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Real Property & Development Review

How to Prevent an Email Exchange from Inadvertently Becoming a Binding Contract

Posted in Real Estate

As published in the Daily Journal of Commerce

Email communications are often as casual as oral conversation, and often do not reflect the level of thought and care that goes into the preparation of a legally binding real estate agreement. But they should.

Most business executives know that the law generally requires a written and signed agreement for a real estate transaction to be legally binding. What many of these people do not appreciate is that an informal email exchange can satisfy these legal requirements and collectively constitute a legally binding real estate contract. The printed name of the seller at the end of an email message will easily be held a sufficient electronic signature to bind the sender to the agreed-upon transaction.

Both the federal Electronic Signatures in Global and National Commerce Act, which applies to all interstate and foreign transactions, and the Uniform Electronic Transactions Act, a version of which has been adopted in Oregon, provide that a contract and signature will not be denied legal effect solely because they are in electronic form.

UETA applies “only to transactions between parties, each of which has agreed to conduct transactions by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.”

While no UETA appellate cases have been reported in Oregon yet, some around the country indicate the intent to contract electronically is easily inferred when a string of email messages contain the terms of a real estate contract.

For example, in New York last year a string of email messages was held to create a binding lease commission agreement for brokerage services. That case contrasts with a 2011 case in Louisiana, where the transaction was conducted by the traditional paper method, and the court rejected the buyer’s claim that their email message was a sufficient notice of contract termination.

One real-life Oregon example of this problem involved an enterprising individual who located a foreclosed home and who communicated an informal and unsolicited purchase offer to the bank via email. The bank’s attorney replied with a message accepting the offer, after which efforts to document and close the purchase failed because of onerous bank demands.

The bank succumbed to the temptation to believe it could back out of the original transaction when it discovered a second buyer ready, willing and able to pay over $100,000 more for the house.

Instead, the original buyer filed a lawsuit and placed a lien on the house, preventing the bank from selling to the second buyer. The first individual eventually prevailed; the bank had to close on the original price and terms.

Oregon courts are very likely to enforce the original buyer’s right to purchase if the key business terms like the property description, price, financing and closing date were agreed upon. Lack of agreement on all the ancillary sort of terms is not required to create a binding contract. The bank’s mistake could have been even more costly had the second buyer sued for damages due to loss of the bargain. Such circumstances are all too common.

So, what is the moral of this story? Protect yourself against unintended email contracts by using disclaimers – the same as those commonly used on nonbinding letters of intent to purchase or lease real property.

If you do not intend to be bound, then you had better say so, because the judicial assumption is going to be that the real estate agreement is binding in the absence of an explicit disclaimer in email messages. Consider every email message the equivalent of a wet-ink signature on a paper letter that potentially will be a legally binding contract unless that intent is expressly disclaimed.

So, how should an appropriate disclaimer read? A beefy disclaimer modeled on a letter of intent would read as:

“While this message consists of an expression of intent, it does not legally bind either party. However, this message will provide the basis for the preparation of a legally enforceable agreement between the parties. The parties acknowledge that this letter does not address all issues contemplated by the transaction described herein and such issues will be the subject of further negotiations. In the event the parties are unable to agree upon and execute, for any reason whatsoever, a mutually acceptable formal agreement, the parties understand that each party reserves the right to cancel all negotiations and consider other offers thereafter. In the event an agreement is executed and delivered by both parties, the terms of that document shall supersede all prior discussions and negotiations, and such document shall constitute the entire agreement of the parties as concerns the subject thereof.”

In many situations, such a long form of disclaimer will be undesirable. In those instances, conditioning a message with just a few words can provide a lot of protection. For example, it could say: “If we can agree upon other material terms, then the following terms would be acceptable as the basis for an agreement on this real property.”

Or you might want to say: “The following terms are subject to review and approval by our attorney.”

You could also simply say: “This message is nonbinding until the signing of a more formal and definitive contract between the parties.”

The key point is to remember that the email messages may well be a binding real estate contract absent some such condition or disclaimer.