Representation of Parties to a Commercial Real Estate Loan Closing [Proposed 2013 Formal Ethics Opinion 14]
A lawyer generally may not represent both the borrower and the lender in a commercial real estate closing, even with consent.
View proposed ethics opinion in full here.
This proposed opinion examines when common representation in a commercial real estate loan closing is a “nonconsentable” conflict. The first inquiry examines whether a lawyer may represent both the borrower and the lender in a commercial real estate closing.
Common Representation in a Commercial Real Estate Closing
According to the proposed opinion, a lawyer generally may not represent both the borrower and the lender in such a transaction, even with consent. Rule 1.7 prohibits concurrent conflicts of interest, which exist where “the representation of one client will be directly adverse to another client” or “the representation of one or more clients may be materially limited by the lawyer’s responsibilities to another client ….” Unlike a residential real estate closing, a commercial real estate closing may involve many opportunities for negotiation, complex contractual provisions, and substantial amounts of money. These unique characteristics create a concurrent conflict of interest that is often “nonconsentable.”
Rule 1.7(b) states the requirements for a conflict to be “consentable.” Nevertheless, some conflicts are not “consentable.” Specifically, a conflict is not “consentable” if “the lawyer cannot reasonably conclude that the lawyer will be able to provide competent and diligent representation” (see Comment 15 to Rule 1.7). The proposed opinion offers a test for determining whether a specific conflict is “consentable:” “when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client’s consent.”
The proposed opinion offers six conditions that must be satisfied in order for common representation in a commercial real estate closing to be ethically permissible:
- The financial stakes are not high;
- The contractual terms have been finally negotiated prior to the commencement of the representation;
- No contingencies need to be resolved;
- 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 specific interests of either party;
- The lawyer discloses that he must withdraw from the representation of both parties if a conflict arises; and
- Both parties give informed consent confirmed in writing.
Lender’s Attorney as the “Closing Lawyer” or “Lead Lawyer”
The second issue in the proposed opinion is whether the lender’s attorney may handle all aspects of the commercial real estate closing (including the title search, title certification, disbursement of closing funds, etc.).
Per the proposed opinion, the lender’s attorney may serve in this capacity, provided that the attorney represents only one party and certain conditions are satisfied:
- The lender’s attorney must inform the borrower that the attorney is not representing the borrower’s interest;
- The lender’s attorney must inform the borrower that the attorney will interpret loan documents in the light most favorable to the lender;
- The lender’s attorney must give the borrower a “reasonable opportunity” to retain its own counsel;
- Attorneys from both sides must advise their respective clients of the risks and benefits of having the lender’s attorney serve in this capacity; and
- The borrower’s attorney must be given the opportunity “to observe and participate in the transaction to the extent necessary to protect the borrower’s interests.”
If you wish to respond or otherwise offer a guest contribution discussing this formal ethics opinion, please contact the ethics editor at firstname.lastname@example.org.