Relating to Real Estate

You are sitting at your desk on a Tuesday afternoon and you receive a telephone call or an email from an out-of-state lawyer asking you to review a set of loan documents in a real estate financing transaction and render an opinion letter about aspects of the deal that involve the law of your state. (Did I forget to mention that the transaction is closing later that week?) Your contact tells you that the real estate that is security for the loan is located in your state (assume that it is Maryland), most of the loan documents are governed by the law of a second state, and the entities were formed under the law of a third state.

The lender has indicated what opinions it wants to receive, which includes an opinion about the enforceability of the loan documents under the law of Maryland. Borrower’s lead counsel is not qualified to render an enforceability opinion about the Maryland deed of trust, and so you have been asked to do that. You quickly determine that you do not have a conflict with either the borrower or the lender. Which of the parties should you represent? Does it matter whether your caller is borrower’s lead counsel or counsel for the lender? 

Counsel to the Borrower

In almost all cases like this one, it is borrower’s lead counsel that requests a Maryland lawyer or law firm to act as local counsel on behalf of the borrower. The local counsel will undertake the diligence, follow the procedures, and draft its opinion letter as described in Local Counsel Opinion Letters in Real Estate Finance Transactions — A Supplement to the Real Estate Finance Opinion Report of 2012, 51 Real Prop. Tr. & Est. L.J. 167 (Fall, 2016) (the Local Counsel Report). The Local Counsel Report observes that regardless of how local counsel is brought into the matter to provide an opinion letter that is required with respect to the borrower, local counsel should consider the borrower as its client unless the transaction parties agree otherwise. Id. at 179.

Suppose in the course of reviewing the Maryland deed of trust, the Maryland local counsel discovers that parts of the document are drafted in a way that it would not draft a similar document, or that language required to be, or is almost always, included in a Maryland deed of trust is not in the lender’s instrument. For example, in Maryland a method of foreclosing on a deed of trust is pursuant to an “assent to decree,” but that method may be used only if the deed of trust contains particular language authorizing an “assent to decree,” and the deed of trust may not have that language. If the deed of trust has language giving the trustees the “power of sale,” which is sufficient to authorize a Maryland foreclosure, the local counsel may get comfort from that. Or suppose that there is neither a power of sale nor an assent to decree clause in the lender’s deed of trust. This would be extremely unusual, but the deed of trust may still be foreclosed although under a process that is much more difficult and expensive and takes considerably longer. (This is comparable, in other states, to a distinction between being able to pursue a non-judicial foreclosure as opposed to being required to undertake a judicial foreclosure.) 

Because a Maryland deed of trust can be foreclosed even without the power of sale or assent to decree language, the local counsel is able to render an enforceability opinion. Importantly, as counsel to the borrower, the local counsel should not, without the client’s informed consent, point out the defects in the deed of trust to the lender that do not render the instrument unenforceable if the local counsel knows or reasonably should know that disclosure would affect the interests of the client borrower materially and adversely. See Model Rule of Professional Conduct (MRPC) 2.3(b). 

On the other hand, if the deed of trust did not include the necessary words “grant,” “convey” or “mortgage” the document would not be enforceable. By entering into the transaction and accepting a commitment letter, the borrower has agreed to encumber its property as security for the loan; the borrower would not be doing that if the deed of trust were fatally defective. Therefore, it would be appropriate for the borrower’s local counsel to advise the lender of what is needed to be done to make the deed of trust enforceable. In other words, it is alright to tell the lender how to make the instrument enforceable, but it is not alright to tell the lender how the make the deed of trust more effective.

Note that an enforceability opinion is different from an assurance for which lenders sometimes ask that the loan documents are in typical form or that they contain all of the customary provisions and remedies as other documents used in similar transactions in your state. The Real Estate Opinion Letter Guidelines, 38 Real Prop. Prob. & Tr. J. 241 (2003) (the Real Estate Opinion Guidelines) provide that such opinions should not be requested by lenders and should not be given by borrowers’ counsel. This is legal advice of the type rendered by counsel to a lawyer’s clients; third party legal opinions are in the nature of evaluations of discrete legal issues. 

The Real Estate Opinion Guidelines further state that a borrower’s counsel could include the following in an opinion letter addressed to the lender: “The loan documents do not omit essential remedies that in the opinion giver’s experience are generally found in similar documents for comparable mortgage loan transactions in the opinion giver’s jurisdiction.” This is not a legal opinion but a statement about the experience of the opining lawyer. Of course, if a lawyer is asked to give this assurance but is unable to do so, the lawyer may not respond to the lender’s request without the informed consent of the borrower. See MRPC 2.3(b). Because of this possible quandary, the Real Estate Opinion Guidelines noted that many opinion givers consider a request for even this type of assurance to be inappropriate.

The Local Counsel Report took a firm position that lenders should not request that the borrower’s counsel provide any opinion relating to whether the loan documents contain all customary remedies. The Local Counsel Report gave three reasons for this: The purpose of legal opinions in this context is to opine on legal issues and not to provide advice, the nature of the assurance is ambiguous (what does “customary” mean here?), and significant conflict issues may arise.

Suppose the loan commitment, which was signed before you were contacted to participate in the transaction, requires that the borrower provide a deed of trust containing customary remedial provisions. As noted above, MRPC 2.3(b) requires that the client give “informed consent” before the lawyer may make render such an opinion. Whether the borrower’s execution of the commitment letter would allow the local counsel to add missing power of sale or assent to decree provisions is a question requiring evaluation in the circumstances, at the very least, and consideration with the borrower client.  

Counsel to the Lender

If the local counsel is asked to represent the lender rather than that borrower, the issues discussed above disappear. The local counsel would review the loan documents on behalf of the lender and should point out any deficiencies or weaknesses in the instruments to its client, the lender. The local counsel would make sure that the loan documents contain all of the provisions that the local counsel would include for a similar type of loan in the local counsel’s jurisdiction. If, for example, a Maryland deed of trust did not have a power of sale or assent to decree clause, the local counsel should point this out and supply the missing language. Having made any necessary changes, the local counsel would be able to offer an “all customary remedies opinion” or to give the assurance that “the loan documents do not omit essential remedies that in the opinion giver’s experience are generally found in similar documents for comparable mortgage loan transactions in the opinion giver’s jurisdiction.”

The local counsel acting on behalf of the lender would be able render an enforceability opinion in the same way that a borrower’s counsel would, based on appropriate assumptions and limitations. If the borrower is formed under the laws of state that is not where the local counsel practices, whether the local counsel represents the borrower or the lender, it would have to make the same assumptions about the entity’s formation, existence, good standing, power, authority, execution and delivery.

Section 1.1a of the Real Estate Opinion Guidelines concluded,

Where concerns for minimizing transactional costs dictate use of only one local counsel, absent a prior existing relationship between the opinion giver and the borrower or a resulting conflict of interest with the lender, such counsel should be retained by and formally represent the lender.

Counsel to the Transaction

Your first thought on receiving the telephone call on that Tuesday afternoon may be that you could be “Maryland counsel to the transaction” because you do not have any prior allegiance to the borrower or the lender, and you are the only lawyer in your state who is involved in the transaction. You see your role as enabler — putting the local pieces together to get the deal done as the parties have already agreed. Unfortunately, there are a number of ethical issues attendant to such a role, including actual or potential conflicts of interest as well as competing duties of loyalty that may arise. In some jurisdictions local counsel could proceed despite these issues if both borrower and lender consent after being adequately informed of the possible consequences. Even though it may be implicit from a commitment letter or loan documents that the borrower’s counsel will render an opinion letter in favor of the lender, when a lawyer is asked to be counsel to the transaction, the consent of the parties is not implied. See §1.1a of the Real Estate Opinion Guidelines. Also, before serving as counsel to the transaction local counsel may want to get an engagement letter from both borrower and lender.

Summary

The most frequent practice by far in real estate financing transactions is for local counsel to be engaged by the borrower, to serve as counsel to the borrower, and to issue a third party opinion letter to the lender.  However, it may be preferable, certainly from the lender’s perspective, for the local counsel to formally be the lender’s lawyer.  Another alternative, for the local counsel to serve as a counsel to the transaction, has potential conflict issues that may be avoided if the lawyer is able to resolve them under the applicable rules of professional responsibility in the local counsel’s jurisdiction.

For more information, contact Edward J. Levin.

Ed Levin
410-576-1900 • elevin@gfrlaw.com

Versions of this article appeared in Opinions Matters, newsletter of the American Bar Association's Real Property, Trust and Estate Law Section’s Committee on Legal Opinions in Real Estate Transactions, in Spring 2017 and in RPTE eReport, American Bar Association’s Section of Real Property, Trust and Estate Law's publication, in May 2017.