June 01, 2014

Real Estate Lawyers Can Face Numerous Ethics Issues

Thomas E. Spahn

Real estate lawyers enjoy an inter-esting practice. Unlike litigators and purely transactional lawyers, they sometimes can point to the tangible “fruits” of their hard work. On the other hand, the real estate market (including the legal aspects) can suffer from “boom and bust” cycles. And real estate lawyers may confront some thorny ethics issues more frequently than other lawyers.

First, real estate lawyers’ clients may ask them to represent both sides in a real estate transaction. Of course, lawyers can never represent both sides in a litigation context. ABA Model Rule 1.7(b)(3). Lawyers handling transactions other than real estate deals rarely if ever consider representing both sides in a transaction. Perhaps the smaller number of negotiated variables in some real estate transactions tempt real estate lawyers to undertake such joint representations.

An ABA Model Rule comment seems to frown on the type of dual representations some real estate lawyers seek to undertake. ABA Model Rule 1.7 comment [28] warns that “a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other.”

Interestingly, some state bars seem more likely than the abstract ethics rules to permit such limited joint representations. Several states’ legal ethics opinions (LEOs) explicitly endorse such a dual role in some circumstances. See North Carolina LEO 2006-3 (1/23/2009) (holding that a lawyer can represent both the buyer and seller in a real estate transaction under certain conditions); Pennsylvania LEO 2009-003 (1/16/2009) (explaining that an in-house lawyer for a real estate developer may represent buyers and sellers of real estate in a transaction for which the developer is involved, but warning the lawyer to watch for later-developing conflicts); Vermont LEO 2011-2 (2011) (finding no per se prohibition on a lawyer “who undertakes the representation of the lender and borrower/buyer in a real estate transaction,” but warning of possible conflicts that might arise).

As in other areas, state courts and bars take differing positions in stating the abstract rules and in applying principles in fact-intensive contexts. Compare Van Kirk v. Miller, 869 N.E.2d 534, 542 (Ind. Ct. App. 2007) (rejecting a claim by the purchaser of a sports bar that a lawyer who jointly represented him and the seller had engaged in an unconsentable conflict; noting that the buyer and seller had “independently negotiated the terms of the transaction and contacted [the lawyer] to draft an agreement that would finalize the deal” (footnote omitted)), with New York LEO 807 (1/29/2007) (“The buyer and seller of residential real estate may not engage separate attorneys in the same firm to advance each side’s interests against the other, even if the clients give informed consent to the conflict of interest.”).

Most lawyers arranging for such limited joint representations explicitly describe themselves as “scriveners,” essentially acting to spot issues that the counterparties must address and then memorializing their negotiated agreement on those issues. However, the Restatement describes as “usually inappropriate” the argument of lawyers representing multiple clients that “the lawyer was performing the role of a mere ‘scrivener’ or a similarly mechanical role.” Restatement (Third) of Law Governing Lawyers § 130 cmt. (b) (2000). Not surprisingly, that section gives the example of “the buyer and seller of property.”

The Restatement gives two illustrations—both of which involve real estate transactions. In one, the Restatement indicates that a lawyer could not represent the buyer and seller “in negotiating and documenting a complex real-estate transaction” because the counterparties “are in sharp disagreement on several important terms of the transaction.” Id. § 122 illus. 10. The second illustration seems much closer to the line—involving counterparties of “comparable knowledge and experience in such transactions” who are “in agreement on terms.” Id. § 122 illus. 11. Even then, the Restatement indicates that such a lawyer could not adequately represent both of the counterparties, because “the transaction is such that both parties should receive extensive counseling concerning their rights in the transaction and possible optional arrangements, including security interests, guarantees, and other rights against each other and in resisting the claims of the other party for such rights.” Id.

Courts’ and bars’ differing attitudes on this issue highlight the difficulty of crafting ethics rules and obviously have a real-life impact on real estate lawyers’ concerns about accepting counterparties’ requests that the lawyer simply memorialize what the clients’ negotiations yield. Because some states are far more liberal than others in allowing real estate lawyers to act as a “scrivener” in representing multiple clients in the same transaction, lawyers must check the applicable state’s ethics rules.

Second, real estate lawyers seem more likely than other lawyers to become business partners with their clients. An explicit ABA Model Rule prohibits lawyers from having a financial interest in litigation (other than the normal contingent fee arrangements). ABA Model Rule 1.8(i). Transactional clients sometimes invite their lawyers to take stock instead of cash as their fee, but this practice seems to have declined over recent years. In contrast, real estate clients are frequently looking for investors to help in their developments, and they often work so frequently and intimately with their lawyers that they turn to the lawyers as potential partners or investors.

ABA Model Rule 1.8(a) does not prohibit lawyers from engaging in business transactions with their clients, but it sets several requirements: (1) the transaction must be “fair and reasonable to the client” and “fully disclosed and transmitted in writing” to the client; (2) the lawyer must advise the client “in writing of the desirability of seeking and [give] a reasonable opportunity to seek the advice of independent legal counsel” about the transaction; and (3) the client must provide informed consent to the transaction “in a writing signed by the client.” Thus, this rule focuses on notice and consent, rather than adopting an outright prohibition. Of course, the pertinent state’s common law fiduciary duties and other real estate- specific regulations would also apply.

Third, because real estate lawyers often deal with client assets that can provide ready security, they may be tempted to acquire a security interest in the client’s real estate to secure payment of their fees. The ABA has indicated that such an arrangement must comply with ABA Model Rule 1.8 requirements. ABA LEO 427 (5/31/2002).

A real estate practice can provide a lucrative and rewarding legal career, but state-specific ethics attitudes can provide special challenges.

Thomas E. Spahn

Thomas E. Spahn is a commercial litigation partner in the Tysons Corner, Virginia, office of McGuireWoods LLP. He recently served on the ABA Standing Committee on Ethics and Professional Responsibility.