Bar News - May 17, 2013
Real Property Law: Ethical Traps: Potential Pitfalls in Real Property Law
By: Steven Slovenski
There is no bulletproof way to completely avoid ethical problems, but there are measures a lawyer can take to minimize their likelihood.
In trying to avoid ethical tangles, one of the most important questions for lawyers to ask is, "Who is my client?"
This fundamental question is not always easy to answer. A real estate lawyer, for example, may have represented a husband and wife years ago when they purchased their home, and now has been asked to represent them again when they refinance with a lender whom the lawyer also represents.
As another example, perhaps the lawyer represents a real estate development company. In that case, the lawyer must be clear with all officers and stakeholders that he/she represents the organizational entity, rather than any of its constituents – the individuals who occupy management or shareholder positions. Under the "entity rule," the lawyer is an agent of the company and owes its fiduciary duties of loyalty, confidentiality, good faith, professional judgment and due care to the entity, NOT the individuals who may have initially engaged the attorney.
Once your client has been identified, it is imperative that the client understands the role of the lawyer during representation. In some cases, the attorney’s role may be as an advisor (limited or full representation), a facilitator, a litigator, or all three. A lawyer may take such action on behalf of the client as is impliedly authorized to carry out the representation (NH Rules of Professional Conduct 1.2).
Lawyers should always do a conflict check on new clients and new matters. If a lawyer is asked to prepare a contract for one of his clients, who is now part of a real estate development company (LLC), to purchase a large tract of land for a potential subdivision, the lawyer will have to perform several conflict checks to make certain that he or she hasn’t represented the owner of the land to be purchased or represented any of the LLC members in an adversarial context. The lawyer will also have to clarify who he or she represents in the transaction. It is also important to be familiar with other professional conduct rules regarding conflicts of interest, including Rules 1.8, 1.9, and 1.10.
Other considerations in determining whether representation is warranted include confidentiality, competency and independent professional judgment.
One of the fundamental obligations of lawyers is to preserve the confidences and confidential information of their clients. Rule 1.6 governs the disclosure of information relating to a client during the lawyer’s representation of the client. Unless the client gives informed consent or the lawyer reasonably believes that disclosure is necessary to comply with Rule 1.6 (b), the lawyer is barred from disclosing information related to the representation.
Confidentiality contributes to the trust that is the hallmark of the lawyer-client relationship. With confidentiality in place, clients are encouraged to seek legal counsel and to communicate honestly, fully and frankly about their legal woes, no matter how embarrassing or legally damaging.
For real estate lawyers, the confidentiality principles apply to real estate law in general, and to more specific situations, such as selling, buying and developing real property. Because real estate transactions involve many pieces of confidential information – the reasons for selling, legal issues, the dynamics of the selling owners, financial records, government permits, taxation issues, etc. – it is critical for lawyers representing sellers, buyers and developers to comply with the confidentiality rules in the NH Rules of Professional Conduct.
Lawyers are expected to be competent in the areas in which they practice. Rule 1.1 requires a lawyer who is representing a client in seeking approvals for a commercial real estate project, for example, to have "specific knowledge about the fields of law in which the lawyer practices," "proper preparation," and "attention to details and schedules" to assure no avoidable harm to the client’s interest.
Other real estate and/or development issues can lead to ethical dilemmas as well. In a 2005 case in New Hampshire, an attorney was disbarred for acquiring a client’s real property for himself at significantly less than the assessed value, which was adverse to his client’s best interest. Earlier this year in New Jersey, an attorney was disbarred for failing to properly disclose to his partners in a soured real estate development deal that he actually purchased the property, and that he did so using the partners’ deposit money!
It’s important to keep in mind that there is often a fine line between zealous representation and inappropriate vexatious practice. Because some business and real estate attorneys have employed abusive and deceptive practices in the past, it is not surprising to learn that threatening criminal prosecution has been one of the tricks up the sleeve of the unscrupulous. This practice is clearly objectionable and may actually subject a lawyer to a malicious prosecution suit and to the filing of an ethics complaint.
To avoid ethical problems, lawyers need to be well versed in and compliant with the New Hampshire Rules of Professional Conduct and familiar with the ABA Rules of Professional Conduct.
Steven Slovenski is an attorney with the law firm of Mesmer & Deleault and manages its Portsmouth office. Slovenski is a former chair of the NH Bar Real Property Section and may be reached at (603) 668-1971, or by email.