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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.
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about your specific circumstances.
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