the foundation of ethics in real estate transactions foundation of ethics in real estate...

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The Foundation of Ethics in Real Estate

Transactions

PRESENTED BY

MICHAEL RESKO, ESQ.

[email protected] (800) 672-6253

mailto:[email protected]

mailto:[email protected]

TRTCLEMICHAEL RESKO, ESQ.

Michael Resko earned his JD from New York University School of Law in 1991. After working for several years at a New York City law firm, in 1996 he opened his own practice, specializing in real estate transactions and litigation, business transactions and litigation, and estate planning and asset protection.

There are several ideals on which the practice is founded:

1. be accessible and responsive to our clients;

2. offer practical solutions to our client’s problems;

3. upfront and fair pricing of our services including writtenfee agreements in ALL matters; and

4. bringing all of our attention, experience and expertise tobear for every one of our clients.

Michael was recently honored for 15 years of service as an Adjunct Professor at New York Law School, where he teaches courses in Real Estate Law and Contracts. He has also taught continuing legal education courses to other attorneys on the subject of New York real estate transactions.

Michael is admitted to practice before the state and federal courts of New York and New Jersey and the United States Court of Appeals for the Second Circuit.

Michael Resko can be contacted at:

Michael Resko, Esq.60 East 42nd Street, 46th Floor

New York, NY 10165 (212) 490-3010

[email protected]

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TRTCLEOutline

Part I: Conflicts of Interest

i. The Rule

ii. Hypotheticals

Part II: The Attorney as Escrow Agent

i. Multiple “uses” of Escrow in real estate transactions

a. Contract down-payment

b. Post-closing issues

ii. Disputes and Conflicts of Interest

iii. Record-Keeping

Exhibits

1) TOPIC: IMPUTATION OF CONFLICTS OF INTEREST; DUAL REPRESENTATION OF

BUYER AND SELLER OF REAL ESTATE

2) TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; CONFLICT OF INTEREST

3) TOPIC: LAWYER/REAL ESTATE BROKER SHARING HER BROKERAGE COMMISSION

WITH LAWYERS WHO REFER BUYERS OR SELLERS

4) TOPIC: LAWYER’S PROVISION OF FREE LEGAL SERVICES WHEN LAWYER IS ALSO

BROKER IN A REAL ESTATE TRANSACTION

5) TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; MORTGAGE BROKERAGE; TITLE

ABSTRACT COMPANY; CONFLICT OF INTEREST

6) LAWYER AS ESCROW AGENT

7) Residential Contract

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Part I: Conflicts of Interest

(i) The Rule

Rule 1.7: (a) Except as provided in paragraph (b), a lawyer shall not

represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) each affected client gives informed consent, confirmed in writing, after full disclosure and consultation, provided, however, that a public entity cannot consent to any such representation. When the lawyer represents multiple clients in a single matter, the consultation shall include an explanation of the common representation and the advantages and risks involved;

(2) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(3) the representation is not prohibited by law; and

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TRTCLE(4) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.

(ii) Hypotheticals:

(a) Can the Attorney represent the Buyer and Seller in a real estate transaction?

The “disinterested lawyer” test:

“[I]n unusual and very limited circumstances” one lawyer might properly undertake dual representation of both parties to a real estate transaction.

[A] lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.

See, New York State Bar Association Committee on Professional Ethics, Opinion Number 807, January 29, 2007, Imputation of Conflicts of Interest; Dual Representation of Buyer and Seller of Real Estate, NY Eth. Op. 807, 2007 WL 833427.

(b) Can the Attorney act as both the real estate broker and represent either party in a real estate transaction?

In a word, “no”.

As noted in N.Y. State 752, however, we have opined on a number of occasions over an extended period of time that, because of the strong financial interest of a lawyer who serves as a broker in the outcome of the brokerage effort, the roles of broker and lawyer in the same transaction are

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TRTCLEincompatible and not subject to consent by the client. N.Y. State 752 and Opinions cited therein. That a lawyer’s or law firm’s participation in a separate brokerage business is limited largely or wholly to that of investor, with little or no management or operational activity, does not alter that result. It is the personal financial interest arising from the investment that creates the personal interest conflict that is the subject of Rule 1.7.

See, New York State Bar Association Committee on Professional Ethics, Opinion Number 886, November 15, 2011, Ancillary Business Organizations; Conflict of Interest, NY Eth. Op. 886, 2011 WL 7784096.

What about referral fees?

See, New York State Bar Association Committee on Professional Ethics, Opinion Number 845, October 14, 2010, Lawyer/Real Estate Broker Sharing Her Brokerage Commission with Lawyers Who Refer Buyers or Sellers, NY Eth. Op. 845, 2010 WL 6470555.

Or pro bono?

See, New York State Bar Association Committee on Professional Ethics, Opinion Number 916, March 27, 2012, Lawyer’s Provision of Free Legal Services When Lawyer is also Broker in a Real Estate Transaction, NY Eth. Op. 916, 2012 WL 1514589.

(c) Can the Attorney act as both the title company and represent either party in a real estate transaction?

“With respect to abstract title companies, in N.Y. State 595 (1988), N.Y. State 621 (1991), and N.Y. State 738 (2001), we held that a lawyer could, with consent after disclosure, refer real estate clients to a title abstract company in which the lawyer or his or her spouse had an ownership interest “for purely ministerial abstract work,” but not where the abstract company provided the additional service of preparing a title report or serving as an agent for the title underwriter. The central rationale was that if the abstract company prepared a report showing exceptions in title and recommending whether a title insurance policy should be issued, the law firm for the party would be required “to negotiate these issues ... with itself.” N.Y. State 738 (2001). See also N.Y. State 731 (2000) (lawyer cannot pay employees to refer clients to lawyer-owned title company for non-

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TRTCLEministerial tasks).”

(d) Can the Attorney represent a mortgage lender and the Buyer in a real estate transaction?

“Taking the second question first, the proposal to represent both the buying client and the lender in the same transaction creates the potential for a clear conflict. The role of the lender’s attorney can be, in part, to protect the interests of the bank in negotiating the loan agreement with the borrower and obtaining the necessary security on the borrower’s property. The role of the buyer’s attorney can be, in part, to protect the borrower’s interests in those same matters. In situations in which the lawyer for the buyer could be called upon to negotiate with the lawyer for the lender, it would not be possible for one lawyer to play both roles, even with consent, because that would put the lawyer in the position of negotiating with him or herself. The lawyer could not zealously represent both parties. See DR 5-105(C); N.Y. City 2001-2 (“Situations in which a lawyer or members of a single law firm would be required to negotiate directly with herself or each other on behalf of multiple clients in a transaction ... will rarely be consentable”). This committee has recognized, however, that in some circumstances there is no negotiation or assertion of rights between the lender and buyer in which a lawyer has any role. As long as full disclosure of the risks of dual representation has been made and knowing consent obtained, we have held such dual representation can be permissible. N.Y. State 8 (1965); N.Y. State 199 (1971); N.Y. State 438 (1976); N.Y. State 694 (1997); see also ABA Inf. 643 (1963) (same); ABA Inf. 837 (1965) (same). But see Nassau County 98-10 (lawyer may not represent buyer and lender in same residential purchase and mortgage transaction).”

See, New York State Bar Association Committee on Professional Ethics, Opinion Number 753, February 26, 2002, Ancillary Business Organizations; Mortgage Brokerage; Title Abstract Company; Conflict of Interest, NY Eth. Op. 753, 2002 WL 1331046.

Part II: The Attorney as Escrow Agent

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TRTCLE“An escrow agent is a custodian or stakeholder of funds designated for a special purpose, usually pursuant to a written agreement. The escrow agent has contractual and fiduciary duties to all parties to the escrow arrangement and may dispose of the escrowed funds only in accordance with the terms of the escrow agreement or with the consent of all parties. The duties of an escrow agent are thus principally matters of contract and fiduciary law, rather than of ethics , and to that extent are beyond the jurisdiction of this Committee. A lawyer serving as escrow agent has fiduciary duties and obligations, not only to his client, but to all parties to the escrow agreement. In addition, a lawyer’s conduct with respect to escrow arrangements is governed by the Code of Professional Responsibility. As discussed more fully below, the requirements of Canon 9 pertaining to the preservation, safekeeping and use of client funds and trust property are applicable to escrowed funds held by a lawyer, although such funds are not literally “funds of clients.” N.Y. City 82–8; N.Y. City 79–48 (1980); N.Y.State 532 (1981); In Re Hollendonner, No. D–1 (N.J.Sup.Ct., Oct. 17, 1985).”

See, New York State Bar Association Committee on Professional Ethics, Formal Opinion Number 1986-5, July 14, 1986, Lawyer as Escrow Agent, NY Eth. Op. 1986-5, 1986 WL 293094.

(i) Multiple “uses” of Escrow in real estate transactions

(a) Contract down-payment

(b) Post-closing issues

(ii) Disputes and Conflicts of Interest

(iii) Record-keeping

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TRTCLENY Eth. Op. 807 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2007 WL 833427

New York State Bar Association Committee on Professional Ethics

TOPIC: IMPUTATION OF CONFLICTS OF INTEREST; DUAL REPRESENTATION OF BUYER AND SELLER OF REAL ESTATE

Opinion Number 807 January 29, 2007

DIGEST: A part-time associate of a law firm is “associated” with the law firm for the purpose of imputation of conflicts of interest. The buyer and seller of residential real estate may not engage separate attorneys in the same firm to advance each side’s interests against the other, even if the clients give informed consent to the conflict of interest. *1 Code: DR 5-105(C), (D)

QUESTION 1. A law firm employs a part-time associate who works for the firm two days per week. When not working at this law firm, the part-time associate operates her own separate private practice of law, at a separate location, where she works as a sole practitioner and handles her own clients, maintains her own files and has her own trust account. A client approached the sole practitioner at her separate practice and asked her to represent the client in buying some residential real estate. The seller approached a partner in the law firm that employs the sole practitioner part-time and asked the partner to represent him as the seller in the same transaction. May the law firm, with full disclosure and consent, represent the seller in a residential real estate transaction while its part-time associate, operating out of her separate practice, represents the buyer in the same transaction?

OPINION Designation of part-time lawyer as an associate 2. A threshold question is whether it is proper to refer to the part-time lawyer as an “associate” of the law firm. The New York City Bar ethics committee has opined that a lawyer who works for a law firm on a continuing basis and spends 10-15 hours per week on firm matters, but does not work exclusively for that law firm, cannot be referred to by the law firm as an “associate.” N.Y. City 1996-8. The New York City Bar opinion cites numerous authorities for the proposition that an “associate” means a “salaried lawyer-employee” and concludes that to call a per diem lawyer—who is paid to work only on specific matters and who does not work exclusively for the firm—an “associate” would be misleading. We agree that it would be misleading to clients and the public to call a lawyer

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TRTCLEan “associate” where that lawyer is called in from time to time to work only on specific matters and is paid on a per diem basis. 1

3. We do not believe, however, that a part-time lawyer must work for only one firm in order to be properly called an “associate.” Where the part-time lawyer is regularly available to consult with the firm and its clients on a variety of matters, albeit during limited hours, the term “associate” can be proper even though the lawyer does not work exclusively for that firm. In this connection we note that a single lawyer can be a partner in two different law firms. Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384 (2d Cir. 1976). We see no reason that a lawyer cannot be an associate in two law firms where the lawyer has a part-time relationship with each firm, if the relationship with each otherwise bears the typical hallmarks of a firm-associate relationship as it is generally understood. Imputation of conflicts to a part-time associate *2 4. Disciplinary Rule 5-105(D) provides that “[w]hile lawyers are associated in a law firm, none of them shall knowingly accept or continue employment when any one of them practicing alone would be prohibited from doing so under DR 5-101(A), DR 5-105(A) or (B), DR 5-108(A) or (B), or DR 9-101(B) except as otherwise provided therein.” 5. A lawyer who is held out to the public as an associate is plainly “associated” with the firm for purposes of DR 5-105(D). The clear implication of calling a lawyer an “associate” of the law firm is that the lawyer is “available to the firm for consultation and advice on a regular and continuing basis.” N.Y. State 262 (1972) (term ‘of counsel’ may only be used where there is a continuing relationship). See also N.Y. State 794 (2006); N.Y. State 793 (2006); N.Y. State 773 (2004); ABA 90-357 (1990). A law firm may not denominate a lawyer as an associate and then take the position that the lawyer is not an associate for the purpose of imputation of conflicts of interest. 6. While properly calling a lawyer an associate means that he or she is associated with the law firm for the purposes of imputation of conflicts of interest, calling the same lawyer something else does not by itself mean that conflicts are not imputed. The label is not dispositive. A lawyer who has another title, such as “contract lawyer,” will be deemed to be “associated” with the law firm in the circumstances set forth in our opinion N.Y. State 715 (1999). Associated lawyers representing buyer and seller in real estate transactions

Cf. N.Y. State 715 (1999) (“If the Contract Lawyer has general access to the files of all clients of the firm and 1

regularly participates in discussions of their affairs, then he or she should be deemed ‘associated’ with the firm. However, if the firm has adopted procedures to ensure that the Contract Lawyer is privy only to information about clients he or she actually serves, then, in most cases, the Contract Lawyer should not be deemed to be ‘associated’ with the firm for purposes of vicarious disqualification.”).

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TRTCLE7. The buyer and the seller of real estate will ordinarily have differing interests in the transaction. Such differences, which would require the exercise of independent legal judgment by the lawyers for each party, include such things as the nature of the deed to be given; customs to be followed in making adjustments; points in the title report which may or may not be disregarded; and what title company to use. N.Y. State 38 (1966). 8. We recognized in N.Y. State 38 (1966) and N.Y. State 611 (1990) that “in unusual and very limited circumstances” one lawyer might properly undertake dual representation of both parties to a real estate transaction. Our conclusion was based on former Canon 6 and later on Disciplinary Rule 5-105(C), which provides:

In the situations covered by DR 5-105(A) and (B) a lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.

9. We concluded in N.Y. State 162 (1970) that a single lawyer could represent both parties to a real estate transaction where the interests of buyer and seller are not actually or potentially differing or would vary only slightly. In N.Y. State 611 (1990), we opined that a single lawyer could represent the seller and the lender in a real estate transaction where the parties have reached a complete accord on the business terms of the transaction, no points of importance remain for negotiations, and a title policy is to be obtained. See also N.Y. County 615 (1973) (lawyer may represent in a real estate transaction, with their consent, both buyer and seller who had already agreed upon the purchase price, time and manner of payment, and other terms and conditions of the sale). *3 10. Where such dual representation by a single lawyer might be permissible, we have cautioned that the lawyer “should not routinely assume that dual representation of these parties will be ethically permissible in every transaction.” N.Y. State 611. A lawyer undertaking to represent both buyer and seller of real estate should heed the admonition of N.Y. State 38 (1966), repeated in N.Y. State 162: “Dual representation should be practiced sparingly and only when it is clear that neither party will suffer any disadvantage from it. It is difficult to justify, except in unusual and very limited circumstances ...” 11. Under DR 5-105(D), these limitations on a single lawyer representing two parties in a real estate transaction apply as well to representation by a single law firm. The opinions discussed above, in which we concluded that a single lawyer may, in unusual and very limited circumstances, undertake dual representation of both parties to a real estate transaction,-involve cases where there is little or no actual adversity between the two parties and they have both sought out a single lawyer (or law firm) to represent them

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TRTCLEjointly. This might occur, for example in a family transaction or where two clients of a lawyer or law firm have agreed on substantially all of the terms of the transaction and together ask the lawyer or law firm to document the transaction for them both. 2

12. The situation under consideration in this opinion is quite different: Here a buyer and a seller of residential real estate each determined at the outset of the negotiations to be represented by separate lawyers in separate firms, and the two clients separately approached lawyers in different firms to negotiate the terms of the transaction between them. The parties’ decision at the outset that they should be represented by two different lawyers in two different firms reflects an actual adversity and conflict of interest between them that would require the two lawyers to negotiate or bargain against each other as adversaries. 13. A conflict like the one here is not consentable under DR 5-105(C). In such a situation, a disinterested lawyer would not conclude that the two lawyers could “competently represent the interests of each.” See N.Y. City 2001-2 (“If the dual representations require lawyers to directly negotiate the substantive business terms with each other, the direct adversity could preclude such concurrent representation — even with consent.”). 3

CONCLUSION

14. The question is answered in the negative.

NY Eth. Op. 807 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2007 WL 833427 End of Document

© 2016 Thomson Reuters. No claim to original U.S. Government Works.

Even in this situation, if potential adversity between the clients became actual, the single lawyer or law 2

firm would usually have to withdraw from representing both of the parties unless the clients have consented to have the lawyer continue for only one of them. DR 5-108(A) (a lawyer may not, without consent, represent a client adverse to a former client in the same or a substantially related matter); EC 5-15.

This conclusion is much the same as that which would be reached if two lawyers in the same firm sought 3

consent for one to represent plaintiff and the other defendant in contested litigation.

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TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; CONFLICT OF INTEREST

Opinion Number 886 November 15, 2011

DIGEST: A lawyer with a substantial investment in a closely held real estate brokerage firm is precluded from representing a party to a real estate transaction in which the brokerage firm is acting as broker *1 Rules 1.7, 5.7 QUESTION 1. May an attorney with a substantial passive investment in a closely held nonlegal business entity that offers real estate brokerage, asset management and property management services represent a buyer, seller or lender in a transaction in which that nonlegal entity is serving as a broker? OPINION 2. The inquirer seeks to establish a closely held nonlegal entity to provide brokerage, asset management and property management services to investors with a focus largely on multi-family apartment assets. The inquirer contemplates a substantial and significant investment in the nonlegal entity but does not contemplate taking an active role in the management or operation of the entity. Inquirer intends to offer legal services to clients of the entity, and particularly services in purchase, sale and lease transactions in which the affiliated nonlegal entity is serving as a broker. The inquirer’s firm would be one of several law firms from which clients of the nonlegal entity would be free to choose. The legal services would be offered only after full written disclosure of the inquirer’s interest in the nonlegal entity. 3. A lawyer or a law firm may provide nonlegal services, themselves or through a separate entity, to clients or other persons. New York Rules of Professional Conduct (the “Rules”) 5.7; see N.Y. State 752 (2002), N.Y. State 753 (2002) and N.Y. State 755 (2002). Whether the nonlegal services provided by the lawyer or law firm, or a separate entity in which they have an interest, are subject to the Rules depends upon whether such services are separate and distinct from any legal services that the lawyer or law firm may provide and, if so, whether the client “could [not] reasonably believe that such nonlegal services are the subject of a client-lawyer relationship.” Id.. The client will be presumed to believe that such nonlegal services are the subject of a client-lawyer relationship unless (i) the lawyer or law firm has advised the client in writing that such

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TRTCLEservices are not legal services and that the protections associated with a client-attorney relationship do not obtain or (ii) the lawyer’s or law firm’s interest in the separate entity providing such services is de minimis. Id.. 4. In all instances, however, the lawyer’s services qua lawyer are subject to the Rules. In N.Y. State 752, we opined specifically that the application of the personal interest conflict rule found in DR 5-101(A), a precursor of Rule 1.7, to a lawyer seeking to serve in the dual roles of lawyer and broker, inter alia, survived the adoption of DR 1-106, the direct predecessor of Rule 5.7. We here reaffirm our opinion in N.Y. State 752 and hold further that, in our opinion, Rule 1.7 applies with undiminished force in circumstances where a lawyer’s conflicting personal interest arises from a separate, nonlegal business or activity permitted by Rule 5.7. *2 5. Thus, absent informed consent, a lawyer may not provide legal representation to a person or entity if a substantial risk exists that the lawyer’s personal interests arising from a permitted separate, nonlegal activity will affect the lawyer’s professional judgment on behalf of that person or entity. Rule 1.7. Informed consent is dependent upon, inter alia, the lawyer’s reasonable belief that the lawyer will be able to provide competent and diligent representation. Id. 6. As noted in N.Y. State 752, however, we have opined on a number of occasions over an extended period of time that, because of the strong financial interest of a lawyer who serves as a broker in the outcome of the brokerage effort, the roles of broker and lawyer in the same transaction are incompatible and not subject to consent by the client. N.Y. State 752 and Opinions cited therein. That a lawyer’s or law firm’s participation in a separate brokerage business is limited largely or wholly to that of investor, with little or no management or operational activity, does not alter that result. It is the personal financial interest arising from the investment that creates the personal interest conflict that is the subject of Rule 1.7. CONCLUSION 7. For the reasons stated, a lawyer with a substantial passive investment in a separate, closely held nonlegal entity that offers real estate brokerage, asset management and property management services may not represent a buyer, seller or lender in a transaction in which such separate nonlegal entity is serving as a broker. (40-10)



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TOPIC: LAWYER/REAL ESTATE BROKER SHARING HER BROKERAGE COMMISSION WITH LAWYERS WHO REFER BUYERS OR SELLERS

Opinion Number 845 October 14, 2010

DIGEST: A lawyer who is also a real estate broker may ethically offer to share her broker’s commission with attorneys who refer buyers or sellers to her if either (a) the referring lawyer is not representing the buyer or seller in the real estate transaction, or (b) the referring lawyer is representing the buyer or seller in the real estate transaction but remits or credits the referral fee to the client and obtains the client’s informed consent to the potential conflict arising from the referral fee. *1 Rules: 1.0(a) 1.7, 1.8(f), 8.4(a).

FACTS 1. An attorney has recently decided to work as a real estate broker, but has not given up her New York law license. She desires to advertise that she will pay a percentage of her broker’s commission to attorneys who refer buyers or sellers to her. In the past, she has received similar letters from other attorneys, but she is unsure if it such offers are ethically acceptable.

QUESTION 2. May a licensed lawyer who is also a real estate broker (but is acting solely as a broker in any real estate transaction) ethically advertise that she will share her broker’s commission with attorneys who refer buyers or sellers to her?

OPINION 3. The Committee assumes for purposes of this analysis that (a) the inquiring attorney is functioning solely as a real estate broker, not as a lawyer, in the real estate transactions in question, and (b) if the inquiring attorney offers any legal services in other matters, they will be distinct from the non-legal services which she renders as a real estate broker, and (c) the attorney will comply with Rule 5.7 of the New York Rules of Professional Conduct (the “Rules”), effective April 1, 2009, if it is applicable. A. Communications to Other Lawyers Are Not “advertisements”

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TRTCLE4. As a preliminary matter, an advertisement that an attorney places solely in her capacity as a real estate broker, with no intention of attracting legal business, is not an “advertisement” within the meaning of Rule 1.0(a) of the New York Rules of Professional Conduct. Rule 1.0(a) provides as follows:

“Advertisement” means any public or private communication made by or on behalf of a lawyer or law firm about that lawyer or law firm’s services, the primary purpose of which is for the retention of the lawyer or law firm. It does not include communications to existing clients or other lawyers.

5. Here, since the purpose of the inquiring attorney’s communications offering to share her brokerage commissions is not “the retention of the lawyer” as a lawyer, the broker’s communication lacks an essential element of an “advertisement” under Rule 1.0(a). Also, the attorney proposes to direct her referral fee offer to other lawyers, and Rule 1.0(a)’s definition of “advertisement” expressly excludes “communications to ... other lawyers.” B. Referral fees to lawyers who represent the buyers or sellers in the transaction *2 6. The Committee’s jurisdiction is limited to interpreting and applying the Rules. The Committee does not render opinions on questions of law, and thus does not opine on whether the proposed arrangement violates any statute or regulation. If the proposed arrangement violates any state or federal law or regulation, it perforce would be unethical. N.Y. State 667 (1994); N.Y. State 595 (1988); N.Y. State 576 (1986). For purposes of this opinion, however, the Committee assumes, with respect to substantive law outside the Rules of Professional Conduct, that an attorney lawfully may accept a share of a real estate brokerage commission, that a real estate broker may lawfully pay a share of her commission to a lawyer as a referral fee, and that the proposed arrangement otherwise is legal. 7. Rule 8.4(a) provides that a lawyer shall not “violate or attempt to violate the Rules of Professional Conduct, [or] knowingly assist or induce another to do so ....” We therefore focus our analysis on whether another attorney’s receipt of the referral fees that the inquiring attorney proposes to pay would violate the Rules of Professional Conduct. If so, then the inquiring attorney’s payment of such fees would “assist or induce another” (the receiving lawyer) to do so. 8. This Committee has often opined that a lawyer cannot act as a lawyer in the same transaction in which a lawyer acts a real estate broker because of the possible conflict between the client’s interest and the lawyer’s own personal interest. See, e.g., N.Y. State 752 (2002); N.Y. State 493 (1978); N.Y. State 340 (1974); N.Y. State 291 (1973); N.Y. State 208 (1971). “The rationale is that the broker’s interest in closing the transaction interferes with the lawyer’s ability to render independent advice with respect to the transaction.”

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TRTCLEN.Y. State 752 (2002). Thus, acting as both a lawyer and broker in a real estate transaction was a nonconsentable conflict under DR 5-101 (A) of New York’s former Code of Professional Responsibility, which prohibited a lawyer from accepting or continuing employment if the exercise of professional judgment on behalf of a client “will be or reasonably may be affected by the lawyer’s own financial, business, property, or personal interests, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents ....” 9. The successor to DR 5-101(A) is Rule 1.7(a)(2), which prohibits representation if 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.” This prohibition applies in the circumstances before us unless, per Rule 1.7(b)(1) and (b)(4), “the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client” and the client gives “informed consent, confirmed in writing.” *3 10. In this Committee’s opinion, under Rule 1.7 it remains a nonconsentable conflict for an attorney to act as both a lawyer and broker in the same transaction. That leads to the question whether a lawyer who could not act as counsel in a real estate transaction may nevertheless receive a share of the broker’s commission in that transaction. 11. This Committee opined in N.Y. State 745 (2001) that a lawyer who is disqualified from a matter on nonconsentable conflict of interest grounds may not receive a referral fee for referring that matter. Cf., Nassau County 89-33 (N.Y.L.J., Dec. 4, 1989, at 7, col. 1) (mortgage broker prohibited from paying a commission to an attorney, whom the broker would denominate as an “associate” broker, if the associate broker would also represent the client in the real estate transaction). 12. Rule 8.4(a) says that a lawyer shall not “knowingly assist or induce another” to violate the Rules of Professional Conduct, so an attorney functioning as a real estate broker is prohibited from paying a referral fee or partial commission to a referring attorney if the attorney-broker knows that the referring attorney’s acceptance of the payment would breach these Rules. See, e.g., Nassau County 93-3 (N.Y.L.J., March 28, 1994, at 8, col. 4) (an attorney has an affirmative duty to report the misconduct of another lawyer who has undertaken to act as a lawyer and real estate broker on the same transaction). 13. Accordingly, under Rule 8.4(a), if the inquiring lawyer/broker knows that the referring attorney will simultaneously represent the buyer or seller in the real estate transaction and keep a share of the real estate brokerage commission, the inquiring attorney may not share her brokerage commission with the referring attorney. C. Referral fees to lawyers who represent buyers or sellers in the transaction but remit or credit the referral fee to the client

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TRTCLE 14. The next question is whether a lawyer/broker may properly pay referral fees where the attorney receiving the referral fee is (or will be) acting as a lawyer for the referred brokerage client in the same real estate transaction but the receiving attorney agrees to remit or credit the referral fee to the client. 15. In N.Y. State 753 (2002), we explained the rationale for the ban on an attorney serving as both a real estate broker and a lawyer in the same real estate transaction: “a lawyer should not have a personal stake in the advice rendered, and the broker who is paid if the transaction closes cannot be fully independent in advising the client as a lawyer.” If the lawyer receiving the referral fee will remit or credit the full amount to the client, that will largely remove the receiving attorney’s “personal stake” but it will not entirely negate the potential for conflict. Even if the lawyer remits or credits the referral fee to the client, the attorney will still have an incentive to refer real estate clients to a broker who pays a referral fee (i.e., shares her commission) because the referral fee (in effect a reduced real estate brokerage commission) will enable the attorney to offer potential clients a reduced brokerage fee (or an equivalent cash payment or credit) for utilizing the attorney’s services, thus attracting more business to the attorney. *4 16. In N.Y. State 682 (1996), we noted that our prior opinions have allowed an attorney to receive a referral fee from providers of non-legal services or products for referring clients if (a) the client consents after full disclosure, (b) the legal fee and the referral fee together do not constitute an excessive fee for legal services, and (c) the attorney remits the referral fee to the client if the client so requests. In these opinions, the referral concerned a product or service that was “fairly uniform among providers” and either was (1) “required in an objectively determinable quantity incident to the legal services performed by the attorney” (e.g., a mortgage and title insurance in connection with a real estate transaction), or (2) was “unconnected with any particular legal services” (e.g. certificates of deposit). These conflicts were consentable because “the fungible nature of the products or services and the objectively determinable amount at issue insulate the client from any ill effects from the attorney’s conflicting interest.” 17. On the other hand, N.Y. State 682 also noted two prior opinions stating that the attorney’s receipt of a referral fee or other financial interest in a transaction with the client was “absolutely forbidden” where the interests of the attorney and client were in such direct conflict that a client could not give meaningful consent to the conflict transaction. The conflict in those opinions was that the attorney’s remuneration “varied according to the quantity of the product or service ... purchased by the client, which was itself based upon the attorney’s legal advice ....” See N.Y. State 682 (1994) (investment advice); N.Y. State 671 (1994) (life insurance); N.Y. State 619 (1991) (life insurance). The prospect of a commission might tempt the attorney to give the client different (and inferior) legal estate planning advice due to the attorney’s financial interest. Thus, N.Y. State 682 explained and extended the analysis in N.Y. State 671 as follows:

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TRTCLE[N]o meaningful consent is available to permit an attorney to retain life insurance referral fees. The services of an investment advisor, similar to life insurance carriers, vary substantially among different providers. Also like life insurance, the amount of the product or services required - i.e., the amount of money entrusted to the investment advisor - is not objectively determined by the transaction, presenting the potential that the attorney might increase the referral fee by recommending that more of the client’s funds be entrusted to the advisor without appropriate regard to the client’s interests. .... Accordingly, disclosure and consent would not cure the direct and substantial conflict between the client’s and lawyer’s interests inherent in accepting a referral fee from the investment advisor, even where the client is offered the choice to claim the referral fee and the attorney purports to exercise independent judgment in framing his or her initial recommendation to consult an investment advisor. Clients view recommendations of other professionals as part of their representation by their lawyers, and expect that lawyers will act as trusted fiduciaries in such matters. *5 18. We think the present situation — real estate brokerage — falls somewhere in between “fairly uniform” products and services like title insurance and certificates of deposit (where receiving a referral fee in connection with client work is routinely consentable as long as the referral fee is remitted to the client), on the one hand, and highly variable products and services like life insurance and investment advice (where receiving a referral fee is nonconsentable even if the referral fee is remitted to the client), on the other hand. While the quality of real estate brokerage services varies among providers, the services are “required in an objectively determinable quantity incident to the legal services performed by the attorney” because a client typically employs only one broker per transaction, commissions are relatively standard, and the size of the broker’s commission depends on the price of the home the client purchases. Moreover, although a referral fee gives the lawyer a financial incentive to refer a client to that particular broker even if the fee is passed on to the client, clients are generally aware that they have many real estate brokers to choose from, and clients are generally capable of evaluating different brokers. 19. Therefore, this Committee believes that a real estate lawyer may ethically accept a referral fee with the client’s informed consent, including a reminder that the client is free to choose a real estate broker other than the one her lawyer recommends. (“Informed consent” is defined in Rule 1.0( j) to include the lawyer’s communication of “information adequate for the person to make an informed decision,” including “the material risks of the proposed course of conduct and reasonably available alternatives.”) As a corollary, a lawyer/broker may pay a share of her commission to a lawyer who refers a buyer or seller if the referring lawyer obtains her own client’s informed consent and remits or credits the commission to that client.

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TRTCLE20. There is one more step. The lawyer/broker (the inquirer here) must confirm that the referring attorney will remit or credit the fee or commission to the client. This should be readily ascertainable and does not threaten privileged communications between the referring lawyer and her client. However, because of practical difficulties and the danger of intruding on the attorney-client relationship, the lawyer/broker need not confirm the referring attorney’s compliance with the disclosure and consent requirements, (This point is further explained below in the last paragraph before our conclusion.) D. Referral fees to lawyers who do not represent the referred clients in the transaction 21. The final question is whether a lawyer/broker may properly pay referral fees to an attorney who refers clients on real estate transactions in which the referring attorney will not be representing the client. We are not aware of any New York ethics opinion addressing this precise issue, but several other jurisdictions have considered whether a lawyer may generally accept a referral fee from a person providing a non-legal product or service to a referred client. The results have been inconsistent. Many of the conflicting authorities were collected in Pennsylvania Opinion 2000-100, 2000 WL 567996, which concluded as follows:

*6 [T]he Rules permit a lawyer to accept a referral fee from a service provider, provided that the lawyer is scrupulous in determining under the particular circumstances that payment of the referral fee will not impact the lawyer-client relationship or the lawyer’s exercise of independent professional judgment and that the client consents to the arrangement on the basis of full disclosure and consultation.

22. In N.Y. State 764 (2003), this Committee approved an attorney’s acceptance of an earnings credit against bank charges based upon balances held in the attorney’s IOLA account as long as the attorney made full disclosure to the client and obtained the client’s informed consent, even though the earnings credit “may well influence the attorney’s decision as to where client’s trust funds should be deposited, and that decision would have a direct and adverse financial impact upon the client if an IOLA account is chosen.” The Committee’s conclusion was based on the language of former DR 5-107(A)(2) and EC 2-21. That language is now contained, with little change, in Rule 1.8(f), which provides, in relevant part, as follows: A lawyer shall not accept ... anything of value related to the lawyer’s representation of the client, from one other than the client, unless:

(1) the client gives informed consent; (2) there is no interference with the lawyer’s independent professional judgment or with the client-lawyer relationship; and

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TRTCLE (3) the client’s confidential information is protected as required by Rule 1.6. 23. We believe that N.Y. State 764 remains applicable under Rule 1.8(f). Thus, assuming that the requisites set forth in Rule 1.8(f) are met, a lawyer attorney may ethically accept referral fees or commissions from non-legal service providers in matters where the lawyer is not representing the client. 24. As a real estate broker, an attorney generally is not ethically obligated to affirmatively monitor the details of compliance of the attorneys from whom the lawyer/broker receives referrals. In particular, the lawyer/broker is not expected to monitor whether referring attorneys make full disclosure to, and obtain informed consent from, their clients. Ordinarily, therefore, it would not be a violation of Rule 8.4(a) for the inquiring attorney to offer and pay referral fees to attorneys for client referrals if the referring attorneys will not actually be representing the clients in the real estate transactions at issue. 25. However, an attorney cannot ignore obvious violations, see, Rule 1.0(k) ( “knowledge may be inferred from circumstances”), so if the inquiring attorney knows that a referring attorney has not obtained informed consent from that client regarding the referral to the lawyer/broker, then the lawyer/broker should (a) withhold the referral fee until the referring attorney cures the violation, or (b) refuse the referral, or (c) take other appropriate remedial steps so that she does not assist another lawyer in violating the Rules of Professional Conduct.

CONCLUSION *7 26. Because the inquiring attorney is still a licensed attorney, Rule 8.4(a) prohibits her from assisting another lawyer in conduct that would violate the Rules of Professional Conduct. Accordingly, whether the inquiring attorney may share her real estate commissions with referring attorneys depends on whether the referring lawyer would be violating the Rules by accepting the referral fee. 27. An attorney is prohibited from simultaneously representing a client in a real estate transaction and receiving a portion of the brokerage commission (i.e., a referral fee) from a real estate broker to whom the attorney refers a client, unless the attorney remits or credits the referral fee to that client. An attorney functioning as a real estate broker (such as the inquiring attorney) is therefore prohibited from knowingly paying a referral fee or sharing a commission without confirming that the commission will be remitted, or equivalent credit given, to the referring attorney’s client. 28. However, an attorney functioning as a real estate broker is not prohibited from paying a referral fee or sharing her real estate commission with an attorney who refers

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TRTCLEher clients to the lawyer/broker if the referring attorney will not be representing the client in the real estate transaction at issue.



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TOPIC: LAWYER’S PROVISION OF FREE LEGAL SERVICES WHEN LAWYER IS ALSO BROKER IN A REAL ESTATE TRANSACTION

Opinion Number 916 March 27, 2012

DIGEST: 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, even if the lawyer advises the party that the party may retain separate counsel. *1 Rules: 1.7(a) QUESTION 1. The inquiring lawyer asks whether a lawyer may serve as a real estate broker in a transaction, and be paid for that service, while also offering free legal services on contract and other legal matters in the same transaction with the disclosure that the client is free, if the client so chooses, to retain a separate attorney to represent the client in the transaction. For the reasons set forth below, our answer is no. OPINION 2. In N.Y. State 752 (2003), we wrote: “In a number of opinions that this committee has issued over the years, we have opined that in certain circumstances a lawyer also engaged in a nonlegal business cannot provide both legal and nonlegal services in the same transaction even with the consent of the client. Brokerage businesses are a salient example. We held in N.Y. State 208 (1971), N.Y. State 291 (1973), N.Y. State 340 (1974), and N.Y. State 493 (1978), that a lawyer could not act as a lawyer in the same transaction in which the lawyer or his or her spouse acted as a real estate broker “because of the possible conflict between his client’s and his own personal interest.” N.Y. State 208 (1971). Accord N.Y. County 685 (1991); see also N.Y. State 694 (1997) (impermissible to participate in broker-run home buyer’s program because of resulting strong interest in broker’s success).” 3. The rationale of these opinions is that the broker’s personal and financial interest in closing the transaction interferes with the lawyer’s ability to render independent advice with respect to the transaction consistent with the principles now embodied in Rule of Professional Conduct 1.7(a). Otherwise put, the problem primarily stems not from the fee the lawyer receives from rendering purely legal advice, but from the separate and independent financial interest of the lawyer/broker arising from compensation for the

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TRTCLEnon-legal services. In our judgment, that financial interest would create an influence that informed consent cannot relieve. We have reached similar conclusions with respect to insurance brokers and securities brokers. N.Y. State 536 (1981); N.Y. State 619 (1991). See also N.Y. State 595 (1988); N.Y. State 621 (1991); N.Y. State 738 (2001) (dual role of lawyer for real estate client and abstract title examiner impermissible because of possible need to negotiate exceptions to title). 4. Accordingly, an offer of free legal services on top of the non-legal services a lawyer proposes to render does not remedy the ill at the heart of our prior opinions. A client’s natural attraction to the cost-saving involved in the lawyer’s proposal only fortifies our concern. A lawyer rendering free legal services, whether pro bono publico or as an appendage to non-legal services the lawyer is also providing, owes the client a duty of rendering independent professional judgment. That duty does not allow the lawyer to represent the client when a reasonable lawyer would find a significant risk that the lawyer’s professional judgment would be adversely affected by the lawyer’s personal financial interests. The more likely a client is to want or need legal services free of charge, the more important is the protection of assuring the exercise of independent professional judgment unburdened by conflicting personal interests. Advising the client that the client could hire another lawyer — the functional equivalent of an effort at consent that we have found wanting in these circumstances — does not eliminate the problem animating our opinions. CONCLUSION *2 5. A lawyer may not offer to provide free legal services in a real estate transaction in which the lawyer is acting and being paid as the broker, even if the lawyer/broker advises that the client has the option to retain separate counsel. (58-11)



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TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; MORTGAGE BROKERAGE; TITLE ABSTRACT COMPANY; CONFLICT OF INTEREST

Opinion Number 753 February 26, 2002

DIGEST: Where a client is represented by a lawyer and uses an ancillary business owned by the lawyer, the rules applicable to personal conflicts of interest and transactions between clients and lawyers continue to apply after promulgation of DR 1-106. Under those rules, a lawyer owning mortgage brokerage and title abstract businesses may not, even with informed consent, represent buyer or seller and act as mortgage broker in the same transaction or act as title abstract company with respect to non-ministerial tasks, but may, where the client consents after full disclosure, act as abstract company with respect to purely ministerial abstract work. The lawyer may, with informed consent, represent the lender in the same transaction in which the lawyer’s company acts as mortgage broker, but may not represent the lender in transactions in which the lawyer’s title abstract company acts in other than a ministerial capacity. The lawyer may in certain circumstances, with informed consent, represent both the buyer’s lender and the seller in the same transaction or, where not required to negotiate terms, the buyer’s lender and the buyer in the same transaction. *1 Code: DR 1-106; DR 1-107; DR 5-101(A); DR 5-105; EC 1-14.

QUESTIONS A lawyer is the sole shareholder of a licensed New York mortgage brokerage corporation and a separate title abstract company. Where the attorney informs the client of the attorney’s other business relationships and discloses same to the client in a Statement of Client’s Rights in Cooperative Business Arrangements, and where the client gives informed written consent, may the attorney and/or the attorney’s companies:

1. Represent the selling client in a real estate transaction and (a) broker the mortgage for the buyer, (b) act as the lender’s attorney at closing, and (c) act as the abstract company for the transaction? 2. Represent the buying client in a real estate transaction and (a) broker the mortgage for the buyer, (b) act as the lender’s attorney at closing, and (c) act as the abstract company for the transaction?

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TRTCLEOPINION

On July 23, 2001, the Appellate Divisions adopted new rules on multidisciplinary practice, effective November 1, 2001. One of those rules, DR 1-106 (22 NYCRR §1200.5-b), addresses the responsibilities of lawyers or law firms providing nonlegal services to clients or other persons, including lawyers or law firms that own or control or are otherwise affiliated with an entity providing nonlegal services to clients of the lawyer or law firm. That rule provides, in pertinent part, that where an entity controlled by a lawyer or law firm provides nonlegal services to a person, the lawyer or law firm is subject to the disciplinary rules with respect to the nonlegal services if the person receiving the services could reasonably believe that the nonlegal services are the subject of an attorney-client relationship. DR 1-106(A)(3). The rule goes on to state that *2 it will be presumed that the person receiving nonlegal services believes the services to be the subject of an attorney-client relationship unless the lawyer or law firm has advised the person receiving the services in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services, or if the interest of the lawyer or law firm in the entity providing nonlegal services is de minimis.

DR 1-106(A)(4). In opinions issued prior to the new rules, this Committee held that in certain circumstances a lawyer also engaged in a nonlegal business could not provide both legal and nonlegal services in the same transaction even with the consent of the client. In particular, with respect to brokers, we held in N.Y. State 208 (1971), N.Y. State 291 (1973), N.Y. State 340 (1974), and N.Y. State 493 (1978), that a lawyer could not act as a lawyer in the same transaction in which the lawyer or his or her spouse acted as a real estate broker “because of the possible conflict between his client’s and his own personal interest.” N.Y. State 208 (1971). Accord N.Y. County 685 (1991); see also N.Y. State 694 (1997) (impermissible to participate in broker-run home buyer’s program because of resulting strong interest in broker’s success). We do not appear to have addressed mortgage brokers, but have reached similar conclusions with respect to insurance brokers and securities brokers. N.Y. State 536 (1981); N.Y. State 619 (1991). We have also suggested, though, that a lawyer-broker can sell insurance to a client where advice about the purchase of insurance products is ““merely tangential” to the legal representation. N.Y. State 687 (1997); N.Y. State 711 (1998). With respect to abstract title companies, in N.Y. State 595 (1988), N.Y. State 621 (1991), and N.Y. State 738 (2001), we held that a lawyer could, with consent after disclosure, refer real estate clients to a title abstract company in which the lawyer or his or her spouse had an ownership interest “for purely ministerial abstract work,” but not where the abstract company provided the additional service of preparing a title report or serving as an agent

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TRTCLEfor the title underwriter. The central rationale was that if the abstract company prepared a report showing exceptions in title and recommending whether a title insurance policy should be issued, the law firm for the party would be required “to negotiate these issues ... with itself.” N.Y. State 738 (2001). See also N.Y. State 731 (2000) (lawyer cannot pay employees to refer clients to lawyer-owned title company for non-ministerial tasks). In N.Y. State 752 (2002), we concluded that these decisions, and similar opinions limiting or barring lawyers from performing dual roles, survive the promulgation of DR 1-106. This is because the decisions were based on the application of DR 5-101(A) to the legal services, not the nonlegal services. That rule bars a lawyer from accepting legal employment if the exercise of professional judgment might be affected by the lawyer’s own “financial, business, property or personal interests.” The pursuit of the nonlegal business activities in the same transaction in which the lawyer was representing a client created an irreconcilable conflict for the lawyer. *3 We turn now to the particular dual employments suggested by the inquirer. Representing Buyer or Seller and Acting as Lender’s Attorney. This part of the inquiry does not involve ancillary businesses at all. The inquirer proposes to represent as a lawyer, in the first question, both the selling client and the lender and, in the second, both the buying client and the lender. These questions are governed by DR 5-105, which regulates conflicts of interest in simultaneous representations. Taking the second question first, the proposal to represent both the buying client and the lender in the same transaction creates the potential for a clear conflict. The role of the lender’s attorney can be, in part, to protect the interests of the bank in negotiating the loan agreement with the borrower and obtaining the necessary security on the borrower’s property. The role of the buyer’s attorney can be, in part, to protect the borrower’s interests in those same matters. In situations in which the lawyer for the buyer could be called upon to negotiate with the lawyer for the lender, it would not be possible for one lawyer to play both roles, even with consent, because that would put the lawyer in the position of negotiating with him or herself. The lawyer could not zealously represent both parties. See DR 5-105(C); N.Y. City 2001-2 (“Situations in which a lawyer or members of a single law firm would be required to negotiate directly with herself or each other on behalf of multiple clients in a transaction ... will rarely be consentable”). This committee has recognized, however, that in some circumstances there is no negotiation or assertion of rights between the lender and buyer in which a lawyer has any role. As long as full disclosure of the risks of dual representation has been made and knowing consent obtained, we have held such dual representation can be permissible. N.Y. State 8 (1965); N.Y. State 199 (1971); N.Y. State 438 (1976); N.Y. State 694 (1997); see also ABA Inf. 643 (1963) (same); ABA Inf. 837 (1965) (same). But see Nassau County 98-10

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TRTCLE(lawyer may not represent buyer and lender in same residential purchase and mortgage transaction). This committee has likewise recognized that representation of a seller and a lender, which commonly do not directly negotiate with each other at all, can be permissible with consent after disclosure. N.Y. State 611 (1990). Even here, we have cautioned that there may be circumstances when the dual representation would be barred:

If, for example, issues arise concerning the acceptability of title, or environmental conditions, or some other condition of closing, the seller may desire to close while the lender may decide it has no obligation to make the loan. ... Where in a particular matter it is not unlikely that such differing interests may arise, the multiple representation should be declined.

*4 Id. Representing Buyer, Seller or Lender and Acting as Mortgage Broker. The inquirer also asks whether the brokerage company can act as the buyer’s mortgage broker in the same transaction in which the inquirer represents as counsel either the seller or the buyer, and the lender. As noted, this committee has held in a number of opinions that a lawyer cannot act as a real estate broker and as counsel to a party in the same transaction. N.Y. State 208, 291, 340, 493. The 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. With respect to the buyer or seller, we see nothing in the nature of the mortgage brokerage business that calls for a different result. The inquirer advises that a mortgage broker is paid a percentage of the money borrowed and only when the loan closes. While the amount of the fee varies widely, the gross mortgage broker fee (before subtraction of the individual salesperson’s fee) almost always exceeds the legal fee a lawyer receives for representing a buyer or seller in a typical, uncomplicated purchase or sale in the inquirer’s area. Under these circumstances, the rationale of our prior opinions with respect to real estate brokers applies with full force. See also Nassau County 89-33 (“By acting as an associate of the mortgage broker for a commission, the attorney would then have a divided loyalty between the obligations to his client and the desire to see the transaction close.”); Nassau County 41/87 (similar); N.C. 248 (1997) (attorney may not “certify title or act as settlement agent because [[attorney’s] personal interest in seeing that [mortgage brokerage corporation] receives its fee or commission for placing the loan could conflict with the client-borrower’s desire to close only when it is in his or her best interest to do so”). But see S.C. 96-04 (permitting dual role, but cautioning, “An attorney

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TRTCLEmust determine that his conflicting role as a mortgage broker will not affect the attorney’s ability to judge independently and render candid advice”). The opinions in which we have suggested that a lawyer-broker might sell insurance to a client if the purchase was “merely tangential” to the advice are different, for there the lawyer was not engaged for estate planning or for similar advice that could be influenced by a desire to ensure that the insurance purchase would close. As we said in N.Y. State 711, “[I]f there is a reasonable probability (viewed objectively) that the lawyer’s professional judgment will be adversely affected by the lawyer’s business interests, then the lawyer must not offer to sell insurance to client.” In the case of the mortgage broker, whose interest is in seeing the transaction close, there is such a reasonable probability. *5 Our opinions do not address at any length whether the prohibition on brokers acting as lawyers extends to lawyers for lenders. Whatever may be the situation with real 1

estate brokers, the lender is in quite a different position in relation to the mortgage broker than the buyer or seller. The mortgage broker is frequently simply a distribution channel for the lender, who sets the terms of the products that will be offered and pays the mortgage broker’s compensation. The lender is typically a sophisticated commercial entity. If it is not happy with the relative incentives provided by the amounts it pays for brokerage and legal services, it can decline to consent to the dual representation. If it wishes to have the greater set of “checks and balances” provided by separating the mortgage broker and legal functions, it can do so. Further, the lender will frequently have an ongoing relationship with the mortgage broker/lawyer, thus tempering any impulse by the broker/lawyer to “close at any cost.” Finally, there is rarely substantial negotiation of the terms of a residential mortgage, and the lawyer’s range of discretion is correspondingly narrower, so any less-than-vigorous representation of the lender will be easier to detect. In short, we do not believe that the dual status of mortgage broker and lender’s attorney creates “‘such delicate conflicting relationships and inescapable divided loyalties that the likelihood of improper conduct or motivation, without any showing of harm and regardless of disclosure and consent, may give rise to professional misconduct.”D’ N.Y. State 516 (1980) (quoting Matter of Kelly, 23 N.Y.2d 368, 378, 296 N.Y.S.2d 937, 945-46 [1968]). With full disclosure and consent, we conclude there are transactions in which a lawyer may act as counsel to an institutional lender and as a mortgage broker for that lender. We are aware that in some circumstances mortgage brokers receive cash compensation from the buyer or undertake, or otherwise have, duties to the buyer to find the best

N.Y. State 694 (1997) noted in passing that a lawyer could not participate in a real estate broker’s program 1

to provide a single, lower-cost attorney to represent the lender and the buyer: “We believe the personal financial incentive for the attorney to use his or her influence over the Purchaser to secure an enforceable contract of sale and to close the transaction is sufficiently great that it is not at all obvious that the Attorney can adequately represent the interests of the Purchaser and Lender as well.” (Emphasis added.)

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TRTCLEpossible mortgage for the buyer. It is possible that in such circumstances the broker’s duties to the buyer would raise an insurmountable conflict for the lender’s lawyer; however, we do not believe that should call for a per se rule. If, for example, the lender’s lawyer was retained only after the loan had been placed with a particular lender, the mortgage broker’s duties to the buyer may have been discharged before the lawyer’s duties to the lender begin. In addition, we do not deal here with any disclosure obligations the mortgage broker may have to the buyer, as that is not a question of legal ethics. Representing Buyer, Seller or Lender and Acting as Abstract Company. As noted, in N.Y. State 595, 621 and 738 we found that a lawyer could not refer real estate clients to a title abstract company in which the lawyer had an ownership interest and that would be hired to provide insurance or perform other than ministerial tasks. That conclusion was based on DR 5-101(A). See, e.g., N.Y. State 738 (2001). As set forth above, those rules continue to apply after the promulgation of DR 1-106. Our opinion in N.Y. State 595 expressly extended this prohibition to counsel for the lender. The lender’s interests in marketable, insured title at the lowest price are little different from the buyer’s. *6 The inquirer reports that in the inquirer’s geographic region, abstract companies “do the research, work the file and present the package to the Title Insurance Companies who provide the Title Insurance to the buyer.” This appears to go beyond the purely ministerial abstract searching contemplated by our earlier opinions. To the extent that the abstract company examines the title and makes recommendations on insurability or exceptions, it would appear to have an irreconcilable conflict with its attorney-owner’s duty to provide independent advice and negotiate title problems, if necessary. We note one further matter. The inquirer intends to provide clients with a “Statement of Client’s Rights in Cooperative Business Arrangements,” in order to inform the clients that the services performed by the inquirer through the title abstract company are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services. The Statement of Client’s Rights in Cooperative Business Arrangements is a statement prescribed by 22 NYCRR §1205.4 for use in alerting clients to the existence of contractual relationships between lawyers and nonlegal professionals commonly involving the reciprocal referral of clients and, to a certain extent, the sharing of premises, overhead and professional fees. See DR 1-107; EC 1-14. It is not clear that this Statement is appropriate in these circumstances. The inquirer does not refer to any agreements or understandings for the reciprocal referral of clients between the law firm and the ancillary businesses, which is the focus of the Statement; the Statement does not disclose the fact that the lawyer owns the mortgage brokerage and abstract title companies, which is highly material; and the Statement does not expressly state that the protections of the attorney-client relationship do not exist with regard to the nonlegal services, as required by DR 1-106(A)(4). We advise the inquirer to

TRTCLE.COM

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TRTCLEuse in place of the Statement of Client’s Rights in Cooperative Business Arrangements, or to supplement it with, a statement more tailored to the requirements of DR 1-106(A)(4) and DR 5-101(A).

CONCLUSION A lawyer who owns a title abstract company and a mortgage brokerage is barred from acting as a lawyer in a transaction in which one or both of those companies is also acting in a variety of situations in which the lawyer’s personal interest in a fee (or dividend) from the ancillary businesses compromises the independence of the lawyer’s legal advice. Our conclusions on this are summarized in the following chart, in which “Y” means that the lawyer can act in the dual capacity in certain circumstances, with informed consent and under the conditions set forth above and in our prior opinions, and “N” means the lawyer cannot act in the dual capacity at all:

*7 (43-01)



CAN A LAWYER ACT IN DUAL ROLE WITH INFORMED CONSENT?

BUYER’S LAWYER SELLER’S LAWYER LENDER’S LAWYER

Mortgage Brokerage N N Y

Title Abstract Co. providing insurance or making insurance recommendation

N N N

Title Abstract Co. performing only “ministerial tasks”

Y Y Y

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TRTCLENYC Eth. Op. 1986-5 (N.Y.C.Assn.B.Comm.Prof.Jud.Eth.), 1986 WL 293094

The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics

LAWYER AS ESCROW AGENT

Formal Opinion Number 1986-5 July 14, 1986

Introduction

*1 This opinion addresses certain ethical questions that arise when lawyers hold funds in escrow. Although the issues are, in many cases, similar to those involving trust funds or other funds held for clients or third parties, only escrow accounts are covered here. We first discuss the general duties of escrow agents and the need for fully informed consent by all parties before the lawyer for one of them can act as escrow agent. We stress the importance of having a carefully drafted escrow agreement that covers, among other things, possible disputes over the escrowed funds. Our opinion then speaks to the possibility that the escrow agreement may involve a client confidence or secret and discusses the conflicts that may arise between the interests of the client and the interests of the other party to the escrow. We then turn to the conflicts that may arise between the interests of the lawyer and the interests of his own client with respect to the escrowed funds. Finally, our opinion discusses the permissible modes of investing the funds, the lawyer’s entitlement to any income that may be earned thereon, participation in the New York IOLA (Interest on Lawyer Accounts) program, problems of commingling and record-keeping requirements. I. Escrow Accounts and Escrow Agents An escrow agent is a custodian or stakeholder of funds designated for a special purpose, usually pursuant to a written agreement. The escrow agent has contractual and fiduciary duties to all parties to the escrow arrangement and may dispose of the escrowed funds only in accordance with the terms of the escrow agreement or with the consent of all parties. The duties of an escrow agent are thus principally matters of contract and fiduciary law, rather than of ethics, and to that extent are beyond the jurisdiction of this Committee. A lawyer serving as escrow agent has fiduciary duties and obligations, not only to his client, but to all parties to the escrow agreement. In addition, a lawyer’s conduct with respect to escrow arrangements is governed by the Code of Professional Responsibility. As discussed more fully below, the requirements of Canon 9 pertaining to the preservation, safekeeping and use of client funds and trust property are applicable to

32

TRTCLEescrowed funds held by a lawyer, although such funds are not literally “funds of clients.” N.Y. City 82–8; N.Y. City 79–48 (1980); N.Y.State 532 (1981); In Re Hollendonner, No. D–1 (N.J.Sup.Ct., Oct. 17, 1985). II. Consent and Escrow Agreements As a general rule, it is ethically permissible for a lawyer to represent a client and to act as escrow agent in the same transaction if all interested parties have consented after full disclosure by the lawyer of the possible effect of his dual role on the interests of each party, and if it is obvious that the lawyer can adequately represent the interests of all parties. See DR 5–105(C); N.Y. County 573 (1969). Such consent must be fully informed. A consent based upon the contemplated discharge of routine escrow instructions, without taking into account potential disputes among the parties, is not sufficient to override a conflict of interest in the event of a dispute. N.Y. City 80–56. *2 It is advisable, therefore, to include in the escrow agreement carefully drafted provisions making clear that the non-client party agrees that, in the event of a dispute between the parties with respect to the escrow or the underlying transaction, the lawyer may represent his client in the dispute. Such a provision clarifies the scope of the non-client’s consent and therefore lessens the likelihood of confusion and delay that might be caused by the lawyer’s attempting to obtain such consent after a dispute occurs, or having to resign as escrow agent or being disqualified from representing his client. In order to give the lawyer-escrow agent an agreed-upon means of resolving any conflict of interest, the escrow agreement should also provide that the escrow agent may at his option pay the escrowed funds into court or submit the matter to arbitration in the event of a dispute over the funds. Such a provision should expedite the ability of the escrow agent to resign as such, but to continue to represent his client, in the event that he deems it necessary or desirable. If the escrow agent were to bring an interpleader action, however, the court might decide that, notwithstanding the fully informed consent of all interested parties, the lawyer-escrow agent cannot represent one of the claimants to the escrowed funds while at the same time he is seeking to be discharged by the court from any further liability with respect to the funds. It is also possible that the lawyer would be required to testify in such an action, thereby disqualifying him from representing his client. See DRs 5–101 and 5–102. III. Escrow Agreement as Confidence or Secret Whether the existence of an escrow account, or information pertaining to that account, is a confidence or secret of a client within the meaning of Canon 4 is a question that frequently arises, usually in the context of a request for such information by the Internal Revenue Service or other governmental authority. Under Canon 4, a lawyer is prohibited from knowingly revealing a confidence or secret of his client. A “confidence” refers to

33

TRTCLEinformation protected by the attorney-client privilege under applicable law. DR 4–101(A). Whether information pertaining to an escrow account constitutes a confidence is thus a question of law beyond the jurisdiction of this Committee. A “secret” refers to other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would likely be detrimental to the client. Id. Whether the existence of, or information with respect to, an escrow account fits this definition requires a factual determination on a case-by-case basis. A lawyer may reveal confidences or secrets with the consent of the clients affected, but only after full disclosure to them. A lawyer may also reveal confidences or secrets when permitted under the Disciplinary Rules or required by law or court order. DR 4–101(C). Thus, if presented with a request by a governmental authority for production of information pertaining to escrow accounts when a client is a target of an investigation, a lawyer must, unless the client has consented to disclosure, decline to furnish such information on the ground either that it is protected by the attorney-client privilege or that it has been gained in the course of a confidential relationship. Taking such a position (as in support of a motion to quash a subpoena) will usually result in a court order deciding the issue. If disclosure is compelled, it will not breach a lawyer’s ethical obligation with respect to his client’s confidences or secrets. If the records of the lawyer, rather than of the client, are the subject of the inquiry, the lawyer’s response should be the same, unless he is certain that the requested information does not constitute a client confidence or secret. See N.Y. County 413 (1953); ABA 393 (1961); N.Y. County 377 (1975); N.Y. City 312 (1934); Connecticut 81–3 (1980); Oregon 440 (1980); Michigan CI–1088 (1985); Michigan CI–925 (1983); Michigan CI–389 (1979); Tennessee 81–F–20 (1981). Depending upon his client’s interests, however, the lawyer may have a further duty under Canon 7 (a lawyer should represent his client zealously within the bounds of the law) to appeal a court order adverse to his client. See Michigan CI–925 (1983); Michigan CI–1088 (1985). IV. Conflicts of Interest—Client versus Third Party *3 Canon 5, which requires a lawyer to exercise independent professional judgment on behalf of his client, and in particular to avoid a stake in interests that might conflict with those of his client, is applicable to the conduct of a lawyer who represents one party to a transaction and at the same time acts as escrow agent for both parties. See N.Y. City 80–56; N.Y. County 573 (1969); N.Y. County 477 (1959); ABA 923 (1966). The role of the escrow agent as a neutral stakeholder may conflict with the obligation of the lawyer to assert his client’s position with respect to the transaction. See N.Y. City 82–8; N.Y. City 80–56; N.Y. County 357 (1940); Nassau County 80–7. In the event of a dispute over the disposition of the escrowed funds, the escrow agent, as a fiduciary for both sides, would be obligated to assume a neutral position, while, as the lawyer for one party, he would be ethically bound to represent his client zealously. See N.Y. County 357 (1940); Canon 7.

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TRTCLEAnother source of conflict between the simultaneous roles of lawyer and escrow agent may arise when the lawyer is put in a position of having to assert a lien on the escrowed funds on behalf of his client. On the one hand, the escrow agent has a duty to treat the escrowed funds neutrally and in accordance with the terms of the escrow agreement. See Nassau County 80–8. On the other hand, the lawyer has an ethical obligation to assert any claims his client may have in a dispute. This Committee has noted in the past that although the issue involves questions of law relating to the duties of an escrow agent, such a lien would nonetheless appear to be an encumbrance on escrowed funds, the imposition of which would seem incompatible with the stakeholder’s role. N.Y. City 80–56. In the absence of knowing consent by the non-client to the lawyer’s continuing to act in both capacities, the lawyer should either resign as escrow agent or decline to represent his client in the dispute. In any case, Canon 9 requires a lawyer to avoid even the appearance of impropriety. Depending upon the circumstances, it might appear improper for a lawyer to participate in the attachment of funds he is holding as escrow agent. Id. Even in the absence of a dispute between the parties to the escrow agreement, the lawyer-escrow agent may face conflicts of interest. For example, in the course of the attorney-client relationship, the lawyer may acquire information material to the escrow arrangement which should be disclosed to the parties in interest. If such information does not constitute a client confidence or secret, the lawyer should, if circumstances warrant, advise his client to take action to eliminate the need for disclosure. If the client is unwilling or unable to do so, the lawyer should disclose such information to the other parties to the escrow agreement. See N.Y. County 477 (1959). If the information does constitute a confidence or secret, the lawyer should probably resign as escrow agent to avoid even the appearance of conflict of interest or divided loyalty to his client. V. Conflicts of Interest—Lawyer versus Client *4 Lawyers sometimes wish to assert their own claims against funds they are holding in escrow, usually to recover unpaid legal fees. Such claims may arise in one of three situations: (1) funds which are payable in full to the parties to the escrow and the client is entitled to receive at least part; (2) funds which are immediately payable only in part; and (3) funds which are only potentially payable to the client. The question whether the lawyer-escrow agent may claim the funds in any of these situations principally involves legal issues. For example, the existence of an attorney’s retaining or charging lien on the escrowed funds as well as the lawyer-escrow agent’s contractual and fiduciary duties are all legal matters and, as previously noted, are thus beyond the jurisdiction of this Committee. The ethical considerations come into play only to the extent the lawyer has legal rights to the escrowed funds. There are two provisions of the Code of Professional Responsibility

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TRTCLEwith which a lawyer in this position should primarily be concerned. The first is DR 9–102(A)(2), which provides as follows:

Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited [in a separate account], but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.

The second is DR 9–102(B)(4), which states that a lawyer shall:

Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.

See N.Y. City 82–22; N.Y. City 82–61; N.Y. City 82–65; N.Y. City 590 (1941); N.Y. City 229 (1932); ABA 859 (1965); Maryland 84–60 (1983); Kentucky E–292 (1984); Michigan CI–636 (1981). When the entire amount in escrow is payable and at least a part is to be paid to the client against whom the lawyer has a claim, the lawyer must first determine whether the funds to be paid the client “presently” or “potentially” belong to the lawyer. This is a legal and not an ethical question. For example, the escrow agreement may provide that a portion of the escrowed funds is to be paid to the lawyer as legal fees. (In such cases, because of the potential conflict the lawyer may have, all parties to the escrow agreement should have the conflict explained to them at the outset and their consent should be obtained.) In such situations, as a matter of contract law, part of the funds would presently or potentially belong to the lawyer. The client would not be “entitled to receive” the funds and thus DR 9–102(B)(4) would not require that the funds be paid to the client. However, if the funds do not presently or potentially belong to the lawyer, they must be “promptly” turned over to the client. *5 Assuming the funds may legally belong to the lawyer, he should then notify the client of his claim to see if the client agrees or disagrees. If the claim is disputed, then, under DR 9–102(A)(2), the lawyer may not pay out the disputed portion to himself until the dispute is resolved, but may retain the funds until such time. Again, this is because the 1

client would not be “entitled to receive” the funds and thus DR 9–102(B)(4) would not be applicable. Of course, if there is no dispute, the funds may be taken by the lawyer. If the

One committee has said that the only instance in which a lawyer may ethically withhold escrowed funds 1

from a client is when the escrow agreement specifically so permits. Nassau County 80–7; Nassau County 85–7. We do not agree.

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TRTCLElawyer has a claim to only part of the funds, the undisputed portion should promptly be paid to the client. If the escrow agreement calls for only a portion of the escrowed funds to be paid out, or if the funds are only potentially payable to the client, a similar analysis to that described above should be followed. There may, however, be additional ethical considerations. The lawyer as escrow agent may be presented with a conflict of interest. To the extent that his disputed claim may only partially be satisfied by the funds payable, or is only to be satisfied from potentially payable funds, the lawyer will have a self-interest in interpreting the escrow agreement, if susceptible to interpretation, in such a manner that the funds not yet payable become so as soon as possible. This conflict would be greater if the escrow agent is, in certain circumstances, required to pay the funds to a third party. In such an instance, the lawyer-escrow agent will have an interest in interpreting the agreement so that the funds go to his client and thus may be obtained by the lawyer. If the funds payable would fully satisfy the disputed claim, the lawyer may have an interest in delaying further distributions to the client, if possible, as a means of forcing a settlement of the dispute. Because of the conflict, the lawyer should resign as escrow agent in these cases. VI. Permissible Modes of Investing Escrowed Funds All escrowed funds received by a lawyer must be deposited in one or more identifiable accounts, in which (with limited exceptions) no funds belonging to the lawyer may be deposited. DR 9–102(A). We have previously opined that, although the rule by its terms refers only to “bank accounts,” it allows the lawyer to deposit escrowed funds in other types of accounts which bear characteristics of safety and security similar to a bank account. We express no opinion on the merits of any such alternative investment account. See N.Y. City 82–8; N.Y. City 81–15; N.Y. City 79–48 (1980); N.Y. City 79–22. The propriety of using a particular investment mode is primarily a matter of the lawyer-escrow agent’s authority under the escrow agreement and his obligations under applicable law. We urge that the lawyer obtain the consent of the parties to the escrow agreement before depositing escrowed funds in an account other than a bank account. N.Y. City 82–8; N.Y. City 79–22. Further, the lawyer should ensure that any pre-withdrawal notice and waiting periods that may apply are understood and approved. N.Y.State 90 (1968). If knowing consent of all parties is obtained, the limitation of DR 9–102(A) to bank accounts (or their equivalent) should not be applicable to escrow accounts. VII. Commingling of Escrowed Funds *6 It is impermissible for a lawyer to commingle a client’s funds with his own funds; however, since it is generally impractical to deposit each escrowed fund in a separate account (DR 9–102(A) and EC 9–5), lawyer-escrow agents often commingle several funds

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TRTCLEin one escrow account. This is permissible as long as proper records are maintained and other ethical requirements are fulfilled. VIII. Interest–Bearing Accounts; Distribution of Interest The typical escrow account—containing several escrowed funds—is often not an interest-bearing account because of the difficulty in calculating the interest attributable to each party. ABA 348 (1982); N.Y. State 554 (1983). Nonetheless, Canon 9 has been repeatedly interpreted to permit, but not require, the placement of escrowed funds in one or more 2

interest-bearing accounts, as long as the requirements of DR 9–102 and other ethical rules are met. N.Y. City 81–15; N.Y. State 554 (1983); ABA 348 (1982); cf. N.Y. City 79–22. Lawyers may not retain as compensation for their escrow services or otherwise any of the interest earned in interest-bearing escrow accounts unless they have obtained the prior knowing consent of their clients and the other parties to the escrow, and even with such consent, there are still serious risks of ethical impropriety. In light of the fiduciary nature of the attorney-client relationship and the fact that the lawyer may be in a superior bargaining position, agreements purporting to grant consent to such arrangements present a clear danger of overreaching and could lead to a breach of Canon 5, which requires a lawyer to exercise independent professional judgment on the client’s behalf. This is so because the lawyer would have a financial interest in delaying the event that terminates the escrow which might conflict with his duty to his client and other parties relating to the funds. See N.Y. City 81–68 (1982). There is also the danger of violating DR 2–106(A), which prohibits a lawyer from collecting a clearly excessive fee. Since the expenses involved in an escrow account are generally nominal, the interest accrued would often substantially exceed any actual administrative costs. See N.Y. City 79–48 (1980). See also N.Y. City 181 (1931) (professionally improper for an attorney, “arbitrarily,” to retain interest as compensation for his services as escrow agent where the escrow agreement is silent on the subject); N.Y. City 81–15 (“In the absence of an explicit agreement, any income realized on the client’s funds by an attorney-escrow agent belongs to the client.”); ABA 348 (1982) (reaffirming ABA 545 (1962) and ABA 991 (1967), and stating that under present-day Canon 9, although depositing funds in statutory “IOLTA” or “IOLA” accounts is proper, it is

Although there is generally no ethical obligation to place funds in an interest-bearing account, there may 2

be a fiduciary obligation to do so under the law of trusts where the funds are sufficient to earn interest. See N.Y.State 554, citing 2 Scott, Law of Trusts, §§ 180.3, 181 (3d ed. 1967); N.Y.State 575 (1986); Judiciary Law § 497(4). Further, in ABA 348, it was indicated that where the amount and the holding period of particular funds make it obvious that the interest to be earned would exceed the cost of placing the funds in an interest-bearing account, the failure to seek the client’s instructions as to how to invest the funds could be an “extreme violation” of the lawyer’s fiduciary obligation, and thus violative of DR 6–101(A) and DR 7–101(A)(1). We agree with the ABA position.

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TRTCLEunethical to use interest earned on client funds “to defray the lawyer’s own operating expenses without the specific and informed consent of the client.”); N.Y.State 554 (1983) (interest earned on “trust accounts,” absent the client’s consent, belongs to the client). *7 Some bar association ethics committees have gone farther and concluded that agreements permitting payments to lawyers from the interest earned on escrow accounts for the purpose of defraying their administrative costs are per se improper. See N.Y. State 532 (1981) (expressly rejecting N.Y. City 79–48 (1980)); N.Y. State 575 (1986); Nassau County 85–9; Nassau County 84–2. Our Committee does not agree with this view. We adhere to the position of our earlier opinions that it is not per se improper for a lawyer to pay himself interest earned on escrowed funds if he has obtained the prior knowing consent of the client and the other interested parties; however, we again caution that even with such consent, there are grave risks of ethical impropriety. These risks include overreaching, a conflict of financial interest between the lawyer and client in violation of Canon 5, overcharging the client in violation of DR 2–106(A), and commingling client funds with the lawyer’s funds in violation of DR 9–102(A). Any agreement purporting to give such consent, if challenged, would be subject to strict scrutiny. IX. IOLA The New York IOLA (Interest on Lawyer Accounts) program, authorized by the legislature in Section 497 of the Judiciary Law, is a non-mandatory, state-supervised program under 3

which lawyers may deposit and commingle in an interest-bearing account clients’ funds (including escrowed funds) that are too small, or to be held for too short a period of time, to be worth investing in a separate interest-bearing account. The interest on the funds is automatically paid to legislatively approved organizations. The main purpose of the program is to help provide civil legal assistance to the poor. It is ethically proper for lawyers to participate in IOLA. N.Y.State 554 (1983); see also ABA 348 Since the funds used in IOLA are not reasonably expected by the client to earn interest (because the sum is so small or to be held for so short a time), the client is not “entitled” to the interest earned by virtue of the program DR 9–102(B)(4); hence, there is no violation if that interest is paid out under the program rather than to the client. X. Record-keeping

Subdivision (5) of § 497 provides that “No attorney shall be liable in damages nor held to answer for a 3

charge of professional misconduct because of a deposit of moneys to an IOLA account pursuant to a judgment in good faith that such moneys were qualified funds.” The term “qualified funds” is defined in subdivision (2) as “moneys received by an attorney in a fiduciary capacity from a client or beneficial owner and which, in the judgment of the attorney, are too small in amount or are reasonably expected to be held for too short a time to generate sufficient interest income to justify the expense of administering a segregated account for the benefit of the client or beneficial owner.”

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TRTCLE Pursuant to DR 9–102(B)(3), a lawyer must maintain complete records of all escrowed funds coming into his possession and render appropriate accounts to his client and the other interested parties regarding them. Lawyers in New York should also refer to the Uniform Rule for the Preservation of Client Funds, applicable in all four Departments of the Appellate Division (22 NYCRR §§ 603.15, 691.12, 806.18 and 1022.5), which sets forth detailed requirements regarding client-fund recordkeeping, including a seven-year retention rule.

NYC Eth. Op. 1986-5 (N.Y.C.Assn.B.Comm.Prof.Jud.Eth.), 1986 WL 293094 End of Document


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Reorder Form No. 8068 (3/00)– Residential contract of sale 2-91

Jointly prepared by the Real Property Section of the New York State Bar Association, the New York State Land Title Association, the Committee on Real Property Law of the Association of the Bar of the City of New York and the Committee on Real Property Law of the New York County Lawyers’ Association.

Warning: NO REPRESENTATION IS MADE THAT THIS FORM OR CONTRACT FOR THE SALE AND PURCHASE OF REAL ESTATE COMPLIES WITH SECTION 5-702 OF THE GENERAL OBLIGATIONS LAW (“PLAIN LANGUAGE”).

CONSULT YOUR LAWYER BEFORE SIGNING THIS AGREEMENT

NOTE: FIRE AND CASUALTY LOSSES AND CONDEMNATION. This contract form does not provide for what happens in the event of fire, or other casualty loss or condemnation before the title closing. Unless different provision is made in this contract, Section 5-1311 of the General Obligations Law will apply. One part of the law makes a Purchaser responsible for fire and casualty loss upon taking possession of the Premises before the title closing.

Residential Contract of Sale

Date: CONTRACT OF SALE, made as of , 20 BETWEEN

Parties: Address: Social Security Number/Fed. I.D. No(s):

hereinafter called “SELLER”, and

Address: Social Security Number/Fed. I.D. No.(s):

hereinafter called “PURCHASER”.

The parties hereby agree as follows:

Premises: 1. Seller shall sell and convey and Purchaser shall purchase the property, together will all buildings and improvements thereon (collectively the “Premises”), more fully described on a separate page marked “Schedule A”, annexed hereto and made a part hereof and also known as:

Street Address:

Tax Map Designation:

Together with Seller’s ownership and rights, if any, to land lying in the bed of any street or highway, opened or proposed, adjoining the Premises to the center line thereof, including any right of Seller to any unpaid award by reason of any taking by condemnation and/or for any damage to the Premises by reason of change of grade of any street or highway. Seller shall deliver at no additional cost to Purchaser, at Closing (as hereinafter defined), or thereafter, on demand, any documents that Purchaser may reasonably require for the conveyance of such title and the assignment and collection of such award or damages.

Personal Property:

2. This sale also includes all fixtures and articles of personal property now attached or appurtenant to the Premises, unless specifically excluded below. Seller represents and warrants that at Closing they will paid for and owned by Seller, free and clear of all liens and encumbrances, except any existing mortgage to which this sale may be subject. They include, but are not limited to, plumbing, heating, lighting and cooking fixtures, bathroom and kitchen cabinets, mantels, door mirrors, switch plates and door hardware, venetian blinds, window treatments, shades, screens, awnings, storm windows, storm doors, window boxes, mail box, TV aerials, weather vane, flagpole, pumps, shrubbery, fencing, outdoor statuary, tool shed, dishwasher, washing machine, clothes dryer, garbage disposal unit, range, oven, refrigerator, freezer, air conditioning equipment and installations, wall to wall carpeting and built-ins not excluded below (strike out inapplicable items).

Excluded from this sale are furniture and household furnishings and

Purchase Price:

3. The purchase price is $

payable as follows:

(a) on the signing of this contract, by Purchaser’s check payable to the Escrowee (as hereinafter defined), subject to collection, the receipt of which is hereby acknowledged, to be held in escrow pursuant to paragraph 6 of this contract (the “Downpayment”): $ (b) by allowance for the principal amount unpaid on the existing mortgage on the date hereof, payment of which Purchaser shall assume by joinder in the deed: $ (c) by a purchase money note and mortgage from Purchaser to Seller: $

(d) balance at Closing in accordance with paragraph 7: $

Existing Mortgage:

4. (Delete if inapplicable) If this sale is subject to an existing mortgage as indicated in paragraph 3(b) above: (a) The premises shall be conveyed subject to the continuing lien of the existing mortgage, which is presently payable, with interest at the rate of percent per annum, in monthly installments of $ which include principal, interest and escrow amounts, if any, and with any balance of principal being due and payable on (b) To the extent that any required payments are made on the existing mortgage between the date hereof and Closing which reduce the unpaid principal amount thereof below the amount shown in paragraph 3(b), then the balance of the price payable at Closing under paragraph 3(d) shall be increased by the amount of the payments of principal. Seller represents and warrants that the amount shown in paragraph 3(b) is substantially correct and agrees that only payments required by the existing mortgage will be made between the date hereof and Closing. (c) If there is a mortgagee escrow account, Seller shall assign it to Purchaser, if it can be assigned, and in that case Purchaser shall pay the amount in the escrow account to Seller at Closing. (d) Seller shall deliver to Purchaser at Closing a certificate dated not more than 30 days before Closing signed by the holder of the existing mortgage, in form for recording, certifying the amount of the unpaid principal, the date to which interest has been paid and the amounts, if any, claimed to be unpaid for principal and interest, itemizing the same. Seller shall pay the fees for recording such certificate. If the holder of the existing mortgage is a bank or other institution as defined in Section 274-a of the Real Property Law (“Institutional Lender”), it may, instead of the certificate, furnish a letter signed by a duly authorized officer, employee or agent, dated not more than 30 days before Closing, containing the same information. (e) Seller represents and warrants that (i) Seller has delivered to Purchaser true and complete copies of the existing mortgage, the note secured thereby and any extensions and modifications thereof, (ii) the existing mortgage is not now, and at the time of Closing will not be, in default, and (iii) the existing mortgage does not contain any provision that permits the holder of the mortgage to require its immediate payment in full or to change any other term thereof by reason of the sale or conveyance of the Premises.

Purchase Money Mortgage:

5. (Delete if inapplicable) If there is to be a purchase money mortgage as indicated in paragraph 3(c) above: (a) The purchase money note and mortgage shall be drawn by the attorney for Seller in the form attached or, if not, in the standard form adopted by the New York State Land Title Association. Purchaser shall pay at Closing the mortgage recording tax, recording fees and the attorney’s fees in the amount of $ for its preparation. (b) The purchase money note and mortgage shall also provide that it is subject and subordinate to the lien of the existing mortgage and any extensions, modifications, replacements or consolidations of the existing mortgage, provided that (i) the interest rate thereof shall not be greater than percent per annum and the total debt service thereunder shall not be greater than $ per annum, and (ii) if the principal amount thereof shall exceed the amount of principal owing and unpaid on the existing mortgage at the time of placing such new mortgage or consolidated mortgage, the excess be paid to the holder of such purchase money mortgage in reduction of the principal thereof. The purchase money mortgage shall also provide that such payment to the holder thereof shall not alter or affect the regular installments, if any, of principal payable thereunder and that the holder thereof will, on demand and without charge therefor, execute, acknowledge and deliver any agreement or agreements further to effectuate such subordination.

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Downpayment in Escrow:

6. (a) Sellers’ attorney (“Escrowee”) shall hold the Downpayment for Seller’s account in escrow in a segregated bank account at until Closing or sooner termination of this contract and shall pay over or apply the Downpayment in accordance with the terms of this paragraph. Escrowee shall (not) (Delete if inapplicable) hold the Downpayment in an interest-bearing account for the benefit of the parties. If interest is held for the benefit of the parties, it shall be paid to the party entitled to the Downpayment and the party receiving the interest shall pay any income taxes thereon. If interest is not held for the benefit of the parties, the Downpayment shall be place in an IOLA account or as otherwise permitted or required by law. The Social Security or Federal Identification numbers of the parties shall be furnished to Escrowee upon request. At Closing, the Downpayment shall be paid by Escrowee to Seller. If for any reason Closing does not occur and either party gives Notice (as defined in paragraph 25) to Escrowee demanding payment of the Downpayment, Escrowee shall give prompt Notice to the other party of such demand. If Escrowee does not receive Notice of objection from such other party to the proposed payment within 10 business days after the giving of such Notice, Escrowee is hereby authorized and directed to make such payment. If Escrowee does receive such Notice of objection within such 10 day period or if for any other reason Escrowee in good faith shall elect not to make such payment, Escrowee shall continue to hold such amount until otherwise directed by Notice from the parties to this contract or a final, nonappealable judgment, order or decree of a court. However, Escrowee shall have the right at any time to deposit the Downpayment and the interest thereon with the clerk of a court in the county in which the Premises are located and shall give Notice of such deposit to Seller and Purchaser. Upon such deposit or other disbursement in accordance with the terms of this paragraph, Escrowee shall be relieved and discharged of all further obligations and responsibilities hereunder. (b) Parties acknowledge that, although Escrowee is holding the Downpayment for Seller’s account, for all other purposes Escrowee is acting solely as a stakeholder at their request and for their convenience and that Escrowee shall not be liable to either party for any act or omission on its part unless taken or suffered in bad faith or in willful disregard of this contract or involving gross negligence on the part of Escrowee. Seller and Purchaser jointly and severally agree to defend, indemnify and hold Escrowee harmless from and against all costs, claims and expenses (including reasonable attorney’s fees) incurred in connection with the performance of Escrowee’s duties hereunder, except with respect to actions or omissions taken or suffered by Escrowee in bad faith or in willful disregard of this contract or involving gross negligence on the part of Escrowee. (c) Escrowee may act or refrain from acting in respect of any matter referred to herein in full reliance upon and with the advice of counsel which may be selected by it (including any member of its firm) and shall be fully protected in so acting or refraining from action upon the advice of such counsel. (d) Escrowee acknowledges receipt of the Downpayment by check subject to collection and Escrowee’s agreement to the provision of this paragraph by signing in the place indicated on the signature page of this contract. (e) Escrowee or any member of its firm shall be permitted to act as counsel for Seller in any dispute as to the disbursement of the Downpayment or any other dispute between the parties whether or not Escrowee is in possession of the Downpayment and continues to act as Escrowee.

Acceptable Funds:

7. All money payable under this contract, unless otherwise specified, shall be paid by: (a) Cash, but not over $1,000.00; (b) Good certified check of Purchaser drawn on or official check issued by any bank, savings bank, trust company or savings and loan association having a banking office in the State of New York, unendorsed and payable to the order of Seller, or as Seller may otherwise direct upon not less than 3 business days notice (by telephone or otherwise) to Purchaser; (c) As to money other than the purchase price payable to Seller at Closing, uncertified check of Purchaser up to the amount of $ ; and (d) As otherwise agreed to in writing by Seller or Seller’s attorney.

Mortgage Contingency:

8. (Delete if inapplicable) The obligations of Purchaser hereunder are conditional upon issuance on or beore , 20 , (the “Commitment Date”) of a written commitment from any Institutional Lender pursuant to which such Institutional Lender agrees to make a first mortgage loan, other than a VA, FHA or other governmentally insured loan, to Purchaser, at Purchaser’s sole cost and expense, of $ or such lesser sum as Purchaser shall be willing to accept, at the prevailing fixed rate of interest not to exceed or initial adjustable rate of interest not to exceed for a term of at least years and on other customary commitment terms, whether or not conditional upon any factors other than an appraisal satisfactory to the Institutional Lender. Purchaser shall (a) make prompt application to an Institutional Lender for such mortgage loan, (b) furnish accurate and complete information regarding Purchaser and members of Purchaser’s family, as required, (c) pay all fees, points and charges required in connection with such application and loan, (d) pursue such application with diligence, (e) cooperate in good faith with such Institutional Lender to obtain such commitment and (f) promptly give Notice to Seller of the name and address of each Institutional Lender to which Purchaser has made such application. Purchaser shall comply with all requirements of such commitment (or of any other commitment accepted by Purchaser) and shall furnish Seller with a copy thereof promptly after receipt thereof. If such commitment is not issued on or before the Commitment Date, then, unless Purchaser has accepted a commitment that does not comply with the requirements set forth above, Purchaser may cancel this contract by giving Notice to Seller within 5 business days after the Commitment Date, in which case this contract shall be deemed cancelled and thereafter neither party shall have any further rights against, or obligations or liabilities to, the other by reason of this contract, except that the Downpayment shall be promptly refunded to Purchaser and except as set forth in paragraph 27. If Purchaser fails to give notice of cancellation or if Purchaser shall accept a commitment that does not comply with the terms set forth above, then Purchaser shall be deemed to have waived Purchaser’s right to cancel this contract and to receive a refund of the Downpayment by reason of the contingency contained in this paragraph.

Permitted Exceptions:

9. The Premises are sold and shall be conveyed subject to: (a) Zoning and subdivision laws and regulations, and landmark, historic or wetlands designation, provided that they are not violated by the existing buildings and improvements erected on the property or their use; (b) Consents for the erection of any structures on, under or above any streets on which the Premises abut; (c) Encroachment of stoops, areas, cellar steps, trim and cornices, if any, upon any street or highway; (d) Real estate taxes that are a lien, but are not yet due and payable; and (e) The other matters, if any, including a survey exception, set forth in a Rider attached.

Governmental Violations and Orders:

10. (a) Seller shall comply with all notes or notices of violations of law or municipal ordinances, orders or requirements noted or issued as of the date hereof by any governmental department having authority as to lands, housing, buildings, fire, health, environmental and labor conditions affecting the Premises. The Premises shall be conveyed free of them at Closing. Seller shall furnish Purchaser with any authorizations necessary to make the searches that could disclose these matters. (b) (Delete if inapplicable) All obligations affecting the Premises pursuant to the Administrative Code of the City of New York incurred prior to Closing and payable in money shall be discharged by Seller at or prior to Closing.

Seller’s Representations:

11. (a) Seller represents and warrants to Purchaser that: (i) The Premises abut or have a right of access to a public road; (ii) Seller is the sole owner of the Premises and has the full right, power and authority to sell, convey and transfer the same in accordance with the terms of this contract; (iii) Seller is not a “foreign person”, as that term is defined for purposes of the Foreign Investment in Real Property Tax Act, Internal Revenue Code (“IRC”) Section 1445, as amended, and the regulations promulgated thereunder (Collectively “FIRPTA”); (iv) The Premises are not affected by any exemptions or abatements of taxes; and (v) Seller has been known by no other name for the past ten years, except:

(b) Seller covenants and warrants that all of the representations and warranties set forth in this contract shall be true and correct at Closing. (c) Except as otherwise expressly set forth in this contract, none of Seller’s convenants, representations, warranties or other obligations contained in this contract shall survive Closing.

Condition of Property:

12. Purchaser acknowledges and represents that Purchaser is fully aware of the physical condition and state of repair of the Premises and of all other property included in this sale, based on Purchaser’s own inspection and investigation thereof, and that Purchaser is entering into this contract based solely upon such inspection and investigation and not upon any information, data, statements or representations, written or oral, as to the physical condition, state of repair, use, cost of operation or any other matter related to the Premises or the other property included in the sale, given or made by Seller or its representatives, and shall accept the same “as is” in present condition and state of repair, subject to reasonable use, wear, tear and natural deterioration between the date hereof and the date of Closing (except as otherwise set forth in paragraph 16(f)), without any reduction in the purchase price or claim of any kind for any change in such condition by reason thereof subsequent to the date of this contract. Purchaser and its authorized representatives shall have the right, at reasonable times and upon reasonable notice (by telephone or otherwise) to Seller, to inspect the Premises before Closing.

Insurable Title:

13. Seller shall give and Purchaser shall accept such title as shall be willing to approve and insure in accordance with its standard form of title policy approved by the New York State Insurance Department, subject only to the matters provided for in this contract.

Closing, Deed and Title:

14. (a) “Closing” means the settlement of the obligations of Seller and Purchaser to each other under this contract, including the payment of the purchase price to Seller, and the delivery to Purchaser of a deed in proper statutory short form for record, duly executed and acknowledged, so as to convey to Purchaser fee simple title to the Premises, free of all encumbrances, except as otherwise herein stated. The deed shall contain a covenant by Seller as required by subd. 5 of Section 13 of the Lien Law. (b) If Seller is a corporation, it shall deliver to Purchaser at the time of Closing (i) a resolution of its Board of Directors authorizing the sale and delivery of the deed, and (ii) a certificate by the Secretary or Assistant Secretary of the corporation certifying such resolution and setting forth facts showing that the transfer is in conformity with the requirements of Section 909 of the Business Corporation Law. The deed in such case shall contain a recital sufficient to establish compliance with that Section.

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Closing Date and Place:

15. Closing shall take place at the office of at o’clock on , 20 or, upon reasonable notice (by telephone or otherwise) by Purchaser, at the office of

Conditions to Closing:

16. This contract and Purchaser’s obligation to purchase the Premises are also subject to and conditioned upon the fulfillment of the following conditions precedent:

(a) The accuracy, as of the date of Closing, of the representations and warranties of Seller made in this contract. (b) The delivery by Seller to Purchaser of a valid and subsisting Certificate of Occupancy or other required certificate of compliance, or evidence that none was required, covering the building(s) and all of the other improvements located on the property authorizing their uses as a family dwelling at the date of Closing. (c) The delivery by Seller to Purchaser of a duly executed and sworn affidavit (in form prescribed by law) claiming exemption of the sale contemplated hereby, if such be the case, under Article 31-B of the Tax Law of the State of New York and the Regulations promulgated thereunder, as the same may be amended from time to time (collectively the “Gains Tax Law”); or if such sale shall not be exempt under the Gains Tax Law, Seller and Purchaser agree to comply in a timely manner with the requirements of the Gains Tax Law and, at Closing, Seller shall deliver to Purchaser (i) an official return showing no tax due, or (ii) an official return accompanied by a certified or official bank check drawn on a New York State banking institution payable to the order of the New York State Department of Taxation and Finance in the amount of the tax shown to be due thereon. Seller shall (x) pay promptly any additional tax that may become due under the Gains Tax Law, together with interest and penalties thereon, if any, which may be assessed or become due after Closing, and/or execute any other documents that may be required in respect thereof, and (y) indemnify, defend and save Purchaser harmless from and against any of the foregoing and any damage, liability, cost or expense (including reasonable attorney’s fees) which may be suffered or incurred by Purchaser by reason of the nonpayment thereof. The provisions of this subparagraph (c) shall survive Closing. (d) The delivery by Seller to Purchaser of a certification stating that Seller is not a foreign person, which certification shall be in the form then required by FIRPTA. If Seller fails to deliver the aforesaid certification or if Purchaser is not entitled under FIRPTA to rely on such certification, Purchaser shall deduct and withhold from the purchase price a sum equal to 10% thereof (or any lesser amount permitted by law) and shall at Closing remit the withheld amount with the required forms to the Internal Revenue Service. (e) The delivery of the Premises and all building(s) and improvements comprising a part thereof in broom clean condition, vacant and free of leases or tenancies, together with keys to the Premises. (f) All plumbing (including water supply and septic systems, if any), heating and air conditioning, if any, electrical and mechanical systems, equipment and machinery in the building(s) located on the property and all appliances which are included in this sale being in working order as of the date of Closing. (g) If the Premises are a one or two family house, delivery by the parties at Closing of affidavits in compliance with state and local law requirements to the effect that there is installed in the Premises a smoke detecting alarm device or devices. (h) The delivery by the parties of any other affidavits required as a condition of recording the deed.

Deed Transfer and Recording Taxes:

17. At Closing, certified or official bank checks payable to the order of the appropriate State, City or County officer in the amount of any applicable transfer and/or recording tax payable by reason of the delivery or recording of the deed or mortgage, if any, shall be delivered by the party required by law or by this contract to pay such transfer and/or recording tax, together with any required tax returns duly executed and sworn to, and such party shall cause any such checks and returns to be delivered to the appropriate officer promptly after Closing. The obligation to pay any additional tax or deficiency and any interest or penalties thereon shall survive Closing.

Apportionments and Other Adjustments; Water Meter and Installment Assessments:

18. (a) To the extent applicable, the following shall be apportioned as of midnight of the day before the day of Closing. (i) Taxes, water charges and sewer rents, on the basis of the fiscal period for which assessed; (ii) fuel; (iii) interest on the existing mortgage; (iv) premiums on existing transferable insurance policies and renewals of those expiring prior to Closing; (v) vault charges; (vi) rents as and when collected. (b) If Closing shall occur before a new tax rate is fixed, the apportionment of taxes shall be upon the basis of the tax rate for the immediately proceeding fiscal period applied to that latest assessed valuation. (c) If there is a water meter on the Premises, Seller shall furnish a reading to a date not more than 30 days before Closing and the unfixed meter charge and sewer rent, if any, shall be apportioned on the basis of such last reading. (d) If at the date of Closing the Premises are affected by an assessment which is or may become payable in annual installments, and the first installment is then a lien, or has been paid, then for the purposes of this contract all the unpaid installments shall be considered due and shall be paid by Seller at or prior to Closing. (e) Any errors or omissions in computing apportionments or other adjustments at closing shall be corrected within a reasonable time following Closing. This subparagraph shall survive Closing.

Allowance for Unpaid Taxes, etc.:

19. Seller has the option to credit Purchaser as an adjustment to the purchase price with the amount of any unpaid taxes, assessments, water charges and sewer rents, together with any interest and penalties thereon to a date not less that five business days after closing, provided that official bills therefor computed to said date are produced at Closing.

Use of Purchase Price to Remove Encumbrances:

20. If at Closing there are other liens or encumbrances that Seller is obligated to pay or discharge, Seller may use any portion of the cash balance of the purchase price to pay or discharge them, provided Seller shall simultaneously deliver to Purchaser at Closing instruments in recordable form and sufficient to satisfy such liens or encumbrances of record, together with the cost of recording or filing said instruments. As an alternative Seller may deposit sufficient monies with the title insurance company employed by Purchaser acceptable to and required by it to assure their discharge, but only if the title insurance company will insure Purchaser’s title clear of the matters or insure against their enforcement out of the Premises and will insure Purchaser’s Institutional Lender clear of such matters. Upon notice (by telephone or otherwise), given not less than 3 business days before Closing, Purchaser shall provide separate certified or official bank checks as requested to assist in clearing up these matters.

Title Examination; Seller’s Inability to Convey; Limitations of Liability:

21. (a) Purchaser shall order an examination of title in respect of the Premises from a title company licensed or authorized to issue title insurance by the New York State Insurance Department or any agent for such title company promptly after the execution of this contract or, if this contract is subject to the mortgage contingency set forth in paragraph 8, after a mortgage commitment has been accepted by Purchaser. Purchaser shall cause a copy of the title report and of any additions thereto to be delivered to the attorney(s) for Seller promptly after receipt thereof. (b) If at the date of Closing Seller is unable to transfer title to Purchaser in accordance with this contract, or Purchaser has other valid grounds for refusing to close, whether by reason of liens, encumbrances or other objections to title or otherwise (herein collectively called “Defects”), other than those subject to which Purchaser is obligated to accept title hereunder or which Purchaser may have waived and other that those which Seller has herein expressly agreed to remove, remedy or discharge and if Purchaser shall be unwilling to waive the same and to close title without abatement of the purchase price, then except as hereinafter set forth, Seller shall have the right, at Seller’s sole election, either to take such action as Seller may deem advisable to remove, remedy, discharge or comply with such Defects or to cancel this contract; (ii) if Seller elects to take action to remove, remedy or comply with such Defects, Seller shall be entitled from time to time, upon Notice to Purchaser, to adjourn the date for Closing hereunder for a period or periods not exceeding 60 days in the aggregate (but not extending beyond the date upon which Purchaser’s mortgage commitment, if any, shall expire), and the date for Closing shall be adjourned to a date specified by Seller not beyond such period. If for any reason whatsoever, Seller shall not have succeeding in removing, remedying or complying with such Defects at the expiration of such adjournment(s) and if Purchaser shall still be unwilling to waive the same and to close title without abatement of the purchase price, then either party may cancel this contract by Notice to the other given within 10 days after such adjourned date; (iii) notwithstanding the foregoing, the existing mortgage (unless this sale is subject to the same) and any matter created by Seller after the date hereof shall be released, discharged or otherwise cured by Seller at or prior to Closing. (c) If this contract is cancelled pursuant to its terms, other than as a result of Purchaser’s default, this contract shall terminate and come to an end, and neither party shall have any further rights, obligations or liabilities against or to the other hereunder or otherwise, except that: (i) Seller shall promptly refund or cause the Escrowee to refund the Downpayment to Purchaser and, unless cancelled as a result of Purchaser’s default or pursuant to paragraph 8, to reimburse Purchaser for the net cost of examination of title, including any appropriate additional charges related thereto, and the net cost, if actually paid or incurred by Purchaser, for updating the existing survey of the Premises or of a new survey, and (ii) the obligations under paragraph 27 shall survive the termination of this contract.

Affidavit as to Judgments, Bankruptcies, etc.:

22. If a title examination discloses judgments, bankruptcies or other returns against persons having names the same as or similar to that of Seller, Seller shall deliver an affidavit at Closing showing that they are not against Seller.

Defaults and Remedies:

23. (a) If Purchaser defaults hereunder, Seller’s sole remedy shall be to receive and retain the Downpayment as liquidated damages, it being agreed that Seller’s damages in case of Purchaser’s default might be impossible to ascertain and that the Downpayment constitutes a fair and reasonable amount of damages under the circumstances and is not a penalty. (b) If Seller defaults hereunder, Purchaser shall have such remedies as Purchaser shall be entitled to at law or in equity, including, but not limited to, specific performance.

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Purchaser’s Lien:

24. All money paid on account of this contract, and then reasonable expenses of examination of title to the Premises and of any survey and survey inspection charges, are hereby made liens on the Premises, but such liens shall not continue after default by Purchaser under this contract.

Notices: 25. Any notice or other communication (“Notice”) shall be in writing and either (a) sent by either of the parties hereto or by their respective attorneys wha are hereby authorized to do so on their behalf or by the Escrowee, by registered or certified mail, postage prepaid, or

(b) delivered in person or by overnight courier, with receipt acknowledged, to the respective addresses given in this contract for the party and the Escrowee, to whom the Notice is to be given, or to such other address as such party or Escrowee shall hereafter designate by Notice given to the other party or parties and the Escrowee pursuant to this paragraph. Each notice mailed shall be deemed given on the third business day following the date of mailing the same, except that any notice to Escrowee shall be deemed given only upon receipt by Escrowee and each Notice delivered in person or by overnight courier shall be deemed given when delivered.

No. Assignment:

26. This contract may not be assigned by Purchaser without the prior written consent of Seller in each instance and any purported assignment(s) made without such consent shall be void.

Broker: 27. Seller and Purchaser each represents and warrants to other that it has not dealt with any broker in connection with this sale other than (“Broker”) and Seller shall pay Broker any commission earned pursuant to a separate agreement between Seller and Broker. Seller and Purchaser shall indemnify and defend each other against any costs, claims and expenses, including reasonable attorneys’ fees, arising out of the breach on their respective parts of any representation or agreement contained in this paragraph. The provisions of this paragraph shall survive Closing or, if Closing does not occur, the termination of this contract.

Miscellaneous: 28. (a) All prior understandings, agreements, representations and warranties, oral or written, between Seller and Purchaser are merged in this contract; it completely expresses their full agreement and has been entered into after full investigation, neither party relying upon any statement made by anyone else that is not set forth in this contract. (b) Neither this contract nor any provision thereof may be waived, changed or cancelled except in writing. This contract shall also apply to and bind the heirs, distributes, legal representatives, successors and permitted assigns of the respective parties. The parties hereby authorize their respective attorneys to agree in writing to any changes in dates and time periods provided for in this contract. (c) Any singular word or term herein shall also be read as in the plural and the neuter shall include the masculine and feminine gender, whenever the sense of this contract may require it. (d) The captions in this contract are for convenience of reference only and in no way define, limit or describe the scope of this contract and shall not be considered in the interpretation of this contract or any provision hereof. (e) This contract shall not be binding or effective until duly executed and delivered by Seller and Purchaser. (f) Seller and Purchaser shall comply with IRC reporting requirements, if applicable. This subparagraph shall survive Closing. (g) Each party shall, at any time and from time to time, execute, acknowledge where appropriate and deliver such further instruments and documents and take such other action as may be reasonably requested by the other in order to carry out the intent and purpose of this contract. This subparagraph shall survive Closing. (h) This contract is intended for the exclusive benefit of the parties hereto and, except as otherwise expressly provided herein, shall not be for the benefit of, and shall not create any rights in, or be enforceable by, any other person or entity.

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IN WITNESS WHEREOF, this contract has been duly executed by the parties hereto.

Seller Purchaser

Seller Purchaser

Attorney for Seller:

Address:

Tel: Fax: Attorney for Purchaser:

Address:

Tel: Fax:

Receipt of the Down payment is acknowledged and the undersigned agrees to act in accordance with the provisions of Paragraph 6 above.

Escrowee Contract of Sale

TITLE NO.

TO

PREMISES

DISTRICT

SECTION

BLOCK

LOT

COUNTY or TOWN

STREET NUMBER ADDRESS

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