MAKING GOOD ON THE GOOD-FAITH OBLIGATION: A RIGHT TO CURE ATTORNEY OBJECTIONS TO REAL ESTATE CONTRACTS
by Patrick D. Hughes
DePaul University College of Law, Chicago

This article originally appeared in the October 1998 issue of the CBA Record and is reprinted here with permission.

Rarified notions of law and economics aside, people enter into real estate contracts because they want to buy or sell a house. The essence of that bargain - the ultimate transfer of the real estate - can be undermined by the abusive invocation of a standard attorney approval clause in the contract. By extending Illinois law on attorney approval clauses, that abuse can be curtailed; barring such judicial advances, contract draftsmanship may fill the gap left by Illinois law.

The standard residential real estate contract in Illinois is conditioned on the parties' attorneys' approvals. The specific language of these attorney approval clauses varies, but Illinois courts have made clear that at the heart of these clauses is the parties' right to seek the counsel of their attorneys before proceeding with the deal the parties just signed. The attorney approval clause is viewed as a total escape clause, allowing the disapproving party to void the contract of sale. The only limitation on the attorney approval is the implied obligation of good faith; there is no obligation that the disapproving attorney be specific regarding his or her objections or that the other side have a right to cure the offending provisions. Because proving bad faith on the part of the attorney would seem nearly impossible, the clause, in practice, is a jettison button on the contract.

This is too much leeway. By failing to grant the non-disapproving party a right to cure the offending provisions of the contract, Illinois courts have in essence granted parties a cooling-off period after the contract is signed, a cooling-off period that the unscrupulous could use to look for a better deal or to do the soul searching that should precede the signing of the contract. A right to cure the objection on the part of the non-disapproving party would beef up the otherwise thin obligation of good faith. After all, if good faith is truly good, then once the disapproving attorney's concerns are addressed, the disapproving party should be ready to proceed. Only bad-faith objections would be punished by a right to cure. Illinois courts should, therefore, examine such a right to cure as an extension of the good-faith obligation. Alternatively, drafters of real estate contracts may consider inserting such a right to cure in their attorney approval clauses.

Attorney Approval Clauses in Residential Real Estate Contracts
For these purposes only, attorney approval clauses come in two varieties: those that do not anticipate further negotiations after the disapproval (non-negotiation clauses) and those that do anticipate such negotiations (negotiation clauses). There may not be much difference between the two for practical purposes in Illinois.

Non-Negotiation Clauses A typical non-negotiation clause is that contained in the form contract distributed by the North Shore Board of Realtors. The North Shore Board's clause states, "This contract is contingent upon the approval hereof as to form by the attorneys for the Purchaser and Seller within ___ days after Seller's acceptance of this contract. Notices shall be given pursuant to Paragraph 14 on the reverse side hereof." Paragraph 14 then states that "if written notice of disapproval is given within the time period specified, this contract shall be null and void and the earnest money shall be returned to Purchaser." See Hubble v. Connor, 291 Ill. App. 3d 974, 977, 684 N.E.2d 816, 819, 225 Ill. Dec. 825, 828 (1997) (quoting similar standard attorney approval clause and noting that the contract is "a standardized real estate sales agreement widely used in the Chicago area").

The contract does not anticipate any back-and-forth between attorneys over any disapproval issues. The disapproving attorney comes to the conclusion that he or she disapproves, the attorney communicates the disapproval, and then the contract is null and void. In practice, one hopes, back-and-forth would be likely if a good faith objection is being raised. A bad faith objection, however, could cleanly jettison the contract. The lawyer need only give notice of objection, and then the contract is null and void.

Negotiation Clauses On the other hand, certain common attorney approval clauses do anticipate some back-and-forth after an attorney objects. In other words, rather than going from disapproval straight to no contract, such clauses instead allow a time period for negotiation, at the expiration of which the contract would be null and void if negotiations were unsuccessful and notice to that effect is given by the disapproving party.

An example of such a clause is reproduced in an Appellate Court of Illinois opinion:

Attorney Review: The parties agree that their respective attorneys may review and make modifications, other than stated purchase price, mutually acceptable to the parties, within ten (10) business days after the date of the Contract acceptance. If the parties do not agree and written notice thereof is given to the other party within the time specified, then this Contract will become null and void, and all monies paid by the Purchaser will be refunded. Olympic Restaurant Corp. v. Bank of Wheaton, 251 Ill. App. 3d 594, 596, 622 N.E.2d 904, 906, 190 Ill. Dec. 874, 876 (1993).

This clause anticipates not a summary disapproval, like the North Shore Board's non-negotiation contract, but a period of negotiation. Only if the negotiation were to prove fruitless, under the terms of the contract, would a notice of disapproval be expected.

Why the Difference May Not Matter The focus here is on an attorney's summary disapproval of the contract; therefore, a negotiation clause for these purposes is different from a non-negotiation clause only if the negotiation clause curtails an attorney's right to submit a summary disapproval. Illinois cases, however, suggest that an attorney is as free to submit a summary disapproval under a negotiation clause as to submit one under a non-negotiation clause.

In reviewing the above-quoted negotiation clause, the Second District in Olympic Restaurant Corp. v. Bank of Wheaton strongly suggested that attorney disapproval could summarily jettison a contract. The Olympic Restaurant court relied heavily on a New Jersey Superior Court holding that "[t]he purpose of such an attorney approval clause is to provide the purchaser or seller with the opportunity of obtaining legal advice with respect to the transaction, and its value lies in the fact that the contract may be canceled upon receiving such advice." Olympic Restaurant, 251 Ill. App. 3d at 600, 622 N.E.2d at 909, 190 Ill. Dec. at 879 [quoting Indoe v. Dwyer, 176 N.J. Super. 594, 601 424 A.2d 456, 460 (1980) (emphasis added)]. The Olympic Restaurant court imposed no obligation for an attorney to provide specific objections and in no way indicated that the anticipated period of negotiation changed the good-faith-obligation analysis.

Good Faith: The Sole Obligation Imposed by Illinois Courts
Three cases from the Appellate Court of Illinois, two First District and one Second District, have made clear that an attorney expressing disapproval is not required to submit specific objections to declare the contract null and void; rather, the only requirement is that the objections be made in good faith. On notice of disapproval, the contract is null and void.

The first case to so hold was Olympic Restaurant, from the Second District in 1993. The court affirmed the circuit court's judgment rendering null and void a real estate contract. The contract contained a "negotiation" attorney approval clause. Before time had run on the contracted attorney approval period, seller's attorney notified buyer of disapproval and proposed specific modifications. That same day, buyer's attorney proposed further modifications and indicated disapproval of certain of seller's proposals. Meanwhile, the seller signed another contract, and the second buyer later sued the seller for specific performance. Seller then filed a third-party complaint to quiet title against the first buyer, who had recorded the first sales contract.

The central issue on appeal was whether the letters were counter-offers that fully invoked the attorney approval clause. The court held the letters were counteroffers; therefore, the original agreement was null and void on notice of the disapproval contained in the letters. Because no agreement was reached on the counteroffers, there was no sale contract. In so holding, however, the court broadly defined attorney leeway in noticing disapproval, stating that "while the review clause must be invoked in good faith, it is not necessary for a party to state a reason when rejecting a contract pursuant to a review clause because the attorney's right to review is a proper exercise of his or her judgment." Olympic Restaurant, 251 Ill. App. 3d at 600, 622 N.E.2d at 909, 190 Ill. Dec. at 879.

The First District agreed in Groshek v. Frainey, 274 Ill. App. 3d 566,654 N.E.2d 467, 211 Ill. Dec. 5 (1995). Groshek directly held that "under an attorney approval clause an attorney need not state the reasons for his [or her] disapproval of a contract because the attorney's right to disapprove is a wholly proper exercise of his [or her] judgment, limited only by good faith." Id. at 571, 654 N.E.2d at 471, 211 Ill. Dec. at 9. The contract in Groshek directed that "[a]pproval will not be unreasonably withheld," but the court held that failure to provide specific reasons is not unreasonable in light of Illinois law limiting the obligation to good faith only. There was, in any event, some indication that the disapproving attorney had at least tendered specific reasons, though that was not the primary basis for the holding. Id. at 572-73, 654 N.E.2d at 472, 211 Ill. Dec. at 10.

Hubble v. O'Connor confronted most directly the question of whether proposed modifications invoked the attorney approval clause. 291 Ill. App. 3d 974, 684 N.E.2d 816, 225 Ill. Dec. 825 (1997). The First District distinguished Olympic Restaurant to allow an attorney to negotiate within the attorney approval time without invoking the disapproval clause and unintentionally voiding the contract; however, in noting that "the option to disapprove the agreement is a powerful right and basic fairness requires that any communication invoking the disapproval right be made clearly and unambiguously," the court implied that the attorney has the right of outright disapproval. Id. at 982, 684 N.E.2d at 821, 225 Ill. Dec. at 831.

Illinois law, therefore, affords the real estate attorney the right to declare a contract with an attorney approval clause null and void on the attorney's disapproval. This right to disapprove carries with it no obligation to make specific objections or reasons for disapproval; instead, the obligation is only one of good faith.

The Problem with 'Good Faith Only' and Why Right to Cure Would Fix It
Good faith as the only requirement for disapproval of the contract invites abuse and puts attorneys in an awkward position. An attorney has objections to every contract reviewed; no contract provides perfect protection for either a buyer or a seller. Even when an attorney reviews that Platonic ideal of contract, the attorney's recognition of the ideal is known but to the attorney. Consequently, a host of other intentions can be masked by the invocation of the attorney approval clause. The most nefarious hidden intention is that a seller has found a better price.

Likewise, a buyer's cold feet could easily transform a minor contract improvement an attorney has in mind into a full-blown objection, which nullifies the contract. In addition, other contingencies that may have lapsed (a professional inspection of the premises, for example) could be motivating the objection. Abusive invocation of the attorney approval clause is an obvious temptation under these circumstances.

Bad faith, furthermore, is hard to define, putting in a dilemma the attorney who takes the good-faith obligation seriously. Need the objection to the contract be the sole motivation for noticing disapproval? Is an attorney still in good faith if his or her objections are real but the motivation for lodging those objections is the client's receipt of a better offer? Is it good faith for the attorney's objection to the contract to be that the contract purports to bind the client to a real estate bargain in which the client is no longer interested? Being ethical in situations such as these is harder than it might seem; the duty of zealous representation rubs against the good-faith obligation.

Making Good on the Good-Faith Obligation
If the other party has a right to cure the objections, abuse and ambiguity would stop or at least subside. The non-disapproving party should be able to request the basis for the disapproving attorney's objections. On that request, the attorney would be forced to specify exactly what aspects of the contract have, in good faith, motivated disapproval. (Failure to provide specific objections would evidence bad faith, therefore deeming invalid the invocation of the attorney approval clause.) If curing the disapproving party's objections, then, is acceptable to the non-disapproving party, then the parties would modify the contract to cure the objections.

This process roughly parallels Uniform Commercial Code Section 2-605, providing in commercial sales transactions a seller's right to particularized objections to rejected goods and to cure those objections. In fact, Comment 2 to U.C.C. Section 2-605 sums up the problem with Illinois real estate transactions' lack of such rights: "[A] buyer who merely rejects the delivery without stating his [or her] objections to it is probably acting in commercial bad faith and seeking to get out of a deal [that] has become unprofitable."

This procedure does not address the situation in which the contract is an abomination in its entirety - full of grossly unfair terms, imposing several requirements contradicting Illinois law, or written in Ancient Greek. Perhaps a lawyer under these circumstances is allowed to recommend that the client get out from the deal cleanly; however, that situation is not the norm: most objections are to a specific paragraph, phrase or word. Furthermore, surely courts ruling on the good faith of a wholesale rejection of the contract would take stock of whether the rejected contract is on a form used widely in the area. If an attorney on the North Shore could reject a North Shore Board of Realtors' contract as an irreparable abomination in its entirety, without explanation, then there is no need for a good faith requirement at all.

Why the real estate bar might be uncomfortable with such a right to cure is telling: truth be told, the right to cure would eliminate the ability of the lawyer to exercise the attorney approval clause as a jettison. Any such resistance proves that the proposal adversely affects only parties and attorneys acting in bad faith. Attorneys who have bona fide objections to the contract, and parties who in good faith are following the attorney's advice, would have no quarrel with a right to cure.

If the goal of the attorney approval clauses and Illinois courts' interpretation of them is, in fact, to provide a cooling-off period, then the contract or the law should so provide, instead of allowing the cooling-off period only to those clients whose lawyers ignore the good-faith obligation.

Illinois courts examining the good-faith obligation should, therefore, consider what the obligation amounts to without a right to cure the disapproving party's objections. The right to cure could be viewed as an outgrowth of the obligation of good faith - making good on the obligation. Viewed as such, the right to cure easily extends Illinois law.

If Illinois courts do not move in such a direction, the proposal could still make its way into Illinois real estate transactions through draftsmanship. There is no reason why a party's right to cure objections could not appear in the attorney approval clause itself, providing what Illinois courts thus far have been unwilling to provide.

ABOUT THE AUTHOR: Patrick D. Hughes is a legal writing instructor at DePaul University College of Law. He thanks Professors Wayne Lewis and Susan Thrower of DePaul for their comments.

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