Attorney Contingency Clauses in Upstate New York.

Beware of what you are signing in an upstate New York real estate transaction. The problems and perils of non-lawyers having contracts signed prior to attorney review.

New York State’s highest court, the Court of Appeals, recently considered a frightening set of facts and protected the attorney-client relationship. But, beware.

In this case, the defendants signed a real estate contract to purchase the home of plaintiffs. The contract contained a rider with an “attorney approval contingency” stating as follows:

“This Contract is contingent upon approval by attorneys for Seller and Purchaser by the third business day following each party’s attorney’s receipt of a copy of the fully executed Contract (the “Approval Period”). . . . If either party’s attorney disapproves this Contract before the end of the Approval Period, it is void and the entire deposit shall be returned.”

Both the contract and the rider were form documents copyrighted and approved by the Greater Buffalo Association of Realtors, Inc. and the Bar Association of Erie County. After signing the contract, the defendants developed qualms about purchasing the plaintiffs’ house, and instructed their attorney to disapprove the contract within the three-day period for invoking the attorney approval contingency.

Three years later, the Plaintiffs finally sold the house at a loss and sued for breach of contract and the “covenant of good faith and fair dealing.” Both the trial court and the mid-level appellate court entered judgment against the defendants finding, in essence, that they had negotiated in “bad faith” by cancelling the contract within the three day right of attorney review.

In reversing, and dismissing the complaint, the Court of Appeals found two reasons to dismiss the complaint:

First, the plain language of the contract in this case makes clear that any “fruits” of the contract were contingent on attorney approval, as any reasonable person in the defendants’ position should have understood that they could cancel for attorney review.

Second, the court held

any inquiry into whether a particular attorney disapproval was motivated by bad faith will likely require factual examination of communications between the disapproving attorney and that attorney’s client (see e.g. McKenna, 123 AD2d at 517 [“defendant acted in bad faith by instructing his attorney to disapprove the contract”] [emphasis added]; Moran v Erk, 45 AD3d 1329, 1329 [2007] [“the evidence supports the court’s determination that defendants acted in bad faith by instructing their attorney to disapprove the contract”] [emphasis added]). That is, the disapproving attorney will be subpoenaed to testify about communications the disclosure of which might be detrimental to that attorney’s client — a direct conflict with an attorney’s duty to preserve a client’s confidences and secrets (see 22 NYCRR 1200.19[a] [defining “secret” as “information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client”]).

Stated simply, if the attorney has to testify as to the reasons for disapproval, then it chills the right of the client to speak, and for the attorney to listen.

The bottom line– the Court of Appeals held that where a real estate contract contains an attorney approval contingency providing that the contract is “subject to” or “contingent upon” attorney approval within a specified time period, and no further limitations on approval appear in the contract’s language, an attorney for either party may timely disapprove the contract for any reason or for no stated reason.

Peter’s bottom line– Don’t sign a contract until you have reviewed it with your New York State real estate attorney. Here’s the full case.–Case-Attorney Contingency Clause.