December 1999

Contingent fees represent a business arrangement whereby the consideration for services is based on an outcome rather than on the amount or type of work performed. American lawyers have long worked on contingent fees, charging nothing (except for direct costs) unless they win or receive a favorable settlement-in which case the fee will usually be a percentage of the amount recovered. The ethical basis for contingent fees in the law is that access to justice is often urgent and should not be denied or delayed while a person who has suffered a wrong searches for financing to pay a lawyer's fee. Contingent fees for surveying or engineering services are more controversial.

Most surveyors regard contingent fees with distrust. More than one author has stated that contingent fees in surveys often are unethical. "One's professional judgment could certainly be clouded when working under this sort of arrangement. I find it too much the appearance of a conflict of interest and often a completely unethical arrangement. My advice: avoid shady deals involving contingencies," wrote D.J. Mouland in his book Ethics for the Professional Surveyor, a Collection of Thoughts.

A text from the engineering field quotes an ethical code attributed to the National Society of Professional Engineers (NSPE). The NSPE prohibits the use of contingent fees under circumstances where the professional judgment of the engineer might be compromised, or when a contingency provision is used as a device for "promoting or securing a professional commission," wrote M.W. Martin and R. Schinzinger in the book Ethics in Engineering. That text states that contingent fees are sometimes used in situations where the consultant is paid only if he or she succeeds in saving the client money in some project. It agrees that contingent fees invite a clouding of judgment, but argues that they should be explored as a way to stimulate imaginative and responsible ways to save costs for the public.

"Wash Out Surveys"

One contingent fee arrangement often discussed in surveying is the situation where surveyors who provide their services as part of the closing of a property transaction charge a fee (often on a percentage basis) only if the sale closes. Such so-called "wash out" surveys obviously only make sense in a high volume environment, and usually exist as part of a deal between a surveyor and a real estate broker or agent who recommends (or even requires) the use of a particular surveyor as part of the closing of a series of future home sales. The agent is able to predict the cost of the survey for inclusion in the Housing and Urban Development (HUD) required Settlement Statement. The agent also is able to tie the costs to closing to keep his overall services competitive. Both the surveyor and the agent see an increase in volume through the arrangement. In some markets, this arrangement might seem to be an attractive gamble, but is it legal? The answer, like so many in the law, is a resounding "Probably not."

The federal Real Estate Settlement Practices Act (RESPA) begins with this statement:

The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. 12 U.S.C. § 2601(a).

The basic prohibition in RESPA:

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. 12 U.S.C. § 2607 (a).

Any violation of the prohibition against charging fees for referrals in such loan transactions is punishable as a criminal act and also is subject to civil liability. 12 U.S.C. § 2607 (d).

Obviously, performing work on a "commission" basis is not prohibited by RESPA. The question is whether doing a survey for free (when the sale doesn't close) is the "giving" of a "thing of value" incident to a referral of future settlement services (assuming that a federally related loan is involved, as generally is the case). One instance of providing surveying services for free or at a reduced rate in order to gain future work is clearly illegal. That occurs when a surveyor provides services at a reduced rate for a plat developer at the time the developer purchases the property in return for future referrals of lot surveys within the final plat. As illustrated in Appendix B of the federal regulations:

Facts: A, a provider of settlement services, provides settlement services at abnormally low rates or at no charge at all to B, a builder, in connection with a subdivision being developed by B. B agrees to refer purchasers of the completed homes in the subdivision to A for the purchase of settlement services in connection with the sale of individual lots by B.

Comments: The rendering of services by A to B at little or no charge constitutes a thing of value given by A to B in return for the referral of settlement services business and both A and B are in violation of section 8 of RESPA 12 U.S.C. §2607. 24 C.F.R. Pt. 3500 App. B (1).

It is the tying of the free or reduced fee-work to future referrals that is illegal.

Two reported cases, both involving title insurance and escrow services, have interpreted RESPA in regards to these sorts of arrangements.

Aiea Lani Corp. v. Hawaii Escrow & Title

In Aiea Lani Corp. v. Hawaii Escrow and Title, 647 P. 2d 257 (Hawaii 1982), a condominium developer entered into an arrangement with a title insurer whereby the insurer issued a policy for the construction loan at a rate of 110 percent of the usual charge, tying the price to an agreement to return 100 percent of the usual charge after the insurer handled all of the closing for the 60 units. Thus, the title insurance company was assured either of obtaining a larger than usual fee for insuring the construction loan, or of obtaining fees for closing all of the units.

An ironic twist to the Aiea Lani case is that it went to court only after the developer experienced financial difficulties and was forced to convey the unsold units to the construction lender. The developer then asked for the 100 percent return, arguing that it had complied with its part of the agreement. The title company (which had created the arrangement in the first place) argued it did not have to comply because the arrangement was illegal, and the court agreed. There was obviously an agreement for future referrals tied to a reduced rate in this arrangement. The question before the court was whether RESPA applied since construction loans are exempt. The court held that RESPA did apply because the individual closings that did occur were not exempt, and RESPA applies to the entire arrangement if it "involves" a federally related mortgage loan. "The term 'involving' is a broad term which 'possesses connotations such as implying, including, relating to, growing out of [and] necessitating as a result or legal consequence.'" 647. P. 2d at 262.

Because the court held the arrangement illegal, the title company did not have to return the 100 percent of the normal fee to the developer (an interesting, but apparently rather inequitable, result).

Shah v. Chicago Titleand Trust Co.

In Shah v. Chicago Title and Trust Co., 102 Ill. App. 3d 787, 430 N.E. 2d 342 (1981), some purchasers of condominium units sued the developer and the title insurer over closing fees. The arrangement between the developer and the title insurance company quoted a fee for furnishing title insurance in connection with converting an existing apartment building to a condominium "consisting of 156 units." Title insurance on the units was deferred "on assumption that we will receive orders for individual units." The proposal further gave a list of "optional services" that included fees for closing individual unit sales "assuming all units are closed through our Escrow Department." 430 N.E. 2d at 343. The court held that this arrangement was legal. The rates quoted to the developer were not directly tied to a referral of settlement services for the units. Rather, the court felt that the rates for a condominium of "156 units" merely proposed a fee based on economics of scale, which is legal. Even though the arrangement quoted a fee for individual closings, it did not condition the developer's fee on the title company actually getting the business of all the individual units.

The legality of offering surveying services on any reduced fee basis depends on whether or not the practice is tied to referrals from a developer, agent or other party working with a project. It would probably not violate RESPA to do surveys based on fees contingent on closing the sale if the work is done only for individual buyers or sellers, although it would not be worth the risk. Beware of any arrangement that suggests you should forego or reduce your fee, in any instance, in return for referrals of future work on any ongoing project.