On October 5, 2010, the New York State Supreme Court Appellate Division, First Department, expanded the application of New York’s Statute of Frauds, ruling that a real estate contract could be formed through email correspondence. In the case of Naldi v. Grunderg, 908 N.Y.S.2d 639, 2010 NY Slip Op 07079 (App Div, 1st Dept 2010), the respective brokers of the buyer and seller discussed via email the terms of the sale of property in New York City, including an offer and counteroffer. Although the proposed terms acknowledged there was no due diligence period, both brokers’ e-mails mentioned a right of first refusal in the event the seller received a legitimate better offer during the next 30 days. Partly relying on the parties’ prior correspondence, including e-mails from the seller’s broker that contained a higher counteroffer and stated that there was to be no due diligence, the buyer started its due diligence without a signed contract and sued to enforce the right of first refusal when the seller attempted to make a deal with a third party.

In reviewing whether this right of first refusal was a valid real estate contract, the Court in Naldi had to determine whether the e-mails by the parties’ representatives could create an enforceable real estate contract that complied with the Statute of Frauds (New York General Obligations Law §5-703). The Appellate Division held that e-mail correspondence could satisfy the Statute of Frauds requirement for real estate contracts, noting that the Court had previously held that e-mails could satisfy the Statute of Frauds in other writing contexts like stipulations, modifications to agreements, etc. Moreover, the Court reasoned that the Statute of Frauds accepted other electronic forms of communication, such as e-mails and facsimiles, as writings with regard to certain complex financial agreements, and with e-mails ever present in business and personal affairs, there is no distinction between an e-mail creating a real estate contract and one creating a financial agreement.

The Appellate Division decided that the Statute of Frauds was flexible enough to permit forming a real estate contract through e-mail correspondence. Under the facts of the case before it, the Naldi Court held that a contract was not formed, because the parties never agreed on a price because the seller’s broker counter-offered $52 million and buyer’s broker submitted a draft contract with its original offer of $50 million.

Nevertheless, real estate professionals, including brokers, listing agents and attorneys, should be aware of the serious implications this case may have regarding the method of negotiating real estate agreements in New York, especially term sheets and leases. The risk is that what parties believe to be casual preliminary correspondence could accidentally create a binding agreement if the parties aren’t careful in their e-mail communications. In light of the Naldi decision, we are advising clients that all preliminary correspondence, e-mail or otherwise, should always include a disclaimer that the parties have not reached an agreement until all parties sign a negotiated contract.