“The Real Estate Consumer Protection Enhancement Act Brings Industry Change,” published in the New Jersey Law Journal by Iram Valentin, Esq., 10-2-2024

“Real estate professionals should take extra care to educate themselves and to comply with the provisions of the Act, recognizing the potential for increased exposure and liability,” writes Iram P. Valentin.

On May 9, 2024, bill S3192/A4454, also known as the Real Estate Consumer Protection Enhancement Act (Bill), was introduced in the Senate and referred to the Senate Commerce Committee. On May 13, 2024, the Senate Commerce Committee reported favorably on the Bill, noting in part that, “This bill incorporates certain protections for consumers regarding residential real estate transactions and certain aspects of commercial real estate transactions.” The bi-partisan-sponsored legislation passed the Senate by a vote of 37-0 on May 20, 2024; the Assembly by a 76-0 vote on June 28, 2024; and both Houses by a vote of 40-0 on June 28, 2024. Gov. Phil Murphy signed the bill into law on July 10, 2024. It is codified at N.J.S.A. 45:15-16.86, et seq. (Act) and pursuant to N.J.S.A. 45:15-16.100, The New Jersey Real Estate Commission is authorized to promulgate regulations pursuant to the Administrative Procedure Act “to effectuate the purposes of the Act, including regulations to address other types of agency or business relationships for real estate brokerage firms.” The Act went into effect on Aug. 1, 2024.

The purpose of the Act is to codify “certain [additional] protections for consumers regarding residential real estate …” Specifically, the Act delineates, among other things: (a) agency relationship classes into which real estate professionals fall; (b) roles and responsibilities imposed on members of those classes; and (c) additional disclosure requirements intended to advise consumers of the various roles and of material information impacting a purchase. For example, real estate agents are now required to make an “Agency Disclosure,” at the outset of a relationship, explaining the nature of the agent’s representation and compensation. Further, real estate agents are now required to post disclosures during open houses disclosing their allegiance. Additionally, a seller is required to provide a brokerage with a seller’s disclosure “with the information [already] filled in and signed by the seller.” Even further, the Act sets forth requirements concerning the handling of “confidential information” and the disclosure of “material information” in connection with a real estate transaction. Finally, the Act imposes additional continuing education requirements on real estate professionals, including “at least one hour on agency per biennial renewal period.”

A Focus on Agency
The definition of “agent” in the new law encompasses licensed real estate brokerage firms and their brokers, “that ha[ve] an agency relationship with a principal.” In other words, because an agency relationship exists between a brokerage/broker and a principal (buyer or seller), then brokers are “agents” of that principal, and by virtue of that relationship, stand in a fiduciary position. The Act is consistent with the long-existing public policy in New Jersey seeking to protect consumers in real estate transactions. The New Jersey Supreme Court long ago declared that, “There can be no doubt that the business of the real estate broker is affected with a public interest. The Legislature has marked it off as distinct from occupations which are pursued of common right without regulation or restriction.” Ellsworth Dobbs v. Johnson, 50 N.J. 528, 552 (1967) (disapproved of by Specialty Restaurants v. Adolph K. Feinberg Real Est., 770 S.W.2d 324 (Mo. Ct. App. 1989)). In Ellsworth, Justice John J. Francis explained:
“The statutes are a valid exercise of the police power designed as they are to protect the public from fraud, incompetence, misinterpretation, sharp or unconscionable practice. Long before these enactments, the relationship between the broker and his principal was regarded as one affected by considerations of public policy. The broker was and is looked upon as a fiduciary and is required to exercise fidelity, good faith and primary devotion to the interests of his principal. He [or she] cannot permit his [or her] interests to interfere with those of his [or her] principal.”
In line with this declaration, the Act includes in the definitions of “brokerage firm,” “buyer’s agent” and “seller’s agent” a declaration that each owe “fiduciary duties” to their principal.

Common Duties and Obligations
Under the new law, a buyer’s agent, seller’s agent, disclosed dual agent, or designated agent, have the following common unwaivable duties: “a. to strictly comply with the laws of agency and the principles governing fiduciary relationships; b. to exercise reasonable skill and care; c. [and] to deal honestly and in good faith[,]” among other things. In addition to the duties imposed by current law, the enhanced law provides that, regardless of status, all agents have the following common, nonwaivable duties: (1) to be loyal by taking no action that is adverse or detrimental to the principal’s interest in a transaction and to exercise primary devotion to the principal’s interests; (2) to timely disclose to the principal any actual or potential conflicts of interest which the agent may reasonably anticipate; (3) to advise the principal to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise; (4) to not disclose confidential information from or about the principal, except under subpoena, court order, or otherwise as provided by law or as expressly authorized by the buyer, even after termination of the agency relationship …” Included in the obligations is the requirement to make a good-faith and continuous effort to find a property for a buyer or a buyer for a property, or both.

In setting forth the respective obligations, N.J.S.A. 45:15-16.97 provides that a principal will not be liable for an act, error, or omission of an agent or transaction broker unless the principal participates in or authorizes the act, error, or omission, or the principal benefits therefrom. In the case of the latter, the principal’s liability will be limited to the monetary amount of the benefit, unless punitive damages are awarded.

Further, a brokerage will not be liable for information required to be disclosed by a seller in a property condition disclosure statement or otherwise by law, or that the brokerage firm requested from the seller but did not get, provided the agent makes reasonable efforts to ascertain all material information concerning the physical condition of the property, including, but not limited to, a) making inquiry to the seller about any physical conditions that may affect the property and b) performing a visual inspection of the property to determine if there are any readily observable physical conditions affecting the property. In order to benefit from the protection, the agent must have made disclosure of such information to the appropriate parties, as required by law.

The Legislature also created an exception to basic agency principals, by providing that knowledge or notice of any facts by the brokerage (agent), will not be imputed to the principal, unless actually known by the principal. Similarly, a brokerage will not be charged with knowledge or notice of any facts known by the principal that are not actually known by the brokerage, “provided a real estate broker, real estate broker-salesperson, or real estate salesperson acting on behalf of the brokerage firm made reasonable efforts to ascertain all material information concerning the physical condition, including, but not limited to, making inquiries to the seller about any physical conditions that may affect the property and performing a visual inspection of the property to determine if there are any readily observable physical conditions affecting the property.” Finally, the rights, remedies, and prohibitions of the Act are in addition to and cumulative of any other right, remedy, or prohibition.

Impact
The impact of the Act will more accurately be seen with hindsight. While there is always the prospect that legislation may result in unintended consequences, the provisions of the Act largely track existing law and public policy. Therefore, they should not present a sea change in the manner in which real estate transactions are handled. In analyzing the law, though, two immediate questions arise.
First, in applying the law, will the courts take care to distinguish between matters only concerning alleged professional negligence, i.e., an alleged failure “to exercise reasonable skill and care” and cases that actually implicate fiduciary obligations, such as a case concerning self-dealing? In “Professional Negligence vs. Breach of Fiduciary Duty in Insurance Broker Malpractice Actions,” (NJLJ Jan. 11, 2019), it was argued that not every claim for professional negligence against a professional (there insurance brokers), is a claim for breach of fiduciary duty. The same concept applies here.
Second, will the courts revisit the issue of whether real estate professionals are exempt from the CFA, as the Appellate Division previously held in Neveroski v. Blair, 141 N.J. Super. 365 (App. Div. 1976), superseded by statute, Lee v. First Union Nat’l Bank, 199 N.J. 251 (2009) (holding that a real estate broker is not subject to CFA liability for services provided because they were “in a far different category from the purveyors of products or services or other activities,”). There, the Appellate Division found that the semi-professional status subject to testing, licensing, regulations and penalties through other legislative provisions placed real estate brokers outside the purview of the CFA. Id., at 379-81. It seems incongruous to continue to subject real estate professionals to the CFA while simultaneously subjecting them to increased regulation.

Until some of these questions are answered, real estate professionals should take extra care to educate themselves and to comply with the provisions of the Act, recognizing the potential for increased exposure and liability as they navigate unsettled territory. For example, real estate professionals can consult the guidance and material available from the many trade and industry organizations serving New Jersey licensed real estate professionals and/or to consult with their in-house or outside counsel about reviewing their brokerages practices and procedures and revising and/or implementing specific forms and checklists.

Iram P. Valentin is a partner in the Hackensack office of Kaufman Dolowich. He is certified by the Supreme Court as a civil trial attorney and a co-chair of Kaufman Dolowich’s national professional liability practice group.

Reprinted with permission from the Oct. 2, 2024 edition of the “New Jersey Law Journal”© 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com. “

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