Many of you will have heard about blockchain technology over recent years. Rocketed to public consciousness by its most high-profile use case, the cryptocurrency Bitcoin, blockchain technology is forecast to have a hugely disruptive impact on a whole host of industries, from finance to shipping. Real estate is no exception.
One of the most exciting blockchain applications is the use of the technology’s permanent, public, and tamper-proof qualities to store and run automated contracts. These smart contracts would be quicker to set-up, more transparent, and less open to challenge and litigation than traditional contracts.
Faster and clearer real estate contracts
The use of extensive legalese within leasing contracts is intended to protect the contracting parties against misinterpretation and loss. However, this often makes the contracting process slow, expensive, and still open to interpretation. Smart contracts could well be the solution, a digital set of rules that formulaically set-out the agreed transaction and action these commitments automatically. A smart contract can be illustrated as an “if-then” action – when a condition is met, then a pre-determined action is performed.
Let’s look at how a commercial office automated leasing contract can be established and executed between a landlord and an occupier:
The property owner commences the smart contract process by programming the leasing conditions, as would usually be contained with a lease (i.e. rent, property management fee, payment frequency and reinstatement particulars), into a new smart contract. The occupier then reviews the lease’s conditions through an online platform and once agreement has been reached they digitally sign the smart contract using a key that denotes his or her identity, or that of their organisation. The property owner also digitally signs the contract, which then turns into a legally binding digital smart contract stored on a blockchain.
At every agreed payment period, the smart contract digitally withdraws funds from the occupier’s account. At that time, the money is immediately deposited into the property owner’s account. Rent payments can be automated, so the right amount is paid on time every time and is fully traceable for audit. This reduces errors and the cost of human involvement. Additionally, property management fees can automatically be calculated, charged and paid. This is made possible based on data fed into the blockchain from Internet of Things devices that record energy, utilities, and more, in a transparent way.
End of Lease
When the smart contract expires, protocols for the security deposit can facilitate deductions – for example concerning reinstatement – or return it to the tenant at the lease end. Smart contracts can include capabilities for third-party decision making, such as the independent expert of a surveyor to determine the reinstatement costs that are due.
Challenges & Opportunities
Automated leasing contracts face some challenges in implementation. These include a lack of understanding of the technology, an unwillingness to change established industry practices, as well as potential legal constraints in some jurisdictions. But there are exciting benefits to adopting blockchain technology and an increasing number of start-ups are aiming to facilitate the creation and operation of smart contracts. These are often sold as ‘smart contracts as a service’. These companies will make it quicker and easier for transacting parties to utilise the benefits that smart contracts can offer, and likely will drive the uptake of their use.
Smart contracts can provide building blocks for a whole new way of conducting commercial real estate business. Are you ready for it?