At a real estate closing, may a lawyer tell the borrower or lender that an appraisal-rights waiver attached to the mortgage is potentially unenforceable because it is not on the signature page?

Plain-English summary

Under S.C. Code § 29-3-68(b), a mortgagor may waive the right of appraisal, which (if there is a deficiency after foreclosure) would prevent the obligor from reducing the deficiency by having the property appraised. The statute requires the waiver to be on the signature page, but lenders' closing documents often place the waiver elsewhere, raising the prospect that the waiver is unenforceable. The inquiry asked whether the closing attorney must inform the borrower or lender that the attached waiver is potentially unenforceable.

The committee separated two questions. Whether the lawyer is obligated to disclose the potential defect is a standard-of-care question, which the committee said is outside its scope; it noted that advice about anticipatory foreclosure litigation may fall outside the scope of representation for overseeing a real estate purchase, making the duty-to-disclose issue one of standard of care rather than professional conduct. Whether the lawyer may disclose depends on whom the lawyer represents.

Relying on Opinion 09-07, the committee explained that in a standard closing where the borrower chose and retained the lawyer and the lender merely supplied closing instructions, the lawyer does not represent the lender; the lawyer must explain the lender's documents to the borrower but need not ensure the lender protected itself, so the lawyer may disclose the defect to the borrower (without the committee opining whether the lawyer must). If, however, the lender asked the lawyer to draft the loan documents, review them on the lender's behalf, or opine on their sufficiency, it would be reasonable to find the lawyer represents both borrower and lender. In that case, discovery of the defective waiver creates a conflict under Rule 1.7(a)(2): disclosing it would benefit the borrower and harm the lender in future litigation, so the lawyer may not disclose to either party and should advise both to seek new counsel, with the conflict requiring the lawyer's removal as counsel for both.

In practice

The opinion holds that, under South Carolina Rule 1.7(a)(2), a closing lawyer who represents only the borrower (the lender having supplied instructions, per Opinion 09-07) may disclose a potentially defective appraisal-rights waiver to the borrower, while whether the lawyer must disclose is a standard-of-care question the committee does not reach. Where the lawyer also represents or owes duties to the lender, the opinion holds that disclosing the defect would give anticipatory advice to one client adverse to the other, creating a conflict that bars disclosure to either side and requires the lawyer to withdraw and advise both to seek new counsel.

Common questions

Q: Must a closing lawyer tell anyone that the appraisal-rights waiver may be unenforceable?

A: The committee did not decide. It said whether the lawyer is obligated to disclose is a standard-of-care question outside its scope, because anticipatory foreclosure advice may be outside the scope of a purchase closing.

Q: If I represent only the borrower, can I point out the defect?

A: Yes. The committee said that where the borrower retained the lawyer and the lender only supplied instructions (so the lawyer does not represent the lender), the lawyer may disclose the defect to the borrower.

Q: What if I also represent or owe duties to the lender?

A: Then disclosing creates a Rule 1.7(a)(2) conflict. The committee said the lawyer may not disclose to either party and should advise both to seek new counsel, withdrawing as counsel for both.

Q: Why is it a conflict to disclose when representing both sides?

A: Because the discovery benefits the borrower and harms the lender in any future foreclosure litigation; disclosing would be anticipatory advice to one client directly adverse to the other.

Background and rules framework

The opinion interprets South Carolina Rule 1.7(a)(2) (a lawyer may not represent a client where there is a significant risk the representation will be materially limited by responsibilities to another client), which corresponds to Model Rule 1.7. The analysis turns on whom the closing lawyer represents, drawing on Opinion 09-07's framework for determining whether a closing lawyer represents the lender, and on S.C. Code § 29-3-68 governing appraisal-rights waivers. The committee treated the duty-to-disclose question as one of standard of care, not professional conduct.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / SC Rule 1.7(a)(2) (concurrent conflicts; representation materially limited by duties to another client)

Statutes:

• S.C. Code Ann. § 29-3-68 (waiver of appraisal rights in a mortgage; waiver required on the signature page)

Other opinions cited:

• S.C. Bar Ethics Advisory Opinion 09-07: whether a closing lawyer represents the lender or only the borrower

See also

• SC Bar Ethics Op. 09-07: Who the Closing Lawyer Represents
• SC Bar Ethics Op. 10-03: Closing Then HOA Enforcement
• SC Bar Ethics Op. 07-01: Lawyer as Broker and Agent

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-10-05/
• Original PDF: https://www.scbar.org/media/tjmbwbxu/10-05.pdf

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 10-05

SC Rule of Professional Conduct: 1.7

Facts

§29-3-68(b) of the Code of Laws of South Carolina provides that a mortgagor may waive the right of appraisal in a mortgage. If a deficiency exists after foreclosure, the waiver would prevent an obligor from reducing the deficiency by having the property appraised.

The statute requires that the waiver be placed on the signature page. Most lenders provide the documents for closing including the mortgage. The waiver of appraisal rights often appears on a page other than the signature page.

Question

Does closing attorney have an obligation to inform either the Borrower or Lender that the waiver to right of appraisal attached to the mortgage is potentially unenforceable?

Summary

Whether the lawyer may disclose the potential deficiency and to whom depends on the relationship between the lawyer and the parties to the closing. The question of whether a lawyer is obligated to disclose the potential deficiency is a standard of care issue and is outside the scope of this committee. Because Rule 1.4, SCACR Rule 407 does not apply, we do not address this issue further.

Opinion

While the waiver of appraisal does not affect the purchase and closing of residential property, during a foreclosure action the waiver may prevent a Borrower from reducing the deficiency by having the property appraised. (§29-3-68, S.C. Code Ann.). It is the opinion of this Committee that advice related to anticipatory foreclosure litigation may be outside the scope of Lawyer’s representation for purposes of overseeing a real estate purchase and, therefore, whether he must disclose the defect is a question of the proper standard of care, rather than professional conduct.

If, however, the question is whether the Lawyer may disclose to either the Borrower or Lender that the waiver is deficient, the primary determination must be whether the Lawyer represents the Borrower only, or if he represents both Borrower and Lender.

In Opinion 09-07, this Committee determined that a lawyer conducting a standard real estate closing where Borrower has chosen and retained Lawyer and the Lender has merely supplied the closing instructions, Lawyer does not represent the Lender. In such a case, while the Lawyer has an obligation to explain the documents prepared by Lender to the Borrower, Lawyer does not have an obligation to ensure the Lender has properly protected itself in the creation of its documents. Lawyer may therefore disclose the defect to Borrower, but this Committee does not opine whether he “must” disclose as that is a question of the proper standard of care regarding the scope of Lawyer’s representation of Borrower.

If, however, Lender requested that Lawyer draft the loan documents, review the documents on behalf of the Lender to ensure Lender’s interests are protected or otherwise opine on the sufficiency of the loan documents, it would be reasonable to believe the Lawyer represents both Borrower and Lender. At that point, discovery of the defective waiver may generate a conflict in Lawyer’s representation of the parties to the closing.

Rule 1.7(a)(2) addresses an attorney’s obligations when conflicts arise between clients. If the Lawyer represents the Borrower only in a standard real estate closing, he may disclose the deficiency and its potential benefits to Borrower. If, however, Lawyer represents the Borrower and the Lender, or otherwise has a duty to the Lender, he may not disclose the defective waiver to either party, but should advise both to seek new counsel for the closing. Since Lawyer is charged with advising Lender as to its interests, and since Lawyer’s discovery would be beneficial to Borrower and detrimental to Lender in future litigation, the conflict requires Lawyer’s removal as counsel for both parties.

Under Rule 1.7(a)(2), a Lawyer may not represent a client if there is a significant risk that the representation of another client will be materially limited by the lawyer’s responsibilities to the first. In this case, should future litigation arise between Lender and Borrower, the parties would be directly adverse to one another. If the Lawyer represents both the Lender and the Borrower in the closing and notifies either party of the defective waiver, he is essentially giving anticipatory legal advice to one client that is directly adverse to the other. While this Committee believes such anticipatory advice would be outside the scope of his representation, in assisting Lender in the correction of its documents at the closing table, Lawyer would be working directly adversely to the Borrower’s potential future interests against Lender.