Is blockchain independent of land administration viable in Nigerian real estate industry?
According to Businessday’s June 14, 2021 publication, the opportunity in the Nigerian real estate industry is worth an estimated $56 billion. Yet the potential has barely scratched the surface of possibility due to incomplete and unreliable land records. This makes airtight due diligence very problematic. Public land administration maintains mostly manual records that are cumbersome to manage, error-prone and easily susceptible to manipulation and fraud. This discourages many potential registry clients. Many would rather risk postponing the registration of interest, or not register at all. However, this risk, when crystallized, can itself prove very costly and intractable even by the courts. The vigilance of the industry has unfortunately bound land transactions in Nigeria to operate at a very basic level.
The most common transactions in land are leases, purchases – at the buyer’s risk and some mortgages. But much more can be done with real estate. One example is developing a secondary market, which allows investors to buy existing mortgages at discounts from mortgage banks and other similar creditors. This solves liquidity problems for the mortgage banks, giving them immediate access to funds that can be cycled back into 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 perform their due diligence, investors cannot make sound decisions. So what can be done?
Blockchain technology
So much has been said in modern media about blockchain. Although largely associated with cryptocurrencies and non-fungible tokens (NFTs), the application can be deployed in various contexts, including media, fashion and finance.
Blockchain is simply a digital ledger of transactions, distributed over a network of computer systems. It is a means of recording transactions so that once those transactions have been validated by the majority of nodes in the network, they cannot be changed, reversed or deleted (i.e. immutable).
Blockchain’s biggest attraction is its promise of transparency, trust and immutability. These characteristics have led many industries to leverage blockchain technology to improve customer trust in their products. For example, the supply of ethically sourced diamonds can be secured by storing information at all stages of the supply chain on the blockchain: from mining to the jewelry store. The possibilities are endless.
The most common transactions are leases, purchases and some mortgages. But much more can be done with real estate. But in the absence of reliable information to perform their due diligence, investors cannot make sound decisions.
As a distributed ledger, the question of whether blockchain is relevant for recording land transactions is redundant. Blockchain can not only record all the transactions, but also has the added advantage that such transaction information is immutable and accessible to the participants. However, information on the blockchain is only as good as the data fed into it. The fact that information on the blockchain is immutable or cannot be deleted does not mean that it is free from human error, or even fraud. To reduce this, many advocate limiting – as much as possible – human intervention in the entire value chain. This means an “ensuite” blockchain ecosystem with all the infrastructure necessary to complete all country transactions, with minimal outside interference. This can be achieved via smart contracts; a built-in blockchain feature.
Smart contracts are simply programs built on the blockchain, triggered by meeting pre-set conditions or logic: “if this, then that”. They are meant to be self-executing, run automatically and without the intervention of intermediaries; such as the unscrupulous middlemen mentioned earlier, or even lawyers and courts. Embedding smart contracts into the real estate blockchain ecosystem means that both the payment system, the independent escrow function and the contract that transfers the interest in land (eg the deed of transfer) are embedded in the blockchain; and participants in the ecosystem submit to “enforcement” and the governance mechanism provided by the smart contract. The next question may then be: how enforceable is a smart contract in land transactions, outside the instrumentality of the public system?
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This question takes on particular relevance considering its applicability to land as a physical resource outside of the blockchain ecosystem. This is different where the asset is digital, for example a digital image, music video, etc. Access to such digital assets can be digitally triggered by fulfilling prerequisites programmed into the smart contract. This can also apply to smart cars or smart houses that are pre-programmed on the blockchain. But the situation is different with a plot of land or most houses. Putting it into context, a seller of a plot of land can refuse to give access to the plot or hand over the physical keys to the house upon receipt of payment on the blockchain. Unlike the Court with its inherent power over the public and its ability to physically deploy public resources to enforce its orders, smart contracts lack this inherent ability; thus creating an argument for integrating the blockchain ecosystem, along with all its infrastructure, into the public legal system.
It goes beyond this, considering that “perfection of title” is necessary to determine the priority of ownership and interest in land. Title perfection means that the governor has given his consent to a land transaction, and it has been entered in the cadastre, as required by the Land Use Act. By determining the exact time when the Governor’s consent is given on a mortgage, the court can – in the case of competing interests in a property – safely determine whose interest prevails. Therefore, it is desirable that the government will consider using blockchain for the land register, to both clean up the system and at the same time facilitate legal resolution of disputes and enforcement of contracts in land transactions on these platforms.
But a government blockchain project may not be immediately feasible. In addition to being capital-intensive, the project will require cooperation with several agencies with associated bureaucracy. If they are committed to the course, the private sector cannot afford such potential delays and uncertainty. So while it is most desirable to integrate blockchain into the public land management system, in the meantime the private sector can consider an ecosystem that is self-sufficient, self-governing and somewhat independent of the public system. How to make it work then?
A nice strategy would be to exploit the principle of private ordering; a situation where private actors create a system – outside the public legal order – for regulation, enforcement and dispute resolution. Participants in this ecosystem themselves create the rules (terms of use) that govern the ecosystem and subject themselves to these governing rules. As such, by simply relying on the fact that a land transaction has been made on the ensuite blockchain governed by the terms of use, participants can safely – and without resorting to the external public land management system – proceed with further strings within the blockchain. of transactions in relation to the land, notwithstanding the delay in perfecting the former titles or interests in the land.
While this article in no way recommends that the parties disregard the perfection of titles, the core of the independent ensuite blockchain ecosystem is that possible land transactions such as mortgages and secondary market transactions can still be conducted reliably pending the time that titles are perfected with the public system. Participants ‘trust’ each other to trust the validity of the transactions on the blockchain without resorting to the public system.
Trust itself is based on the blockchain’s limitation to only certain active stakeholders (a closed network) within the real estate industry, as opposed to the full public or even occasional participants. Access to the blockchain ecosystem will be based on strict requirements, such as the volume of previous land transactions and restriction to a certain type of property. The ecosystem may also have the power to impose “sanctions” such as blacklisting participants who violate the internal rules, thereby making others wary of dealing with them, or completely denying errant participants access to the blockchain. It may also adopt an “escrow” feature in its smart contract, so that payments made are not released on the blockchain until certain conditions are met, e.g. until the buyer confirms access to the property. These features reduce disputes and create a trusted ecosystem where land transactions can thrive independent of the public land administration system; at least pending the time the government creates a real estate blockchain that is integrated into the public system. Disputes, where a reference is made to the courts (e.g. for a declaration of property rights), are also made as a last resort. The court may likely treat contracts generated by the ecosystem (eg ecosystem terms of use and “Smart” assignment letters) like any other contract.
It is perhaps predictable that, given the enormous benefits, an ideal land management system would do well to upgrade to blockchain technology. It is therefore important for the government to consider this as part of its agenda. But while the government considers it, the private sector may want to build its own blockchain ecosystem for real estate that is self-governing and independent of public administration.
Omolade Afonja is an intermediate employee at Perchstone & Graeys
