This is the third of a series of articles examining the question of who should be allowed to rely on an opinion letter issued by a real estate lawyer in a financing transaction and how that reliance should be expressed (and limited) in the opinion letter.
As noted in the previous articles in this series, lawyers do get sued over legal opinions, and many opinion claims are asserted that never make their way into a court. One important risk management tool by law firms who issue third party opinion letters is to limit expressly who may rely on an opinion letter, because courts recognize that a legal opinion may be relied upon only by its addressee and by any other person expressly authorized to rely. Limiting who may rely on an opinion letter, therefore, necessarily limits the potential plaintiffs when things go wrong.
In examining the issue of who should be allowed to rely on opinion letters issued by real estate lawyers in financing transactions, it was previously noted that the appropriate reliance parties are determined in large part by the type of financing transaction. As indicated, most financing transactions in which real estate lawyers issue opinion letters (as lead counsel or as local counsel) tend to fall into one of these categories: portfolio loans, conduit loans, HUD loans, Fannie Mae/Freddie Mac loans, syndicated loans, and debt securities. This article examines the appropriate reliance parties in a conduit loan transaction, i.e., a loan to finance a specific real estate project, originated by a “conduit” lender for the purpose of transferring the loan to a securitization platform.
The addressee of an opinion letter in a conduit loan is normally the originating or “conduit” lender. Clearly the conduit lender is entitled to rely on the opinion letter and has the right to assert a claim against the opinion giver in appropriate circumstances if the lender suffers a loss on account of a “misrepresentation” in the opinion letter.
Similarly, the real estate mortgage investment conduit (or REMIC) to whom the conduit lender intends to transfer the loan for securitization should also be entitled to rely on the opinion letter (at least once the loan has been transferred to it), inasmuch as the REMIC will likely own the loan until its maturity. If the actual REMIC to which the loan will be transferred is known at the time of origination, then ideally the opinion letter should be addressed to the specific REMIC, in addition to the conduit lender, or the REMIC should be specifically identified in the opinion letter as a party entitled to rely on the opinion letter. However, often the identity of the REMIC is not known at the time of loan origination, at least to borrower’s counsel, in which case a more general reliance clause can be added, usually at the end of the opinion letter. Illustrative language for this purpose is included at the end of this article.
Typically a REMIC enters into a pooling and servicing agreement or trust and servicing agreement pursuant to which a third party servicer undertakes to administer the loans held by the REMIC in a mortgage loan pool. Often, counsel for the originating lender will insist that the opinion letter of borrower’s counsel be addressed to the servicer as well. However, inasmuch as the servicing agreement (which borrower’s counsel never sees) provides the servicer with authority to act on behalf of the REMIC as to the loans held in the applicable mortgage loan pool, making the servicer a reliance party seems unnecessary. The servicing agreement speaks for itself: either the servicer has been authorized to assert claims with respect to opinion letters (in which case naming the servicer specifically in the opinion letter is unnecessary) or it has not been granted such authority by the servicing agreement (in which case the opinion letter should not be used to alter the role of the servicer). Inasmuch as the opinion giver is not afforded the opportunity to review the servicing agreement so as to understand the servicer’s rights against the opinion giver, it seems a not unreasonable position for the opinion giver to decline to add the servicer as a reliance party; otherwise, the opinion giver is granting the servicer an independent route to assert claims against the opinion giver that may or may not have been intended by the servicing agreement.
Assuming that the loan is in fact being originated for securitization, are there other parties who should be entitled to rely on the opinion letter, in addition to the conduit lender and the REMIC? As noted in a previous article, lender’s counsel is not an appropriate reliance party, even though many lender’s counsel persist in asking to be so named. Similarly, an opinion giver should not be required to name loan “participants” as reliance parties for the reasons described in the previous article as well as due to the fact that a conduit loan simply does not usually have participants. Although allowing the conduit lender’s “successors and assigns” to rely on an opinion letter may seem a reasonable request from an opinion recipient, there are very good reasons, discussed at length in the previous article, why using such an open-ended clause is not advisable for the opinion giver and should be avoided. Besides, a conduit loan is, by definition, originated with the understanding that it will be transferred to a REMIC and not to unnamed “successors and assigns” of the conduit lender.
Historically, lender’s counsel in conduit loans have requested that opinion letters expressly permit reliance thereon by a rating agency issuing a credit rating for commercial-mortgage backed securities issued with respect to a pool of mortgage loans that includes the conduit loan. However, opinion givers should be aware that most rating agencies no longer expect to be named as reliance parties in opinion letters issued in connection with the origination of loans, whether the loans were originated for securitization or otherwise. In fact, many lender’s counsel seem to be unaware of this development, and often they continue to insist that an opinion letter must name rating agencies as reliance parties. Because this issue continues to crop up on a frequent basis in conduit loan closings, some background might be useful.
Standard & Poor’s Corporation in its US CMBS Legal and Structural Criteria, as recently as 2003, required that opinions should be addressed and delivered to Standard & Poor’s, and this appears to have been industry market practice. However, the 2003 criterion was superseded by later guidance that no longer required that opinions be addressed to S&P. Notwithstanding this change in policy, many lender’s counsel continue to insist that rating agencies be named in opinion letters for conduit loans. In 2015 Bill Dunn with Clark Hill PLC and Joe Forte with Kelley Drye & Warren, LLP undertook to ask DBRS, Inc., Fitch Ratings, Kroll Bond Ratings Agency, Inc., Moody’s Investors Service, Inc., Morningstar Credit Ratings LLC, and Standard & Poor’s their position on this topic, and all of these rating agencies confirmed that they do not require being an addressee or being named as a reliance party of opinion letters issued at the closing of a conduit loan. However, the rating agencies do expect that such opinion letters will be disclosed to them for due diligence (but not reliance) purposes, which can be accomplished by posting the opinion letter on the securitization website under SEC Rule 17g-5. The illustrative reliance paragraph below, which is a version of the reliance language presented in Local Counsel Opinion Letters in Real Estate Finance Transactions, addresses this disclosure requirement.
In summary, in opinion letters issued at the closing of conduit loans, the reliance parties should be limited to (a) the originating or conduit lender and (b) the REMIC to which the loan will be transferred for securitization. It is not necessary or appropriate for such opinion letters to be addressed to successors and assigns, lender’s counsel, loan servicers or rating agencies or for such parties to be named as reliance parties; however, such opinion letters should allow disclosure to rating agencies (other than for reliance purposes). Admittedly, opinion givers are likely to encounter significant resistance to an opinion giver’s attempt to limit the reliance parties as suggested herein. However, over time it is hoped that a more consistent approach by opinion givers on this issue will gradually cause the conduit loan market to accept this approach.
The following is one example of a concluding paragraph describing the parties that are entitled to rely on the opinion letter issued in a conduit loan.
The foregoing opinions are being furnished only to the Lender and only for the purpose referred to in the first paragraph of this opinion letter, and this opinion letter is not to be disclosed to any other person or entity or used or relied upon by any other person or entity or for any other purpose without our prior written consent. At your request, we hereby consent to disclosure of this opinion letter to and reliance hereon by any trust to which the Loan is transferred and which is established for the purpose of securitizing commercial mortgage loans (the “Securitization Trust”), subject to the conditions set forth in this paragraph. This opinion letter speaks only as of the date hereof, and we have no responsibility or obligation to update this letter, to consider its applicability or correctness to any person other than the Lender as of the date hereof, or to take into account changes in law, facts or any other developments of which we may later become aware that might change the opinions expressed herein. We also consent to disclosure of this opinion letter to nationally recognized statistical rating organizations rating an issuance of securities by the Securitization Trust or otherwise entitled to access under Rule 17g-5 under the Securities and Exchange Act of 1934, as amended (or any successor provision to such subsection), by providing a copy of this opinion letter to the appropriate 17g-5 information provider for the Securitization Trust or as otherwise permitted by the applicable pooling and servicing agreement or trust and servicing agreement, as the case may be, but such consent to disclosure shall not be construed to entitle any party (other than the Lender and the Securitization Trust) to rely on this opinion letter.
