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Supreme Court concludes that attorney review period is not a requirement of absolute auction contracts

On June 9, 2022, the New Jersey Supreme Court unanimously decided that attorney review period is not a required contractual provision for a residential real estate sale by absolute auction. In this case, John C. Sullivan v. Max Spann Real Estate & Auction Co. (A-57-20) (085225), Plaintiff John C. Sullivan was trustee to the Sylvester L. Sullivan Grantor Retained Income Trust, seller of the residential property in question. Defendants included successful bidder, Mengxi Liu, and Max Spann Real Estate and Auction Co. (Max Spann), a licensed real estate agency which conducted the auction of the residential property.

Liu successfully bid on the property and subsequently executed contractual documents of which she was in possession prior to the auction. Those documents contained various notices warning potential buyers of the risks associated with engaging in the transaction without an attorney. Upon entering the contract, Liu deposited $121,000 in earnest money, which was held in escrow by Max Spann. Liu was unable to secure the funds for the ultimate purchase of the property and thus breached the contract. Max Spann retained the earnest money. The property was ultimately sold after a second auction.

Plaintiff seller initiated the subject suit against Max Spann and Liu seeking the earnest money as liquidated damages for Liu’s breach of contract. Max Spann counterclaimed for half f the deposit The lower Court found that Liu breach the contract and ordered that the earnest money be divided equally between Max Spann and Plaintiff. Liu appealed, arguing that the contract improperly excluded an attorney review period provision pursuant to New Jersey State Bar Ass’n v. New Jersey Ass’n of Realtor Boards (“State Bar Ass’n”), 93 N.J. 470, 471-86, modified, 94 N.J. 449 (1983).

Under State Bar Ass’n, contacts for the sale of certain categories of residential real estate must contain a three-day attorney review period during which either party’s counsel may cancel the contract. However, the Court reasoned that there is a critical difference between a transaction involving a negotiated contract addressed in State Bar Ass’n and the contract provided by Max Spann in advance of a absolute auction. Unlike a typical residential transaction, the seller’s offer occurs when there is public notice of an auction without reserve, and the highest bid constitutes acceptance of that offer and determines the sales price.

The Supreme Court concluded that, as a result of this fundamental difference, the attorney review period prescribed by State Bar Ass’n is incompatible with a sale by absolute auction, since the review period would nullify the cost benefit of the accelerated and final sale offered by such an auction. Furthermore, the public policy objective of State Bar Ass’n was met by the language advising the bidder of the importance of legal representation and the risks of proceeding without it. Thus, preparation of the subject contract did not constitute an unauthorized practice of law by Max Spann.

Both buyers and sellers should take note of this precedent, particularly if seeking to engage in a transaction outside of a typical negotiated contract. The risks of proceeding without legal representation are clear in this case, to the detriment of all parties involved. Pursuant to this opinion, once a contract is executed, unrepresented parties may find themselves locked in, which no opportunity to seek counsel after they have entered a binding agreement.

Other transactional arenas where this may apply?

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