A promissory note is the quintessential "negotiable instrument" in a legal
sense – that is it may be bought and sold. The concept sounds simple enough, yet
in the world of commercial real estate, the sale of a promissory note secured by
real property can evolve into an extremely complex matter. Much depends on the
nature of the underlying collateral and its use (office, retail, residential,
hotel, land, industrial), but also the structure of the deal.
When a purchaser buys a promissory note secured by real property, it really
has to perform its due diligence on the loan and the property. The extent of the
due diligence is initially determined by the purchaser. Ultimately, it becomes a
matter for negotiation between purchaser and seller. While common ground may
include recent financials on the property, the loan documents, relevant
third-party studies, any evidence of default by the borrower or notices of
default, acceleration notices issued by the seller/note holder, and the
bankruptcy status of the debtor, much caution must be exercised by a seller
tempted to turn over to the purchaser "all correspondence" or any documentation
subject to attorney-client privilege.
By unwittingly turning over these types of documents to the third-party
purchaser, a note holder/seller could "blow" its attorney-client privilege or
reveal other confidential information about which it has signed confidentiality
agreements. Once lost, by exposing the confidential or privileged information to
the purchaser, the seller/note holder may risk claims not only from those who
benefited from executed confidentiality agreements (such as third-party
providers of studies – environmental and engineering, for example), but also may
risk losing that delicate privilege covering correspondence between itself and
its own counsel in existing or subsequent law suits.
Every seller/note holder facing a note purchaser's request for "all files"
would be wise to consider carefully what is in the files, preferably with
counsel, and what needs to be redacted before handing it "all" over in a due
This alert was authored by
Dorothea W. Dickerman. For more information,
Greater Washington-Baltimore Region
Transactional Real Estate practice.