Green v. Morgan Properties

A-3203-10T2 (N.J. Super. App. Div. 2011) (Unpublished)
  • Opinion Date: November 3, 2011

LEASES; ATTORNEY’S FEES; CONSUMER FRAUD ACT — If a lease provides that a landlord will be reimbursed for attorney’s fees, those fees may be collected even if the landlord uses an in-house attorney, but if the landlord seeks to collect more than its actual and reasonable attorney’s fees, then it may be guilty of illegal fee splitting and may be violating the Consumer Fraud Act.

A group of tenants filed a class action lawsuit against their landlords accusing them of wrongful eviction and consumer fraud. The tenants were residents of properties owned by related landlord entities. Each of the landlords employed an in-house counsel to handle tenant non-payment cases. Each lease contained a provision requiring the tenant to pay a mandatory attorney fee if it was subject to an eviction action, and a reduced attorney fee if it paid all of its arrears before the trial date. The tenants claimed that the landlords violated the anti-eviction statute, N.J.S.A. 2A:18-61.6 when representing to the tenants that they would be subject to eviction if they failed to pay those attorney’s fees. They also claimed that the lease provision requiring them to pay the landlords’ attorney’s fees (when the landlord was represented by in-house counsel) was unconscionable and violated the Consumer Fraud Act.

The tenants argued that since the landlords were non-attorneys, they were not permitted to collect attorneys’ fees when they were self-represented through in-house counsel. They also claimed that the landlord’s in-house counsel was a salaried employee and the fees sought exceeded the landlords’ actual legal expenses. This, they argued constituted illegal fee-sharing between attorneys and non-attorneys.

The lower court disagreed, and dismissed the tenants’ complaint with prejudice. It cited a 1998 New Jersey Supreme Court case, Community Realty Management, Inc. v. Harris, 155 N.J. 212, 242 (1998) which approved, in principle, the right of a landlord to collect reasonable attorney’s fees incurred in connection with an eviction if that right was set forth in the lease. The lower court found that, generally, the attorney fee provision set forth in the leases before it was reasonable and that the landlords were not required to prove that the fee was reasonable in each case. The lower court also dismissed the consumer fraud and negligent misrepresentation claims, finding that there was no unconscionable business practice since the leases allowed the landlords to collect attorneys’ fees and the court deemed the fees to be reasonable.

The tenants appealed. The Appellate Division reversed even though it rejected the tenants’ argument that the landlords and were not permitted to recover attorneys’ fees when represented by in-house counsel. The New Jersey Supreme Court decision in Community Realty did not limit the landlords’ ability to collect fees to those incurred by hiring outside counsel. However, the Court did agree that the tenants had put forth a valid illegal fee splitting claim. It noted that, pursuant to the Rules of Professional Conduct, R.P.C. 5.4(a), a non-attorney is not permitted to share legal fees with an attorney. Thus, the landlords were not permitted to collect an attorney fee under the lease greater than their actual cost for legal services provided by their in-house counsel.

The Court also found that the tenants adequately alleged a consumer fraud claim for misrepresentation. The tenants had claimed that the landlords falsely represented that the attorney fee charge set forth in the leases represented the actual legal costs incurred by the landlords, while the actual fees paid to the landlords’ salaried in-house counsel were significantly lower. The Court agreed that the Consumer Fraud Act applied to the landlord-tenant relationship, and that the allegation that the landlords misrepresented their actual legal costs was the basis of a Consumer Fraud Act claim for negligent misrepresentation.