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New law on attorney modification clauses in real-estate contracts? Has the Second District made it easier for a party to a real estate contract to make a counteroffer disguised as a mere "modification"?

The second district of the Illinois Appellate Court recently issued two opinions, authored by the same justice, addressing the effect of actions taken under the same or similar attorney approval clauses in contracts for the sale of residential real estate.

A prominent real estate practitioner fears that one opinion in particular might create confusion about what constitutes a counteroffer. That's an important issue, because a counteroffer can open the door for the other party to reject the deal.

The cases are Patel v McGrath, 2007 WL 1933968 (2d D 2007), and Jennings v Baron, 2007 WL 2190080 (2d D 2007).

The Patel case

The attorney approval clause at issue in Patel read as follows:
 Attorney review: The respective attorneys
 for the Parties may approve, disapprove,
 or make modifications to this Contract,
 other than stated Purchase Price, within
 five (5) business days after the Date of
 Acceptance. Disapproval or modification
 of this Contract shall not be based solely
 upon stated Purchase Price. Any notice of
 disapproval or proposed modifications(s)
 by any Party shall be in writing. If within
 ten (10) business days after the date of
 Acceptance written agreement on proposed
 modifications(s) cannot be reached
 by the Parties, this Contract shall be null
 and void and earnest money refunded to
 Buyer upon written direction of the Parties
 to Escrowee. If written notice is not
 served within the time specified, this provision
 shall be deemed waived by the Parties
 and this Contract shall remain in full force
 and effect.

The clause in Jennings was identical, save the sentence prohibiting purchase price being the sole reason for disapproval or modification of the contract, which was not at issue.

The Patels offered to buy real estate from Mcgrath in Burr ridge, and Mcgrath accepted the offer. Within five business days after Mcgrath's acceptance, the Patels' attorney sent a letter to Mcgrath's attorney requesting certain modifications to the contract.

The Patels' attorney included the following language in the letter: "Please be advised that the above modifications should not be construed as a revocation of the current Contract, nor should they be construed as a counter-offer."

On the same day, Mcgrath's attorney sent a letter to the Patels' attorney. That letter both rejected the Patels' proposed modifications and, with no explanation, disapproved the contract. Mcgrath then, according to the opinion, relisted the property for half a million dollars more than the original listing price.

The next day, the Patels' attorney sent a letter to Mcgrath's attorney accepting the rejection of the Patels' proposed modifications and demanding specific performance of the contract. The Patels then filed a complaint seeking specific performance.

Mcgrath moved to dismiss, arguing that the letter from the Patels' attorney rejected the contract and that Mcgrath's attorney properly disapproved the contract within the review period. The trial court granted the motion.

The appellate court reversed, finding, first, that a contract was formed upon Mcgrath's acceptance of the Patels' offer. The court then stated that normally invocation of the attorney-approval clause triggers a rejection of the contract. But, citing Hubble v O'Connor, 291 Ill App 3d 974, 684 NE2d 816 (1st D 1997) and the restatement (Second) of Contracts, the court found that the clause in the Patels' first letter, stating that it was to be considered neither a revocation of the contract nor a counteroffer, rendered the letter a mere "invitation to negotiate a variation of the terms of the already-existing contract." Patel at *5.

That letter, then, was just what it said it was: neither a rejection of the contract nor a counteroffer. The contract for Mcgrath's sale to the Patels, then, remained in effect.

Mcgrath's attorney, however, did disapprove the contract within the period specified in the contract. The court observed that under the contract, Mcgrath was not required to provide any reason for the disapproval to the Patels.

But, noting the property's immediate relisting at a substantially higher price, the court found a question of material fact as to what role, if any, the purchase price played in the disapproval. The court therefore reversed the circuit court's order of dismissal and remanded the case.

The Jennings case

The Patel case inspired spirited discussions among ISBA members, both on and off ISBA's electronic transactional discussion group. Chicago lawyer Mike Maslanka and Lisle lawyer Steven Bashaw believe that the court has modified the law on attorney approval clauses.

Bashaw notes that his consistent position--up to now--has been, "you can't make it not a counteroffer by saying it's not." he fears that the court's ruling will create uncertainty.

Maslanka, though, is sanguine, suggesting that the holding "probably won't have a huge impact on most deals, as only the high-priced properties are likely to end up in litigation." he further suggests "Practitioners may now need to handle transactions differently depending on which appellate district they're in."

Bashaw prefers the court's reasoning in Jennings, which, in his view, provides counsel with more certainty. There, Jennings' and the Barons' attorneys entered into negotiations for modifications to the contract for the Barons' purchase of real estate from Jennings. Ultimately, the Barons' attorney approved the contract provided that Jennings agreed to certain modifications, including that the property was not appraised for less than the purchase price.

Jennings did not respond to that letter within 10 business days. The Barons' attorney subsequently sent a letter declaring the contract null and void. Jennings subsequently did respond and addressed, but did not agree to, the Barons' requests for modifications. The Barons did not purchase the property.

Jennings sued, alleging breach of contract. The Barons filed an affirmative defense that the contract was null and void under the attorney approval clause because the parties had not reached an agreement on proposed modifications to the contract. After a bench trial, the trial court found that the Barons had not validly terminated the contract and awarded Jennings damages and costs. The Barons appealed.

Looking to the language of the contract, the court noted that it provided that it would be null and void if written agreement on proposed modifications could not be reached within 10 business days. The parties did not dispute that they did not reach a written agreement within that period. End of story, said the court: the lack of a written agreement on the proposed modifications within the 10 days rendered the contract null and void.

Wondering whether Jennings may require sequels, Bashaw finds it interesting that, as the court pointed out in a footnote, the parties argued as if the agreement were required within 10 business days of the date of the proposed modifications--not of the date of acceptance (and contract formation). He expresses concern that the case "ignores the reality that coming to an agreement on anything [in a residential real estate transaction] within 10 days is virtually impossible."

Certainly, as practitioner comments on ISBA's transactional discussion group show, the moral of both cases is caution when acting for either buyer or seller under the attorney-approval clause.

Helen W. Gunnarsson is an attorney and writer in Highland Park. She can be reached at <>.
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Title Annotation:Patel v. McGrath, Jennings v. Baron; Illinois
Author:Gunnarsson, Helen W.
Publication:Illinois Bar Journal
Date:Sep 1, 2007
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