Auction Sales Contract Deemed Enforceable

Plaintiff Sullivan (Sullivan) owned a residence and acreage in Bernardsville, New Jersey. Sullivan entered into an agreement with Defendant Max Spann Real Estate & Auction Co. (Max Spann), a licensed real estate brokerage, to sell the property at auction. The auction agreement included a provision that Max Spann and Sullivan would each be entitled to one-half of any forfeited earnest money deposit.

Mengxi Liu (Liu) viewed the property twice before registering for the auction. The auction registration form acknowledged that an auction sales contract is not subject to an attorney review period. Liu also received a blank copy of the sales contract, which was drafted by Max Spann's attorney.

Liu submitted a winning bid of $1,100,000 for Sullivan's property at the auction. The sales contract was filled out by a licensed salesperson from Max Spann's brokerage; Liu signed the sales contract and submitted a required deposit in the amount of $121,000.

The sales contract lacked an attorney review provision and provided that the purchaser would lose their deposit as liquidated damages in the event of a default. The purchase terms were "all cash" with no mortgage contingency, however, Liu could not perform without securing financing, which she was unable to do prior to the closing date. Thus, Liu defaulted. As a result, Max Spann retained Liu's deposit of $121,000 in its escrow account. Max Spann subsequently auctioned the property for $825,000.

Sullivan filed suit against Max Spann for breach of contract and breach of the covenant of good faith and fair dealing, seeking to be paid the full amount of Liu's deposit. Liu was added as an indispensable party, and then sought to have the sales contract voided for a lack of an attorney review provision and for legal impossibility due to her inability to obtain financing.

The trial court found that auction sales contracts, prepared by an attorney and provided to prospective bidders before the auction, need not contain a three-day attorney review period required by New Jersey law in real estate sales contracts, and ordered that the $121,000 deposit be split between Sullivan and Max Spann.

On appeal, the court found that the failure to include a three-day attorney review provision did not render the sales contract void. Although attorney review provisions are required in most real estate contracts under New Jersey case law and New Jersey's Contract of Sale statute, there is an exception for auction contracts to reflect the expediency and finality of the bidding process.

The court determined that the liquidated damages provision within the sales contract was enforceable because it was reasonable in light of the actual losses caused by Liu's default. In this case, actual damages could be calculated by subtracting Liu's original bid ($1,100,000) from the amount for which the property eventually sold ($825,000), a difference of $275,000. Thus, liquidated damages of $121,000 were reasonable.

Next, the court upheld the trial court's order to split the deposit between Sullivan and Max Spann pursuant to the unambiguous terms of the auction agreement, noting that the split was far less than the ten percent commission that Max Spann would have earned if Liu hadn't defaulted.

Finally, Liu asserted that her performance should be excused because it was impossible for her to obtain financing. However, the court noted that when submitting her bid, Liu knew she did not have sufficient cash, and had only hoped that "everything was going to work out" financially. Therefore, the court found that the defense of impossibility wasn't raised in good faith and did not excuse her performance.

Note: As of May 2021, this case is pending appeal to the New Jersey Supreme Court.

Sullivan as Tr. of Sylvester L. Sullivan Grantor Retained Income Tr. v. Max Spann Real Est. & Auction Co., 465 N.J. Super. 243, 242 A.3d 870 (App. Div. 2020)