"Attorney Approval Contingency" Clause in Real Estate Contracts Enables Parties to Void Executed Contracts and Does Not Violate Covenant of Good Faith and Fair Dealing
March, 2009
In Moran v. Erk, 11 N.Y.3d 452 (2008), the Court of Appeals of New York observed that "attorney approval contingency" clauses enable either side's attorney to void executed contracts for any reason, or for no reason at all. The "attorney approval contingency clause" provides that attorneys will have the final word on the validity of a contract, even once an expectation of performance may already have been created. Id.
On December 13, 1995, Defendants Mehmet and Susan Erk (the "Erks") signed a real estate contract to purchase the home of plaintiffs James and Kathleen Moran (the "Morans"). The home was a 5,000 square-foot ranch-style home located in Clarence, New York. The Contract of Sale, which was executed by the Morans on December 22, 1995, provided for a purchase price of $505,000.00, and contained a Rider with an "attorney approval contingency." The clause read 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.
Id. at 454.
The Contract of Sale and the Rider containing the "attorney approval contingency" were form documents approved by both the Greater Buffalo Association of Realtors, Inc. and the Bar Association of Erie County, which posted links to the forms on their website. The website explicitly stated that if the "attorney approval contingency" clause was removed or modified, the Bar Association's approval would be automatically revoked.
Soon after executing the contract, the Erks began having second thoughts about purchasing the home. They discussed their concerns with friends and relatives and ultimately decided that they were going to purchase a different residence. Still within the Approval Period, they instructed their attorney to disapprove the contract and their attorney did so without providing any reason or justification. As a result, the Morans were forced to keep their house on the market for three more years and eventually sold it "at a loss" for just $385,000.00. Soon after, they brought suit against the Erks alleging breach of contract. The Morans sought to recover the $120,000.00 differential between their contract price and the eventual sale price of the home, as well as additional "carrying costs" for marketing the property for an additional three years.
At trial, the Morans relied upon McKenna v. Case, 507 N.Y.S.2d 777 (4th Dep't 1986), and argued that the Erks instructed their attorney to disapprove an executed contract was a breach of an implied covenant of good faith and fair dealing. The trial court agreed and the Appellate Division subsequently affirmed the lower court's decision.
Rejecting McKenna and refusing to impose a good faith test on the "attorney approval contingency" clause, the Court of Appeals reversed the decision of the lower courts and dismissed the Morans' damages claim. The Court of Appeals stated:
We do not ordinarily read implied limitations into unambiguously worded contractual provisions designed to protect contracting parties. The Morans, however, contend - and the lower court apparently agreed - that the implied covenant of good faith and fair dealing implicitly limits an attorney's ability to approve or disapprove a real estate contract pursuant to an attorney approval contingency. This argument misconstrues the implied covenant of good faith and fair dealing under New York law.
Moran at 456.
The Court of Appeals reasoned that attorney approval contingencies are not subject to the application of the implied covenant of good faith and fair dealing. Id. The Court articulated the covenant to be a pledge between parties to "[not] do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Id. (citing 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002)). The Court then stated that "the plain language of the contract in this case makes it clear that any ‘fruits' of the contract were contingent on the attorney approval, as any reasonable person in the Morans' position should have understood." Id. The contract was never formed because although executed, the contingent requirement had not been met and therefore the Morans' rights under the agreement had never vested. Id.
Learning Point:
Under New York law, rights under a contract will not be enforced unless all contingencies have been fulfilled and those rights are fully vested. The courts will not apply the covenant of good faith and fair dealing to an agreement that is still subject to the fulfillment of a condition precedent. There will be no damages rewarded for breach of contract where the injured party has merely a contingent interest and should not have had a reasonable expectation of performance under the contracted terms.
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