Legal Tech for Transactional Lawyers Newsletter: #7

A deep dive into e-Signatures in real estate transactions, some solid article links and the intersection of travel, life and work!

Happy Friday!

In this edition we dive into why execution of documents has not fully moved into the digital age in commercial real estate transactions, despite advances in technology and plenty of e-signature platforms on the market. 

Included below are links to some really good resources from MISMO and Freddie Mac in the context of mortgage transactions.

Hopefully you find it useful and interesting.  Please feel free to share with anyone that may be interested and have a great weekend!

Matt Basile

If you find this content valuable, please connect with me on LinkedIn.

Leveraging Tech in Transactional Matters

📗 When Will eSignatures Become Widely Adopted in Commercial Real Estate Transactions?

We all use electronic signature platforms for agreements in our personal life and e-mortgages have become more common in residential loans, but what is holding back adoption in commercial real estate transactions?  There are probably a few factors: 

📃 Recordable Documents - The main reason folks are hesitant to execute real estate transaction documents using an e-signature platform is because in most cases there will be one or more recordable documents (mortgages, deeds of trust or ALRs in a loan transaction and deeds in sale transactions) that need wet signatures and notarized.  There was a nice push during the pandemic where county recording offices were accepting fully electronically executed and notarized documents for recording (because laws were changed federally for a small period of time) but now we are back to each county having its own recording rules.

 📗 Promissory Notes / Negotiable Instruments - The second major issue is that promissory notes are typically negotiable instruments under the UCC and lenders need an original to hold in a vault.  There are ways around this using e-notes but this is not an easy process to change.

🎯 Final Documents Can Be A Moving Target - In most commercial transactions, the documents are negotiated right up until the closing date and parties prefer to collect signatures in advance using breakaway signature pages that are attached to the final documents by the lawyers.  The problem with using most e-signature platforms for commercial transactions is that they often (for good reason) require the final document to be included for execution so you cannot send documents out for signature until they are in final form.  This often creates logistical issues.  

🧩 Setting Up For E-Signature Can Be Cumbersome - Setting up one document for execution on an e-signature platform is easy, but setting up 30-50 documents with a number of parties on short notice can be time consuming.  This can be a deterrent to attorneys and other parties.

👴 Original Closing Sets / Old Habits - Despite the digitalization of most processes, many parties still require a full set of originals to send to their records department and collect dust, even though they only really need the original note in most cases and they have all documents in PDF format.

Electronic signatures are much more efficient and less cumbersome for execution, so it would be great to see a shift away from wet ink signatures in the coming years.  How can we move past the legitimate concerns noted above and move commercial real estate transactions into a fully digital workflow?  

Below are a few ideas:

🏦 eNotes / eMortgages - MISMO has put together a full set of standards relating to Remote Online Notartization, eMortgages and eNotes, including an eMortgage closing guide.  This is all being done at reasonable scale for residential mortgages, so the blueprint is there.  It would be awesome to see someone try to take it to commercial products.

😊 Transaction Management Platform - One of the biggest keys to implementing fully digital transactions and eMortgages is first adopting a transaction management / document automation platform and leveraging automatically created signature packages first and then once that is in place switching to eSignatures and remote online notarization (and eNotes and eMortgages).  This also alleviates the pain of setting up documents for execution and the issue of documents changing until right before closing.

🔍 Change Management - Before any of this is possible, the right stakeholders need to take a step back at closing requirements and decide why originals are needed and be prepared to rely on electronic documents where is it acceptable.

I am always interested in discussing this topic and would love to brainstorm an electronic closing process if anyone is interested. 🚀🚀

Articles and News

💡 Freddie Mac e-Mortgage Guidelines

This link to the Freddie Mac website includes a number of excellent resources with respect to eMortgages in the context of single family residential loan transactions.  Most of these guidelines apply in the commercial context too, they are just much harder to implement due to the reasons noted above, the complexity of transactions and strong preferences of sophisticated parties.

📜 Do Lenders' Really Need Promissory Notes?

This is a solid analysis by Anthony Cianciotti of why promissory notes are not always needed in loan transactions.  This does not fully apply to real estate loan transactions for the reasons noted and because these loans often gets sold and securitized, but this is worth reading in any event as a refresher on negotiable instruments.

🌞Pain and Suffering is Good

This article contains a link to the full interview with Nvidia founder Jenson Huang that is worth a watch.  He encourages students to embrace solving difficult problems - "“I don’t know how to do it [but] for all of you Stanford students, I wish upon you ample doses of pain and suffering,” Huang said. “Greatness comes from character and character isn’t formed out of smart people—it’s formed out of people who suffered.”

🏆 Top Uses of Gen AI for Legal Work

This article from Stephanie Pacheco at Bloomberg contains a nice graph of common legal use cases for Gen AI.  I think it is important to keep in mind that with all use cases right now, a trained legal eye needs to review and verify any summaries or legal research produced.  It should augment and speed up certain tasks, but not fully automate them.

📉 Knowledge Graphs for Real Estate Documents?

If you are interested in learning about knowledge graphs and how they can be used to enhance LLM performance, this blog post by Tony Seale (and the embedded links) is a great place to start.  I wonder what proper ontology for real estate documents would look like... For example, it will be very helpful to know whether when you are passing a loan document as context to an LLM whether it is a first draft or a negotiated draft.  What type of property does it relate to?  Is it a refi or an acquisition.  It all layers together to provide important context for the LLM performing the task.