8 N.J.L. 2055
September 20, 1999
157 N.J.L.J. 1118
September 13, 1999
Preparation of Contracts and Leases in Commercial Real Estate
Transactions by Real Estate Licensees
The New Jersey Real Estate Commission has requested this Committee to consider whether a licensed real estate salesperson or broker ("licensee") may prepare contracts and leases relating to commercial properties without violating the general proscriptions against non-lawyers engaging in the practice of law. The inquiry was occasioned by a Licensee Alert published in the Real Estate Commission's Summer 1998 Newsletter, which is distributed to all licensed brokerage offices and others involved in the real estate profession. The Alert stated as follows:
As a real estate licensee, you may prepare contracts for the sale of improved residential properties containing one to four dwelling units or for vacant one family lots were you have a commission or fee interest in the transaction. The preparation of contracts for the sale of commercial or other non-residential property in transactions in which a licensee has a fee or commission interest is deemed to be the unauthorized practice of law and will subject licensees to sanctions by the Administrative Office of the Courts as well as the Commission.
Real Estate Commission Newsletter (Summer 1998). Following publication of the Licensee Alert, the Real Estate Commission received correspondence seeking clarification of this pronouncement from a member of the bar. In addition, the correspondent inquired as to whether it would be acceptable for the individual parties to themselves prepare commercial contracts and leases if counsel was not involved in the transaction. Specifically, the Real Estate Commission now seeks this Committee's guidance with respect to the question of whether a licensee's preparation of such legally binding documents in a commercial transaction constitutes the unauthorized practice of law.
Analysis of this matter calls for further clarification of what conduct constitutes the unauthorized practice of law by laypersons involved in real estate sales and lease transactions. Unlike prior cases brought to the attention of the courts and this Committee, the instant matter raises questions concerning the activities of real estate salespersons and brokers in the specific context of commercial real estate transactions. Under existing law, licensees are permitted to prepare real estate agreements only where: (1) the property being conveyed fits an express definition of residential property; and (2) the agreement contains an attorney review clause under which either party's attorney could disapprove the agreement within three days. New Jersey State Bar Ass'n v. New Jersey Ass'n of Realtor Boards, 186 N.J. Super. 391 (Ch. Div. 1982), affirmed, 93 N.J. 470, 475, modified, 94 N.J. 449 (1983).See footnote 1 1 Accordingly, it is the opinion of this Committee that licensees who prepare contracts and leases relating to Commercial properties commit the unauthorized practice of the law. The exception set forth in the Bar Ass'n case is not broad enough to cover commercial transactions, nor is the public interest which supports that exception applicable to most commercial transactions.
The initial step in analyzing the above described conduct is to determine whether it transgresses from permissible business and professional activities into the realm of the practice of law. Oftentimes the line is indistinct because what constitutes the practice of law does not lend itself to precise and all-inclusive definition. New Jersey State Bar Ass'n v. Northern new Jersey Mortgage Associates, 32 N.J. 430, 437 (1960) (quotations omitted) (Mortgage Assoc.), overruled on other grounds, In re Opinion 26 of the Committee on the Unauthorized Practice of Law, 139 N.J. 323 (1995). In this case, the Committee is guided by a well-developed body of law which holds that the preparation of a real estate sales contract or lease on behalf of another, whether it be for a residential or commercial property, constitutes the practice of law.
It has long been recognized that the practice of law is not confined to litigation, but extends to legal activities in many non-litigious fields which entail specialized knowledge and ability. Mortgage Assoc., 32 N.J. at 437. See also In re Application of New Jersey Soc'y of Certified Public Accountants, 102 N.J. 231, 233 (1986) (the practice of law includes legal activities in non-litigious fields), Cape May County Bar Ass'n v. Ludlam, 4 N.J. 121, 124 (1965) (The practice of law is not, therefore, necessarily limited to the conduct of cases in court, but is engaged in whenever legal knowledge, training, skill and ability are required). The opinions of this Committee are in accord. See, e.g., Opinion 22 of the Committee on the Unauthorized Practice of Law,See footnote 2 2 103 N.J.L.J. 246 (1976) (the preparation of legal documents, such as contracts, for execution or use by others is the practice of law), Opinion 33, 153 N.J.L.J. 184 (1998) (rendering of opinions in connection with bond issue is the practice of law). Accordingly, merely because the conduct at issue does not involve a legal action before a court or other quasi-judicial body, does not mean that it falls outside the practice of law.
While acknowledging that some overlap exists between the role played by a licensee and an attorney in a real estate transaction, both the Supreme Court and the trial judge concluded in the Bar Ass'n case that a licensee's preparation of a contract or lease involved the practice of law. Bar Ass'n I, 186 N.J. Super. At 392 (Justice Sullivan sitting on recall assignment in the Chancery Division), Bar Ass'n II, 93 N.J. at 474. This principle was more recently confirmed by the Supreme Court in Calvert v. K. Hovnanian at Galloway, 128 N.J. 37, 46 (1992) (We agree with the lower courts that when Bedson, a licensed real-estate salesperson, filled in the blanks of Hovnanian's contract, he was engaged in the unauthorized practice of law). This Committee therefore concludes, as a threshold matter, that a licensee's preparation of a commercial real estate sales contract or lease on behalf of another constitutes the practice of law.
Having determined that the preparation of a commercial real estate contract or lease is embraced within the practice of law, we next consider whether this practice is otherwise permitted. A technical finding that a person is engaged in the practice of law will not necessarily result in a holding that his actions amount to the unauthorized practice of law, if 'strict adherence to such a thesis is not in the public interest.' Opinion 14, 98 N.J.L.J. 399 (1975) (quoting Appell v. Reiner, 43 N.J. 313, 316 (1964). This public interest analysis was further endorsed by the Supreme Court as follows:
The question of what constitutes the unauthorized practice of law involves more than an academic analysis of the function of lawyers, more than a determination of what they are uniquely qualified to do. It also involves a determination of whether non-lawyers should be allowed, in the public interest, to engage in activities that may constitute the practice of law.
In re Opinion 26, 139 N.J. 323, 327 (1995). Accordingly, the ultimate question in this matter is whether the activity at issue - the preparation of commercial real estate sales contracts and leases by licensees - is in the public interest.
The starting point for this analysis is the Supreme Court's opinion in State v. Bander, 56 N.J. 196 (1970). In Bander, the defendant real estate broker, who prepared a residential contract of sale, was convicted of violating N.J.S.A. § 2A:170-78, a statute (now repealed) which imposed penalties for the unauthorized practice of law. That statute contained an express exemption for real estate licensees engaged in the drawing of deeds, bonds, mortgages, leases, releases, agreements or assignments. Id. The trial court found that the exemption unconstitutionally infringed upon the Supreme Court's exclusive authority to regulate the practice of law. N.J. Const. Art, VI, § 2, par. 3. The Supreme Court certified the defendant's appeal on its own motion and reversed. Agreeing with the basic proposition that it exclusively possesses the authority to regulate the practice of law, the Court nonetheless found that the statute did not transgress that authority. Instead, the Court held that the legislature intended to aid the judiciary by providing a penalty for certain forms of unauthorized practice of law practice was not, and could not, be intended to authorize the practice covered by the exemption. Id. at 201.
Sensing that its determination failed to resolve the lingering question of whether the licensee's drafting activities constituted the unlawful practice of the law, and thereby subject to injunction or other remedy, the Supreme Court suggested that an answer might be obtained in a separate suit brought by interested parties. Id. at 202. Through such a proceeding, the Court posited that the question could be answered based upon a more complete record of facts surrounding the extent, length of existence, effect and result of the performance of similar acts by real estate brokers generally and the public need for such service. Id. at 202-03.
Taking its direction from the Supreme Court, the New Jersey State Bar Association commenced an action against licensed realtors as a class seeking a ruling that the preparation of contracts for the sale of real estate or leases thereof by licensees constituted the unlawful practice of the law. Bar Ass'n I, 186 N.J. Super. 391, 393. Early attempts to resolve the case by mutual agreement of the State Bar Association and the New Jersey Association of Realtor Boards did not come to fruition and the matter proceeded to trial. On the third day of trial, a new settlement was reached by the parties which introduced the concept of the attorney-review clause. The trial judge held public hearings on the proposed settlement and, with some minor revision, approved the proposal. Id. at 398. A consent judgement was entered and ultimately approved by the Supreme Court, again with some minimal changes. Bar Ass'n II, 93 N.J. 470. The final settlement authorized licensees to prepare contracts or leases pertaining to residential real estate containing one to four dwelling units and for the sale of vacant one-family lots in transactions in which the licensee has a fee or commission interest. The contract or lease, in order to be valid, must include an attorney-review clause making the agreement subject to review by an attorney for the buyer or seller within three business days.See footnote 3 3
Both the trial court and the Supreme Court, in approving the settlement, concluded that the public interest would be served by permitting licensees to prepare contracts and leases in residential transactions. Justice Sullivan, who presided over the trial, based his approval upon factual findings related to residential real estate transactions:
[I]n New Jersey, most contracts for the sale of residential property are orginally prepared by the realtors who negotiated the sales. The proofs also showed a widespread practice among realtors of including an attorney review option clause in such contracts. The proposed settment accommodates the interests of realtors and attorneys by allowing the realtor to consummate the contract phase of the transaciton, with attorneys handling the actual transfer of title. Most importantly, however, it serves to protect the public interest by making the contract subject to prompt attorney review if either buyer or seller so desires.
Bar Ass'n I, 186 N.J. Super at 396. Quoting Justice Sullivan's opinion at length, the Supreme Court expressly affirmed the finding that the pubilc interest would be best served by permitting licensees to undertake the drafting of such residential agreements pursuant to the terms of the settlement. Bar Ass'n II, 93 N.J. at 474.
In Bar Ass'n II, the Supreme Court did not address whether licensees should be prohibited from drafting commercial contracts and leases. However, by first concluding that the activity generally constituted the practice of law, and then creating an exception based upon the public interest for residential transactions, the inescapable inference is that any drafting done outside this narrow exception would constitute the unauthorized practice of law.
Not only does the conduct at issue in this Opinion fail to come within the boundaries of the exception created in the Bar Ass'n case, the public interest rationale behind that decision does not carry over to commerical transactions. As set forth above, the State Bar Association and the New Jersey Aessociation of Realtors Boards arrived at their settlement after a number of attempts to work out a sensible solution. As recognized by Justice Sullivan, because of the repetitive nature of such transactions and the availability of forms generally applicable to residential sales, the parties themselves determined that the public interest would not suffer from allowing licensees to draft agreements in certain limited types of residential transactions. Indeed, while each residential transaction present its own unique challenges, for the most part, the standardized contracts and leases which have emerged adequately allocate the risks and benefits of the transaction among the parties. See generally, In re Opinion 26, 139 N.J. 323, 334, 353 (South Jersey residential real estate practice, which involves no attorneys and relies upon form contracts, has been conducted without any demonstrable harm to sellers and buyers).
Commercial real estate transactions oftentimes present more complex issues and the form of contract or lease can have consequences on matters beyond the mere conveyancing of an interest in property. Cf. Baldasarre v. Butler, 132 N.J. 278, 296 (1993) (prohibiting dual representation of counsel in commercial real estate transactions where large sums of money are at stake, where contracts contain complex contingencies, or where options are numerous.) For example, in drafting a commercial contract or lease, counsel may need to pay particular attention to the tax consequences of the transaction, environmental issues, the identity (and perhaps formation) of the entity which will hold title on behalf of the purchaser, financing issues, the capacity of the signatories to the document including the need to preserve the right of a corporate body to ratify the transaction, the impact upon existing tenants and the triggering of rights of first refusals. Moreover, as one commentator put it,
A profusion of municipal ordinances, statutes and regulations is creating under the real estate attorney's umbrella specialists dealing with rent control, corporate buildings, industrial buildings, shopping centers, contractors, lender reviews and acquisitions and disposal of the newly created Resolution Trust Corporation... Prior to drafting any commercial contract, it is important for the attorney to become thoroughly familiar with all governmental controls which might affect the transaction.
13A. J. Celantano, Jr. and H. Walentowizc, New Jersey Practice - Real Estate Law and Practice § 27.1 (1991). Thus, while the licensee specializing in commercial transactions might be a critical part of the negotiating team, it is doubtful that he or she will have the training and knowledge necessary to protect all of the legal concerns of the client at the time the contract or lease is drafted. Given this level of complexity, this Committee cannot conclude that the public interest will best be served by permitting licensees to prepare commercial real estate contracts and leases.
This conclusion is consistent with the consent judgement approved by the Supreme Court in the Bar Ass'n case. As noted earlier, the compromise reached in that action permitted licensees to draft contracts of sale and leases for residential properties containing one to four dwelling units or vacant one family lots. Implicit in that limitation is the understanding that transactions involving structures containing more than four dwelling units, or multi-lot subdivisions, are in reality commercial transactions involving the panoply of issues discussed above. For this Committee to now determine that licensees may draft commercial real estate agreements would be contrary to the precedent established in the Bar Ass'n case.
This Committee recognizes that in some relatively simple commercial transactions, the expediency of having the licensee prepare the contract or lease might be beneficial and result in no harm to the parties involved or the public generally. For example, a simple lease to rent a small store in a strip mall for twelve months may present appreciably less complexity than the sale of a $3,000,000 residential estate. Yet, under existing law, a licensee may prepare the sales contract for the mansion, but not the lease for the little shop. The difficulty in drawing a bright line as to which transactions become too legally complex for a licensee was identified by Justice Schreiber in his dissent in Bar Ass'n II:
If a line must be drawn within which realtors may practice law, it would seem appropriate that it depend on the subject matter of the advice and the nature of the realtor's acts, rather than the type of structure to be conveyed.
Id., 93 N.J. at 485See footnote 4 4
The response to this apparent inconsistency is twofold.
First, the line drawn with respect to residential property was
created by the State Bar Association and New Jersey Association of
Realtor Boards as part of their settlement of the Bar Ass'n case.
Those two groups were in the best position to identify the types of
transactions in which licensees would be most qualified to draft an
agreement of sale or a lease without creating a risk of harm to the
public. And, by virtue of their approvals, both the trial court
and the Supreme Court validated the judgement of these professional
organizations in crafting the dividing line ultimately settled
upon. The second response is that the Supreme Court must have
recognized that in sophisticated residential transactions involving
substantial sums of money, the attorney review clause would
invariably be invoked and counsel retained. Conversely, in the
relatively simple lease transaction described above, the
individuals have the option of simplifying the transaction by
themselves selecting and preparing the applicable form agreement.See footnote 5
The difficulty in attempting to demarcate the conditions under which the public interest would favor licensees' preparation of commercial agreements is the variety of circumstances in which such transactions take place and the number of legal issues which might potentially arise from the creation of the agreement. It would be inappropriate for this Committee to arbitrarily set parameters describing under what conditions licensees may engage in the questioned practice. Accordingly, this Committee finds that the preparation of a commercial real estate sales contract or lease by a licensee constitutes the unauthorized practice of law.