In the new COVID-19 reality, with social distancing and personal health protection paramount, it is more important than ever for attorneys to know how to and be comfortable giving their clients the option to close transactions remotely.
Several factors, from the exchange of digital agreements and other items to be delivered at closing to the use of electronic signatures, are important to understand and should be agreed on by the respective counterparties in advance to allow a transaction to be smoothly closed or consummated remotely. The most important factors for closing transactions remotely include:
- Agreement among the parties to close the transaction remotely
- Identification of any closing deliverables permitted to be exchanged in electronic form only
- Identification of any closing deliverables that require the exchange of original “wet ink” signatures or other original pages, and if so, agreement on when and where original pages will be delivered
- Identification of any closing deliverables that require notarization, and if so, confirmation of the notary or type of notarization that is available and acceptable.
Whether all of the above factors are relevant varies based on the size and type of transaction. More detailed descriptions of these factors, in addition to other considerations to keep in mind when structuring a remote closing, are set forth below.
Make sure all parties are in agreement concerning the form and delivery of closing deliverables.
The initial and most important factor for closing transactions remotely is to ensure that all parties agree that the transaction should be closed remotely. The second critical piece, discussed further below, is agreement among the parties as to the form of the closing deliverables—including whether electronic versions only are acceptable, or if original “wet ink” versions are required. If original documents will be exchanged, the parties should also agree beforehand on the location and the timing of delivery of such originals.
Subject to the applicable parties’ agreement, most transactions can be closed remotely through the exchange of electronic versions of the closing deliverables. This exchange is typically done by email or by uploading the closing deliverables to a shared document folder or file transfer protocol (i.e., Sharefile, Dropbox, etc.). However, as discussed below, the exchange of only electronic signatures is not acceptable for some transactions, necessitating the review of the documents and substantive law (defined below) applicable to each transaction sought to be closed remotely.
Regardless of the type of signatures (electronic and/or original) to ultimately be exchanged, when transactions are closed remotely, all parties typically want to review and sign off on all closing deliverables before agreeing to initiate the wiring of funds or otherwise consummate a transaction. Absent other agreement, electronic and/or original signature pages for closing deliverables are often exchanged for review and held in escrow until released by the respective signing party.
After all of the documents and signature pages have been reviewed and approved by the parties, the wiring of funds and/or any other steps that may be needed to complete the transaction are initiated. When funds are wired, parties generally wait until confirmation that the funds have been received before releasing their signature pages, officially closing the transaction.
Agree on which closing deliverables may be exchanged in only electronic form, with electronic signatures.
As mentioned above, once parties have agreed to close their transaction remotely, the next critical factor is to determine whether the parties may exchange only electronic versions of the closing deliverables or if any original or “wet ink” executed versions may also be required. Such determination is often based on whether original signatures (and if applicable, notarizations) are required.
While it is not the only relevant factor used to determine if an agreement is valid and enforceable, an electronic signature, as opposed to a “wet ink” original signature, is acceptable to “execute” enforceable agreements in a number of circumstances. Pursuant to the U.S. federal Electronic Signatures in Global and National Commerce Act (E-SIGN), as well as the widespread adoption of the Uniform Electronic Transactions Act (UETA) and comparable electronic signature laws at the state level, with some exceptions, electronic signatures and agreements cannot be denied legal effect or enforceability solely because they exist in electronic form.
When taken as a whole, the net effect of these statutes is that every jurisdiction in the United States has substantially the same rules concerning the use of electronic signatures. However, that doesn’t mean that electronic signatures can be used in every context.
In addition to incorporating the exceptions set forth in E-SIGN, UETA, and comparable state electronic signature laws also carve out additional types of transactions governed by state law and other substantive law that may be applicable to a transaction. For example, certain areas of law that are commonly excluded from the electronic signature statutes pertain to real property recording documents, entity documents, and documents covered by different provisions of the applicable Uniform Commercial Code.
It is also important to review the applicable documents (including, for example, the transaction documents, party entity documents, and any related financial documents, if applicable) to ensure that none expressly prohibit the form of electronic signature the parties wish to use. If any transaction documents are being executed by an individual not physically in the U.S. or by an entity that is not organized in the U.S., consulting with local counsel about the use of electronic signatures is advised.
What constitutes an electronic signature?
Electronic signatures are broadly defined under both E-SIGN and UETA as any “electronic sound, symbol, or process attached to or logically associated with a [contract or other]record and executed or adopted by a person with the intent to sign the record.” The key elements are that the “electronic signature”:
- Must be logically associated with the contract or record
- Can be authenticated as having been made or authorized by an individual
- Was included by such individuals with the intent to make such contract or record binding.
Electronic signatures used in transactions today are most commonly either scans of “wet ink” executed signature pages or documents with digital signatures (i.e., DocuSign, AdobeSign, etc.) associated therewith. However, as noted in the definition, other sounds, symbols, or processes may also qualify.
Software companies continue to develop and improve electronic signature platforms to provide enhanced security, authentication support, and digital association of the electronic signature with the appropriate document. In addition to such factors, the level of confidentiality and data security protection available should also be carefully considered when evaluating using a remote signature platform.
Consider including an electronic signature rider in transaction documents.
While the agreement to use electronic signatures can be implicit in the course of conduct among parties to a transaction, parties may consider including an “electronic signature rider” in the applicable agreement or otherwise memorializing such intention. Existing language in transaction documents can be revised or a new provision added to make it clear that all parties agree that, where permissible under applicable law, the transaction documents may be executed with electronic signatures, and electronic documents and records are permitted.
Identify any closing deliverables that are required to be “originals.”
If, pursuant to applicable law or otherwise required by the parties, original or “wet ink” executed versions of any closing deliverables must be exchanged, the parties should agree on the procedure for compiling and delivering such original documents in advance of the applicable closing or delivery date.
Subject to agreement of the parties, electronic copies of such original documents are often circulated for closing to evidence the existence of the original. When transactions close remotely, the actual original documents are sometimes kept in the grantor’s possession until after funds are received or the transaction is otherwise closed, at which point such originals are sent for delivery. If original signature pages or documents are to be sent for delivery, such documents should be sent in a trackable manner using a reputable delivery service.
Identify if any of the closing deliverables need to be notarized.
It is also important to identify, well in advance of closing, if one or more closing deliverables for a transaction needs to be notarized. Traditionally, documents that need to be notarized require the executing party to visit, self-identify, and execute such document(s) in front of a notary public. Notaries can often be found at law offices, courthouses, banks, UPS, and other shipping or courier service stores, among other locations. However, such locations need to be open, and the signing party and notary both need to be available in the same location at the same time for a document to be notarized. If all such locations are closed, or individuals are not comfortable or capable of being in close proximity, it may not be possible to get a document notarized using traditional methods. Fortunately, other options may be available.
Notaries are commissioned by states. Each state has its own procedures and statutes regulating what kind of notary services can be provided.
As technology develops and realities change, more jurisdictions are enacting legislation to permit notaries to sign and certify documents electronically, as well as to permit notaries to notarize documents remotely, often pursuant to a separate type of online commission that does not require the notary to be physically in the same location as the signing party. Such online commissions often require the notary to use acceptable audio-visual technology, a recording of which may be required to be retained by the notary.
The important difference between these two types of notarizations is that electronic notaries still must be in the physical presence of the signor. For electronic notarization to be provided remotely, the notary must also have a respective online or remote notary commission from the notary’s applicable state. To allow clients more flexibility, an attorney that is either already a traditional notary or is considering becoming a notary, may want to also be commissioned as both an electronic notary and online notary in his or her state, if available.
Additionally, while legislation at the state level permitting electronic and online notarization is generally subject to substantive law, COVID-19 has prompted some governors to issue executive orders to permit specific types of remote notarizations, without such restrictions. Always check the relevant jurisdiction(s) for the latest developments, if any, related to the use of electronic signatures or notarizations.
Additional items to be aware of: Status of state and county filing and recording offices.
Finally, identify if any of the recording or filing offices to which closing deliverables need to be submitted post-closing are either closed or the services typically provided are being reduced or altered. This is especially important for transactions where closing deliverables need to be filed or recorded to put third parties on notice as to the ownership of or encumbrances on real property, or to perfect a security interest as the closures or reduced services may delay or otherwise negatively affect the ability to put third parties on constructive notice or perfect such interest(s). Similarly, state or county closures or restrictions may also affect the ability to obtain current certificated lien searches, charters, and good standing certificates.
If any such closures or restrictions are deemed relevant for a transaction, the attorney should identify and discuss with their client any possible problems or risks the closures or restrictions may cause and propose approaches to address the same.
About the Author
Danielle O. Mirabal is an attorney with Sidley Austin LLP who works with clients to close transactions throughout the United States.