Blockchain and Real Estate John Salmon and Ted Mlynar Sabine Reimann and Martin Haase 20 March 2018 Düsseldorf
Cryptocurrencies Cryptocurrency figures 1517 cryptocurrencies US$20,512,217,808 39.3% 24H volume bitcoin (BTC) BTC dominance BTC market cap US$180+bn How much is involved? US$457bn+ US$8,233,850,000 (780,578 BTC) BTC 24h volume Statistics: https://coinmarketcap.com/currencies/bitcoin/ (visited 22/02/18) Hogan Lovells 2
2017 cryptocurrency ICOs From: https://www.coinschedule.com/stats.php (visited 3/16/18) Hogan Lovells 3
2018 cryptocurrency ICOs From: https://www.coinschedule.com/stats.php (visited 3/16/18) Hogan Lovells 4
How does blockchain work?
What is a blockchain? A blockchain is a data structure created by a computer program In most blockchains of interest, the stored data is transaction data the computer program implements a transaction (e.g., Alice pays Bob $100) Hogan Lovells 6
Why is a blockchain special? In most blockchains of interest, the computer program runs on a network of computers the data structure is stored on each computer (a distributed ledger) the network of computers must reach a consensus to add data to the data structure each computer adds data to its copy of the ledger (blocks are added to the blockchain) Hogan Lovells 7
Distributed ledger Instead of a bank controlling a transaction ledger, control is dispersed among multiple computers on the network. Each computer holds a copy of the distributed ledger. Current payment systems require third-party intermediaries that often charge high processing fees but machine-to-machine payment using a distributed ledger allows for direct payment between individual parties. Hogan Lovells 8
How blockchain works 5. The transaction is complete, shared ledger is simultaneously updated, creating a verifiable, permanent audit trail to prove occurrence and timing of the transaction. 3. The network validates the transaction as well as the user s status using algorithms. Transactions are verified when consensus has been achieved among the participating computers. 1. Transaction requested Network users request a transaction 2. The transaction is broadcast to a peer-to-peer (P2P) network of computers 4. The new block of validated transactions is added to the existing digital ledger. Entire transaction, including asset ownership, is cryptographically recorded in ledger. Hogan Lovells 9
Key legal challenges Banking Privacy and data protection Tax Legal challenges Ownership & governance IP rights Competition law Hogan Lovells 10
What else can a blockchain store? In some blockchains, the stored data is another computer program: a Smart Contract the stored computer program implements a more complicated transaction (e.g., if today is June 15, then Alice pays Bob $100) the network of computers run the stored computer program automatically and simultaneously based on data on/off the blockchain Hogan Lovells 11
What is a smart contract? A smart contract is a computer program (series of instructions for a computer to implement) designed to implement (part or all of) an agreement written in a computer programming language Hogan Lovells 12
Why use a smart contract? Automatic execution reduces contracting risks deliberate non-performance third-party interference force majeure Less ambiguity computer programs requires precision Standardization reliably repeatable performance Fraud avoidance contract stored permanently Hogan Lovells 13
Real estate use cases
Blockchain Technology s Impact on the Real Estate Sector Cryptocurrency purchases Land title records Lease and property-level records Real estate due diligence Smart Contracts Mortgage-backed securities, investment trusts (REITs) Tokenized real estate Hogan Lovells 15
Real estate issues KYC / AML? Will Land Registries accept e-signature? Valid documentation "In writing only"? Valuation of Land Taxes where payment in cryptocurrency? Hogan Lovells 16
Purchasing with cryptocurrency Hogan Lovells 17
Purchasing with cryptocurrency https://www.telegraph.co.uk/news/2017/12/16/first-bitcoin-homes-sell-uk/ Hogan Lovells 18
Land Records Estonia E-Land Register title records Cook County, Illinois working to update law so transfer of a token is both the conveyance and the public record Dubai Land Records all government documents on a blockchain by 2020 verify property data backed by timestamp signatures connect renters to landlords and other property-related billers, such as electrical, water and telecom utilities Hogan Lovells 19
Real estate ICOs BitRent construction project investment and monitoring Caviar real estate loans and cryptocurrency Property Coin tokenize equity and loans in real estate Hogan Lovells 20
Blockchain in German Real Estate Blockchain technology and the German Land RegisterSmart Contracts and facility management Smart Contracts in the German real estate environmentcommercial Real Estate Finance and Due Diligence Hogan Lovells 21
Blockchain Technology and the German Land register The Land Register is a not only Deeds Register, but even more a Title Register Land Register carries out a material review of applications The "numerus clausus" of in rem rights is to be maintained; complex legal relationships for review, e.g. Hereditary Building Rights (Erbbaurechte) Condominium Rights (Wohnungseigentumsrechte) Land Register has to apply and review open legal terms Not suitable for smart contracts no simple "I-T-T-T" (if-this-then-that)-processes Rule of law, access to justice: Land Register is answereable and subject to legal review The Land Register displays the priority of rights in rem Ranking does not depend on order of registration Priority notices Reservation of rank Hogan Lovells 22
Blockchain Technology and the German Land register Land Register is supported by protection of good faith, backed by state liability 892 BGB: For the benefit of the party acquiring a right to a land plot through a legal transaction, the content of the land register is deemed correct, unless an objection to the correctness is registered or the acquirer aware of the incorrectness. 839 BGB: The state is liable for damages caused by wrong registrations. => In practice, no extensive title research or title guarrantees in German RE transactions (unlike in share transactions) Nevertheless: Land Register System under constant review and modernization: Paperless filing system ( 135 Land Register Code - Grundbuchordnung) Notaries may issue authentications and other certificates electronically with a qualified electronic signature. But: notaries as intermediaries still required Blockchain and qualified electronic signatures may replace certain notarial functions which do not require a material review Certified transfer of certified land charges (Briefgrundschulden) - 1155 BGB Hogan Lovells 23
Smart Contracts legal concept The concept of "Smart Contracts" what is the contractual agreement The program code, written in the computer language (the "Smart Contract Code"?) Or the underlying analog terms (the "Smart Legal Transaction") The Smart Contract Code may cover technical procedural aspects I-T-T-T rules Interpretation of Parties' underlying intention / indefinite legal terms cannot (yet) be covered by Smart Contract Codes Access to justice legal review must be ensured Content of the contract must be understandable and transparent for the average user ( 307 (1) 2 BGB) requires an analog language programming language not suitable Hogan Lovells 24
Smart Contracts legal concept Analog legal contracts under civil law Legal framework of the German Civil Code and further applicable rules (VOB/B) Subject to law on general contract terms ( 305 ff. BGB) Example: automatic payment may conflict with right to withhold or reduce payment May be excluded in principle, but not in case the counter claim is acknowledged or res iudicata Smart Contract Code is a tool to execute contracts in the ordinary course of business Hogan Lovells 25
Smart Contracts in the German real estate Environment Potential applications: Standardized construction agreements Maintenance agreements Supply agreements Role of Blockchain technology (public / consortium / fully private) Proof of identity and financial standing (subject to compliance with data protection) Conclusion / documentation of the contract Votes, e.g. in condominium structures Payment procedures But: Smart Contract continue to depend on quality of "real world input" ("Oracles") Electronic acceptance of construction works by independent sworn experts (=> BIM), Standardized electronic maintenance protocols Hogan Lovells 26
Smart Leases for Residential Leases Residential Lease Agreements highly standardized Residential Lease Agreements are subject to high degree of standardization No strict written form requirement (unless agreed for a fixed term of >1 year) Potential: base for connecting the Residential Lease with "Smart Building Applications" Residential Lease Law and law on General Contract Terms will nevertheless apply Automated execution of contracts must be subject to review Fixed Term Leases and the written form requirement - 550 BGB Leases with a fixed term of > 1 year are subject to written form requirement Written form fulfilled by electronic form with a qualified electronic signature ( 126a BGB) Hogan Lovells 27
HL Engage Blockchain toolkit Engage The online insight and analysis you need Hogan Lovells 28
The Hogan Lovells team John Salmon Partner, London T +44 20 7296 5071 john.salmon@hoganlovells.com John is a highly experienced IT lawyer with a market leading reputation in the financial services sector. His main focus is advising financial institutions on their strategic IT projects and he supports his clients in implementing innovative digital and technology solutions whilst managing legal and regulatory risk. John has a reputation as a lawyer in the FinTech area and has been heavily involved with leading edge developments. Areas of focus Banking Services Data Protection IT Outsourcing Product Compliance Regular Contracts and Business Issues Regulatory Authorisation and Financial Institutions John has been actively involved in developing industry-wide solutions for electronic data exchange issues. In addition, John has extensive experience of drafting and negotiating both customer and supplier IT services contracts. Name Theodore J. Mlynar Role, Location Partner, New York T +1 212 918 3272 ted.mlynar@hoganlovells.com For more than 20 years, Ted Mlynar has been developing and implementing innovative solutions to some of the most difficult intellectual property problems in the world. Ted prepares and advises in the negotiation of intellectual property licenses with a particular focus in areas of high technology, including electronics, wireless communications, semiconductors, software, and ecommerce. Ted has co-authored and has been quoted in numerous articles relating to blockchain and smart contract technologies. He has been acknowledged by the Chamber of Digital Commerce as a subject matter expert in the field of smart contracts. Ted leads the Hogan Lovells Blockchain-Smart Contracts IPMT Working Group. Areas of focus IP Litigation, Arbitration and Alternative Dispute Resolution Medical Devices IP Licensing, Commercialisation and Technology Transfer Post Grand Proceedings Social Media Technology Contracts Strategic Counseling and Portfolio Development Hogan Lovells 29
The Hogan Lovells team Dr. Martin Haase Counsel, Dusseldorf T +49 211 13 68 514 Areas of focus Real Estate Infrastructure, Energy, Resources, and Projects Mergers and Acquisitions martin.haase@hoganlovells.com Martin Haase has many years of experience in the area of real estate, in particular with special real estate projects such as holiday resorts as well as with industrial real estate projects. Especially for complex projects, he not only develops tailor-made solutions but also succeeds to get these through due to his solution-oriented style of negotiation. Martin is acknowledged for his experience with building leases. Therefore, he is the right person to go to if you intend to develop, finance or sell projects based on building leases. He does not only know what you should take care of, but also how to present such projects to investors and financing banks. Clients value that Martin knows how to provide his legal advice with a wider commercial and strategic advice. Martin is an appreciated lecturer in real estate seminars and a speaker in our "Lunch Lectures". Name Sabine Reimann Role, Location Counsel, Dusseldorf Areas of focus Real Estate T + 49 211 13 68 513 sabine.reimann@hoganlovells.com Sabine Reimann is an authority in real estate law and widely recognized in the market. Clients do not only appreciate her for her excellent juridical knowledge, but also for her pragmatic solutions, which she is able to implement with superior negotiation skills. Her technical preapprenticeship enables her to find innovative solutions especially in challenging matters. She advises on real estate transactions, on commercial tenancy law, on real estate disputes, project developments and also gives advice in connection with the development, manufacture and merchandising of ecologically sustainable properties. Her clients appreciate that she "thinks outside the box" in order to find the best solution even in complex juridical situations. Furthermore, she has substantial experience in the area of corporate real estate management as well as with the relocation and restructuring of management and production locations. She is also a leading lawyer in retail. Social Media Hogan Lovells 30
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