COMMERCIAL LEASES AND THE LAW OF ELECTRONIC TRANSACTIONS

By Guest Authors: David P. Resnick and Seth Corthell

David P. Resnick,
RSP Shareholder

Most commercial leases are forged by a deliberate, organic process that includes face-to-face meetings, telephone calls and written correspondence between the landlord, the tenant and their respective agents, culminating in a written contract that historically was required to be signed by hand by both parties.  Over the past 20 years, the rise of email as a generally-accepted medium of business communication has prompted the law to allow certain contracts, including leases, to be entered into electronically, without a handwritten signature.  Progress has been made in this respect, both by statute and the common law; however, tweaking a centuries-old legal axiom takes time.  This article addresses recent developments and the present state of the law with respect to commercial leasing and electronic media.

 

The Historical Basics 

Under the law, all leases are contracts.  As such, leases require certain basic legal components to be enforceable.  Every contract must state definite terms and include a grant of consideration and mutuality of agreement and obligation between competent parties.  In order to be valid, contracts require offer and acceptance by the parties.

 

In addition, almost all leases are subject to the statute of frauds.  Patterned after an English statute enacted in 1677, the statute of frauds is the legal doctrine that certain contracts – including leases and other contracts affecting any interest in land – be contained in a written, signed instrument.  Certain exceptions commonly apply, notably to short term (i.e. less than one year) leases.  But prior to recent developments, the law was relatively straightforward:  Real estate contracts must be in writing to be enforceable.

 

The Culture Evolves

 

In light of this precedential legal backdrop, many questions arise from our increasing reliance on email in commercial leasing.  For instance, can an email or series of emails constitute a written lease?  Can an electronic signature on a lease bind a party in the same way as a handwritten signature?  Short of an ink-signed paper document, what might constitute a binding lease?

 

In 1999, in response to questions like these and calls for clarity on the use of electronic media for business transactions, the Uniform Law Commissioners promulgated the Uniform Electronic Transactions Act (UETA).  The UETA was the first effort to create a uniform set of laws with respect to electronic commerce, and 47 states have adopted it since its release.

 

Section 7 of the UETA contains the fundamental rules of the act:

  • A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.
  • A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
  • If a law requires a record to be in writing, an electronic record satisfies the law.
  • If a law requires a signature, an electronic signature satisfies the law.

In short, the objective of the UETA is to establish that in the context of applicable transactions, electronic signatures are the equivalent of manual signatures and electronic records are the equivalent of hard copies.  A stated “paradigm” of the UETA is that it applies only to parties to transactions who have each acquiesced by some means to be bound electronically.  Moreover, under the UETA a party may always refuse to be bound by electronic correspondence.

 

Application

 

While case law is plentiful with respect to electronic communications and application of the UETA, the common law is still evolving as to the application of these topics in the context of  commercial leases and other real estate contracts.  A few notable cases highlight the complexities and pitfalls inherent in adjudging the enforceability of contracts without historically reliable handwritten signatures.

 

Though not ultimately related to a lease, St. Johns Holdings, LLC v. Two Electronics, No. 16 MISC 000090, 2016 WL 1460477 at *3 (Mass. L.C. April 14, 2016) is an example of a court’s willingness to expand its interpretation of the statute of frauds in the context of electronic communications.  In that case, the plaintiff, St. John’s Holdings (SJH) contacted the broker of defendant Two Electronics (T-E), first seeking to lease T-E’s property and later seeking to purchase the property instead.

 

Following a period in which the parties exchanged and negotiated draft purchase agreements through their respective agents, T-E’s broker sent a text message to SJH’s real estate agent stating that T-E wanted SJH to sign the purchase agreement first and provide the deposit check before T-E would finalize it.  At the end of the message, T-E’s broker (bearing authority for T-E) wrote his name.  The same day, SJH’s agent went to the office of T-E’s broker and delivered the check and the signed agreement.  Unbeknownst to SJH or its agent, T-E had a competing offer from a third party, and had accepted the other offer the same day it received the signed agreement from SJH.  T-E then refused to execute the agreement with SJH.

 

SJH subsequently brought an action for a declaratory judgment that the contract was executed, and for specific performance of the contract.  T-E moved to dismiss, arguing that SJH could not allege that T-E ever provided a signed writing compliant with the statute of frauds grounds.  SJH argued that the broker’s name at the bottom of the text message from T-E’s agent was sufficient to satisfy the statute of frauds.

 

The court ultimately agreed with SJH, finding that the text message in question, read in conjunction with the previous negotiation communications between the parties satisfied the requirements of the statute of frauds.  In coming to this conclusion, the court noted the evolution of business practices and the prevalence of electronic communications in business transactions.  The court analogized the broker’s name at the bottom of the text message to an electronic signature at the bottom of an email and deemed it sufficient to satisfy the statute of frauds’ signature requirement.

 

Similarly, Crestwood Shops, LLC v. Hikene, 197 S.W.3d 641, 644 (Mo. Ct. App. 2006), demonstrates the significance courts will apply to email correspondence under the UETA in adjudicating the validity of contractual offer and acceptance.  In that case, tenant Hikene sought to lease larger retail space in a shopping center from the landlord, Crestwood Shops, LLC.  The parties entered into a five-year lease, but following commencement of the term, Hikene identified several problems with the new space, including mold on the premises, a defective HVAC system, and foundation issues.  As Hikene made preparations to renovate the new space, she brought the issues with the property to Crestwood’s attention.

 

Communications between Hikene and Crestwood became increasingly contentious, and both parties thereafter agreed to correspond in writing only.  Following her continued dissatisfaction with Crestwood’s response to the space issues, she stated in an email her desire to terminate the lease if the problems were not corrected by a date certain.  The next day, Crestwood responded that they accepted Hikene’s request to be released from the lease as of the stated date.

 

Hikene sought a declaratory judgment that the lease was not terminated, arguing that she did not agree to conduct her business transactions electronically and that she did not intend her email to be an offer to terminate the lease.  The court disagreed, ruling that the parties consented to the conduct of business through email, and that Hikene’s email constituted an offer to terminate that satisfied the statute of frauds.  In coming to its decision, the Court noted that the UETA instructs fact-finders to consider the “context and surrounding circumstances, including the parties’ conduct.”  Following this directive, the court determined that Hikene’s March 17 email insisting that the parties communicate through email demonstrated her willingness to transact business through email.

 

Clarity Is Key

 

As the legal regimes associated with electronic communications evolve, a variety of measures are available to parties to a lease in order to avoid being bound without intent.  For instance, landlords and tenants transacting electronically may ensure that a lease proposal or draft lease document is not exploited as an offer by including the following common language in each cover transmittal:  “Nothing herein shall be deemed or construed to be an offer by [sender], and [sender] shall not be bound unless and until such time as all parties have delivered fully-executed documents.”  And persons transmitting via email should always be aware that their electronic signature may be deemed to have the same legal effect as their handwritten signature.

 

As a general proposition, if a party wishes to confirm that it will not be bound by electronic correspondence, it is always wise to do so in writing.  The requirement in the UETA that a party must agree to conduct business electronically need not be established by an explicit statement; rather, it may be satisfied by an interpretation of context and conduct.  To be clear, parties to a lease are advised to reduce to writing their consent, or withdrawal of consent, to be bound in this manner.

 

Not long ago, commercial leases would take weeks to negotiate, draft and finalize.  Like virtually every other area of commerce, technology has streamlined the leasing process such that today, leasing transactions are completed with lightning speed.  Leasing professionals should be mindful of the hazards of doing business electronically and should consider the legal consequences of every email.

 

David P. Resnick is a member of the Board of Editors of the Commercial Leasing Law & Strategy newsletter.  He is a Shareholder at Robbins, Salomon & Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development and finance.  Seth Corthell is an attorney based in Chicago, Illinois.

 

Reprinted with permission from the May 2017 edition of the Commercial Leasing Law & Strategy ©2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.