State Bar Association
of interest; serving as lawyer and broker in same real estate transaction
lawyer who receives a broker’s commission in a real estate transaction may not
also serve as the lawyer for the buyers, even if the buyers are long-time
clients and friends and have requested both kinds of services
1. The inquirer is an attorney and licensed
real estate broker. A married couple,
long-standing clients and friends of the inquirer, seek to buy real estate and
have asked the inquirer to represent them as both broker and attorney in that
real estate purchase.
2. The inquirer proposes to serve in both
of those capacities in the real estate transaction. As broker, the inquirer would receive a
brokerage commission from the seller (which we assume would be a percentage of
the sale price of the real estate). As attorney, however, the inquirer would
provide the requested legal services pro bono, because the buyers have limited
3. May a lawyer who is serving as a broker
in a real estate transaction also provide pro bono legal services to the buyers
in that transaction?
4. The general provisions on conflicts of
interest are set forth in Rule 1.7 of the New York Rules of Professional
Conduct (the “Rules”). A lawyer with a
conflict of interest under Rule 1.7(a) may not represent a client unless the
conflict is waivable and is properly waived by the client under Rule
1.7(b). One kind of conflict, a
“personal interest” conflict, arises when a reasonable lawyer would conclude
that “there is a significant risk that the lawyer’s professional judgment on
behalf of a client will be adversely affected by the lawyer’s own financial,
business, property or other personal interests.” Rule 1.7(a)(2).
5. Such personal interest conflicts are
generally present when a lawyer provides brokerage services as well as legal
services in the same real estate transaction.
We have opined on numerous occasions that a lawyer may not act as an
attorney on behalf of any party to a real estate transaction in which the
lawyer is also acting as a broker. See,
e.g. N.Y. State 1013 ¶ 1 (2014); N.Y. State 933 ¶ 7 (2012); N.Y. State 919 ¶ 3
(2012). In N.Y. State 753 (2002), we explained our reasoning:
rationale for these opinions is that a lawyer should not have a personal stake
in the advice rendered, and a broker who is paid only if the transaction closes
cannot be fully independent in advising the client as a lawyer.
N.Y. State 1015 (2014) (quoting N.Y. State 753 and citing later opinions).
6. Moreover, while many conflicts may be
waived by the client, that is not the case when a lawyer serves as both broker
and attorney. “[T]he personal interest
of a lawyer-real estate broker in the brokerage fee that will be generated by a
closing of a real estate transaction so conflicts with the lawyer’s
responsibility to provide independent legal judgment with respect to that
transaction as to preclude the dual roles and to make the conflict
non-consentable by the client.” N.Y.
State 933 ¶7 (2012).
7. This per se rule that serving as both
broker and attorney in a real estate transaction creates a non-consentable
conflict does not apply in certain situations involving non-standard
arrangements for broker compensation. For example, the per se rule does not
apply when the broker is to be compensated by a flat fee not dependent on the
closing of the transaction,1
or when the broker credits the full amount of the brokerage commission
to the client.2 But here, as
we understand the inquiry, the broker compensation would be the usual kind of
commission and would be retained by the inquirer. Accordingly, this matter is subject to our
longstanding per se rule, and the conflict is non-consentable.
8. The fact that the inquirer would provide
the legal services pro bono does not change this conclusion. See N.Y. State 916 (2012) (“A lawyer may not
offer free legal services as an add-on bonus to a party to a real estate
transaction in which the lawyer is acting as broker”). Indeed, underlying the per se rule is the
materiality of a standard brokerage commission.
See N.Y. State 1015 ¶7 (2014) (“The risk that legal judgment would be
adversely affected is heightened by the common circumstance that the broker’s
contingent fee will be substantially greater than the fee of the lawyer
representing the seller.”). When the
amount of the legal fee is zero, the relative importance of the brokerage fee
becomes even greater, and so does the risk it poses to the lawyer’s independent
legal judgment, because the only way the lawyer can make money in this scenario
is to close the real estate transaction and obtain the broker’s commission.
9. Seeking to avoid application of the per
se rule discussed above, the inquirer asserts certain distinctions from the
facts of our prior opinions. The
inquirer points out that the provision of both kinds of services would result
from a request by the clients, who are long-time clients and friends of the
inquirer, rather than from the attorney’s suggestion. The inquirer also notes that the brokerage
commission would be paid by the seller and would result in no financial burden
to the inquirer’s clients.
10. We do not think that these distinctions
change the result. The lawyer’s interest
in the commission is the same no matter who suggested the provision of
brokerage services and no matter who pays that commission. The fact that the
broker’s commission will be paid by the seller rather than by the lawyer’s
client (the buyer) does not diminish the risk of an adverse impact on the
lawyer’s independent professional judgment.
A large commission is a large commission.
11. In N.Y. State 1043 (2015), we rejected the
argument that the benefit to the client from receiving free legal services
eliminates the conflict. There, the
inquirer represented an estate in the sale of real property through a real
estate broker the lawyer had recommended to the executors. The broker later offered to pay the lawyer a
referral fee (25% of the broker’s commission), which the lawyer proposed to
accept in lieu of charging legal fees to the estate for services rendered in
the real estate transaction. We
disabling conflict that [our prior] opinions identify is a lawyer’s pecuniary
interest in the broker’s . . . . commission . . . . , which irredeemably
interferes with the lawyer’s distinct obligation to exercise independent
professional judgment on the client’s behalf.
That the estate beneficiaries may benefit from the arrangement does not
remedy this circumstance, any more than a lawyer/broker’s waiving a legal fee,
which is also of benefit to the client, can do so.
12. Conceivably the friendship between the
lawyer and the clients could be so strong as to serve as an adequate
counterweight to the lawyer’s interest in the commission, but the test in the
Rules does not turn on so subjective an assessment. Rather, it turns on these objective
standards: whether “a reasonable lawyer” would find a significant risk that
personal interests would compromise professional judgment, and whether the
actual lawyer “reasonably” believes there will be competent and diligent
representation. We continue to believe
that application of these objective standards supports the per se rule set
forth in our prior opinions that renders a conflict such as this one
13. In a real estate transaction, even when a
lawyer provides pro bono legal services at the request of clients who have long
been clients and friends of the lawyer, the lawyer may not also serve in that
transaction as a broker compensated by commission. The conflict cannot be cured
by the client’s consent because it is non-consentable.
1The per se rule of a nonconsentable conflict
applies whenever the brokerage services are compensated in the usual way, as a
commission contingent on the transaction being closed. We have also considered the context of an
alternative fee arrangement in which when brokerage services are compensated by
a fixed and non-refundable fee, not contingent on closing. We found that such a fee arrangement did not
give rise to a conflict, and while there could be other foreseeable conflicts
in such a situation, those other conflicts could be subject to waiver by
informed consent. N.Y. State 1015 ¶¶
2When a lawyer who is also acting as a real
estate broker remits or credits the entire brokerage fee to the client, then
the brokerage fee typically would not give rise to the kind of
personal-interest conflict described above.
See N.Y. State 845 part C (2010) (a lawyer who will be compensated as a
broker may share part of her brokerage commission with a referring lawyer who
represents a buyer or seller in the transaction if the referring lawyer remits
or credits the referral fee to the client).