Can a real estate lawyer privately finance the purchase and construction of a home for a contractor client the lawyer regularly represents?

Plain-English summary

A lawyer who practices mainly real estate law regularly handled closings for a general contractor client, including purchases and construction loans. The lawyer had an opportunity to finance the purchase and construction of one of the homes the contractor wanted to build, using a construction loan with a lender and the lawyer's own funds. The lender knew the lawyer was providing the financing, the contractor would have his own attorney, the contractor would sign an affidavit that the lawyer did not represent him in the transaction, and a loan agreement would govern disbursements and costs.

The committee concluded the lawyer may enter the contract, provided he complies with Rule 1.8(a). The rule generally prohibits business relationships with clients but permits a business transaction with a client when: (1) the transaction is fair and reasonable; (2) the terms are fully disclosed and transmitted in writing in a manner the client can reasonably understand; (3) the client is given a reasonable opportunity to seek the advice of independent counsel; and (4) the client consents in writing.

Applying the rule, the committee found the facts appeared to satisfy each requirement: assuming the loan agreement is fair and reasonable, it would govern disbursements and costs; the contractor would have independent counsel; and the contractor would sign an affidavit acknowledging the lawyer did not represent him. The committee noted the facts did not expressly say so but assumed the affidavit would provide overall consent to the transaction. It cited Ethics Advisory Opinion 97-34, which allowed a lawyer to contract with a residential contractor to build the lawyer's home while representing the contractor in a divorce, so long as Rule 1.8(a) was met.

In practice

Under this opinion, on the facts presented, a lawyer's private financing of a regular client's project was permissible because it appeared to meet each Rule 1.8(a) requirement: a fair and reasonable loan agreement governing disbursements and costs, independent counsel for the contractor, an affidavit that the lawyer did not represent the contractor in the deal, and the committee's assumption that the affidavit would supply written consent to the transaction. The committee framed the conclusion conditionally ("appears to comply"), tying it to satisfaction of all four Rule 1.8(a) elements.

Common questions

Q: Can I do a business deal with a client I regularly represent?

A: Yes, if Rule 1.8(a) is satisfied. The committee held a lawyer may finance a contractor client's home provided the four Rule 1.8(a) requirements are met.

Q: What does Rule 1.8(a) require?

A: A fair and reasonable transaction; full written disclosure of terms the client can understand; a reasonable opportunity for the client to consult independent counsel; and the client's written consent.

Q: Does the client having his own lawyer satisfy the rule by itself?

A: It addresses the independent-counsel element, but the committee looked at all four requirements together, including written disclosure of fair terms and written consent.

Background and rules framework

The opinion applies South Carolina's version of Model Rule 1.8(a) (business transactions with a client), set out at S.C. App. Ct. R. 407. It relies on SC Ethics Advisory Opinion 97-34 as a prior application of the same rule to a lawyer contracting with a contractor client.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / SC Rule 1.8(a) (business transactions with a client), S.C. App. Ct. R. 407

Other opinions cited:

• SC Ethics Advisory Opinion 97-34 (lawyer contracting with a residential contractor client under Rule 1.8(a))

See also

• ABA Formal Op. 00-416: Purchase of accounts receivable from a client
• SC Bar Ethics Op. 04-11: Sharing one office between a law practice and the lawyer's other business

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-05-02/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 05-02

RULE 1.8(a)

Facts
Attorney is mainly involved in the practice of real estate law with a client who is a General Contractor and for whom Attorney frequently handles closings. These closings may be for the purchase of real estate or for construction loans.

Attorney has the opportunity to finance the purchase and construction of one of the homes that Contractor would like to build. The lender has full knowledge that Attorney would be providing the financing for the home through a construction loan with the lender and the use of Lawyer’s own funds (either through bank accounts or a home equity draw). Contractor will have his own attorney for the transaction. He will sign an affidavit acknowledging that Attorney does not represent him in this transaction. There will be a loan agreement as to the disbursement of funds and responsibility for costs.

Question
Is the proposed business transaction permissible under the South Carolina Rules of Professional Conduct?

Summary of Opinion
Attorney may enter into a contract to finance the purchase and construction of a home with his client, Contractor, provided Attorney complies with the requirements of Rule 1.8(a).

Opinion
Rule 1.8(a) of the South Carolina Rules of Professional Conduct generally prohibits entering into business relationships with clients. Nevertheless, an attorney is not prohibited from entering into a business transaction with a client if: (1) the transaction is fair and reasonable; (2) the transaction and terms are fully disclosed and transmitted in writing to the client in a manner which can reasonably be understood by the client; (3) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and (4) the client consents thereto in writing. Rule 1.8(a)(1) – (3), S.C. App. Ct. R. 407.

Under the facts presented, it appears that Attorney has fulfilled all the requirements delineated in Rule 1.8(a). First, assuming the loan agreement is fair and reasonable, the loan agreement will govern the disbursement of funds and the responsibility for costs. Second, Contractor will have independent counsel for the transaction. Finally, Contractor will sign an affidavit acknowledging that Attorney does not represent him in this transaction. While the facts do not expressly say so, the Committee also assumes that Contractor’s affidavit will provide overall consent for this transaction. Therefore, the proposed business transaction appears to comply with Rule 1.8(a). See also Ethics Advisory Opinion 97-34 (opining that an attorney could permissibly enter into a contract with a residential contractor to build a home for the attorney where the attorney currently represented the contractor in a divorce, so long as the attorney complied with Rule 1.8(a)).