The traditional in-person closings for commercial real estate loans, as well as other types of commercial finance transactions, are largely a thing of the past. Instead, most lawyers representing borrowers (or the borrowers themselves) deliver pdf copies of executed closing documents in escrow to the lender’s counsel via email in advance of the closing, with originals (if required at all) to follow or to be delivered to the title insurance company for recordation, as applicable. Often only executed signature pages are delivered. Lender’s counsel becomes the depository for closing documents, attaches executed signature pages to and otherwise compiles closing documents, and determines if all closing conditions have been satisfied.
One of the closing documents typically delivered in advance is the borrower’s counsel signed opinion letter. Unlike most of the loan documents, however, the opinion letter confirms (or relies upon the premise) that many of the other closing conditions have been satisfied. As a result, it should not be released to the lender until borrower’s counsel has determined that those conditions have been satisfied and that (to borrow a term familiar to our litigation colleagues) the opinion letter is “ripe” for release. However, it is the lender’s counsel, rather than borrower’s counsel, who holds the signed closing certificates with authorizing resolutions, executed loan documents and other closing documents and who may be in the best position to make that determination.
Often the way to accomplish this logistically is for the issuer of the opinion letter to place the opinion letter in escrow under a set of conditions that provides when the letter may be released to the lender.
If the opinion letter in question is to be issued by one or more local counsel rather than by or in addition to the borrower’s lead counsel on the loan transaction, determining when those conditions have been satisfied may become even more difficult. Particularly in large syndicated loans with collateral in several states and/or subsidiary guarantors organized under the laws of different states, the local counsel retained to issue opinion letters regarding the laws of their respective states probably will have little or no contact with the borrower or its affiliates, with the lender or with lender’s counsel. The local counsel’s principal point of contact will be borrower’s lead counsel, who likely reached out to local counsel on the borrower’s behalf to request the local counsel opinion letter, but who is not necessarily in a position to determine when closing conditions that matter to local counsel have been satisfied.
For purposes of this discussion, let’s assume that you have been asked by a major law firm based in New York (“Lead Borrower’s Counsel”) to issue a local counsel opinion letter in a syndicated credit facility (the “Credit Facility”) between ABC Bank, as administrative agent and collateral agent (the “Lender”), and XYZ Manufacturing Company (the “Borrower”). The Borrower operates its business and owns real property in several states, including your state (the “Local State”). The Borrower also has several subsidiaries that will guarantee the loans made under the Credit Facility and will grant security interests in collateral to secure those loans. One of those subsidiaries (“Local Sub”) is a corporation that is organized under the laws of the Local State (the “Local Law”) and owns real property in the Local State that will be mortgaged to secure the Credit Facility. All of the loan documents are governed by the laws of the State of New York, except that the deed of trust or mortgage to be recorded in the Local State (the “Mortgage”) is governed by the Local Law with respect to the creation, perfection and enforcement of liens.
You have been asked to give the following opinions, among others, to the Lender, in each case as to Local Law:
You are allowed to assume in your opinion letter, among other things, the genuineness of signatures.
You have no prior relationship with the Borrower, Local Sub and or any other affiliates of the Borrower, and you will have no direct contact with them during the course of the transaction. You also will have no contact with the Lender or, except for responding to comments on your draft opinion letter, the lead counsel to the Lender (“Lead Lender’s Counsel”). Almost all of your communications are with a second-year associate at Lead Borrower’s Counsel who is clearly stressed out working on this transaction and the others the associate is juggling at the same time
You have reviewed early drafts of the credit agreement, guarantee agreement and the security agreement, but you did not provide any comments on them because they are governed by New York law, and, even though they may be mentioned in the Mortgage and in your opinion letter, you are not giving any opinion on them. You have reviewed Local Sub’s organizational documents and a draft of a secretary’s certificate for Local Sub, but Lead Borrower’s Counsel has not yet prepared the authorizing resolution to be attached to the certificate. You have also reviewed a revised draft of the Mortgage which incorporates comments you submitted earlier. You have not been provided with copies of any closing documents as executed or with a good standing certificate for Local Sub.
In order for Lead Borrower’s Counsel and Lead Lender’s Counsel to determine that all conditions to closing have been satisfied so that funding of the loan may proceed immediately thereafter or as soon thereafter as contemplated by the credit documents, it is entirely appropriate for Lead Borrower’s Counsel to expect to receive signed opinion letters from local counsel in escrow in advance of closing and with clearly understood conditions as to when the opinion letters may be released from escrow. But, as often is the case, the devil is in the details.
C. Delivering the Opinion Letter in Advance of Closing
The stressed-out second year associate at Lead Borrower’s Counsel finally advises you that your opinion letter has been approved as to form by Lead Lender’s Counsel and that closing is anticipated to occur in three days, pending finalization of the credit agreement and other documents not covered by your opinion letter. The associate asks you to overnight that evening your original, signed opinion letter in escrow, as the associate has responsibility for several local counsel opinions and needs everything in advance to get organized for the closing. The associate directs you to leave the opinion letter undated so that the associate may insert the date of closing (in case closing doesn’t occur on the anticipated date). The associate states that your opinion letter will be dated and released when Lead Borrower’s Counsel releases its opinion letter.
How should you respond? Lawyers legitimately may differ in how they would deliver a signed local counsel opinion letter under these circumstances. The following represents responses that I would make in order to minimize the risk of the opinion letter’s being issued before it is “ripe” for release.
1. Should the Original, Signed Opinion Letter be Delivered in Escrow or Just a PDF Copy?
When I am local counsel in this type of situation, I only provide a pdf copy of the signed opinion letter, not the original, in advance of closing, and I provide the original, if requested, after the closing. Admittedly, it shouldn’t matter inasmuch as delivery of a copy of the signed opinion letter is binding on the opinion giver just as a copies of signed loan documents can be binding on the borrower. However, I take some comfort (even if misplaced) that the Lead Lender’s Counsel will not have my original opinion letter, if at all, until all of the closing conditions that the Borrower is required to satisfy have in fact been satisfied. If the closing date changes from the date of the opinion letter or perhaps never happens, I would rather not have an original, signed opinion letter sitting in the office of Lead Lender’s Counsel or Lead Borrower’s Counsel that needs to be destroyed, and I have no way of making sure that happens. Once the closing has occurred, and if specifically requested, local counsel can overnight the original, signed opinion letter to Lead Lender’s Counsel or Borrower’s Counsel, as appropriate; however, often Lead Lender’s Counsel is satisfied with the pdf copy emailed in advance of closing.
2. Should the Opinion Letter be Undated?
I don’t deliver signed opinion letters that are undated, in large part it looks unprofessional for an opinion letter to have a date that has been inserted by hand and in part because, in delivering an undated opinion, I would be relying on the stressed-out second year associate to insert the closing date without my participation. As noted below, if the opinion letter is not delivered until the eve of the closing, dating the opinion letter in advance is seldom an issue.
3. When Should the Opinion Letter be Delivered in Escrow?
I do not deliver a signed opinion letter in escrow until the closing date is a certainty, or a near certainty. This usually means sending a pdf copy of the signed opinion letter by email on the evening before the closing is to occur, or first thing in the morning of the closing, after making a determination that, notwithstanding any past postponements in the targeted closing date, it appears that the closing will in fact take place on that date. This approach has two advantages. First, the opinion letter can be dated before it is sent, and it is not likely that an updated opinion letter will need to be sent to replace the first one because the closing is postponed. Second, it increases the likelihood that any remaining documents relevant to the opinion letter will have been finalized (and approved by the opinion giver) before the opinion letter is sent in escrow so that there will be fewer contingencies to release of the opinion letter.
4. To Whom Should the Opinion Letter be Delivered in Escrow?
To some extent, your answer to this question may depend on how much you trust Lead Borrower’s Counsel or Lead Lender’s Counsel in the transaction. In theory, of course, liability should not attach to the opinion issuer unless the conditions for release of the opinion letter from escrow are satisfied, regardless of who holds the opinion letter in escrow and then releases it, but who wants to explain after the fact that the opinion letter that was released improperly and circulated to all parties should not have been “out there”? Often Lead Borrower’s Counsel tells local counsel to send its opinion letter to Lead Borrower’s Counsel so that it can deliver everything at the same time. Perhaps the best approach is to send the pdf copy in escrow to both Lead Lender’s Counsel and Lead Borrower’s Counsel so that both are well aware of the conditions to release.
5. What Conditions Should be Placed on Release of the Opinion Letter from Escrow?
Depending on the facts associated with each transaction and the practices of the lawyers involved, the conditions under which local counsel opinion letters are delivered in escrow can vary widely and include the following:
• The opinion letter may be released when Lead Borrower’s Counsel releases its opinion letter. This condition works well for Lead Borrower’s Counsel, of course, but it may not take into account matters that are still outstanding for local counsel’s opinion letter that are not relevant to the issuance of Lead Borrower’s Counsel’s opinion letter. For example, in the facts recited earlier, local counsel is giving an opinion as to the entity status and power and authority of Local Sub and as to due authorization, execution and delivery by Local Sub of the Local Sub Documents. If Local Counsel has not yet received a copy of the signed secretary’s certificate with all necessary attachments or copies of the Local Sub Documents as executed by Local Sub in order to confirm all of the foregoing, its opinion letter should not be released even though Borrower’s Counsel is perfectly willing to release its opinion letter because it is not giving those opinions. On the other hand, if local counsel is not giving an opinion as to the foregoing matters and instead is only giving an opinion as to the enforceability of a Mortgage, based on an assumption that the Mortgage has been duly authorized, executed and delivered, this condition may be entirely appropriate for local counsel if local counsel has already received and approved a copy of the Mortgage in final (if not executed) form.
• The opinion letter may be released at the closing of the loan transaction. This escrow condition may be too vague to protect local counsel from release of its opinion letter before it should be released. What if Lead Borrower’s Counsel determines, after long hours of hard work on the loan documents and persistent pressure by their clients to allow funding, that conditions to closing have been satisfied without remembering (or perhaps without having been told) that local counsel never received copies of Local Sub’s good standing certificate or some other document that forms a basis for one of the opinions it is giving? On the other hand, as noted above, if local counsel is not giving an opinion as to the foregoing and instead is only giving an opinion as to the enforceability of a Mortgage, based on an assumption that the Mortgage has been duly authorized, executed and delivered, this condition may be entirely appropriate and sufficient for local counsel if local counsel has already received and approved a copy of the Mortgage in final (if not executed) form.
• The opinion letter may be released only upon release by Local Sub of its executed signature pages. As noted above, physical delivery of loan documents from the borrower to the Lender seldom occurs in the closing of modern commercial lending transactions. Instead, executed loan documents (or at least executed signature pages) are emailed to Lead Lender’s Counsel in escrow, and thereafter the borrower or Lead Borrower’s Counsel notifies the Lender or Lead Lender’s Counsel at the appropriate time that the borrower has “released” the executed documents. This is understood by parties on both sides of the transaction to mean that the loan documents have been “delivered” in the final step of the closing process so as to have the effect of making the loan documents a binding obligation of the parties. If local counsel has determined that all other outstanding items for its opinion letter have been provided other than delivery of the Local Sub Documents, this condition provides assurance that the Local Sub Documents have been “delivered” for purposes of the “duly executed and delivered” opinion. It also allows the local counsel opinion letter itself to be released without separate authorization from local counsel on the day of closing, as Lead Borrower’s Counsel will likely know before or at least the same time as local counsel when the borrower has released its executed signature pages. As additional assurance, local counsel may request a separate certificate from Local Sub to the effect that it has authorized release of the signature pages (or executed documents) from escrow and that its release of the signature pages (or executed documents) is intended to constitute delivery of the Local Sub Documents.
• The opinion letter may be released only upon express authorization by local counsel. This condition obviously is most favorable to local counsel. When there is uncertainty as to the status of certain items needed for local counsel to release its opinion letter (other than simply release of executed documents), such a broad, unilateral escrow condition may be entirely appropriate. However, this condition often is unacceptable to Lead Borrower’s Counsel who need to know that the local counsel opinion letters can be released when they are ready to close rather than waiting for separate authorizations from each local counsel at the last minute. In addition, such a broadly stated condition fails to provide Lead Borrower’s Counsel with any guidance as to what items may remain outstanding in order for local counsel to authorize release of its opinion letter. In the fact pattern set forth above, the outstanding items that local counsel needs in order to release its opinion letter are copies of the following:
an officer’s certificate (or equivalent) certifying as to (i) true and correct copies of the organizational documents of Local Sub, (ii) the adoption of resolutions authorizing the Local Sub Documents and (iii) the persons authorized to execute the Local Sub Documents with specimen signatures of each, in form approved by local counsel;
a current good standing certificate (or equivalent) from the Local State as to Local Sub;
final versions of the Local Sub Documents, each in form approved by local counsel and as executed by the appropriate person on behalf of Local Sub; and
final versions of the credit agreement and any other loan document referenced in, but not the subject of, the opinion letter (unexecuted or executed).
If the foregoing are actually listed in the escrow instructions provided by local counsel when its signed opinion letter is transmitted to Lead Borrower’s Counsel, local counsel should advise Lead Borrower’s Counsel when those conditions have been satisfied in advance of closing and modify its escrow instructions to a more limited set of conditions. If all have been satisfied before closing, the only remaining condition may be “release” by Local Sub of the Local Sub Documents.
D. Post-Closing Deliverables
Promptly after the closing, local counsel should request Lead Borrower’s Counsel to deliver to local counsel copies of the final versions of all documents relevant to local counsel’s opinion letter, including the loan documents as executed by the applicable parties. Even if local counsel did not provide an opinion as to execution and delivery of certain loan documents, it may be helpful in the future to be able to retrieve those documents as executed.
Finally, before the stressed out, overworked second year associate at Lead Borrower’s Counsel moves on to the next deal, don’t forget to congratulate the associate for successfully closing the transaction. Chances are that you, as local counsel, helped the associate in some small way to understand better the process for issuing opinion letters in financing transactions.
