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Ethics: Ethical Considerations for the Lawyer Acting as a Real Estate Broker

Mon, 12/18/2017 - 09:58 -- admin25

by Kelly B. Gibbons

Lawyers who practice real estate law can potentially wear many “hats.” The most common hat is to represent the buyer or seller in the transaction. A less common hat that lawyers sometimes wear is to serve as a broker in a real estate transaction. While the Texas Occupations Code authorizes lawyers to act as brokers in real estate transactions, ethical pitfalls can arise. There is no attorney-client relationship “where a person hires an attorney in a non-legal capacity.” In re Bivins, 162 S.W.3d 415, 419 (Tex. App.—Waco 2005) (orig. proceeding). Thus, if a lawyer is only acting as a broker in a real estate transaction, his or her communications with their client may not be privileged or confidential, and depending on the specific circumstances, the lawyer could easily violate the Texas Disciplinary Rules of Professional Conduct (TDRPC).

Chapter 1101 of the Texas Occupations Code, known as the Real Estate License Act (RELA), defines a “broker” as a person, who for another person and in exchange for a commission or other valuable consideration, sells or purchases real estate, negotiates the listing, purchase, or sale of real estate, aids in locating real estate for purchase, or undertakes any of the other actions enumerated in the statute. Section 1101.005 of RELA provides that a lawyer licensed in Texas does not need a separate license to act as a real estate broker and can perform (with a few enumerated exceptions) all work that a broker is authorized to do.

Ethical problems can arise when real estate transactions end up in litigation and a party questions whether the other party’s attorney was acting as a broker or as an attorney in the transaction. In In re Rescue Concepts, Inc., --- S.W.3d --- (Tex. App.—Houston [1st Dist.] 2017) (orig. proceeding), the real estate transaction at issue failed to close, and the buyer sought discovery of communications between the seller and its attorney, who also served as the seller’s broker. The seller asserted that the communications were protected from disclosure pursuant to the attorney-client privilege, and the buyer argued that the communications were not privileged because the seller’s attorney was only acting as a broker in the transaction.

In finding that an attorney-client relationship existed between the seller and its attorney, the court (1) scrutinized the engagement agreement and found that the seller and the attorney intended to form an attorney-client relationship and (2) considered the services that the attorney rendered, which a broker could not have, such as negotiating and drafting special contract provisions and discussing litigation strategy. The Court then held that the communications were intended to be kept confidential between the seller and its attorney and were made for the purpose of providing legal services, and the Court conditionally granted the writ of mandamus.

Thus, under the specific facts of Rescue Concepts, the lawyer was able to point to enough evidence to show that she was acting as a lawyer in the transaction and, consequently, her communications with her client were protected by the attorney-client privilege. It is not difficult to see how the outcome may have been different if her engagement agreement had not been as specific as it was or if she had not undertaken the additional work that a broker was not authorized to do under RELA.

Rule 1.05 of the TDRPC defines “confidential information” to include both “privileged information” and “unprivileged client information.” Thus, based on Rescue Concepts, if the client intends to engage the lawyer as both a broker and as a lawyer, to comply with the lawyer’s obligations under Rule 1.05 of the TDRPC to protect the client’s confidential information, the lawyer should ensure that the scope of his or her engagement agreement is broad enough to include the rendition of legal services in connection with the specified real estate transaction. Additionally, the lawyer should explain to the client, and set out in the engagement agreement, the additional work that the lawyer will undertake that is beyond what a broker is authorized to do under RELA.

Conversely, and extrapolating from Rescue Concepts, if the client wishes to retain the lawyer in the capacity as a broker only, the lawyer should consider clearly setting forth in his or her engagement agreement the disadvantages to that employment, such as the potential disclosure of the client’s confidential information. Additionally, the lawyer should consider advising the client to consult with other counsel should the client have any questions about the agreement to engage the lawyer as a broker only.

Kelly B. Gibbons is an associate attorney with Campbell & Associates Law Firm, P.C. She can be reached at kgibbons@cllegal.com.

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