At a real estate closing, can the buyer's lawyer who prepares the settlement statement charge the seller (a non-client) a 'payoff handling fee' for transmitting the mortgage payoff?

Plain-English summary

In a South Carolina real estate closing, the buyer is represented by Lawyer A and the seller by Lawyer B. Lawyer A prepares the settlement statement and is responsible for collecting and transmitting the payoff of the seller's existing mortgage. Lawyer A proposed adding a line item, a "Payoff Handling Fee," charged to the seller, in an amount exceeding the actual cost of overnight delivery or the bank's wire fee. The inquiry asked whether Lawyer A may charge the seller (a non-client) such a fee, and whether Lawyer A may instead seek actual reimbursement.

The committee concluded that Rule 1.5(a), which provides that "[a] lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses," does not limit its applicability to a lawyer's own client. The committee noted that of the eight factors listed for determining the reasonableness of a fee, the word "client" appears in only two. In a standard closing, the buyer's attorney typically prepares the settlement statement, listing settlement charges and adjustments on one side or the other. By charging the seller a payoff handling fee, the buyer's lawyer is communicating that the lawyer seeks payment for an in-house service performed in satisfying the seller's obligation, plus reimbursement of related expenses. So long as the amount is not unreasonable considering the time and labor required and the other applicable Rule 1.5 factors, charging it does not violate Rule 1.5.

The committee added that listing a payoff handling fee on the seller's side of the settlement statement only communicates an intention to charge the seller. The buyer's lawyer presumably forwards a copy of the proposed settlement statement to the seller's attorney, and the seller may refuse to sign the settlement statement if the seller does not agree to the fee.

In practice

The opinion holds that, under South Carolina Rule 1.5(a), a buyer's closing lawyer may charge a seller a payoff handling fee that exceeds the bare delivery or wire cost, even though the seller is not the lawyer's client, provided the amount is reasonable under the Rule 1.5 factors. Rule 1.5(a)'s reasonableness limit is not confined to a lawyer's clients. The opinion treats the line item as a communicated intention to charge that the seller, through the seller's own counsel, may decline by refusing to sign the settlement statement. The opinion notes the lawyer may instead seek only actual reimbursement of the delivery or wire expense.

Common questions

Q: Can a closing lawyer charge a fee to someone who is not the lawyer's client?

A: Yes. The committee said Rule 1.5(a) does not limit its applicability to a lawyer's own client; only two of the eight reasonableness factors even mention the client, so a buyer's lawyer may charge the seller a reasonable payoff handling fee.

Q: Does the payoff handling fee have to be limited to the actual delivery or wire cost?

A: No. The committee said the fee may exceed the actual overnight-delivery or wire cost as long as it is not unreasonable considering the time and labor required and the other Rule 1.5(a) factors. The lawyer may alternatively choose to seek only actual reimbursement.

Q: What protects the seller if the seller objects to the fee?

A: The settlement statement. The committee said listing the fee only communicates an intention to charge it; the proposed statement is forwarded to the seller's attorney, and the seller may refuse to sign if the seller does not agree.

Background and rules framework

The opinion interprets South Carolina Rule 1.5(a), which corresponds to Model Rule 1.5(a), barring a lawyer from making an agreement for, charging, or collecting an unreasonable fee or an unreasonable amount for expenses. The analysis turns on the committee's reading that the rule's reasonableness standard applies to charges a lawyer makes generally, not only to charges billed to the lawyer's own client, so a service fee charged to an adverse party at a closing is measured by the same reasonableness factors.

Citations and references

Rules of Professional Conduct:

• MR 1.5 / SC Rule 1.5(a) (no unreasonable fee or expense charge; eight reasonableness factors)

See also

• SC Bar Ethics Op. 06-02: Marked-Up Recording Fees at Closing
• SC Bar Ethics Op. 11-05: Daily-Deal Legal Services

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-11-06/
• Original PDF: https://www.scbar.org/media/grihef1j/11-06.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 11-06

SC Rule of Professional Conduct: Rule 1.5

Facts:

Buyer is represented by Lawyer A. Seller is represented by Lawyer B. As part of the real estate closing transaction, at closing, Lawyer A collects from Seller the mortgage debt payoff amount and is responsible for the transmittal of the payoff of the existing mortgage debt. Lawyer A creates the settlement statement. Lawyer A proposes to create a line item on the settlement statement entitled “Payoff Handling Fee” which is a charge to Seller (who is Lawyer B’s client). The “Payoff Handling Fee” is in excess of the actual cost of an overnight delivery letter package or a wire handling fee charged by Lawyer A’s bank.

Questions:

1. In a real estate closing transaction, is it ethically permissible for Lawyer A to charge a “Payoff Handling Fee” to a person who is not his client, who has not entered into a fee arrangement with Lawyer A, and with whom Lawyer A has no attorney/client relationship?

2. In a real estate closing transaction, is it ethically permissible for Lawyer A to seek actual reimbursement from a person who is not a client, who has not entered into a fee arrangement with Lawyer A, and with whom Lawyer A has no attorney/client relationship?

Summary:

In a standard real estate closing, absent additional facts and circumstances, a buyer’s lawyer preparing a settlement statement may add a reasonable payoff handling fee to the Seller’s side of the statement even though the lawyer has not entered into a fee arrangement nor has an attorney/client relationship with the seller. The lawyer may, alternatively, choose to seek actual reimbursement.

Opinion:

Rule 1.5(a) states that “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” It is important to note that this rule does not limit its applicability to a client. In fact, in listing the eight factors to be considered in determining the reasonableness of a fee, the word “client” appears in only two of them.

In a standard real estate closing in South Carolina, a buyer’s attorney typically prepares the settlement statement. Preparation of the settlement statement involves listing various settlement charges and other adjustments (including, but not limited to, prorated real estate taxes, assessments, title charges, government recording and transfer fees, and additional costs and fees) on one side or the other. In charging the seller a “Payoff Handling Fee,” buyer’s lawyer is only communicating the fact that buyer’s lawyer is seeking payment for a service performed in-house in satisfying an obligation of the seller and/or reimbursement of related expenses. As long as buyer’s attorney has charged an amount that is not unreasonable considering the time and labor required, and has also considered any other applicable factors under Rule 1.5, buyer’s attorney is not in violation of Rule 1.5.

It is important to note that in listing a payoff handling fee on the seller’s side of a settlement statement, buyer’s lawyer has only communicated an intention to charge the seller such a fee. Presumably, buyer’s lawyer has forwarded a copy of the proposed settlement statement to seller’s attorney (as it appears to be the case in the facts above) and seller may refuse to sign the settlement statement if he does not agree to it.