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.