. This Contract will be legally binding at the end of this three-day period unless an attorney for the Buyer or the Seller reviews and disapproves of the contract.
- Counting the Time: You count the three days from the date of delivery of the signed contract to the Buyer and Seller. You do not count Saturdays, Sundays or legal holidays. The Buyer and the Seller may agree in writing to extend the three-day period for attorney review.
- Notice of Disapproval: If an attorney for the Buyer or the Seller reviews and disapproves of this contract, the attorney must notify the REALTOR(S) and the other party named in the Contract within the three-day period. Otherwise, this Contract will be legally binding as written. The attorney must send notice of disapproval to the REALTOR(S) by certified mail, by telegram or by delivering it personally. The telegram or certified letter will be effective upon sending. The personal delivery will be effective upon delivery to the REALTOR(S) office. The attorney may also, by need not, inform the REALTOR(S) of any suggested revision(s) in the Contract that would make it satisfactory.
Studied by Attorney
As used in Paragraph 1 of the administrative code provision, “studied by attorney” means that either the buyer or seller may choose to have an attorney study the contract.
A contract drawn up by a Realtor is only a proposed contract. The document does not actually take effect and become a contract until the three-day period has expired. The contract will be legally binding at the end of the three-day period, unless of course, an attorney for the buyer or seller has disproved the contract.
Moreover, the contract is the Realtor’s, not the attorney’s. It can be disapproved, but it cannot be altered or amended.
Many practitioners do not follow Paragraph 1’s instructions. Deviations take a number of forms, such as:
- An attorney faxes or sends a letter to the attorney on the other side of the real estate transaction, disapproving the contract without following the requirements set out in paragraph 3.
- An attorney faxes or sends a letter to the attorney on the other side of the real estate transaction approving the contract subject to changes.
- An attorney faxes or sends a letter to the attorney on the other side of the real estate transaction, requesting certain changes in the contract and requesting the attorney to sign the letter, without first obtaining specific written approval from the other attorney’s clients.
- An attorney faxes or sends an amendment to the contract to the attorney on the other side of the real estate transaction and requests the attorney to sign the amendment, without knowing whether that attorney has written approval or power of attorney to agree to the amendment.
None of the above procedures are authorized by paragraph one of the attorney review clause or by interpretive case law (see below).
Counting the Time
The three-day period begins to run from the date of delivery of the signed contract to both buyer and seller, not counting Saturdays, Sundays or legal holidays. The buyer and seller may agree in writing to extend the three-day period for attorney review.
The cases now hold that the attorney review period may be shortened to something less than three days by agreement between the parties, which should be clearly set out in a letter indicating that the attorney has reviewed the contract and agrees to complete review within the abbreviated period. Realtors cannot assist the parties desire to shorten the A/R period. It must be done through legal counsel.
Notice of Disapproval
If the attorney for the buyer or seller reviews and disapproves the contact, that attorney must notify the Realtor or Realtors and the other parties named in the contract within the three-day period. Notice of disapproval must be sent to the Realtors by certified mail, by telegram or by personal delivery. The telegram or certified letter will be effective upon sending. Personal delivery will be effective upon delivery.
Although here is no provision for faxing notices to the parties or e-mailing notices to the parties, recent case law has allowed substance to trump form when the parties received the proper notice via email.
Attorneys for the buyer and the seller sometimes do an end-run around the notice requirement of paragraph 3, but the fact is that the document is the Realtor’s – not the attorneys’— and so the Realtor must be properly notified.
An attorney may certainly inform the Realtor of any suggested revisions of the contract that would make it satisfactory. But an attorney is on very thin ice in disapproving a contract while requesting changes, because the entire transaction may fall. The attorney should notify his or clients of that possibility in advance.
As a practical matter, changes may be done by addendum instead of by disapproving the contract, so that the overall contract remains in full force and effect. If the attorney draws the addendum, there is no need to place an attorney review clause in the addendum.
If an attorney has not followed the review-clause procedure precisely, he or she may be at a great disadvantage in attempting to negotiate additional terms to the contract. If the procedure used by the attorney to disapprove the contract is not correct, there is a binding contract at the end of the three days, which legally cannot be changed.
The attorney is also in a very difficult position to determined when the three days have actually expired. The Realtor is in the best position to make that determination, since it is the Realtor and not the attorney who normally arranges for the fully signed contract to be given to the parties in order for the three-day period to begin to run.
Therefore, it is advantageous for all the parties that the attorney work closely with the Realtors in determining when the fully executed contract has actually been delivered to the last party to the transaction and, if there are changes to be made to the contract, to work with the Realtors to accomplish those changes without the necessity of disapproving the contract.
It is important to understand that the procedures set out in the attorney review clause must be followed to the letter to protect clients in the transaction and also in the event the matter proceeds to litigation. Lawyers should periodically review the procedure they use for the attorney review process not only to protect their clients, but to protect themselves as well.