Cyber Rentals

New Jersey Law Journal

April 24, 2006

Internet Law

Cyber Rentals

A profound change in the execution of real estate rental transactions

By Jonathan Bick

Bick is of counsel to WolfBlock Brach Eichler of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law [Random House 2000].

The Internet has profoundly changed the way people execute real estate rental transactions, mostly for the better. In addition to putting significant amounts of rental information into the hands of potential tenants and allowing virtual tours of available rental properties, the Internet allows the submission of rental applications. Properly executed, an Internet real estate rental application may save time and money for both the potential tenant and landlord. Improperly executed, such an application may result in legal difficulties, including unenforceable contracts and negligence claims.

Internet real estate rental applications, like traditional applications, are either commercial or residential in nature. Both residential and commercial property transactions normally are initiated by an application and result in an agreement to create a contractual relationship between the tenant and the landlord, providing space in exchange for consideration. However, the terms of a residential transaction are normally subject to more governmental regulation than a commercial agreement.

Residential agreements are largely regulated by statute. Thus, relatively few terms are negotiable. A commercial agreement, however, generally is not limited by governmental regulations and parties may negotiate all terms. Consequently, in a commercial lease the tenant may be responsible for maintaining the building, grounds, heat, and electricity and paying for insurance and real estate taxes. The landlord’s relationship with the tenant in that instance is limited to receiving the rent.

State and federal statutes relating to residential agreements often restrict what a landlord might request from a potential tenant. Due to the fact that such information is generally uniform and limited in scope, residential applications easily adapt to Internet forms.

Internet residential rental applications have all the elements of traditional residential rental applications. In particular, the identification of the property of interest, the rent of that property, when occupancy is contemplated, the applicant's name, address, date of birth, social security number and driver's license number.

Typically, the applicant is required to list every place he has lived for at least the past three years, as well as employment information and other revenue sources. He is also required to list all vehicles that may be parked at or near the property, (including cars, trucks, RV's, trailers, boats, etc.), disclose whether he has renter’s insurance, whether he has been evicted or declared bankruptcy, and whether he was ever convicted of a felony. The application usually asks for personal references, credit and banking information.

Like a traditional rental application, an Internet application will request

confirmation that the information is true, correct and complete. The application will also request authorization to verify the information provided, including permission to conduct a credit report.

Both a traditional rental application and an Internet application typically require a processing fee that must be paid in advance. Both normally come with notices that the applicant agrees to execute the lease or rental agreement if approved, the property will be occupied only by the person named in the application and that the application fee is neither a deposit nor rent, and will not be applied to future amounts due or refunded, even if the application is declined. Each usually contains a notice that the applicant understands that the landlord may terminate any rental agreement entered into for any misrepresentation, no matter when the misrepresentation is discovered. They also contain notices required by law, such as: the property owner strictly adheres to all fair housing laws; gross income must be approximately three times the rent amount; each person 18 years or older must fill out an application; all sections of the application must be filled in completely; the application is nonrefundable; picture ID is required; proof is required for all sources of income; if approved, initial payment must be made by cashier’s check only; and security deposit must be received within 24 hours of approval.

While the content of Internet and traditional residential agreements are similar, their execution, fee payment and validation are not. Traditional applications are executed with a traditional signature. Internet applications take advantage of the Electronic Signatures in Global and National Commerce Act (E-signature Act) and are executed with a digital signature.

The E-signature Act is a broad and general statement that contracts cannot be invalidated simply because they are in a digital form. The act states that an electronic contract, signature or record is legally equivalent to a hard-copy contract, signature or record. But the act does not detail the technical requirements of an electronic or digital signature and does not recommend implementation models. This allows landlords a range of options for obtaining electronic signatures.

Electronic signatures use a variety of methods and are created using different technologies. The Internet can only communicate digitalized data, so ultimately all electronic signatures must be reduce to that form.

Two of the most common ways of electronically signing a residential application are: (1) by signing the paper in pen, then scanning the paper for attachment and transmission; and (2) by placing on the application, where it would normally be signed, a symbol comprised of numbers and/or letters between two forward slashes. The United States Patent and Trademark Office has accepted the second method. For more details concerning information on signature requirements see Trademark Rules 2.119(e); 2.193(c); Patent and Trademark Rule 10.18; Fed. R. Civ. P. 11; TBMP §§ 106.02, 203.03, 309.02, 311.01, 502.04, 527.02, 1202.03.

Please note that the second method requires proper notice to the potential tenant. Failure to provide such tenant-notice provisions in an appropriate form and location may result in an unenforceable application. Ideally, the notice should detail the significance of the transaction and be proximate to the location of the part of the Internet form which requests the electronic signature.

Traditional application fees are paid by check submitted with the application. Internet applications are normally paid by credit card. To ensure proper payment, Internet applications normally require the credit card number, the expiration date and the 3 or 4 digit security code appearing on the back or front of the credit card.

The request for credit card information may make the landlord vulnerable to legal difficulties associated with negligence unless certain technical precautions are taken. While no standard of action is dictated by statute, the industry recognizes that Internet application involving credit card information use Secure Sockets Layer (SSL), which encrypt credit card data while it is being transferred. The use of SSL ensures that credit card number related information is scrambled and locked with a mathematical key during transfer.

Traditional applications are validated by hand. A representative of the prospective landlord reviews the application. Internet applications normally take advantage of electronic validation. Such validation varies by software application, but normally includes an electronic confirmation that an entry has been made for all mandatory fields and specific items -- such as phone numbers, zip codes and drivers’ licenses -- are the proper length.

Internet verification normally involves the communication and maintenance of personal information that may be used for Internet identity theft. Thus, as in the case of the landlord's communication and maintenance of credit card data, electronically verified applications must be handled so as to reduce or eliminate negligence related legal difficulties.