In a standard residential real estate purchase transaction, there are generally six (6) separate contracts in play…
In a standard residential real estate purchase transaction, there are generally six (6) separate contracts in play: (1) the Purchase and Sale Agreement; (2) the buyer’s contract with the lender; (3) the seller’s contract with listing broker; (4) the buyer’s contract with selling broker; (5) the commission agreement between listing broker and selling broker; and (6) the real estate agents’ independent contractor agreements with their respective brokers. In many cases, the closing has been referred to the closing attorney by a real estate agent, builder/developer, seller, or relocation company with whom the attorney has a preexisting business relationship. Though one or more of these referring sources may “represent” you in the transaction, the closing attorney generally has few, if any, duties to a buyer/borrower or referral sources unless formally, separately, and exclusively retained thereby. An attorney acts only as the agent for the client or clients who retained him.Bandele v. Am. Home Mortg. Servicing, 2009 U.S. Dist. LEXIS 96744 (N.D. Ga. 2009).
2. CASH TRANSACTIONS
In a cash transaction, the closing attorney will generally represent the party who contacted them to initiate the conveyance process. Such a relationship is a matter of contract that may be express or implied from the conduct of the parties. Cleveland Campers, Inc. v. R. Thad McCormack, P.C., 280 Ga. App. 900, 903 (2006). Though an attorney-client relationship cannot be created unilaterally in the mind of a would-be client, an attorney-client relationship is sufficiently established when it is shown that the advice or assistance of the attorney is sought and received in matters pertinent to his profession. Id. However, the mere initiation of contact alone is not conclusive of the establishment of an attorney-client relationship, nor is the mere payment of the attorney’s fees. Id. at 277. Additional considerations to justify a reasonable belief that of an attorney-client relationship has been established are the extent of contact during the process, as well as any prior relationship between the attorney and the would-be client. Since it is not uncommon for a seller to initiate communications with the closing attorney in cash transactions, even where the buyer is to pay the attorney’s fee, it is imperative to clearly and unequivocally establish with the attorney from the outset the scope and extent of representation desired.
In certain cash transactions, the attorney may elect to act in a purely ministerial capacity pursuant to O.C.G.A. §15-19-50. In such case, the attorney must be diligent in clearly and unequivocally adhering to the ministerial functions of conveyance, and refrain from offering legal advice to either party, especially as to matters of title, lest an attorney-client relationship unwittingly be established.
3. LOAN TRANSACTIONS
In a loan transaction, the closing attorney generally represents the “lender.” Where the originating and funding entity are one and the same, this is not a difficult determination. Where a mortgage broker is involved, however, the issue is not so clear, especially where the funding lender, or the entity to whom the loan is being simultaneously assigned, is disclosed in the closing package or instructions, or where the closing attorney is directed to ensure that the mortgagee clause on the hazard insurance is an entity other than the one who submitted the title order, or where the closing instructions are generated by an entity other than the entity who submitted the title order.
In Garrett v. Fleet Finance, Inc., 252 Ga. App. 47, 52 (2001), a mortgage broker submitted the title order to the closing attorney, but the closing documents indicated that the loan was to be assigned to Fleet Finance. The Court’s decision in this matter required a preliminary determination of who retained the closing attorney, i.e. whether the closing attorney represented the broker or the lender. Though Garrett submitted an expert opinion from a non-attorney asserting that the assignee of a mortgage was the true lender, the Court rejected the opinion of the non-lawyer regarding the existence, nonexistence, or conflict of interest of agency arising from the attorney client relationship. After conducting an examination of the Truth in Lending Act, the Court determined that that Act did not treat a broker and an assignee as one and the same, and that the closing attorney represented the broker because the broker submitted the title order and all disclosures mandated by the Act were made in the name of the broker.
4. REO & RELOCATIONS
Where a closing is referred to an attorney by a financial institution or relocation company, where the financial institution or relocation company is acting as or on behalf of the seller, substantial conflict of interest issues can arise. In such transactions, the closing attorney often represents the seller and the lender. In many such cases, the seller does not provide a seller’s disclosure statement, conveys title only by limited warranty deed, and/or deletes survival clauses and provisions dealing with obligations for the adjustment of prorations subsequent to closing. Moreover, the closing attorney will often be provided power of attorney to sign for the relocation company, who was provided power of attorney by the seller. Such circumstances are fraught with malpractice liability, let alone issues of conflict of interest. Because such circumstances put the buyer/borrower at a significant legal disadvantage, it is highly advisable to avoid such circumstances, even if a conflict letter is obtained from the seller and lender.
5. DUTY OF CARE
A closing attorney has a fiduciary relationship with his client, whomever it may be, and therefore owes the client a duty of “utmost good faith.” Garrett, supra, at 51; O.C.G.A. §23-2-58. Even if a buyer/borrower is not the closing attorney’s client, and not owed a duty of “utmost good faith,” however, the buyer/borrower’s interests cannot be completely disregarded.
The trend in Georgia has been to relax the rule of strict contractual privity in matters of legal malpractice, recognizing that under certain circumstances, professionals owe a duty of reasonable care to parties who are not their “client.” Driebe v. Cox, 203 Ga. App 8, 9 (1992). For example, a lawyer may be charged with special obligations in dealings with a beneficiary of a client. Georgia Rules of Professional Conduct, Rule 1.2 Comment 8 (2009). In general, Georgia’s courts look to the quantity of direct communication with the attorney, the reasonableness, and foreseeability of reliance of the third party, who paid the attorney’s fees, who initiated contact with the attorney, and the existence of disclaimers and disclosures to determine if a duty exists, and if so, the degree of duty owed.
In a real estate closing, a borrower may be justified as a foreseeable third party beneficiary in reasonably relying upon the competency of a closing attorney. Williams v. Fortson, Bentley & Griffin, 212 Ga. App. 222, 224 (1994). Therefore, even though a lender is not deemed to have a fiduciary relationship with a borrower, and the borrower is not technically the client of the closing attorney, the third party beneficiary is owed a duty of reasonable care where it is clear that a client has engaged an attorney for another’s benefit, to inspire confidence in and invoke reliance upon the client. Burch v. Chase Manhattan Mortg. Corp., 2008 U.S. Dist. LEXIS 76595 (N.D. Ga. 2008), citing to Pardue v. Bankers First Fed. Savings &c. Assn., 175 Ga. App. 814 (1985); Legacy Homes, Inc. v. Cole, 205 Ga. App. 34, 36 (1992).
Further, a closing attorney may also assume liability through “gratuitous representation”. In Simmersonv. Blanks, 149 Ga. App. 478, 481 (1978), the Court determined that an attorney who undertakes to do, even without reward, is responsible for misfeasance, though they would not be liable for non-feasance had the task for which the attorney had no duty to perform never been undertaken. In such circumstances, a gratuitous agent would owe the duty of “slight diligence” to a party justified in relying upon the representations or conduct of an attorney to the degree such reliance encompasses the knowledge which the attorney professes to possess. Driebe at 9.
Due to the number of contracts involved in a standard residential real estate transaction, the buyer/borrower is more often than not unrepresented by legal counsel. Therefore, a buyer/borrower should, as an initial matter, communicate with the closing attorney at the earliest possible time to determine who in fact is represented by the closing attorney, evaluate whether their legal interests are sufficiently represented in the transaction, and whether a conflict of interest exist. The only way to ensure adequate representation, however, is to retain independent counsel.