Seller & attorney approval: Beware of killing contracts

The attorney approval clause included in real estate contracts lets the attorney  approve, disapprove or make modifications to the contract (other than price) within 5 business days after the contract is signed.

There’s one situation in which the attorney approval clause can be very dangerous. It’s this: Let’s say the Seller accepts an offer from Buyer 1. During the attorney approval period with Buyer 1, the Seller decides to accept another offer from Buyer 2 (almost always for more money than Buyer 1 offered). Seller tells his attorney to “kill” the contract with Buyer 1 under the attorney approval clause.

I don’t have many hard and fast rules in my practice, but here’s one that I do follow: I refuse to kill the contract with Buyer 1 using the attorney approval clause if the sole reason is to get the Seller more money from Buyer 2. The reason I do (or don’t do) this is that there is an implied element of good faith in the attorney approval process and you can’t just toss out Buyer 1 for no reason other than price. It specifically says in the attorney approval clause that modifications to price cannot be made. Plus, killing Buyer 1’s contract just invites litigation.

In the last two weeks, I have had two separate transactions in which the attorney for the Seller tried to kill the contract with Buyer 1. In both cases, Buyer 1 recorded the contract against the property and both parties filed lawsuits in court to stop the Seller from selling to Buyer 2. (I represented Buyer 2 in both cases.)  In the first transaction, Buyer 2 dropped out as soon as they heard of the court fight.  The parties are still sorting out the second transaction. So much for the “slow” real estate market.

Watching these two transaction unfold reinforced my belief that if a Seller uses the attorney approval clause in an aggressive manner like this, he or she is likely to end up in court.

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