Staying Out of the Conflict Zone – Recognizing and Reacting to Conflicts of Interest in Real Estate Transactions
During the course of a real estate retainer, it can be easy for a lawyer to lose sight of what constitutes a conflict of interest, as well as what one should do to avoid its pitfalls and consequences.
Simply stated, a conflict of interest arises when the lawyer’s duties to a client are compromised by something or someone else. While this may seem completely straightforward, actual or potential conflicts of interest may not be as readily apparent in day-to-day practice.
The following are fictional scenarios, loosely based on real situations where the lawyer should have been on guard for conflicts of interest:
Mom and Dad are retired, and own a mortgage-free home as joint tenants. Their son has arranged, with the help of a mortgage broker, a substantial private mortgage on the home in order to fund his new business venture. The son brings Mom and Dad to the solicitor’s office to sign closing documents. The son appears very eager to have the transaction closed, but Mom and Dad appear hesitant.
Husband and Wife are wealthy, and own a number of residential properties to which title is held in both their names. The Wife is an executive at a large company who travels often for business, and the Husband is a stay-at-home parent. The Husband is a long-time client of the solicitor, and brings a firm agreement to sell one of their properties. The Husband instructs the solicitor to use the majority of the sale proceeds to pay off a number of his credit card debts and unsecured lines of credit. The transaction is closing soon, and the Husband advises that the Wife is in town for a brief visit, and only available to meet tomorrow morning.
Both scenarios should cause an immediate response from the solicitor. In Scenario 1, there seems to be an imbalance of power between the son and his parents. The son’s proactive approach to arranging the mortgage gives rise to the belief that he may be exerting a significant degree of influence over the mortgaging of his parents’ home; this is also borne out by the fact that the proceeds of the mortgage will be used for the son’s purposes. In this scenario, the solicitor’s duty to Mom and Dad is being adversely affected by a third person, their son.
Scenario 2 is different, but not any less serious. In this case, it appears that the Wife may be vulnerable not because of any lack of sophistication on her part, but because she has a busy career, and as a result, the family’s personal and financial matters are the domain of the Husband. While both Husband and Wife own the property being sold, the solicitor has been instructed to use the majority of the sale proceeds to discharge personal debts of the Husband, possibly to the complete ignorance of the Wife. In this case, the solicitor’s duty to the Wife is being materially affected by a duty to another client, the Husband. While the solicitor may feel confident about the Husband’s instructions because he is a long-time client, the appropriate steps must still be taken to deal with this conflict of interest. Fraudsters often prey on the trust built with a solicitor through personal connections, professional referrals, and ongoing business relationships.
Risk management and action steps
To ensure that all of these clients have provided their informed consent to the transactions, and before taking any further action, the solicitor should insist that Mom and Dad in Scenario 1, and the Wife in Scenario 2, obtain independent legal advice from another solicitor with no connection to the matter or any of the parties.
As with any matter, it is imperative for the solicitor to get acquainted with the parties and the deal. In Scenario 1, the solicitor should ensure that instructions are coming directly from Mom and Dad (without any coaching from their son). The solicitor should bear in mind that if the mortgage transaction closes, the mortgage proceeds must be paid only to Mom and Dad, who own the property. Whether they choose to fund their son’s business venture, and to what degree, is up to them alone.
In Scenario 2, the solicitor should make clear to both Husband and Wife that there is a joint retainer, as defined in Rule 3.4-5 of the Law Society of Ontario’s Rules of Professional Conduct. The solicitor should also have regard for Rule 3.4-6, which deals with situations where a lawyer has a continuing relationship with a client for whom the lawyer acts regularly. In the joint retainer, no information regarding the matter received from one client (such as how the sale proceeds will be used) may be kept confidential from the other. If a conflict develops that cannot be resolved, the solicitor may have to withdraw from representing either client.
The scenarios presented are just two out of a multitude of possible fact patterns that could arrive at the doorstep of any real estate practice, even as late as the date of closing. A smart real estate lawyer should be fully aware of the circumstances of the transaction and diligent in taking instructions; remain mindful of whether a conflict of interest exists or may develop over the course of a retainer; insist on clients obtaining independent legal advice where there is a possibility of a conflict of interest, and remember to document all discussions.
By Leo Law, TitlePLUS Underwriting Counsel