By George Bobo
Key Point: It has become standard practice for a lender, as part of its due diligence, to require the borrower to provide an opinion from borrower’s counsel that the loan documents are enforceable as part of closing loans over a certain amount.
Current Lender Practice
It has become standard practice among lenders on loans above a certain minimum amount to require that the borrower engage an attorney to give the lender an opinion at closing that, among other things, states that the borrower is duly formed and has power and authority to enter into the loan transaction, and that the loan documents are enforceable. That simple statement masks considerable time, thought and negotiation that goes into preparing and giving the opinion. Some lenders set the requirement for an opinion at a loan amount of $2,000,000 and above, but often the threshold is lower. A borrower should check the loan commitment letter before signing it to determine if a borrower counsel opinion (“Opinion”) will be required. It adds expense and time to the closing process.
Tip. If the loan commitment contains a requirement for an Opinion, discuss it with the loan officer and see if it is necessary. Simple loans with a single entity borrower and personal guarantors (as opposed to entity guarantors) with lender prepared loan documents often pose limited legal documentation risk to lenders without the need for an Opinion. If an Opinion is required, discuss the content with the lender and ask if the lender will be satisfied with the Model Opinion (defined below). It will eliminate negotiation of its terms later and potentially reduce expense.
Why Is An Opinion Required?
Simply put, it is to give comfort to the lender that the attorney for the borrower and guarantor(s) has determined that the loan documents are legally enforceable, subject to the terms of the Opinion. Its purpose is to lower legal documentation risk for the lender. It is part of a lender’s due diligence. To give the Opinion, the borrower’s attorney must examine the organizational records of the borrower and guarantor(s) and the loan documents and apply the law to which those are subject. If an examination of the organizational records or loan documents reveals legal flaws, the process of preparing the Opinion brings those out so that they are corrected before closing.
The ultimate purpose of the loan documents is to allow collection the full amount of the loan from the borrower and/or guarantor(s), or failing that, to recover the collateral. Seasoned bankers know that if a loan goes bad, it is likely because of an unforeseen change in circumstances such as a recession, and that the net worth of the borrower and guarantors vanish, leaving only the real estate collateral for recovery on the loan. If there is a loan documentation issue, such as failure to authorize the loan by the board of directors of a corporate borrower or the members of a limited liability company, or failure of the borrower or guarantor entity to be duly formed or there is a flaw in the enforceability of the loan documents, to name a few, the lender may not be able to recover on the loan either by suit against the borrowers and/or guarantors, or by foreclosure against the collateral property.
The Georgia Model Opinion
In 1997 the Legal Opinion Committee of the Real Property Section of the State Bar of Georgia prepared a Report On Legal Opinions To Third Parties In Georgia Real Estate Secured Transactions (the “Report”) in order to develop a model legal opinion for real estate secured transactions in Georgia. The committee considered model opinions adopted by other states as well as the Legal Opinion Project Drafting Committee of the Business Law Section of the American Bar. The Report was amended in 2009 and supplemented in 2014. The Report is 192 pages long and contains a wealth of real estate law on the topics addressed in the Opinion and advice to attorneys giving the Opinion. The Report contains a model opinion, the most current edition of which is set forth as Exhibit A to the Supplement to Report on Legal Opinions To Third Parties in Georgia Real Estate Transactions dated March 11, 2014 (“Model Opinion”) which is recommended by the committee preparing the Supplement. While the form Model Opinion is only a five page document, it incorporates Interpretive Standards (“Interpretive Standards”) which contains definitions and 21 qualifications. As examples, the qualifications in the Interpretive Standards excludes any opinion as to compliance with securities laws, environmental laws, zoning and land use laws, building codes, and the status of title to the property securing the loan, and others.
The Report provides guidance as to customary practices of Georgia lawyers experienced in preparing and reviewing opinion letters, including procedures opinion givers follow in conducting the factual and legal investigations required to support their opinions.
What Does The Georgia Model Opinion Cover?
The Georgia Model Opinion first defines the name of the borrower and the guarantor(s), and the documents that the opinion giver has reviewed. The documents (“Loan Documents”) listed in the Model Opinion are the:
(1) Promissory note;
(2) Deed to Secure Debt and Security Agreement;
(3) Assignment of Leases and Rents;
(4) UCC financing statement be filed with the clerk of superior court in any county; (personal property filing);
(5) UCC financing statement to be filed with the clerk of superior court in the county in which the real property is located (fixture filing); and
(6) The guaranty agreement(s).
NOTE that the Model Opinion does NOT include the loan agreement as a Loan Document to which the Opinion applies.
The Opinion then states that based on and limited by the foregoing, it is the opinion giver’s opinion that:
(1) Borrower was incorporated and duly organized as a corporation (or limited partnership or limited liability company) under the laws of Georgia and borrower is existing and in good standing under the laws of Georgia;
(2) Borrower has power to execute and deliver the Loan Documents, to perform its obligations under the Loan Documents or own and use the collateral property and to conduct its business;
(3) Borrower has duly authorized the execution of the Loan Documents and delivered the Loan Documents.
(4) The execution and delivery by borrower of the Loan Documents do not violate its organizational documents, do not violate any applicable constitution, regulation, rule or law to which the borrower or the collateral property is subject and to not to the opinion giver’s knowledge constitute a breach of any material agreement known to the opinion giver which borrower or the property is bound, or any judicial or administrative decree known to the opinion giver to which the borrower or the property is subject;
(5) Guarantor has executed and delivered the guaranty;
(6) A statement similar to (4) above as to Guarantor;
(7) The Loan Documents are valid and enforceable against borrower in accordance with their terms (the main event); and
(8) The guaranty is valid and enforceable against guarantor in accordance with its terms.
So long as the lender and its counsel will accept the Model Opinion, an attorney giving the opinion can review the documents and prepare the Opinion following a fairly customary checklist. However, many lenders also want an opinion that the loan agreement is enforceable. Loan agreements on small loans are often 20 or more pages long, and on large loans can easily exceed 100 pages and contain many exhibits. In addition, many lenders, particularly those from out of state, have their own borrower counsel opinion form, and ask for a list of additional opinions, including opinions that filing of UCC financing statements in other states will perfect a security interest in personal property.
A matter that frequently comes up is the need for opinions that cover law of more than one state, called “split opinions”. Often the lender is based in New York, Illinois, California or another state and wants the law of the state in which the lender is based to apply to the loan documents and guaranties. Complicating that is that the law of Georgia will apply as to perfection of the deed to secure debt on the real estate and fixture collateral, and enforcement of the loan documents against the Georgia collateral. Further complicating the problem is that often the borrower and / or guarantor(s) may be organized in Georgia, or may be organized in another state (Delaware is popular). In those cases it is usually necessary to retain two firms. As an example, if the loan documents provide that New York law will apply except for perfection and enforcement against the collateral, then a New York firm will be retained to give an opinion as to New York law, and a Georgia firm will be retained to give an opinion as to perfection and enforcement of the Georgia collateral under the laws of Georgia.
How Do I Get A Borrower Counsel Opinion?
Find a commercial real estate lawyer who has experience in issuing Opinions. Opinions are a specialized practice. It takes hours to collect the borrower’s and guarantor’s (assuming the guarantor is an entity) organizational documents, review proposed loan documents, prepare borrowing and guarantor resolutions, brush up on the non-routine law, prepare a draft Opinion, negotiate with lender counsel on troublesome issues, and issue the final Opinion. Be sure your lawyer has time before engaging she or him to do the work.
What Do Opinions Cost?
Depends on what Opinions are given. A simple Opinion restricted to the Model Opinion by a lawyer familiar with her or his client’s business so that there is limited research to do may cost $2,500 to $3,500 or so. An Opinion on a large loan with entity guarantors and documents not covered by the Model Opinion may run as much as $10,000 or more. Time to study the organizational documents of the borrower and guarantors, the loan documents to be opined to, matters not included in the Model Opinion, and the risk to the opinion giver are all part of the equation determining cost.
All opinion letters add costs to the transaction, but not all add value to the recipients. Generally opinion letters and the opinions they contain are appropriate when they add value beyond the representations and warranties obtained directly from the borrower and guarantors and when the diligence needed to prepare the opinions can be accomplished in a cost effective manner. The golden rule is that it is not appropriate to request an opinion that counsel for the opinion recipient, in the same situation as the opinion giver, would not be prepared to give.