Can a lawyer take part in a home sale where the price is grossed up to match a seller's concession, if every document discloses both the concession and the gross-up?

Plain-English summary

A seller's attorney faced a single-family home contract listing a $306,000 price with a $6,000 "seller's concession," where in reality the seller would not pay the buyer's closing costs. Instead, the price had been "grossed up" by $6,000 so the seller's net was $300,000, and the contract, HUD-1 Settlement Statement, transfer tax return, transfer report, and all other documents disclosed both the seller's concession and the matching gross-up. The lawyer asked whether participating was ethical where every document stating the price disclosed both the increase and that it equaled the concession (paragraphs 1 through 4).

The committee built on N.Y. State 817 (2007), which held that a lawyer may not participate in a transaction with both a seller's concession and a grossed-up price unless the gross-up is disclosed in the transaction documents. The opinion did not condemn concessions or gross-ups themselves; it required disclosure to avoid a misrepresentation about the purchase price. Under Rule 8.4(c) (and its predecessor DR 1-102(A)(4)), it is a misrepresentation for transaction documents to contain an untrue statement of material fact or to omit a material fact in a way that makes the documents materially misleading. Disclosing a concession without disclosing the matching gross-up is a "half-truth," a form of misrepresentation (paragraphs 5 through 8).

The committee distinguished a genuine concession, where the seller actually bears an economic cost (for example, reducing the price by $6,000 to cover a roof repair), from the device here, where the matching gross-up wipes out the concession and leaves the seller's economics unchanged. Quoting LaSalle Bank, N.A. v. Shearon, it described such a "seller's concession" as a misnomer because the seller concedes nothing. An undisclosed gross-up can mislead tax assessors, appraisers, and mortgage investors; the practice being widespread is no defense, and the rule applies equally to the buyer's, seller's, and lender's attorneys. Even where a mortgage broker or loan officer suggests the device, the lawyer is not relieved of the disclosure duty (paragraphs 9 through 12).

Applying these principles, the committee concluded that a lawyer may ethically participate where the gross-up and the concession are expressly and meaningfully disclosed in all documents stating the price, for example by a statement that "the sales price has been increased by a sum equal to the seller's concession." That some lenders may then be unwilling to approve the loan does not change the analysis; whether lenders participate is for them and their regulators. A minority of the committee dissented, taking the view that disclosing the concession alone is sufficient and that the industry is familiar with financing buyer closing costs (paragraphs 13 through 17).

In practice

The opinion holds that, under Rule 8.4(c) as it stood at the time, a lawyer may participate in a residential sale that grosses up the price to offset a seller's concession only if every document stating the price discloses that the price was increased by a sum equal to the concession; without that disclosure, participating is a misrepresentation. The committee located the violation in the half-truth: disclosing a concession while hiding the matching gross-up implies a price reduction that did not occur. It applied the rule identically to the buyer's, seller's, and lender's lawyers, rejected "everyone does it" and "the broker suggested it" as defenses, and noted a dissent that would treat disclosure of the concession alone as enough.

Common questions

Q: Is a seller's concession itself improper?

A: No. The committee stressed that many seller's concessions are legitimate; the problem is a matching gross-up that cancels the concession without disclosure (paragraphs 5, 10).

Q: What disclosure makes participation ethical?

A: Every document stating the price must expressly disclose that the price was increased by a sum equal to the concession, for example "the sales price has been increased by a sum equal to the seller's concession" (paragraph 14).

Q: Does it matter that a lender or broker suggested the gross-up?

A: No. The committee held the lawyer is not relieved of the disclosure duty even when a broker or loan officer suggests it, and noted disclosure may matter more there (paragraph 12).

Q: Which lawyers does the rule reach?

A: It applies equally to the buyer's attorney, the seller's attorney, and the lender's attorney (paragraph 10).

Background and rules framework

The opinion interprets New York Rule 8.4(c) (conduct involving misrepresentation), with reference to Rule 1.0(k) (the "should know" standard), corresponding to ABA Model Rule 8.4. The analysis follows the committee's earlier opinion N.Y. State 817 (2007) and treats an undisclosed gross-up as a material half-truth about the purchase price.

Citations and references

Rules of Professional Conduct:

• MR 8.4 / NY Rule 8.4(c): conduct involving misrepresentation
• NY Rule 1.0(k): the "knows" and "should know" standard

Cases:

• LaSalle Bank, N.A. v. Shearon, 23 Misc. 3d 959, 881 N.Y.S.2d 599 (Sup. Ct. Richmond Cty. 2009), a "seller's concession" used with an offsetting gross-up is a misnomer
• U.S. Express, Inc. v. Intercargo Ins. Co., 841 F. Supp. 1328 (E.D.N.Y. 1994), a failure to disclose can be as much a misrepresentation as a false statement

Other opinions cited:

• N.Y. State 817 (2007): a lawyer may not participate in a concession-plus-gross-up transaction unless the gross-up is disclosed
• New Jersey Opinion 710 (2006) and its clarifications: consistent with N.Y. State 817

See also

• NY State Bar Ethics Op. 892: Lawyer's Participation in a Residential Real Estate Transaction
• NY State Bar Ethics Op. 1033: Short-Sale Negotiator Fee and Misrepresentation to the Bank

Source

• Landing page: https://nysba.org/ethics-opinion-882/