March 2001

Ethics and the Law
Ethics and the Real Estate Lawyer

by Barrie Althoff, WSBA Chief Disciplinary Counsel

Real estate lawyers, while subject to all of the provisions of the Rules of Professional Conduct, are likely to find that some of the RPCs arise more frequently in their practices than others, and that some RPCs are both difficult to comply with and perplexing. This article looks at some of the likely areas of concern.

Practicing law ethically is neither easy nor intuitive. Washington’s RPCs set out the minimum ethical standards of conduct required of lawyers. Conduct below those standards is subject to discipline. While by their terms the RPCs do not establish standards for malpractice, they are often used as practical guides to good practice with a view to serving a client well and reducing the likelihood of malpractice suits.

The first of the RPCs, RPC 1.1, is simple and direct: "A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." Lawyers who have never handled real estate transactions or litigation, particularly complex ones, should either spend the resources to become skilled in the area, associate with another lawyer who has the requisite knowledge and skills, or decline the representation. Failing to do so, they will likely fail their clients and subject themselves to malpractice and disciplinary proceedings.

While many lawyers may be able to competently handle the legal aspects of the purchase or sale of a single-family house, lawyers should not assume competence. At a minimum, the lawyer needs to understand the responsibilities of buyers, sellers, real estate brokers, buyers’ and sellers’ agents, escrow agents, title insurance companies, lenders, building inspectors, and so on. The lawyer needs to understand the appropriate documents and know what is usual and customary in such transactions. The lawyer needs to understand the different types of title insurance and a report’s reservations, exceptions and exclusions, and to know which matters are significant and which are not.

The lawyer should also be able to follow a title report’s legal description of the relevant property and verify that the report and other documents do in fact properly describe the property in question. The lawyer must understand a building inspector’s report, and know which items are red flags and which are merely routine maintenance items. The lawyer should know the types of financing available, and their advantages and disadvantages. If the buyer or seller is other than an individual, the lawyer should know who is authorized to sign for the party, how the buyer or seller can hold the property, and how that can vary, for example, depending on whether the party is or is not married. If there are adverse material facts about the property being sold (for example, a death or notorious crime occurred there) or material latent defects, the lawyer needs to be able to advise the client about what needs to be disclosed to potential buyers. Likewise, the lawyer should be able to advise a client, for example, whether the Fair Housing Act or other laws prohibit any disclosure about a property’s current or prior occupant having AIDS or other health conditions, on the basis that such persons are considered handicapped.

Lawyers handling condominiums, covenanted communities or commercial developments need more extensive knowledge and skill than required for a single-family house transaction. The lawyer should know federal, state and local laws applicable to complex real estate developments and financings, and be thoroughly familiar with the types of documentation needed for common-owned and commercial projects, and how participants therein interact. But basic knowledge is not enough. For example, does the lawyer know how to handle a property rezone? Does the lawyer know how to draft ground leases and understand that they are significantly different from commercial space leases? Does the lawyer know Federal Communications Commission regulations on antennae, and how federal and state regulations interact and apply to condominium or planned community restrictions on the size, appearance and location of satellite dishes?

Can the lawyer competently advise a client on application of hazardous waste or environmental laws and regulations to a proposed commercial or industrial real estate development? Does the lawyer sufficiently know the accessibility provisions of the Americans with Disabilities Act to intelligently interpret them for a developer or owners’ association? Can the lawyer capably counsel a client under the Fair Housing Administration Act on how to avoid discriminating in the sale or rental of dwellings? Does the lawyer know what to say to a condominium owners’ association when told that a resident claims another resident is sexually or racially harassing her, and demands the association intervene to stop the harassment? In drafting or reviewing residential or commercial condominium documentation, or the typical covenants, conditions and restrictions for a residential community, does the lawyer understand the effect of the restrictions or the limitations on warranties, and can the lawyer explain what is routine, what is unusual, and what might inhibit the client’s ability to use or dispose of the property as wished? And, can the lawyer draft, for example, condominium documentation that both fully complies with federal and state laws, and yet is livable and understandable by nonlawyers who will have to, literally, live for decades, and perhaps a lifetime, with the lawyer’s work product?

Conflicts of interest can be difficult to catch and painful to cure. A lawyer who initially misses a later-discovered conflict will likely have to terminate representation on the matter for all conflicted clients, and may also be denied legal fees for all representations, particularly where the conflicts are ones that likely could or should have been recognized by the lawyer at inception. While some conflicts under the RPCs cannot be waived by clients, others can. When conflict rules are applied after there is a problem, however, they are usually construed narrowly against the lawyer and in favor of the clients, with proven strict compliance with the RPCs required of the lawyer.

The principal RPC conflicts-of-interest provisions are RPC 1.7 through 1.10. RPC 1.7 generally prohibits a lawyer from representing a client if the representation will be materially adverse to another client, or if the representation may be materially limited by the lawyer’s responsibilities to another client or a third person, or by the lawyer’s own interests. RPC 1.8, among other things, generally prohibits business transactions with clients and using client information to the disadvantage of the client. RPC 1.9 limits a lawyer’s ability to represent a person "in the same or a substantially related matter" in which that person’s interests are materially adverse to the interests of a former client, and prohibits a lawyer from using confidences or secrets relating to a prior representation to the disadvantage of a former client. For illustrative cases see State v. Hunsaker, 74 Wn. App. 38 (1994), and Oxford Systems, Inc. v. Cell-pro, Inc., 45 F.Supp. 2d 1055 (W.D.WA, 1999). In addition, RPC 1.10 imputes conflicts of other persons in a firm to the firm as a whole and to all of its lawyers, but generally allows "screening" of the directly disqualified person to remedy the imputation. RPC 2.2, permitting a lawyer to act as an intermediary between two or more of the lawyer’s clients and requiring withdrawal from all representations on any client’s request, is dangerous to rely on. Because it has led to so many misunderstandings, the ABA Commission on the Evaluation of the RPCs has recently recommended its deletion.

In routine single-family house transactions, a lawyer practicing in an urban area will not usually encounter many conflicts unless such transactions are a substantial part of the lawyer’s practice, or the lawyer represents a broker or a lender. Lawyers practicing in smaller communities or rural areas, however, may frequently find conflicts due to their prior representations.

In more complex real estate transactions, such as condominiums, covenanted communities and commercial projects, a lawyer’s risk of conflicts can increase significantly. Not infrequently the lawyer is asked to take on, formally or informally, multiple roles and clients, changing hats, as it were, during the course of the representation. As a real estate project progresses from a gleam in the developer’s eye to a set of plans and permits, to a hole in the ground, to a project under construction, to a finished project, to space to be sold or leased, the lawyer may represent, or be asked to represent, numerous parties with actual or potential conflicting interests. This can particularly happen if the nonlawyer participants are not sophisticated and experienced in such projects, and sometimes it may not be recognized as a formal representation but merely a casual question about the law tossed at the lawyer. Where the participants have affiliates involved in planning, designing, financing, developing, constructing, selling or leasing, the blurring of the lines may become more complex and more subtle since the multiple affiliated clients will often perceive themselves as "one big family" and may not appreciate the awkward position the lawyer is placed in when trying to act independently for a client.

Before undertaking any representation, a lawyer should ask the most basic questions: who do I represent; who is my client? The answer is sometimes far from simple. Unless the lawyer has never had more than one client, conflicts may well arise which need resolution. For example, in real estate development or litigation, the lawyer’s potential clients might include one or more of the land owner, developer, lessor, lessee, buyer, seller, bonding company, title insurer, construction lender, permanent lender, architect, engineer, general contractor, subcontractors, real estate brokers or agents, owners’ association, officers of such an association, escrow agents, trustee in a real property foreclosure, and so on. Where a lawyer acts as a closing agent for the sale of condominium units, for example, the lawyer must take care to make clear his role and whom he represents.

While some conflicts are apparent, obvious and nonwaivable — for example, representing both buyer and seller — others may not be so obvious. In commercial transactions where both sides are represented by counsel, sometimes one lawyer will also act as escrow agent in closing the transaction. In such a case, the lawyer has a duty to advise the participants to seek independent counsel. Bowers v. Transamerica Title Insurance, 100 Wn.2d 581 (1983). More generally, see Stroud v. Beck, 49 Wn.App 279 (1987); Bennett v. Maloney, 63 Wn.App. 180 (1991); Hurlbert v. Gordon, 64 Wn.App. 386, review denied 119 Wn.2d 1015 (1992) for a discussion of claims against lawyers acting as escrow agents, and Bohn v. Cody, 119 Wn.2d 357 (1992), for a real estate malpractice case carefully analyzing who was a lawyer’s client and listing various relevant factors.

A lawyer’s attempt to identify clients may be complicated by the client’s form. For example, many real estate projects involve joint ventures or partnerships. Does the lawyer represent the entity, or one or more of the partners? Larger players in real estate ventures are often national or regional in scope and may have complicated inter-linked affiliates which may give rise to further conflicts. What entity is involved? Does the lawyer represent the entity, an affiliate, or the controlling shareholder? When a member of the board of directors of an owners’ association or its manager consults a lawyer, does the lawyer represent the association, the individual (perhaps dissident) director, the manager, or just an owner? Unless the lawyer knows the answer, the lawyer cannot ethically represent the client because, for example, the lawyer will be unable to identify potential conflicts of interest and to whom the lawyer owes a duty of loyalty, or whose confidences and secrets the lawyer is to preserve. Whenever a lawyer is dealing with a corporate or other business entity, the lawyer must take the time to understand the structure of the entity and determine where in that structure the proposed client is situated. Only then can the lawyer make an informed decision as to whether there are conflicts of interest present.

During the course of a complicated real estate transaction or litigation, actual or potential conflicts not apparent at the start may develop. Lawyers must regularly check for conflicts not just when taking on a new client, but also throughout the course of the representation to assure that conflicts are recognized and resolved.

If a lawyer practices in a law firm, the lawyer must remember that conflicts of others in the firm may be imputed to the lawyer under the imputation rules set forth in RPC 1.10. Further, when hiring laterally, care should be taken whether the hire be of a lawyer, paralegal, secretary, or other staff member, since conflicts may arise from each of those relationships which could lead to disqualification of the firm, loss of legal fees, and possible disciplinary action. While prompt screening of the personally disqualified lawyer may resolve the conflict, failure to do so may disqualify the entire firm and lead to loss of legal fees.

Lawyers acting as trustees in real estate foreclosure actions should be aware that under Cox v. Helenius, 103 Wn.2d 383 (1985), they act as fiduciary for both grantor and beneficiary. Thus they may well have a conflict if they also represent one of the parties. If a conflict arises where the same lawyer has been both the named trustee in foreclosure and a representative of the beneficiary, the lawyer should transfer one of the roles to another person, being careful for the RPC 1.10 imputation rules.

A special danger for lawyers undertaking representations in real estate ventures is the common invitation by one or more of the players for the lawyer to invest in the venture either in lieu of all or a part of legal fees, or as a wholly separate cash investment. A lawyer considering doing so should be cautious, since the ethical dangers are great. In Washington, pursuant to a series of Supreme Court decisions, business transactions with clients are presumed fraudulent. To overcome this presumption, the lawyer must carefully comply with the complex provisions of the RPCs. For further discussion on investing in clients and their ventures, see Barrie Althoff, "Investing in Your Client’s Business" (Bar News, March 2000, p. 45) and the July 7, 2000 American Bar Association Formal Ethics Opinion 00-418, "Acquiring Ownership in a Client In Connection with Performing Legal Services."

RPC 4.2 prohibits a lawyer from communicating about the subject of the representation with a person the lawyer knows is represented by another lawyer in the matter, unless the other lawyer consents.

A real estate lawyer may often come into contact with represented persons. As a lawyer’s reputation and expertise grow, the lawyer will likely come to know many repeat participants in real estate developments and ventures, and in the course of many real estate developments the lawyer and such persons will often casually encounter one another. Care must be taken not to communicate with them about matters the lawyer knows they are represented on. Similarly, a municipal lawyer knowing a landowner is represented by counsel must communicate only with the counsel and may not communicate directly with the landowner. Particularly vexatious are situations where opposing counsel does not respond to the lawyer and the transaction becomes stalled. Even in these cases, the lawyer may not bypass nonresponsive opposing counsel. Instead, the lawyer should urge his or her client to contact the opposing client to pressure the nonresponsive lawyer to take action.

RPC 4.2 problems also arise routinely in disputes between condominium developers and owners’ associations, and between condominium unit owners and their associations. For example, if a lawyer represents the association in a dispute with unit owners, or represents the developer in a dispute with the association, and knows that the owners or association are represented by counsel in the dispute, the lawyer may not communicate with the represented person. It is not unusual for a lawyer representing an association or the developer to attend owners’ association meetings to advise the client. The lawyer will often be asked questions by others, but where the person asking a question is represented by counsel, the lawyer risks violating RPC 4.2 if the lawyer responds. Similarly, if a lawyer representing an owner knows the association is represented by counsel, the lawyer may not deal directly with the officers of the association as to the dispute, but must instead only deal with the association’s lawyer.

Very good lawyers with the best of intentions can and do violate RPC 4.2, usually simply by inadvertence and desire to complete a transaction for a client. Thus, great care should be taken whenever dealing with a person whom the lawyer knows is represented by counsel. For recent examples of real estate lawyers being disciplined for such communications, see the disciplinary notices in the May 1999 and December 2000 issues of Bar News.

RPC 4.3 seeks to protect unrepresented persons from mistakenly believing another person’s lawyer is representing them and from being taken advantage of by overreaching lawyers. It generally prohibits a lawyer from stating or implying to an unrepresented person that the lawyer is disinterested. It also requires that when the lawyer knows, or reasonably should know, that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer must make reasonable efforts to correct the misunderstanding.

The most significant ethical danger for lawyers in dealing with unrepresented persons is not violation of RPC 4.3. Rather, it is bearing the consequences of the unrepresented person’s mistaken, but reasonable, belief that the lawyer is in fact representing him. The existence of a lawyer-client relationship does not depend on the existence of a fee agreement or the payment or lack thereof of any legal fees. Rather, a lawyer client relationship exists if the "client" reasonably believes it exists. See Bohn v. Cody, 119 Wn.2d 357, 363 (1992). Thus, lawyers need to beware of responding to questions of an unrepresented person in such a way as to give a mistaken impression that the lawyer is giving legal advice or is looking out for the other person. Such mistaken beliefs of representation likely may arise among unsophisticated persons not used to dealing with lawyers, but it can also happen where any potential client consults a lawyer, with the lawyer believing he or she made it clear that there was no representation, and the potential client equally believing that the lawyer was going to provide some legal services. Where a lawyer represents one or more entities or affiliates, care should be taken to clarify exactly who the lawyer represents so that others do not form a mistaken belief of representation.

When dealing with persons the lawyer knows are not represented, the lawyer has a positive duty not to mislead the person as to the lawyer’s role, and, if the lawyer believes the person has a mistaken notion of the lawyer’s role, to make a reasonable effort to correct that mistake. The only advice a lawyer should give to unrepresented persons is that the lawyer cannot give legal advice and that they should consult independent counsel.

For example, if the lawyer is acting as a closing agent in a real estate transaction, the lawyer must appropriately advise the parties of the lawyer’s function. A lawyer handling a closing may well be asked by an unrepresented person for legal advice which the lawyer may not provide. Further, when acting as a closing agent, the lawyer may have conflicting duties between the one person he may also represent as a lawyer, and other persons whom he may be representing only as closing agent. See, for example, Hurlbert v. Gordon, 64 Wa.App.386 (1992).

RPC 2.1 requires independence and candid advice of lawyers, and empowers them to be more than mere technical legal consultants. It states that "in representing a client, the lawyer shall exercise independent professional judgment and render candid advice." The lawyer cannot be merely a "yes" person to the client. Sometimes the lawyer will have to tell the client hard truths that the client may not want to hear.

The rule also provides that: "In rendering advice, the lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors that may be relevant to the client’s situation." The lawyer is not a mere legal vending machine. When a lawyer is foreclosing a property, the lawyer’s actions for the client will profoundly affect the dispossessed. The lawyer should not hesitate to discuss the real-life impacts with his client.

In drafting or interpreting covenants, conditions and restrictions for a condominium or planned community, the lawyer should not hesitate to remind the client that the provisions can impact the everyday quality of life of those living in the condominiums. The lawyer should feel free to discuss with the client and explain, both when drafting and enforcing such provisions, the practical consequences of enforcement which might include not only the usual legal risks and costs, but also bad publicity which may lower both the quality of life for those living in the residences and the resale value of their units.

There are numerous other areas of practice where a real estate lawyer can find ethical perils that involve the same ethical principles applicable to the rest of the lawyer’s practice.

RPC 1.2 requires a lawyer to keep a client reasonably informed about the status of the matter of representation, to reasonably comply with requests for information, and to explain matters to a client so the client can make informed decisions regarding the representation. This requires the lawyer to be able to translate complex legal concepts into everyday language for the client to understand, making due allowance for the sophistication of the client. Where a lawyer represents a condominium owners’ association, for example, the lawyer must take care to assure that the board of directors, often made up of volunteers of widely differing sophistication, understands the legal advice provided by the lawyer. The lawyer should be able to explain the concept of due process, so that the association treats members fairly and avoids significant liability for failing to do so. In Riss v. Angel, 131 Wn.2d 612 (1997), an association incurred significant damages for failing to observe due process in dealing with a member’s request for construction approval.

RPC 1.6 requires a lawyer to maintain client confidences and secrets. If a client has submitted a loan application, and the lawyer later discovers the client intentionally and materially misstated the client’s assets or liabilities such that the application is false and misleading — in short, it is fraudulent — what is the lawyer to do? If the lawyer learns that in constructing a multiple-story condominium or apartment house, the client knowingly used inferior products to save money and bribed a building inspector to look the other way, what is the lawyer to do? If the client tells the lawyer the client intends to discriminate against a particular racial or other group, or has in fact done so on prior projects, what is the lawyer to do? Can the lawyer blow the whistle on the client, or is the lawyer bound to maintain a client’s confidences and secrets? The lawyer needs to know RPC 1.6 and other RPCs to answer such questions.

RPC 1.14 requires a lawyer to preserve the identity of client funds. A real estate lawyer often handles substantial amounts of client funds. These funds must be kept in a trust account and may be withdrawn only in accordance with client instructions. The lawyer needs to properly document all trust account transactions and notify the client thereof, to deposit funds in separate interest-bearing accounts if a positive net return on funds can be reasonably expected, or if not, to a pooled IOLTA trust account. Further, RPC 1.14(d) specifically provides that: "Escrow and other funds held by a lawyer incident to the closing of any real estate or personal property transaction are client funds subject to this rule regardless of whether the lawyer, the law firm, or the parties view the funds as belonging to clients or non-clients." For a curious case of one lawyer misusing another lawyer’s trust account, see Hetzel v. Parks, 93 Wn. App. 929 (1999).

A real estate lawyer, like any lawyer, is expected to be honest, and the RPCs repeatedly require it. RPC 3.3 requires candor to the tribunal; RPC 3.4 requires fairness to opposing parties and counsel; RPC 3.9 requires a lawyer representing a client in a legislative or administrative tribunal in a nonadjudicative proceeding to disclose the lawyer’s representative capacity; RPC 4.1 requires truthfulness in statements to third parties; and RPC 8.4 prohibits conduct involving dishonesty, fraud, deceit or misrepresentation. The more difficult situations arise, of course, where a lawyer’s duties of honesty and candor collide with the lawyer’s duties under RPC 1.6 to maintain client confidences and secrets.

RPCs 5.1 through 5.3 generally require a lawyer to maintain proper supervision over other lawyers and nonlawyers in the office, and set up procedures to assure compliance with the RPCs. Many lawyers extensively use "subordinate" lawyers (associates and contract lawyers) and paralegals. Has the lawyer set up appropriate procedures to assure their conduct complies with the RPCs? Does the lawyer in fact adequately supervise and review their work product? Can the lawyer prove it? RPC 5.5 prohibits a lawyer from assisting a nonlawyer to practice law.

Recent Washington Supreme Court decisions such as Perkins v. CTX Mortgage Company, 137 Wn.2d 93 (1999), and the recent recommendation of the Washington State Bar Association to define the practice of law explore what practicing law means. What is less clear is how this may impact the roles of the various players in real estate transactions. Lawyers need to carefully supervise their nonlawyer staff, and be vigilant as to whether their nonlawyer clients may be engaged in the unauthorized practice of law and whether they as lawyers might be viewed as assisting in it.

Of considerable interest nationally has been the concept of multidisciplinary practice under which lawyers would join with nonlawyers to render to clients through one firm multiple professional services. Washington’s RPCs, like those of most other United States jurisdictions, currently prohibit such a practice. RPC 5.4(a) prohibits a lawyer from sharing legal fees with non-lawyers, while RPC 5.4 (b) prohibits a lawyer from forming a partnership with a nonlawyer if any of the activities of that partnership include practicing law. If such multidisciplinary practices were permitted, however, a lawyer might, for example, form a real estate development firm which includes the lawyer providing legal services, along with a surveyor, environmentalist, architect, banker, construction company, etc. to provide all-in-one complete concept-to-finished-project services. Very considerable opposition has been expressed nationwide, however, over the concept of such multi-disciplinary practice, with some fearing that such practice would erode, if not destroy, certain core values of the legal profession, such as independence, maintaining client confidences and secrets, avoiding conflicts of interest, and so on. On the other hand, others have supported the concept as providing fully integrated professional services to a client. The Washington State Bar Association Committee on the Future of the Profession is currently evaluating the concept of multidisciplinary practice.

To practice law ethically in the area of real estate requires not only legal competence, but also significant awareness of numerous ethical obligations. Lawyers dealing with condominiums, covenanted communities, and commercial developments have an even more daunting task of maintaining competence, avoiding the entanglement of conflicts of interest, dealing with both represented and unrepresented persons, acting as a candid and independent legal advisor, and also satisfying all of their other ethical obligations under the Rules of Professional Conduct. At the same time, they also have the satisfaction of knowing that they play a vital role in providing housing and workplaces for our society. In doing so, they need to imitate their clients’ construction practice. Just as the client builds a firm foundation before constructing a building, lawyers need to build a firm foundation of competence and ethical practice before undertaking a client representation.

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