NEW YORK COUNTY LAWYERS’ ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 697
TOPIC: DIVISION OF FEES WITH LANDLORD
DIGEST: LAW OFFICE MAY NOT ENTER INTO LEASE BASED ON PERCENTAGE OF GROSS REVENUES OF OFFICE
CODE: DR 3-102(A); DR 2-103(B); DR 2-106(A); DR 5-101(A); DR 7-102(A)(8)
A lawyer who recently graduated from law school is planning to open her own law practice and has found office space that the landlord is willing to rent to her at a rental of 2% of the gross revenues of her law firm. Is such a lease permitted under the Lawyer’s Code of Professional Responsibility (1990) (the “Code”)?
Sixty years ago, it was recognized that percentage lease agreements were absolutely prohibited as an improper division of legal fees with a non-lawyer, N.Y. City 228 ( 1932 ). More recently, that traditional view has been reaffirmed in other jurisdictions, Ala. 89-92 (1989); Phila. 81-6 (1981). Re-examining the issue, this Committee concludes that notwithstanding significant changes in the practice of law over the last sixty years, percentage lease agreements cannot be reconciled with existing ethical prohibitions.
The reason stems primarily from the fact that a law office’s gross receipts consist almost exclusively of legal fees. Consequently, a percentage lease agreement, whereby the amount of rent due to the landlord consists of a percentage of the tenant law office’s gross receipts, will inevitably result in the division of legal fees with a non-lawyer. This is directly contrary to DR 3-102(A) of the Code, which states, with three exceptions not pertinent here, “A lawyer or law firm shall not share legal fees with a non-lawyer.”
Supporting this express prohibition is the concern that a percentage lease agreement creates a built-in financial incentive for the landlord to pressure the tenant law office to increase billings. This could in turn cause the landlord to interfere with the lawyer’s exercise of independent professional judgment in violation of DR 5-101(A), or to pressure the lawyer to charge excessive fees in violation of DR 2-106(A) or to pay improper referral fees to the landlord in violation of DR 2- 103(B), Judiciary Law §491 and DR 7-102(A)(8). Whether or not these underlying concerns could be satisfactorily addressed by the terms of the lease is a question that need not be reached, in view of the direct violation of DR 3-102(A) the proposed arrangement would entail.
For the foregoing reasons, we conclude that the proposed arrangement is prohibited under DR 3-102(A) of the Code.
July 28, 1993