If proper procedure is not used to disapprove a real estate contract, 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 misunderstanding and misinterpretations of the clause’s meaning. 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 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 this contract within the three day period. Otherwise, this contract will be legally binding as written. The attorney must send notice of the disapproval to the Realtor(s) by certified mail, by telegram or be 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, but need not, inform the Realtor(s) of any suggested revision(s) in the Contract that would make it satisfactory.
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 disapproved the contract.
Moreover the contract is the realtor’s, not the attorney’s. It can be disapproved and may be altered or amended by request. An attorney may certainly inform the realtor of any suggested revisions of the contract that would make it satisfactory. But an attorney is on thin ice in disapproving a contract while requesting changes, because the entire transaction may fail. The attorney should notify his or her 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 draw the addendum, there is no need to place an attorney review clause in the addendum.
The new attorney review clause
In 2017 a case came before the New Jersey Supreme Court that addressed the procedures used in the New Jersey Real Estate Industry for many years, namely the method of delivery of the notice of disapproval. The case was Conley v Guerrero. The summary of the case is set out herein:
In 1983, the New Jersey Supreme Court affirmed a final consent judgment for a settlement agreement between the New Jersey State Bar Association and the New Jersey Association of the Realtor Boards. The terms of the settlement provided that real estate brokers and salespersons may prepare contracts to sell or lease real property, so long as a standard form is used that includes a three day period for attorney review. Plaintiffs Michael Conley Jr and Katie M. Maurer (Buyers) made an offer to purchase a condominium from defendant Mona Guerrero (Seller), and, a few days after, the Seller signed and executed the contract. Before the three day attorney review period expired, the Seller’s attorney sent the Buyer’s attorney and their realtor notice of disapproval by email and fax, rather than by the methods approved under the 1983 holding and prescribed in the parties’ contract (certified mail, telegram or personal service).
The Buyers sued for specific performance, claiming the contract was enforceable because the Seller’s notification of disapproval was sent improperly. At issue before the Supreme Court was whether the attorney review provision of a standard form real estate contract had to be strictly enforced, thereby nullifying the Sellers’ notice of disapproval and requiring enforcement of the real estate contract. The Court concluded that, because the Buyers received actual notice of disapproval within the three day attorney review period by a method of communication commonly used in the industry, the notice of disapproval was valid. The court also exercised its constitutional authority over the practice of law and found that an attorney’s notice of disapproval of a real estate contract could be transmitted by fax, email, personal delivery or overnight mail with proof of delivery. Notice by overnight mail will be effective upon mailing. The attorney review period within which this notice must be sent remained three business days.