Blockchain meets real estate

Blockchain, Real estate, Facility management, Crowdfunding, Participation, Digital share, Participation certificate, Exchange

This paper is based on the presentation of the authors at the digit! Immo on 19 January 2018.

Distributed ledger technology (Blockchain) is predicted to have a lasting impact on financial, logistic and trade markets. Its underlying decentralized structure ensures immutability, permanence and universal accessibility. Furthermore, distributed ledger technology enables its users to transfer assets in a cheap and fast way. As a result, blockchain technology provides a variety of possible applications in a wide range of business fields, one of which is real estate.

Essentially, three conceivable uses regarding real estate industry are currently discussed. Each use brings its own legal challenges for lawyers and lawmakers.

Blockchain-based electronic land register

A land register shows all rights concerning ownership, possession and other rights in land. Due to the above-mentioned characteristics, blockchain technology seems to be a state’s best solution to assure an immutable land register. Some countries have launched projects to implement a blockchain-based electronic land register, these states can be divided into two groups. The first group consists of states which have reached a high level of security in real estate transfer, e.g. Sweden, England and Ukraine. Their main intention is to reduce the number of paper documents and intermediaries, resulting in reduced transaction costs. The second group is formed of states facing security problems in connection with real estate transfers resulting from bribery and fraud, e.g. Brazil, Ghana, Honduras, Georgia. Their main intention is to make transactions more transparent and to reduce the potential for criminal activities.

In Switzerland, there is no central land register for the entire country. Instead, the cantons are responsible for its own land register. Notaries are involved in the transactions of real estate in order to enhance the public’s confidence. Rights in rem are principally established by registering entries in the land register. An entry in a land register provides full proof of the facts evidenced therein, as long as the inaccuracy of their content is not proven, and bona fide third parties are protected. Under applicable Swiss law, the land register can be held electronically. Thus, a (private) blockchain-based land register that displays certain information publicly is conceivable under Swiss law. From January 1, 2019, a new provision in the Swiss Civil Code will facilitate the use of an electronic land register by allowing cantons that have an electronic land register to delegate specific tasks – such as the access of the public to certain data – to private third parties.

 

Smart contract-based facility management

Blockchain technology has also great potential to transform the paper-laden area of facility management into an automated and fast system concluding and enforcing contracts in order to manage real estate. The use of smart contracts can help record and enforce contractual obligations in an immutable, unstoppable and irrefutable way, as well as holding and controlling blockchain assets. Applicable examples may be the use of smart devices that send data such as energy or water consumption automatically and directly to the respective contracting party and thus facilitating the creation of cost statements and payments. Blockchain can also be used to help landlords and property managers manage their property portfolio much more easily. For example, Smart Tenancy Contract is a software that uses a system of smart contracts to enable quicker reconciliation of cashflow transactions for rental payments and property expenses, thus allowing landlords and property managers to manage the cashflow of their property portfolios much more easily. In this and other systems, smart contract technology is used to digitally sign and execute rental agreements with automated execution, programmed to automatically debit the tenant’s account every month to pay rent. This approach allows individuals to enter into rental contracts for apartments or parking spaces from the moment of entering a property. Similarly, the smart contract could for instance automatically lock the apartment or parking space in cases where rent has not been paid (as far as it is legal in the respective jurisdiction).

 

Investing in real estate / Crowdfunding

In the field of investing in real estate, investors’ underlying assets could be documented on the blockchain for the purpose of facilitating their transfers. However, the documentation and valid transfer of assets on the blockchain depends on the respective applicable law. Under Swiss law, a transfer of real estate by a token is not valid, due to the requirement of the execution of a public deed and an entry in the land register. Here, a change of the law should be considered by Swiss lawmakers, for example, the above mentioned private blockchain-based land register where the verification of transfers and entries could be carried out by notaries, lawyers etc. However, there are a number of Swiss projects (e.g. blockimmo) launching a security token representing digital shares, participation certificates and other rights (such as contractual claims) in real estate which are not subject to such transfer restrictions. By tokenizing commercial revenue streams of real estate, these can then be turned into liquid assets that can be traded on an exchange.

January 2019 | Authors: Dr. Lucy Gordon, Dr. Andreas Glarner

Your team

Contact

In need of legal or tax advice? We look forward to contacting you.