e-Land Transfer

New York Law Journal, April 14, 1999

Copyright 1999 New York Law Publishing Company
New York Law Journal

April 14, 1999, Wednesday

SECTION: REAL ESTATE UPDATE; Electronic Transactions; Pg. 5

HEADLINE: On-Line Deals; How the Internet is Changing the Land Transfer Business

BYLINE: By Jonathan Bick; Jonathan Bick is an adjunct professor of Internet Law at Rutgers Law School in Newark, New Jersey and at Pace Law School in White Plains, New York. He is also Of Counsel at Friedman Siegelbaum located in New York and Roseland, N.J.

CONVENTIONAL thinking suggests that real property transactions are unimpaired by the introduction of the Internet. n1 Such thinking is usually grounded in an innate understanding that subject matter jurisdiction determination, which is the selection of the proper authority or responsible court to entertain a controversy and enter a binding order for relief, is easy in the case of real estate. If real property is located in New York and is not subject to another sovereign, the New York court may presumptively enter an order deciding title to, or use of, real property. Consequently, until recently, little attention has been paid to changes wrought by the Internet in real property legal transactions.

n1 See Steven R. Salbu, "Who Should govern the Internet?" 11 Harv. J. Law & Tec 429, Winter 1998. ("Despite a burgeoning market for real estate transactions over the Internet, real property remains among the most fundamentally and unalterably localized of regulatory interests (The logic here is that while negotiations and transactions occur across dimensions of space and time rendered increasingly irrelevant by technological advancements, the subject of the contracts themselves -- i.e., the land and permanent improvements thereon -- remains inextricably connected to an identifiable locale.) In the absence of a fundamental rethinking of federalism, it is difficult to imagine a diminution of states' interests in governing real property transactions."

Real estate attorneys who evaluate Internet realty transactions on a regular basis have typically found that transactions that were once little more than abstractions have been replaced by actual controversies. As real estate legal professionals begin to pay attention to the changes brought about by the Internet in the real estate industry, they are regularly being unpleasantly surprised.

It is obvious that each parcel of real property is uniquely associated with the particular jurisdiction within which it lies. This reality and the fact that real estate law is so heavily influenced by history has fostered a mind-set that the law of the jurisdiction within which realty lies is the exclusive law that should be applied to that realty.

Unfortunately, such thinking often overlooks the certitude that real property law deals with many distinct concerns. It also overlooks the fact that such concerns are related only by the fact that they all involve the dual question of which claim deserves what legal protection. The answers to these questions often turn on considerations of fairness and economic efficiency. The Internet is becoming a larger and larger factor in these considerations and hence an increasingly important element in the resolution of real property legal difficulties.

The use of the Internet in real property transactions has changed the answer to some real estate questions. In fact, the Internet has created new legal challenges for all types of real estate legal practitioners. Since the extensive use of the Internet has reduced the local stake in the outcome of a real estate transaction, the role of jurisdictions outside of the jurisdiction in which the real property is located has increased. In this context, allowing more non-local regulation of real estate transactions is justified because local interests are diminished.

Consider the case of Stroman Realty v. Antt, n2 where Stroman Realty, a Texas broker in the secondary market for time-shares in resort properties, challenged Florida's and California's attempts to force Stroman to comply with licensing, disclosure, escrow, fee, and advertising requirements when it deals with people or land in their states. Florida and California stated that the court must dismiss this case for lack of personal jurisdiction and other reasons. The court found that the Texas court had personal jurisdiction in part due to the minimum contact afforded by the Internet. It should be noted, however, that most state courts including Florida and California have found neither Internet nor computer contacts alone to be sufficient for establishing a basis for exercising personal jurisdiction. n3

n2 Stroman Realty, Inc.v.Jim Antt, Jr., et al., 20 F. Supp. 2d 1050 (August 28, 1998).

n3 Andrew E. Costa "Minimum Contacts in Cyberspace: A Taxonomy of the Case Law" 35 Hous. L. Rev. 453 Summer 1998.

The Internet is more than just a new communications medium. The Internet is the confluence of three technological phenomena: namely the integration of print, broadcast and common carrier; the mixing of information processing and communication services; the blending of content and services. This is important to note because the American legal system has built a different legal structure for each of these three types of communication systems. Thus the outcome of a matter may depend up the technology of the communication system.

If the introduction and use of the Internet were merely a shift to a new communications medium then it could be argued that the interest in a piece of real property held by the jurisdiction in which it lies is undiminished. The basis for this contention is that prior shifts in communication mediums have historically left state interests in real estate unchanged. n4

n4 See Steven R. Salbu, "Who Should govern the Internet? 11 Harv. J. Law & Tec 429, Winter 1998. which notes that 'such a situation may arise, for example, in libel, a state tort doctrine whose rationales are unaltered by the expansive publication and dissemination capabilities of the Internet" and states that "this assertion regarding indistinguishability refers to the substance of libel law rather than to complex issues of who may be responsible for publication of defamatory text, which becomes quite complex in the realm of cyberspace." Also see Giorgio Bovenzi, "Liabilities of System Operators on the Internet," 11 Berkeley Tech. L.J. 93, 118-28 (1996).

Because of the worldwide nature of the Internet, and the traditionally limited sovereignty of most jurisdictions, obtaining jurisdiction and choosing a convenient forum, from the Internet real estate transaction plaintiff's perspective, and opposing outrageous jurisdictional requests from defendant's perspective, are potentially new concerns in real estate transnational litigation.

Among the concerns that may arise in the context of transnational real estate litigation are statutory and other bases for subject matter and personal jurisdiction. This, in turn, raises issues of "long-arm" statutes, "minimum contacts," property as bases for jurisdiction, and in the case of Internet users who are not U.S. citizens, the interplay between the Brussels and Lugano Conventions on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters. n5

n5 ; Richard H. Kreindler, "Obtaining Jurisdiction Abroad: Party Autonomy and Choice-of-Forum Clauses" New York Law Journal, June 29, 1998, at 1.

In New York a real estate contract is generally valid if it is in writing, describes the property and sets a purchase price. Normally, the time for performance is not an essential term of the contract and most reasonable delays by the buyer will not be considered a breach. All of these norms might not be applicable if the Internet is the sole basis for the transaction and if only one -- or none -- of the parties is a New York resident. n6

n6 The most obvious example would occur if the realty in question was not owned by the seller or was not actually located in New York.

Real estate legal practitioners may also be called upon to consider choice-of-forum clauses and challenges to jurisdiction. In short the use of the Internet in real estate transactions may pose some novel legal difficulties because the Internet crosses geographical boundaries.

Practice Changes

The Internet is already changing relationships between real estate buyers and sellers, as well as lenders and real estate agents in transacting real estate business. Understanding such changing relationships is important to real estate legal practitioners because changing relationships often lead to changes in the application of the law.

Internet sites dedicated to real estate n7 have helped enormously in maintaining contact with commercial brokers and in making introductions to others. Internet listings of residential properties provide direct access by consumers around the country. Web sites are providing detailed descriptions, photos and floor plans for residential and commercial properties, with frequent updates. Brokers generally dispose of mailers that are sent out, but a Web site can always be accessed and generally contains more information. n8

n7 See Elizabeth Rhodes "Home, Real Estate" Seattle Times, Dec. 6, 1998, at D1. (reporting that there are more than 100,000 real estate and related sites on the Internet.

n8 Anthony E. Malkin, "Recovery Is Partial for Rental Market" NYLJ, Jan. 13, 1997, at S6.

According to The American Banker, real estate-related transactions constitute one of the top five growth sectors on the Internet. The value of consumers' transactions over the Internet will total $ 26 billion by 2002 and the number of Internet users in the United States will increase more than three fold to 102 million, from 30 million today. The American Banker also indicated that that 30 percent of mortgage originations will be done on-line by 2005, up from only 1 percent in June 1997. The paper estimated that 68 percent of the people considering real estate transactions will use the Internet by next year, up from 36 percent last year. n9

n9 The American Banker, Nov. 12, 1998, at 9.

These projections are supported by changes in the real estate business, changes facilitated by the Internet. Traditionally, real estate information and verifiable property data has only been accessible on a regional basis from a limited number of data service companies or from local appraisers. There has never been a national service to provide comprehensive information about residential properties, which account for more than 15 million appraisal transactions in refinancing annually for the 75 largest US, markets. According to Real Estate Weekly this will change when the Appraisal Institute implements its new Internet property database, which is composed of appraisal information, derived primarily from the front page of the Uniform Residential Appraisal Report (URAR) form developed by Fannie Mae. n10

n10 See "Appraisal Institute spearheads new Internet property database," Real Estate Weekly, Oct. 7, 1998 at 28.

New Concerns

The Internet has raised some interesting issues for the real property legal practitioner. These include concerns related to percentage rentals, changing the reliance on representations and increasing liability for infringement by people and firms, which use the Internet to find real estate. While there are many other issues, these have come up more often than most others have.

Percentage rentals are an issue for Internet businesses. While neither the mere source of rental income (i.e. the Internet) nor the mere change of place of payment of rent (i.e. to an Internet location), although made permissible by the lease, is sufficient to remove the case from the general rule that a lease of real estate is to be performed at the place where the real estate is located. n11 Such a fact may change the nature of the transaction primarily because Internet income is arguably not associated with a physical location.

n11 Consider Plaza Amusement Company v. Rothenberg, 159 Miss. 800, 131 So. 350 (1930), in that case, a lease of a building in Mississippi was for a term, and the rental was paid by a series of notes executed in advance and made payable in New Orleans. The court found that the law of Mississippi applied, the reasoning that the rent was to be paid in New Orleans did not mean the performance of the lease was to be in New Orleans, and it found that Mississippi law applied.

Accordingly, if a lease provides for payment of rent, measured either wholly or in part by a percentage of a tenant's sales, and the same is required to be paid or adjusted by the tenant at a date subsequent to the closing of the title, the lease should account for Internet sales.

When representing the purchaser, consider whether, by the terms of the rental agreement, there may be an obligation to repay any Internet-related rental income paid before the closing. If such a contingency is possible, obtain an agreement from the seller obligating him or her to make the appropriate refund.

The Internet is usually accessed by the client's personal computer which is connected to a larger computer known as a server. The server may be located on a client's property and will likely be the focal point for many commercial transactions. The transaction may have nothing to do with the space that is rented to hold the server. This matter can be easily handled if the attorney for the tenant of a percentage rental identifies this as an issue during lease negotiations.

The Internet has changed the relationship between the buyer and the seller with respect to awareness of conditions associated with the acquisition of realty. The legal principle of caveat emptor, -- let the buyer beware -- suggests that realty sellers are under no obligation to divulge obvious defects in the physical condition of a home. Nor do real estate sellers have a legal duty to disclose non-obvious defects in the realty, unless they make the real property dangerous or unfit for habitation.

In other words, real estate sellers do not need to volunteer information about property defects that hurt a property's value, unless such defects also pose a health or safety risk. The buyer has the duty to inquire, inspect and discover, even though sellers may have more knowledge about a property. It should be noted that this set of obligations is breaking down, particularly in with respect to residential transactions.

The Internet allows buyer to inspect the properties remotely, which means that while the sellers representations (i.e. the Internet images) have increased. "The Internet is a valuable tool to secure information indirectly or to use as a sanity check or credibility check determining if information -- received through discovery -- is really sufficient." n12 However, the act of allowing the buyer to use the Internet to inspect a property gives the seller an additional channel to disclose defects in the property and hence, the force of a buyer's argument with respect to hidden or undisclosed defects has diminished.

n12 Sherri Kimmel "Internet Awareness is Critical", 20 Pennsylvania Lawyer 34 September/ October, 1998.

Such changes in the relative rights of the real estate parties should be of particular interest to people and firms, which are not located near the real estate they are interested in buying or using. Due to the costs associated with visiting remote properties, they would be the parties most likely to use the Internet as part of a real property transaction.

Copyright law gives its owners certain exclusive rights to their work. n13 Since many real estate transactions now involve the Internet the potential liability of copyright infringement is now a matter of obvious interest to the real estate legal community. The larger the real estate firm, the more likely it is to be perceived as having deeper pockets or being more amenable to personal jurisdiction than others.

n13 See 17 U.S.C. @ 106 and 17 U.S.C. @ 106(1) for the arguably most important right of reproduction.

It has been reported that both Microsoft Corp. and Moore Corp. Ltd., were sued by an individual who claims that these firms infringed on his patented Internet real estate shopping technology. It is alleged that Microsoft and Moore Data Management Services misappropriated the plaintiff's patented inventions that let computer users make point-and-click identifications of available properties on a map displayed on the Web. n14 Since mere copying results in infringement (no intent is required) Internet users which use either the Microsoft or Moore software may also be subject to infringement action.

n14 "Business Browser" The Arizona Republic, Dec. 3, 1998 at D2.

Transactions Banned?

Internet real estate transaction may already be barred in some states. This is a result of state legislatures attempting to regulate other forms of Internet commerce. Louisiana's Internet Gambling Law is an example of an attempt to regulate the Internet possibly being misapplied to regulate real estate transactions.

With the advent of Internet gambling, n15 Louisiana passed a law which provides a maximum $ 500 fine or six months in prison for an individual who participates in Internet gambling, and a maximum $ 20,000 fine or five years in prison for anyone who: "provides ... any computer services ... or any server providing a home page ... or any other product accessing the Internet ... for the primary purpose of the conducting as a business of any game, contest, lottery, or contrivance." n16

n15 Internet gambling is the use of a computer, attached to the Internet that allows anyone with Internet access to play games of chance and participate in sports betting. In this manner, a citizen of a state that has prohibited gambling can access a gambling location via the Internet from his or her own state and participate in a prohibited activity.

n16 La. Rev. Stat. Ann. 14:90.3.E (West Supp. 1998).

The Louisiana law prohibits Internet gambling. Unfortunately, the sweeping wording conceivably applies to Internet real estate transactions. To be specific, Louisiana prohibits a person from assisting a party who is engaging in an activity in which that person, when accessing the Internet, "risks the loss of anything of value in order to realize a profit." Consequently, but for a statutory exception, the Louisiana statue could be make Internet service providers like Prodigy or America Online subject to prosecution by providing Internet access to Louisiana citizens, and thereby assisting in real estate gambling transactions. n17

n17 La. Rev. Stat. Ann. 14:90.3.H (West Supp. 1998).

Other Internet users and providers are not exempt and may fall within the broad language of the Louisiana law. A legitimate real estate transaction that is transacted over the Internet and entails any form of risk may be prohibited by Louisiana's prohibition of Internet gambling. To be specific, consider a transaction in which the completion of a land sale includes the exchange of information and contracts via the Internet, and this transaction involves the potential for the risk of loss of property value in the future, and a possibility that the property value will increase. Such a transaction violates the Louisiana law regarding Internet gambling.

The recognition of the role of the Internet in real estate transactions will be slowed by the heavy influence of history upon the outcome of realty related matters. For example, the courts of a jurisdiction in which a parcel of real estate lies will go to some extreme lengths to achieve a basis of jurisdiction over a nonresident who has contracted to purchase realty within that jurisdiction. This is true even when the case boils down to the determination as to whether there is a sufficient basis for the application of long-arm jurisdiction due to the effect of a defendant's unperformed promise to acquire realty within a particular jurisdiction.

Consider Black River Associates. v. Newman n18 where the court found that even though the defendant had absolutely no physical contact with New York, he still, "transacts any business in the state," citing CPLR @ 302(a)(1). This is significant because the parties to an Internet real estate transaction need not have physical contract.

n18 218 AD2d 273 (4th Dept. 1996).

In this case the plaintiff was a partnership with offices in New Jersey. The partnership was organized under New York law and owned property in New York. A California resident was the defendant. He negotiated the purchase of the New York property by telephone and fax with a realtor located in Florida. The plaintiff signed a contract of sale (prepared in California), in New Jersey. The deal was not closed on the closing date, so plaintiff had the defendant served in California and brought the case in New York. The defendant moved to dismiss the suit on the grounds that he had no contacts with New York.

It has been noted that obtaining personal jurisdiction using New York under CPLR @ 302(a) over a nonresident who defaults on a contract to purchase real property located in New York is surprisingly difficult and "there is a paucity of case law in New York dealing with real property contract actions against nonresidents." n19 It has also been noted that there would have had little hesitation in answering the question in the affirmative under CPLR 302(a)(4), since CPLR @ 302(a)(4) states rather clearly that a cause of action arising out of the ownership use or possession of New York real property qualifies. n20

n19 See Robert A. Barker, "Preclusion of an Issue; Long-Arm Jurisdiction" NYLJ, May 19, 1997, at 3. ("Plaintiff, apparently bent on making the task more difficult than it had to be, succeeded nevertheless in convincing a unanimous court that there was an (a)(1) basis. In treating this argument the court cited every jurisdiction case from Pennoyer v. Neff (95 U.S. 714 (1877)) to Asahi v. Superior Court, (480 U.S. 102 (1987)) and discussed most of them.")

n20 Id.

International Deals

Since the Internet is global it is as technologically easy to negotiate an international real estate transaction as a transaction among parties within a jurisdiction. This is particularly true of commercial leases. Alas, technological ease does not simplify international legal difficulties.

The growth of modern multinational enterprises, n21 and other commercial entities, which operate in more than one country has further increased the likelihood of Internet real estate transactions. Despite the potential for Internet international realty transactions none of the three major codes of transnational business conduct have been modified to address it. Therefore major issues are yet unsettled. Under such circumstances it is advisable to act conservatively.

n21 See, "The Law of Transnational Business Transactions," edited by Ved P. Nanda and Ralph Lake, Release 24 (December 1997), page 2-2.

To be specific, those who engage in international realty transactions should bear in mind the following two items. First, give due consideration to the real property law and the Internet transaction policies of the country in which the property is located as well as the commercial policies in which the buyer and seller are located. This will reduce the chance that a legal obligation will be over looked.

Second, determine and observe the legal obligations concerning the supply of information for the buyer's and seller's country, as well as the jurisdiction in which the property is located. This will allow all parties to meet the appropriate request by governmental authorities in a timely manner.