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2013 Formal Ethics Opinion 14: Representation of Parties to a Commercial Real Estate Loan Closing

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The Ethics Committee voted to publish 2013 Formal Ethics Opinion 14 for comment at its meeting on October 24, 2014. This opinion was published along with an alternative due to the split in opinion on whether a lawyer can represent multiple parties to a commercial real estate loan closing. This opinion and its alternative reach different conclusions. The first proposed opinion was adopted at the Committee’s meeting on January 23, 2015.  Under the adopted opinion, common representation in these types of transactions raises a “nonconsentable conflict” most of the time. Effectively, this means that a lawyer handling a commercial real estate closing is usually not allowed to ask the borrower and lender to consent to common representation.

The opinion explains that Rule 1.7 prohibits representation if there is a concurrent conflict of interest unless certain conditions are met first. A concurrent conflict arises when representation of one client is directly adverse to another client or when representation of one client materially limits the lawyer’s ability to represent the other client. Therefore in the context of a commercial real estate loan closings, there are several reasons why these types of conflicts can arise: (1) they are “arm’s length” business transactions meaning it involves independent parties acting in their own self-interest, (2) there are large sums of money at stake, (3) the necessary documentation for the transaction is complex, and (4) there are ample opportunities for negotiations between the parties.

Even when there are conflicts, sometimes the conflicts can be waived if the lawyer determines that representation of all “conflicted” parties will be competent and diligent and each of those clients gives informed consent. However, there are some conflicts that are nonconsentable. Therefore to determine consentability, the opinion notes two tests to consider. The first is “whether the interests of the clients will be adequately protected if the clients are permitted to give their informed [consent].” The other is “when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstance, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client’s consent.”

Although the Ethics Committee previously ruled in a 1986 opinion, in RPC 10, that a lawyer can represent multiple parties in a residential real estate closing, a commercial closing is substantially different. Most notably, commercial loan closings involve numerous negotiations which decrease the possibility of impartiality, and there are numerous chances for conflicts to arise which increase the prejudice to the parties. Thus, in most cases, common representation in a commercial loan closing is a nonconsentable conflicts.

Where this opinion differs from the alternative opinion is that it notes there are instances where informed consent can be given for common representation. Dual representation of the borrower and lender for a commercial closing is consentable when: “(1) the contractual terms have been finally negotiated prior to the commencement of the representation; (2) there are no material contingencies to be resolved; (3) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (4) it is unlikely that a difference in interests will eventuate and, if it does, it will not materially interfere with the lawyer’s independent professional judgment in considering alternatives or foreclose courses of action that should be pursued on behalf of a client; (5) the lawyer reasonably concludes that he will be able to act impartially in the representation of both parties; (6) the lawyer explains to both parties that his role is limited to executing the tasks necessary to close the loan and that this limitation prohibits him from advocating for the specific interests of either party; (7) the lawyer discloses that he must withdraw from the representation of both parties if a conflict arises; and (8) after the foregoing full disclosure, both parties give informed consent confirmed in writing.”

The second ruling in this opinion holds that a lawyer can be the lead lawyer in a commercial loan closing provided the lawyer only represents one party. This is presented in the context of Bank’s Counsel which is a lawyer that is specifically authorized by the bank to handle the commercial closing. Thus, the lending lawyer can serve as a closing lawyer so long as “[1] borrower is informed that the closing lawyer will not represent its interests and will interpret loan documents in the light that is most favorable to the lender, [2] the borrower has a reasonable opportunity to retain its own counsel and is not misled as to its right to do so, [3] the lawyers for both parties advise their clients about the risks and benefits of a having the lender’s lawyer serve as the closing lawyer; and [4] the borrower’s lawyer is allowed to observe and participate in the transaction to the extent necessary to protect the borrower’s interests.”

Ana Hopper, Editor-in-Chief Emeritus
About Ana Hopper, Editor-in-Chief Emeritus (33 Articles)
Ana Hopper is a 2016 Campbell Law graduate and served as the Editor-in-Chief of the Campbell Law Observer for the 2015-2016 academic year. She is originally from Winston-Salem and graduated from the University of North Carolina at Charlotte in 2012 with a Bachelor of Arts in Political Science and Sociology. The summer following her first year of law school, Ana worked as a research assistant for Professor Amy Flanary-Smith. Ana also interned at the Criminal Appellate Section of the Department of Justice her second year, and at the New Hanover District Attorney's Office as an intern the summer before her third year. She served as a Legal Research and Writing Scholar, Vice President of BLSA, and Community Chair of Lambda during her time at Campbell.
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