This article uses real estate practice as a case study because there are now more malpractice claims in real estate than in any other legal specialty. (A mortgage lender’s general form of “smart” checklist is available as a free download at tinyurl.com/meg4y2y.)
Checklists need citations to commentary and integrated forms. Smart checklists should include a one-line description of each document that is required for the matter covered by the checklist, together with a citation to expert commentary that explains the document’s essential provisions and the material risks, issues, and legal authorities relating to the document. The citation should also provide a source for a model form of the document.
The citations in a smart checklist help to keep the list short by eliminating explanations. Traditional checklists—without such citations—will launch numerous questions from junior lawyers and paralegals that would otherwise be answered based on the cited sources.
Checklists should be comprehensive and without blind spots. Traditional real estate checklists have blind spots. For example, because the lender’s lawyer is generally paid for services through the closing, most loan closing checklists do not cover important post-closing issues relating to loans, such as when continuation or other additional Uniform Commercial Code (UCC) filings need to be made or when renewals are required of insurance policies and letters of credit securing the loan. Law firms often maintain internal post-closing procedures to obtain filed UCC-1 copies and to advise clients regarding UCC-3 continuations. Such procedures, however, usually do not cover the post-closing risks of a change of the debtor’s name or location, the reorganization of the debtor in a new state, the sale of any collateral to a third party not located in the debtor’s location, the conversion of any collateral into proceeds, or a change of the lender’s name or address, and the short deadlines for the UCC filings that should be made accordingly.
Smart checklists identify material risks and how to avoid them. A smart checklist should include a separate section summarizing the practical steps that lawyers can take to reduce the liability exposures of lenders, as well as the lawyer’s own liability. Counsel for borrowers also need a separate checklist explaining how they can lawfully limit their respective personal liability.
A smart checklist for a particular type of transaction should include a separate list of the risk factors for that transaction, for each party, and the methods of reducing or eliminating each risk. Lenders also need to know how to avoid borrower defenses, equitable subordination, and fraudulent transfers. In addition, each party needs to know what factors will trigger a judicial recharacterization of a loan as a partnership; a sale of a loan as a loan to the seller or a security; a nonrecourse loan as a payment; a lease as an installment sale or loan; a sale-leaseback as a loan or partnership; or a loan participation as an unsecured loan or security.
Sub-checklists should cover various types of deals. Sub-checklists should cover the special additional checklist items relating to common types of deals, from the perspective of each party. In the case of real estate finance, for example, sub-checklists should explain equity kickers, mezzanine loans, convertible mortgage loans, leasehold mortgage loans, subordinate loans, construction loans, installment sales and purchase money loans, loans secured by residential property, securitizations, sale-leasebacks, loan participations, loan sales, loan modifications and workouts, and deeds in lieu of foreclosure.
Legal forms should be designed so that the special clauses, relating to each of the foregoing types of deals, are identified and available for insertion, as required, in the documents for each deal.
The data input sheet should list the variable terms in integrated forms. A specialized additional checklist is a data input sheet that lists each of the variable business terms that are added to the blank forms for each deal. In the case of a loan, for example, the standard terms should include the name and address of the lender, borrower, and guarantors, the amount of the loan, the loan term, and so on. This data input sheet should be integrated with a complete set of documents, using the same variable terms for consistency. Once the data input sheet is completed, the senior lawyer on the deal should review it and sign off on it. Finally, each of the business terms in the integrated documents should be completed using document assembly software, or a similar automated process, to eliminate errors that can occur when a human being manually inserts each of these variable business terms into each of the documents.
Checklists must include items required by governing documents and laws. There is no substitute for reviewing the governing documents and confirming that there is a line in the checklist for each item that is required by such governing documents. Ideally, a citation to the relevant section of the applicable governing document should also be added to each such checklist line. A lawyer may also have an obligation to obtain or file other documents under applicable court orders and rules, ethics rules, or case law.
All material deadlines should be separately listed in the checklist. Such deadlines ideally should also be added to computer programs that will provide automatic reminders to the responsible parties.
Checklists should disclose that they are mere summaries and not legal opinions. Each checklist is merely a summary. Because a checklist is often sent to a client or third parties, ideally a caveat should be added prominently to each checklist to disclose the obvious—that is, that the checklist is not intended as a complete list of all applicable documents and actions and is not intended to constitute a legal opinion and that reliance should be placed only on the original documents.
Checklists can avoid ethical lapses and wasted effort and confirm client instructions. Each lawyer has an ethical duty to explain to the client what the lawyer will be doing on behalf of the client. To comply with such ethical duties, and to avoid misunderstandings, ideally the lawyer should send to the client, as soon as feasible, a checklist confirming the documents and scope of work for such matter.
The lawyer has an ethical duty to explain to the client the checklist and its legal consequences, as well as any material omissions, variations, options, or risks. Further, the lawyer should reserve the flexibility to waive or modify any of the documents listed on the checklist to the extent instructed or agreed to by the client, customary for the same or similar transactions, or pursuant to the lawyer’s reasonable judgment.
Checklists can confirm agreed limits on scope of legal representation. The typical legal retainer letter describes a very broad scope for the lawyer’s representation of a client. The scope of the lawyer’s representation, however, typically comes into focus at various points during the course of such legal representation. To avoid additional misunderstandings (such as when a lawyer performs work that the client does not need and does not want to pay for), the lawyer should describe the general scope of the lawyer’s work and what is excluded.
ABA Real Property, Trust & Estate Law Section
This article is an abridged and edited version of one that originally appeared on page 34 of Probate & Property, January/February 2014 (28:1).
For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
PERIODICALS: Probate & Property, bimonthly magazine; Real Property, Trust and Estate Law Journal, published three times a year; e-Report, bimonthly e-newsletter.
CLE AND OTHER PROGRAMS: Watch out for RPTE’s monthly CLE teleconferences; for more information, please visit our website.
BOOKS AND OTHER RECENT PUBLICATIONS: A Guide to International Estate Planning, 2d ed.; The Advisor’s Guide to Life Insurance; The Commercial Lease Formbook, 2d ed.; The Insured Stock Purchase Agreement, with Sample Forms, 2d ed.; From Handshake to Closing: The Role of the Commercial Real Estate Lawyer, 2d ed.; Education Planning: Taxes, Trusts, and Techniques; Real Estate Opinion Letter Practice.