In a standard residential real estate closing where the borrower retains the lawyer, does the lawyer also represent the lender, and does following the lender's closing instructions create an attorney-client relationship with the lender?

Plain-English summary

A lawyer conducts a standard real estate closing after being chosen and retained by the borrower, who is financing the purchase with a loan. The lender typically sends a loan package with closing instructions the lawyer is expected to follow. The lawyer asked whether, in a standard closing where the borrower retains the lawyer, the lawyer should assume he also represents the lender (and so must comply with Rule 1.7), whether he is actually representing both, and whether the lender's requirement that he follow the closing instructions creates an attorney-client relationship with the lender.

The committee concluded that, absent additional facts, the lawyer does not represent the lender. The mere supplying of closing instructions does not by itself create an attorney-client relationship with the lender or a significant risk that the borrower's representation will be materially limited by responsibilities to the lender, so Rule 1.7(a) does not apply. Citing Doe v. McMaster, the committee noted the Rule 1.7 concerns are "only applicable when there is a business relationship between Lender and the attorney," and no such relationship exists when the lawyer is not engaged by the lender, did not draft the lender's closing package, and did not provide the lender a legal opinion on the documents.

The committee, drawing on its prior opinions, cautioned that who a lawyer represents in a residential closing has not been clearly resolved in South Carolina and that protecting an unsophisticated buyer/borrower is of paramount concern. As noted in Opinion 02-16, a lawyer's involvement on behalf of one party does not necessarily mean the lawyer represents another, but a lawyer "may create an attorney-client relationship when the lawyer volunteers to provide a legal explanation of the various documents involved in the settlement of" a loan to another party (see also Opinion 00-17). Still, a lawyer's promise to ensure the lender's package is executed per the lender's instructions does not automatically create an attorney-client relationship with the lender. Citing Opinion 91-03 and Glover v. Libman, the committee said the focus is on the subjective expectations of the would-be client, and an institutional lender that supplies a pre-determined package with execution instructions typically has no subjective expectation that the lawyer is representing it. The committee defined a "standard real estate closing" as a residential closing where the borrower chose and retained the lawyer and a sophisticated institutional lender provides financing through a pre-prepared loan package forwarded for execution; the lawyer must explain the lender's documents to the borrower, but the lender's instruction to ensure proper execution does not by itself create an attorney-client relationship with the lender. A different conclusion would follow if the lender asked the lawyer to review the documents to protect the lender's interests or to draft or opine on the sufficiency of the note, mortgage, and other loan documents. Where a reasonable basis exists to believe the lawyer represents both the borrower and the lender, or that a party does not fully understand the situation, the lawyer should comply with Rule 1.7 and Rule 4.3.

In practice

The opinion holds that, under the South Carolina rules as they stood at the time, a lawyer retained by the borrower in a standard residential closing does not represent the lender, and following the lender's closing instructions does not by itself create an attorney-client relationship with the lender or trigger Rule 1.7(a). The committee tied the lender-as-client question to whether a business relationship exists (the lawyer being engaged by the lender, drafting its package, or opining on its documents) and noted that protecting an unsophisticated borrower is the paramount concern. It directed that if the lender asks the lawyer to review, draft, or opine on the loan documents to protect the lender, or if a reasonable basis exists to think the lawyer represents both parties or that a party misunderstands the situation, the lawyer should comply with Rule 1.7 and Rule 4.3.

Common questions

Q: Does a lawyer retained by the borrower also represent the lender at closing?

A: No, absent additional facts. The committee concluded that supplying closing instructions does not by itself make the lender a client or trigger Rule 1.7(a).

Q: When would a lawyer be found to represent the lender?

A: The committee said a different conclusion follows if the lender asks the lawyer to review the documents to protect the lender's interests, or to draft or opine on the sufficiency of the note, mortgage, and other loan documents, creating a business relationship.

Q: What determines whether an attorney-client relationship with the lender formed?

A: The committee said the focus is on the lender's subjective expectations; an institutional lender that supplies a pre-prepared package with execution instructions typically has no expectation that the lawyer is representing it.

Q: What should the lawyer do if it is unclear who he represents?

A: The committee said that where a reasonable basis exists to believe the lawyer represents both parties, or that a party does not fully understand the situation, the lawyer should comply with Rule 1.7 (conflicts) and Rule 4.3 (dealing with an unrepresented person).

Background and rules framework

The opinion interprets South Carolina Rule 1.7 (concurrent conflicts of interest), specifically Rule 1.7(a) on significant risk of material limitation, and Rule 4.3 (dealing with an unrepresented person), which correspond to the like-numbered Model Rules. The analysis turns on whether an attorney-client or business relationship with the lender exists and on the lender's subjective expectations, against the backdrop of South Carolina's concern for protecting unsophisticated borrowers.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / SC Rule 1.7, 1.7(a) (concurrent conflict; significant risk of material limitation)
• MR 4.3 / SC Rule 4.3 (dealing with an unrepresented person)

Cases:

• Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (S.C. 2003), Rule 1.7 concerns apply only where a business relationship exists between lender and attorney
• Glover v. Libman, 578 F. Supp. 748 (N.D. Ga. 1983), attorney-client relationship turns on the would-be client's subjective expectations

Other opinions cited:

• S.C. Bar Ethics Advisory Opinions 02-16, 00-17, 91-03, and 06-11 (who a lawyer represents in a residential real estate closing)

See also

• SC Bar Ethics Op. 09-01: Closing-Only Lawyer's Duties
• SC Bar Ethics Op. 06-11: Seller-Only Mail-Away Closing
• SC Bar Ethics Op. 05-18: Limited-Scope Closings

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-09-07/
• Original PDF: https://www.scbar.org/media/kpob51kc/09-07.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 09-07

SC Rules of Professional Conduct: 1.7, 4.3

Facts

Lawyer is conducting a standard real estate closing after being chosen and retained by the Borrower. Borrower is financing the purchase with a loan from Lender. Lender typically sends Lawyer a loan package with closing instructions that Lawyer is expected to follow.

Question

In a standard real estate closing where Borrower retains Lawyer, should Lawyer assume that Lawyer is representing the Lender as well such that Lawyer should comply with the requirements of Rule 1.7? Under the facts above, is Lawyer representing both the Borrower and the Lender? Does Lender’s requirement that Lawyer follow Lender’s “closing instructions” create an attorney-client relationship with Lender?

Summary

In a standard real estate closing where Borrower has chosen and retained Lawyer, absent additional facts and circumstances, Lawyer does not represent the Lender. The mere supplying of closing instructions by a Lender to Lawyer does not, in and of itself, create an attorney-client relationship between Lender and Lawyer nor create a significant risk that Lawyer’s representation of Borrower will be materially limited by Lawyer’s responsibility to Lender. As such, the requirements of Rule 1.7(a) do not apply.

Opinion

In Doe v. McMaster, 355 S.C. 306, 585 S.E 2d 773, (2003), the Court noted that the ethical concerns contemplated by Rule 1.7 are, “only applicable when there is a business relationship between Lender and the attorney.” A business relationship does not exist when Lawyer is not employed or engaged by Lender, has not drafted Lender’s closing package, and has not provided a legal opinion to Lender on the quality or legitimacy of the documents contained in Lender’s closing package.

Case law and the prior opinions of this Committee have consistently pointed out that an attorney-client relationship can be created in a variety of situations. In Ethics Advisory Opinion 06-11, we state the following caution: “The issue of who lawyers represent in a residential real estate closing has not been clearly resolved in South Carolina and caution should be taken.” That being said, it is clear in the case law and our prior opinions that the protection of an unsophisticated buyer/borrower is of paramount concern.

As noted in Ethics Advisory Opinion 02-16, a lawyer’s involvement in a real estate closing on behalf of one party does not necessarily mean that the lawyer is also representing another party at closing, however, “a lawyer may create an attorney-client relationship when the lawyer ‘volunteers to provide a legal explanation of the various documents involved in the settlement of’ a loan” to another party. In other words, it is possible for a lawyer representing a lender to also create an attorney-client relationship with a buyer even where the lawyer specifically notified the buyer that he was only representing the lender. (See also, Ethics Advisory Opinion 00-17). Does a lawyer’s promise to ensure that a lender’s loan package is executed in accordance with lender’s instructions automatically create an attorney-client relationship between the attorney and lender? The answer is ‘no’.

As noted in Ethics Advisory Opinion 91-03, “other courts have said ‘in determining whether an attorney-client relationship existed..., the focus must be on the subjective expectations’ of the would-be clients, ‘such that their individual belief and reliance are safeguarded.’ Glover v. Libman, 578 F. Supp. 748 (N.D. Ga. 1983).” In a standard real estate closing, a lawyer may reasonably conclude that an institutional lender does not have any subjective expectation that the lawyer is providing legal representation to lender. In fact, a lender typically supplies its documents in the form of a pre-determined package with instructions on how its forms are to be executed. The lawyer is not supplying any legal advice to the lender.

A “standard real estate closing” means a residential real estate closing where Borrower has chosen and retained Lawyer and a sophisticated institutional Lender is providing financing evidenced by a loan package prepared in advance by the Lender and forwarded to the closing attorney for execution. While the Lawyer has an obligation to explain the documents proffered by Lender to the Borrower, Lender’s instructions that Lawyer ensure that its documents be properly executed does not, in and of itself, create an attorney-client relationship between Lender and Lawyer.

A different conclusion would be reached if Lender requested that Lawyer review the documents on behalf of the Lender to ensure Lender’s interests are protected or if Lender requested Lawyer to draft or opine on the sufficiency of the note and mortgage and other loan documents.

In those instances where a reasonable basis exists for a lawyer to believe that the lawyer represents both the borrower and the lender or that a party to the closing does not fully understand the situation, lawyer should take the appropriate steps to comply with Rule 1.7, Conflict of Interest and Rule 4.3, Dealing with Unrepresented Person.