Must a lawyer disclose a 'gross-up' of the purchase price in a residential real estate contract that includes a seller's concession?

Plain-English summary

A local bar association and realtors' association jointly approved a residential sale contract that always included a "Disclosure Clause" stating "The Purchase Price reflects an increase equal to the amount of the Seller's Concession." The clause was added to comply with N.Y. State 882 (2011) and N.Y. State 817 (2007), but the inquirer reported that lenders treated the disclosed gross-up as an "inducement to purchase," causing delays, demands to strike the language, and loan rejections. The inquirer asked the committee to reconsider Opinion 882 and drop the requirement that all seller's concessions be stated as an increase in the purchase price.

The opinion concludes the inquiry rests on a misunderstanding of the prior opinions. Those opinions never required that every transaction with a seller's concession be characterized as a gross-up; they are limited to situations where the purchase price has in fact been grossed up in connection with a concession. What a lawyer must disclose depends on the facts: the relevant duty is the Rule 8.4(c) prohibition on conduct involving dishonesty, fraud, deceit, or misrepresentation. When the parties agree on a price and then increase or "gross up" that price to offset a seller's concession, the lawyer must disclose the gross-up; but when there has been no gross-up because the seller actually bears an economic cost reflected in the concession, the lawyer has no obligation to assert a gross-up and indeed should not "disclose" something known to be inaccurate.

Because the facts vary by transaction, the disclosure obligation varies too. The committee observed that always including the Disclosure Clause is neither required nor appropriate if it misstates the facts in particular cases, and noted an alternate county form with a "Check if Applicable" box as a more fact-sensitive approach (without endorsing specific wording). Addressing the lender pushback, the opinion reaffirmed N.Y. State 892 (2011): a lawyer may not participate in a transaction where a lender's objection precludes the required disclosure. The industry's reaction, it reasoned, confirms the materiality of an undisclosed gross-up rather than undercutting the rule, and a lawyer's wish to avoid complications cannot justify a misrepresentation. The committee adhered to Opinions 882 and 817.

In practice

Under this opinion, a lawyer in a residential transaction with a seller's concession must look at whether the purchase price was actually grossed up to offset that concession. The opinion holds that, under New York's Rule 8.4(c) as it stood at the time, an actual gross-up must be disclosed, while a concession the seller genuinely absorbs does not require any gross-up statement and should not be described as one. A boilerplate clause that asserts a gross-up in every contract can itself produce a misstatement when no gross-up occurred. The opinion also notes a lawyer may not avoid the disclosure duty by remaining willfully blind to a gross-up, though a good-faith failure to disclose facts the lawyer does not know is not a misrepresentation.

Common questions

Q: Does every seller's concession have to be disclosed as a purchase-price increase?

A: No. The opinion concludes the disclosure duty applies only when the price was in fact grossed up in connection with the concession; where the seller actually bears the cost, no gross-up statement is required.

Q: Is it a problem to include a gross-up disclosure clause in every contract?

A: It can be. The opinion concludes that invariably including the clause is not required and is inappropriate where it misstates the facts of a particular transaction, since asserting a gross-up that did not occur is itself a misrepresentation.

Q: What if a lender refuses to accept the gross-up disclosure?

A: The opinion reaffirms N.Y. State 892 that a lawyer may not participate in a transaction where a lender's objection precludes the required disclosure of an actual gross-up.

Q: What if the lawyer does not know whether a gross-up happened?

A: A good-faith failure to disclose unknown facts is not a misrepresentation, but the opinion says a lawyer may not avoid the duty by being willfully blind to the existence of a gross-up (citing Rule 1.0(k) on inferring knowledge from circumstances).

Background and rules framework

The opinion applies New York Rule 8.4(c) (no conduct involving dishonesty, fraud, deceit, or misrepresentation; cf. Model Rule 8.4(c)) and references Rule 1.0(k) (knowledge may be inferred from circumstances; cf. Model Rule 1.0(f)). It builds on a line of New York real estate opinions, N.Y. State 817 (2007), N.Y. State 882 (2011), and N.Y. State 892 (2011), on seller's concessions and gross-ups.

Citations and references

Rules of Professional Conduct:

• New York RPC 8.4(c) (dishonesty, fraud, deceit, misrepresentation; cf. Model Rule 8.4(c))
• New York RPC 1.0(k) (inferring knowledge from circumstances; cf. Model Rule 1.0(f))

Other opinions cited:

• N.Y. State 817 (2007): gross-up of purchase price with a seller's concession must be disclosed
• N.Y. State 882 (2011): disclosure required where a gross-up offsets a concession
• N.Y. State 892 (2011): lawyer may not participate where a lender's objection precludes required disclosure

See also

• NY State Bar Op. 1022: Sellers' Concessions on Tax Forms TP-584 and RP-5217
• NY State Bar Op. 1033: Short-Sale Negotiator Fee and Misrepresentation to the Bank
• NY State Bar Op. 998: Disclosing Client Fraud After a Short-Sale Closing

Source

• Landing page: https://nysba.org/ethics-opinion-993/