Can a law firm lease office space from a nonlawyer landlord where the rent is a percentage of the firm's gross receipts?

Plain-English summary

A law firm asked whether it could lease office space from a nonlawyer landlord on terms where the rent was the greater of a specified minimum or a percentage of the firm's gross receipts. The Committee concluded the percentage arrangement was impermissible.

Because a law firm's gross receipts are normally predominantly legal fees, the Committee reasoned, a percentage-of-gross-receipts rent constitutes an arrangement for sharing legal fees. Rule 5.04(a) states the general rule that a lawyer or firm shall not share or promise to share legal fees with a nonlawyer, and the three exceptions in Rule 5.04(a) do not reach a commercial lease between a tenant firm and a nonlawyer landlord. Although percentage leases are common for commercial property generally, the fee-sharing prohibition makes them impermissible for lawyers.

The Committee noted it had reached a similar conclusion under the prior Texas Code of Professional Responsibility in Opinion 377. It explained that a percentage rental would create an incentive for the landlord to refer legal business to the firm, the kind of situation Rule 5.04(a) is meant to prevent; quoting Comment 1, the principal reasons for the limitations are to prevent lay solicitation of clients for lawyers and to avoid encouraging or assisting nonlawyers in the practice of law.

Currency note

This opinion was issued in 1990, under the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990. Texas did not adopt the ABA's Ethics 2000 revisions; its rules have been amended only piecemeal since, including the comprehensive 2021 revisions adopted by Texas Supreme Court order. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a law firm pay rent as a percentage of its gross receipts to a nonlawyer landlord?

A: The Committee concluded no. Since gross receipts are predominantly legal fees, percentage rent is sharing legal fees with a nonlawyer, which Rule 5.04(a) prohibits.

Q: Do the Rule 5.04(a) exceptions allow a percentage lease?

A: Per the opinion, no. The three exceptions in Rule 5.04(a) do not apply to a commercial lease between a tenant firm and a nonlawyer landlord.

Q: Why does the rule treat percentage rent as a problem?

A: The Committee explained that percentage rent would give the landlord an incentive to refer legal business to the firm, which Rule 5.04(a) is intended to prevent.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 5.04(a) (professional independence; prohibition on sharing legal fees with a nonlawyer; ABA Model Rule 5.4(a)) and its Comment 1. The analysis characterizes percentage-of-gross-receipts rent as fee sharing because a firm's receipts are predominantly legal fees, and grounds the prohibition in preventing lay solicitation and assistance to nonlawyer practice.

Citations and references

Rules of Professional Conduct:

• MR 5.4(a) (sharing legal fees with a nonlawyer)
• Texas Disciplinary Rule 5.04(a) and Comment 1

Other opinions cited:

• Tex. Ethics Op. 377: reaching a similar conclusion on percentage rent under the prior Texas Code of Professional Responsibility

See also

• TX Ethics Op. 493: Limited Liability Partnership With Nonlawyer Professionals
• TX Ethics Op. 481: Financing Client Legal Fees Through a Finance Corporation
• TX Ethics Op. 483: Charging Interest on Client Loans and Referrals to a Lawyer's Own Loan Company

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-467/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_467.pdf

Original opinion text

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

QUESTION PRESENTED

May a law firm enter into a lease of office space with a nonlawyer landlord under the terms of which rent equals the greater of a specified minimum rental or a percentage of the law firm's gross receipts?

DISCUSSION

A lease arrangement in which a nonlawyer landlord may receive as rent a percentage of a law firm's gross receipts constitutes an arrangement for the sharing of legal fees since normally a law firm's gross receipts are predominantly legal fees.

Rule 5.04(a) of the Texas Disciplinary Rules of Professional Conduct (the "Disciplinary Rules") states the general rule that "[a] lawyer or law firm shall not share or promise to share legal fees with a non-lawyer . . . ." Three specific exceptions to this general rule are set forth in Rule 5.04(a), but none of the exceptions applies to a commercial lease between a tenant law firm and a nonlawyer landlord.

Although percentage lease arrangements are common in leases of commercial property, the general prohibition on a lawyer's sharing legal fees with nonlawyers makes such arrangements impermissible for lawyers. A similar conclusion under the previously applicable Texas Code of Professional Responsibility was reached in Texas Professional Ethics Committee Opinion 377 (published in the January 1975 Texas Bar Journal). A percentage rental agreement is prohibited for lawyers because an arrangement under which a nonlawyer landlord could receive a percentage of legal fees earned by a law firm would create an incentive for the landlord to refer legal business to the law firm. Rule 5.04(a) is intended to prevent such a situation: "[T]he principal reasons for these limitations are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting nonlawyers in the practice of law." Comment 1 to Rule 5.04(a) of the Disciplinary Rules.

An office lease arrangement with a nonlawyer landlord in which a law firm agrees to pay rent that may be an agreed percentage of the law firm's gross receipts constitutes an agreement to share legal fees with a nonlawyer in violation of Rule 5.04(a) of the Disciplinary Rules.

CONCLUSION

An office lease arrangement with a nonlawyer landlord in which a law firm agrees to pay rent that may be an agreed percentage of the law firm's gross receipts constitutes an agreement to share legal fees with a nonlawyer in violation of Rule 5.04(a) of the Disciplinary Rules.

Tex. Comm. On Professional Ethics, Op. 467 (1990)