The Often Overlooked Attorney Review Clause
 
October 30, 2003
 

The attorney review clause in a real estate contract has been described by one judge as a provision intended to “give the parties to a [real estate] contract, who may not be sophisticated in matters relating to real estate and/or contracts, a chance to have their attorneys scrutinize the offer before acceptance.”  Even when all parties have signed the contract, the presence of the attorney review clause renders the contract only conditional.  Another court has said, “A contract which contains an attorney approval clause is appropriately construed as a qualified or conditional acceptance of the terms of that contract.  Invocation of the clause triggers a rejection of the contract and, at times, a counteroffer.”

In the last ten years, there have been a handful of cases in Illinois dealing with attorney review clauses.  These cases deal mainly with (a) the construction of the attorney review clause itself, and (b) the manner in which an attorney invokes the clause, and the effect that such invocation may have on the contract.  While these cases were decided by Illinois state courts, the way judges interpret and handle these types of clauses is worthy of attention across the board.

Construction

An important issue when it comes to attorney review clauses is the manner in which the clause is written.  For example, in one case, the contract signed by the parties contained the following attorney review provision:

“It is agreed by and between the parties hereto as follows: That their respective attorneys may approve or make modifications, other than price and dates, mutually acceptable to the parties.  Approval will not be unreasonably withheld, but if within [five business] days after the date of acceptance of the Contract, it becomes evident agreement cannot be reached by the parties hereto, and written notice thereof is given to either party within the time specified, then this Contract shall become null and void, and all monies paid by the Purchaser shall be refunded.”

The defendant’s attorney provided written notice of his disapproval of the contract to the plaintiff within the five day period, but did not explain why his approval was being withheld.  The plaintiff argued that the defendant’s attorney acted in bad faith, withholding approval simply because the defendant had changed his mind about the purchase of the plaintiff’s property.  The plaintiff also claimed that the defendant’s attorney was required to state his reasons for not approving the contract in the form of proposed modifications, and absent such a counteroffer, the contract never became “null and void.” 

The court began its analysis by noting that “the courts that have interpreted the [attorney review] clause have given the attorney a much wider scope of authority, permitting disapproval of the contract for any reason, limited only by an implied covenant of good faith.”  Under prior holdings, there was support for the view that under an attorney approval clause an attorney need not state the reasons for his or her disapproval, because the attorney’s right to disapprove is a wholly proper exercise of his or her judgment, limited only by good faith.

As these cases are always very fact specific, the court emphasized the language of the clause and saw the attorney’s right to “approve or make modifications” as sufficient to remove any ambiguity from the clause.  The defendant won the case, and the contract was nullified.

In a similar case, the seller executed a contract for the sale of her property, and shortly thereafter received a separate offer to purchase the property at a higher price.  The contract contained a five day attorney review period.  The day after that contract was executed, the seller’s attorney rejected the contract.

The purchaser argued that the rejection of the contract by the seller’s attorney was made in bad faith.  However, the court found that the purchaser had placed unreasonable time pressures on the seller, giving her only three hours to accept the contract and not allowing her to confer with her attorney prior to its execution.  In addition, the seller’s attorney testified that the third party’s offer to purchase the property was not relevant to his determination to reject the contract.  Based upon this testimony, the court found no evidence that the seller’s attorney acted in bad faith.

Invocation

Another crucial factor is how an attorney invokes the contract’s attorney review clause.  In one case, the defendant agreed to purchase the plaintiff’s home, and signed a form contract that contained an attorney review clause.  That clause provided:

“14. Attorneys Review:  The parties agree that their respective attorneys may review and make modifications, other than stated purchase price, mutually acceptable to the parties, within ten (10) business days after the date of the Contract acceptance.  If the parties do not agree and written notice thereof is given to the other party within the time specified, then this Contract will become null and void, and all monies paid by the Purchaser will be refunded.  IN THE ABSENCE OF WRITTEN NOTICE WITHIN THE TIME SPECIFIED HEREIN, THIS PROVISION WILL BE DEEMED WAIVED BY ALL PARTIES HERETO AND THIS CONTRACT WILL BE IN FULL FORCE AND EFFECT.”

The 10 day review period expired on November 8.  On November 7, the plaintiff’s attorney sent a letter to the defendant and the defendant’s attorney advising that he did not approve the contract, and requesting modifications to the contract.  The same day, the defendant’s attorney responded with a letter containing his own modifications, and disagreeing with some of the changes made by the plaintiff’s attorney.  Neither side accepted the other’s modifications.  On November 11, the plaintiff’s attorney sent a letter stating that the plaintiff did not wish to accept the defendant’s counteroffer, and that they considered the matter “closed.”

The trial court found (and the appellate court agreed) that the “clear implication” of the attorney review clause was “that within the stated time, the attorneys for the parties may make modifications and that if those modifications are not agreed [upon] within the specific time, then the contract becomes null and void.”  The court found clear language in the November 7 letters between the parties’ attorneys invoking the attorney review clause and indicating that the original contract was not acceptable to either side.  Therefore, the court concluded that the letters were counteroffers, which operated as rejections of the original agreement and proposals for new agreements.

The court also focused briefly on the construction of the attorney review clause.  It stated that the attorney review clause could have been more clearly drafted, but the most important part of the clause relating to the matter before the court provided that “if the parties do not agree and written notice thereof is given then this Contract is null and void.”  The court noted that the clause did not specify whether the parties were required to disagree regarding the contract itself, or to any requested modifications of the contract.  In any case, the parties to that contract clearly did not agree to the modifications set forth by their respective attorneys, and the modification requests themselves indicated a disagreement with the contract.

What about the actual lawyer to lawyer communications?  Consider the following attorney review provision that was the center of a dispute between a buyer and seller:

“This contract is contingent upon the approval hereof as to form by the attorney(s) for Buyer and Seller within 5 Business days after Seller’s acceptance of this contract.  Unless written notice of disapproval is given within the time period specified above, then this contingency shall be deemed waived and this contract will remain in full force and effect.  If written notice of disapproval is given within the time period specified above, this contract shall be null and void and the earnest money shall be returned to the [Buyer].”

After the contract was executed on June 8, the parties continued to discuss modifications past the five day period specified for disapproval, agreeing to extend the period to June 22.  On June 17, the purchaser’s attorney faxed to the seller “a proposed rider to the contract for review and comment.”  This rider was passed back and forth between the parties until June 30, when the seller’s attorney received the last rider from the purchaser’s attorney, which was unexecuted.  On July 6, the purchaser’s attorney sent a letter to the seller’s attorney in which he stated that he had “withdrawn attorney approval” of the contract, and requested that the seller return the earnest money to his client.

The seller asserted that the purchaser had not invoked the attorney approval clause in a timely manner, and that the attempt to exercise it on July 6th was merely a way to absolve the purchaser from their obligation to buy the property.  The court agreed, relying on the fact that the writing from the purchaser’s attorney “did not fairly inform the seller that the contract would be voided under the attorney disapproval clause if the seller failed to agree to the purchaser’s suggested changes.”

Conclusion

When making decisions regarding the use of attorney review clauses in real estate contracts, Illinois courts, and probably most others, analyze not only the form of the clause, but also the manner in which it was invoked.  The courts appear willing to give such clauses a broad interpretation, keeping in mind that their purpose is to protect unsophisticated sellers and purchasers from entering into an unfavorable agreement.

All parties interested in using a review clause should pay careful attention to whether the language of the clause gives exactly the type of authority intended to the lawyers.  Does the clause require justification for disapproval?  Is a counteroffer required, or may opposing counsel reject the contract outright?  By what method may the attorney review option be exercised?  Failing to pay careful attention to this often overlooked clause can lead to disaster.

For more information, e-mail Amy McShane at amy.mcshane@hklaw.com or call toll free, 1-888-688-8500.