Green v. Morgan Properties
73 A.3d 478, 215 N.J. 431, 2013 WL 5180483 (2013)
Rule of Law:
A contractual provision in a residential lease for fixed attorneys' fees, denominated as 'additional rent' for eviction proceedings, is not a liquidated damages clause and is subject to judicial review for reasonableness, with the landlord bearing the burden of proof; moreover, an in-house attorney for the landlord is generally not individually liable to tenants under the Consumer Fraud Act or for professional negligence for actions taken within the scope of her employment.
Facts:
- Darnice Green, Mathew Blumberg, Michael Permenter, and Beth Permenter were tenants in apartment complexes owned by East Coast the Willows, LLC, and East Coast Colonial Apartments, LLC, and managed by Morgan Properties, Morgan Management, and Mitchell L. Morgan, Inc.
- Eviction actions were initiated against each of the plaintiffs for non-payment of rent.
- To avoid eviction, plaintiffs were required to pay attorneys' fees in amounts fixed by a provision in their apartment leases.
- The original leases included a provision demanding $400 in attorneys' fees if a court appearance was required, and $200 if the matter was resolved without a court appearance, characterized as 'additional rent'.
- Plaintiffs Green and the Permenters executed new leases in 2010 that altered this provision, stating that $400 plus costs would be due as 'Additional Rent' if the landlord used attorney services (including in-house counsel) for lease enforcement.
- Defendants file an average of 200 eviction complaints each month in Camden County alone, which are handled by Rosemary Spohn, Esq., a salaried in-house counsel for Morgan Properties.
- Plaintiffs believed the attorneys' fees fixed in their leases were unreasonable when compared to the actual attorneys' fees the corporate defendants incurred for using in-house counsel.
Procedural Posture:
- Plaintiffs Darnice Green, Mathew Blumberg, Michael Permenter, and Beth Permenter filed a complaint in the Superior Court, Law Division (trial court) against corporate defendants and Rosemary Spohn, Esq., alleging violations of the Anti-Eviction Act (Count One), Consumer Fraud Act (Count Two), and negligence (Count Three).
- Defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief may be granted.
- The trial court granted defendants' motion, dismissing the entire complaint with prejudice.
- Plaintiffs appealed the trial court's order to the Appellate Division (an intermediate appellate court).
- The Appellate Division reversed the trial court's order, reinstating Count Two (CFA) and Count Three (negligence/misrepresentation) against all defendants, and converting the dismissal of Count One to be without prejudice.
- Defendants filed a petition for certification to the New Jersey Supreme Court, which was granted.
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Issue:
Does a residential lease provision requiring tenants to pay fixed attorneys' fees for eviction proceedings as 'additional rent' constitute a presumptively reasonable liquidated damages clause, thereby shifting the burden of proving unreasonableness to the tenant, and can a landlord's in-house counsel be held individually liable to tenants for such provisions under consumer fraud or negligence theories?
Opinions:
Majority - Justice HOENS
No, a residential lease provision requiring tenants to pay fixed attorneys' fees for eviction proceedings as 'additional rent' does not constitute a presumptively reasonable liquidated damages clause, and therefore the landlord bears the burden of proving the reasonableness of such fees. Furthermore, no, a landlord's in-house counsel cannot generally be held individually liable to tenants under the Consumer Fraud Act or for professional negligence for actions related to these provisions when acting within the scope of employment and without inducing direct reliance. The Court rejected the argument that the attorneys' fee provisions were liquidated damages clauses. In the context of summary dispossess actions, such fees are considered 'additional rent,' not damages. Additionally, the lease provision itself did not fix a truly liquidated sum because it set two initial levels but then allowed for higher actual fees to be charged, deviating from the traditional definition of liquidated damages. Residential leases are contracts of adhesion, meaning tenants typically lack bargaining power, making it inappropriate to assume the fee was 'pre-negotiated.' Tenants must be afforded a forum to challenge the reasonableness of lease clauses. Shifting the burden of proof to tenants to show unreasonableness would be impermissible, as the party seeking attorneys' fees (the landlord) ordinarily bears the burden of proving their reasonableness, and contractual fee-shifting provisions are strictly construed and disfavored in New Jersey, consistent with the Anti-Eviction Act's purpose to protect tenants. The Consumer Fraud Act (CFA) claim against the corporate defendants was sufficiently pleaded because plaintiffs alleged the fixed fees were unreasonable compared to actual costs, especially given the use of salaried in-house counsel and the high volume of eviction cases. This was enough to withstand a motion to dismiss. However, the CFA claim against the individual in-house attorney, Rosemary Spohn, Esq., was dismissed because the complaint did not allege she had any role in drafting the leases or calculating the fees, nor any other act falling under the limited scope of individual employee liability under the CFA. The professional negligence claim against the individual attorney was also dismissed. The Court reiterated that an alleged violation of ethical rules (like fee-sharing) does not create a private cause of action for a non-client. While attorneys may be liable to third parties in narrow circumstances (e.g., misrepresentations known to be relied upon), the complaint offered no such basis to establish an attorney-client relationship or a duty to the tenants. The Court emphasized its reluctance to allow non-clients to sue adversary attorneys to protect zealous advocacy.
Analysis:
This case clarifies that attorneys' fees stipulated in residential leases for eviction purposes are subject to rigorous judicial review for reasonableness, affirming the protective nature of the Anti-Eviction Act and the Consumer Fraud Act in New Jersey. By rejecting the 'liquidated damages' characterization for these lease provisions, the Court places the burden of proving reasonableness squarely on landlords, especially in the context of contracts of adhesion. The decision also reinforces the high bar for individual liability of attorneys to non-clients, safeguarding zealous advocacy while still allowing claims against corporate landlords for potentially unconscionable practices. This will likely lead to greater scrutiny of landlord attorney fee clauses and discourage landlords from attempting to profit excessively from eviction-related legal costs.
