UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER鈥橲 CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 95-04
1. Is it ethical for a lawyer to accept a real estate commission when the lawyer does not have a real estate license?
2. If the lawyer is a licensed real estate broker, may that lawyer accept both a real estate commission and a legal fee?
Summary:
1. Whether a lawyer may accept a real estate commission when the lawyer does not have a real estate license is an issue of substantive law, not a question governed by the Rules of Professional Conduct, and therefore is not properly before the Committee.
2. A lawyer probably will be prohibited under the Rules of Professional Conduct from acting as real estate broker for one party to a transaction and as lawyer for the other party. A lawyer may act as broker and lawyer for the same party, provided the lawyer complies with the guidelines set forth in the Rules of Professional Conduct.
Opinion:
1. Accepting a Commission Without a Real Estate Broker's License Whether a lawyer may accept a real estate commission when the lawyer does not have a real estate license is a question of substantive law outside the purview of this Committee. Reference is made to the relevant statutes and regulations governing such conduct. Reference is made particularly to S.C. Code Ann. 40-57-30 (Supp. 1993) (provisions of chapter on real estate brokers not applicable to owner of property or attorney of owner acting within scope of duties) and Annotation, Right of Attorney, as Such, to Act or Become Licensed to Act as Real-Estate Broker, 23 A.L.R. 4th 230, Sec. 5 (1983) (discussing statutes in other states similar to section 40-57-30).
If such conduct is not permitted under applicable statutes and regulations, such conduct would constitute professional misconduct under Rule 8.4.
2. Acting as a Licensed Broker and a Lawyer in the Same Transaction Whether a lawyer who is a licensed real estate broker may act as both a lawyer and a broker in the same transaction, and receive both a legal fee and a real estate commission, depends on the particular facts applicable to the transaction. The relevant issues are similar to issues previously considered by the Committee concerning whether a lawyer may engage in other business activities with the lawyer's clients. See SC Bar Adv. Op. 83-13, concerning whether a lawyer may own a court reporting service, SC Bar Adv. Ops. 92-03, 82-20 and 75-03, concerning whether a lawyer may act as title agent at a client's closing; and SC Bar Adv. Op. 78-14, concerning whether a lawyer may own a life insurance agency to which clients are referred.
The issue of whether a lawyer may act as both a lawyer and a broker in the same transaction has been addressed by ethics advisory committees in other jurisdictions over the years, primarily under the Code of Professional Responsibility. The committees have reached varying conclusions. Opinions issued in at least one state have prohibited the conduct in question. See NY State Ops. 493 (1978), 340 (1974), and 208 (1971). Opinions published in other states have permitted the conduct in question, but subject to certain limitations. See Conn. Inf. Op. 88-5, R.I. Op. 94-59.
Real estate brokers generally act either as the agent of the seller or the agent of the purchaser (in most cases, as agent of the seller). The question presented does not specify whether the lawyer proposes to act as agent and lawyer for the same party, or as agent for one party and lawyer for the other party. Both situations are discussed below.
(A) (A) Acting as Broker for One Party and Lawyer for Another Party If the lawyer proposes to act as agent for one party and lawyer for the other party (for example, as the seller's broker, but as the purchaser's lawyer), it is doubtful that the lawyer can comply with Rules 1.7(b) and 1.6(a) of the Rules of Professional Conduct. Rule 1.7(b) provides as follows:
A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) The lawyer reasonably believes the representation will not be adversely affected; and (2) The client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
Although the Committee cannot address substantive law regarding the duties of an agent broker to its principal, presumably such relationship involves at least a duty of loyalty. For example, presumably the broker for a seller has a duty to that seller to do everything reasonable within the broker's power to ensure that the closing on the sale occurs. Such responsibility to the seller would materially limit the lawyer's representation of the purchaser/client in the same transaction. Under Rule 1.7(b), the lawyer, in order to maintain both relationships, must reasonably believe that representation of the purchaser/client will not be adversely affected by the lawyer's obligations as broker for the seller. It is doubtful that the lawyer could reasonably believe under such circumstances that the representation would not be adversely affected.
A lawyer who acts as a seller's broker and a purchaser's lawyer, or vice versa, also would be in a position to reveal confidential information in violation of Rule 1.6. Under Rule 1.6(a), a lawyer must not reveal information relating to representation of a client unless the client consents after consultation. For example, a purchaser's lawyer may receive confidential information from the purchaser concerning the purchaser's ability or intention to close. The duty of confidentiality to the purchaser/client would conflict with any duty the lawyer may have as the seller's broker to provide such information to the seller.
(B) Acting as Broker and Lawyer for the Same Party A more likely scenario is that the lawyer proposes to represent the same party both as broker and lawyer. Assuming that the sales commission will be paid to the lawyer only if the transaction closes, the lawyer has a pecuniary interest in the transaction potentially adverse to his client. This may be particularly true when the lawyer is acting as the purchaser's broker and lawyer and discovers information which would require him to advise his client not to close on the property, a decision which would be adverse to the lawyer's pecuniary interest in receiving a commission at closing.
In the Committee's opinion, a lawyer may represent a party both as broker and lawyer, and may receive both a commission and a legal fee, but only if the lawyer complies with Rules 1.8(a), 1.7(b) and 2.1. Rule 1.8(a) provides as follows:
A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client; (2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and (3) The client consents in writing thereto.
The lawyer's conduct also is governed by Rule 1.7(b), quoted above, providing that a lawyer shall not represent a client if the representation of the client may be materially limited by the lawyer's own interests unless the lawyer reasonably believes the representation will not be adversely affected and the client consents after consultation. In addition, under Rule 2.1, a lawyer must exercise independent professional judgment and render candid advice in representing a client. The lawyer must determine that his conflicting role as broker will not affect the lawyer's ability to judge independently and render candid advice.
In the event the lawyer complies with Rules 1.7(b), 1.8, and 2.1, but during the course of representation determines that the lawyer's own interest will adversely affect the representation, the lawyer must withdraw from the representation.
We note that the lawyer should be cautious in determining whether the lawyer can comply with these rules. Instructive in this regard is In re Morgan, 288 S.C. 401, 343 S.E.2d 29 (1986), in which a lawyer received a public reprimand for representing multiple parties as well as acting as broker in a real estate transaction. The facts of Morgan illustrate the risk that the lawyer's own financial interests in the transaction may be so great as to prohibit his representation of a party to the transaction.
The dual role of the lawyer/broker also raises questions beyond the issues of conflict of interest and duty of loyalty. For example, Rule 7.3 restricts a lawyer's ability to solicit professional employment from a prospective client. If a party hired the lawyer originally to provide services as a broker, it would be impermissible for the lawyer to solicit the opportunity to represent the party as lawyer. See SC Bar Adv. Op. 78-14 (construing Disciplinary Rule 2-104(a) of the Code of Professional Responsibility as prohibiting a lawyer from representing the purchaser if the lawyer in the course of his activity as the real estate broker suggested to the purchaser that he should obtain the services of a lawyer).
Although beyond the scope of the questions presented to this Committee, the Rules of Professional Conduct may prohibit the lawyer from operating a law practice and a real estate broker's practice out of the same office.
Also potentially applicable is Rule 1.5, which requires that a lawyer's fee be reasonable. When acting as a lawyer and a broker in the same transaction, a lawyer may not charge two fees for the same service.