Real Estate Ethics

Langford.CarolReal estate transactions are fraught with ethical conundrums. That is mainly because the parties to a transaction are often savvy about the law and what transactional documents they need prepared, so they insist on representing themselves. Or if they have a lawyer, they tell you not to speak with their attorney in order to save money. To complicate matters, the client might have a silent joint venture partner who is relying on your good work on the deal.

You have to know going in to the representation that real estate law is the highest legal malpractice claim area right now. Once the recession hit, investors who lost their money found new and creative ways to get at their lawyer’s insurance policy to cover their losses. That has not abated despite the economy improving and the stock market reaching unprecedented heights. So what should a real estate lawyer watch out for?

First, if a client has not solicited money from investors in a way that fully complies with the law, do not prepare the papers for the transaction. You would be surprised how many lawyers, in a misguided attempt to bring in business, take on somewhat shady clients. I say “somewhat shady” because the client might have done something he contends is arguably legal.

For example, a promoter posts a billboard ad to attract investors that technically violates SEC laws, but the investors are sophisticated and likely understand what they are investing in. The lawyer drafts documents that explain that the deal “might” violate SEC laws, and has the investors waive any claim against the promoter. But what happens when the investors lose their money? They sue the lawyer, because by then the promoter has long ago declared bankruptcy.

Second, I would warn lawyers to be careful about seizing on opposing counsel’s apparent material errors in contract language while drafting the transaction documents. COPRAC Ethics Opinion 11-0002 holds that where an attorney has made a material change to contract language in such a manner that his conduct constitutes deceit, active concealment or fraud, the failure of the attorney to alert opposing counsel of the change is a violation of his or her ethical duties. An example would be an intentional or unintentional failure to redline a change and not inform opposing counsel of it.

Last, but certainly not least, be wary of client/buyers who ask you to represent them and others to the transaction without a waiver, even if the others agree to sign whatever form of purchase agreement you negotiate for the buyer. I can’t begin to tell you have many times I have gotten calls about deals gone sour where the lawyer is being sued for representing more than one person in a matter with no Rule 3-310 conflicts waiver. It is true that clients are busy and don’t want to sign waivers, but you have the exposure if anything—anything—goes wrong.

All this being said, real estate prices are improving and I predict some boom years for the practice. It is about time! But don’t forget that you are a lawyer first with ethical obligations, and a scrivener second.

Carol M. Langford is a lawyer in Walnut Creek and an adjunct professor of ethics at U.C. Berkeley Boalt Hall School of Law. Her practice emphasizes attorney conduct and State Bar defense matters.

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