The rendering of a third-party legal opinion, like other attorney responsibilities in connection with closing a real estate secured finance transaction, involves professional liability risks.1 This article will discuss how an opinion preparer’s use of due diligence and the inclusion in its opinion of customary assumptions, qualifications, limitations, and exclusions (henceforth referred to as assumptions and qualifications) helps to minimize these risks.
As a third-party legal opinion is rendered to a non-client, normally malpractice liability is not involved. Instead, legal opinion claims are normally brought in an action by the opinion recipient based on a theory of negligent misrepresentation. While few lawsuits may be filed annually with respect to legal opinions, notable lawsuits have occurred, and significant judgments or settlements have resulted. Thus, the giving of legal opinions necessitates proper risk management procedures. In determining whether an opinion giver was negligent in preparing a legal opinion, courts often will look to the customary practice related to giving and receiving opinion letters.
The ACREL Attorneys Opinions Committee, along with Legal Opinions in Real Estate Transactions Committee of the American Bar Association Real Property Trusts & Estates Section and the Opinions Committee of the American College of Mortgage Attorneys (collectively, the Real Estate Opinions Committees), have been active over the years in providing guidance regarding customary practice in rendering third-party legal opinions related to real estate finance transactions. Two of the more influential reports issued by the Real Estate Opinions Committees are the Real Estate Finance Opinion Report of 2012 (the 2012 Report)2 and Local Counsel Opinion Letters in Real Estate Finance Transactions– A Supplement to the Real Estate Finance Opinion Report of 2012 (the Local Counsel Report).3 The 2012 Report and the Local Counsel Report go into significant detail regarding the due diligence required to render a third-party legal opinion and also discuss customary assumptions and qualifications typically contained in a real estate finance legal opinion. Each report contains an Illustrative Opinion setting forth model language to address both due diligence and forms of assumptions and qualifications.
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Firm Policies
Law firms seeking to minimize their professional liability risks related to opinions may establish policies and procedures related to their attorneys who issue opinion letters. Last fall the American Bar Association Business Law Section Legal Opinions Committee issued its Report on 2019 Survey of Law Firm Opinion Practices4 (the Report). The Report reflects the results of a survey of approximately 300 law firms throughout the United States regarding the policies and procedures law firms maintain with respect to their third-party legal opinion practice. As noted in the introduction to the Report:
Most law firms have policies and procedures for the preparation and delivery of legal opinion letters to recipients who are not their clients. The policies typically identify the opinions a firm is willing and unwilling to give, and the procedures establish the steps opinion preparers are expected or encouraged to take before they deliver an opinion letter on behalf of the firm. Firms often provide their lawyers with sample opinion letters and assign various responsibilities for the opinion letters their firm delivers to a committee or committees of the firm’s lawyers (an “opinion committee”).5
The Report also contains a discussion of selected areas of law that may or may not be covered in opinions given by various law firms in the country, including Delaware law opinions by non-Delaware lawyers, laws of other states besides Delaware where the opining lawyer is not admitted, UCC opinions, no-litigation confirmations, no breach or default opinions, and the enforceability of arbitration clauses.
While strong firm policies and procedures can help reduce the professional liability risks in rendering third-party legal opinions, the actual wording of the legal opinions and the due diligence performed in preparing the legal opinions are essential parts of professional liability risk management.
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Customary Practice
Over the years, various bar associations, committees, and others have tried to develop guidance and protocols with respect to rendering legal opinions. This has evolved into what is referred to as customary practice. Under customary practice, the meaning of the words used in an opinion letter, and the diligence required to provide such an opinion letter, are determined by the customary practice of lawyers who regularly give and receive such opinion letters. The Real Estate Opinion Guidelines6 provide valuable guidance regarding customary real estate opinion letter practice.7 As customary practice may vary due to regional or practice-related differences, it is not always possible to precisely identify what is customary practice. Reports by bar groups and opinion committees are helpful in identifying customary practice in certain areas. Also, the Customary Practice Statement,8 which has been adopted by numerous bar associations and groups, including the Real Estate Opinion Committees, summarizes opinion letter customary practice.9
A main reason for the focus on customary practice is to enable opinion givers and opinion recipients to understand the generally accepted meaning of words normally used in legal opinions and what due diligence is needed in order to render specific legal opinions. Since the words in a legal opinion can create risks to the opinion giver, and the failure to perform adequate due diligence can also create risks, the various opinion reports have extensive discussions of what is meant by customary practice, what the words used in a legal opinion mean, and what due diligence is required to satisfy the customary practice standards of lawyers rendering opinions.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
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