updated on 14 January 2020
QuestionHow might blockchain influence real estate transactions?
Blockchain is a decentralised data management platform - differing from traditional databases where data is stored in a one 'centralised' place. Decentralisation enables the data on a blockchain platform to be shared and accessed by multiple users over a network, whilst the data itself is kept safe and secure by encryption and verification technology. Users can configure their blockchain network to allow certain people to access the data (for example, during the negotiation of a contract), or perhaps let that data be publically available (for example, the bitcoin trading market).
The data is itself made up of 'blocks'. Every time a user adds new data to the blockchain, a new 'block' is immediately added to the chain, in chronological order, for the rest of the users in the network to access. This means that users are able to access the most up-to-date 'block' of data each time they access the network, as well as a full history of the data that preceded it (it is nearly impossible for old data 'blocks' to be amended or deleted without detection).
Ways that blockchain might influence real estate transactions
There is considerable discussion about how blockchain could 'revolutionise' the client experience in a real estate transaction. There are three key stages of a typical real estate transaction which could effectively incorporate blockchain technology.
A traditional real estate transaction involves a large-scale review exercise; to check the title to the land in question, its current state and history of use, as well as the identities of the parties involved. Reviewing this volume of information is time-consuming and vulnerable to simple human error or fraud. Holding data such as this in a digitised format, within a blockchain platform, allows for it to be automatically verified, which in turn could mitigate the likelihood of error or fraud and generally streamline the due diligence process, to the benefit of all parties.
However, this data is only as good as the user who produces it. Lawyers must therefore work collaboratively with their clients and other advisors on any transaction to ensure the next data 'block' is accurate and verified by all parties before it is added to the blockchain network.
Ordinarily, contracts are negotiated between parties in stages. A contract is drafted, saved and sent to the other party; the other party will save the document, amend it, re-save it and send it back to the originating party. The parties effectively ‘take turns’ to consider this single document (or a version of it). This can take time, as the contracts are intricately reviewed and amended.
Blockchain technology can be used to store all of the parties' authenticated requirements and conditions for the given transaction (much like agreed 'heads of terms') and include these within a data 'ledger'. This data is effectively stored as computer code in a ‘smart contract’. All parties can then access this data and digitally verify that their requirements and conditions have been fulfilled; allowing the contract to progress automatically and ultimately execute itself. At this stage, contract monies (which would be deposited in an escrow account at the outset of the transaction) can be automatically transferred and the land register updated. This could significantly reduce the time and cost associated with contract negotiation.
Of course, the smart contract has its limitations. For example, the technology cannot interpret in the way that a human can; sometimes leading to the more subtle elements of the parties' requirements being lost. In this way, legal terms such as "acting reasonably", or "using best endeavours", would be ineffective. There is also an inherent risk that there may be errors in the coding of the smart contract, which could potentially go unnoticed.
Property purchasers, tenants or investors currently bear the risk of a ‘registration gap’. This is where, following completion of a transaction, a legal interest in the property will not exist until the transaction has been registered at the Land Registry. Until this time, the purchaser, tenant or investor only has an equitable interest and cannot, for example, serve a notice to remove a sub-tenant from the property. Blockchain technology could reduce this ‘gap’ by ensuring that registration occurs much faster following the completion of a transaction.
Additionally, it would be very useful for interested parties to be able to view a constantly up-to-date, decentralised register of ‘who owns what’ in land terms. This could speed up the due diligence process in a real estate transaction and could make title investigations cheaper and more straightforward.
To this end, the Land Registry in England and Wales has already generated a digital register for a small number of properties, through its partnership with R3 (a blockchain technology company).
What does this mean for lawyers?
Arguably, the ease of access to blockchain networks could make it easier for clients to carry out certain elements of a transaction themselves, or at least reduce the necessary workload of a traditional transactional real estate lawyer. However, the nature of a lawyer as a trusted advisor with particular experience, expertise and the ‘human touch’, perhaps means lawyers will continue to be the preferred choice for parties engaged in real estate transactions. This may be evident in the fact that blockchain has threatened to overturn the traditional real estate transaction for years, but this is yet to truly kick-off.
There is clearly scope for further innovation in the real estate sector, for both lawyers and their clients. Only time will tell how significantly this will influence the real estate sector, as blockchain technologies are developed further and more widely embraced.
Ben Butterworth is a solicitor in the transactional real estate team at Michelmores.