Real Life Ethics in Property Disputes
Transcript of Real Life Ethics in Property Disputes
WSSFC Quality of Life/Ethics Track
Session 12
Real Life Ethics in Property
Disputes
Mark B. Hazelbaker Kasieta Legal Group LLC, Madison
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Real Life Ethics In Property Disputes
October 24, 2014
Mark B Hazelbaker, Attorney-at-law
Kasieta Legal Group, LLC
Madison Wisconsin
The Lawyer’s Challenge In Real Estate: Responsibility Without Authority Or
Involvement
Frustratingly, even as the rules and mandates which apply to real estate transactions have
become ever more complex, lawyers have been progressively marginalized in these transactions.
In just a generation, we have gone from a system in which it was virtually impossible to transfer
real property without major involvement by a lawyer to a system in which involvement of
lawyers has become rare.
Forms and lightly-trained real estate sales agents and brokers have been substituted for
the involvement of counsel. Unquestionably, these institutions function. But, all too few real
estate agents follow the overarching advice of their trade association to recommend the
engagement of an attorney when things out of the routine appear. The result, often, is that when
problems arise they could have been easily and relatively inexpensively avoided by the
involvement of counsel before the transaction. Afterward, some of these problems are literally
beyond solution. If, for example, there is an access problem and it cannot be cured by an
easement of necessity, there may be no effective remedy at all.
The reality of today is that when attorneys become involved in real estate transactions,
they assume professional responsibility for at least part of the transaction even though they have
little or no authority or capacity to affect the outcome.
The presentation today focuses on overview of some of the important ethical concepts to
keep in mind when lawyers to have the opportunity to be involved in real estate. Although
pushing for lawyer involvement in real estate transactions may seem self-serving, we must not
hesitate to recommend ourselves as the sophisticated experts we are in matters involving the law.
Fundamentally, the many rules and strictures which now influence and guide real estate
transactions are legal questions. Filling in the blank on a form is well and good when the
question is which address to use. When the question is whether or not it is appropriate to waive
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an environmental contingency, that question is much more significant. It requires advice from
counsel with experience in these matters.
I. BASIC ETHICAL ISSUES INVOLVED IN DEALING WITH NON-LAWYERS
A. Know the Players. Real estate transactions involve:
1. A buyer and seller. Sometimes, the terms lessor and lessee; landlord and tenant;
licensor and licensee are used, but the roles are the same. One party owns real
estate and the other seeks to gain certain rights to it.
2. Third-party vendors who finance or facilitate the transaction, such as banks or
mortgage lenders, title insurers, closing agencies, property condition inspectors,
contractors and regulatory agencies.
3. Advisers who assist buyers and sellers in the transaction, including real estate
professionals, lawyers and financing brokers.
B. Know the relative roles and rules.
1. Buyers and sellers are subject to federal and state disclosure and honesty
requirements:
a. Federal: 18 U.S.C. 1001 [false or fraudulent information provided to federal
agencies], 1010 [false or forged statements in HUD loans], 1012 [kickbacks,
false statements to HUD] ; 31 U.S.C. 3729 [false claims or statements to
defraud the government], 3802 [civil penalty for fraudulent statements to the
government] in the case of financing issued or insured by federal agencies;
b. Wisconsin: Real estate condition reports and disclosure, Ch. 709, Wis. Stats.
Chapter 709’s provisions require disclosure of defects, not of risks or hazards,
Hoekstra v. Guardian Pipeline, LLC, 2006 WI App 245, 298 Wis. 2d 165, 726
N.W.2d 648, 03-2809.
2. Third-party vendors are usually highly regulated:
a. Lenders: 12 CFR Part 34, which regulates certain mortgages, appraisals, due-
on-sale clauses, and lending standards; Truth in Lending, [Regulation Z], 12
CFR 226; the new Ability-to-Repay Rule; regulations under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124
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Stat. 1376 (2010), (Dodd-Frank Act), and the Wisconsin Consumer Act,
Chapters 421-429, Wis. Stats., especially Chapter 428, Wis. Stats., First Lien
real estate and other mortgage loans.
b. Title companies: Real estate settlement practices act, 12 USC sec. 2607; and
primarily, state insurance laws, such as chapters 600 – 655, Wis. Stats.
c. Real estate professionals, Ch. 452, Wis. Stats., and the Rea1 Estate Examining
Board rules, Chs. REEB 11, et seq.; most notably, REEB 24.
C. Know The Limits on Real Estate Professionals’ Practice.
1. Real estate agents and brokers are not lawyers and may not practice law.
2. The REEB rules provide at sec. 24.03, Competent Services:
(2) Competence required.
(a) Licensees shall not provide services which the licensee is not competent to
provide unless the licensee engages the assistance of one who is competent. Any
person engaged to provide such assistance shall be identified and that person's
contribution shall be described.
3. In 1961, the Wisconsin Supreme Court delineated a limited “carve out” from
the unauthorized practice of law statute, for real estate professionals, State ex
rel Reynolds v. Dinger, 14 Wis. 2d 193 (1961). The Court rejected claims by
the Attorney General that administrative rules permitting real estate
professionals to complete forms approved by the Board would authorize
improper practice of law:
We conclude that Rule, sec. REB 5.04, includes provisions which permit to a
limited extent the practice of the law by certain nonlawyers; that the regulation of
the practice of the law is a judicial power and is vested exclusively in the supreme
court; that the practitioner in or out of court, licensed lawyer or layman, is subject
to such regulation; that whenever the court's view of the public interest requires it,
the court has the power to make appropriate regulations concerning the practice of
law in the interest of the administration of justice, and to modify or declare void
any such rule, law, or regulation by whomever promulgated, which appears to the
court to interfere with the court's control of such practice for such ends. Further,
although we have the power to declare void Rule, sec. REB 5.04, in so far as it
affects the practice of law, we do not use the power in this instance because we,
ourselves, consider the rule a salutary one which in its essentials continues a
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practice of laymen which we have long tacitly permitted and which has worked
reasonably well. The Rule has not enlarged the practice of the law by laymen
which we have hitherto permitted. When we consider that such practices should
be discontinued it will be time for us to use our power. It is not required now.
State ex rel Reynolds v. Dinger, 14 Wis. 2d 193 at 206.
4. The current rules governing the scope of real estate practice are found in REEB 16,
Wis. Adm. Code. Real estate agents and brokers are allowed to use forms approved
by the REEB to the extent of completing those forms. However:
REEB 16.04 (2) For those kinds of real estate or business opportunity transactions
for which the board has not approved contractual forms a licensee, when acting as an
agent or a party, may use contractual forms drafted by a party or an attorney, if the
name of the drafter is imprinted on the form before use by a licensee. For the purpose
of this subsection, a listing broker is a party to the listing contract transaction.
5. Real estate professionals are allowed to use REEB forms, Wisconsin State Bar
deed forms, government agency forms, UCC forms and real estate management
forms.
6. The proper manner for using REEB-approved forms is described in sec.
REEB 16.06, Wis. Admin. Code. Non-lawyers may fill in the blanks on
forms. But, the rule limits the use of “blank addendum” and other addendum
pages by real estate professionals:
(4) Except as provided in sub. (5), a licensee may use a pre-prepared addendum
form and attach it to an approved form under all of the following circumstances:
(a) The addendum has been prepared by the broker or an attorney who is
identified on the addendum.
(b) The addendum is incorporated by reference into the approved form and the
approved form and the addendum are properly related to one another.
(c) The addendum relates to the blanks on an approved form; or alters or
supplants optional provisions within an approved form.
(5) A licensee may use a pre-prepared addendum which supplants or alters the
printed provisions of an approved form only if the following conditions are met:
(a) The addendum has been drafted by an attorney who is identified on the
addendum.
(b) There are no optional or multiple choice provisions in the addendum.
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7. As you probably are aware, many large brokerages have standard addenda
which contain disclosures, non-standard real estate clauses and other contract
provisions – which have not universally been approved by the REEB. These
are questionable.
8. The blank addendum issue: real estate agents sometimes cross the line in
drafting addenda provisions that are contracts. Only lawyers and parties can
draft substantive addenda provisions, REEB 16.06. An example:
Clearly, it is incumbent on the lawyer here to prevent unauthorized practice of law.
D. Define And Limit Your Responsibility.
1. If you handle real estate at all, you’ve probably received the phone call we all have –
“Hi; we want to make an offer to purchase a house and would like you to look at it.”
Or, “We received an offer to purchase and we would like you to look at it.” Or
“Would you come to the closing?” Is that appropriate? Yes, if the client agrees.
2. The challenge is to define and properly limit the attorney’s role. Under SCR 20:1.2
(c) “A lawyer may limit the scope of the representation if the limitation is reasonable
under the circumstances and the client gives informed consent.” In turn, SCR 20:1.0
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(g) states that: “’Informed consent’ denotes the agreement by a person to a proposed
course of conduct after the lawyer has communicated adequate information and
explanation about the material risks of and reasonably available alternatives to the
proposed course of conduct.”
3. The Wisconsin State Bar issued a Formal Opinion which describes the roles lawyers
can play in this process, E-97-1, “Limitation of representation in residential real estate
transactions.” The opinion succinctly discusses ethical issues posed by the various
roles lawyers play in modern real estate transactions; for that reason, it is appended to
this outline.
4. The Opinion, reflecting the Rules, encourages lawyers to carefully define the client in
the transaction, and the role to be played.
5. A fee agreement (mandated if the expected fees exceed $1,000) or an engagement
letter should set forth the scope of the representation and the basis for the fees. This
avoids “mission creep.”
6. Single-client Transaction: the terms of engagement should define who the client is,
and who has client control. This can be complicated in corporate, association or
partnership dealings, SCR 20:1.13.
7. Multiple-party transactions: if a lawyer is drafting deeds for a title company, or
attempting to write up a deal with multiple parties, the agreement should define what
the lawyer is doing, which would have to be limited to writing up an agreement
reached by the clients themselves.
8. Role of assistants: the State Bar has addressed the limits of what our paralegals and
assistants can do, Formal Opinion E-95-31. With client consent and information,
lawyers may send paralegals to closings to perform defined task, as the lawyer’s
representatives. If an issue arises which requires the exercise of legal judgment,
however, the paralegal needs to ask for guidance from the lawyer. The paralegal
must be competent to handle the delegated tasks. Candidly, with respect to forms and
routine closing issues, they may be more competent.
1 This opinion contradicts but does not address a contrary conclusion reached in Formal Opinion E-80-2.
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9. Lawyers acting as lawyers in transactions are to be compensated for their legal
services through the payment of fees. It is possible for the fees to be as combination
of legal fees and commissions, if the lawyer also is acting as a real estate broker,
Formal Opinion E-86-3. However, the Opinion notes that the fees involved must be
disclosed, the potential for conflicts must be disclosed, and the fees must be
reasonable. Lawyers need to beware of a situation in which their legal advice may be
influenced by their desire to earn a commission for making a sale happen.
10. Lawyers must be careful to assure that their clients are complying with disclosure
requirements. SCR 20:1.6(b) requires lawyers to withdraw from representation of
clients if the client refuses to disclose information that may result in a criminal or
fraudulent act that will seriously injure another party. Formal Opinion E-88-10
addresses the possibility that a duty to disclose may arise if the lawyer is aware that
the client failed to disclose information about hazardous wastes on the property
involved in a transaction.
11. Lawyers should not accept employment to prepare the documents in a transaction and
then represent the broker at the closing. There are loyalties to two different clients in
that scenario which are inconsistent. That is reflected in an older opinion, E-69-3, but
it seems consistent with today’s rules.
II. HANDLING THE ROLES PLAYED BY VARIOUS PROFESSIONALS
A. The Lawyer.
The lawyer’s role in modern real estate transactions, especially residential transactions, is
consistently underemphasized.
1. Virtually all language other than filling in the blanks should properly be drafted by
lawyers with due consideration to legal requirements and the merits of the
transaction.
2. In addition to advising on legal aspects of the transaction, lawyers are permitted to
advise clients on other matters, SCR 20:2.1. “In representing a client, a lawyer shall
exercise independent professional judgment and render candid advice. In rendering
advice, a lawyer may refer not only to law but to other considerations such as moral,
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economic, social and political factors that may be relevant to the client’s situation.”
Thus, the advice rendered by an attorney in real estate matter may include such things
as the business aspects of the deal, the market conditions, what custom and practice is
in the business community or the real estate community and other things that bear on
the deal – – provided the lawyer actually knows what he or she is talking about.
Commenting on the value of property, for example, unless the lawyer has an appraisal
or other valid information is stupid.
3. The lawyer needs to diplomatically assure that legal issues are handled by the
attorney that the parties do not blindly rely on title insurance as a substitute for
actually assuring that they are being conveyed merchantable title and a fair value.
B. The Real Estate Broker/Agent
1. Real estate professionals perform an invaluable service in today’s economy. Selling
real estate is extraordinarily time – intensive. There are special rules that apply to
conveyancing of real estate that have no applicability in other contexts. Lawyers
should have deep respect and profound courtesy to real estate professionals for the
important work they do in conducting marketing, value analysis, presentation and
preparation of transactions.
2. However, lawyers need to work, diplomatically, with real estate professionals to
assure that these professionals do not exceed the bounds of propriety. Particularly,
lawyers need to insist that brokers not draft extensive contract provisions in addenda
or other blank spaces in the form contracts. At a minimum, lawyers need to make
clients aware that if the broker – drafted language is insufficient, the broker will be
held to a far lower standard of care, if any, as to the downside consequences of the
mistake.
3. Lawyers need to assure that brokers and agents do not attempt to provide assurances
with respect to title, legality of proposed uses, or other aspects where the question
involves interpretation and application of law. This is also true of issues where the
question is enforce ability of agreements, damages and remedies for failure to close,
and other aspects which could potentially wind up in court. A professional who
cannot appear in court to defend a position should not be staking one.
C. Title Companies.
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Title insurance found its way to broad acceptance over a generation in which real estate
attorneys bitterly resisted the rise of title and escrow companies as the closing agents and
title arbiters in the economy. Although some of that was simply stubbornness and
traditionalism, there were reasons for the objections.
1. Title companies play several different roles in today’s real estate economy. Their
name identifies just one of them. They find policies of insurance which protect sellers
and other parties from claims for damages resulting from defects in title that emerge
after a closing. It is important to note that a title insurance company is actually
ensuring the quality of its title search, not the title itself. It is also important to note
that there are significant exceptions to any title commitment which may apply in
cases where problems later emerge.
2. Title companies also act as escrow agents for the disbursement of funds, often on
behalf of multiple parties to the same transaction. Recognize that your client will have
authority to authorize disbursement or to receive only a small portion of the funds that
are involved in any given transaction. The title company is required to follow the
directions of other funding agencies or parties as to their funds.
3. Perhaps the most important consideration to remember is that a title commitment is
not an opinion of title. The commitment is actually a representation that, in the
judgment of the title examiner, title is vested in a particular party, subject to the
exceptions stated. If that opinion is incorrect, the party who receives less than the title
they bargained for cannot sue the title examiner for malpractice. Rather, the recourse
they have is the contract for insurance. As noted, there are qualifications limitations
and exceptions that make the policy much less than it seems.
4. It is an attorney’s responsibility to understand what the exceptions in the title policy
mean, whether or not it is necessary to work to remove those exceptions, or, in some
instances, two obtain specific provisions in the purchase contract to address title
issues.
5. Title companies may be owned by an attorney, but companies themselves cannot
practice law. Only attorneys can.
III. APPLYING THE RULES OF PROFESSIONAL CONDUCT IN PRACTICE
Let’s examine several fact scenarios:
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A. Purchase and sale of a single-family home at 123 Main Street, Mayville.
You receive a call from John Jones indicating that he has looked at 123 Main St. in Mayville
through Hometown Real Estate, a brokerage. He likes the house and told the broker, Adam
Smith, and that he intended to offer $145,000 for the house. Smith told Jones that Smith
would begin writing up an offer, but has not delivered it yet. Jones tell you that he spoke to
another broker, who suggested that broker Smith was proposing far too high a price for it and
the property is really only worth $ 130,000. Jones asks you what you think about the price,
and also says that he has heard that this particular neighborhood has high groundwater and
may have wet basements and asks you what you know about that and what should be done.
You discuss the matter with Jones briefly and tell him you’ll get back to them. Smith calls
you, indicating he heard from Jones that Jones might be talking to you and wants to know
whether you have discussed the transaction with Jones. You have had other real estate
matters with Smith, some of which resulted in personal tensions between you and Smith.
B. Purchase and sale of a zero lot line duplex at 234 Main St. in Mayville
Your previous client Sarah Webster calls you to ask you to help her in making an offer on
a half-duplex property. She meets with you and shows you property information compiled
by a real estate agent. The information indicates that the duplex is being sold as two separate
units. It indicates that the seller will, prior to closing, accomplish dividing the duplex into
two units. The duplex has one driveway. It is a side-by-side duplex with a common wall
between the two units. There is a single water and sewer lateral, although water is separately
metered. The property information prepared by the sales agent states that the driveway is
adequate to comply with village of Mayville code requirements. The information also
indicates that the sales agent is the owner of the property, and will be preparing documents to
accomplish the property split.
C. Purchase and sale of 567 Main St., Mayville, a commercial property.
You are called by Albert Foster, owner of Mayville Cleaners, who wants to hire you to
review just the offer to purchase and other transaction documents on his proposed acquisition
of a vacant building on Main Street. He wants to relocate his dry-cleaning business to that
property. You are also the attorney for the village of Mayville, and are familiar with the
zoning of the property as well as the recent history concerning its ownership. The property
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was divided by certified survey map from a larger parcel, and conditions were imposed on
the split which limit the use of the parcel. As village attorney, you assisted in preparing the
approval conditions. Mr. Foster tells you that the seller is represented by real estate broker
Thomas Ward, who is acting on behalf of 567 Main, LLC, a limited liability company. One
of the members of the limited liability company is a former client of yours, Edward Randall.
You prepared Mr. Randall’s will and estate plan.
D. “Just Handle The Closing.”
You receive a call on a Monday morning from longtime friends and clients Michael and
Susan Dewalt. They ask you to come to the closing of their purchase of a new home that
they have had built for them. They tell you that they want you to do no more than handle the
closing. The seller is the builder, I Have A Hammer, LLC. You agree to assist them. You
ask them to inform the title company that you will be at the closing and have the title
company forward the documents to you. You receive the documents and review them. The
title commitment indicates no unusual exceptions as to ownership of the land, which is a
newly created subdivision lot. As to the house, there are lien waivers as to most of the work
on the house. You show up at the closing and discover that your clients and the builder are
there discussing the project. Your clients are unhappy because the house is not finished, and
a bonus feature the builder promised to build to get the work has not even been started. From
review of the closing statement, you are aware that the remaining undistributed funds in
escrow appear to be less than would be necessary to finish the work. You also note that the
offer to purchase and the construction contract, which are in the closing file, contained no
reference to the bonus feature. You mention that to your clients, and they indicate to you that
they will be paying the builder an extra $2000 outside of the contract funds.