Blockchain Technology for the Rental Agreement Process

Nov 23, 2018 Articles Blockchain Technology for the Rental Agreement Process

Until now shielded from the powerful innovation waves which reshaped most industries, real estate is undergoing an unprecedented transformation process along many of its dimensions. Physical space morphs into data streams that can be auctioned off on public exchanges, sensors redefine office layouts, new modes of transportation and package delivery change our understanding of logistics, digital is no longer only a hype word but a driver reshaping the revenue structure of most retailers.

Within this swirl of innovation processes, blockchain solutions for real estate transactions promise benefits through increased transparency and speed of execution, reduced costs and fewer errors.

Brief Overview of Current Process

The current process of rental agreements for apartments in Switzerland is very time-consuming and document-intensive. The process starts once the tenant is selected and the rental terms for an apartment are agreed upon. The property management company most of the time enters the data manually into their system, creates a standard rental agreement and then sends it in duplicate form via regular mail to the tenant. Together with the rental agreement, the following documents are sent to the tenant:

  • Rental guarantee agreement to open an escrow account
  • In some cantons, the official form containing the initial rent – statutory rent form
  • Form to fill in how exactly the name should be inscribed at the door
  • Form on how rent will be paid: direct debit, payment slip or standing order

Once all the forms are filled out and the tenant has signed the contract, all documents are sent back by regular mail to the property management company, the contract is countersigned and sent back to the tenant. Additionally, the property management company has to give notice to the property caretaker, the power station and the residents’ registration office that a new tenant is about to move in to the property. Once these steps are complete, the property management company needs to receive the confirmation that the deposit has been placed in an escrow account. Only after that can the apartment be handed over.


*EWZ – https://www.ewz.ch/

To summarize, when a rental agreement is created, it is sent back and forth three times before it is signed by both parties and archived. The payment of the deposit again takes a few days until it has gone through. If everything is done error-free, this process may still require at least one week for completion. Given the large number of contractual steps involved, this process may be rendered more efficient using a blockchain solution.

Alternative Blockchain-based Process¹

After the terms are agreed upon, the blockchain generates a rental agreement and includes the required documents such as the statutory rent form. The form for the payment terms as well as the agreement for the rental guarantee for the bank are obsolete, as payments can be triggered using smart contracts. The tenant can check and approve the documents, the terms of the rental agreements and fill out the doorbell inscription form. Once done, a smart contract triggers the payment of the deposit amount to the property management company’s wallet. As the property management company has already given consent by choosing that specific tenant, a counter-approval is not necessary and can be triggered by the system. The rental unit including the new tenant is automatically activated in the system. The blockchain will trigger notices to the power station, the resident’s registration office and property caretaker about the new tenant. As the deposit amount has been automatically transferred and all other necessary steps are also taken, the acceptance report can be filled out and the key for the apartment can be handed over.

The legal validity of the contract, although only approved online, is given, as a rental agreement in Switzerland falls under Art. 11 of the Swiss Code of Obligation stating that it does not have to be in a certain form, i.e. written form, to be valid – a simple handshake is enough. Although the rental agreement does not have to be, it currently is mostly in a written form as the contract serves as a proof in case of disputes. However, approving the terms online should be enough proof in case of dispute.

Blockchain architecture

This process will require the blockchain to be permissioned, probably with a consortium solution, having the tenants as well as the property management company as users. Access could be granted to the property owners as well. Identities of the users need to be known, as property management companies will need to know the identity of the person approving the contract.

The different users should have different roles and thus access levels. In Switzerland, every building and every apartment has an official identification number. For a building, the unique number EGID (Eidgenössischer Gebäudeidentifikator) refers to important data of the building including address, coordinates, year of construction, number of floors and what type of heating system the building has.

For apartments, this unique identification number EWID (Eidgenössischer Wohnungsidentifikator) refers to number of rooms and size of an apartment. Every person registered in the official register for residents needs to be linked to a unique building identification number as well as to a unique apartment identification number. This data is already available and EWID could be used and linked to the blockchain application in order to being able to clearly identify which apartment a person is renting. A person entering a new tenant on the distributed ledger simply needs to choose the unique identification number of the apartment and add the tenant.

Consensus mechanisms such as voting or multi-party consensus are the ones making the most sense, also due to the fact that they use a lot less computing power and offer faster transactions. In order to trigger rental payments via smart contracts, offering a cryptocurrency will be necessary.

Having this process on a blockchain will reduce the time required for a rental agreement to become valid dramatically. However, due to the permissioned setting and the pre-defined nodes participating in validating transaction, it is controversial that the proposed use case can be called a blockchain as many features of an open-source, public and fully decentralized blockchain will not be.

Author: Livia Wetzel, Mihnea Constantinescu


¹Further details presented in “A use case of blockchain technology in the real estate industry for the rental agreement and accessory charge settlement processes”, Livia Wetzel (available from author)

Posted on Nov 23, 2018 by

Livia Wetzel

   
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