Opinion Letter Real Estate

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					                            YOUR OPINION TOOL BOX:
                     DETAILED NUTS AND BOLTS ISSUES
                                  IN LEGAL OPINIONS
                                      Catherine T. Goldberg
                                         David L. Miller

       These materials provide a context for an interactive workshop on practical issues in legal
opinion practice. In these materials, we first review the general background in which legal
opinions are rendered and then we introduce some specific practical issues.

A.     THE OPINION FRAMEWORK.

       1.      What‟s a Legal Opinion For our purposes, a legal opinion is written advice
rendered to one party by counsel for another party in a transaction. Most commonly, counsel for
a borrower in a loan transaction renders an opinion to the lender at the loan closing.

       2.      Lots of Reports for Reference A growing number of state and national bar
associations have published legal opinion protocols that provide guidance as to customary forms
and practice for a wide variety of legal opinion letters. A fairly lengthy bibliography of reports is
published in Sterba, Legal Opinion Letters 3d ed. (2006), and a large number of reports is
included in Glazer, FitzGibbon and Weise, Glazer and FitzGibbon on Legal Opinions (2d ed. &
Rev. Supp. 2005) (hard copy & disc). Here is just a sample of the many available reports:

               (a)     The relatively code-like Third-Party Legal Opinion Report, Including the
                       Legal Opinion Accord (the “Accord”), of the Section of Business Law of
                       the American Bar Association (“ABA”), 47 Bus. Law. 167 (1991).

               (b)     A compilation of articles in the book, The Attorney‟s Opinion Letter in
                       Real Estate Transactions, by the American College of Real Estate Lawyers
                       (“ACREL”) published in 1992 by the ABA (the “ACREL Papers”).

               (c)     The Report on Adaptation of the Accord for Real Estate Secured
                       Transactions (the “Report”) of the Section of Real Property, Probate and
                       Trust Law of the ABA and ACREL, 29 Real Prop. Prob. & Tr. J. 569
                       (1994).

               (d)     Numerous reports of the “Tri-Bar” Opinion Committee, including a report
                       on Closing Opinions published in 53 Bus. Law. 591 (1998) (the “Tri-Bar
                       1998 Report”).

               (e)     A New York bar report on Mortgage Loan Opinions, 33 Real Prop. Prob.
                       & Tr. J. 552 (1998) (the “1998 Mortgage Opinion Report”).




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               (f)     The Legal Opinion Principles (1998) and the Guidelines for the
                       Preparation of Closing Opinions (2001) (the “Guidelines”) of the
                       Committee on Legal Opinions of the ABA Section of Business Law. The
                       2001 Guidelines, 57 Bus. Law. 875, supersede a set of guidelines
                       published in 1991 along with the Accord. The Guidelines restate the
                       “Golden Rule” of opinion practice: “An opinion giver should not be asked
                       to render an opinion that counsel for the opinion recipient would not
                       render if it were the opinion giver and possessed the requisite expertise.”
                       And, of course, the Guidelines also state the corresponding principle for
                       the opinion giver.

               (g)     The Real Estate Opinion Letter Guidelines of ACREL and the ABA, 38
                       Real Prop. Prob. & Tr. J. 241 (2003) (the “Real Estate Guidelines”).

               (h)     The most recent attempt at a comprehensive review (at least as far as we
                       know), a report of the Opinions Committee of the California State Bar
                       Business Law Section called “Toward a National Legal Opinion Practice:
                       The California Remedies Opinion Report,” 60 Bus. Law. 907 (2005)(the
                       “California 2005 Report”).

 A recent decision, Hafner v. Infocure Corp. (In re Infocure Sec. Litig.), 210 F. Supp. 2d 1331
(N.D. Ga. 2002), is an example of a case where the defendant opining lawyer‟s use of the ABA‟s
Accord served as the foundation for the court‟s dismissal of investors‟ claims attacking the legal
opinions as misleading. In virtually each instance where the investors claimed to have been
misled by the substance of a particular opinion, the court turned to the Accord‟s explanation of
that particular opinion to narrow and add definition to its meaning, and, in so doing, to refute the
claims of the investors to the effect that the opinions were misleading. The Infocure decision
provides an example of the benefit of using, or incorporating, in an attorney‟s opinion, standard
provisions from a form which includes explanatory footnotes or an accompanying explanatory
report, or both, as in the case, for example, of the Inclusive Opinion or the opinions developed
and promulgated by other professional groups, including state bar associations.

       3.     A Form for Discussion We have attached a basic sample real estate legal opinion
as Exhibit A. The form we selected for this workshop is the form developed jointly by the ABA
and ACREL opinion committees to incorporate the principles of the Accord and the Report (the
“Inclusive Opinion”). This form should facilitate our discussion if for no other reason than that
each paragraph is numbered. We also have included some sample provisions in the discussion
below. We are not endorsing these provisions; we include them to help provide a context and in
some cases because we hope to provoke discussion.

        4.     Rating Agencies Get into the Act Rating agencies such as Standard & Poors
Ratings Services have published requirements for legal opinions that must be issued to support
debt ratings. To obtain an S&P rating of certain kinds of debt, a company will need to provide
outside counsel opinions covering issues such as bankruptcy and lien perfection. See
www.standardandpoors.com.
        5.      Ethical Issues Opinions raise a number of obvious ethical issues. Conflict and
confidentiality issues arise because legal opinions divide the loyalty of the opinion giver. In an
opinion, counsel for the borrower is asked to provide information and comfort to the lender.
Among many other good articles, the ACREL Papers include a discussion by Charles Sokoloff
of ethical issues in opinion practice.



B.     SPECIFIC OPINION ISSUES.

       1.      Jurisdictions Covered

                A legal opinion should expressly state what jurisdiction‟s laws the opinion covers.
The Inclusive Opinion refers to a jurisdiction whose laws are covered by an opinion as the
“Opining Jurisdiction.” Exhibit A, Section 1.3. The Guidelines and the Real Estate Guidelines
state that the opinion giver must not “mislead” the recipient but do not preclude including a
limitation in the opinion through “specific language” so long as the limitation is not misleading.

                Issue: What is the correct approach in a multi-state transaction where the
transaction documents state that they are to be governed by laws of a state in which the opinion
giver is not qualified to render opinions? Should the opinion giver (i) assume that the transaction
documents are governed by the laws of the state where the opinion giver is qualified
notwithstanding the express provisions of the transaction documents; (ii) assume the relevant
laws of all states are the same; (iii) always hire local counsel in each state; or (iv) punt?

                Sample Provision: Here is a sample provision for approach (i) above: “Certain
provisions contained in the Transaction Documents state that, under certain circumstances,
certain issues arising under the Transaction Documents shall be governed by the laws of the
State of ________. We are not familiar with those laws and render no opinion about them. For
purposes of our opinion, we have assumed, with your consent, that all the provisions of all of the
Transaction Documents, and all issues arising under the Transaction Documents, will be
governed by the laws of the Opining Jurisdiction notwithstanding the express terms of the
Transaction Documents. We express no opinion about what law actually will govern the
Transaction Documents, any particular provision of the Transaction Documents, any particular
Transaction Documents, or any or all issues arising under the Transaction Documents. You have
indicated your willingness, therefore, to accept an opinion on the enforceability of all of the
Transaction Documents under the laws of the Opining Jurisdiction. If all of the Transaction
Documents were construed in accordance with the internal laws of the Opining Jurisdiction,
without regard to the conflict of law provisions of the Opining Jurisdiction, the Transaction
Documents would be legal, valid, binding and enforceable against the Client in accordance with
their terms [subject to the exceptions and limitations set forth in ___________].”
       2.      Choice of Law

                Section 3.7 of the Inclusive Opinion provides a choice of law opinion but the
sample provision above disclaims any choice of law opinion on the assumption that choice of
law issues are likely to be more problematic in a multi-jurisdictional transaction. If nothing else,
the exact dividing line between issues that will be governed by one state‟s law and issues
governed by another is not always clear. For example, if the line is drawn (as it sometimes is)
between documents (loan agreement governed by New York law and deed of trust by Virginia
law) which state‟s law governs as to any specific factual issue?

               Issue: Should the opinion always cover choice of law issues?

               Sample Provision: See Inclusive Opinion, Section 3.7.

       3.      The Feds

                Many opinions cover not just state law but laws of the United States as well. See,
e.g., Tri-Bar 1998 Report.

                Issue: Is it appropriate for the opinion to state that the opinion covers federal as
well as state law? What are the risks?

               Sample Provision: “The opinions expressed in this letter are limited to the
federal laws of the United States of America and the laws of the [State], and we express no
opinions with respect to the laws of any other jurisdiction.”

       4.      Assignment of Claims Act

                Well, here is one federal law issue. A typical form of assignment of leases and
rents as security for a loan is not fully enforceable with respect to a U.S. government lease. If
certain procedures are satisfied, the assignment of the rents should be enforceable against the
government tenant; the assignment of the lease probably is not technically enforceable until the
lender takes over the property and certain other procedures are satisfied. Similar limitations
apply to all government contracts. The statute, 31 U.S.C. §3727 et seq. (the "Assignment of
Claims Act") prohibits the assignment of claims that have matured under government contracts,
and 41 U.S.C. §15 et seq. (the "Assignment of Contracts Act") prohibits the assignment of
executory contracts (i.e., continuing obligations under a government contract). However, these
Acts provide an exception meant to permit the assignment of amounts due or to become due
under government contracts as collateral for commercial loans. Generally, the exception permits
an assignment to a financial institution of monies due or to become due, as long as certain
requirements and procedures of the federal regulations are satisfied.

              Issue: Is it appropriate for a real estate opinion to take exception to Assignment
of Claims Act and Assignment of Contracts Act issues? Is it necessary?

                Sample Provision: If a lender wants comfort as to these issues (assuming the
regulatory requirements are satisfied), the following opinion might be useful: “Lender has taken
all steps required in order to effect the assignment to Lender, pursuant to the Assignment of
Rents, of the monies due and to become due under that certain U.S. Government Lease for Real
Property, Lease No. GS-__________ ("the GSA Lease") under 31 U.S.C. §3727, et seq. and the
regulations promulgated thereunder and 41 U.S.C. §15 et seq. and the regulations promulgated
thereunder (collectively, the "Acts"); provided that (a) the contracting officer and disbursing
officer have received that certain Notice of Assignment of even date herewith (the "Notice of
Assignment") in connection with the GSA Lease and the contracting officer has executed the
"Acknowledgment" in the form attached to the Notice of Assignment and (b) at such time as
Lender exercises its remedies as provided in the Assignment of Rents, the written notice of
revocation contemplated by the Notice of Assignment is delivered in accordance with the Acts to
the contracting officer and the disbursing officer, instructing the United States to deliver to
Lender in place of the Borrower all monies due and to become due under the GSA Lease. Upon
satisfaction of the novation regulations set forth at 48 C.F.R. §42.1204, including any approvals
by the government required thereunder, Lender would become the landlord under the GSA Lease
after its purchase of the Property at a trustee‟s sale of the Property pursuant to the Deed of Trust
or pursuant to a deed in lieu of foreclosure.”

       5.      Genuineness of Signatures

               Many opinions assume that all signatures on all relevant documents are genuine.
The Inclusive Opinion assumes this in Section 3.1(e) as to all signatories, including the
client/borrower.

                Issue: Is it appropriate for the opinion giver to assume that signatures on behalf
of the client/borrower are genuine? What if a signature is missing?

             Sample Provision: “We assume that all signatures called for in the Transaction
Documents have been obtained and are genuine.” Is this appropriate?

       6.      Knowledge Limitations

                 Many opinion letters include statements limited to the “knowledge” of the opinion
giver. The most common examples are statements that the new transaction documents do not
violate other agreements or violate applicable law, and statements that a borrower is not involved
in litigation. In a law firm, unless all lawyers are polled, statements to the knowledge of the firm
can be limited to a specific group of lawyers. One approach is in the Glossary of the Inclusive
Opinion, referring to the actual knowledge of the “Primary Lawyer Group.” Similarly, the ABA
Principles state that there is no duty to poll all lawyers in a firm, only those whom the primary
lawyer has identified as being reasonably likely to have information needed to support an
opinion.

               On the other hand, some lawyers are concerned that merely limiting a statement to
the knowledge of the opinion giver may not always be read to avoid the duty to poll others
within a firm. It seems prudent to include an express limitation, but even that may not overcome
the duty to inquire.
                Issue: Whose knowledge is implied by the use of the phrase “our knowledge” in
the legal opinion of a law firm? Should the opinion state the specific names of the relevant
lawyers?

                Sample Provision: Here is a sample knowledge limitation that addresses both
which lawyers should be polled as well as the next topic, due diligence: “Whenever a statement
concerning factual matters herein is qualified by the phrase “our knowledge,” it is intended to
indicate that, during the course of our representation of [the Client] in connection with this
matter, no information that would give us current actual knowledge of the inaccuracy of such
factual statement has come to the attention of the attorneys in our firm who have been involved
with our representation of [the Client] in connection with this matter. Please be advised that
[only [lawyer name] and [lawyer name] have been so involved.] or [only those attorneys in our
firm who both have performed substantive legal services in the [transaction] and have specific
knowledge of the substance of this opinion letter have been so involved.] Other than our review
of the documents listed above, and our determining the knowledge of the foregoing lawyers who
have performed legal services for [the Client] in connection with this transaction, we have not
undertaken any factual investigation, and any limited inquiry undertaken by us during the
preparation of this opinion letter should not be regarded as such an investigation. No inference
concerning our knowledge of any factual matters bearing on the accuracy of any such factual
statement should be drawn from our limited representation of [the Client.]”

       7.      Diligence Limitations

               Another issue related to the knowledge limitation is the diligence limitation. The
sample provision above seeks to limit not just knowledge but diligence. Some lawyers believe
that merely including a knowledge limitation does not eliminate an opinion giver‟s implied duty
of due diligence. Even if the opinion includes an express limitation on the diligence undertaken
by the opinion giver, an opinion that is simply wrong as to a material issue is problematic. Two
recent cases involving failures to disclose litigation or investigations are cautionary tales. In
both cases each opinion letter included some provisions purporting to limit the firm‟s diligence
obligations but neither firm was insulated from claims. The cases are Dean Foods v.
Pappathanasi, 2004 WL 3019442 (Mass Super. Ct. Dec. 3, 2004) and National Bank of Canada
v. Hale & Dorr, LLP, 2004 WL 104972 (Mass. Super. Ct. Apr. 28, 2004). Opinion givers
beware!

               Issue: What diligence is due in rendering a legal opinion?

               Sample Provision:       See the last half of the provision in the prior section.

       8.      Bankruptcy Opinions

               Most average real estate opinions expressly disclaim any assurance that loan
documents are enforceable in bankruptcy. An example of this exception is in Section 3.3 of the
Inclusive Opinion. On the other hand, in a transaction in which the debt receives a credit rating,
and even in an increasing number of non-rated financing transactions, lawyers are asked to
render opinions that provide some comfort as to what will occur in bankruptcy. The most
common of these is the non-consolidation opinion.
                 Another issue that sometimes arises is how a transaction will be characterized: is
the sale a true sale or the lease a true lease (as opposed to a financing) or is the loan a true loan
(as opposed to equity). These opinions are less common and more problematic than the non-
consolidation opinion.

              Issue: When is it appropriate to require a bankruptcy/non-consolidation opinion?
How about a true sale opinion?

                 Sample Provision: These opinions are “reasoned” opinions and normally rather
lengthy but they will sum up with a conclusion to the following effect: “Based on the
assumptions set forth in this letter being correct at all relevant times in all material respects, and
in light of the discussions set forth in this letter, it is our opinion that, under present published
decisional authority and statutes applicable to federal bankruptcy cases, and in a properly
presented case, if „ABC‟ were to become a debtor in a case under the Bankruptcy Code, a federal
bankruptcy court acting reasonably, correctly following and applying existing published
precedent to the facts as set forth in this letter, and giving full consideration to all the factors
relevant under such precedent, would not, over the objection of Lender (and that of any other
party in interest also opposing the requested relief), substantively consolidate the assets and
liabilities of Borrower with those of ABC in a bankruptcy involving ABC as „debtor.‟”

       9.      Completion Guarantees

               In construction loans, lenders often seek a guarantee of completion of the
construction project, not just a guarantee of payment or of non-recourse carve-outs. The 1998
Mortgage Opinion Report discusses some common problems in enforcing guarantees.

              Issue: What special limitations are appropriate for an opinion covering a
completion guarantee?

               Sample Provision: “We assume that the Lender will continue to advance funds
for the completion of the project as provided for in the Transaction Documents. Enforceability
of the Guaranty is subject to defenses of a surety.”

       10.     Jury Trial Waiver

               The waiver of a jury trial may be unenforceable in a variety of contexts. A recent
case in California has more generally invalidated jury trial waivers there.

               Issue: Should opinions expressly disclaim any coverage of jury trial waivers?

                Sample Provision: “We render no opinion with respect to the enforceability or
validity of any provisions in the Loan Documents that purport to waive the right to a jury trial
prior to commencement of a litigation. See Grafton Partners, L.P. v. Superior Court, 116 P.3d
479 (Cal. 2005). As a consequence, these provisions are invalid in California and the inclusion
of same may violate the provisions of the California Business and Professions Code as an unfair
business practice.”

       11.     Tenancy in Common
                We are seeing an increasing number of tenancy in common agreements used to
facilitate tax-deferred exchange of real properties under Internal Revenue Code section 1031.
When lenders seek comfort as to the enforceability of these “TIC” agreements, they raise some
interesting opinion issues.

              Issue: What exceptions might be appropriate to include in an opinion covering a
tenancy in common agreement?

                  Sample Provision: “(e) Without limiting the generality of the foregoing paragraph (d)
[cite to certain other qualifications] we express no opinion on whether the tenancy-in-common interest(s)
created by or in connection with the TIC Agreement may or may not be properly characterized as
securities under any state or federal law, or if they are so characterized as securities, whether they are
required to be registered with any state or federal agency before being offered or sold or if actions are
required to be taken to obtain one or more exemptions from registration, or whether any persons engaged
in offering or selling them are required to be registered with any state or federal agency before doing so.
Further, we express no opinion on the effect of any such characterization of the tenancy-in-common
interests as securities or the effect of any such compliance or lack of compliance upon the opinions given
in this Opinion Letter.
“(f) Further, without limiting the generality of the foregoing paragraph (d), and regardless of the
characterization or lack of characterization of the tenancy-in-common interests as securities, we express
no opinion on whether the tenancy-in-common arrangement under the TIC agreement may or may not be
characterized by the Internal Revenue Service or another taxing authority as a partnership instead of real
estate, or will otherwise fail to receive the favorable tax treatment that the Tenants in Common and
Borrowers seek in their investment, and we express no opinion on the effect of such characterization or
other failure to receive favorable tax benefits on the opinions given in this Opinion Letter.”

“(g) We express no opinion on the enforceability of the provision in the TIC Agreement that
requires a Tenant in Common to offer its interest to the other Tenants in Common if an Event of
Bankruptcy (defined therein) should occur.

“(h) Because the relevant law of the State is not well developed, we express no opinion on the
provision in paragraph 11 of the TIC Agreement that conditions the right to partition of a Tenant
in Common by requiring the Tenant in Common to first offer its interest to the other Tenants in
Common at fair market value. The TIC does not place any time limit on this condition, nor is
one apparent from the TIC Agreement itself. Under the TIC Agreement the fair market value is
to be determined by real estate appraisers acting outside of the judicial system. The right to
partition is a favorite of the law, and courts of the State have “inherent equitable powers” to
“provide as fair a partition as possible to the parties that are appropriate to the special
circumstances of each individual case.” Sims v. Sims, 122 N.M. 618, 625, 628, 930 P.2d 153,
160, 163 (1996). Although tenants in common may waive their right to partition, Martinez v.
Martinez, 98 N.M. 535, 539-540, 650 P.2d 819, 823-824 (1982), “an agreement to partition, to
be enforceable, must place a reasonable time limitation upon the period during which it can be
enforced,” Prude v. Lewis, 78 N.M. 256, 264, 430 P.2d 753, 765 (1967). [This requirement
seems to be widely recognized among the states. See 59A Am. Jur.2d Partition §53 (2003).] The
courts of the State have not enunciated standards for determining whether a time limitation is
reasonable. Instead, it has been stated that “[w]hat would be a reasonable time . . . would depend
upon consideration of the lawful purposes for which the promise was made and the time to be
consumed in its performance.” Prude, 78 N. M. at 265, 430 P.2d at 766. The issue is, of course,
whether a State court would treat a condition upon the right to partition the same as it would a
waiver of that right. There are arguments on both sides of the issue. Because we have no law
providing guidance on the resolution of this issue, we cannot render any opinion about any
clause that imposes this or any similar condition on the right to partition.”

       12.     Laundry Lists

               More generally, when should an opinion call out a specific provision of a loan
document as being possibly unenforceable and when should the generic qualification do the
trick? Section 3.6 of the Inclusive Opinion includes a “generic qualification” in which the
opinion giver very broadly disclaims responsibility for the enforceability of any particular
provision of the loan documents, but Section 3.5 of the Inclusive Opinion includes a laundry list
of “Other Common Qualifications.”

               Issue: When is it enough already?

               Sample Provision: See Inclusive Opinion Section 3.5.

       13.     Practical Realization

                And speaking of the generic qualification, are folks seeing a return to “practical
realization?” In opinions with relatively broad limitations on enforceability, opinion recipients
can draw comfort from a general statement that not all is unenforceable. The comfort in Section
3.5 of the Inclusive Opinion is the way this was approached by ACREL and the ABA in various
reports, and makes the most sense to us, but others have given comfort that the unenforceable
provisions won‟t prevent the “practical realization” of the deal. The California 2005 Report
includes among many other things a discussion of “practical realization” assurance, pointing out
some interpretive problems inherent in the vagueness of the phrase.

              Issue: Is “practical realization” an acceptable concept for real estate opinions?
Other opinions?

                Sample Provision: “The opinion regarding enforceability set forth above is
subject to the qualification that certain [remedial] provisions of the Loan Documents may be
unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity
of the balance of the Loan Documents or impair the practical realization of the benefits [intended
to be] created by the Loan Documents.”

       14.     Limitations on Reliance

               Many opinions include express limitations on the parties who may rely on the
opinion and the purposes for which those parties may rely. Section 5.1 of the Inclusive Opinion
allows only the named lender to rely.

              Issue: Is it appropriate to allow counsel for the lender to rely on the opinion of
borrower‟s counsel? Rating agencies? Successor noteholders?
                Sample Provision: “The opinions expressed in this opinion letter are solely for
the benefit of Lender [and for the benefit of Lender‟s successors and permitted assigns and
participants (who shall have no greater rights relating to this opinion letter than the named
addressee has relating to this opinion letter as of the date of this letter)] in connection with the
consummation of the transactions contemplated by the Loan Agreement. Without our prior
written consent, this opinion letter may not be used or relied upon by any Person for any other
purpose whatsoever, or by any other Person for any purpose whatsoever, except for the use of
this opinion letter (i) in connection with review by a regulatory agency having supervisory
authority over the Lender for the purpose of confirming the existence of this opinion letter, (ii) in
connection with the assertion of a defense as to which this opinion letter is relevant and
necessary, or (iii) as required by a court order.”

       15.     Tax Opinion Disclaimer

                Treasury Department Circular No. 230, Section 10.35, provides detailed
requirements for certain tax opinions. The new boilerplate tax advice disclaimers now make our
email messages even longer. Should the same concerns that gave rise to the email disclaimer
result in similar provisions in routine transactional opinions?

               Issue: In which opinions is the disclaimer required or appropriate?

                Sample Provision: “This opinion letter is not intended or written to be used as
tax advice, and may not be used, for the purpose of (i) avoiding tax-related penalties under the
Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-
related matter addressed in this opinion letter.”

       16.     Whatever else is bugging you

                During the workshop we will want to discuss other practical opinion issues that
interest the participants.

				
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