Can a lawyer take part in a home sale where the price is grossed up to match a seller's concession but the gross-up is not disclosed?

Plain-English summary

A seller's attorney had long used contract language disclosing both a $25,000 seller's concession toward the buyer's closing costs and a matching $25,000 increase ("gross-up") in the sale price. In this transaction the lender objected, advising that the contract's disclosure that the price was increased because of the seller's concession "is not allowed." The committee was asked whether a lawyer may participate where the lender objects to disclosure of the gross-up in the contract and HUD-1 Settlement Statement (paragraphs 1 through 3).

The committee answered no, applying Rule 8.4(c), which bars conduct involving dishonesty, fraud, deceit, or misrepresentation. It relied on its prior opinions N.Y. State 817 (2007) and N.Y. State 882 (2011), which held that a seller's concession and a matching gross-up are not improper in themselves, but that the gross-up must be expressly disclosed in the documents reciting the sale price; otherwise it misrepresents the true price. As N.Y. State 882 put it, if a buyer must pay $6,000 to get a $6,000 discount, the true price has not changed, so an undisclosed gross-up is a misrepresentation, and the rule applies equally to the buyer's, seller's, and lender's attorneys (paragraphs 4 through 5).

The committee stressed two points carried over from N.Y. State 882. The fact that the practice is widespread does not authorize participating in the misrepresentation, and the fact that the gross-up was suggested by a mortgage broker or loan officer does not relieve the lawyer of the disclosure duty; if anything disclosure matters more when the lender's own representative encourages it. Because the lender here rejected the required disclosure, the lawyers had actual knowledge that the documents would misrepresent the price (Rule 1.0(k)). The committee concluded that none of the lawyers may participate, and that their best course is to advise the lender that the gross-up is prohibited unless disclosed, and to decline to participate if the lender will not agree (paragraphs 5 through 8).

In practice

The opinion holds that, under New York Rule 8.4(c) as it stood at the time, the problem is not the seller's concession or even the gross-up itself, but the failure to disclose a gross-up that offsets the concession, which misstates the true purchase price. The committee made disclosure in the documents that recite the price the dividing line: with disclosure the transaction is permissible, without it the lawyer is participating in a misrepresentation. It applied the rule identically to buyer's, seller's, and lender's counsel, rejected "everyone does it" and "the lender's agent suggested it" as defenses, and identified the lawyers' course where the lender refuses disclosure as advising the lender of the prohibition and withdrawing from the transaction if the lender will not agree.

Common questions

Q: Are seller's concessions and price gross-ups improper?

A: Not in themselves. The committee, following N.Y. State 817 and 882, said the problem is only a gross-up that offsets the concession and is not disclosed in the documents reciting the price (paragraphs 4 through 5).

Q: The lender won't let us disclose the gross-up. Can I still close?

A: No. The committee held that participating in documents that hide the offsetting gross-up is a misrepresentation under Rule 8.4(c), and no lawyer for buyer, seller, or lender may participate (paragraphs 5, 7 through 8).

Q: Does it matter that the gross-up was the mortgage broker's or loan officer's idea?

A: No. The committee said that does not relieve the lawyer of the disclosure duty, and disclosure may matter even more when the lender's representative encourages the misrepresentation (paragraph 6).

Q: What should I do if the lender objects to disclosure?

A: The committee said the best course is to advise the lender that the undisclosed gross-up is ethically prohibited, and if the lender will not agree to disclosure, decline to participate in the transaction (paragraph 7).

Background and rules framework

The opinion interprets New York Rule 8.4(c) (dishonesty, fraud, deceit, or misrepresentation), which corresponds to ABA Model Rule 8.4(c), together with the definition of "knowingly" and "should know" in Rule 1.0(k). It rests squarely on the committee's prior real estate gross-up opinions, N.Y. State 817 (2007) and N.Y. State 882 (2011), which set the disclosure requirement the present inquiry applies.

Citations and references

Rules of Professional Conduct:

• MR 8.4 / NY Rule 8.4(c): dishonesty, fraud, deceit, or misrepresentation
• NY Rule 1.0(k): definition of "knowingly," "know," and "should know"

Other opinions cited:

• N.Y. State 817 (2007): a gross-up matching a seller's concession must be disclosed to avoid misrepresentation
• N.Y. State 882 (2011): identifying which documents must disclose the gross-up; rule applies to all counsel; widespread practice is no defense

See also

• NY State Bar Ethics Op. 1022: Seller's Concessions on Tax Forms TP-584 and RP-5217
• NY State Bar Ethics Op. 1033: Short-Sale Negotiator Fee and Misrepresentation to the Bank
• NY State Bar Ethics Op. 952: Representing Both Lender and Buyer When the Lender Pays the Buyer's Fees

Source

• Landing page: https://nysba.org/ethics-opinion-892/