LEGAL CORNER: Important Recent State and Federal Court Decisions

LEGAL CORNER: Important Recent State and Federal Court Decisions
John Dolgetta, Esq., Dolgetta Law, PLLC.

Various state and federal court decisions have been issued recently impacting the real estate industry. At the federal level, two important decisions have been issued relating to antitrust lawsuits involving the payment of real estate commissions and the Department of Justice’s investigation initiated in 2019 into the National Association of Realtors’ Clear Cooperation Policy and Participation Rule. In New York, two lawsuits uphold the doctrines of “Buyer Beware” and “Time of the Essence”.

Moehrl v. NAR: The Commission Lawsuit Moves Ahead

On March 29th, the judge in Moehrl v. NAR [see] issued an order granting class certification to the plaintiffs in the case. The class certification ordered in this lawsuit is a crucial ruling issued against NAR and the other defendants. While the case is far from over, a decision against NAR and the other defendants would not only dramatically alter the commission payment landscape across the country but could have a major impact on the entire real estate industry. The plaintiffs in the Moehrl case allege that the requirement that the sellers pay the commission in real estate transactions is a violation of federal antitrust laws by inflating the costs for sellers.

In Moehrl, the judge points out that the “Plaintiffs contend that together the NAR and Corporate Defendants have engaged in a continuing contract, combination, or conspiracy to unreasonably restrain price competition among real estate brokers in violation of § 1 of the Sherman Act, 15 U.S.C. § 1.” The plaintiffs each sold a home on a Multiple Listing Service (MLS) that implemented and engaged in the practice of unreasonably restraining price competition and “therefore paid a purportedly inflated commission to the successful buyer-broker.” This lawsuit is quite expansive and covers homes listed with the defendants on 20 NAR-affiliated MLSs across the nation.

There are two classes of individuals covered under the court’s certifications: (1) “Home sellers who paid a commission between March 6, 2015, and Dec. 31, 2020, to a brokerage affiliated with a Corporate Defendant in connection with the sale of residential real estate listed on a Covered MLS and in a covered jurisdiction;” and (2) “Current and future owners of residential real estate in the covered jurisdictions who are presently listing or will in the future list their home for sale on a Covered MLS.” The ruling relied on the testimony of two expert witnesses, a law school professor from Harvard University School of Law, and an economics professor from New York University. According to an article published by Inman, the NYU economics professor “estimated that total class damages in the case come to $13.7 billion. If the court awards treble damages, that figure could go up to $41.1 billion.” [See]. This case is extremely important for the real estate industry and will be closely followed.

DOJ v. NAR: Clear Cooperation Policy and Participation Rule

In 2019, the DOJ opened an investigation into certain NAR policies, including the Clear Cooperation Policy and the Participation Rule, by issuing Civil Investigative Demands to NAR. The DOJ alleged that these policies violated antitrust laws and they restrict competition and prevent real estate agents from offering lower commission rates and alternative service models to consumers.

NAR’s Clear Cooperation Policy generally requires that brokers who are Realtor members publicly advertise all properties that they list for sale, regardless of whether the listings are intended to be sold through the MLS or through other means. The Participation Rule, on the other hand, requires that brokers who participate in the MLS share their listings with other MLS participants and offer compensation to other brokers who introduce buyers to a real estate transaction. The DOJ argued that these policies limit competition and consumer choice, and ultimately violate antitrust laws.

In 2020, the DOJ and NAR negotiated a settlement of the DOJ’s action and ultimately, the DOJ entered a Complaint, Stipulation and Order, and Proposed Final Judgment with the court. On the same day, the DOJ sent a “closing” letter to NAR which confirmed “‘that the Antitrust Division has closed its investigation into (NAR’s) Clear Cooperation Policy and Participation Rule’ and that NAR ‘Accordingly’ had ‘no obligation to respond to’ the corresponding CIDs.’” [See].

After the DOJ and NAR entered into their Settlement Agreement, NAR made changes to these policies in order to comply with the terms of the Settlement, and submitted the changes to the DOJ for approval. In early 2021, NAR reached out to the DOJ for an update and received no response. In April, the DOJ ultimately responded, however, it tried to renegotiate the terms of the Settlement Agreement, and in July 2021, the DOJ issued new CIDs and reopened its investigation.

On Jan. 25, 2023, the U.S. District Court for the District of Columbia, issued a Memorandum Opinion holding that “not setting aside the CID at issue would deprive NAR of the benefit for which it bargained: the closure of the Antitrust Division’s investigation into its Participation Rule and Clear Cooperation Policy. The government, like any party, must be held to the terms of its settlement agreements, whether or not a new administration likes those agreements. For this reason, the CID at issue must be set aside. A separate order will issue.” This is a very important decision as it not only allows NAR’s Clear Cooperation Policy and Participation Rule to remain in place, but also firmly establishes that the government, like all parties, must abide by the terms of any agreement, including the Settlement Agreement entered into by the DOJ and NAR.

Fink v. 218 Hamilton LLC: Affirming The Declaration of Time of the Essence

In Fink v. 218 Hamilton LLC, [see], the contract of sale between the seller and purchaser included a customary mortgage contingency clause. The purchaser was provided with a 60-day mortgage contingency period to obtain a mortgage commitment. The mortgage contingency provision permitted the purchaser to cancel the contract and receive a refund of the down payment paid at contract signing if the purchaser was unable to obtain a commitment within the 60-day period.

The purchaser failed to obtain a mortgage commitment before the expiration of the mortgage contingency period, did not terminate the contract, and failed to request a return of the down payment. The purchaser also failed to close by the projected closing date contained in the contract. In light of the purchaser’s actions, the seller’s attorney sent a “time of the essence” letter and set a specific closing date. Upon receipt of the TOE letter, the purchaser requested a 10-day extension to close. The seller denied the purchaser’s request and no closing occurred.

The purchaser then sued the seller for specific performance and breach of contract. The Supreme Court, Kings County, denied the purchaser’s motion for summary judgment and granted the seller’s motion to dismiss. The purchaser argued that the TOE letter was defective because the seller knew that the purchaser needed additional time to close.

The court explained that when the contract was not terminated in accordance with its terms, the purchaser was bound to proceed with the transaction and had no further right to terminate the contract of sale, or to delay the closing.

According to the court, “there is no requirement that a time of the essence letter must consider the purchaser’s ability to close by that date. Indeed, if that were true then the entire expedient of sending such time of the essence letters would be undermined thereby.” The purchaser further argued that the contract of sale afforded the purchaser an additional 10 days to cure if it failed to close by the closing date. However, the court held that “where a time of the essence letter has been duly served and purchaser fails to abide by those terms, the purchaser is not afforded another 10 days [to cure] in addition to the time provided by the time of the essence letter.”

R. Vig Properties, LLC v. RahimzadaCaveat Emptor, Merger Doctrine Revisited

On Feb.  23rd, the Appellate Division, Second Department, issued its decision in R. Vig Properties, LLC v. Rahimzada [see], which upheld the longstanding doctrine of Caveat Emptor (“Buyer Beware”) and the merger doctrine. The parties entered into a contract of sale whereby the sellers (defendants) agreed to sell to the purchasers (plaintiffs) three improved commercial properties. The real estate transaction closed in 2006 and, in 2012, the plaintiffs sued the defendants alleging fraud and deceit, misrepresentation, and breach of contract.

The plaintiffs alleged that the defendants represented to them that one of the properties being sold was occupied by a tenant pursuant to “a self-sustaining triple-net master lease.” The plaintiffs further alleged, among other allegations, “that the defendants withheld from them certain facts…including the fact that the master tenant…was experiencing financial difficulties and absent rent concessions would breach the master lease and vacate the property; the fact that a prior determination of the United States Bankruptcy Court…relieved all prior assignees of the master lease for that property from liability notwithstanding that the terms of the master lease, annexed as an exhibit to the contract of sale, provided that such assignees were liable; and the fact that the tenant…was a single asset entity with no assets ….” This was all information that could have been investigated by the purchaser and/or was available publicly.

The Doctrine of Buyer Beware: Fraudulent Misrepresentation and Active Concealment

In New York, it is well-settled that in real estate transactions purchasers are subject to the doctrine of Caveat Emptor (i.e., Buyer Beware). Purchasers must conduct all due diligence in connection with the purchase of real property and must satisfy themselves as to the condition of the property. There are very limited legal remedies available to purchasers post-closing.

One such remedy is a cause of action for fraudulent misrepresentation. The Court in F. Vig Properties, LLC explains that “a cause of action to recover damages for fraudulent misrepresentation requires ‘a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.’”

Another remedy available to a purchaser is a cause of action for active or fraudulent concealment. Ultimately, the court held “the facts alleged to have been misrepresented and/or improperly concealed were not matters peculiarly within the defendants’ knowledge which could not have discovered by the plaintiffs by the exercise of ordinary intelligence and/or which thwarted the plaintiffs in their efforts to fulfill their responsibilities imposed by the doctrine of caveat emptor.” A seller is not required to disclose anything about the property unless required to do so by law or “some conduct (i.e., more than mere silence) on the part of the seller rises to the level of active concealment.”

The Merger Doctrine

Another important doctrine in contract law is the merger doctrine. The court in F. Vig Properties, LLC explains that “The merger doctrine in a real estate transaction provides that once the deed is delivered, its terms are all that survive and the purchaser is barred from prosecuting any claims arising out of the contract.” The court dismissed the plaintiff’s action based on the fact that all of the terms contained in the contract of sale merged into the deed, and the terms contained in the deed are the only provisions that survive the closing, unless the contract specifically provides that a particular provision or provisions survive the closing.

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