87 N.J.L.J. 705
November 5, 1964
OPINION 51
Developer's Attorney
Conflict of Interests
Advertising and Solicitation
Intermediaries
In October 1963 our Supreme Court handed down its decision in
the case of In re Kamp, 40 N.J. 588. The opinion was concerned with
ethical problems arising from the conduct of an attorney
representing the owner of a real estate tract being developed for
residential housing. Since then this Committee has several times
considered related problems. See N.J. Advisory Committee on
Professional Ethics, Opinions 13, 87 N.J.L.J. 1 (1964); 27, 87
N.J.L.J. 97 (1964); 40, 87 N.J.L.J. 281 (1964). Our earlier Opinion
7, 86 N.J.L.J. 405 (1963), quoted in Kamp, did likewise. We are now
presented with a number of further inquiries of like nature posing
issues thought not to have been reached in Kamp or touched upon in
our earlier opinions.
It may be helpful briefly to restate the factual situation
which commonly gives rise to this type of problem. In a typical
instance of this sort a developer will retain an attorney to act
for him who, among other things, will search the title to the
tract, take steps to remove any cloud upon the title, represent the
developer in presenting the proposed subdivision to the local
planning board and do the legal work involved in connection with
preparing for the construction of roads, the introduction of
utilities and the like. Additionally, in such a typical situation,
the attorney, either alone or in company with the developer, will
make arrangements with a financial institution to supply the
developer with funds needed to improve his tract and construct
homes upon it. The lending institution, it is said, as a
prerequisite to supplying construction money, will insist that the
arrangement be such as to result in permanent mortgage loans upon
the individual homes being placed with the institution. The lending
of construction funds is apparently only attractive when coupled
with an assurance that eventually the institution will be able to
add a number of permanent mortgage loans to its investment
portfolio. The arrangements with the lending institutions will also
generally include an understanding that the developer's attorney
will represent the lender in connection with the placing of all
individual mortgage loans on the tract. The most important question
in the field of professional ethics that then arises is as to
whether and under what circumstances the same attorney, now
representing both seller and lender, may also represent an
individual purchaser of a home. That he may do so in disregard of
various canons of professional ethics was made clear in the Kamp
case. It was, however, there noted that it is not per se
objectionable for an attorney to represent both a buyer and seller
in the purchase and sale of a piece of real estate, provided that
full disclosure of the dual representation and of all pertinent
facts is made to both parties, each of whom unequivocally approves
the arrangement. 40 N.J. 588, 595. We believe, however, that
certain important factors are present in the representation of a
real estate developer as described above which do not exist when an
attorney is handling the simple case of a sale and purchase of a
single piece of property.
The first of these arises from the fact that the attorney,
either consciously or unconsciously, will be influenced by a desire
to maintain his economically profitable relationship with the
seller. The developer has more homes to sell, hence more profitable
professional employment for the attorney. The desire to maintain
this relationship will make it difficult in any given case for the
attorney to devote himself to the interests of a buyer with the
same degree of vigor and undivided loyalty which would be the case
were such desire not present. This motivation may very probably
cause the attorney's representation of the buyer to be less
searching, less demanding and in general less effective than would
be the case were the attorney not reluctant to risk the loss of
what for him has become a profitable monopoly.
A second point, interrelated with the first, stems from the
fact that the attorney acquires a very extensive and intimate
knowledge of the developer and of the tract in question as the
result of the work he carries out for the owner. If the developer
will not be able or willing to construct roads as rapidly as is
represented, if a subcontractor is not doing his work well, if
drainage problems exist and have not been solved, if there is a
question as to when and how all utilities will be introduced, if,
as an example only, the masonry foundations of various homes have
proven defective, the attorney in each case will perforce possess
this knowledge. These are only a few of the possibilities. Anyone
who has had direct contact with projects of this sort will be able
to add other examples from his own experience. Undertaking a dual
representation, the attorney will find himself in an impossibly
equivocal position. As representing the seller, he must use all
reasonable and proper means to see that the proposed sale of his
client's property is consummated; as representing the buyer, he has
an obligation to reveal any information which would be of genuine
interest or help to the buyer in determining whether to make the
purchase and in protecting his rights after the contract has been
signed. It is apparent that this twofold obligation cannot be met
in circumstances where the attorney's knowledge embraces any fact,
known to him as the result of his relationship with the seller,
which, if known to the buyer, might influence him to reject the
purchase or to insist upon terms or conditions less favorable to
the seller.
As mentioned above, there is a very definite interrelationship
between these two factors the existence of which we have sought to
emphasize. In general they will not be present in the ordinary
isolated transaction where an attorney represents both buyer and
seller. On the other hand they would seem to be endemic in the
kind of situation we are considering. Accordingly, it seems clear
that unless in any given case these factors for some reason fail to
exist or unless their influence can be minimized to the point of
complete insignificance, they constitute an insurmountable
impediment to the kind of dual representation here being
considered.
In addition to the conflict of interests as between buyer and
seller, a word is in order as to the possible conflict between the
buyer's interests and those of the lending institution, where they
are represented by the same attorney. Justice Proctor's comments
in the Kamp case are pertinent.
A similar situation [one of a conflict of
interest] may occur, for example, when the
buyer of real estate utilizes the services of
the attorney who represents a party financing
the transaction. To the extent that both
parties seek a marketable title, there would
appear to be no conflict between their
interests. Nevertheless, a possible conflict
may arise concerning the terms of the
financing, and therefore at the time of the
retainer the attorney should make clear to the
buyer the potential area of conflict. In
addition, if the buyer's interests are
protected only to the extent that they
coincide with those of the party financing the
transaction, the attorney should explain the
limited scope of this protection so that the
buyer may act intelligently with full
knowledge of the facts. 40 N.J., at page 596.
Again we believe the situation here to be significantly different
from the case where an attorney represents both the purchaser of a
home and the local lending institution that supplies the mortgage
funds. That is very common practice and in general quite
unobjectionable. In the case we are considering, however, the
desire to continue to represent the lender as more homes are sold
in the future will naturally abate the ardor with which the
attorney will strive to secure the best terms for the purchaser.
The wish to maintain existing relationships both with the seller
and the lender will cause the attorney to shy away from the
alternative of seeking to induce all parties to permit the
financing to be placed elsewhere upon more favorable terms, should
this be possible. Only after a very full disclosure to the client
of these possible disabling factors should an attorney already
representing the lender, under circumstances such as these, agree
to accept a retainer from the buyer.
Before turning to specific inquiries relating to this general
subject matter, it will be helpful first to consider a question
which lies close to the heart of ethical problems arising in this
area. Is it objectionable or not for a developer to urge or insist
that mortgages upon individual dwellings shall, at the time of
closing title, be placed with a particular lending institution?
Despite the instinctive distaste that many feel for this newly
emerging commercial practice which seeks to deprive the buyer of
his hitherto unfettered right to choose his own method of
financing, we do not feel that it is legally objectionable per se.
Nor do we feel that an attorney's participation in effecting and
carrying out such an arrangement is unethical. It is now a well
recognized fact that a developer, in the course of constructing new
dwelling units, generates a substantial amount of long-term
investment in the form of individual mortgages placed upon the
homes constructed. This long-term investment is a valuable by-
product of his effort. If preserved and channeled to a selected
lending institution, the developer will receive as an economic quid
pro quo improved terms with respect to his construction financing.
Indeed it has been asserted, as mentioned above, that unless the
developer can assure the lending institution that it will receive
all or most of the permanent mortgages, the developer may be unable
satisfactorily to finance his construction. There would seem to be
no legitimate reason why a developer should not profitably exploit
this long-term investment which his efforts have created. We pause
to note, however, that to compel a purchaser to accept the mortgage
proposed by the seller will often and perhaps in most cases result
in the buyer's losing the benefit of independent representation.
Although we cannot condemn this practice, we do not mean to
encourage it. Wherever feasible or practicable it is believed the
professional should exert such legitimate influence as may be
available to the end that buyers may continue, as they have done in
the past, to make their own mortgage arrangements and so in most
cases come to have the protection of independent counsel. With
these thoughts in mind we turn to a series of collateral but
related questions that have been posed.
1. A mortgage broker, mortgage company or real estate broker
submits an application for a mortgage loan to a bank and requests
that in the event the loan is granted, a particular attorney, on
the bank's list of approved attorneys, be designated to close the
loan. Is the attorney's participation in a transaction of this
nature ethical?
Where the attorney in question has taken no step to secure his
own recommendation, his participation is not objectionable. Where,
however, the attorney solicits his own recommendation, the practice
is unethical.
A seller who solicits buyers to employ an
attorney is touting for the attorney. Canon
27 prohibits an attorney from soliciting
employment through touters. ... In re Kamp,
supra, at page 598.
2. May an attorney represent a developer who makes financing
arrangements with a lending institution which will result in
prospective buyers' being required to secure their mortgage loans
from this institution?
This question has already been answered in the affirmative.
If the developer and the lending institution so agree, then this
arrangement may be followed. In negotiating such an arrangement
the attorney is doing nothing unethical; provided, of course, that
neither he nor the developer does anything to solicit the
attorney's employment by the lending institution in connection with
future individual mortgage loans. Such employment would not in and
of itself be unethical but its solicitation, directly or
indirectly, would constitute a violation of Canons 27 and 35.
3. May the lending institution designate the developer's
attorney as the only attorney permitted to represent it in the
closing of permanent mortgage loans on the tract in question?
Any lending institution is entirely at liberty to select any
attorney it chooses to represent it. There is nothing unethical in
an attorney's representing the developer and at the same time
representing the lending institution with respect to the placing of
individual permanent mortgage loans. Again, as set forth above, we
must assume the designation comes about in such a way as not to
infringe the letter or spirit of Canons 27 or 35.
4. May the purchaser through his own counsel insist that he
be permitted to procure a permanent mortgage from a lending
institution other than that designated by the developer? Failing
in this, may the purchaser's attorney insist that the lending
institution in question permit him to represent it in closing the
permanent mortgage loan with his client?
The purchaser may insist with whatever strength and to
whatever length he pleases that he be allowed to finance his home
elsewhere. Whether he is successful will depend upon his persuasive
efforts. This query involves no ethical problem. As to the second
question, it should go without saying that the purchaser's attorney
may not insist nor may he even suggest that the lending institution
permit him to represent it. This is a flagrant violation of Canon
27. Attorneys are not ethically at liberty to solicit employment.
Drinker, Legal Ethics, 210 et seq.
5. If the developer and the purchaser agree that the latter
may obtain a permanent mortgage loan from a different lending
institution, may the developer require the purchaser to recompense
him for a proportionate amount of what he may have paid his
attorney for handling the construction financing?
As so expressed, there is no ethical question involved. The
seller is at liberty to fix the price at which the property is to
be sold and in so doing to take into account such elements of cost
as he deems proper.
The converse of this question has also been asked, namely,
whether an arrangement between the developer and his attorney,
whereby the latter makes minimal charges or no charges to the
developer for services rendered in preparing the tract for
development, is ethical. In answering this question we must assume
that the reason for the attorney's modest charge is that he hopes
to be recompensed later as he comes to represent various interests
at the time homes are actually sold. This practice violate Canon
35 and is squarely condemned by the Kamp case. At page 598 Justice
Proctor said:
...The respondent permitted Staben to use
him as a tool in the competitive process by
offering the buyer a lower price in return for
his consent to employ respondent.This
commercial exploitation of the professional
services of an attorney mars the essential
dignity of the profession.
6. A developer advertises that "Closing costs are included
in the purchase price." His contract states that:
The cost and disbursements of procuring and placing the mortgage including the fees of mortgagee's attorneys for the preparation of necessary documents, the mortgagee's title search and insurance, credit information and survey, shall be paid by the Seller. It is understood, however, that the Seller agrees to assume the cost of passing of title only if the mortgage originates with the ... Association [naming the institution]. It is recommended that the Purchasers retain counsel to represent their interests at the time of the passing of title.