Sellers' Concessions Opinion 892 (NEW)

[VINCEN...@aol.com]

 A new Sellers' Concession Opinion 892 has been handed down recently by the NYSBA. A complete copy is affixed below for your review. Now, to discuss it. What I find amazing is that the attorney, like a good soldier, is following all the required directives as to disclosure of the Sellers' Concession as we had heretofore resolved, ad nauseum. Then the Lender comes along and resolves that the Sellers' Concession which, no doubt, originated with that Lender, cannot be disclosed in the Contract and on the HUD-1. The Opinion seems to add very little to what we already know. What beneficially came from this Opinion however is the caution that this Opinion applies just the same as amongst the Purchaser's attorney, the Sellers' attorney and the Lenders' attorney. So if one attorney objects to the concealment, at least it "infests" all the other attorneys, which would preclude, for example, the Sellers' attorney and the Lender's attorney whispering among everyone other than the objecting Purchasers' attorney that he is the only "spoiler" to the deal.

 

So at least ALL the attorneys are similarly bound to "walk away". The issues? I see the following. What happens if the Lender does not send an attorney and only sends a "civilian"? If the Purchasers' attorney and the Sellers' attorney walk away from the closing table, can the "civilian" still effectively close the deal with neither side being represented by counsel with no repercussions? Go figure. Maybe. Are there any consequences to the Lender? Is the Lender's in-house counsel held ethically accountable and answerable under the Opinion notwithstanding the Lender's in house counsel's physical non-appearance at the closing. Sure, why not? Let's keep it transparent, right?

 

In closing, and I ask for the umpteenth time, when is the NYSBA going to take the Department of Banking and the Board of Realtors, at the State level, to task and insist that they ethically get on board with the Bar Association since the Bar seems to be the only one advocating transparency, while these

other two entities have no issues with continuing to "play the game".

 

VINCENT J. GALLO, ESQ.
706 Forest Avenue
Staten Island, NY 10310
Telephone: 718.273.1699
FAX: 718.273.3101
E-Mail: vincen...@aol.com

====================================================================

New York State Bar Association

Committee on Professional Ethics

Opinion 892 (11/28/11)

Topic: Lawyer’s participation in residential real estate transaction that includes both a “seller’s concession” and an equivalent “gross-up” in the sale price.

Digest: The fact that the sales price in a residential real estate transaction has been "grossed-up" must be expressly disclosed in the transaction documents containing the sales price in addition to the amount of the "seller's concession." Rules: 8.4(c)

FACTS

1. Seller's attorney presented a contract for the sale of a single family home to the mortgagee bank with provisions stating that "At the closing of title Seller shall pay $25,000.00 towards Purchasers' closing costs and points" and "Purchaser and Seller hereby and herewith acknowledge and understand that the sales price has been increased by the sum of $25,000.00 to allow and provide for the aforesaid Seller's Concession."

2. Although seller's attorney has been using substantially similar language without objection by lenders for numerous residential real estate transactions, the lender in this instance advised the seller's attorney that the "Contract states price increased due to Seller concession; increase for this reason is not allowed."

QUESTION

3. May a lawyer ethically participate in a residential real estate transaction where the lender objects to the disclosure in the sales contract and the HUD-1 Settlement Statement showing that the amount of the sales price has been increased ("grossed-up") in an amount equivalent to the amount of the seller's concession?

OPINION

4. Rule 8.4(c) prohibits a lawyer from engaging in conduct involving misconduct. Under the facts of this inquiry the failure to disclose the increase or "gross-up" of the purchase price would constitute misrepresentation. In N.Y. State 817 (2007) this Committee opined that a lawyer's participation in a residential real estate transaction that includes a "seller's concession" and a "grossed up" or increased sales price is ethically prohibited, unless the gross-up is disclosed in the transaction documents. That opinion did not hold that a seller's concession or gross up was improper. Rather, the opinion held a full disclosure of the gross-up in the transaction documents was necessary to avoid a misrepresentation regarding the amount of the purchase price.

5. In N.Y. State 882 (2011) we affirmed what we said in N.Y. State 817 and clarified in which documents the disclosure of the gross up was required to be made: The problem is not the seller's concession in the abstract. Many seller’s concessions are legitimate. The problem here is the matching "gross up" of the selling price, which effectively wipes out the seller’s concession. If a buyer has to pay $6,000 in order to get a $6,000 discount, then the true selling price has not changed. Thus, a gross up, if not expressly disclosed as such, is a misrepresentation and is proscribed by Rule 8.4(c). Consequently, if a lawyer participates in a real estate transaction in which the lawyer knows (or should know) that the transaction documents containing the grossed-up sales price do not expressly disclose that the sales price was increased by the same amount as the seller's concession, the lawyer violates Rules 8.4(c). The fact that the practice may be widespread does not authorize an attorney to participate in the misrepresentation. The Rule is equally applicable to the buyer's attorney, the seller's attorney, and the lender's attorney. N.Y. State 882 ¶ 10. Here because the mortgagee bank rejected the disclosure required by our ethical opinions, the attorneys for the buyer, seller and lender not only had reason to know that the documents with the deletion would contain a misrepresentation, they each had actual knowledge. [1]

6. N.Y. State 882 addressed the issue raised by the current inquiry. Even if the seller’s concession and matching gross-up were suggested by a mortgage broker, a loan officer, or some other employee at the mortgage bank, the lawyer is not relieved from making the necessary disclosures. Disclosure may be even more important in that situation because the lender’s representative – the very person who might be expected to detect a misrepresentation (the supposedly increased sales price that is fully offset by an unexplained seller’s concession) – is encouraging the misrepresentation. No function other than to misrepresent the purchase price can be ascribed to a gross–up equal to an unexplained seller’s concession. A lawyer may not participate in that misrepresentation no matter who suggested it. Id. ¶ 11.

7. Under these circumstances, where the lender objects to the disclosure of the gross-up of the purchase price, none of the lawyers may ethically participate in the transaction. Their best course would be to advise the lender the "gross-up" is ethically prohibited unless disclosed in the documents that recite the purchase price and that if the lender will not agree to the disclosure, the lawyers for the buyer, seller and lender may not participate in the transaction.

CONCLUSION

8. A lawyer may not ethically participate in a residential real estate transaction where the lender objects to the disclosure of the fact that there has been a gross-up of the purchase price equivalent to amount of the seller's concession. (12-11) [1] Rule 1.0(k) provides as follows: “Knowingly,” “known,” “know,” or “knows” denotes actual knowledge of the fact in question. A person’s knowledge may be inferred from circumstances. person’s knowledge may be inferred from circumstances. A lawyer “should know” a fact when it can be readily inferred from the circumstances.

[VINCEN...@aol.com]

This brings up another serious issue.  I would characterize it as the competing tug-of-war between the 1) proceeding with the closing in violation of Opinion 892 versus 2) the "abandonment of the Client.  This would apply whether you are the Seller's attorney, the Purchaser's attorney or the Bank Attorney.

 

The Bank announces at the closing table, naturally, I mean why bring it up in advance, that they can not allow for the disclosure and representation of the Seller's concession as dictated by Opinion 892.  You, as Seller's attorney or Purchaser's attorney advise everyone that you cannot therefore proceed with the closing. The next thing you witness with that pronouncement is your 90 year old Seller having a stroke, and the pregnant 30 year old couple's moving truck passing by.

 

Needless to say, you cannot close.  So what do they do? The Lender convinces the Seller and Purchaser to both fire their attorney, and allow the closing to finish with just the "settlement agent" mind you, not an attorney, to finish the closing without the participation of either the Seller's attorney or the Purchaser's attorney.

 

Do the attorneys who were fired have an obligation to report this matter to the Lender, to FHA, to the Department of Banking, to the NYSBA, etc? Are there potential malpractice consequences to either attorney if the deal does not close with allegations of "forseeability" and why neither attorney picked up on this issue prior to the closing (not that this ever happens).  A real potential mess.  The NYSBA does have to get these other agencies on board, otherwise this will create a perfect opportunity for realtors, mortgage brokers, mortgage bankers and title companies to push attorneys out of the closing process under the guise of their being "spoilers". 

 

 VINCENT J. GALLO, ESQ.
706 Forest Avenue
Staten Island, NY 10310
Telephone: 718.273.1699
FAX: 718.273.3101
E-Mail: vincen...@aol.com

[Weinman, Pete]

Vince,

How about the following additions to your existing "Seller's Concession" rider/paragraph:

Furthermore, the said sum certain Sellers’ Concession shall also be unequivocally recited as a sum certain Sellers’ Concession on page 1 of the HUD-1 Settlement Statement, and if the Lender or Lender’s counsel opines, at the closing table that it can not or will not disclose the entire amount on the HUD-1, then the closing shall be aborted forthwith.   In addition the Sellers’ Concession shall be recited on RP-5217 Section 14-I “Other Unusual Factors Affecting Sale Price” (Specify Below) with an unequivocal recitation “below” that states that the “Full Sale Price” at Section 13, ie. $___________________, includes a sum certain Sellers’ Concession of ie. $___________________, so as to ensure that the public record evinces nothing less than full disclosure.  Moreover, the Purchaser and Seller each understand, recognize, and agree that their respective attorneys are ethically bound to not allow their clients to close this transaction without such full public disclosure, and that representation shall terminate, and all liability shall cease between the attorney and client if and when either client should decide to close this transaction in the absence of such full public disclosure against the advise of counsel.  

Pete

______________________________________

The Law Offices of Peter J. Weinman
260 Christopher Lane - Suite 201

Staten Island, NY 10314
Tel: (718) 442-2010 ~ Fax: 866-Weinman

google.StatenIslandLaw.com

LEGAL CONFIDENTIAL: The information contained in this e-mail and in any attachments hereto may contain information which is legally privileged or confidential in nature. It is intended only for the attention and use of the named recipient(s). If you are not an intended recipient, you are not authorized to retain, disclose, copy, distribute, or even think about the message and/or any of its attachments. If you received this e-mail in error, please notify me, delete this message, and immediately wipe from your memory any residual information that may have been retained.  You are hereby instructed to make believe it never happened.  Failure to comply will result in bad Karma and may also result in an audit by the IRS in the next calendar year.  In either event, I would not mess around because this is serious business and nothing to laugh about.  Hey, I am surprised that you are still reading this notice.  That is very impressive and I do commend you.  I never actually anticipated anyone would ever get this far into my notice and I only wish I had something more meaningful to say.  Thank you for sticking it out to the end.

[Weinman, Pete]

Mark,

That example on the form is telling us to not "net" out the actual cost.  That's fine - why would we? 

I'm only talking about reciting the fact that per the contract, the price was increased a sum certain while the seller applied that same sum certain towards purchaser's closing costs in the section for other unusual factors.

Pete

______________________________________

The Law Offices of Peter J. Weinman
260 Christopher Lane - Suite 201

Staten Island, NY 10314
Tel: (718) 442-2010 ~ Fax: 866-Weinman

google.StatenIslandLaw.com

LEGAL CONFIDENTIAL: The information contained in this e-mail and in any attachments hereto may contain information which is legally privileged or confidential in nature. It is intended only for the attention and use of the named recipient(s). If you are not an intended recipient, you are not authorized to retain, disclose, copy, distribute, or even think about the message and/or any of its attachments. If you received this e-mail in error, please notify me, delete this message, and immediately wipe from your memory any residual information that may have been retained.  You are hereby instructed to make believe it never happened.  Failure to comply will result in bad Karma and may also result in an audit by the IRS in the next calendar year.  In either event, I would not mess around because this is serious business and nothing to laugh about.  Hey, I am surprised that you are still reading this notice.  That is very impressive and I do commend you.  I never actually anticipated anyone would ever get this far into my notice and I only wish I had something more meaningful to say.  Thank you for sticking it out to the end.

On Thu, Dec 15, 2011 at 9:43 PM, <mabla...@aol.com> wrote:

How does one include the Seller's Concession in the sales price on the RP-5217NYC and recite it under "other unusual factors" when the instructions to the form specifically state "Do NOT include Seller's concessions in stating the full sales price"?  See portion of the instructions added to this email below.

 

Does the mere fact that the instructions specifically mention "Seller's Concessions" seem odd to you?  Is it so common place that the "NYC's Instructions" form tells you not to include the "gross up" figure. 

 

What do you do now.  Do you violate Opinion 892 and follow the instructions or include the seller's conscession and the "gross up" figure and recite the fact that you are doing it under "other unusual factors"?  May be someone should tell the City to change their form?

 

Just a thought..............  

 

RP-5217NYC Real Property Transfer Report

Instructions ........

 

"12. Full Sale Price

- enter the total amount paid for the property. This includes money/cash, other property, personal

property, goods or any other thing of value; the cancellation of indebtedness or the assumption of an encumbrance,

mortgage or other obligations on the real property. Please round to the nearest whole dollar amount. If there is no

Full Sale Price for the transfer enter $0.

Please note that typical components of the Full Sale Price would include:

Cash Consideration

- include the total amount of cash transferred from the buyer to the seller. This

includes any standard purchase money mortgages and second or third mortgages.

Assumed mortgages and other liens or obligations

- include the principal amount of any existing

mortgages, liens, or encumbrances on the property assumed or taken subject to by the buyer and the

amount of any other indebtedness or obligation assumed, cancelled or discharged by the buyer as part of

the consideration.

Property received by the seller

- include the fair market value of any other property or thing of value

received by the seller as part of the full sale price.

Do NOT include seller concessions in the full sale price (i.e., the buyer and seller have agreed on a price of

$100,000 for the purchase of the property. As part of the agreement, the seller will pay $4000 of the buyer’s closing

costs. Therefore, the actual full sale price paid by the buyer (or received by the seller) is $96,000 ($100,000 -

$4000)."

 

Marc A. Berk, Esq.

706 Forest Avenue
Staten Island, NY 10310

mabla...@aol.com
Tel. No. 718-494-6500
Fax No. 718-983-6366

CONFIDENTIALITY NOTE: The contents of this transmission may be attorney-client privileged and are intended to be viewed only by the addressee. If you receive this transmission in error, kindly reply to the sender at the address indicated above and delete the transmission promptly.

[mabla...@aol.com]

Pete,

 

I beg to differ.  When the Transfer Tax returns are prepared, the "gross up" amount is in fact what the transfer tax is based.  Is it not?  Tax is paid on the "gross-up" figure, being the total consideration. Why wouldn't you put the total consideration, i.e the "full sales price" on RP-NYC5217 and recite "other unusual factors"...... price includes seller's concession of $_____.  It is clear to anyone looking at the deed what net price is.

 

The instructions are telling you to conceal it!!     

[mabla...@aol.com]

Marc A. Berk, Esq.

706 Forest Avenue
Staten Island, NY 10310

mabla...@aol.com
Tel. No. 718-494-6500
Fax No. 718-983-6366

CONFIDENTIALITY NOTE: The contents of this transmission may be attorney-client privileged and are intended to be viewed only by the addressee. If you receive this transmission in error, kindly reply to the sender at the address indicated above and delete the transmission promptly.

-----Original Message-----
From: Weinman, Pete <wei...@statenislandlaw.com>
To: VINCENTJGALLO <VINCEN...@aol.com>
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Sent: Thu, Dec 15, 2011 8:37 pm
Subject: Re: Sellers' Concessions Opinion 892 (NEW)

[Weinman, Pete]

Marc,

"Do not include the seller concession in the full sales price" does not mean "do not mention the seller concession."  

I agree on the gross-up due - of course tax is paid on the higher value.  However, I do not believe the instructions on the form are telling us to conceal anything; they tell us not to net the concession out (thus lowering the consideration to $96,000 in their example).  Show the grossed-up value and put a comment in the other unusual factors box putting the world on notice what actually took place. 

Pete

______________________________________

The Law Offices of Peter J. Weinman
260 Christopher Lane - Suite 201

Staten Island, NY 10314
Tel: (718) 442-2010 ~ Fax: 866-Weinman

google.StatenIslandLaw.com

LEGAL CONFIDENTIAL: The information contained in this e-mail and in any attachments hereto may contain information which is legally privileged or confidential in nature. It is intended only for the attention and use of the named recipient(s). If you are not an intended recipient, you are not authorized to retain, disclose, copy, distribute, or even think about the message and/or any of its attachments. If you received this e-mail in error, please notify me, delete this message, and immediately wipe from your memory any residual information that may have been retained.  You are hereby instructed to make believe it never happened.  Failure to comply will result in bad Karma and may also result in an audit by the IRS in the next calendar year.  In either event, I would not mess around because this is serious business and nothing to laugh about.  Hey, I am surprised that you are still reading this notice.  That is very impressive and I do commend you.  I never actually anticipated anyone would ever get this far into my notice and I only wish I had something more meaningful to say.  Thank you for sticking it out to the end.

[Morin, Lucien]

Having lectured on this topic here in Rochester on 12/14,  I like the suggested language.

Also, I want to thank Vince for his raising this issue in light of Opinion 892.

Lou II

Lucien A. Morin, II

McConville, Considine, Cooman & Morin, P.C.

25 East Main Street Suite 500

Rochester, New York 14614

(585) 546-2500

fax: (585) 546-7218

www.mccmlaw.com

 

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