Attorneys in New York may cancel real estate purchase agreements on behalf of their clients for any reason, or for no reason at all, under the “attorney approval contingency” clause typically used in Rochester and WesternNew York.

The Erks signed a contract to purchase the Morans home in Clarence, NewYork for $505,000. The contract of sale contained an “attorney approval contingency.” That clause provided that the contract was contingent upon approval by the parties’ attorneys giving both the seller and buyer three days from their attorney’s receipt of the contract to disapprove of the contract and render it void.

The contract and rider were boilerplate forms copyrighted and approved by the Greater Rochester Association of Realtors and the Bar Association of Erie County. It is intended to ensure that real estate brokers avoid the unauthorized practice of law.

After signing the contract, the Erks began to have second thoughts about the purchase. As a result, they instructed their attorney to disapprove of the contract, which she did within the three-day period provided in the contract. The Morans sold their house about 3 years later for $385,000.

Shortly thereafter, they sued the Erks for breach of contract and sought the difference in sale prices plus carrying costs for the nearly 3-year period the house was on the market.

The NewYork trial court entered judgment against the Erks, holding that they acted in bad faith by instructing their attorney to cancel the contract. The New York Appellate Division affirmed.

The New York Court of Appeals reversed, holding the language of the “attorney approval contingency” clause means what it says: no vested rights are created by the contract prior to the expiration of the contingency period.

The Court held that as long as attorneys cancel sales contracts within the prescribed time period, and the contract otherwise does not explicitly prevent them from doing so, attorneys and their clients would not be acting in bad faith by withdrawing from the sales agreement under the attorney approval contingency.

Ruling otherwise would inject doubt in an area of contracts — the sale of real estate — where “clarity and predictability are particularly important.” Reading a bad-faith exception into the contingency clauses could prompt litigation “by a disappointed would-be seller or buyer any time an attorney disapproved a real estate contract pursuant to an attorney approval contingency.”

The threat to attorney-client confidentiality under a bad faith regime could harm the attorney-client relationship itself in the context of real estate transactions. A diligent attorney, cognizant of the risk of being subpoenaed to testify as to the basis for disapproval, would face a perverse incentive to avoid candid communications with his or her client regarding a transaction in which the attorney is supposed to represent the client’s legal interest.