According to the Businessday post of June 14, 2021, the opportunity in the Nigerian real estate industry is worth an estimated US$56 billion. However, the potential has barely scratched the surface of possibility due to incomplete and unreliable land records. This makes airtight due diligence very problematic. The public land administration primarily maintains manual records that are cumbersome to manage, prone to error, and easily subject to manipulation and fraud. This deters many potential registry customers. Many would rather take the risk of postponing their interest registration or not registering at all. However, this risk, when it crystallizes, can be very costly and irreparable even by the courts. Caution within the industry has unfortunately bound land deals in Nigeria to operate at a very basic level.
The most common transactions in land are lease contracts, purchases -at the expense and risk of the buyer- and some mortgages. But much more could be done with real estate. One example is the development of a secondary market, which allows investors to buy existing mortgages at discounts from mortgage banks and other similar creditors. This solves the liquidity problems of mortgage banks, giving them immediate access to funds that can be returned to the market and used to finance other deserving projects, thus creating a virtuous circle of economic value. But in the absence of reliable information to carry out their due diligence, investors cannot make sound decisions. So what can be done?
block chain technology
Much has been said in the contemporary media about blockchain. Although it is largely tied to cryptocurrency and non-fungible tokens (NFTs), its application could be deployed in a variety of contexts, including media, fashion, and finance.
Blockchain is simply a digital ledger of transactions, distributed through a network of computer systems. It is a means of recording transactions so that once those transactions are validated by the majority of the nodes in the network, they cannot be changed, reversed or deleted (i.e. immutable).
Blockchain’s biggest draw is the promise of transparency, trust, and immutability. These qualities have led many industries to take advantage of blockchain technology to improve customer trust in their products. For example, the supply of ethically sourced diamonds can be ensured by storing information at each stage of the supply chain on the blockchain: from mining to jewelry. The possibilities are endless.
The most common transactions are leases, purchases, and some mortgages. But much more could be done with real estate. But in the absence of reliable information to carry out their due diligence, investors cannot make sound decisions.
As a distributed ledger, the question of whether blockchain is relevant to the recording of land transactions is redundant. Blockchain can not only record all transactions, but also has the additional advantage that such transaction information is immutable and accessible to the participants. However, the information on the blockchain is only as good as the data that goes into it. Just because the information on the blockchain is immutable or cannot be deleted does not mean it is free from human error or even fraud. To reduce this, many advocate limiting human interference throughout the value chain where possible. This means an ‘en suite’ blockchain ecosystem with all the necessary infrastructure to consummate entire land transactions, with minimal outside interference. This could be achieved through smart contracts; a built-in blockchain function.
Smart contracts are simply programs created on the blockchain, activated by fulfilling pre-established conditions or logic: “if this, then that”. They are intended to be self-running, to run automatically and without the intervention of intermediaries; like the unscrupulous intermediaries discussed above, or even lawyers and courts. Incorporating smart contracts into the real estate blockchain ecosystem means that both the payment system, the independent escrow function, and the contract that transfers interest in the land (for example, the Deed of Assignment) they are integrated into the blockchain; and participants within the ecosystem submit to the ‘compliance’ and governance mechanism provided by the smart contract. So, the next question could be: how enforceable is a smart contract in land transactions, outside of the instrumentality of the public system?
Also Read: Nigerian Real Estate Sector Shows Resilience Amid Economic Crises
This question takes on special relevance considering its applicability to land as a physical asset outside of the blockchain ecosystem. This is different than when the asset is digital, for example a digital image, music video, etc. Access to such digital assets can be digitally activated by meeting preconditions programmed into the smart contract. This can also apply to smart cars or smart homes that have been pre-programmed into the blockchain. But the situation is different with a plot of land or with most houses. Putting it in context, a land seller can, upon receiving payment on the blockchain, refuse to provide access to the land or hand over the physical keys to the house. Unlike the court with its inherent power over the public and its ability to physically deploy public resources to enforce its bidding, smart contracts lack this inherent ability; thus creating an argument to integrate the blockchain ecosystem, along with all its infrastructure, into the public legal system.
It goes further, considering that ‘perfection of title’ is necessary to determine ownership priority and interest in the land. Perfection of title implies that the Governor has consented to a land transaction and it has been entered into the land registry, as required by the Land Use Law. By determining the exact time the governor’s consent to mortgages is given, the court can, in the case of competing interests in a property, determine with certainty which interest prevails. Therefore, it is desirable that the government consider leveraging blockchain for its land registry, in order to sanitize the system while facilitating judicial dispute resolution and contract enforcement in land transactions on those platforms.
But a government blockchain project may not be immediately feasible. In addition to being capital intensive, the project will require the collaboration of several agencies with their attendant bureaucracy. If it is committed to the course, the private sector cannot afford such delays and potential uncertainties. So while it is more desirable to integrate blockchain into the public land management system, the private sector may want to consider in the meantime an ecosystem that is self-sufficient, autonomous, and somewhat independent of the public system. How then to make it work?
A good strategy would be to take advantage of the principle of private orders; a situation in which private actors create a system -outside the public legal order- for regulation, enforcement and dispute resolution. The participants within this ecosystem create for themselves the rules (Terms of Use) that govern the ecosystem and abide by these governing rules. As such, simply by relying on the fact that a land transaction has taken place on the private blockchain governed by the Terms of Use, participants can safely and without recourse to the external public land administration system , continue within the chain of blocks with additional chains. of transactions in relation to land, despite the delay in perfecting previous titles or interest in the land.
Now, while this article is in no way admonishing of parties ignoring the perfection of titles, the gist of the suite blockchain independent ecosystem is that potential land transactions, such as mortgages and secondary market transactions, can still be carried out reliably until the time titles are met. perfected with the public system. Participants ‘trust’ each other to trust the validity of transactions on the blockchain without resorting to the public system.
The trust itself is based on the blockchain’s restriction to only certain active stakeholders (a closed network) within the real estate industry, as opposed to the full public or even casual participants. Admission to the blockchain ecosystem would be based on strict requirements, for example, the volume of past land transactions and the limitation to a certain type of property. The ecosystem may also have the power to impose ‘sanctions’, such as blacklisting participants who break internal rules, making others wary of dealing with them, or denying blockchain access to participants altogether. participants who made mistakes. You can also adopt within your smart contract an “escrow” feature so that payments made are not released on the blockchain until certain conditions are met, for example until access to the property is confirmed by the buyer. These features reduce disputes and create a trusted ecosystem within which land transactions can thrive independently of the public land management system; at least pending the moment when the government creates a real estate blockchain that integrates into the public system. Furthermore, disputes, when referred to the courts (for example, for declaration of title), are made as a last resort. The court is likely to treat ecosystem-generated contracts (eg, the Ecosystem Terms of Use and the ‘Smart’ Assignment Deed) like any other contract.
It is perhaps foreseeable that, given its immense benefits, an ideal land administration system would do well to upgrade to blockchain technology. Therefore, it is important that the government consider this as part of its agenda. However, while the government is considering it, the private sector may want to build their own real estate blockchain ecosystem that is autonomous and independent from public administration.
Omolade Afonja is an Intermediate Associate at Perchstone & Graeys
