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Does the three-day review on real estate apply to auctions?

March 15, 2021 Anthony Alvarez

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In New Jersey, after a buyer and seller sign a contract for purchase/sale of real estate, such as a house, there is typically a three-day attorney review period. This three-day review period is a required clause in real estate contracts. In this three-day period, your attorney may review the contract, and either negotiate changes with the other side or void the contract. Beyond this three-day review period, the terms of the contract are final.

  • Appellate Division Majority holds that there is an “auction exception” to the three-day attorney review period in New Jersey.

In the recent 2020 New Jersey Appellate Division court case, Sullivan v. Max Spann Real Estate, 465 N.J. Super. 243 (App. Div. 2020), the two of the three judges of the majority or the court’s opinion ruled that an auctioneer can waive the three-day attorney review period for an auction sale or that this three-day attorney review period does NOT apply to auction sales. This means that if you are involved in the purchase/sale of at an auction and sign a contract, the sale may be final WITHOUT the opportunity for your attorney to review the contract and there is no opportunity for your attorney to negotiate changes or void the contract. Essentially, once you sign a real estate contract in an auction, you are stuck with it. Luckily, it was an appellate court case and it may be reviewed by the Supreme Court of New Jersey, especially since it was a split 2-1 decision.

  1. What led Ms. Liu to seeking protection of the three-day attorney review period?

In this case, Mengxi Liu was the highest bidder at an auction with a $1.21 million bid for a Bernardsville home, her bid was accepted and she paid a $121,000 down payment on the home. The contract did not contain a three-day attorney review period clause. Subsequently, Liu was not able to secure a mortgage for the purchase and tried to obtain her $121,000 deposit back. Liu claimed that the contract was void due to the lack of a three-day attorney review clause.

  1. Three-day review period meant for traditional home sales, not auctions.

The court disagreed with Liu, claiming that the three-day attorney review period applied to a “traditional, residential real estate” sale, not to “private real estate auctions.” The court further explained that N.J.A.C. 11:5-6.2(g) intended for the three-day attorney review for typical home sales, not auctions. The court went on to say that the goal of an auction is to privately sell a property quickly and that auction bidders know that their bid is final and binding, once accepted by the auctioneer.

  1. The buyer in an auction can benefit from the lack of a three-day review period?

The court hypothesized that a three-day attorney review period in auctions would allow sellers to seek out new buyers within that three-day review period. If they found a new buyer, they could easily void the contract with the original bidder. If they did not find a new buyer, they have the original bidder to fall back on.

  1. The lack of a three-day review period provision does not render the contract void.

Ultimately, the court concluded that the legislature, in creating the three-day attorney review period for traditional real estate contracts, did not intend for such a provision to apply to private real estate auctions. According to this court decision, Ms. Liu was out of luck and could not get her $121,000 down payment back.

  • Appellate Division Dissent determined that no exception existed to the three-day attorney review period…yet.

The dissenting opinion of one judge of the three-judge panel sided with the New Jersey State Bar Association and the realtors’ group that filed an amicus brief opposing the exception for auctions. This judge agreed that the appellate court did not have the authority to amend the 1983 New Jersey Supreme Court decision, New Jersey State Bar Ass'n v. New Jersey Ass'n of Realtor Boards, 94 N.J. 449 (1983), that created the three-day attorney review period on real estate contracts. The dissenting judge said that such an exception could only be carved out by the New Jersey Supreme Court.

  1. The Appellate Division exceeded its authority by carving out an exception only the Supreme Court of New Jersey could.

The judge added that “while lower courts interpret and enforce the provisions, only the Supreme Court may modify it.” This means that the appellate court had the right to try to understand how the review period applied or to make sure it was in a real estate contract, but the Appellate court could not create a new exception to the rule and change the rule. The Appellate court exceeded its authority when it added an exception to the rule set down by the Supreme Court of New Jersey.

  1. Even the Real Estate Commission had not carved out the exception.

Furthermore, the dissenting judge pointed out that the Real Estate Commission included this three-day attorney review clause requirement in its code, specifically in N.J.A.C. 11:5-6.2(g) and if the commission intended for there to be an auction exception, it would have created one.

  1. The contract should be void and unenforceable without the three-day review.

Lastly, the dissenting judge added that this attorney review clause is required in all real estate contracts for sale, and a real estate contract without such clause, is void and unenforceable. The dissenting judge concluded that Ms. Liu’s contract was void, Ms. Liu should receive her deposit back and an exception to auction sales for the three-day attorney review period did not yet exist.

  • The Appellate Division case is headed to the Supreme Court of New Jersey.

Since there was a 2-1 split decision at the Appellate level, the 2020 Appellate Division case appears to be heading to the Supreme Court of New Jersey for them to potentially determine whether there is or is not an auction exception to the three-day attorney review period on real estate contracts.

  • Until then, the existence of the “auction exception” remains up in the air.

At this point in time, until a determination is made by the Supreme Court of New Jersey, it is important to keep in mind that an auction sale in New Jersey may not be subject to the three-day attorney review requirement. Again, that means that a real estate contract as a part of an auction sale may be binding before and without the existence for the three-day attorney review period. But that does not necessarily mean that the auction seller will not include the clause in the contract.

 

 

 

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