NEW YORK COUNTY LAWYERS ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 685
TOPIC: DUAL PRACTICE: CONFLICT OF INTEREST
DIGEST: A lawyer may not act as both lawyer and real estate broker in the same transaction, even with the consent of the client.
CODE: EC 5-1; EC 5-2; DR 2- 103(A); DR 5-101(A); DR 5-104(A); DR 5-105 (C).
May a lawyer receive a legal fee and real estate brokerage commission from the same client in connection with the same transaction?
It is not unethical for a lawyer to engage in non-legal work, such as acting as a real-estate broker. See N.Y. State 206 (1971). The question posed here is whether the lawyer may act as a real-estate broker and a lawyer on the same transaction. DR 5-101 (A) provides that a lawyer may not accept employment in a legal matter if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property or personal interests, except with the consent of the client after full disclosure. In any transaction in which the lawyer may earn a real-estate commission, the lawyer’s financial, business, property or personal interests are involved. Thus, the ultimate questions under these disciplinary rules are (1) whether acting as a real estate broker for the client may reasonably affect the lawyer’s professional judgment on behalf of the client and (2) whether consent may cure any such conflict.
Effect on the Lawyer’s Judgment
We believe that the lawyer’s economic interest in earning a real estate commission may reasonably be expected to impair the duty of undivided loyalty to the client, the linchpin of a lawyer’s professional responsibility. N.Y. State 576 (1986), N.Y. State 595 (1988). As real estate broker, the lawyer has an economic interest in closing the transaction and earning the brokerage fee. This directly conflicts with the role as a lawyer. For example, the lawyer for the buyer must protect the buyer against the potential fraud, overreaching and puffery that may issue from parties concerned exclusively with effecting a closing at the highest price, and, in particular, must point out potential defects in title and other defects that would reduce the value of the property or cause the buyer to cancel the purchase.
Considerations such as these have led the New York State Bar Association Ethics Committee consistently to find acting as broker and lawyer for the same transaction ethically improper. In N.Y. State 208 (1971), the State Bar Committee rejected this practice because of the potential conflict of interest. In so doing, it noted that DR 5-101 (A) raises the possibility that a lawyer may with ethical propriety engage in conflicting dual employment “with the consent of his client after full disclosure”. However, the State Bar Committee viewed EC 5-2 as stating the preferred rule. EC 5-2 provides that:
“A lawyer should not accept proffered employment if the lawyer’s personal interests or desires will, or there is a reasonable probability that they will, affect adversely the advice to be given or the services to be rendered the prospective client. After accepting employment a lawyer carefully should refrain from acquiring a property right or assuming a position that would tend to make his or her judgment less protective of the interests of the client”.
See also N.Y. State 244 (1972), N.Y. State 340 (1974), N.Y. State 493 (I978); N.Y. City 883 (1973).
The New York Department of State has taken a similar position with respect to the dual roles of real estate agent for the seller and mortgage broker for the buyer of residential property. See N.Y. Department of State, Declaratory Ruling 91-8 (1991)(Real Estate Broker). Based on the fiduciary relationship between the broker and the seller (as real estate client) and buyer (as mortgage finding client), the State Department opined that the multiple roles would create “a web of adverse interests which will make it impossible for the broker to fulfill . . . its duty of undivided loyalty”.
Under the plain language of DR 5-101 (A), it is always possible to cure a personal conflict of interest by obtaining client consent after full disclosure. However, several ethics opinions have suggested that DR 5- 101(A) is subject to the same limitations on client consent that appear in DR 5-105(C) and EC 5-2. Under DR 5-105(C), it is appropriate to request consent only if it is “obvious” that the lawyer can provide adequate representation despite the conflict. For example, the State Bar Committee has held that the “obviousness” test precludes client consent to representation by a law firm in a real estate transaction which involves a title abstract company of which the subject law firm is a principal. N.Y. State 595, supra. Under EC 5-2, a lawyer should not accept proffered employment if there is a reasonable probability that personal interests will adversely affect the lawyer’s advice or services to the client.
We agree with this per se rule. We believe that the roles of lawyer and real estate broker are fundamentally conflicting. This is especially true in residential real estate transactions, where the client (whether buyer or seller) is generally not sophisticated in real estate matters, possibly is engaging in one of the largest financial transactions of his or her lifetime, and is looking to the lawyer to exercise professional judgment in the transaction for the protection of the client. But the fundamental nature of the conflict is not tempered when the client is sophisticated. We believe that no fully informed client should consent to these dual roles; consequently, the conflict is non-consentable.
A lawyer may not act as both a lawyer and a real estate broker in the same transaction, even with the informed consent of the client.
July 10, 1991