Blank Portrait



Are We Coming Apart or Coming Together:

To What Extent Does Customary Real Estate Legal Opinion Practice

Diverge From or Converge With Customary “Business Transaction”

(Non-Real Estate) Legal Opinion Practice

Kenneth M. Jacobson©[1]/

Lawyer A closes a real estate mortgage loan made to its client, the borrower, in the morning and, in connection with that closing, provides an opinion of counsel to the mortgage lender. Lawyer A then walks across the street and closes a deal on behalf of a client that is buying a non-real estate business in the afternoon of the same day. In the afternoon deal, Lawyer A delivers an opinion of counsel to the seller of the non-real estate business. All other things being equal, should the diligence practiced by Lawyer A and the scope of the opinions and the accepted meanings of the opinions provided by Lawyer A in the two deals closed on the same day differ in any material respect? There is growing anecdotal evidence of convergence, where appropriate, of real estate legal opinion practice and non-real estate business legal opinion practice. The benefits of such a convergence include consistency of practice where appropriate. Perhaps, lawyers in various jurisdictions should be able to issue substantially the same opinion in the real estate mortgage financing they close in the morning as in the non-real estate business transaction deal they close in the afternoon, except to the extent of identifiable differences in practice and law or where the need to converge practice is not cost-justified.[2]/

In 1998, the TriBar Opinion Committee issued its report on “Third-Party ‘Closing’ Opinions,”[3]/ reporting on customary New York legal opinion practices in business transactions. Customary legal opinion practice is important because it is the standard by which opinion letters are judged.[4]/ Following the issuance of the TriBar II Report, the Business Law Section of the American Bar Association developed “Legal Opinion Principles”[5] and “Guidelines for Preparation of Closing Opinions”[6] for use in transactional matters. Historically, statements of customary legal opinion practice promulgated by the business bar have not adequately addressed certain unique aspects of commercial real estate legal opinion practice. While, perhaps an overgeneralization, there is growing evidence that, as asserted above, with the exception of certain significant matters, real estate transaction legal opinion customary practice does not significantly diverge from business transaction legal opinion customary practice. Evidence of such convergence may be seen through a review of the “Real Estate Guidelines”[7]/ which adopted the Business Guidelines and the Principles, but added additional guidelines appropriate for real estate practice addressing issues that may not arise in non-real estate transactions. This paper reviews certain aspects of the TriBar II Report as exemplifying customary legal opinion practice (“Customary Business Transaction Legal Opinion Practice”) in the “business transactions” arena and compares it to certain aspects of the Real Estate Guidelines and also to certain aspects of the “Mortgage Loan Opinion Report” of the Subcommittee on Mortgage Loan Opinions of the Committee of Real Property Law of the Association of the Bar of the City of New York and the Attorney Opinion Committee of the Real Property Section of the New York State Bar Association[8]/ (as such reports and guidelines may exemplify real estate legal opinion practice, “Customary Real Estate Legal Opinion Practice”).[9]/

There are a few significant differences, some of which are recognized in the TriBar II Report.[10]/ As discussed below, one of the most significant difference arises in the context of the remedies or so-called enforceability opinion. This paper discusses a few areas of convergence and divergence. However, an exhaustive study of customary legal opinion practice is beyond the scope of this paper.[11]/

General

There appears to be convergence between Customary Business Transaction Legal Opinion Practice and Customary Real Estate Legal Opinion Practice. Customary practice refers to the consensus regarding the meaning of language used in opinions utilized in connection with business transactions and the factual and legal diligence to be conducted in order to provide opinions.[12]/ It has been asserted that customary practice is generally uniform among those who provide opinions.[13]/ The Real Estate Guidelines state they reflect the then current state of customary real estate legal opinion practice.[14]/ This paper will discuss certain aspects relating to the customary accepted meanings of certain opinions and will not focus on the requisite due diligence to support those opinions. First, this paper will address areas of convergence between Customary Business Transaction Legal Opinion Practice and Customary Real Estate Legal Opinion Practice. This paper will then discuss a few selected areas of divergence between Customary Business Transaction Legal Opinion Practice and Customary Real Estate Legal Opinion Practice. This paper will then discuss some reasons to account for such divergence. Finally, this paper will raise a few selected questions for further study by the legal opinion community.

Convergence

There is growing evidence that Customary Business Transaction Legal Opinion Practice and Customary Real Estate Legal Opinion Practice are convergent in various aspects of the opinion process. That is, in the typical opinions that are given with regard to organization,[15]/ existence,[16]/ good standing,[17]/ foreign qualification,[18]/ entity power,[19]/ due authorization, execution and delivery[20]/ and noncontravention with laws, agreements and orders[21]/ there is broad consensus on meaning and appropriateness of requests and responses.

Another area of convergence pertains to the approach taken with regard to the enforceability opinion where the governing law as set forth in the relevant documents differs from the law of the opinion giver’s jurisdiction. The TriBar II Report indicates that an enforceability opinion, assuming it covers the chosen-law jurisdiction, will address whether the courts of the chosen law jurisdiction will give effect to that provision.[22]/ However, chosen law and the location of the parties and their respective counsel do not always neatly match up. The TriBar II Report indicates that a traditional approach would be for the borrower to retain counsel in the chosen law jurisdiction to address the chosen law.[23]/ Another approach, indicated as receiving growing acceptance, is to permit the opinion giver, to opine that the opinion giver’s jurisdiction will give effect to the chosen law provision, but if the law of the opinion giver’s jurisdiction were to be applied, such document would be enforceable under the laws of that jurisdiction.[24]/ Such approach was suggested as a viable alternative by the Real Estate Guidelines.[25]/ Such approach may be receiving growing acceptance in the market. Because one may argue that the essence of a real estate secured transaction is the ability to realize upon the collateral securing the financing, the opinion recipient is keenly interested in whether it will be able to realize upon the collateral should the financing get into trouble. Obviously, real estate collateral is located in a given jurisdiction and the laws of that jurisdiction may be applied to determine whether the lender may obtain the collateral or not. Having the opinion giver located in that jurisdiction may provide the answers sought by the lender. The choice of law opinion would advise the recipient that its bargained for choice of law should be given effect. Documents that have been prepared by an institutional lender that choose the law of a jurisdiction other than the jurisdiction in which the real estate collateral is located may very well have been vetted by counsel in the jurisdiction of the chosen law who will have advised their institutional lender clients as to the enforceability of those documents under the laws of the chosen jurisdiction. Having the opinion giver again address this question may not be cost-justified in all instances.

Divergence

Customary Business Transaction Legal Opinion Practice implies that an opinion that a document is enforceable against a party means that, based upon the assumptions in the opinion, and subject to the qualifications expressed in the opinion, a contract has been formed (that is, all of the necessary elements for a valid contract exist), each and every provision will be given effect so that a breach of any provision will entitle a party to a remedy and that each specified remedy in the document will be given effect.[26]/ Customary Business Transaction Legal Opinion Practice requires that any limit on the remedies opinion must be stated in the opinion.[27]/ The customary qualifications to the remedies opinion are the equitable principles and bankruptcy qualifications.[28]/ To the extent that additional qualifications are needed because of problems in the document or problems with the law, such qualifications must be separately stated. While perhaps an overgeneralization, Customary Business Transaction Legal Opinion Practice dismisses, as a general proposition, the so-called “generic exception” qualification accompanied by practical realization “comfort”.[29]/ The TriBar II Report indicates that the “practical realization” formulation has been “encrusted” with tradition but its use should be limited to the context of lease and secured financing transactions.[30]/ “Practical realization”, according to the TriBar II Report, should be taken to mean that the remedies provisions taken as a whole will provide the opinion recipient with the comfort of knowing that it can realize on its security in the event of a default and pursue a claim for damages.[31]/

The New York Report indicates that document enforcement is judicial enforcement.[32]/ The New York Report is consistent with the TriBar II Report in that an enforceability opinion expresses the opinion giver’s professional judgment that, based on the assumptions, and subject to the qualifications, expressed in the opinion, each and every provision in the document in question will be given effect.[33]/ Consistent with the TriBar II Report, some formulation of the generic qualification with comfort is acceptable in mortgage loan transactions.[34]/ The New York Report describes two (2) alternative formulations, one of which is a “practical realization” formulation recognized in the TriBar II Report and the other of which is a more detailed formulation focusing on remedies available following a material default in the relevant documentation, but such formulation would allow foreclosure and judgment for the principal and interest, late charges, default interest, prepayment premiums and reasonable enforcement costs. To the extent the enforcement of those items would be doubtful, a specific exception should be taken.[35]/

The Real Estate Guidelines report that use of a generic exception is almost universal in Customary Real Estate Legal Opinion Practice. Furthermore, the Real Estate Guidelines indicate that use of the practical realization formulation of the “comfort” in connection with the generic qualification is increasingly disfavored and notes a growing consensus with use of the ACREL formulation of generic exception and assurance.[36]/

One could assert that because Customary Business Transaction Legal Opinion Practice allows for continued use of practical realization comfort in the context of a real estate transaction, Customary Business Transaction Opinion Practice and Customary Real Estate Legal Opinion Practice converge. However, asserting that there is convergence may not be true to the spirit of how the real estate bar approaches the enforceability opinion. Customary Real Estate Legal Opinion Practice, as set out in the Real Estate Guidelines, indicates that use of a generic qualification is appropriate and recommends use of the so-called ACREL formulation of the “comfort”.[37]/ However, in endorsing use of a variant of that approach, the New York Mortgage Report, contemplated that significant issues such as prepayment may not be adequately addressed by that generic formulation.[38]/ This approach found some favor in the Real Estate Guidelines in that specific exception should be taken for non-judicial remedies of which an out-of-state lender might not be aware of or contractual provisions known by the opinion giver to have been controversial or heavily negotiated.[39]/ Without addressing what standard is to be used to determine what is, or is not, controversial, or what is or is not understood to be heavily negotiated, this pushes one closer to the TriBar approach. There is a growing trend in wholly intrastate transactions to forego an enforceability opinion in its entirety from the borrower’s counsel.[40]/ In addition, for professional responsibility and cost-efficiency reasons, there is also a trend to utilize lender’s in-state counsel for the provision of opinions or advice regarding enforceability where the transaction will support only one counsel in a given jurisdiction.[41]/ Customary Business Transaction Legal Opinion Practice[42]/ and Customary Real Estate Legal Opinion Practice[43]/ do converge in that both indicate that requests for overriding assurances of enforceability in the face of qualifications are inappropriate. Perhaps, it may make sense to look at the generic qualification and the related comfort as broad brush; that is, if something really bad happens, the lender may foreclose and get its principal and non-default rate interest.

Customary Business Transaction Legal Opinion Practice[44]/ and Customary Real Estate Legal Opinion Practice[45]/ converge in the sense that the enforceability opinion includes an implied usury opinion. To the extent that a usury exemption forms the basis for a usury opinion, Customary Real Estate Legal Opinion Practice would suggest that the basis for such opinion be stated if not obvious.[46]/ For example, an exemption for loans made to a limited liability company or secured by a real estate mortgage should be obvious on their face. However, opinions that rely on arrangement of financing by a licensed broker or provision of financing by a licensed lender, should state the basis for such exemption as a cursory review of a loan file would not indicate to the reviewer the basis for such exemption.

Certain opinions may be requested or provided in real estate transactions because of the presence of multi-state secured transactions where transaction participants may not be familiar with the laws of all of the jurisdictions where security may be enforced. For example, some opinion givers in real estate transactions may be requested to provide opinions to the effect that the documentation in question includes customary remedial provisions for transactions of the type in question. Of course, the Real Estate Guidelines indicate that the circumstances in which the borrower’s counsel is requested to provide such an opinion are limited.[47]/ Other opinions that may be requested of a borrower’s counsel in real estate transactions include opinions with regard to the necessity of a lender to qualify in a jurisdiction or that the lender is not required to pay taxes in respect of a given jurisdiction. However, as indicated in the Real Estate Guidelines, such requests, dependent in many instances on a number of assumptions, may have little practical utility.[48]/

Trends and Conclusions

This paper does not purport to address all possible areas of convergence or divergence in opinion practice. However, as indicated, there are many areas of convergence between Customary Business Transaction Legal Opinion Practice and Customary Real Estate Legal Opinion Practice. Areas of divergence arise because of the convergence of the desire of real estate lenders to obtain the benefits of their security with the circumstances where substantive laws may indicate that certain provisions of the relevant documents may not be enforceable. This, combined with the desire to minimize transactional costs, where appropriate, has led to increased use and acceptance of the generic qualification and related “comfort” in customary Real Estate Legal Opinion Practice. Trends include foregoing of enforceability opinions in wholly-intrastate transactions and the lender’s counsel providing the necessary comfort to the lender in those multi-state transactions where costs push the parties to utilize only one counsel in that jurisdiction. The California Report indicates that, in the absence of special factors, the benefit obtained by a recipient of an enforceability opinion may be provided, on a more cost-effective basis by that party’s counsel.[49]/ Whether the notion of elimination of the requirement that the borrower’s counsel provide an enforceability opinion will gain increasing acceptance in the marketplace remains to be seen. Is elimination of the tradition of borrower’s counsel providing an “enforceability” opinion a desirable approach? If it is eliminated, will business transaction legal opinion practice follow?

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© Copyright 2006. Kenneth M. Jacobson. All rights reserved.

1 This paper does not provide legal, tax or accounting advice. This paper and the views expressed do not describe minimum standards of practice or represent the positions of any firm or other organization. The author reserves the right to assert positions contrary to those stated in this paper.

2 Section of Business Law of the American Bar Association, Committee on Legal Opinions, “Legal Opinion Principles” 53 Bus. Law. 831 (May 1998) (the “Principles”).

3 TriBar Opinion Committee, 53 Bus. Law. 591 (February 1998) (“TriBar II Report”).

4 See Restatement (Third) of the Law Governing Lawyers §95. See also, Business Law Section of the State Bar of California, Opinions Committee, “Toward a National Legal Opinion Practice: The California Remedies Opinion Report”, 60 Bus. Law. 907 (May 2005).

[1] Section of Business Law of the American Bar Association, Committee on Legal Opinions, “Legal Opinion Principles”, 53 Bus. Law. 831 (May 1998) (“Principles”).

[2] Section of Business Law of the American Bar Association, Committee on Legal Opinions, “Guidelines for Preparation of Closing Opinions”, 57 Bus. Law. 875 (2002) (“Business Guidelines”). The Business Guidelines were intended to complement the Principles. Business Guidelines at 875.

[3] American College of Real Estate Lawyers Attorneys Opinion Committee and the American Bar Association Section of Real Property, Probate and Trust Law Committee on Legal Opinions in Real Estate Transactions,” 38 Real. Prop. Prob. & Tr. 241 (Summer 2003) (“Real Estate Guidelines”).

[4] Association of the Bar of the City of New York Committee of Real Property Law Subcommittee on Mortgage Loan Opinions and the New York State Bar Association Real Property Section Attorney Opinion Committee, “Mortgage Loan Report”, 54 Bus. Law. 119 (November 1998) (the “New York Report”).

[5] Of course, some may debate whether the TriBar II Report exemplifies customary legal opinion practice.

[6] See TriBar II Report at 626.

[7] A joint effort including members of the Legal Opinion Committee of the Real Property, Probate and Trust Law Section of the American Bar Association and the Attorneys Opinion Committee of the American College of Real Estate Lawyers, in which the author of this paper is a participant, is, as of the writing of this paper (December 2006), underway to study similarities and differences in customary practice.

[8] See TriBar II Report at 595.

[9] State Bar of California, Business Law Section, “Report on Third-Party Remedies Opinions”, Appendix 8, 2 (2004) (December 2, 2006) (“California Report”).

[10] Real Estate Guidelines at 242.

[11] See e.g. New York Report, at 143-144.

[12] Id.

[13] Id., at 145. The New York Report reports that the TriBar II Report suggested that because the good standing certificate is based solely upon certificates obtained solely from public officials, the benefits of such opinion are marginal and suggest that the “good standing” opinion not be required. The New York Report concurred with such suggestion.

[14] Id. at 143.

[15] Id. at 145-146.

[16] Id. at 150-151.

[17] Id. at 165-167.

[18] TriBar II Report, at 634.

[19] TriBar II Report, at 634.

[20] TriBar II Report, at 635.

[21] Real Estate Guidelines, at 257.

[22] TriBar II Report, at 620. This paper does not address the historical argument between adherents of the so-called “each and every provision” approach to enforceability as exemplified in the TriBar II Report and the so-called “essential provisions” approach to enforceability. The California Report suggested that the debate should be discontinued and that attention should be focused on determining when liability for breach of the standard of care imposed through customary practice should be imposed. See California Report.

[23] Id. at 622.

[24] Id.

[25] Id., at 626.

[26] id.

[27] id.

[28] New York Report at 152.

[29] id., at 153.

[30] id., at 157.

[31] id., at 159-161.

[32] Real Estate Guidelines, at 250-251.

[33] id.

[34] New York Report, at 160.

[35] Real Estate Guidelines, at 251.

[36] id., at 245.

[37] id. at 243.

[38] TriBar II Report, at 627.

[39] Real Estate Guidelines, at 251.

[40] TriBar II Report, at 628.

[41] Real Estate Guidelines, at 251-252.

[42] id.

[43] id., at 243-244.

[44] id., at 253-254.

[45] California Report, at 12-13.

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