January 22, 2002

Electronic Signatures and Commercial Real Estate Transactions

Holland & Knight Newsletter
Steve Snively

Internet e-mail is used frequently to negotiate and exchange documents for commercial real estate transactions, such as sales, leases and loans. Nonetheless, most such transactions are not consummated until the final documents are printed, signed and exchanged. The need for handwritten signatures often delays the deal. New federal legislation, the Electronic Signatures in Global and National Commerce Act (Pub. L. No. 106-229, 114 Stat. 464 [2000]) clears the way for consummation of real estate transactions, simultaneously by parties sitting at computers in different places and time zones, without the need for handwritten signatures on printed documents.

Handwritten and Electronic "Signatures"

Handwritten signatures are creations of the physical world, a unique interaction of brain, body, pen and paper, a distinctive flow of lines and swirls that can be replicated only by the signatory. Certain unique characteristics of the person are imbedded in each handwritten signature. A signature may authenticate an object, such as that of an artist on a painting. If an object is a legal document, it also confirms agreement to its terms.

A signed document authenticates and preserves the agreement of the parties. The document is authenticated through use of a distinctive mark, sometimes with witnesses and notarization, which confirms that the person who signed is the same as the person whose mark appears on the document, i.e. the person is not an imposter and the signature is not a forgery. A handwritten signature also maintains the integrity of a document. By initialing pages, the use of special paper and the exchange of executed originals, parties may assure that the document is not altered after it is signed.

A new world has emerged in recent years, one without physical characteristics, which exists through the confluence of minds and human energy connected by the Internet. Ingenious technology for electronic signatures has emerged from this new world. Although many types of electronic signatures are being developed, most lack any consistent traits. To understand these new electronic signatures, think of them as a process by which documents in digital format are authenticated, rather than as a distinctive physical mark such as a handwritten signature.

An electronic signature may be hidden in a document, woven intricately throughout the fabric comprising its digital code, and invisible when the document is viewed on a computer screen or printed. Nonetheless, the unique characteristics it imparts to the digital version of the document confirm its authenticity and preclude its alteration, in most instances much more effectively than with handwritten signatures and printed documents.

Significance and Limitations of the "E-Sign Act"

The Electronic Signatures in Global and National Commerce Act (E-Sign Act), which became effective on October 1, 2000, provides that an electronic signature or document has the same legal effect as a printed signature or document. A signature or contract relating to a transaction may not be denied legal effect, validity or enforceability solely because: (a) it is in electronic form; or (b) an electronic signature was used in its formation (Section 101[a]). The term "transaction" includes the sale, lease, exchange or other disposition of any interest in real property (Section 106[13][B]). This gives the electronic medium the same legal status as the paper medium. The simple but sweeping provisions of the E-Sign Act create a legal environment within which new computer technologies may flourish.

The E-Sign Act also provides that any legal requirement for a notarization or acknowledgment, either verified or under oath, may be satisfied by the electronic signature of the person authorized to perform those acts (Section 101[g]). These provisions are of particular significance to the real estate industry, since many conveyancing documents must be notarized prior to recording.

What Is an Electronic Signature?

The E-Sign Act defines an "electronic signature" to include "...an electronic sound, symbol or process, attached to or logically associated with a contract ...by a person with the intent to sign..." "Electronic" is defined as relating to technology having electrical, electronic, magnetic, wireless, optical, electromagnetic, or similar capabilities." The definition is intentionally broad as to what is an electronic signature, and includes the following:

  • handwritten signature on a fax transmittal
  • image of a handwritten signature, scanned and digitized
  • "smart cards" which identify the user
  • encrypted "digital signature" with public and private keys
  • voiceprint, retinal scan, fingerprint or DNA comparison

There are many types of electronic signatures. Some are crude and unreliable and others are complex and extremely effective. New electronic signature technologies emerge constantly. Many of these technologies are combined with password features, date recording and document encryption.

Encryption, the process by which the digital version of a document is scrambled and encoded, is central to "digital signatures," currently the most sophisticated type of electronic signatures. Special computer software with algorithms encode the digital version of a document so that it may be read or modified only by authorized individuals using the same software. This software creates two different "keys," which may be passwords, smartcards, retinal scans or other methods of identification. One set of "private" keys, are used by the parties to lock the document through encryption. A separate "public" key is shared with others to unlock and read the document. Only the parties to a transaction, together with their private keys, may alter the document once it has been encrypted.

Which of the electronic signature technologies become most popular, by providing the right combination of security and ease of use, will be determined in the marketplace.

Consumer Protection Provisions

The E-Sign Act contains extensive provisions to protect consumers. A "consumer" is someone who obtains products or services primarily for personal, family or household purposes (Section 106[1]). Disclosures are required, and procedures established, pursuant to which consumers may consent to the use of electronic signatures and records (Section101[c]). The procedures include verification that the parties use compatible computer software. These special consumer provisions apply to transactions such as home mortgage loans and residential leases, but do not apply to business-to-business transactions such as shopping center leases or project construction loans. Nonetheless, since the E-Sign Act does not require anyone to use electronic signatures, all parties to a commercial real estate transaction must consent to their use.

Even though the consumer protection provisions of the E-Sign Act do not apply to commercial transactions, the cautious drafter of a commercial real estate document utilizing electronic signatures nonetheless may wish to include similar provisions. This would reduce the likelihood that a party to the commercial contract might challenge its enforceability based on the argument that there was not an effective consent to utilization of electronic signatures

Exceptions and Special Provisions

In addition to the consumer protections, specific provisions are also included in the E-Sign Act in response to concerns expressed by representatives for insurance agents and brokers, governmental agencies such as the Securities and Exchange Commission and the Federal Communications Commission and the Banking industry. Certain types of transactions are excepted specifically, including: wills and testamentary trusts, family law matters, certain provisions of the Uniform Commercial Code, court orders and notices, terminations of utility services, repossession or foreclosure of rental property or a primary residence, termination or health or life insurance, product recalls, documents relating to hazardous materials and standards and format requirements of governmental agencies relating to the filing of records (Section 103 and 104).

One purpose of the E-Sign Act is to eliminate the uncertainty caused by non-existent or inconsistent state electronic signature laws. Generally, this new federal legislation preempts conflicting state laws, and overrides specifically those which required the use of, or favored, a specific technology for electronic signatures and records (Section 102). The E-Sign Act includes additional provisions governing the maintenance of electronic records.

Conclusion

The E-Sign Act is designed to eliminate legal barriers to the development of new and innovative digital signature technologies. It opens the doors for private business and entrepreneurs to develop these technologies, and will impact dramatically e-commerce in the future, including transactions of the commercial real estate industry.

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