STATE OF NEW YORK
DEPARTMENT OF STATE
OFFICE OF ADMINISTRATIVE HEARINGS
869 DOS 01
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DIVISION OF LICENSING SERVICES,
Complainant,
-against-
HECHT GROUP CORP.,
Real Estate Broker, DECISION
AMNON HECHT,
Representative Real Estate Broker,
ODED HECHT,
Real Estate Salesperson,
Respondents,
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ADMINISTRATIVE LAW TRIBUNAL
123 William Street, New York, NY 10038
Held: December 13, 2001
Felix Neals, Supervising Administrative Law Judge
___________________________________
Respondents, Hecht Group Corp., and Messrs. Amnon Hecht and Oded Hecht, 1131 Lexington Avenue, New York, NY 10021, were represented by Mr. Amnon Hecht. Mr. Oded Hecht did not appear.
Complainant, the Division of Licensing Services, was represented by Scott NeJame, Esq., Assistant Litigation Counsel, 84 Holland Avenue, Albany, NY 12208.
ISSUES
The Division of Licensing Services brought this action under the provisions of Real Property Law, §441-e, State Administrative Procedure Act, Articles 3 and 4, and 19 New York Codes Rules and Regulations, §400, to determine if the respondents demonstrated untrustworthiness and incompetence. The State charges that respondents: (1) failed to deal openly, honestly, and fairly with members of the public; and (2) charged, received, and retained commissions that were excessive, unconscionable, and not reasonably related to actual services performed.
EVIDENCE SUMMARY
Evidence submitted includes the following:
A. EXHIBITS.
1. Pleadings that consist of notice of hearing and complaint.
2. Licensure history of the respondents.
3. Commission agreements, Hecht Group Corp.
4. HSBC teller's checks.
5. Statements, Mr. Amnon Hecht.
B. WITNESSES. Witnesses for the State: Mr. Leonard Bayer, expert witness; Mr. Christopher Ullrich, complaining witness; Ms. Rosalind Young, License Investigator, Division of Licensing Services. Witness for respondents: Mr. Amnon Hecht.
FACTS
By the substantial evidence, I find the following facts:
Hecht Group Corp. has been licensed since March 27, 1997, and currently is licensed as a corporate real estate broker for the term March 27, 2001, through March 27, 2003, with Mr. Amnon Hecht licensed as the representative real estate broker.
Mr. Oded Hecht has been licensed since April 28, 1997, and was licensed as a real estate salesperson for the term June 14, 1999, through June 14, 2001, associated with Hecht Group Corp. Mr. Oded Hecht is not currently licensed to engage in regulated real estate activity.
On November 22, 2001, twenty-one days before the scheduled hearing date, a copy of the pleadings was delivered by certified mail to each respondent at the address last known to the Division of Licensing Services.
Hecht Group Corp. primarily engages in the rental of rent stabilized apartments obtained through exclusive listings with landlords. In its exclusive-listing relationships with landlords, Hecht Group Corp.: assumes the cost of cleaning and painting apartments, eviction of tenants, and placing of advertisements of apartments available for rent; insures tenant's rent payments; interviews and selects prospective tenants; and obtains both financing information from and credit reports on prospective tenants.
The record does not reveal whether Hecht Group Corp.'s obligations as exclusive agent of landlords include any managerial or operational duties in the renting of rent stabilized apartments.
Hecht Group Corp. bases its fee policy on a percentage of the difference between the amount of the stabilized rent charged for an apartment and the market-value rent that would be charged for a compatible apartment not covered by rent regulations. An example of the rationale given by Mr. Amnon Hecht is as follows: If Hecht Group Corp. obtained a rent stabilized apartment for a prospective tenant at a $1,000 monthly rent, and the apartment's market value is $2,000 monthly rent, the client "saves $12,000 a year." Hecht Group Corp., then, has the right to charge as much as 50% of the $12,000 "savings."
On July 19, 1999, Hecht Group Corp., in compliance with its fee policy, charged and collected from prospective tenant, Mr. Christopher Ullrich, a fee of $9,850, 49% of the annual rent of $20,181.96, for the rental of a three-bedroom, rent stabilized apartment, apartment 6, at 57 East 97th Street, Manhattan.
The events underlying the rental transaction were as follows: on July 19, 1999, in response to an advertisement for an apartment rental, Mr. Christopher Ullrich telephoned the offices of Hecht Group Corp. and spoke to an unidentified person regarding the advertisement. During that same day in a second telephone call, that person advised Mr. Ullrich that the brokerage fee would be $10,000, to which Mr. Ullrich agreed, the need being imminent to vacate his then current apartment.
Later, on July 19, 1999, Mr. Ullrich and Ms. Emond visited the offices of Hecht Group Corp., and by Mr. Oded Hecht were shown apartment 6, 57 East 97th Street, Manhattan. After seeing the apartment, Mr. Ullrich and Ms. Emond returned to Hecht Group Corp.'s offices and executed a preprinted, form, commission agreement prepared by Mr. Oded Hecht. Contractually, the parties agreed to a monthly rental of $1,681.83, a $9,850 commission, and a $140 credit check fee.
Hecht Group Corp. calculated the brokerage fee of $9,850 as follows: Mr. Ullrich's search was for a three-bedroom apartment in the price range of $2,500 monthly, or $30,000 a year. Hecht Group Corp. found Mr. Ullrich a three-bedroom apartment for $1,681.83 monthly rental, $20,181.96 a year, at a saving of $9,818.04 a year ($30,000 minus $20,181.96) for the first year. In addition, there were further savings in that the lease for the rent stabilized apartment did not expire in one year.
Hecht Group Corp. contends that the fee charged the prospective tenant, Mr. Ullrich, relates to extra and unique services rendered in securing the rent stabilized apartment. Hecht Group Corp. lists those extra and unique services to include the following: (1) through the hard work and intensive efforts of Hecht Group Corp. to obtain listings of rent stabilized units below market value in desirable neighborhoods, the prospective tenant obtained an apartment below market value in a desirable neighborhood; (2) the prospective tenant saved money in the amount of the difference between the stabilized rent and market value; and (3) Hecht Group Corp. paid for the apartment to be painted.
Services rendered by Hecht Group Corp. in the transaction were: on behalf of the prospective tenant as agreed in the commission agreement, finding the apartment; as exclusive agent of the landlord, advertising the apartment as available for rental, finding, interviewing, and selecting the prospective tenant, obtaining financial information from and credit report on the prospective tenant, collecting the initial rent and security payments from the prospective tenant, and painting of the apartment.
Concordantly, the $9,850 fee was exacted from the prospective tenant by Hecht Group Corp. because of the desirability of the rental accommodation and not because of any unusual or extra services rendered.
Mr. Leonard Bayer, licensed real estate broker and qualified by the State as an expert witness, testified in the form of an opinion concerning brokerage fees established by custom and usage in the Manhattan, mid-upper, eastside community as being: a fee of one-month rent; or a fee from 10% to 15% of annual rent, with an average fee of 12% of annual rent.
Mr. Amnon Hecht objected to the testimony of the expert witness. Mr. Hecht asserts that the witness engaged in unlawful conduct in that he has questioned other real estate brokers regarding the fees charged by those brokers for real estate brokerage services.
Mr. Hecht bases his objection on an affirmative response of the witness to Mr. Hecht's cross-examination question of whether the witness had ever asked another broker about the commission charged by that broker in real estate transactions.
Essentially, Mr. Amnon Hecht asserts that the expert witness engaged in anticompetitive conduct in violation of State antitrust law that makes illegal any agreement that restrains competition in any business (General Business Law, Article 22).
As the party asserting a violation of the Donnelly Act, Mr. Hecht must: (1) identify the relevant product market; (2) describe the nature and effect of the purported conspiracy; (3) allege how the economic impact of the conspiracy does (or will) restrain trade in the real estate brokerage business; and (4) reveal a conspiracy or reciprocal relationship between the expert witness and one or more other entities. Mr. Hecht's conclusory allegation of conspiracy is legally insufficient to state a violation of New York's Donnelly Act in that he both fails to allege facts that name the alleged conspirators and fails to allege facts that support the existence of a conspiracy.
Accordingly, the tribunal finds that the expert witness was properly qualified, presented reliable data, and expressed a trustworthy opinion.
The maximum fee factually established as usual by custom and usage for apartment 6, at 57 East 97th Street, Manhattan, is 15% of the annual rent of $20,181.96, or $3,027.29. The $9,818.04 fee charged by Hecht Group Corp. for obtaining that apartment is $6,822.71 in excess of the established, maximum, usual fee.
The evidence offered fails to reveal either the extent of Mr. Oded Hecht's (as a real estate salesperson) participation or involvement (if any) in establishing the brokerage fee charged Mr. Ullrich by Hecht Group Corp. or that Mr. Oded Hecht received any part of the commission collected by Hecht Group Corp. from Mr. Ullrich.
The tribunal finds that Mr. Amnon Hecht fully cooperated with the Division of Licensing Services' investigation, testified forthrightly, and appears to truly believe, first, that the formula or basis for computation of its fees is legal, because licensing law and regulations do not impose legal limits on the amount or rate of fee that can be charged a customer as long as the involved parties agree, and second, that Hecht Group Corp. earns the fees charged because of the services provided by Hecht Group Corp. to potential tenants.
OPINION
Mr. Oded Hecht did not appear at the hearing, and he is not currently licensed to engage in regulated real estate activities.
The tribunal: (1) retains subject matter jurisdiction, such being statutorily conferred and cannot be acquired, lost, waived or extended except by legislative action; and (2) acquired personal jurisdiction (a) both through the proper service of process, the timely delivery by certified mail of a copy of the pleadings addressed to Mr. Oded Hecht at the address last known to the Division of Licensing Services which complies with the due-process requirements of Real Property Law, §441-e(2), State Administrative Procedure Act, §301(2), and 19 New York Codes, Rules and Regulations, §400.4(a), and (b) through the representation of Mr. Oded Hecht by Mr. Amnon Hecht (State Administrative Procedure Act, §501; 19 New York Codes, Rules and Regulations, §400.10). Additionally, when properly served with a copy of the pleadings, Mr. Oded Hecht was eligible to automatically renew the prior license under the two-year, limitation provision of Real Property Law, §441(2), which provides that any license granted under the provisions of Real Property Law, Article 12-A, may be renewed on the application of the holder made within two years from the date of expiration of the previously issued license.
Hecht Group Corp.'s argument that this disciplinary proceeding should be dismissed because Mr. Ullrich lacks authority to institute a disciplinary action through the Department of State is without merit. First, law empowers the Department of State to enforce the provisions of Real Property Law, Article 12-A, upon the complaint of any person or on the initiative of the Department of State (Real Property Law, §442-a[5]). This proceeding was brought by the Division of Licensing Services after investigation by the Division of Licensing Services of the charges made in the complaint by Mr. Ullrich. Second, the amount of a fee charged by a real estate broker and the fee's relevance to actual services performed by the real estate broker are proper issues for consideration in a quasi-judicial, administrative, disciplinary hearing brought by the State.
Also inefficient is respondents' contention that Hecht Group Corp. and the prospective tenant are competent parties and basically free to voluntarily enter into a contract and by contract make a law for the parties. The power to contract is not unlimited, and the agreement must not be in violation of legislation, public policy or a rule of common law. The State pleads unconscionability as a means of protecting the commercial consumer, Mr. Ullrich, from what the State considers a grossly unfair bargain.
The doctrine of unconscionability, rooted in equitable principles, has been defined as contractual overreaching or patent unfairness. To be unconscionable, the agreement must be grossly unreasonable when considered in the circumstances of mores, business practices of the time and place of enforceability, and relationship between the contracting parties. Generally, a determination of unconscionability requires proof that the contract was both procedurally and substantively unconscionable when made; an exception may occur where the fee provision of a real estate broker's commission agreement is so excessive as to warrant a finding of unconscionability (Division of Licensing Services v Monad Realty Associates Inc., 86 DOS 86 [1986]).
In the rental transaction, Hecht Group Corp. created agency relationships with the landlord/owner of the rent stabilized rental accommodation and with the prospective tenant.
An agency relationship was established between the landlord and Hecht Group Corp., real estate broker, when the parties consented to have the broker act on behalf of and in accordance with the instructions of the landlord in obtaining a tenant for apartments located in the building, 57 East 97th Street, Manhattan. That agency is characterized by the exclusive agency agreement and by the conduct of the parties. The broker was the only real estate agent authorized to lease the apartments available for rental in the building; the broker advertised the unit for rental, screened and selected the prospective tenants, obtained financial information from and prepared and submitted applications for credit reports on the prospective tenants; and assumed the cost of cleaning and painting the apartments.
The agency relationship created between the prospective tenants, Mr. Ullrich and Ms. Emond, and the real estate broker, Hecht Group Corp., is evidenced by the commission agreement executed by the parties to pay a brokerage commission to Hecht Group Corp. in the event that the prospective tenants acquired the apartment located by Hecht Group Corp.
Dual agency representations were created by operation of law when the real estate broker became the agent for both landlord and prospective tenants in the rental transaction. The issue of the fiduciary obligations of disclosure imposed on a dual agent was not raised and, therefore, is not before the tribunal.
Because the evidence does not establish that the services provided by Hecht Group Corp. as exclusive agent to the landlord in the renting of the rent stabilized housing accommodation to Mr. Ullrich include a managerial duty in the operation of the building in which the rent stabilized housing accommodation is located, and because Hecht Group Corp.'s services were performed in New York City, Hecht Group Corp. may charge the prospective tenant, Mr. Ullrich, a fee in the rental transaction involving the rent stabilized apartment (9 New York Codes, Rules and Regulations, §2525.1).
Compensation of a real estate broker is not regulated by statute and is not legally fixed by custom and usage. A real estate broker and an employer may agree upon any rate of compensation, method, and time of payment. However, where a real estate broker fixes a fee far in excess of rates established by custom and usage for a particular brokerage service in the community involved, the amount of the fee must be relevant to and represent charges for some legitimate service actually performed by the broker that is above and beyond the normal services rendered in such a transaction by real estate brokers.
The substantial element of unconscionability appear in the content of the commission agreement. The 49% commission charged ($9,850) and collected from the prospective tenant by Hecht Group Corp. is far in excess ($6,827.17) of the 15% maximum fee ($3,027.29) established by custom and usage for services customarily rendered by a real estate broker in such real estate transactions, is not related to any unusual or extra services rendered by Hecht Group Corp. to the prospective tenant, and was charged the prospective tenant because of the desirability of the rent stabilized apartment.
Consequently, $6,822.17 of the $9,850 fee is excessive and unconscionable and not reasonable related to legitimate services performed by Hecht Group Corp.
Mr. Amnon Hecht's apparent unawareness of the illegality of the fee policy established for Hecht Group Corp. is not a defense. Law obligates a licensed real estate broker to know the law that governs the real estate brokerage business. While not a defense, lack of knowledge is considered by the tribunal both in determining the intent underlying the violation of law and in assessing penalty.
The representative broker's misconduct in charging and collecting the exclusive and unconscionable fee resulted from negligent acts that equate with incompetence.
As the representative real estate broker, Mr. Amnon Hecht is required by law to an officer of the corporate real estate broker (Real Property Law, §441-b[2]), is an agent and the corporate officer responsible for ensuring that the licensed activities of the corporate real estate broker are conducted in compliance with licensing law, rules, and regulations, and is liable for his participation in or authorization of any illegal act.
Hecht Group Corp., the licensed corporate real estate broker, acts through its officers, agents, and employees, and the vicarious liability of the corporate real estate broker is statutorily imposed (Real Property Law, §442-c). The representative real estate broker's acts of misconduct in the real estate transaction conducted as an agent and officer of the corporate broker were cognitional acts of a corporate officer that violate the provisions of Real Property Law, §440-a; law imputes to the corporate broker actual knowledge of and responsibility for the cognitional acts of the representative real estate broker.
CONCLUSIONS OF LAW
Based on the foregoing findings of fact and opinion and as a matter of law, I conclude:
Respondents, Hecht Group Corp. and Mr. Amnon Hecht, demonstrated incompetence in that they committed the offense of contractual overreaching by charging, receiving, and retaining a commission that is excessive, unconscionable, and not reasonably related to actual services performed by respondents; and restitution may be ordered.
The State failed to prove by substantial evidence the allegations made against Mr. Oded Hecht.
ORDER
Based on the foregoing findings of fact, opinion and conclusions of law and under the provisions of Real Property Law, §441-c:
I ORDER that by January 31, 2002, respondents, Hecht Group Corp. and Mr. Amnon Hecht, shall refund to Mr. Christopher Ullrich the sum of six thousand eight hundred twenty-two and seventeen one hundred ($6,822.17) dollars plus interest at the legal rate for judgments (currently 9%) from July 19, 1999, by certified check or money order.
I FURTHER ORDER that by January 31, 2002, Hecht Group Corp. and Amnon Hecht furnish proof satisfactory to the Division of Licensing Services that the restitution ordered by this tribunal has been paid.
I FURTHER ORDER in the event that Hecht Group Corp. and Mr. Amnon Hecht fail to timely comply with the order of this tribunal: (1) all valid licenses issued to Hecht Group Corp. and Mr. Amnon Hecht under provisions of Real Property Law, Article 12-A, shall be suspended beginning February 1, 2002, and shall continue until Hecht Group Corp. and Mr. Amnon Hecht comply with the order of this tribunal; and (2) on or by February 1, 2001, Hecht Group Corp. and Mr. Amnon Hecht shall deliver in person or by certified mail to Ms. Usha Barat, Customer Service Unit, Department of State, Division of Licensing Services, 84 Holland Avenue, Albany, NY 12208, (a) all valid licenses and pocket cards issued to Hecht Group Corp. and to Mr. Amnon Hecht under provisions of Real Property Law, Article 12-A, or (b) alternatively file an affidavit in form prescribed by the Division of Licensing Services if the failure to return all licenses and pocket cards is due either to the documents' loss or destruction.
I FURTHER ORDER the complaint against Mr. Oded Hecht is dismissed.
I FURTHER ORDER under the provisions of Real Property Law, §441-c(2), that a copy of this decision be served personally or by certified mail to each respondent addressed to each respondent's principal place of business last known to the Division of Licensing Services and to each complaining consumer.
SO ORDERED: December 20, 2001
Felix Neals
Supervising Administrative Law Judge