Bar News - April 20, 2016
Ethics Corner: Avoiding Ethical Pitfalls in Real Estate Transactions
QUESTION: Dear Ethics Committee: I have been asked to draft a real estate purchase agreements for both Buyer and Seller. Is this permissible? Is it permissible for me to represent Borrower and Lender? If it is, what steps can conscientious lawyers take to ensure that they do not run afoul of the ethics rules?
ANSWER: You are right to be wary of such joint representations. The opinions and articles in New Hampshire and nationwide are fairly consistent that simultaneous buyer and seller representation is not permissible.
But, a joint representation of a borrower and lender is not automatically impermissible. Even then, a borrower-lender joint representation must be reviewed carefully before being undertaken. It is imperative that a lawyer communicate the limitations on such representation to the potential clients.
The New Hampshire Bar Association Ethics Committee recently issued an opinion that is well worth your time and may be found on the Bar website. Although this opinion is primarily concerned with joint representations in the estate planning context, it has useful advice for any lawyer contemplating any joint representation. Additionally, the Committee issued a practical ethics article in 1990 on joint representations in real estate transactions, which may be found at www.nhbar.org/pdfs/PEA4-90.pdf. But, note that there have been changes to the relevant New Hampshire Rules of Professional Conduct (NHRPC) since that article was published, and these changes should be reviewed.
A lawyer contemplating a borrower and lender joint representation should carefully analyze her role in the transaction and the likelihood that the potential clients’ interests currently differ or reasonably may diverge during the course of the joint representation. If so, the lawyer must decide whether those competing interests would materially interfere with the lawyer’s independent judgment and ability to evaluate alternatives available to any of the potential clients.
If the lawyer determines that the potential clients’ interests do not and will not materially interfere with the lawyer’s duties, the joint representation may be permissible under certain limited circumstances. Under the NHRPC Rule 1.7, the lawyer must obtain each client’s informed consent to the joint representation confirmed in writing. Also, a lawyer would be wise to review the requirements of NHRPC Rule 1.6 before disclosing one client’s confidential information to another. A lawyer should review the NHRPC Rule 1.0(b) and 1.0(e) for the definitions of “confirmed in writing” and “informed consent.”
In her communications with the clients, a lawyer should be sure to address how the disclosure of confidential information will be handled, under what circumstances the lawyer will be required to withdraw if a conflict arises, and other alternatives to the joint representation. The prospective clients must have sufficient time to explore those alternatives, and this opportunity must be reflected in the informed consent, which is confirmed in writing. The lawyer should be very sensitive to the potential clients’ circumstances. It is possible that power dynamics between the clients could interfere with a client’s perception of her freedom of choice to either give or withhold informed consent.
Memories fade and written documentation will best protect the clients’ interests and the lawyer’s practice. A conscientious lawyer should ensure that all clients receive copies of all communications and that all conversations are memorialized and shared with all clients. Also, after the joint representation has been initiated, the lawyer should periodically review the representation to ensure that any potential or actual conflicts are promptly identified and appropriately addressed.
The lawyer should note that the “harsh reality” test will be used to review the lawyer’s conduct. The harsh reality test examines “whether, if a disinterested lawyer were to look back at the inception of the representation once something goes wrong, would that lawyer seriously question the wisdom of the first lawyer’s requesting the client’s consent to this representation or question whether there had been full disclosure to the client prior to obtaining the consent.” This test shines a cold light on a lawyer’s conduct.
Joint representations in a borrower-lender real estate transaction are not prohibited per se. But they are full of pitfalls for unwary lawyers. A lawyer considering such a representation should carefully analyze the representation’s circumstances before it is initiated and consider whether recommending separate representation would be in the clients’ and lawyer’s best interest.
The NHBA Ethics Committee provides general guidance on the New Hampshire Rules of Professional Conduct and publishes brief commentaries in the New Hampshire Bar News. New Hampshire lawyers may contact the committee for confidential and informal guidance on their own prospective conduct or to suggest topics for “Ethics Corner” commentaries by emailing Robin E. Knippers.