In 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 Yet the practice has continued notwithstanding that the 2003 Criteria was superseded and its subsequent replacements have no such requirement.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.