A real estate lawyers client list frequently includes financial institutions, individuals, partnerships, closely-held corporations, associations, and real estate investment trusts. The disciplinary rule that governs the relationship with all of these clients, except the individual, is Rule 1.12, Texas Disciplinary Rules of Professional Conduct (hereinafter referred to as the Texas Rules) and Rule 1.13, Model Rules of Professional Conduct (hereinafter referred to as the Model Rules). This Rule states that when a lawyer is employed or retained by an entity, the lawyer works for the entity. The Rule seems simple enough, and case law in the area generally supports the theory that the attorneys duty is to the entity and not the individuals.1 There are, however, cases that hold differently.2 At the end of the day, the transaction lawyer is left with 2 conclusions: First, the entity theory generally works in the context of a large publicly held corporation. Second, the attorneys actions are going to be evaluated on a case by case basis. Legal assistants that work with real estate attorneys who represent only large institutional investors and large financial institutions probably will not find this article as helpful as those who work with attorneys whose practice frequently consists of the following scenario:

The lawyers long-time client, Jim Jones, brings in his good friend, Sam Smith, and asks the lawyer to draw up a partnership agreement for the two of them. After the partnership is formed, the lawyer negotiates the purchase and sale agreement for the partnership to acquire a shopping center. He then drafts and negotiates the lease with the anchor tenant.

In this context, Sam Smith may well think of himself as the client of the lawyer. As long as the shopping center is a success and the partnership is making money for both Jim and Sam, the question probably will never come up. However, when the shopping center is not producing enough cash flow to pay debt service on the full recourse loan and Sam Smith discovers that as a general partner in the partnership he is personally liable for repayment of the loan, Sam Smith may ask his lawyer how the lawyer let them get into this mess. If an attorney-client relationship does exist between the lawyer and Sam Smith, the lawyer owes Mr. Smith a duty of care, loyalty, confidentiality, and communication.3 These duties may be enforced in a court of law or through a disciplinary proceeding. If the lawyer breaches one or more of these duties and is very lucky, he will merely be fired by the client. The usual remedy, however, is a malpractice claim. Once the claim gets to court, the lawyer loses more often than not. It is, therefore, important for the lawyer to practice defensive lawyering.

The attorney-client relationship comes into existence when the client consents. The emphasis on the word client is intentional. Lawyers generally think of the relationship beginning when the lawyer accepts. What they forget is that the relationship can be implied.4 When that is coupled with the natural tendency of lawyers to share their opinions on just about any subject with anyone who will listen, the first area of vulnerability is evident. The lawyer should beware of the casual conversation he has with his neighbor about the problems the neighbor is having with the contractor that is re-modeling his kitchen!5

As stated above, certain duties attach even in situations where the attorney declines representation after meeting with the potential client. These duties include (i) maintaining any confidences the lawyer obtains; (ii) avoiding existing and future conflicts; and (iii) advising the potential clients of any deadlines, if applicable. The beauty contest now used by many organizations, has added an additional dimension to the problems associated with the consultation.

The prospective client may provide a bid package upon which the various firms are requested to submit a written response. The prospective client selects those firms it desires to interview personally from the group of firms submitting the written responses. In the alternative, the prospective client may proceed directly to personal interview. Topics typically discussed at the personal interview include fee arrangements, the firms prior experience relevant to the proposed engagement, how the firm proposes to staff the engagement, the approach the firm would use if retained, and the firms assessment of the strengths and weaknesses of the particular matter.

The lawyer(s) making the presentation must be given a certain amount of information regarding the activities of the company and/or the specific matter if the presentation is to be meaningful. The prospective client has complete control over the information provided, but disclosure of at least some confidential information often is unavoidable. However, the whole idea behind a beauty contest is that many will apply, but only one (or a limited few) will be selected. What are the obligations of the lawyers that are not retained? Does disclosure to the lawyers that are not retained destroy communications that otherwise would qualify for the privilege? The broad answer to the first question is that the lawyers who are not retained have a duty of confidentiality where a client attempts in good faith to retain a lawyer.6 The broad answer to the second question is that the attorney/client privilege protects prospective clients who communicate with a lawyer in an initial consultation but whom the lawyer does not thereafter represent, as well as persons with whom an attorney-client relationship is formed.

If the prospective client has not addressed its expectations with respect to confidential information and conflicts of interest arising out of the selection process in its Request for Proposal, the law firm contestant should address them when it submits the proposal. The prospective client may relieve the law firm of these dutiess through a properly worded waiver and consent.7

Most lawyers make an effort to obtain an engagement letter when accepting a new representation. Those same lawyers are not nearly as conscientious about documenting the fact that they are declining the representation. The letter does not need to be long and complicated. It should, however, make it clear to the potential client that the lawyer is declining the business. If the potential client provided the lawyer with any documentation regarding the possible representation, those documents should be returned with the non-representation letter. If the lawyer decides to recommend another lawyer or law firm, he should include several names. Lawyers have been held liable for negligent referral. Finally, if the transaction contains time-sensitive matters or deadlines, the letter should advise the prospective client of those deadlines and emphasize the possible consequences of delay.

Before accepting any representation, the lawyer must disclose all possible conflicts and obtain the clients consent.8 Every firm should have an established method of checking for conflicts. There are a number of computer software programs on the market for this purpose. As we all know, however, even computers are not foolproof. If a mistake is made while inputting information, the computer may very well miss a conflict. Most malpractice insurance carriers advise having at least 2 independent methods for checking conflicts. The Rules governing conflicts of interest include personal conflicts of an individual lawyer (spouse in opposing law firm, devout environmentalist being interviewed by a developer), conflicts with current clients, and conflicts with former clients. It is important to remember that if one lawyer in the firm is disqualified, then the entire firm is disqualified and that Chinese walls generally are not recognized under the Rules.9

An engagement letter/fee agreement is not just a good business practice, it is documentary evidence that the lawyer satisfied his ethical duty to communicate the basis or rate of the fee the lawyer will charge.10 A good engagement letter/fee agreement will clearly identify the client, will state the method for calculating the lawyers fee (hourly, flat fee, blended rate), will state whether the fee includes expenses or whether expenses will be billed separately, and will state what the lawyer will do to earn the fee. Even if the statute of frauds issue did not exist, a lawyer would never knowingly permit his client to enter into an oral contract to purchase property. However, it is not at all unusual for that same lawyer to perform legal services based upon a single telephone call or meeting with a client.

The lawyer may want address one or more of the following issues in the engagement letter/fee agreement.

Most lawyers do not like to continue representing the client that does not pay for his services. If the engagement letter/fee agreement addresses this situation, it is possible to condition both your initial and continued work on the payment of the fee.11

To avoid future misunderstanding, the lawyer should clearly state what he has been hired to do and what he has not been hired to do. The Rules permit a lawyer to limit the scope of his representation under certain circumstances.12 Many real estate lawyers draft partnership agreements, but do not give securities or tax advice. Others document loans for lending institutions, but do not give regulatory advice. A well-drafted engagement

letter/fee agreement will eliminate any questions regarding the scope of the representation. The lawyer is charged with safeguarding the clients property. The Rules, however, do not tell the lawyer how long he must retain the clients files, and maintaining the files can be quite costly. If the lawyer adopts a file retention policy and clearly describes that policy in the engagement letter/fee agreement, he should be able either to return the files to the client or to destroy them after a few years. It also is good practice to make sure that all original documents are forwarded to the client.

If a potential conflict exists and the client still wants to retain the lawyer, the engagement letter/fee agreement should disclose the conflict and describe the possible disadvantages to the client. Even though the general conflict of interest Rule does not require that the consent be in writing,13 it is always prudent to get written consent. If the representation involves multiple clients with potentially conflicting interests, the Rules require that the lawyer act as an intermediary and that the lawyer obtain the written consent of the clients.14 In addition to the representation of partnerships and corporations, the real estate lawyer frequently finds himself representing one or more of the following: (i) family members,15 borrower/guarantor, buyer/seller,16 title company/buyer and/or seller. If the lawyer honestly evaluates the situation, feels that the conflict will not adversely affect the representation, and the client consents, the Rules permit all of these representations. Unfortunately, triers of fact seldom view the representation as permissible when it is being viewed with hindsight. It is imperative, therefore, that the lawyer carefully document the relationship at the beginning of the representation and that he review the representation from time to time after it has begun to make sure that his evaluation remains the same. A New York court, even in pretty egregious circumstances, found that a law firm was not liable for damages to one of the partners in a partnership based upon an engagement letter that described the exact fact situation that was the subject of the suit and that expressly stated that the law firm would do exactly what it did in that situation.17

Under certain circumstances, it is just as important for the real estate lawyer to disclose who he is not representing. If the lawyer represents an individual and helps that individual sell a tract of land that is also owned by other family members, the lawyer should make clear to the other family members that he is not representing them. The same thing holds true if the lawyer has a long-standing attorney/client relationship with a partner in a partnership. Lawyers who document residential real estate loans have had borrowers sign a letter acknowledging that the lawyer does not represent them for quite sometime. It is rare to see that type of letter in a commercial real estate transaction. In a typical 2-party transaction where both parties are obviously represented, the letter certainly is not necessary. There are some commercial borrowers, however, that, in an effort to save on legal fees, do not have their own lawyers review loan documents. In that situation and the situation where the banks lawyer is not certain whether the borrower is represented, the nonrepresentation letter is just as important in a commercial lending transaction.

Even if the lawyer manages to dodge the pitfalls associated with accepting a new client, he remains vulnerable. He has an on-going duty to keep the client informed about the subject matter of the representation.18 Most lawyers think that they have satisfied this obligation when they provide the client with copies of all correspondence. It is important to remember, however, that the duty to inform includes the duty to explain. Many lawyers often mistakenly think that their sophisticated client understands and are concerned that the client will be offended if they explain something that the client feels he understands. It always is better to risk offending a client than it is to try to convince a jury that the client understood the ramifications of making a loan secured by a second lien on property.

Comment 1 to Rule 1.05 states that:

Both the fiduciary relationship existing between lawyer and client and the proper functioning of the legal system require the preservation by the lawyer of confidential information of one who has employed or sought to employ the lawyer. . . .

Because transaction lawyers often find themselves representing more than one party in a transaction, the duty to maintain confidences becomes very troublesome. The principle of confidentiality is derived both from the law of evidence and the law of agency.19 Under usual evidentiary concepts, when two or more clients jointly consult a lawyer, their confidential communications are privileged as to others but not between themselves. The clients obviously did not intend the communications to be confidential between or among themselves. If one of the joint clients separately consults the lawyer, it appears that the same rule may apply.20 Therefore, the lawyer cannot maintain confidentiality in the event of subsequent litigation between or among the clients themselves.

The transaction lawyers problems with confidentiality, however, seldom arise in the context of litigation. They usually come under the much broader agency law, which addresses the duties arising from fiduciary relationships generally.21 Under these principles, an agent is prohibited from disclosing or using information that was either revealed by the principal in confidence or acquired by the agent in the course of the agency, relating to the principal or to matters in which the agent has been employed.22 This duty applies to lawyers just as to other agents of the client and continues after the agency (attorney-client) relationship has been concluded.23 In keeping with these broad rules of agency, the Texas Rules expanded the scope of the communications protected by the obligation of confidentiality by including all information relating to the client, whether or not the disclosure would be detrimental or embarrassing to the client.24 The general preference in favor of maintaining client confidentiality has always been subject to exceptions.25 The Texas Rules divide the exceptions to the confidentiality rule into discretionary exceptions26 and mandatory exceptions.27

The lawyer who represents multiple clients is constantly confronted with the conflict between his duty to keep his client(s) informed and his duty of confidentiality. Before the client(s) consent to a multiple representation, they must understand that the resolution of this conflict falls within the discretionary exception permitting the lawyer to reveal confidential information when he has reason to believe it is necessary to do so in order to comply with . . .a Texas Rule of Professional Conduct. . . .28 Rule 1.03 requires that a lawyer keep his client(s) reasonably informed and explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. If one client discloses information to the lawyer regarding the subject matter of the multiple representation which he did not intend to disclose to the other party in the multiple representation, the lawyer is faced with a decision which will never be resolved to the satisfaction of all parties in the transaction.

Depending upon the nature of the confidential information, it also is quite possible that the resolution of these conflicting duties will fall within at least one of the mandatory exceptionsthe exception which requires that the lawyer disclose confidential information if necessary to avoid making a false statement of a material fact to a third person.29 In longstanding attorney-client relationships it is not at all unlikely that the lawyer will have obtained confidential information which could have an unexpected bearing on the matter which is the subject of the multiple representation.

It is not at all uncommon for a real estate lawyer to be sued when he participates in a business transaction with his client and the transaction goes bad. In spite of that fact, it also is not uncommon for real estate lawyers to participate in business transactions with their client! The Rules give very specific guidelines for doing this.30 It is important to note that the Rule starts out by prohibiting this practice unless certain conditions are met. Once again, these conditions include obtaining an informed written consent from the client. In addition, the lawyer is held to higher standard of care in the transaction because of the fiduciary nature of the attorney/client relationship.

It is just as important to memorialize the end of the attorney/client relationship as it is to document the beginning. Many lawyers think that because they have an on-going relationship with a client that the relationship has not terminated. There are circumstances in on-going relationships, however, that do require documentation. Many in-house lawyers share the drafting responsibilities in larger financial institutions and in-house loan administrators review the title policy and file UCC Financing Statements after the closing. The outside lawyers task actually terminates when the documents he prepares are forwarded to the title company. With different people responsible for different aspects of the transaction, it is not uncommon for one party to think the other was taking care of a matter. If the lawyers role in a particular transaction ends when he sends the documents to the title company, there should be written evidence acknowledging the end of that transaction. If the lawyer is retained in what obviously will be a one-time relationship, the letter memorializing the end of the transaction should address any outstanding matters relating to the transaction that will require follow-up by the client and should address the issue of file retention.

In the past, lawyers frequently had long careers and had little or no concern that they would be sued. That luxury no longer exists in the legal profession, and the suits are not limited to the less than stellar representatives of the profession. Many of the larger law firms are particularly attractive because they carry very large malpractice limits. In my 20 years of practice, I can honestly say that I rarely have met an unethical lawyer. In recent years, however, I have remembered on numerous occasions a saying that Dean Page Keeton emphasized in my first year torts class. He said, Everyone in this room is negligent from time to time. Some are just luckier than others!

Barbara LeBarron is a partner with Dillard, LeBarron & Brashier, L.L.P. in Houston, Texas, and is Board Certified in Commercial Real Estate Law by the Texas Board of Legal Specialization. Ms. LeBarron also is Chairman of the Texas College of Real Estate Attorneys, a member of the Real Estate, Probate, and Trust Law Council of the State Bar of Texas, and a frequent speaker at continuing legal education programs.

1 In re WPMK, Inc., 42 B.R. 157, 162 (Bankr.D.Haw. 1984) ([w]hen an attorney is retained by a corporation, his responsibilities and loyalties are to the corporation and not to individual employees, officers, or directors of the company); Egan v. McNamara, 467 A.2d 733, 738-39 (D.C. 1983)(corporate counsel has a duty to ensure that the business transaction is in the best interest of the corporation regardless of the impact on the shareholders); Ocean Club of Palm Beach Shores Condominium Assn v. Estate of Daly, 504 So. 2d 1377, 1379 (Fla. Dist. Ct. App. 1987) (attorney for a condominium association represents the corporate entity, not the owners of individual units).
2 Rosman v. Shapiro, 653 F.Supp. 1441, 1445 (S.D.N.Y. 1987 (in a close corporation consisting of two shareholders, it is indeed reasonable for each shareholder to believe that the corporate counsel is in effect his own individual attorney); In re Roberts, 75 B.R. 402, 406 (Bankr. D.Utah 1987)(realities of representing a small, closely-held entity mandate a closer look at the actual circumstances surrounding the representation).
3 Restatement of Law Governing Lawyers, Preliminary Draft No. 11 (May, 1995) 2 at p. 2-1 (hereafter referred to as the Restatement).
4 Duval County Ranch Co. v. Alamo Lumber Co., 663 S.W. 2nd 627 (Tex.Civ.App.- Amarillo 1983, writ refd n.r.e.).
5 Prigmore v. Hardward Mut. Ins. Co. of Minn., 225 S.W. 2d 897 (Tex.Civ.App-Amarillo 1949, no writ)(gratuitous services establish attorney-client relationship).
6 Rule 1.09, Comment 4A, Texas Disciplinary Rules of Professional Conduct ( hereafter referred to as the Texas Rules).
7 The Task Force on Conflicts of Interest, Conflicts of Interest Issues, 50 BUS. LAW. 1381, August, 1995, at 1397.
8 Rules 1.06 and 1.07, Texas Rules.
9 Petroleum Wholesale, Inc. v. Marshall, 751 S.W.2d 295 (Tex.AppDallas, original proceeding).
10 Rule 1.04(b), Texas Rules.
11 Rule 1.15 (b)(5), Texas Rules a lawyer may withdraw if the client fails to fulfill an obligation to the attorney and a reasonable warning has been given that the lawyer will withdraw unless the obligation is fulfilled. But see, Staples v. McNight, 763 S.W.2d 914 (Tex.App. Dallas 1988, writ denied) (court stated in dicta that by accepting employment an attorney impliedly represents that he will see the task through to conclusion).
12 Rule 1.02(b), Texas Rules.
13 Rule 1.06, Texas Rules.
14 Rule 1.07, Texas Rules.
15 Lanier v. Sallas, 777 F.2d 321 (5th Cir. 1985); Brennans Inc. v. Brennans Restaurants, 590 F.2d 168 (5th Cir 1979); and Hoggard v. Snodgrass, 770 S.W.2d 577 (Tex. AppDallas 1989, original proceeding)
16 Dillard v. Broyles, 633 S.W.2d 642 (Tex.App.Corpus Christi 1982, writ refd n.r.e.)
17 Interstate Properties v. Pyramid Company of Utica, et al., 547 F. Supp. 178 (S.D.N.Y. 1982).
18 Rule 1.03, Texas Rules.
19 Rule 1.05, Texas Rules. See, Comment 3 The principle of confidentiality is given effect not only in the Texas Rules of Professional Conduct but also in the law of evidence regarding the attorney-client privilege and in the law of agency. . . .
20 See, McCormick On Evidence at 219-220, Section 91 (3d Ed.). See also, Miller, Morton, Caillat & Nevis v. Superior Court, 215 Cal. Rptr. 365 (Cal.App. 1985), which applied this joint client doctrine to all general partners as joint clients of the law firm. [It should be noted that this opinion was ordered not to be published and under California Rules of Court has little or no persuasive value. In addition, the court relied on a specific California Evidence Code provision relating to joint clients.]
21 Schuwerk and Sutton, A Guide to the Texas Disciplinary Rules of Professional Conduct, 27A HOUS. L. REV. 1 at 80 (hereinafter referred to as Sutton and Schuwerk).
22 Id.
23 Id. See, Gleason v. Coman, 693 S.W.2d 564, 566 (Tex. App. - Houston [14th Dist.] 1985, writ refd n.r.e); Usury v. St. Joseph Hosp., 43 Ohio App. 3d 48, 49, 539 N.E.2d 700, 701 (1988); General Realty Assocs. v. Walters, 136 Misc. 2d 1027, 519 N.Y.S.2d 530,532 (1987). See also, Restatement (Second) of Agency sec. 396 (1957).
24 See, Rule 1.05(a), Texas Rules.
25 Sutton and Schuwerk at 80.
26 Rule 1.05(c) and (d), Texas Rules.
27 Rule 1.05(e) and (f), Texas Rules.
28 Rule 1.05(c)(4), Texas Rules.
29 Rule 1.05(f), Texas Rules.
30 Rule 1.08, Texas Rules.

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