State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
May an attorney who is also licensed as a real estate broker act in both capacities on behalf of a client in connection with the purchase of real property? If an attorney may act in both such capacities, is it ethically proper for the attorney to enter into a fee agreement with the client whereby the attorney is compensated by either sharing in the real estate broker's commission if the transaction is consummated or at the attorney's usual hourly rate if the transaction is not consummated?
An attorney may ethically act as an attorney and licensed real estate broker in the same transaction. However, the attorney must at all times conform to the standards of both professions and, to the extent that those standards are in conflict, the attorney must at all times conform to the standards of the State Bar of California. As a result, there are substantial risks for the attorney/broker.
Rules 2-101, 2-107, 2-111, 3-102, 4-101, 5-101 and 5-102 of the Rules of Professional Conduct of the State Bar of California.
Section 6068, subdivision (e), of the California Business and Professions Code.
The Committee has been asked whether an attorney may act in a dual capacity as both attorney and licensed real estate broker in connection with the purchase of real property for a client under a fee arrangement which provides for compensation as a broker if the transaction is consummated, or, alternatively, compensation at the attorney's "usual hourly rates" if the transaction is not consummated. The attorney seeks to comply with the terms of rule 5-101 of the Rules of Professional Conduct (avoiding adverse interests) by means of a written agreement in which the client expressly(1) waives the attorney's adverse interest which results from the dual nature of the relationship.1
Historically, attorneys have been prohibited from engaging in dual occupations, at least where both are practiced out of the same office. While myriad reasons have been advanced condemning second activities of lawyers,2 the major concern was that attorneys might use the non-lawyer occupation as a basis for advertising and solicitation, with the rendering of non-lawyer services acting as a "feeder" of clients for the law practice. See, for example, Libarian v. State Bar of California (1944) 5 Cal.2d 314 [153 P.2d 739], involving censure for signposts at the attorney's office listing three lines of services (law, income tax preparation, and notary public). See also former rule 2-104 of the Rules of Professional Conduct (repealed in April, 1979) and former American Bar Association Code of Professional Responsibility, Disciplinary Rule 2-101(e) (repealed in 1980).
The rationale for the historical prohibition of dual occupation has been undercut by the increased constitutional protections afforded lawyers who wish to advertise their services. (See Bates v. State Bar of Arizona (1976) 433 U.S. 50; Ohralik v. Ohio State Bar (1978) 436 U.S. 447; and In the Matter of R.M.J. (1982) __ U.S. ___ [102 S.Ct. 929].) The ethical problem of an attorney's functioning in dual professional or occupational capacities were not addressed directly in the earlier disciplinary cases, because the analysis of those cases stopped at the "advertising" issue.3
The inquirer asks specifically about the ethics of an attorney functioning in the combined role of broker and lawyer, apparently on behalf of a prospective buyer-client. Clearly brokers and lawyers engage in overlapping and closely related functions. Indeed, California Business and Professions Code, section 10153.4, requires evidence of satisfactory completion of a three-semester unit course in the legal aspects of real estate law unless the applicant for a broker's license is a member of the California State Bar. California law thus implicitly recognizes an attorney acting as a real estate broker as an ethical combination of pursuits. See also Business and Professions Code, section 10133,4 and Provisor v. Haas Realty (1967) 256 Cal.App.2d 850, holding that an attorney acting as a real estate broker was not entitled to collect broker's fees unless the attorney also was a licensed real estate broker.5
It also must be recognized that potential clients of the attorney-broker may be sophisticated parties, such as developers, investors or entrepreneurs, either individuals or group entities. For such clients, the services of an attorney-broker may be extremely valuable, providing needed expertise and cost-efficient delivery of professional services in a legally complex area.
Accordingly, we conclude that it is not unethical for an attorney to engage in the dual occupations of attorney and real estate broker in connection with the acquisition of real property on behalf of a client. However, attorneys are cautioned that the practice of dual occupations does create an increased risk of a violation of the Rules of Professional Conduct. As was stated in American Bar Association, Committee on Ethics Professional Responsibility, opinion No. 328, supra:
"It may be impossible to know whether the lawyer's work for another person is performed as part of the practice of law or a part of his [sic] other occupation or profession ....
"In carrying on law-related occupations or professions the lawyer almost inevitably will engage to some extent in the practice of law, even though the activities are such that a layman can engage in them without being engaged in the unauthorized practice of law...
"If the second occupation is so law-related that the work of the lawyer in such occupation will involve, inseparably, the practice of law, the lawyer is considered to be engaged in the practice of law while conducting that occupation. Accordingly. he is held to the standards of the bar while conducting that second occupation." (Emphasis added.)
The activities of a real estate broker are clearly "law related" as contemplated by American Bar Association, Committee on Ethics and Professional Responsibility, opinion No. 328, supra, and an attorney who is acting as a real estate broker in the same transaction must conform to the standards of the bar and the Rules of Professional Conduct in all aspects of such activities.
The qualification just stated is a substantial one, and imposes very real ethical constraints for attorneys pursuing dual professions. For example, an attorney has a duty under Business and Professions Code section 6068, subdivision (e), to maintain inviolate the confidences and preserve the secrets of the client. An attorney has a duty of loyalty to his or her client and may be treated as a fiduciary even though the relationship of others in the second profession is not that of fiduciary; see rule 4-101 of the Rules of Professional Conduct (accepting employment adverse to a client), rule 5-101 of the Rules of Professional Conduct (avoiding adverse interest) and rule 5-102 of the Rules of Professional Conduct (avoiding the representation of adverse interests). Fees set by the lawyer must conform to requirements of rule 2-107 of the Rules of Professional Conduct (fees for legal services) and compensation arrangements must not violate rule 3-102 of the Rules of Professional Conduct (financial arrangements with non-lawyers). And, publicity given to the second occupation and methods of seeking business must conform to rule 2-101 of the Rules of Professional Conduct (professional employment).
The balance of this opinion discusses these ethical constraints.
Business and Professions Code section 6068 provides, in part:
"6068. It is the duty of an attorney . . .
(e) To maintain inviolate the confidences, and at every peril to himself preserve the secrets of his client..."
The practice of dual professions may raise very substantial problems in honoring the duty of confidentiality. For example, like an attorney, a broker may have a fiduciary relationship. Unlike an attorney, this duty may extend to parties which have potentially conflicting interests -- the buyer and seller. Further, specific pieces of information may call for disclosure to both parties under the law governing brokers. For instance, Business and Professions Code section 10232.5 ("Contents of Statement Given to Prospective Lender or Purchaser''), at subsection (b)(4), includes the following requirement: "Information available to the broker relative to the ability of the trustor or vendee to meet his or her contractual obligations under the note or contract including the trustor's or vendee's payment history under the note or contract." (Emphasis added.) It is easy to conjure up a situation where the buyer-client has divulged information to the lawyer indicating a precarious financial situation -- information that might be quite valuable to the seller of the property or to a prospective lender or purchaser of a mortgage note. See, for example, Anderson v. Thatcher (1946) 76 Cal. App.2d 50, 68 [172 P.2d 533]: ([A]n agent acting for adverse principals with the acquiescence of each has a bounden duty to act with fairness to each and must disclose to each all facts which he knows or should know would reasonably affect the judgment of each in permitting such dual agency").
An attorney-broker thus can be caught between conflicting professional obligations, viz., disclosure versus revealing client confidences. Honoring the duty of confidentiality may jeopardize the broker's license, harm the client and expose the lawyer to civil liability. This danger was recognized specifically by the Los Angeles County Bar Association Committee on Legal Ethics, opinion No. 384 (1980), wherein it was stated:
"The risk of such conflict in the situation at hand appears to be particularly great because the attorney, if initially engaged solely as broker, may become privy to information while acting solely as a broker which he would not have obtained if he had acted only as an attorney for one of the parties from the beginning."
Further, because of the broker's key role as facilitator of a transaction, an attorney who is subject to the duty of confidentiality may be placed in the anomalous position of being unable to extricate himself or herself from liability as alder and abettor to a fraud. For example, pending closing of escrow, the attorney may learn that some information concerning the financial condition of buyer contains a mistatement of material fact. In these circumstances the attorney may be required to withdraw pursuant to rule 2-111 of the Rules of Professional Conduct. Withdrawal would probably be inadequate to prevent consummation of the fraud which the attorney, as broker, may have aided and abetted, and section 6068, subdivision (e), of the Business and Professions Code on its face would require the attorney, at "every peril to himself," to maintain the client's secret.6
Accordingly, the attorney may seek to avoid the likelihood of a conflict between the attorney's duty of avoiding conflict and the broker's duty of disclosure. An attorney-broker may advise a client of this potential conflict prior to undertaking representation and could consider that the client waive, in writing, the duty of confidentiality respecting information which the attorney as a licensed broker is obligated by law to disclose. (Maxwell v. Superior Court (1982) 30 Cal.3d 606.)
A closely related problem was addressed in Watt Industries, Inc. v. Superior Court (1981) 115 Cal. App.3d 802, which held that attorney's notes of conversations with his client, the purchaser of a condominium, were not protected under the work product privilege because the attorney was acting merely as a "business agent" for the client. Arguably, communications with the attorney acting as broker would not be subject to the attorney-client privilege, although this result would be inconsistent with the general conclusion that the profession of real estate broker is so law related that an attorney must practice it within the standards of the State Bar.
Rules 4-101 and 5-102 of the Rules of Professional Conduct contain prohibitions against an attorney accepting employment which is adverse to a client, or without disclosing his relationship with an adverse party, or which would represent conflicting interests, without first obtaining the informed and written consent of the client(s).7 Implicit in these rules is the concept that an attorney may not accept dual representation unless he or she can adequately and competently represent the interest of each. See, e.g., Business and Professions Code sections 6067 and 6068, and rule 6-101 of the Rules of Professional Conduct (failing to act competently). It is often difficult in a real estate transaction for a lay customer to identify accurately the interest represented by the broker. In the case put in the inquiry, the attorney is acting as broker for the buyer. Presumably most sellers of real estate will be separately represented or can be effectively advised in writing that the attorney-broker represents only the buyer and that seller should obtain separate representation.
An attorney-broker representing a seller is in a much more difficult position. Such a broker would list and advertise the property for sale and would hold himself or herself open to the general public as ready to facilitate the sale of the property. Potential buyers are as likely as not to be separately represented, and those who are not may expect seller's broker to be able to handle their end of the transaction as well.
An attorney-broker, of course, may not handle both ends of the transaction without complying with rules 4-101 and 5-102 of the Rules of Professional Conduct, at a minimum. And this raises the most difficult question of all -- should an attorney-broker represent both buyer's and seller's interest? While this question can only be answered in a context of a particular transaction, it is difficult to imagine a real estate transaction so simple that an attorney could represent both sides while avoiding the appearance of impropriety. However, under appropriate circumstances, California cases have permitted dual representation where there is full disclosure and informed consent. (See Klemm v. Superior Court (1977) 75 Cal. App.3d 893 [142 Cal. Rptr. 509] (dual representation in uncontested dissolution proceeding where no community property, wife waived child support and joint custody agreed) and cases cited therein.)
Another aspect of the duty of loyalty is addressed in rule 5-101 of the Rules of Professional Conduct, dealing with the circumstances under which an attorney may enter into a business transaction with a client.8 An agreement between an attorney-broker and a client buying real estate clearly is a business transaction subject to rule 5-101 of the Rules of Professional Conduct. Further, the attorney clearly has an adverse interest to the client in that the attorney will receive significantly greater compensation if the transaction closes than if it does not, which might lead the attorney to encourage consummation of the transaction on terms and conditions which the attorney might not endorse. Not only must this conflict be disclosed in writing to the client, the attorney must act scrupulously to insure that all actions taken are in fact in the best interest of the client. The attorney should also recognize that if matters go awry this very conflict may be offered as evidentiary support for a charge of malpractice.
Rule 2-107 of the Rules of Professional Conduct provides that an attorney "shall not enter into an agreement for, charge or collect an illegal or unconscionable fee" and sets forth certain standards for determining the reasonableness of fees. (See also Bushman v. State Bar (1974) 113 Cal.Rptr. 904.)
The fee payable in the circumstance that the transaction is successfully consummated is likely to appear shockingly large when compared to the attorney's normal hourly rate charges. On the other hand, the overall fee arrangement is quite advantageous to the client since the client obtains the services of both an attorney and a broker at no additional cost (indeed, at no cost in most cases where the buyer's and seller's broker split fees payable by the seller). Accordingly, the fee arrangement proposed should not be viewed as objectionable under rule 2107 of the Rules of Professional Conduct. However, the fee arrangement does involve a potential adverse interest to the client (see discussion above) and must be disclosed and consented to in compliance with rule 5-101 of the Rules of Professional Conduct.
Rule 3-102(A) of the Rules of Professional Conduct states that a member of the State Bar ". . . shall not directly or indirectly share legal fees except with a person licensed to practice law . . .". This rule has its origin in American Bar Association Disciplinary Rule 3-102, which is substantially to the same effect, and which is intended to help enforce Canon 3: "A lawyer should assist in preventing the unauthorized practice of law." This rule would not appear to be violated where the attorney-broker acts on behalf of the buyer of real property. No amount which has been paid to a member of the State Bar as "legal fees" will in fact have been shared with a non-member.
Rule 3-102(A) of the Rules of Professional Conduct is much more troublesome in the case where an attorney-broker is representing the seller. The amount paid to the attorneybroker on consummation of the sale, while designated as a real estate commission, is, in fact, paid in part for the performance of legal services. Because all of the activities of the attorney-broker are clearly law related, even though some of the activities could be performed by a licensed real estate broker, the full amount paid must be regarded as a "legal fee" within the meaning of rule 3-102(A) of the Rules of Professional Conduct. It should be noted that the buyer's broker is engaging in a lawful profession. However, care should be taken to avoid the literal stricture of rule 3-102(A) by arranging that the buyer's nonattorney broker is receiving his or her commission directly from the buyer (e.g., the purchase price and the commission paid by seller to its broker may be reduced to offset the amount the buyer pays its own broker).
Finally, an attorney-broker may be prohibited by rule 3-102(A) of the Rules of Professional Conduct from sharing fees received with a salesperson, partner, or any other person who is not a member of the State Bar.
As noted above, attorneys have a judicially sanctioned right to advertise. Advertising of an attorney's dual professional qualifications would likewise be permissible. However, all advertising and solicitation by an attorney-broker must conform to rule 2-101 of the Rules of Professional Conduct and standards adopted by the Board of Governors pursuant thereto.
An attorney who is also licensed as a real estate broker may act in both capacities on behalf of a client in connection with the purchase of real property so long as both professions are pursued within the standards of the State Bar of California. If the attorney is to be compensated by either sharing in the real estate broker's commission, if the transaction is consummated, or at the attorney's usual hourly rate, if the transaction is not consummated, the attorney must comply with rule 5-101 of the Rules of Professional Conduct. Although such compliance may be best achieved by a written fee agreement in which the terms of the transaction are fully disclosed and as to which the client is given a reasonable opportunity to seek other counsel, such waiver may not be effective.9 An attorney acting in both capacities on behalf of a client in connection with the sale of a parcel of real property is likely to encounter great difficulty in conducting both professions within the standards of the State Bar, and is subject to a substantial possibility of violating the Rules of Professional Conduct.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of The State Bar of California. It is advisory only. It is not binding upon the courts, The State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.
1 Rule 5-101 is in discussed footnote 8, below. The adverse interest is that the attorney will receive significantly greater compensation if the transaction closes than if it does not, which might lead the attorney to encourage consummation of the transaction on terms and conditions which the attorney might not endorse if compensated at normal hourly rates.
2 See citations collected in American Bar Association, Committee on Ethics and Professional Responsibility, opinion No. 328 (1972) at page 2.
3 Attorneys are cautioned that, while the historical problems of "general advertising" are resolved by the case authority cited in the text, an attorney still may not engage in personal solicitation of potential clients prohibited by rule 2-101(B) of the Rules of Professional Conduct.
4 California Business and Professions Code, section 10133, states, in part, as follows:
"The definitions of a real estate broker and a real estate salesman as set forth in sections 10131 and 10132, do not include the following:
(c) Services rendered by an attorney at law in performing his duties as such attorney at law."
5 Interestingly, the Provisor court did not even question the ethical nature of such a combination of pursuits.
6 American Bar Association, Disciplinary Rule 4-101(C), which has not been adopted in California, would permit an attorney to reveal
"(3) The intention of his client to commit a crime and the information necessary to prevent the crime.
(4) Confidences or secrets necessary . . . to defend himself or his employees or associates against an accusation of wrongdoing."
Similarly, California Evidence Code section 954 provides that there is no attorney-client privilege if the services of the attorney were sought or obtained to enable or aid anyone to commit or plan to commit a crime or a fraud. The circumstances under which an attorney may reveal a client's intended crimes or torts is beyond the scope of this opinion. See, for example, American Bar Association, informal opinion No. 1314 (1975) (attorney whose client is about to commit perjury must either withdraw from representation or report the misconduct to the court); Meyerhofer v. Empire Fire & Marine Insurance Co. (2d Cir. 1974) 497 F.2d 1190 (corporation's attorney when named as a defendant in a securities fraud may disclose confidential information exculpatory to himself); Commercial Standard Title Co. v. Superior Court (1979) 92 CaI.App.3d 934, 935 [155 Cal.Rptr. 393] (defendants in negligence action may not cross complain against plaintiff's former attorney for negligence, in part because the "attorney had his mouth sealed -- he must preserve his client's secrets inviolate at all peril to himself"); Glade v. Superior Court (1978) 76 Cal. App.3d 738, 745 [143 Cal.Rptr. 119 at 124] (Evidence Code section 956 codifies the common law rule that the privilege protecting confidential communications is lost if the client seeks to perpetuate a crime or a fraud); Comment, The Future Crime or Tort Exception to Communications Privileges, 77 Har. L. Rev. 730 (1964); and Annot., Applicability of Attorney-Client Privilege to Communications with Respect to Contempated Tortious Acts (1965) 2 A.L.R. 3d 861; Levine, Self-Interest or Self-Defense: Lawyer Disregard of the Attorney-Client Privilege for Profit and Protection, 5 Hofstra L. Rev. (1977) 783.
7 Rule 4-101 of the Rules of Professional Conduct provides:
"RULE 4-101. ACCEPTING EMPLOYMENT ADVERSE TO A CLIENT.
"A member of the State Bar shall not accept employment adverse to a client or former client, without the informed and written consent of the client or former client, relating to a matter in reference to which he has obtained confidential information by reason of or in the course of his employment by such client or former client."
Rule 5-102 of the Rules of Professional Conduct provides:
"RULE 5-102. AVOIDING THE REPRESENTATION OF ADVERSE INTERESTS:
"(A) A member of the State Bar shall not accept professional employment without first disclosing his relation, if any, with the adverse party, and his interest, if any, in the subject matter of the employment. A member of the State Bar who accepts employment under this rule shall first obtain the client's written consent to such employment.
"(B) A member of the State Bar shall not represent conflicting interests, except with the written consent of the parties concerned."
8 Rule 5-101 of the Rules of Professional Conduct provides:
"Rule 5-101. AVOIDING ADVERSE INTERESTS.
"A member of the State Bar shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless (1) the transaction and terms in which the member of the State Bar acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in manner and terms which should have reasonably been understood by the client, (2) the client is given a reasonably opportunity to seek the advice of independent counsel of the client's choice on the transaction, and (3) the client consents in writing thereto."
9 We have not here considered the additional risks that may be presented by the dual relationship under rules 2-101, 2-107, 2-111, 3-102, 4-101, 5-101 and 5-102 of the Rules of Professional Conduct.