Are Emails Binding in Real Estate Negotiations?

Q During negotiations for an office building lease, I sent a prospective tenant several emails stating the space's square footage. The square footage that I quoted should have been big enough for the tenant's business needs. The tenant signed a lease for the office, but now it's having trouble fitting all of its furniture and equipment in the space. The tenant's architect said that the space is substantially smaller than how I represented it in the emails, and the tenant has asserted that it should be able to terminate the lease because of the representations. Can the tenant hold me to any of the representations I made in the emails? Are the emails binding?

A Possibly, depending upon where your business is located. Whether a party's emails regarding a commercial real estate transaction are binding on that party is a new, controversial issue and is state-specific.

Potential Landmark Case in Progress

A New York case that's on its way to the Court of Appeals, the state's highest court, could set a precedent. The case, which involves a dispute between the owner and prospective buyer of a pair of adjacent apartment buildings in Manhattan, is applicable to commercial leases, the lower appeals court noted.

There, the buyer wanted to turn the two buildings into a hotel. It sent the owner an offer for $50 million for both buildings. A contract was sent to the owner, and the buyer began researching how much structural work would be needed to turn the buildings into a hotel. But the owner didn't sign the contract, and shortly after, the buyer learned that it had sold the buildings to another hotel developer for $52 million.

The buyer sued the owner for breach of contract. It sought to enforce a right of first refusal that it claimed the owner had granted it. The alleged right of first refusal gave the buyer a chance to make a counter offer if another party, like the hotel developer, made an offer for the two buildings. The supposed right of first refusal was effective for 30 days to give the buyer time to conduct due diligence—such as determining how much work was necessary to convert the buildings—in contemplation of signing the contract to purchase the properties.

The owner denied that it had granted the buyer a right of first refusal or any other right that would've restricted its ability to sell the buildings to whomever it chose. The court ruled in favor of the buyer because of an old email the owner had sent to it. In the email, the owner gave the buyer the right to match “any legitimate, better offer.” The court concluded that “email is a legitimate form for deals to take.”

Same Weight as Traditional Contracts

The owner appealed the decision of the lower court, and asked the appeals court to dismiss the buyer's claim. The owner argued that, despite the email, there was no real evidence that the two sides had agreed on a deal, because the buyer had never acknowledged the email from the owner with one of its own.

The appeals court agreed. It determined that, because the buyer had never sent a “reply,” he could not claim that the right of first refusal had ever been extended to him. “There was never a ‘meeting of the minds’ between the parties on the terms of the proposed right of first refusal set forth in the February 12, 2007 email,” said the appeals court.

The appeals court dismissed the case, but it upheld the lower court's ruling that emails are binding in real estate negotiations. “E-Mails carry the same weight as traditional contracts,” the appeals court said. Moreover, a right of first refusal wasn't void because it had been memorialized only in an email. And an automatically generated identification block of the party making an offer could serve as a valid signature [Naldi v. Grunberg, October 2010].

The buyer has appealed the dismissal to New York's Court of Appeals.

Legislation Progressed According with Technology

The lower appeals court noted that in the past, contracts for real property were required to be in writing. “Today, a decade into the twenty-first century, e-mail is no longer a novelty,” it added. “As much as a communication originally written or typed on paper, an e-mail retrievable from computer storage serves the purpose of the statute of frauds by providing some objective guaranty, other than word of mouth, that there really has been some deal,” it added.

The enactment of several laws demonstrates that. Although it has not been enacted by New York, the Uniform Electronic Transactions Act (UETA), which was passed in 1999 and has been enacted by 47 states, provides that “a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation” and that “if a law requires a record to be in writing, an electronic record satisfies the law.”

In 2000, Congress enacted the Electronic Signatures in Global and National Commerce Act (E-SIGN), which provides that “a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form… or an electronic record was used in its formation.”

In 1999, the New York Legislature enacted the Electronic Signatures and Records Act (ESRA), which provides: “Unless specifically provided otherwise by law, an electronic signature may be used by a person in lieu of a signature affixed by hand and shall have the same validity and effect.”

Clarify Validity of Electronic Signatures

Barring an unlikely reversal from the New York Court of Appeals, this case will set the precedent that emails are binding in real estate negotiations in New York. If UETA has not been enacted in your state and there are no other rules that would bind you to the square footage representations you made in your emails, the tenant may not be able to terminate its lease.

In the future, to be safe, don't commit to information that you include in any emails you exchange with tenants. Specify that any agreed-upon terms that have been discussed in emails must be memorialized using a traditional method to be effective. Ask your attorney about including disclaimer language like this in your emails to clarify things for both sides:

Model Language

Email communications shall not be deemed an offer, as no documents are binding unless and until executed.

And to make it clear exactly which communications will be binding after you sign the lease, ask your attorney about adapting the following “copy and electronic signature clause” for your lease with the tenant.

Model Lease Language

Tenant expressly agrees that if the signature of Owner and/or Tenant on this Lease is not an original, but is a digital, mechanical, or electronic reproduction (such as, but not limited to, a photocopy, fax, email, PDF, Adobe image, jpeg, telegram, or telecopy), then, at Owner's sole option, such digital, mechanical, or electronic reproduction shall be as enforceable, valid, and binding as, and the legal equivalent to, an authentic and traditional ink-on-paper original wet signature penned manually by its signatory.

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