LAW 792 Study Guide - Fall 2019, Comprehensive Final Exam Notes - Illinois, Lien, Mortgage Law
30 Nov 2019
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LAW 792
Market Context for Real Estate Transactions
• Market choices based on self-interested economic benefit (market factors)
o Accounting profit – covering cost of transaction (short-term consideration)
o Economic profit – accounting profit vs. return that could have been earned from
alternative transaction of comparable risk (long-term consideration)
• Role of lawyer:
o Structures/documents transaction (documents, strategies, coordinates 3rd parties)
▪ Must delegate tasks to be able to juggle client
o Manages/organizes time (order, interest priorities, measures time value of money
quick sale price for property vs. FMV)
▪ Be aware of deadline triggers throughout transaction to be sure not to
jeopardize client rights (ex: attorney approval rider)
o Risk manager (identify, reduce and shift risk)
▪ Weigh return (captured value) against client’s level of risk aversion
▪ Argue for provisions in contract to get home inspection (usually buyer
responsibility)/allow safe harbor zone to back out of contract/reduce purchase
price to account for risk vs. buying as-is
▪ In residential transaction → more so managing expectations, not so much risk
→ what the parties want in the use of that property; what will expenses be; are
there defects/repairs necessary for property; will I be able to sell property
when I want to move on
▪ In commercial transaction → managing risk is a much more accurate
descriptor
• Types of Costs
o Transaction Costs: Costs associated with undertaking exchange (collecting
information, negotiating, cooperating and regulatory compliance)
o Out-of-Pocket Costs: Actual expenses incurred in doing a project (POC cost = paid
outside closing)
▪ Sunk Costs: Costs that cannot be recovered when a party abandons a course of
action.
o Opportunity Cost: Market choices one gives up to pursue selected choice
• Transactional Misbehavior: Party to a transaction tries to change the dynamics of the deal
after the deal has been struck.
o Modify risk allocation based on own rate of return
o Rent-seeking behavior - law treated as commodity to invest in (ex: investing for
zoning changes); extract value from favorable laws and regulations
• Market Risk Categories
o Temporal Risk: Time value of money (PV worth more today than tomorrow from
inflation; benefits of having assurance); risks usually due to incomplete knowledge or
information
▪ Historical Risk: inability to be certain about historical information upon which
particular business judgments rely in calculating the desirability of a current
transaction (ex. credit history)
▪ Present Risk: information relied on to establish the presence or absence of
specific conditions that would affect the property or the transaction (ex:
housing code violations)
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▪ Future risk: not being able to predict future (inflation, interest rates,
employment rates)
o Transactional Risk
▪ Investor/Ownership/Entrepreneurial Risk: liability for things affecting
property (contract liability; risk of depreciation)
▪ Marketplace Risks: general market factors that affect profitability; not
property-specific (risk of inflation)
• Affects liquidity (how quickly investment can be exchanged for other
things)
▪ Credit Risks: ability/willingness to pay lender back; occurs whenever payment
and performance are not simultaneous
▪ Transfer risk: risk of error in process of making/documenting transaction (ex:
mistake in document preparation, risk that promise/warranty may be untrue)
Marsh v. Wallace
• Facts: Marshes claim lawyer breached fiduciary duty of loyalty to them by undertaking to represent
them in transaction with Wallace when lawyer had conflicts of interest (personal financial interest to
recover overdue legal fees from Wallace which would result from closing the transaction + had long-
time relationship with Wallace whose interests were adverse to Marshes).
• Holding: Lawyer violated fiduciary duty by failing to disclose potential for conflict of interest in
representing both parties and not getting informed consent.
o Liable to refund buyer’s fees
• Key takeaway:
o Each lawyer owes duty of care + duty of loyalty/fidelity to clients which includes disclosing
conflicts of interests
▪ Includes fiduciary duty of confidentiality, candor and disclosure (including duty to
inform clients of matters of reasonable importance to representation)
▪ Conflict of interest = substantial risk that lawyer’s representation would be
materially/adversely affected by lawyer’s own interests or lawyer’s duties to another
person
o Here, lawyer adequately informed clients of his financial interest in transaction (adequately
disclosed, included debt owed to him in closing contract) but did not get informed consent
from both parties about dual representation
▪ Real estate closings are unusual because closing attorney undertakes responsibilities
to both parties in transaction (vs. each party being zealously represented by own
counsel)
• But lawyer owes duty of loyalty to his own client
o Lawyer here did not have clear understanding of who he represented; undertook to represent
both sides to close transaction without disclosing potential conflict of interest or getting
informed consent to his representation = violated fiduciary duty
▪ Lawyer had affirmative duty to explain all implications of pros/cons and risk of
representing both parties and getting knowing/informed consent
▪ Attorney should have written out conflict waiver and had both parties sign it
• IL adopted Model Rules of Professional Conduct
o MPC 1.7: attorney shall not represent client if there is concurrent conflict of interest (directly
adverse to another client)
o P. 209 of Vol. 1
find more resources at oneclass.com
find more resources at oneclass.com
