Confidentiality, Privilege Issues Sometimes Overlooked in Note Sales

January 28, 2011

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 diligence delivery.

This alert was authored by Dorothea W. Dickerman. For more information, visit our Greater Washington-Baltimore Region Transactional Real Estate practice.