With social distancing in place amid the Coronavirus outbreak, and set to remain for some time, the inability to sign contracts “in ink” or in some cases with a witness present, is causing a bottleneck of deals in the real estate sector.
And could more widespread use of e-signatures help to ensure the continued flow of real estate deals, from the signing of lease agreements to property acquisitions and disposals?
We spoke to commercial property lawyer, John Dingle, a partner at Blandy & Blandy LLP, to find out more.
What impact is COVID-19 having on real estate deals currently?
The impact of COVID-19 is being felt right across the legal profession, and no more so than in the real estate sector. Residential conveyancing is effectively on hold and commercial real estate transactions are under significant pressure.
The challenges brought to bear by COVID-19 are substantial and multiple, including the (in)ability to sign transactional documentation.
What does the law state when it comes to signatory requirements for contracts or deeds for the sale of property?
The Law of Property (Miscellaneous Provisions) Act (LPMPA 1989) states that signatures must be in “writing” and be “signed” or “executed”. This means that hard copy documents must be physically signed in “wet ink” and, for deeds, a witness should be physically present to sign as well.
Illness, self-isolation, quarantine, and social distancing all mean that the signing and execution of documents, and arranging for witnesses to be present where required, is not as straightforward as it once was.
“One self-isolating client, for example, recently refused to sign a deed that requires a witness to be present, even where the witness would keep at a “safe” distance in doing so. In the absence of any viable alternative, that is putting the associated transaction on hold.”
John Dingle, Blandy & Blandy LLP.
If you are unable to sign a contract (as opposed to a deed) what can be done?
One initial avenue to explore is arranging for an agent to sign on your behalf. For example, a solicitor may be able to sign a property sale contract prior to exchange, assuming of course, that your solicitor is able to do so and has your express authority.
In real estate transactions it is far more typical for the party to the relevant contract to sign it – particularly where the contract is not a straightforward one. However, a deed (such as a transfer deed, mortgage or legal charge, and most leases) cannot be executed in the same way.
Other e-signature options include signing and scanning a hard copy document which is sometimes used in the context of a property transaction where there are no alternatives or limited time, pasting a signature into a soft copy document, or use of an e-pen or finger to sign on a tablet.
But what can be used, and when, to overcome the obstacles laid out by COVID-19?
Unfortunately, statute does not currently assist very much at all. The Electronic Communications Act 2000 created a framework for the use of an e-signature but it did not state whether an e-signature can or will satisfy the necessary legal and compliance requirements.
Neither the LPMPA 1989 nor the Companies Act 2006 set out any specific requirements for what a signature must actually look and smell like.
The Law Commission has, for a few years now, been closely examining the question of whether and how documents can be electronically executed, and in fact it published a report as recently as September 2019 which stated that a deed can be executed using an electronic signature, subject to the signatory intending to authenticate it and provided that the necessary execution formalities are followed.
Not only this, the report stated that e-signatures are admissible in legal proceedings which may pave the way for further legislation to flesh this out in more detail.
Is it possible to demonstrate the validity of the e-signee? How can that be achieved?
It is important to ensure that the party signing the document validly and safely creates (and intends to create) a legally binding document in which the whole of the document is authenticated.
However, the requirement for a signed written contract may be satisfied inadvertently, as this cautionary tale explains.
In the 2019 case of Neocleous and another v Rees, the Court ruled that a chain or string of emails between solicitors, in which the terms of a sale of land were being negotiated and agreed, was capable of creating a written contract.
Not only that, the Court also held that the automatic addition of an electronic signature to the bottom of the emails by the owner’s solicitor was capable of creating a signed contract. This demonstrates how an electronic document and e-signature can be created without any apparent intention of the owner to do so.
The landowner was therefore bound by the terms of the sale in the email string, despite not having formally signed a contract.
What about deeds for things like lease agreements?
In the context of e-signatures, the view of the Law Commission is that – notwithstanding its report of September 2019 – a deed must be signed “in the presence of a witness”.
This means that the relevant witness must be physically present at the point of signing and, crucially, this applies whether the document is signed in wet ink or via an e-signature.
What constitutes as “physically present”?
Currently this means that the signatory and witness must be physically in the same place at the same time.
The impact of COVID-19 is very likely to hasten and facilitate the Law Commission’s recommendation, however, a working group has been established to examine e-signatures further, including how video-link witnessing may be allowed.
My own view is that there are many instances where a solicitor or other professional will be far better placed to witness the execution of a document via video-link or other virtual means than, for example, a third party who the signatory may not know well and/or may conceivably never meet again.
What role does HM Land Registry have to play in the e-signature debate?
Legal title to a registered estate in land is not transferred until registration with HMLR is complete, so HMLR will, ultimately, have the final say.
The validity of an e-signature therefore depends on HMLR being able to accept the relevant deed or other document being executed in that way.
Online electronic signature platforms encrypt documents by way of signatory verification but, as things stand, HMLR are yet to be convinced and require an original or certified copy of a document to be submitted to HMLR with signatures in a recognisable (or traditional) form.
What is the Law Society’s view of the matter?
Their guidance is clear.
“Even though the government on 3 March 2020 supported the view of the Law Commission about the validity of electronic signatures for deeds, HM Land Registry have their own requirements. In terms of electronic signatures, our view is that these:
- Can be used to sign contracts to sell/buy unless the contract is being executed as a deed
- Cannot be used for deeds
- Probably cannot be used where a signature needs to be witnessed unless the witness was present when the electronic signature was affixed – in which case a wet ink signature could have been used
- Cannot be used where a wet ink signature is required, for example, for documents for HM Land Registry and some lenders
So, will we see e-signatures become the norm as a result of COVID-19?
Until technology allows solicitors or the technology itself to confirm e-signatures and/or e-documents in the same way, to allow HMLR to be certain that an e-signed document is as good as a wet-ink original and without risk of increased fraud, then HMLR are unlikely to relax their requirements in a hurry.
Technology is certainly advancing, and quickly, but HMLR (and legislation) will certainly not be rushed at the expense of the central tenets of contract and deed formation, or the protection and guarantee of what is, by far, the most valuable asset for the vast majority of people.
We are already seeing a move towards e-signing in the real estate world, but HMLR are effectively calling the shots, and with the residential conveyancing market effectively at a standstill, where is the urgency to pull the trigger?
Will this be the catalyst for change? Only time will tell.
If you would like advice in relation to any of the issues discussed in this article, don’t hesitate to get in touch with Vail Williams.