At the end of February, the Lord Chancellor's Department issued a Press Release on the issue of electronic conveyancing. Hardly a week goes by without some comment in the Press about the effect of e-commerce on the property market. Is electronic conveyancing simply part of the hype relating to e-commerce generally? The answer to the question is "No". It is very likely that the internet will revolutionise the way we buy and sell property in the near future.
So what is electronic conveyancing?
Buying and leasing property generally is a two stage process. There is the initial contract for sale or lease followed by the transfer or lease. "Electronic conveyancing" is a loose term which is used to apply to both stages of the process.
For electronic conveyancing to work, the law needs to accept that electronic created documents are valid and enforceable.
The current law
For most types of goods, electronic contracts can legally be created and there has been a substantial growth in e-retailing over the past 12 months. The normal rules for creating a legally enforceable contract are that you need the following:-
- Offer.
- Acceptance.
- Consideration.
- Intention to create legal relations.
- Capacity (not a minor) saying.
All of these are easily fulfilled in the case of a property sale or lease (although the sanity may some time be doubted!). However, buying a shopping centre is not quite the same as buying a book or a car. The law requires that, in order to create a valid contract for the sale or other disposal of an interest in land, the parties need to comply with section 2 of The Law of Property (Miscellaneous Provisions) Act 1989. This Act requires:-
Sub-section (1)
A contract for the sale or other disposition of an interest in land can only be made in writing and only incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
Sub-section (3)
The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
Electronic contracts do not comply with section 2. There is a slight irony in that prior to the enacting of the 1989 Act, the courts recognised a doctrine of "part performance". Under this doctrine, if there had been an electronically created contract which had been acted upon, then the court might have been prepared to accept that the contract was enforceable even though created electronically. This was a way of enforcing, to some extent, verbal contracts. However, this is no longer possible.
As always there is an exception. The one exception to section 2 is that you can create a contract for the sale of an interest in land by way of a "public auction" (section 2(5)(b)) without complying with section 2. There is no legal definition of what amounts to a "public auction", but it must be more than simply a private invitation to bid made to a selected band of preferred bidders. Technically there is no need for any form of written "contract" under the "public auction" exemption. The contract is created by the gavel going down. There is no reason even as the law stands now why the gavel need not be an electronic one. Although internet bidding is now possible at a number of auctions, we have not yet reached a stage in the United Kingdom in practice where an auction is carried out entirely electronically.
With regard to the subsequent transfer or lease then again statute requires certain formalities. In particular, sections 52 and 54 of the Law of the Property Act 1925. The basic requirement is for a "deed" otherwise the document is void. Again, an electronic transfer or lease does not currently satisfy these requirements.
So what does the future hold?
1. Electronic Communications Bill
The Government published at the end of last year a draft Electronic Communications Bill which is currently making its way through Parliament. This Bill will have widespread implications for businesses as a whole and is not just aimed at the property industry. There are two clauses which are of particular interest to the property industry, namely:-
- Electronic signatures - under clause 7, electronic signatures will be legally recognised as valid.
- "In writing" - as a result of clause 8, the appropriate government minister (which will be the Lord Chancellor in the case of contracts, transfers and leases) will have a discretion to elect that references in any Act of Parliament to a requirement for "in writing" or "by deed" no longer mean that and that electronically created documents will be sufficient.
In other words, if the Lord Chancellor exercises his clause 8 discretion, we will have a situation where, as a matter of law, electronically created contracts, transfers and leases will be valid.
It is clear from the Press Release issued in February that the Lord Chancellor will be looking with great interest at the possibilities for electronic conveyancing. Although the focus will be on speeding up the house buying process, the same rules will apply to commercial property transactions. The Lord Chancellor has indicated that he will issue a consultation paper shortly, with a view to making electronically created documents legally enforceable early next year.
2. Land Registration
The land registration system cannot be ignored in all of this. In fact, the Law Commission and the Land Registry jointly published in 1998 a paper entitled "Land Registration for the 21st Century", which referred to electronic conveyancing.
Amongst the numerous proposals in this 300 page paper, the Law Commission and the Land Registry recommended that our land registration system (which is still based on the model designed in 1925) be updated. There was also a recognition that the current three stage process of signing a transfer in the prescribed form, lodging the application, and the registration taking effect retrospectively once completed, was not appropriate in the modern era.
Subject to developing the appropriate technology, the Law Commission and the Land Registry recommended that it should be possible for transfers and leases to be created electronically and to be registered instantaneously. Not only would this considerably speed up the current registration process, but there would be tremendous advantages in terms of costs savings overall.
It was also recognised that there would need to be guarantees as to the security of the system, to avoid abuse and also a need to overcome any fears relating to being "technology dependent".
How long it will take to set up the appropriate technology and systems for the UK to move to an automated land registration system is difficult to say. We have already seen considerable progress with the Land Registry's direct access system, and this will shortly be expanded with the availability of filed plans, electronically. There is little doubt that, to the extent of technology does not yet exist, it will be developed. Some places (for example New Zealand and Ontario) are already using automated land registration systems.
3. Title packages and other information
We have already reached the stage where title packages relating to properties being sold at auction are available for inspection on the internet.
There are now several organisations competing to establish databases of property information who will be able to provide quickly to lawyers and their clients details of all the normal searches. All of this will assist in speeding up the conveyancing process. In addition, we are awaiting the results of the trials conducted by the Lord Chancellor's department in Bristol.
There is no doubt that over the next few years there will be a considerable widening of the amount of information that is available both publicly and privately on the internet and it is easy to see that in a few years time it will be possible for the leases to units in a shopping centre to be not only stored electronically, but also so that the landlord and all its professional advisers will, by way of a password, have access to the documents.
Conclusion
Over the next 10 years we are going to see more changes to the way we conduct business than we have over the past 75 years. Although we may be a few years off creating the appropriate systems for instantaneous land registration, there is no reason why electronically created contracts and leases should not become the norm within a relatively short space of time. Perhaps the most difficult area to change is people's attitudes and ingrained working practices.
For further information on this topic, please contact Mark Heighton at Mark.Heighton@cms-cmck.com or on +44 (0)20 7367 3000.
This article was written by Mark Heighton, a partner in our property group for Estates Gazette (appeared 13th May 2000).
