“Smart contracts”, a term originally coined over 20 years ago, is nowadays used to describe computer codes and algorithms that allow contracts to self-perform. The term is highly related with blockchain, as the main trend is that these work on a blockchain-based platform.

In a nutshell, a smart contract will “self-enforce” / “self-perform” a predetermined outcome from a contractual provision once its objective criteria is met without the need of an intermediary.

At present, smart contracts are best suited to execute somewhat rudimentary legal tasks, which typically involve transferring funds or imposing financial penalties when certain conditions are satisfied.

However, as the applications of blockchain and the assets controlled by it expand, the use of smart contracts is likely to become more complex and legally sophisticated.

Have you been at a hotel and found that once you’ve been billed and paid through your card, an app will open the room door? That’s a smart contract.

Other actions can be performed such as utilities in a flat which might continue to work as rent is paid through a credit card.

Real estate applications

Eventually, smart contracts might rule and perform transfer of real estate ownership.

These contracts are expected to reduce transaction costs and time spent on real estate deals, while still benefiting from the security, transparency, immutability, decentralization, and permanence that blockchain offers.

Furthermore, smart contracts - coupled with other property record-keeping applications of blockchain - could be used to review leases, cash flows, and property history.

This can greatly improve asset management and the auditing process of properties and leases, which would be especially useful in real estate portfolio transactions.

Challenges ahead

Notwithstanding its promising applications, smart contracts still have a long way to reach maturity and overcome traditional text-based contracts.

There are concerns that need to be addressed before the widespread application of smart contracts.

These include technological shortcomings and the incompatibility between the smart contract’s objective and automated nature versus the desirable subjectivity sometimes needed in real-life business.

Like many other digital applications in traditional contracts, such as eSignatures or eDocs, smart contracts are likely to be more formally regulated and implemented in the near future.

The application of smart contracts is not only an exciting new intersection between the law and technology, but it is also a transformational stage for the real estate industry if implemented as proponents believe.

Next steps

This article forms part of our Real Estate Horizons 2019, which among other things also review how tokenization will affect the real estate sector in 2019.

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