Risk Management for Legal Opinions: Limiting Who May Rely on Your Opinion Letters

This is the fifth of a series of articles in Opinions Matters 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.

Syndicated Loans

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 expressly limit 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, I 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-insured loans, Fannie Mae/Freddie Mac loans, syndicated loans, and debt securities. This article examines the appropriate reliance parties in syndicated loans. Although a very large real estate loan to finance a particular project may be syndicated, most real estate loans tend to be bilateral loans that are either held by the originating lender in its portfolio or transferred to a securitization platform. Therefore, if a real estate lawyer is called upon to issue an opinion letter in a syndicated loan, more often than not the opining lawyer will be acting as local counsel in a large corporate financing that happens to be secured by real property in that lawyer’s state. However, the issues regarding appropriate reliance parties are the same for syndicated loans whether the opinion giver is lead counsel or local counsel.

Opinion Letters in Syndicated Loans

A syndicated loan is a form of debt financing in which an affiliate of one or more banks or other financial institutions (usually referred to as the “arranger” or “joint lead arrangers”) assembles a group (or “syndicate”) of lenders to extend various types of credit (term loans, revolving credit loans, letter of credit facilities, etc.) to a company to provide working capital, finance an acquisition of a business, or for other purposes. Each member of the syndicate commits to fund or extend its proportional share of the total amount of loans or credit to be made available. The bank that is affiliated with the lead arranger serves as “administrative agent” for all of the lenders. The institution serving as administrative agent or another member of the syndicate may also serve as “collateral agent” for the lenders with regard to any collateral to be pledged to secure the credit facilities. Although the administrative agent is responsible for properly documenting and closing the credit facility and for administering the credit facility during its term, each lender in the syndicate is a party to the credit agreement, executes the credit agreement for the closing, and has a direct contractual relationship with the borrower.

The foregoing relationship between the lenders and the borrower in a syndicated credit facility is to be contrasted with a loan participation that may be more familiar to real estate lawyers. In a loan participation structure, the originating lender sells participation interests in the loan to other parties, but the originating lender continues as the sole party to the loan documents on the lending side of the transaction, while the borrower maintains privity of contract only with the originating lender and does not have any direct relationship with the participants. Although the lender in such a transaction may request that an opinion giver allow participants to rely on the opinion letter, the opinion giver normally can and should resist such a request, as allowing reliance in such circumstances is inconsistent with the participation structure in which only the originating lender is a party to the loan documents.

In addition to the fact that the original lenders in the syndicate have a direct contractual relationship with the borrower, syndicated loans differ from many traditional real estate loans in that the lenders in the syndicate fully intend to sell (or at least have the right to sell) some or all of their pro rata shares of the credit facilities at any time to other financial institutions in the well-established secondary market for syndicated loans. The right to sell loans in the secondary market is subject to certain conditions, but once those conditions are satisfied, the lender who purchases an interest thereby assumes the selling lender’s obligations and becomes a party to the credit agreement with respect to the loan amount purchased.

Reliance Parties for Opinion Letters in Syndicated Loans

In general, the expectation in the syndicated loan market for loans originated in the United States is that an opinion letter issued by the borrower’s lead counsel and any local counsel would be addressed to, or would allow reliance by, (a) the administrative agent, (b) the collateral agent (if any), and (c) the lenders from time to time in the syndicate, including those lenders who purchase a loan in the secondary market at any time during the term of the credit facility. As noted above, there is usually an arranger or joint arrangers for a syndicated loan, and often there are other agents or roles for lenders in a syndicated loan, in addition to the administrative agent and the collateral agent, such as a “syndication agent,” “documentation agent,” and “bookrunner.” The financial institutions serving in these roles may even be identified as such on the cover page of the credit agreement, but they are not usually a signatory to any loan document. It is not typical to include such persons as addressees or reliance parties in an opinion letter, as their roles are very limited if not nonexistent after the closing, and they would not be a proper party to assert a claim under the opinion letter.

In the addressee line of the opinion letter, the administrative agent and collateral agent may be identified by name (and capacity as agent) or by a defined term used in the opinion letter for such parties. The opinion letter usually does not identify by name the lenders in the syndicate as of the date of the opinion letter because (a) the opinion giver often does not know who they are, and (b) it usually makes more sense to identify the “Lenders” who may rely on the opinion letter in a more generic sense as all such parties who are currently “Lenders” and who become “Lenders” post-closing, in recognition of the fact that the loans will be traded in the syndicated loan market.

However, that does not mean that an opinion letter in a syndicated loan should allow reliance by all “successors and assigns” of the initial lenders. It has become accepted practice to limit reliance along the lines of the following sample language:

The foregoing opinions are being furnished only to the Administrative Agent, the Collateral Agent and the Lenders as of the date hereof 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 reliance on this opinion letter by any successor administrative agent and any successor collateral agent under Credit Documents and any future assignee of any Lender’s interest in the loans under the Credit Documents pursuant to an assignment that is made and consented to in accordance with the express provisions of the Credit Documents (collectively with the Administrative Agent, the Collateral Agent and the Lenders as of the date hereof, the “Permitted Reliance Parties” and each, individually, a “Permitted Reliance Party”) 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 Administrative Agent, the Collateral Agent and the Lenders 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. Any reliance by a Permitted Reliance Party must be actual and reasonable under the circumstances existing at the time such Permitted Reliance Party is first entitled to rely on this opinion letter, including any changes in law, facts or any other developments known to or reasonably knowable by such Permitted Reliance Party at such time. (Emphasis added.)

The foregoing limitations were developed and have become accepted in opinion letters for syndicated loans in recognition of the fact that, when syndicated loans are traded on the secondary market, the opinion letter issued at the closing should only run to the benefit of assignees who purchase a loan in accordance with the recognized assignment provisions of the loan documents, assignees should not have not greater rights against the opinion giver than the initial lenders at the closing, and an assignee should be held to a standard of reasonableness in its reliance.

Other Limitations on Reliance

Other limitations on the right of future lenders to rely on an opinion letter are possible as well, although they have not gained as broad acceptance in the syndicated loan market as the sample language set forth above. For example, it has been suggested that an opinion letter issued for a syndicated loan should state that only the administrative agent, and not individual lenders in the syndicate, may assert a claim against the opinion giver for matters addressed by the opinion letter. This limitation certainly seems logical, inasmuch as the administrative agent has general responsibility for originating and administering syndicated loans as well as for exercising remedies, all on behalf of the lender syndicate. From the standpoint of the opinion giver, it eliminates the possibility of multiple claims and lawsuits from various lenders for the same alleged error in an opinion letter and instead places responsibility for asserting such a claim on the party that is probably in the best position to evaluate such a claim—namely, the administrative agent. However, many opinion recipients resist this sort of a limitation, perhaps fearful that it will be viewed negatively in the secondary loan market.

Another possible limitation is to restrict reliance by subsequent lenders to those who purchase a loan within a finite period of time after the closing, such as 90 days or six months. Such a limitation is more likely to insure that the lenders who may ultimately assert a claim against the opinion giver were involved in the loan origination itself or at least are only established financial institutions who purchased the loans in the ordinary course of the syndicated loan business, as opposed to vulture funds and other loan purchasers who acquire a loan much later and for less conventional reasons. However, this limitation does not yet seem to have broad acceptance in the U.S. syndicated loan market.

Opinion givers sometimes also attempt to limit their liability in syndicated loans to a particular dollar amount, perhaps comparable to the limits of their malpractice insurance. Although this limitation also is not likely to be accepted in the U.S. syndicated loan market, both of the last two limitations mentioned are not uncommon in opinion letters for syndicated loans originated in the United Kingdom or certain other European countries. If a U.S. lawyer is called upon to issue a local counsel opinion in such a transaction—such as, for example, an opinion on collateral documents relating to real estate in the U.S. that secures a credit facility provided by European banks (a so-called outbound cross-border opinion)—that lawyer may find such limitations to be acceptable. In fact, if other opinion letters provided in connection with the credit facility—from lead borrower’s counsel or other local counsel outside the U.S.—contain such limitations, the U.S. lawyer should be able to follow suit.

Finally, if issuing an opinion letter as local counsel in a U.S. syndicated loan transaction, local counsel should ask for a draft of the opinion letter to be issued by lead borrower’s counsel. If there are any limitations on reliance in the lead counsel opinion letter that are broader than those local counsel would have otherwise proffered, local counsel may choose to adopt those limitations as well.