Commercial Real Estate Broker's Failure to Perform Found to Violate New Jersey Consumer Fraud Act; Damages Tripled!

On June 18, 2002 the Appellate Division, in Hadjiyerou v 18 Briar Hill Road Corp. affirmed a trial court’s application of the New Jersey Consumer Fraud Act to the relationship between a commercial landlord and a real estate broker. The landlord had retained the broker to find a tenant for a restaurant site. The landlord made clear it wanted a strong tenant with restaurant experience and was relying on the broker to produce qualified candidates. The broker produced a candidate but, as the facts are presented in the case, did almost nothing to check into the tenant’s financial background or his managerial ability. Notwithstanding this lack of checking, the broker represented the candidate as “eminently qualified.” A lease was signed, but the tenant dishonored his financial obligations from the first day. Both the security deposit check and first month’s rent check bounced. The landlord produced expert testimony to the effect that a broker has a duty to make every reasonable effort to provide as much financial information as possible to a property owner about a prospective tenant. The expert, and in turn the Court, also relied on N.J.A.C. 11:5-6.4(b), which requires a real estate licensee to make reasonable efforts to ascertain all material information concerning the financial qualifications of every person for whom he or she submits an offer to his or her client or principal.

The Appellate Division specifically ruled that the described events constitute a violation of the Consumer Fraud Act. The Court quotes the following language from the Act: “[t]he act, use, or employment by any person of any unconscionable commercial practice, deception, … false pretense, … [or] misrepresentation?in connection with the sale or advertisement of … real estate … is declared top be an unlawful practice.” The Court also states “An intent to deceive is not a prerequisite to the imposition of liability.” In short, the broker’s representation that the tenant was qualified, without the broker having done the research deemed required to make such a statement, was found to be a material misrepresentation, and a violation of the Consumer Fraud Act. As provided for in the Consumer Fraud Act, the $416,779 award of damages to the landlord (there is no explanation of how damages were calculated) was tripled to $1,250,337.

Interestingly, there is no discussion of any duty on the part of the landlord to independently qualify a tenant with which the landlord voluntarily elects to do business. The trial court accepted testimony to the effect that the landlord was relying on the broker – end of discussion (at least in the Appellate Division opinion).

The Court does leave open the possibility that the Consumer Fraud Act might not apply to a situation involving the brokerage of a lease. In a two sentence footnote the Court notes the Consumer Fraud Act references the sale of real estate, but simply observes, without discussion, that the lease in the instant case included an option to purchase. It is difficult to believe that but for that option the result would have been different.

So the bottom line – a new twist on some brokers’ favorite maxim – rather than Buyer Beware – it is now Broker Beware!