CREFW-Winter2016

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CRE Finance World Winter 2016
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I
Loan Closing Legal Opinions
and Rating Agencies:
Disclosure Not Reliance
n commercial real estate finance transactions, it is customary
for the borrower’s counsel to deliver a legal enforceability
opinion to the lender at the closing of the loan. From the
beginning of the commercial mortgage loan securitization
market, it became common practice, however, for lenders’
counsel to require that any rating agency involved in the related
CMBS issuance be an addressee of, or named a reliance party in,
such closing opinion letters. The practice appears to have been
based upon the Standard & Poor’s US CMBS Legal and Structural
Criteria, which as late as 2003 provided: “As a general rule,
opinions to be provided in accordance with Standard & Poor’s
criteria should be addressed and delivered to Standard & Poor’s.”
This “general rule” seems to have evolved into an industry market
practice. Yet the practice has continued notwithstanding that the
2003 Criteria was superseded and its subsequent replacements
have no such requirement.
The problem for borrowers’ counsel is that a party who is an
addressee or is named as a reliance party in an opinion letter
may have the right to claim recourse against the opinion giver
for negligence in many jurisdictions. The lender is a party to the
transaction but the rating agency is not a party at the loan level.
Simply making a copy of an opinion letter available to a rating
agency in the conduct of its due diligence, which would include
being able to review the closing opinion for its apparent regularity
and to confirm its issuance at the loan closing, is very different
from legal reliance.
Today lawyers issuing closing opinions often resist the request to
address their opinion to a rating agency or to name a rating agency
as a reliance party in their opinion and lender’s counsel routinely
assert that their request is “market” for securitized loan transactions.
To deal with this ongoing situation, the question was put to the
rating agencies directly to obtain their definitive position on this
issue in conjunction with the preparation of a report supplementing
the Real Estate Finance Opinion Report of 2012[47 REAL PROP.
TR. & EST. J. 213].
After their receipt of a formal written request asking whether
closing opinions had to be addressed to them, or name them as
reliance parties (the “Request Letter”) and a subsequent series
of communications led by Joseph Philip Forte and William Dunn,
DBRS, Inc., Fitch Ratings, Kroll Bond Ratings Agency, Inc., Moody’s
Investors Service, Inc., Morningstar Credit Ratings LLC, and
Standard & Poor’s confirmed that they do not require being an
addressee or named as a reliance party of loan-level closing
opinions issued in connection with the origination of commercial
real estate mortgage loans intended for securitization.
As the non-reliance/disclosure-only discussion has evolved, some
recent legal opinion letters address this issue by making reference
to posting the closing opinion on the securitization website under
SEC Rule 17g-5, thus making it available for rating agency review
in their due diligence. As an alternative to Rule 17g-5, the Commercial
Real Estate Finance Council has also published an industry
Best Practice proposing revising all CMBS pooling and servicing
agreements to allow delivery of documents and materials such
as legal opinions directly to the rating agencies. But that can
be done only if it is also posted on the 17g-5 website. Based on
the Request Letter, the discussions with the rating agencies and
developments in Rule 17g-5, a specific provision for opinion letter
disclosure was recently circulated in the exposure draft of Local
Counsel Opinion Letters in Real Estate Finance Transactions: A
Supplement to the Real Estate Finance Opinions Report of 2012
(the “Report”) which makes reference to both delivery schemes,
and is language that was submitted to the NRSROs as acceptable
non-reliance/disclosure language. No NRSRO raised an objection to
the non-reliance/disclosure provision. The language is as follows:
nationally recognized statistical rating organizations rating
an issuance involving the Loan or otherwise entitled to
access under Rule 17g-5 under the Securities and
Exchange Act of 1934, as amended (or any successor
provision to such subsection) by providing a copy of this
opinion letter to the appropriate 17g-5 information provider
for the securitization into which the Loan or a component
of such Loan is deposited or as otherwise permitted by the
applicable pooling and servicing agreement or trust and
servicing agreement, as the case may be.
The purpose of the Report is to make clear to all participants in
commercial mortgage loan transactions intended for securitization
that ratings agencies do NOT in their respective criteria require
that they be addressees of, or named as reliance parties in, loan
closing opinions. As they are not parties to the loan transaction
but simply require access to the loan level closing opinions, it is
appropriate to provide a copy of the closing opinion for their due
diligence purposes subject to confidentiality, but not for reliance in
the sense of legal recourse to the opinion giver. Going forward this
should be market practice for loan closing opinions.
William B. Dunn
Of Counsel
Clark Hill, P.L.C.
Reporter
Local Counsel Opinion Report
Joseph Philip Forte
Partner
DLA Piper LLP