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The case at the Supreme Court of New Jersey known as John C. Sullivan v. Max Spann Real Estate & Auction Co. (A-57-20) (085225) was decided on June 9, 2022, regarding an auction, originally conducted on October 20, 2016.

Following the October 20 auction, the high bidder could not secure financing and could not perform. In response to a damages claim by the seller, the high bidder countered that no state-mandated 3-day attorney review was provided in the purchase contract, and as such, the contract was void(able.)

New Jersey is the only state with state law that requires (or prior to this case, required) a 3-day attorney review clause in contracts for the purchase of real property. Otherwise in the United States, many states require an attorney to be present at a real property closing, and some states mandate certain contracts be used; many real estate trade associations provide such paperwork.

Far more interesting to auctioneers is that this Supreme Court held absolute auctions were not compatible with traditional real estate negotiations:

A residential real estate sale by absolute auction is distinct from a traditional real estate transaction in which a buyer and seller negotiate the contract price and other terms and memorialize their agreement in a contract. In an absolute auction or an auction without reserve, as is the issue here, the owner unconditionally offers the property for sale and the highest bid creates a final and enforceable contract at the auction’s conclusion, subject to applicable contract defenses. Imposing the three-day attorney review prescribed in State Bar Ass’non residential real estate sales conducted by absolute auction would fundamentally interfere with the method by which buyers and sellers choose to conduct such sales.

John C. Sullivan v. Max Spann Real Estate & Auction Co. (A-57-20) (085225)

As is clear here, traditional real estate sellers don’t offer their real property for sale, and rather invite offers from interested buyers, where the sellers can accept or reject (and/or counter) those offers. An offer has to have the intent to contract and specific terms, which traditional sellers don’t have. However, an absolute auction seller has both.

We’ve discussed auction contract formation numerous times including https://mikebrandlyauctioneer.wordpress.com/2009/11/21/does-bid-calling-form-contracts/ and https://mikebrandlyauctioneer.wordpress.com/2014/08/11/bid-calling-is-just-numbers/.

This “promise” to sell in an absolute auction is a collateral contract made with all the bidders, given certain terms and conditions. We previously wrote about such contracts here: https://mikebrandlyauctioneer.wordpress.com/2009/12/29/the-three-3-types-of-auction-contracts/.

Importantly, these terms and conditions — whatever they happen to be — should be the same for each bidder in light of the 2020 case in West Virginia known as Alex Lyon & Son, Sales Managers & Auctioneers, Inc. v. Leach, 844 S.E.2d 120 (W.Va. 2020). In this recent case, the court held terms and conditions bind both the auctioneer (seller) and all bidders, and …

Finally, as a general principle, all the bidders at an auction must stand upon an equal footing. Accordingly, an auctioneer cannot vary the announced terms of the sale as to some bidders, or any one bidder, to the detriment of the other bidders.

Alex Lyon & Son, Sales Managers & Auctioneers, Inc. v. Leach, 844 S.E.2d 120 (W.Va. 2020)

As we’ve repeatedly noted — and this New Jersey Supreme Court seems to possibly suggest — a with reserve auction is much like traditional real estate in that the seller is strictly inviting offers and can decide to sell or not. This follows how bidders see these two types of auctions where absolute sellers will sell and with reserve sellers might or might not sell.

Your “with reserve” (seller confirmation) auction is in fact eerily close in structure to a traditional listing when it comes to real property at auction. How exactly is this type of with reserve auction better than a traditional listing, particularly in a strong seller’s market? It may not be any different or better. If this subject auction had been with reserve, the required attorney review clause probably would have held.

Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at Mike Brandly, Auctioneer, Brandly Real Estate & Auction, and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, and an Instructor at the National Auctioneers Association’s Designation Academy and Western College of Auctioneering. He has served as faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.