In this article, I'm going to be discussing some fairly recent and mostly unknown law about contracting through electronic methods that can be a big help to all players in the real estate investing world. Let's start with some real estate legal basics everybody knows.
A valid contract to buy, sell, or lease real estate has to have an offer, an acceptance, and legal consideration, and there has to be a clear mutual acceptance of all its terms by all parties. And all parties to the contract have to be legally competent, of legal age, and of sound mind. Right? Sure, everybody knows that.
Of course, such a contract has to be in writing and physically signed by all the parties. Right? Well, not really. That used to be true, but it no longer is the case.
The Uniform Electronic Transactions Act
Until 1999, under Common Law and in most states and as per Federal Law, such an agreement certainly did have to be in writing and signed by all the parties in every state--and no enforceable agreement was in place until all parties had signed. Sometimes a very lengthy process indeed.
But in 1999, an unheralded event started changing this law forever: the Uniform Electronic Transactions Act. The UETA basically permits the writing and signature to be by either email or fax, or even a voice recording, doing away with the requirement that there must be a physical document that all parties must physically sign.
Whereas the law in general is usually years and eons behind the rest of society and is normally playing slow catch-up, for once it actually got to the starting line pretty early and has been racing to catch up ever since. In the case of the UETA, it has amazingly been adopted by 48 states* and Congress in whole or in part--all in less than seven years. Incredible!
Wait. Please. What do you mean uniform and adopted? What are you talking about? Well, to get a handle on that, let's have a quick look at some history.
No uniform laws from state to state
Until about a hundred years ago every state simply did its own thing and enacted legislation helter-skelter as lawmakers were called upon to do by their constituents. With such a hodgepodge of legislation, state laws varied widely and randomly. A citizen from one state really couldn't reasonably anticipate the laws he or she might encounter or violate while visiting any other state.
Then, somebody had the bright thought that maybe a group of law-knowledgeable people could meet and come up with some standard or uniform laws that might be enacted by more than one state to bring some order to law making. So a citizen of one state might reasonably anticipate the laws in another state--In other words, some uniformity in the laws of several states.
In 1892, a group of lawyers, judges, and law professors met in Chicago to work on the problem. They formed the National Conference of Commissioners on Uniform State Laws for the express purpose of drafting some uniform laws that the states might then adopt as their own.
The NCC has created, drafted, and published 200 separate legal Acts and seen them enacted into law by the states. Today the NCC consists of 300 lawyers, judges, and lawmakers from all over the United States who meet frequently and produce laws that they feel should be enacted in all states.
Some of those laws have been very popular and are well known, such as the UCC (Uniform Commercial Code), which I suppose by now has been enacted into law by all the states. Others like the Uniform Probate Code and Uniform Partnership Act are in the process of becoming universal law.
Keep current on Uniform Acts
You can read and check the status of the UETA and all the other Uniform Acts at: www.law.upenn.edu/bll/ulc/ulc.htm, the Uniform Law Commissioners official site. A reader can find all the "uniforms" there, read them in detail, and quickly see which of them have been enacted by the 50 states.
I recommend that everybody read the list of Uniform Laws that have been drafted and sent to the states for passage. Amazing what they have done and the diversity of legislation for which they have been responsible!
On checking on the status of the UETA, we can see that 48 states, all but NY and WA, have in fact enacted the basic UETA into their own state statutes, and NY and WA have enacted the same basic law legislation on their own, although not quite identical to the UETA.
One last thing you need to know: Although 48 states have adopted the UETA, you should understand that the adopting states may have adopted all the UETA as it came from the NCC, or they may have adopted only pieces and parts of it, as each state legislature is fiercely independent and thinks it's unique and not just a rubber stamping outfit.
So even though your state is listed among the states that have adopted the UETA, I'd still recommend you read your particular statute to see what it specifically says.
OK, enough history. How can you and I use that law in our real world, real estate businesses? Here's how I've used it and do so all the time.
Let's say Bob Borrower calls and asks me to find him a loan of $350,000 for a commercial property, and Bob says to me on the phone that he'll gladly pay 18% interest and pay my fee of $xxx to get that loan for him. And further, he can give the lender a 1st Deed of Trust on that property that's worth $1 million.
He tells me that he's been turned down by the banks and some other lenders, and its going to cost him much more than those fees and that high interest if I can't help him get the money he needs.
To follow up and nail this down, and so I have something firm in the way of an enforceable contract with Bob, before I begin working on finding the money he wants, I send him an email or fax (whichever Bob uses) confirming our conversation and asking him to read it over and reply to me if I've got it right and we have a deal as written.
When I get the email back from Bob (or his fax) OKing the deal and terms I've outlined, I've got an enforceable agreement as per the UETA or my state's version of the UETA. Until I get that email or fax back from Bob, I don't have a valid or enforceable agreement, so I don't waste my time working on his deal.
This practice has saved my bacon more than once when, after I've found the money and got the deal essentially done, Bob conveniently "forgets" our exact deal and tells me that he will pay me only a portion of the agreed upon fee or will only pay 8% interest, etc. And I have had to remind Bob by showing him our email or fax correspondence of our actual agreement.
This identical process works equally well on any other real estate agreement such as Purchase and Sale, Lease Option, Assignment, Joint Venture Agreement, etc., or any other kind of agreement, whether real estate related or not. As long as all terms are clearly spelled out and mutually agreed upon, you have a deal you can take to escrow or court if necessary.
Of course, that deal isn't notarized, so normally it cannot be recorded in Deed Records. If it's something that really calls out for recording, you'd still need the document to be written and physically signed, with Notary Public's signed Acknowledgement.
I've even had some situations where I've made an offer, the other guy responds with a counter-offer, and we negotiate and come to a compromise agreement, all contained in the emails or faxes and as good as if done on paper with ballpoints.
His lawyer said we had an enforceable agreement
In one situation, I had about a dozen such emails back and forth setting out an agreement that a real estate owner in another state agreed to give me an ownership interest in a property he had in his state in return for my doing some work for him on that property.
Without such emails, the agreement would have had to be written, mailed, modified, returned, etc., possibly a very lengthy process. And while our total agreement wasn't set out in any single email, by reading all of it, all terms were clearly spelled out and anybody reading it would see that an agreement had been reached in all details.
Although the land owner later maintained that such an agreement never existed, I showed my email agreement to his lawyer and that lawyer had no trouble understanding that an enforceable agreement, pursuant to the UETA, did in fact exist and his client had to perform as agreed.
While there is no explicit requirement under basic UETA*** that all parties to that email be informed that one of the parties is intending to rely on the email correspondence or get the explicit permission of the other parties, I'd recommend that when you commence your emails to discuss the contract to bind the deal, that you include somewhere in your email a statement like this:
Sender intends to rely on this and subsequent emails as proof of whatever agreements are therein reached.
If you do so, it will be difficult for the other person to claim he didn't know his emails were binding and he wasn't really intending to enter into any binding contract.
So that's what the UETA is all about and why it's a very useful tool for all of us, as a space age method of doing business. It's especially useful in negotiating and striking while the iron is hot and the motivated seller or buyer IS so motivated. Start using this space-age law as it can be one of your best servants.
[Author's note: ***There is a Federal version of UETA. A major difference in the law that most states have adopted and the Federal version, is this: In the states' versions, the party wanting to use and rely on email or fax in his contracting activities does not normally need to have disclosed ahead of time that he is going to do so, whereas in the Federal version such disclosure is normally required.
However in the case of a voice recording by any means, the party doing the recording must, in most states, either have explicit permission and prior informed consent for same. Without that consent and/or notice the using party cannot normally use the recordings as evidence of the existence of a contract.
Congress adopted the basic UETA to cover those situations where Federal law might apply. Since so much of modern world communication is by email and fax, and these in turn rely on telephone and cable lines, undoubtedly all such communication is Federally protected under the doctrine of Interstate Commerce, which brings Federal law into play, even where the parties might all be in the same state.
I suppose if both or all parties were on a private company network, (or a tape recorder were set out on a table with all parties' agreement to let that recording be their contract) the deal might escape Federal coverage under the IC doctrine. One would have to brief this issue to know for sure what the law might be as far as applying and pertaining to a particular fact situation.]
I am disclaiming any liability for anybody's reliance on this article. This is not intended to be legal advice and anybody needing advice on the topic should seek his own lawyer's advice and help on his situation.
About the Author:
John J. Merchant, JD, EMS is a graduate of SMU School of Law in Dallas, Texas. He practiced law for a number of years before devoting his time to a variety of business interests and investments. He has been involved in investment real estate since before graduating from high school and has owned and managed over 150 properties in eight states, including ranches, oil leases, gas stations, rentals, single family and multiplexes, office buildings, warehouses, and even fast food restaurants.
John is owner and broker of MesaRoya Properties in Tacoma, Washington, a commercial real estate brokerage. He is a Gold Card member of National Council of Exchangors (Equity Management Specialist) and a member of various other real estate exchange and marketing groups.
John generously shares his time and experience answering questions on our CRE Online Legal Forum, and in 2005 we were honored to present to him a Creative Real Estate Online Certificate of Appreciation plaque.