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Davin, L.L.C. v. Daham

329 N.J. Super. 54, 746 A.2d 1034 (App. Div. 2000)

LEASES; ATTORNEYS; FORECLOSURE—When negotiating a lease for premises at a property under foreclosure, a landlord’s attorney must insist that its client advise the tenant of the proceedings, and if the landlord won’t do so, the attorney must withdraw.

A four-unit commercial shopping center was subject to a convoluted foreclosure proceeding. It involved several landlord bankruptcies and several transfers of the property during the course of the proceedings. Nonetheless, well along during the proceedings, the record owner of the property entered into a lease with a tenant to operate a retail bagel shop. The tenant made substantial expenditures involving, among other things, installation of fixtures, equipment, and improvements. It took approximately four months to complete to work and the activities were visible to the public. The record owner’s attorney prepared a lease and the lease was reviewed by the tenant’s attorney. Throughout the negotiations, the landlord’s attorney never mentioned to the tenant or to the tenant’s attorney that the property was in foreclosure and also never advised them of the circumstances surrounding the foreclosure. On the other hand, the tenant’s attorney never recommended that his client obtain a title search. The foreclosing lender commenced an ejectment action to remove the tenant from the premises. Ordinarily, unless an existing tenant has been made a party defendant to a foreclosure suit, its interest is unaffected thereby. “Here, the tenancy was entered into not only after the execution of the mortgage, but also after the foreclosure was instituted and a notice of lis pendens filed.” Therefore, the Court concluded that the tenant took its leasehold interest subject to the mortgage and subject to ejectment “since it was subsequent in time to the mortgage, and subsequent in time to the foreclosure and filing of the notice of lis pendens.” However, that did not end the Court’s inquiry. The tenant contended that the mortgagee should have been equitably estopped from ejecting it from the premises. In order to establish a claim of equitable estoppel, “the claiming party must show that the alleged conduct was done, or a representation was made, intentionally or under such circumstances that it was both natural and probable that it would induce action. Further, the conduct must be relied on, and the relying party must act as to change his or her position to his or her detriment.” The evidence showed that a representative of the foreclosing mortgagee was aware of the extensive construction activities taking place on the premises, but took no steps to make the tenant aware of the impending foreclosure action. Therefore, the Appellate Division remanded the matter to the lower court to see if equitable estoppel, which can arise by silence or omission where one is under a duty to speak or act, was applicable under these circumstances. “If, on remand, it is determined that [the mortgagee] is estopped from ejecting [the tenant, the tenant] would then be entitled to remain in the premises for the balance to the term of the lease, assuming they comply with its terms and conditions.” As to the claim by the tenant against its own attorney, there was testimony before the lower court that it is not standard practice when reviewing a commercial lease with the size or duration of this particular lease, to order a title search. The lower court judge, relying on his prior extensive experience as a practicing attorney, stated that “an attorney for a tenant never orders a title search before advising his or her client to enter into a lease.” The Appellate Division disagreed. It felt there was a genuine issue of material fact as to whether the tenant’s attorney should have ordered a title search in properly representing his clients, and, that issue should not have been decided by summary judgment, but rather should have been submitted to the ultimate finder of fact.

This left the question as to whether the record owner’s attorney had a duty to advise the tenant and the tenant’s attorney as to the existence of the foreclosure action. “Whether an attorney owes a duty to a non-client third-party depends on balancing the attorney’s duty to represent clients vigorously, Rules of Professional Conduct, Rule 1.3, with a duty to refrain from knowingly making a false statement of material fact or law to a third person.” Thus, it is clear that in an appropriate circumstance, an attorney may owe a duty to a non-client. The tenant’s claims against the landlord’s attorney appeared to be based upon the contention that the attorney owed it a duty to disclose “any factual and/or legal impediments which might foul or encumber the subject lease.” Moreover, it contended that the record owner’s attorney “owed them a duty not to include in the proposed lease a covenant of quiet enjoyment in light of the impending foreclosure.” According to the Court, although an attorney has a duty to represent his or her client effectively and vigorously, an attorney “also has a duty to act fairly and in good faith. Among the factors to be considered in determining whether to impose a duty is the potential impact on the public.” “Candor and honesty necessarily requires disclosure of significant facts, even though the disclosure might not be in the interest of the client.” When the record owner’s attorney “prepared the lease, he was keenly and acutely aware of the fact that it was extremely unlikely that [the tenant] would be able to occupy the premises for the term of the lease. ... Given the materiality of the [mortgagor’s] apparent inability to assure the fact that [the tenant] would be entitled to enjoy the premises for the term of the lease and that [the record owner’s attorney] was aware of that material fact, we merely hold today that [the attorney] was obliged to recommend disclosure of that fact [by his own client] to [the tenants], or their attorney, and cease representation if [his client] fail[s] to follow that recommendation.” The Court appreciated that the record owner’s attorney was in a difficult position, but “when the fact to be disclosed goes to the very essence of the transaction, the attorney should recommend disclosure.” The Court merely concluded that the attorney was required to advise his clients to disclose the facts. The question as to whether the acts of the tenant’s attorney and the record owner’s attorney were a proximate cause of damages suffered by the tenants, and if so, what those damages were, was left for resolution by the fact-finder.


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