Supreme Court Rules on Consumer Fraud Action Against Landlords

Supreme Court Rules on Consumer Fraud Action Against Landlord for Charging Attorneys’ Fees for In-House Counsel

On September 17, 2013 the New Jersey Supreme Court affirmed the decision of the Appellate Division which reversed the Trial Court decision dismissing a Consumer Fraud action filed against a large residential landlord and an attorney-employee for charging fixed fees as additional rent in residential tenancy cases.  The decision, Darnice Green v. Morgan Properties, merely stands for the proposition that the tenant’s attempt to proceed with a class action can in fact continue and dismissal by the trial judge before the litigation had an opportunity to run its course was reversible error.

The Consumer Fraud action is based upon the allegation that the imposition of attorneys’ fees where the corporate defendants were represented by in-house counsel was an unconscionable commercial practice (violating the Consumer Fraud Act) because the fees exceeded the actual cost of legal representation.  The landlord attempted to defend these fees, alleging they were “liquidated damages” set forth in a “negotiated lease” and was therefore enforceable.

In this ruling the Supreme Court determined that in this context the Court had to analyze how Courts are to determine the reasonableness of a residential lease provision imposing a fixed sum for attorneys’ fees.

In pursuing that analysis, the Court concluded that while liquidated damages in a contract resulting from a negotiation between persons of relatively equal bargaining power would be enforceable, attorneys’ fees are not a form of damages.  Therefore, they cannot be considered liquidated damages.  The lease in question did not fix a liquidated sum (it specified the fee would be $400.00, or more if the case cost the landlord more).  In addition, the leases were not negotiated by persons of an equal bargaining power and therefore the Court recognized residential leases as “contracts of adhesion.”  The Court recognized that “residential tenants must be afforded a forum to challenge the reasonableness of lease clauses on which landlords rely for purposes of summary dispossess proceedings.”  In that regard, the Court recognized that the landlord has the burden of proving reasonableness in this context.  The Court determined:

“Indulgently interpreted, plaintiffs claim that the amounts of attorneys’ fees fixed in the leases were unreasonable because they bore no relationship to the work involved in a summary dispossess action or the actual fees that were or could have been incurred in those proceedings.  In part, plaintiff asserted that the corporate defendants routinely file hundreds of such complaints averaging 200 each month in Camden County alone, that the work devoted to any particular complaint is modest in both terms of the preparation of the pleading and the time expended in a court appearance, that simply multiplying the fixed fee by the average of number of complaints would suggest that the fees are unreasonable and that, because the corporate defendants appear through a salaried attorney-employee, a reasonable fee would be one that reflected her salary.”

This claim articulated by the Court was enough to survive a dismissal motion and will proceed to be litigated against the corporate defendants.

What that does that mean for landlords who use attorneys who are not employees who seek to recover counsel fees as additional rent?  The law has not changed.  In that context, the landlord’s ability to recover attorneys’ fees as additional rent has always been limited by a “reasonableness” test.  That is not new.  Most important, the Court seems to recognize that and further recognized that in a normal situation, putting landlords or landlords’ counsel through a more extensive proof process to address “reasonableness” is not practical in the landlord/tenant court and will not be required.

“We do not suggest that in every summary dispossess action, the landlord’s attorney should be required to prove with precision that the basis for an attorney’s fee, included in the lease as additional rent, was calculated as would be the case in an ordinary application for a fee award, see R.P.C. 1.5, because requiring such proofs would threaten to undermine the efficiency of summary dispossess proceedings.  Nonetheless courts considering such provisions are empowered to decline to include an attorney’s fee as part of the rent due and owing, even when included in a lease, if the sum is not reasonable on its face or if the attorney is unprepared to demonstrate that it is reasonable under the circumstances.”

In fact, the Court concluded “it may well be that the corporate defendants can demonstrate that the basis on which the fees were calculated and included in the lease is reasonable, but it will be their burden to do so.

Recent newspaper articles have suggested that this decision changes the law related to the collection of attorneys’ fees in “run of the mill” residential tenancy cases.  The law has not changed.  It remains the same.  Reasonable fees will be allowed and any fee appearing to be “reasonable on its face” should not require any extraordinary proceedings to demonstrate the reasonableness of a fee which would burden the summary process.

By: Christopher J. Hanlon, Esq. of Hanlon Niemann & Wright, a New Jersey Landlord Tenant Law Firm located in Central NJ

Should you have the need for legal counsel in this area, please contact chanlon@hnlawfirm.com or call toll-free (855) 376-5291.