The contract and rider were “form documents . . . approved by the Greater Buffalo Association of Realtors Inc. and the Bar Association of Erie County.” Following contract execution, the purchasers “developed qualms” about purchasing the home and ultimately purchased a different home. As a result of their qualms, “they instructed their attorney to disapprove the contract,” and she did so within the three-day period for invoking the contingency.
The sellers, who had moved out of their home before the contract had been signed ultimately sold the home for about $120,000 less than the subject contract price. The sellers sought to recover the difference between the contract price and the eventual sale price as damages, together with carrying costs for the three years that had elapsed between the contract cancellation and the ultimate sale.
The trial court held for the sellers, saying that “where a Buyer acts in bad faith by instructing his attorney to disapprove a real estate contract, the condition that the contract be approved by an attorney is deemed waived and a contract is formed.” The Appellate Division affirmed. However, the Court of Appeals reversed.
The Court explained:
The sellers argued that the contract created an “implied limitation upon an attorney’s discretion to approve or disapprove the contract.” The court explained that “[w]e do not ordinarily read implied limitations into unambiguously worded contractual provisions designed to protect contracting parties.” The court explained that the implied covenant of good faith and fair dealing is intended to bar conduct that would “have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Here, “the plain language of the contract . . . makes clear that any ‘fruits’ of the contract were contingent on attorney approval, as any reasonable person in the [seller's] position should have understood . . . .”
The court also explained that “considerations of clarity, predictability, and professional responsibility weigh against reading an implied limitation into the attorney approval contingency. Clarity and predictability are particularly important in the interpretation of contracts . . . .”
The court expressed concern that “[r]eading a bad faith exception into the [contingency] would create . . . a regime where ‘question[s] of fact precluding summary judgment’ would ‘usually [be] raise[d]‘ by a disappointed would-be seller or buyer any time an attorney disapproved a real estate contract pursuant to” a contingency clause. The court emphasized that in an area where “clarity and predictability are particularly important, ‘this novel notion would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules’ of plain-text contractual language . . . .”
Additionally, the court noted that “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 the attorney’s client . . . .” The court was concerned that a “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 . . . .” The court said that “the threat to attorney-client confidentiality under a bad faith regime would harm the attorney-client relationship itself in the context of real estate transactions. A diligent attorney, cognizant of the risk of being subpoenaed to testify as to the basis for a disapproval, would face a perverse incentive to avoid candid communications with his or her client regarding a transaction in which the attorney is supposed to represent the client’s legal interest.” The court also noted that New Jersey had also declined to apply a good faith test to a contingency clause in a real estate contract.
Accordingly, the court 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. Since no explicit limitations were placed on the attorney approval contingency in the contract in this case, the [purchaser's] attorney’s timely disapproval was valid, and the contract is void by its express terms.”
Accordingly, the complaint was dismissed.
Comment: The court was concerned, inter alia, that the implied covenant of good faith and fair dealing would be used to vary terms of a clearly worded contract provision in an area which requires “clarity and predictability.” The court also recognized the practical problem that attorneys who reject a contract would be subjected to discovery with respect to their private communications with their clients.
In weighing the rights of a buyer and a seller, where a contract has incorporated an explicit attorney contingency provision, the court was concerned that significant problems would arise if a buyer’s attorney, who had timely rejected a contract pursuant to an attorney approval contingency clause, were to be deposed by a seller’s litigator. A seller knows that the contract is contingent and will not ripen into a binding contract until the attorney contingency period elapses. Therefore, the seller should not be able to use the bad faith argument to convert a contingent contract into a firm contract on the ground that a purchaser’s attorney lacked a good faith reason to reject the deal.
Moran v. Erk, New York State Court of Appeals, No. 176, decided Nov. 25, 2008, Ch.J. Kaye and Ciparick, Graffeo, Smith, Pigott and Jones concur. Decision by Read, J.
Rent Stabilization – Multiple Horizontal Dwelling – Art. 78 Review Not Available to Challenge Division of Housing and Community Renewal (DHCR) Procedures Which Are Merely Inane or Burdensome – Ex Parte Discussions by DHCR Fact Finder Violated Owner’s Due Process Rights
This Art. 78 proceeding was commenced by an owner against the state Division of Housing and Community Renewal (DHCR) to set aside a DHCR determination (determination) which denied the owner’s petition for administrative review (PAR) on the ground that the decision was arbitrary and capricious. The PAR confirmed a DHCR rent administrator’s ruling that the owner’s building (building) was part of a horizontal multiple dwelling (HMD).
The underlying issue was “whether two adjacent buildings owned by [the owner]” since 1985, constitute an HMD within the meaning of the Rent Stabilization Law (RSL) and the Emergency Tenant Protection Act (ETPA). The building has less than six residential units, but if the two buildings constitute an HMD, the number of residential units exceed the threshold for regulation under the RSL and ETPA.
The two buildings had been built at different times by separate builders for separate owners. In 1954, they came under joint ownership. The buildings had “different designs, . . . heights, architectural features, layouts and certificates of occupancy and multiple dwelling registrations.” Since 1954, “the buildings have remained in single ownership, have been jointly managed, and some building systems have been modified from time to time to serve both buildings.” Rent Stabilization Code (RSC) §2522.11(d) provides:
