A potentially key development underpinned by blockchain technology are smart contracts for commercial real estate deals. Boiled down, a smart contract is computer code which can self-execute – as well as self-enforce – the terms and conditions laid out in a legal agreement. To the world of commercial real estate (CRE) the decentralised nature of blockchain and smart contracts offers the opportunity to bypass expensive ‘middlemen’ such as financial institutions and solicitors.
Darren Best, the Managing Director of Savoy Stewart commented: “Smart contracts are only in their infancy, but they have huge potential to make a real game-changing impact in the commercial real estate industry. As this research certainly shows, smart contracts have left an encouraging impression on commercial real estate professionals. The benefits highlighted by them, demonstrates the huge potential smart contracts have and as the understanding of their functionality as well as applications to different commercial real estate processes/procedures improves, they could over time gradually phase out standard paper-based contracts.”
Some survey data
In the commercial real estate industry, smart contracts are already being used to conduct property transactions such as buying, selling, leasing and financing.
Commercial estate agents Savoy Stewart surveyed 544 CRE professionals to try to identify what they think are the biggest benefits of using smart contracts in CRE. Savoy Stewart found:
- 71% perceived increased speed as being the biggest benefit
- 66% believed smart contracts enable a property transaction (between a buyer and a seller) to become more efficient – because it reduces the need for ‘middlemen’
- 59% rated smart contracts as secure
- 74% thought the lack of understanding/knowledge is the main barrier inhibiting wider adoption (of smart contracts in CRE)
- 69% felt the lack of government clarity will limit smart contract adoption.
Smart contracts and CRE
Since smart contracts run as software code, they do not require the manual processing of documents. This means smart contracts can significantly quicken various purchasing stages, including verification and ownership.
With CRE transactions typically involving multiple intermediaries – such as brokers, banks and solicitors – a smart contract has the ability to ‘take over’ some or all these functions, thereby facilitating the exchange between the buyer and seller, with fewer parties involved. Similarly, with fewer or no ‘middlemen’ to deal with in a smart contract, there is less need to pay often expensive intermediary fees: if proven in practice, this would enable both buyer and seller to save.
Interestingly, a majority of those surveyed rated smarts contracts as ‘highly secure’. Their reasoning is that, with records placed on a blockchain, these records are immutable which, in turn, means documents cannot be forged and opportunistic property scams become much more difficult.
As side observations:
- only 40% envisaged a positive environmental impact – because smart contracts can be paper free
- 45% saw clearer communication as a key advantage, because all terms and conditions are recorded in explicit detail within a smart contract.
Possible barriers to smart contract adoption in CRE
Savoy Stewart also asked what the CRE professionals think are the main barriers which might inhibit wider use of smart contracts in the future. Unsurprisingly, respondents cited ignorance, the lack of smart contract understanding/knowledge as the primary reason why the CRE industry might not exploit them on a greater scale going forward.
Almost as concerning, a clear majority felt government inaction or precision – about how it intends to regulate and tax smart contract transactions – will limit smart contract adoption. Other inhibitors included:
- 51% attributing the lack of best practice standards as being a potential constraint (to the wider use of smart contracts)
- 58% foresaw data privacy compliance as a challenging issue – since details stored on a smart contract ‘remain forever’ and so may breach certain data privacy regulations.
Enterprise Times: what does this mean
Smart contracts have an allure, because they seem to offer the possibility to eliminate middlemen – like lawyers, banks and others. Ironically, commercial real estate agents are ‘agents’ – middlemen – themselves. There is the possibility that, if buyers and sellers can find each other, they can eliminate CREs as well…
The bigger issue, to Enterprise Times, is the assumption by the CRE respondents that contractual terms and conditions are capable of encapsulation within a smart contract. If contract standardisation was simple it would have happened already in the ‘manual’ world. That this has not occurred suggest that commercial real estate smart contracts may not permeate soon, aided (as Stuart Savoy discovered) by a lack of government clarity.