The paperwork that comes with many real estate deals may say the terms of the sale are “conditional on lawyer's approval.”

This clause confuses buyers, sellers and many real estate agents and rightly so. What is the lawyer supposed to be approving? The price? Some particular part of the contract? Does the phrase give someone the right to walk away if the lawyer does not find anything really wrong with it?

The law says that every condition must be exercised in good faith. You can’t just say “I changed my mind” and walk away from a deal. But in practice, it is not so easy to understand, as we see in the following two cases.

On April 2, 2006 Flora and Mario Rizzutto received an offer for their Edmonton home from Hassan and Mona Rahall. It had a condition stating it was “subject to seller’s lawyer’s approval.” The Rizzuttos had until April 10 to review this offer with their lawyer.

On April 7, the Rizzuttos told the buyers that they would accept their offer, but on April 10, the Rizzuto’s lawyer told the Rahalls the deal was off. Apparently, the sellers were building a new house and they were worried it might not be finished at the time the sale on their old home was scheduled to close. This concern was never raised with the Rahalls.

The main issue was whether the Rizzuttos even asked their lawyer to approve the contract. The Rizzuttos claimed that they did and that they did not need to reveal what they discussed with their lawyer because these conversations were protected by lawyer-client privilege.

The Rahalls sued and a judge concluded the Rizzuttos did not act in good faith and demonstrated no reason why their lawyer might not approve of their contract. It was clearly not enough that the sellers suddenly changed their mind because of a concern that their new house might not be finished in time.

Here’s what the judge said: The term “subject to lawyer’s approval” is not an all-encompassing condition. The Rizzuttos did not act in good faith by cancelling the deal and could not use the late closure of their new house as an excuse if it was not shared with the Rahalls.

A Manitoba case that went to court in 2010 had a different outcome. In this situation, Sheila and Robert Morrow agreed to sell some land and the agreement was “subject to seller's lawyer approval.” They changed their minds and told their lawyer to say he did not approve the deal. It appeared the lawyer in fact found no problem with the agreement, but the Morrows viewed the condition as allowing them an escape hatch.

In this case, the judge decided that the sellers could rely on the condition to get out of the deal. He noted that the facts demonstrated that the sellers had only one hour to make up their minds whether to accept a $3 million deal, received no professional representation prior to signing the agreement, were not trying to cancel the deal just to accept a higher offer and did take the time to meet with their lawyer. As such, he concluded that they could rely on the condition to get out of the deal.

The moral of the story is that buyers and sellers need to understand that all conditions must be exercised in good faith and that judges will look at the particular circumstances of every case before making any decision.

Facts matter.

For example, if your deal is conditional on financing, you have to at least apply for financing and get turned down or receive unacceptable terms before you can cancel your deal. If your deal is conditional on a home inspection, you have to at least have the home inspected and then not be satisfied with the results. It is the same with a lawyer review condition. You need to go to the lawyer and receive advice about all aspects of the contract and then make up your mind.

If you want to limit a lawyer’s advice to certain clauses in the agreement, then you will need to say so. If the clause is left too wide, then more latitude will be given to the lawyer.

The irony is that to properly draft a subject to lawyer's approval clause, you need a lawyer. But if you had a lawyer advising you, you wouldn’t need the clause in the first place. Go figure. The best advice is to first consult your Realtor; but make sure they have enough knowledge and experience in the field to be of assistance to you, like Mase and Sam.

Source: www.moneyville.ca