Brokerage—Agents May Attempt to Undermine a Transaction Being Advanced By Another Agent Working In the Same Brokerage Firm—Fiduciary Duties—Negligence—Interference With Contract—Implied Covenant of Good Faith and Fair Dealing
This decision required the court “to consider the nature and extent of the fiduciary duty owed by a real estate brokerage firm and its agents when it agrees to act as a seller’s listing agent.” The plaintiff, a commercial property owner, had entered into an “exclusive right to sell/rent agreement” (agreement) with the defendant brokerage firm (broker). The agreement provided that all of the broker’s agents, with the exception of three named agents (named agents), were to be considered “outside brokers.”
The plaintiff subsequently entered into a land purchase agreement (LPA) with a developer (developer), “for the…purpose of developing a senior living community on the property” (senior housing). The LPA stated that one of the named agents “was the broker who was acting on behalf of the seller.” The LPA was subject to certain contingencies, including zoning and development approvals. Some members of the community opposed the senior housing, citing concerns as to “an influx of senior citizens in the village.”
The plaintiff alleged that two of the broker’s agents, “took action to actively oppose and interfere” with the senior housing transaction and that the developer ultimately determined it could not obtain the required approvals and terminated the LPA.
The plaintiff asserted claims against the broker and agents for “negligent violation of the standard of care required of real estate professionals to act in good faith in the best interests of the client; breach of fiduciary duty; breach of contract and the covenant of good faith and fair dealing; and tortious interference.” The defendants moved to dismiss, contending that “there is no principal/agent relationship between either of them and plaintiff; that they have no duty toward plaintiff; that even assuming they ‘injected’ themselves into the transaction as plaintiff contends, they did not thereby acquire a duty toward plaintiff; and that the contract and tortious interference claims cannot be maintained.” The broker did not deny that “it had a duty toward plaintiff,” but argued that the allegations did not “establish that it breached such duty as it had, in tort or under the contract.”
The complaint alleged that although a defendant agent was not listed as the plaintiff’s agent, “she was nevertheless involved in plaintiff’s sale transaction in that she initially approached plaintiff” to advise that “the village board would not approve the [developer’s] zoning proposal, and suggested that plaintiff terminate the contingent contract and place the property back on the market, because she believed there were other potential purchasers interested in the property.” Such agent had allegedly acted “in her own self-interest when she offered assistance and attempted to place the property on the market to show to her own prospective buyers, and to attract new buyers.” The plaintiff further alleged that such agent “used her position and influence with the village board to convince the board to deny the zoning application.” She had allegedly disseminated false or misleading information “to spark public outcry and sway the board into denying the application.”
Additionally, the plaintiff alleged that other defendant agents “obstructed” the Senior Housing transaction “in response to complaints from the owner of an adjacent property” (neighbor). The neighbor had used the broker when he had purchased his property and claimed that he had been assured by the broker that the plaintiff’s “property was not suitable” for the subject type of development. The neighbor allegedly “threatened [the broker] with litigation for misrepresenting the allowable use of plaintiff’s…property, prompting [broker’s] agents to take steps to obstruct the sale.”
The complaint further asserted that a defendant agent had “a personal interest” in blocking the sale to the developer, because that agent had her own potential buyer and because of concerns about the neighbor’s potential claim. The agent had allegedly opposed the zoning proposal at public events and meetings, disseminated false information and tried to convince plaintiff to rescind the contract and relist the property, “threatening to ‘take further action’ upon plaintiff’s refusal.”
In order to establish negligence, a plaintiff must prove “the existence of a duty owed by a defendant to the plaintiff, a breach of that duty, and that such breach was a proximate cause of injury to the plaintiff.” Moreover, “contractual duties may not be converted into the basis for a negligence claim by alleging a lack of due care in the performance of the contract….”
Additionally, “a real estate broker is a fiduciary with a duty of loyalty and an obligation to act in the best interests of the principal.” “Where a broker’s interests or loyalties are divided due to a personal stake in the transaction or representation of multiple parties, the broker must disclose to the principal the nature and extent of the broker’s interest in the transaction or the material facts illuminating the broker’s divided loyalties.” However, “when a real estate brokerage firm is made up of many individual agents, the duty owed by the agent who represents the client does not apply to those other agents of the brokerage firm who had no involvement in the brokerage’s dealings with the client….”
The Court of Appeals has held that “practical considerations” require a distinction “between the fiduciary duty owed by the buyer’s individual agent and that owed by the agent’s firm. An individual buyer’s agent acting on behalf of multiple clients bidding on the same property cannot negotiate an optimal purchase price for all of them. The buyers’ interests conflict; the agent’s representation is inevitably compromised. But two buyer’s agents simply affiliated with the same real estate brokerage firm and acting on behalf of different buyers bidding on the same property generally do not present comparable risks. There is no incentive for these agents to represent their clients less than zealously, consistent with their fiduciary duties under Real Property Law §443 (4) (a) and common law: they only earn commissions for sales to their own clients. As a result, in this situation the agents have every reason to negotiate in their clients’ best interest.”
The Court of Appeals further observed “real estate licensees are commonly affiliated with megabrokerage firms featuring multiple licensees and offices.” For example, three brokerage firms in New York have more than 1,000—affiliated licensees and “[w]ould-be buyers are…aware that they are competing with other potential buyers, including those represented by other agents affiliated with the firm that they have retained.” Thus, “‘[u]nless a broker and principal specifically agree otherwise, a broker cannot be expected to decline a prospective purchaser’s request to see another property listed for sale with that broker.’” Moreover, “unless a real estate brokerage firm and principal specifically agree otherwise, the firm is not obligated to insure that its affiliated licensees forgo making offers on behalf of other buyers for property on which the principal has already bid.”
The plaintiff argued that such precedent was “limited to situations where two buyers’ agents are affiliated with the same brokerage firm but acting on behalf of different buyers with opposing interests.” The subject court opined that such interpretation was too narrow and “counter to the thrust” of Court of Appeals precedent, “which sought to formulate a rule consistent with the nature and fundamental requirements of the real estate marketplace in New York.”
Since the agreement stated that all of the broker’s agents, with three exceptions, “are to be considered outside brokers,” the court held that the plaintiff was “not entitled to expect that any other [defendant agent] had a fiduciary duty toward it.” As “outside brokers,” such other agents had “no greater obligation than any broker with a different brokerage firm would have toward plaintiff.”
The plaintiff argued that it did not allege that “every individual agent of [broker] owed it a duty, but only” the two defendant agents “owed it a duty based on ‘their involvement in the transaction.’” The court held that the defendant agent’s alleged effort to try “to convince plaintiff to cancel the contract and entertain other offers from their own clients, does not constitute involvement in the transaction so as to create a fiduciary duty that did not otherwise exist.” Moreover, the two defendant brokers’ alleged opposition to the proposed development “neither created nor violated any fiduciary duty by those…agents who were not explicitly representing the seller.” The court held that the two defendant brokers’ actions, “in their own perceived personal interest,” at a time when they “did not owe any fiduciary duty to plaintiff,” could not be attributed to the broker “for purposes of alleging a violation of its fiduciary duty.”
The plaintiff also asserted that “the lack of a brokerage agreement between itself and [defendant agents]” did “not preclude a fiduciary relationship, because such a relationship may arise based on ‘statements, promises and conduct’….” Fiduciary liability does not depend “solely” on a contract. A fiduciary relationship could result “from the relation.” However, the plaintiff failed to support its claim that such relationship had been created here, “by allegations of…statements, promises or conduct” (conduct). The plaintiff had relied on the same conduct to create a fiduciary duty as it had cited “to establish a breach of that claimed duty.” Furthermore, a breach of fiduciary duty claim against the broker “must be based on conduct of one of its agents who had a duty toward plaintiff.” Here, “none of the allegations support a violation of…fiduciary duty…by any of [broker’s] agents,” and thus, the broker itself could not be liable for a breach of fiduciary duty.
The complaint failed to cite a particular provision of the agreement that the defendants allegedly breached and the defendant agents were not parties to that contract. Although the broker was subject to the covenant of good faith and fair dealing, the broker “fulfilled the listing agreement by procuring a purchaser, albeit a conditional one; to the extent plaintiff contends that affiliated agents of the brokerage other than those directly representing plaintiff placed the interests of [the neighbor] ahead of plaintiff’s interest, the [broker] cannot be found to have breached its contractual obligations.”
Since neither of the defendant agents had a relationship with the developer, the court held that the allegations that they had interfered with the zoning application did not state a claim that they induced a breach of contract by the developer. The plaintiff did not allege that the developer had breached the contract, “but rather, that it terminated the contract pursuant to the contract’s terms.” “A claim for tortious interference with prospective business relations does not require a breach of an existing contract, but the party asserting the claim must meet a ‘more culpable conduct’….” The plaintiff did not demonstrate that the defendant had interfered “with prospective business relations” “by wrongful means” or that “the offending party acted for the sole purpose of harming the other party.” “‘Wrongful means’ include physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure.” The allegation that the broker and its agents “refused to re-list plaintiff’s property after the [developer’s deal] was terminated” failed “to satisfy that element of the tort.”
Finally, a defendant agent submitted minutes of a town board meeting to establish that the purchaser’s “termination of the contract was not due to defendants’ alleged efforts to cause the rejection of the zoning proposal,” since the board did not vote to reject the proposal. The minutes were improperly submitted with “reply papers” and were not relied upon as a ground for dismissal. Moreover, the minutes were “not of the sort that conclusively establishes the claimed fact as a matter of law, and therefore would not be a proper basis for a motion pursuant to CPLR 3211(a)(1)….” Accordingly, the court granted the motions to dismiss.
106 N. Broadway LLC v. Houlihan Lawrence, Sup. Ct., Westchester Co., Index No. 57543/2017, dated March 15, 2018, Ruderman, J.
Landlord-Tenant—Motion For Civil Contempt and Civil Penalties Denied—No Negative Inference Drawn From Board Members Not Testifying—No Reason to Believe Board Members Had Knowledge of the Scope or Quality of the Work—Petitioner Thwarted Respondents’ Efforts to Abate Violations By Unreasonably Limiting Hours and Days When Contractors Could Do Remedial Work and By Calling the Police
A petitioner commenced an HP proceeding against, inter alia, the respondent. The petitioner sought an order directing the respondents to correct violations and for imposition of civil penalties. In 2014, the parties had executed a consent order (consent order), which required the respondents to correct violations that had been placed on the premises on May 5, 2014. In 2016, the petitioner had moved to hold the respondents in contempt of the consent order and to impose civil penalties for failing to correct the violations which were subject to the consent order. The respondents cross-moved to dismiss violations and to amend the consent order, to remove a clause which “placed the responsibility for curing such violations on respondents.”
A 2016 court order (2016 order) denied the respondents’ cross-motion in its entirety and denied that part of the petitioner’s motion to hold the respondents in contempt of the consent order. The 2016 order provided that the petitioner could restore the contempt motion if the repairs had not been “cured and/or certified as cured within 45 days” and assessed penalties in the amount of $76,320 against the respondents.
Thereafter, the respondents restored the proceeding, seeking to have additional time to cure the remaining violations. The petitioner then cross-moved to restore her prior motion for contempt. Following a hearing on the issue of contempt, the court found that the respondents had not violated the consent order or the 2016 order. The court explained that the respondents had “made continuing efforts and engaged in ongoing work to comply with both orders in question.”
“Before a court punish for civil contempt, the movant must demonstrate…a lawful court order was in effect that clearly expressed an unequivocal mandate,” “that the contemnor knew about the order,” “the order was disobeyed to a reasonable certainty,” and “the movant was prejudiced.”
The subject premises involved a duplex apartment that was located on the 10th and 11th floor of the subject building. The petitioner attempted to characterize a condition on the 11th floor as a violation that was subject to both the consent order and the 2016 order. However, such condition involved a violation that had actually been placed on March 2016. Since that violation was after the consent order, it could not have been the subject of the consent order or of the 2016 order. The court held that the respondents could not be held in contempt for not correcting or failing to correct those violations. Moreover, the respondents could not be in contempt for failing to repair conditions on the 11th floor with respect to a consent order that cited violations which had been issued with respect to the 10th floor.
Furthermore, violations which had been issued on May 5, 2014, had been marked as corrected as of March 30, 2016 and Aug. 1, 2016 and had been dismissed following a reinspection. Pursuant to MDL §328(3), “there’s a presumption that the inspector’s findings are correct and the court can take judicial notice of such.” The petitioner had failed to rebut such presumption.
Additionally, the court was troubled by the “petitioner’s actions in calling the police to report respondents’ contractors as trespassers and having them removed from the building.” The petitioner could have contacted the respondent to determine if these individuals were authorized to conduct repair work at the premises. This was especially so, since their litigation was pending “concerning the correction of violations.” The petitioner had observed these men with “heavy machinery” and knew that “violations needed to be corrected.” The petitioner had not established that “she would be physically threatened or harmed.” The court found that “petitioner’s action thwarted respondents’ efforts in correcting the violations” and that the petitioner had engaged in “dilatory behavior which did cause a delay in correcting the existing conditions.” The respondents had explained that the petitioner unreasonably limited the hours and days that remedial work could be done, i.e., the petitioner allegedly provided access “a couple of hours at a time and on non-consecutive dates….”
The court refused to draw a negative inference because the respondents did not call any board member to testify during the hearing. The court explained that “[r]respondents need only call witnesses who are competent to testify as to the facts and the issues regarding the violations.” Since the issues involve “the physical aspect of construction to abate the violations,” the court opined that board members were unlikely to be familiar with such facts. “There was no showing that any specific board member would have had the slightest understanding” of the scope or quality of the work.
Accordingly, the court denied the motion for contempt and civil penalties. However, the court directed that respondents repair certain conditions, if those conditions still exist.
Comment: Obviously, there are not only difficult landlords, but there are also difficult tenants. Why would tenants impede remedial work? Sometimes, they want to enhance a claim for a rent abatement or harassment. Some tenants may have a good faith basis for asserting that a landlord’s repair plan is unreasonable, because of its scope or schedule. Additionally, some tenants may have mental health issues or are just unreasonable.
Of course, there are landlords who will refuse to make repairs or will protract the process, in order to save money or harass a tenant, hoping that the tenant will eventually raise a “white flag” and vacate the apartment.
Both tenants and landlords should strive to maintain detailed records of incidents and communications in order to establish a clear record that will enhance their credibility.
Faber v. Loft 14 Condominium, Civ. Ct., N.Y. Co., Index No. 6099/14, decided March 9, 2018, Wendt, J.
Scott E. Mollen is a partner at Herrick, Feinstein.