The New Jersey Supreme Court recently held that the mandatory three-day attorney review clause that must be included in contracts for the sale of residential real estate is not required in absolute auction sales. See Sullivan v. Max Spann Real Estate & Auction Co., 2022 N.J. LEXIS 512 (June 9, 2022).  An absolute auction sale is different from a traditional sale of real property in that, rather than listing a property for sale and negotiating the terms of the sale with interested individuals as in a traditional real estate sale, an absolute auction involves the seller listing the property for auction and showing the property to all parties interested in bidding, with the high bid among the interested parties creating a binding, enforceable contract for the sale of the property.

The case arose from the auction of property in Bernardsville, NJ (the “Property”). At the time of the auction, the Property was owned by plaintiff Sylvester L. Sullivan Grantor Retained Income Trust. Plaintiff John C. Sullivan (Trustee) was appointed Trustee of that Trust. Defendant Mengxi Liu (“Liu”) was an experienced bidder at real estate auctions who, along with her husband, had purchased six residential properties prior to the auction at issue and had previously attended four or five real estate auctions conducted by realtor Max Spann. On September 25, 2016, either Liu or her husband completed a pre-auction form, which acknowledged receipt of information including a template Contract for Sale of Real Estate (the “Contract”) and notice, which contained a number of disclaimers and explains the advantages of consulting with a lawyer.  Liu was the highest bidder for the Property and testified that in the wake of her successful bid, Max Spann employees escorted her to a separate room where documents including completed versions of the template Contract and notice previously received were signed, and Liu paid $121,000 as an earnest money deposit, which was put into escrow.  However, Liu was unable to satisfy her obligations under the Contract and did not purchase the Property.  Max Spann retained Liu's $121,000 earnest money deposit in an escrow account, and in March 2017, conducted a second auction to sell the Property, and sold the Property to the highest bidder for $825,000.

The Trustee and the Trust brought an action against Max Spann and later named Liu as a defendant, seeking a declaratory judgment that Liu had breached the Contract and that the Trust should receive the deposit as liquidated damages. Max Spann counterclaimed for half of the deposit. The trial court held that the Contract was enforceable, and that Liu had breached the Contract by failing to purchase the Property. It entered judgment on plaintiffs' breach of contract claim against Liu and ordered that Liu's $121,000 earnest money deposit be divided equally between Max Spann and the Trust. Liu appealed the trial court's judgment.

On the appeal, Liu focused her argument on the contention that the Contract was unenforceable because it did not comply with the New Jersey Supreme Court's decision in New Jersey State Bar Ass'n v. New Jersey Ass'n of Realtor Boards, where the Court held that a licensed real estate broker or salesperson who prepares a contract for the sale of certain categories of residential real estate does not engage in the unauthorized practice of law, provided that the agreement prescribes a three-day attorney review period during which either party's counsel may cancel the contract. 93 N.J. 470 modified, 94 N.J. 449 (1983).  The Appellate Division affirmed the trial court, holding that "a private real estate auction sale is not the consumer type contract contemplated in [State Bar Ass'n], and therefore, the three-day attorney review period is not required in such a sale."  Liu appealed to the Supreme Court.

The Supreme Court affirmed.  The Court began by distinguishing State Bar Ass’n, holding that the absolute auction sale at issue stands in stark contrast to the traditional real estate transaction that was the focus of State Bar Ass'n.  The Court pointed out that in a typical real estate transaction, a buyer and seller negotiate the sales price and other terms of the contract, and the contract is prepared in accordance with the agreed-upon terms; whereas, in an absolute auction, the seller's offer occurs when there is public notice of an auction without reserve, and the highest bid constitutes acceptance of that offer and determines the sales price.  The Court held that the attorney review period prescribed in State Bar Ass'n is incompatible with the sale of residential real estate by absolute auction, and that if it were to permit counsel to cancel contracts for any reason after an absolute auction as in a traditional real estate transaction, buyers would be deprived of the opportunity to purchase property at a bargain price, and sellers would lose the benefit of an accelerated and final sale. The Court also stated in a footnote that its decision applies only to the case at issue involving an absolute auction or “auction without reserve” conducted in person and does not consider traditional real estate sales in which multiple potential buyers make competing offers in a "bidding war," nor does it consider online auctions.

As to the public policy objective stated in State Bar Ass'n of protecting consumers by ensuring that they are told that retaining counsel is advisable and proceeding unrepresented is risky, the Court held that this objective was substantially achieved by the information that Max Spann provided to Liu before the auction.  The court concluded that there was no unauthorized practice of law in the preparation of the Contract that Liu executed, and that the Contract was enforceable.

Attorneys and real estate professionals should take note of this decision and counsel their clients of same before the clients participate in any absolute auction sale.  It is a definitive pronouncement by New Jersey’s highest court that the three-day attorney review period prescribed by the landmark State Bar Ass'n decision does not apply to absolute auction sales.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.