Rochester, NY - The Court of Appeals last week upheld a party’s right to back out of a real estate contract for any or no reason, if a contingency clause commonly used in Upstate real estate contracts is invoked.

“Where a real estate contract states that it is ‘subject to’ or ‘contingent upon’ the approval of each party’s attorney, this language means what it says: no vested rights are created by the contract prior to the expiration of the contingency period,” Judge Susan P. Read wrote for the state’s highest court in Moran v. Erk, 176.

John Anderson, a partner at Harter Secrest & Emery LLP and board counsel for the Greater Rochester Association of Realtors (GRAR), applauded the decision.

“I think it adds certainty to an area of the law that was begging for certainty, and it ultimately protects the confidential nature of the attorney-client relationship in residential real estate matters,” he said.

Attorney Disapproves Contract

The case involved an Erie County couple who signed a $505,000 contract to buy a house on Salt Road in the Town of Clarence. The Erks changed their minds a few days later and instructed their attorney to disapprove the contract, which had a three-day attorney approval contingency clause.

The Erks never claimed anything was amiss in the contract — they simply wanted to live closer to Buffalo, where both are practicing obstetricians/gynecologists. Their attorney, Amy Stromberg of HoganWillig, disapproved the contract without stating a reason.

The Morans put their house back on the market and sold it three years later for $120,000 less than the Erks’ contract price. They sued for breach of contract, claiming the Erks acted in bad faith by not allowing their attorney to consider the contract.

Erie County Justice Joseph P. Glownia awarded the Morans $234,065.75 — the difference in the home’s sales price, plus interest. The Appellate Division, Fourth Department upheld the ruling, citing its decision in McKenna v. Case, 123 AD2d 517 (1986). McKenna found that a lawyer’s disapproval under such a contingency clause would be invalid if “occasioned by bad faith.”

The Court of Appeals reversed in a decision issued last week. Invoking a contingency clause within the stated time period does not violate the state’s implied covenant of good faith and fair dealing, the state’s highest court found.

The implied covenant provides that neither party shall destroy or injure the other party’s right to receive the fruits of a contract, the Court of Appeals noted, citing 511 W. 232nd Owners Corp. v. Jennifer Realty Co. 98 NY2d 384 (1995). In Moran v. Erk, however, “any ‘fruits’ of the contract were contingent on attorney approval,” the court said, rejecting the Morans’ argument that there was an implied limit on the attorney’s discretion.

“Clarity and predictability are particularly important in the interpretation of contracts,” the appeals court continued.

A bad faith rule would introduce “chanciness” into otherwise unambiguous agreements and “likely require a factual examination of communications between the disapproving attorney and that attorney’s client.”

Requiring an attorney to testify about client communications conflicts with the duty to preserve a client’s confidences and secrets, and could create an incentive for lawyers to avoid candidate communications with their clients, the court said.

The attorney approval contingency clause ensures that real estate brokers avoid the unauthorized practice of law and allows the contracting parties to have agents representing their legal interests, the Court of Appeals said.

Form Contracts Common Upstate

Form residential real estate contracts typically are used Upstate, while the custom Downstate is for attorneys to draft such contracts on a transaction-by-transaction basis.

The form contract at issue is copyrighted and approved by the Greater Buffalo Association of Realtors Inc. and the Bar Association of Erie County, and also is used throughout Western New York. It is available on the Erie County bar’s Web site.

Anderson said the Monroe County Bar Association and GRAR regularly review the form purchase contract commonly used in the region and likely will study the language to ensure it falls within the scope of Moran v. Erk.

“I think benefit of the attorney approval clause is that it enables [people] to enter into the transactions, but have a lawyer review” and void it if there’s any problem, Anderson said.

Asked how often he thinks that happens in Rochester, Anderson noted that buyers and sellers regularly invoke the clause, “although I wouldn’t say it’s often,” he added.

Problems might arise if a transaction warrants use of a different type of contract or if additional information becomes known to the buyer or seller after signing. Either party could have a change of heart, change of life circumstances, new information about the property, problems with the contract — “anything else you can think of. Every case is specific or different,” Anderson said. “What the court says is that, in most circumstances, the reasons are irrelevant.”