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These are difficult times for the real estate industry. Prices have dropped, sales have plummeted and the regulatory landscape continues to become more challenging. At the same time, the legal rights afforded homebuyers have continued to expand under the Consumer Fraud Act (“Act”), which prohibits unconscionable practices in connection with the sale of real estate.

It is well established that brokers may be held liable under the Act for misleading sales material. Home improvement contractors will be penalized for mere technical violations, and even financial lenders are now deemed subject to the Act’s requirements. A recent trial court opinion, Matera v. M.G.C.C. Group, Inc., has further expanded the scope of the Act and should be a cautionary tale for anyone who participates, however indirectly, in selling real estate.

In Matera, a lender acquired Phase III of a residential development by deed in lieu of foreclosure after the original developer defaulted. The lender appeared before the planning board in 1996 to obtain a compliance letter to allow Phase III to be constructed. Allegedly, the lender failed to disclose drainage problems affecting homes already constructed in Phase II by the original developer, and also misrepresented drainage information in the plans presented to the board. After the board granted the compliance letter in 2002, the lender sold Phase III to a builder. During construction of Phase III, water flooded the homes in Phase II.

Homeowners in Phase II sued the lender, the builder and others. The lender moved to dismiss the consumer fraud claims, arguing that it did nothing unlawful in selling Phase III and that it was not responsible for the water damage to the homes in Phase II.

The court held that the lender’s alleged misrepresentations before the planning board, if proved at trial, would be the type of unconscionable conduct prohibited by the Act. The critical issue, however, was whether the lender made these misrepresentations as part of the sale of Phase III, since the Act only applies to unlawful conduct occurring in connection with the sale of real estate.

The court ruled that the lender made the alleged misrepresentations to the board in connection with the sale of Phase III. The court reasoned that because the lender could not sell Phase III without the compliance letter, its appearance before the board was part of the sale process. And since the lender made the alleged misrepresentations with the objective of selling Phase III, the court considered the lender’s appearance before the board inextricably linked to the sale of the real estate.

A consumer fraud claim requires three elements under the Act:

• Existence of an unlawful act under the Consumer Fraud Act;

• An ascertainable loss by the plaintiff; and

• A causal nexus between the unlawful conduct and the loss.

Because it is remedial legislation intended to deter unconscionable practices, the Act has always been construed liberally in favor of consumers. In allowing the homeowners’ consumer fraud claims to proceed to trial, the court in Matera interpreted the Act as being intended to protect any consumer who suffers an ascertainable loss from any unlawful conduct.

Significantly, the court concluded that a claim under the Act does not require direct contact between the violator and the victim. There need only be a nexus between the unlawful conduct and the loss. Consequently, the court did not evaluate the relationship between the lender and homeowners because it focused instead on the connection between the lender’s unlawful conduct and the damages suffered by the homeowners.

The court reasoned that the flooding would not have occurred if the lender had disclosed the drainage issues to the board. According to the homeowners, if the board had been made aware of the drainage issues, it would not have issued the compliance letter or it would have required corrective measures prior to construction.

The court’s opinion continues an alarming trend of expanding the scope of the Act. Under the court’s holding, a lender that acquired an asset by foreclosure is now exposed to treble damages and legal fees from complete strangers. The lender did not have any contract or dealings with the homeowners. It did not even construct Phase III, which caused the water damage to Phase II. Nevertheless, the lender must now defend itself at trial because of misrepresentations allegedly made to the planning board in seeking an administrative approval to allow the property to be constructed.

The court’s opinion is alarming for two reasons. First, it exposes all participants in a real estate transaction to potential liability under the Act. Under the court’s rationale, any activity intended to satisfy a contractual contingency could be considered part of the sale process. In Matera, the qualifying conduct was appearing before the planning board to secure a development approval.

Presumably, any conduct by a seller to satisfy a contractual contingency could be considered part of the sale process. And any assistance provided by a broker, attorney or engineer to satisfy the contingency could be subject to the Act and later expose that professional to consumer fraud claims.

Second, the court’s opinion allows liability to be imposed without any contractual relationship or direct dealings between the plaintiff and defendant. Under the court’s holding, a consumer fraud claim only requires a connection between the unlawful conduct and the damages. There is precedent for this holding, since indirect suppliers of merchandise may be sued under the Act even though they have no direct contact with the consumer. However, the court’s holding now extends this interpretation of the Act to the real estate setting.

The lesson to be learned from Matera is that all participants in a real estate transaction should consider themselves potentially exposed to consumer fraud claims from peripheral parties. Based upon the court’s interpretation of the Act, they will be permitted to pursue a claim so long as they can demonstrate that they suffered damages from unlawful conduct under the Act. Waivers and disclaimers in contracts and loan documents will not protect against these types of claims. Consequently, the only sure-fire way to avoid exposure under the Act is to act honestly and openly at all stages of the transaction.

Because Matera is a trial court opinion, it is not binding precedent and it may even be appealed. However, the court’s reasoning undoubtedly will be adopted by other courts and the expansion of liability under the Act will certainly continue.

The views expressed here are those of the author and not of GlobeSt.com.

Craig W. Alexander is a partner in the law firm Mandelbaum Salsburg Gold Lazris & Discenza, West Orange, NJ. He can be reached at [email protected].

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