From Real Estate Opinion Letter Practice, Chapter ?
Purpose and Function of Opinions
As already indicated, the most common context for opinions in real estate transactions is a mortgage loan. Indeed, opinions are rarely requested or given in other real estate transactions, such as purchase and sale agreements, leases and construction contracts. Opinions are more common in the case of real estate syndications, yet their essential elements typically address tax and securities issues, not real estate matters. Similarly, while opinions are sometimes requested in sale/lease back transactions, this structure is often economically equivalent to a real estate loan and therefore elicits the same concerns as do mortgage loan transactions. In short, real estate opinion letters rarely involve transactions other than mortgage loans or their equivalents.
The de facto limitation of real estate opinions to mortgage transactions is informative as to not only the history of the evolution of opinion letter practice, but the justification and purpose of such opinions as well. As discussed in § 1.1, the custom of a third party opinion as a condition to the closing of a mortgage loan transaction traces directly to the comparable custom in unsecured commercial loan transactions. In each case, the lender has made an investment of funds which requires thorough due diligence as to the ability and legal obligation of the borrower to repay the loan and perform its other contractual obligations. Some of these concerns can be satisfied by a legal opinion, others cannot. The issue of which party’s counsel should provide the legal opinion or advice is discussed below.1 The more basic question is the role that the legal opinion plays in the broader process of due diligence which is appropriate when real estate investments are made.
The fundamental purpose and justification for an opinion letter from an adversary party’s lawyer is to facilitate due diligence as to matters not otherwise, or not easily, accessible to the recipient and its counsel. As stated in the Guidelines included in the ABA Business Accord Report, the
proper purpose of a third-party legal opinion is to assist in the Opinion Recipient’s diligence. It is not to transform the Opinion Giver into a surety for [its] Client or to serve as a strategic device employed by any party to renew pursuit of its business objectives.2
The focus of the lender’s due diligence insofar as it involves opinion letters relates to (1) the ability of signatories to the transactional documents to bind a corporate or partnership borrower, (2) the borrower’s ability, as a legal matter, to perform its obligations under the loan documents, (3) the identification of conflicts between those obligations and other preexisting obligations under other contracts to which the borrower is a party and (4) the actual or potential violation of relevant law occasioned by entry into the loan or otherwise relating to the borrower’s activities. In addition, lenders frequently seek assurance as to organizational matters relating to the borrower, including its status in particular jurisdictions, either as an element of the authority to execute documents and bind the borrowing entity, or as an independent concern. Opinions are sometimes directed toward eliciting information regarding pending litigation. Finally, lenders often seek to obtain, through opinion letters, comfort as to the legal enforceability of the substantive provisions of loan documents. The use of an opinion letter to accomplish all of these objectives is often controversial; yet it is unlikely that the time and effort which is involved in negotiating and rendering a formal legal opinion will be undertaken unless one or more of these issues are addressed.3
Nearly every one of the state bar reports begins with a discussion of the purpose of a legal opinion in a loan transaction, secured or otherwise. Commonly cited examples of the purpose of a third party opinion include the assurances that loan documents are binding on the borrower,4 that loan documents are judicially enforceable5 and that the documents evidence a mutuality of intent or meeting of the minds of the respective parties.6 Other stated objectives include identification of potential risks or problems that may arise during the course of the loan7 and assurance that the conditions to the closing of the loan have been satisfied.8 Unfortunately, these purposes are typically espoused as a general matter, without reference to the justification for specific opinions in specified circumstances. Thus, while the delivery of an opinion regarding proper organization and due authorization to bind the borrower or entity may satisfy a due diligence need which is properly allocated to the borrower’s attorney through the third-party opinion process, an enforceability opinion from the borrower’s counsel is unlikely to replace the obligation of the lender’s counsel to advise his or her own client of remedial uncertainties in loan documents.9 And it is questionable whether an opinion letter can ever evidence the state of mind of the borrower with respect to mutual intent or subjective agreement of the parties.10 In short, what is often lacking in the literature is a thoughtful analysis of the purpose and justification in particular circumstances of each of the typical third party opinions.
This book is not intended to fill that void, if indeed such a comprehensive analysis is possible. It is, however, a recurring theme of this work that the greatest value of a third party opinion is related to its most justifiable purposes: that is, the disclosure of information not otherwise or easily accessible to the recipient or the provision of legal advice which the attorney for the borrower is better qualified or situated to give than is the lender’s counsel. This premise has considerable implications for both a cost/benefit analysis of the opinion process11 and the issue as to which lawyer, the lender’s or the borrower’s, should be expected to provide various opinions or advice.12
What Constitutes a Legal Opinion?
Before discussing these issues, a threshold question arises: namely, what constitutes a legal opinion either to one’s own client or to a third party? Legal advice takes a variety of forms: oral consultations, written evaluations of the status and merits of pending or potential litigation, perhaps even newsletters and other marketing materials which address current developments in the law. When such advice is given to one’s own client, the question as to whether a legal opinion has been given may be a subtle one; identification of a communication to a third party as a legal opinion is somewhat simpler.
Third party opinion letters normally share certain characteristics of format and language. They are usually signed in the name of the law firm, rather than by an individual lawyer, are structured in terms of a listing of documents, a statement of assumptions, qualifications and other limitations, and include a series of assurances preceded by the phrase “we are of the opinion that. . . . ” These formalities distinguish the typical third party opinion from other correspondence to a client or third parties. This does not mean that other communications may not be viewed as an opinion. Commentators and risk management consultants have noted the dangers of inadvertent opinions to one’s own client which are not subject to procedures for institutional safeguards.13 In the case of third party opinions, the improbability of correspondence with an opposing party including legal advice, through means other than a formal opinion letter, makes the risk of an unintended opinion much less likely.
Lawyers and law firms universally acknowledge the risks inherent in opinion letters, once identified as such, which are considerably greater than in other communications. While the standard of professional competence and liability for negligence for opinion letters is comparable to that for other legal evaluations and judgments, third party opinions are delivered in an adversary context in which considerable investment and exposure to liability may be made in express reliance14 upon the lawyer’s assurances. Because the opinion is given to a party other than the client, the risks of attempted enforcement and potential liability increase; there is always the possibility that a dispute will arise between the transactional parties and that the opinion recipient, in a search for a deep pocket defendant, will assert a claim against the opinion giver. As a result, most lawyers and law firms take special care in, and in the case of law firms provide special procedures for, opinion letter preparation, research and clearance.15
“Reasoned” and “Clean” Opinions
Opinions are frequently categorized as clean or bond opinions on the one hand and reasoned or explained opinions on the other.16 The first type is that which is normally requested and rendered as a third party opinion in a real estate transaction. The level of assurance manifested by clean opinions states a professional judgment and prediction of how a particular matter, if disputed, would be adjudicated.17
Reasoned opinions are occasionally requested when, as a result of negotiation of transactional documents or the research undertaken in an effort to render a clean opinion, an issue of legal uncertainty, either because of conflicting authority or lack of precedent, is identified. By consensus, and indeed common sense, no lawyer should be asked to render an opinion on an uncertain legal issue.18 In many cases, the attorneys and the clients involved in a transaction are fully aware of uncertainties in relevant areas of the law, especially with respect to enforceability of various provisions in loan documents. Often such matters can be excluded from a clean opinion through standard qualifications, such as the effect of bankruptcy or the judicial applications of principles of equity;19 in other cases, specific exceptions are appropriate. In unusual cases, however, an issue may be viewed as so important to the transaction as to require legal analysis of the merits of arguments on both sides and the likelihood of the judicial outcome in the form of a reasoned opinion.
A reasoned opinion is typically framed in a different format than a clean opinion. Instead of the brief, conclusory statements of a series of general assurances, a reasoned opinion is a discursive legal analysis of a specific issue followed by a conclusion frequently stated in the terms that a court “would hold,” “should hold,” or “is more likely than not to hold” in a particular manner. These alternative formulations express decreasing degrees of comfort as to the probability of a favorable judicial outcome. Commentators have debated the nuances in meaning of these and other expressions of reasoned opinions.20 There is, however, consensus that a reasoned or explained opinion should be a balanced presentation of the authorities or policy considerations on either side of the issue in question, rather than an exercise in legal advocacy. The purpose of a reasoned opinion is not to provide assurances, but rather to disclose and evaluate legal risks which may then be assumed by or allocated between the parties to the transaction.
Third party reasoned opinions are rare in real estate loan transactions. There are at least two reasons for this.21 First, given the amount and nature of a secured lender’s investment and the potential pitfalls relating to local foreclosure laws, a mortgage lender will rarely proceed without retaining counsel licensed and experienced in the jurisdiction in which the real property is located. It is unlikely that the lender will be unaware of a legal issue significant to the transaction or that it will be without the aid of its own attorney’s analysis of any such issue.22 When both parties are represented by competent counsel, it is often uneconomical23 and unwise24 for the lender to rely on advice from counsel for an adversary party. Thus, consultation with its own counsel makes a reasoned opinion from the borrower’s counsel, at best, a second opinion on a matter already analyzed by the lender’s own attorney and, at worst, redundant and economically wasteful.25
Second, a reasoned opinion from the borrower’s counsel may be affirmatively harmful to the recipient. Unlike an opinion or advice from its own lawyer, a third party opinion enjoys no privilege of confidentiality and is clearly discoverable in a litigated dispute over loan documents or the status of the borrower. Not only is the opinion’s analysis of various authorities a road map26 for challenging the lender’s litigation contentions, but its expression of uncertainty as to the legal issue makes it difficult to show any meeting of the minds as to these issues27 and undercuts any substantive arguments of equitable reliance or unexpected hardship in the event of an adverse court ruling.
In short, third party reasoned opinions are unlikely to advise the lender, as opinion recipient, of anything it does not already know, and, moreover, may be an undesirable addition to the lender’s loan closing file in the event of subsequent litigation. As a result, reasoned opinions are rarely encountered in real estate transactions.
1. See § 1.5.
2. ABA Business Law Accord, Guidelines ¶ 1(B)(2). See also TriBar Closing Opinion Report at 596; 2005 California Business Law Report ¶ 2.
3. The occasional exception is a transaction in which no opinion is initially requested, but an issue will arise in the course of document negotiation with respect to which a “clean” or “reasoned” opinion will be requested and given. See § 1.4 for a discussion of clean and reasoned opinions.
4. 1987 California Real Estate Report at 1143; 2007 Maryland Bar Report ¶ C.1.
5. 2007 Maryland Bar Report ¶ C.1.
6. See 1987 California Real Estate Report at 1143–44.
7. 1987 California Real Estate Report at 1143; Georgia Corporate Report § 1.03.
8. 1985 Texas Mortgage Report at 20.
9. See § 1.6 and Ch. 5.
10. See Ch. 5.
11. See § 1.6.
12. See Ch. 5.
13. See § 1.5 and Ch. 2.
14. It should be noted that express reliance is not sufficient to trigger liability under a third party opinion. The reliance must also be justifiable. See Ch. 2 for a detailed discussion of opinion letter liability.
15. See Ch. 2.
16. The Business Law Accord Report at 230–31 expresses a preference for the terms “explained” and “nonexplained” opinions. See also TriBar Closing Opinion Report at 25.
17. The standard of care and the level of professional competence underlying an opinion are discussed in further detail in Ch. 2.
18. ABA Business Law Accord, Guidelines ¶ I.B(3). The purpose of an opinion is to communicate a legal evaluation, not to guaranty a specific result or to indemnify either party to the transaction against an uncertain or adverse state of the law. See further discussion in § 1.7. See also TriBar Closing Opinion Report at 600.
19. See Ch. 5.
20. See, e.g., 1987 California Real Estate Report at 1151–53. There appears to be a growing consensus that there should be no difference in meaning attributed to “would hold” and “should hold” language. See, e.g., 2005 California Business Law Report ¶ IV.B.4; TriBar Closing Opinion Report at 607 n.37.
21. These reasons are not necessarily unique to real estate transactions.
22. An exception to this general rule is when the borrower’s attorney is a specialist in the field of an arcane issue and the lender’s local counsel is not. The California Real Estate Report identifies as examples reasoned opinions on tax or land-use issues. 1987 California Real Estate Report at 1152 n.32.
23. See discussion of costs/benefit considerations in § 1.6.
24. See discussion in Ch. 9.
25. When the recipient’s counsel is equally well situated to provide advice on an issue, a third party opinion probably will not give rise to liability on the part of the opinion giver for a negligently prepared opinion, rendering the opinion of doubtful value. See Ch. 2.
26. See FitzGibbon & Glazer, Opinions on Agreements at 691 n.123.
27. This is particularly relevant to the issue of transaction characterization. See § 5.12.