By Jones Osborn II

Lenders making commercial real estate loans often require the borrower's legal counsel to furnish an opinion letter. Borrowers sometimes wonder why their own lawyer has to give legal advice to the lender, which is an expert in the business of making loans. It can be particularly irritating for a borrower to have to pay his own lawyer to tell the lender that the lender's documents are enforceable. After all, the lender's own lawyers drafted the documents--so why does the borrower's lawyer have to vouch for their enforceability?

Part of the answer is simply because the lender requires it. If you want the money, you have to play by the lender's rules. The rest of the answer, however, is that opinions are supposed to address concerns that are within the particular knowledge and expertise of the borrower and his legal counsel. To that extent, the request for an opinion is reasonable. The lender, after all, does have a legitimate interest in knowing that there are no hidden legal problems which may affect the repayment of the loan.

The opinions most often requested by a lender making a secured commercial loan are as follows:

Existence and Good Standing. If the borrower is a corporation, limited liability company or limited partnership, the lender wants to know that the entity has been properly formed and is in good standing in the state of its formation. Legal counsel typically obtains a certificate of good standing from the state in order to give this opinion.

Power and Authority. The lender wants to know that the borrower has the power under its governing documents to enter into the loan agreement and to repay the loan, and that it has taken all necessary action to properly authorize the loan. This normally requires a review of the articles of incorporation or formation, the bylaws or operating agreement, and the corporate resolutions or other documentation authorizing the transaction. This is clearly an appropriate opinion to request of the borrower's counsel, since he is responsible for seeing that the borrower is legally empowered to obtain the loan and to repay it.

Enforceability. The lender generally requests an opinion from borrower's counsel that the promissory note, deed of trust, and other loan documents are valid and enforceable. While this might seem to be something the lender should be responsible for since the lender drafted the documents, it is still frequently required. It is used as a catch-all by the lender to uncover any problems with the enforceability of the loan that it might not otherwise be aware of. This is often the most difficult part of the opinion for legal counsel, since there are many things that might affect the enforceability of the loan. Missing any one of them could make the loan uncollectible and thereby expose the borrower's counsel to liability.

Creation of Lien. Borrower's counsel is frequently asked to give an opinion that the deed of trust or security agreement is in proper form for recording, that it will create the lien intended to be created against the collateral, and that it is recorded in the proper location. This kind of opinion is appropriate, particularly when the lender is from another state and wants assurances that the loan is properly secured in the state where the collateral is located. It is not a difficult opinion to give and one that is generally not the matter of much discussion.

Consents Not Required. Lenders will typically ask the borrower's counsel to state that no consents or approvals are required in connection with the loan. To the extent the consents are required by law from governmental agencies, the borrower's counsel is normally in a position to give this opinion because this is a matter of law; however, to the extent the consents are required from private parties pursuant to contracts or other arrangements to which the borrower is a party, the most the borrower's counsel can do is to state that no such consents are necessary "to the best of his knowledge." Obviously, the latter issue is partly a matter of law and partly a matter of fact, and if the borrower's counsel does not know about a particular contract he cannot give an opinion as to what it may or may not require.

No Violations of Laws. Borrower's counsel is often asked to state that the execution and performance of the loan documents do not violate any laws, including any usury laws. This is strictly a matter of law, and lender's counsel usually has no problem giving such an opinion.

Taxes and Fees. Lenders, particularly those from out of state, often request opinions that there are no mortgage recording taxes or fees, documentary stamp taxes, or other significant charges that may be levied in connection with the loan. This is an appropriate subject for an opinion, and borrower's counsel generally give such opinions without hesitation, especially in Arizona where there are no such taxes or charges.

Assumptions and Limitations. All opinions are subject to an express list of assumptions and limitations by the lawyer giving the opinion. For example, the opinion will probably state that it is limited to matters of Arizona law (if given in Arizona), that any opinion on enforceability is subject to the effect of bankruptcy laws, that the loan documents are enforceable against the lender, that the persons executing the documents are legally competent to do so, and so on. A legal opinion can expose the lawyer to significant liability and therefore the utmost care must be given to the issuance of legal opinions. Most law firms, in fact, have a committee that must review all opinions before they are released.

It is not unusual for the borrower's counsel to engage in detailed negotiations with the lender's counsel over the wording of the opinion. Sometimes lender's counsel may overreach in their requests for opinions, either by asking for opinions which the borrower's counsel should not give, or requesting the elimination of certain of the assumptions and limitations.

Conclusion. For these reasons, the opinion can sometimes be an expensive and time-consuming part of the loan transaction. However, as long as lender's counsel continue to require opinions this appears likely to continue as an expensive fact of life.