Due to a 1983 settlement of litigation brought by the New Jersey State Bar Association
against the NJ Association of Realtors, all real estate contracts prepared by realtors must contain an attorney review clause, permitting the parties to cancel via their attorneys for any reason or no reason within 3 business days of full execution and distribution of the contract.
The Appellate Division in a recent 2-1 decision decided that real estate auction contracts
are not subject to the attorney review requirement. Typically, an auction buyer will complete a form of contract supplied by the auctioneer and submit it for consideration. Then the highest bid
would be accepted and that buyer obligated to close.
The auction buyer in this case forfeited a $121,000 deposit when her mortgage was not approved. It seems to me that this is an unjust result, particularly as auction contracts contain acres of unintelligible boilerplate unfavorable to buyers. Would a reasonably informed buyer
agree to risk losing $121,000 if unable to obtain a mortgage (a process with many many variables)?
On the other hand, if a winning bidder is allowed to cancel the contract through attorney review, then the purpose of the auction is defeated. Although the auctioneer could protect the process by accepting backup bids.
Two of the Appellate Division judges held that auction contracts are not subject to attorney review, while the third dissented. That means that their decision will be reviewed by the New Jersey Supreme Court.
The interesting wrinkle in this particular case is that the defaulted buyer had her realtor
involved in the completion of the auction contract. That may very afford the court with a basis
for reversing the Appellate Division this time. At the same time, the Supreme Court of Legislature should consider requiring some conspicuous warning notices in auction contracts.
We shall see.