Many solutions where NFTs can be used are linked to the real estate market. Potentially, title to land or buildings can be transferred using non-fungible tokens representing entire properties or even very small portions of property. On the one hand, this is intended as a significant aid to facilitate the transaction itself, which in practice is quite time-consuming and complex, and involves a number of formalities and agreements with the notary public. On the other hand, it is intended to open up the market to people who may not have the means to become owners of a whole piece of property, and who want to be involved in investment projects with a large number of small investors. If properly structured, NFT smart contracts can also automatically regulate a variety of issues regarding options for property use, property maintenance, generated earnings or outlays.
There are many ideas on how NFTs can be used in the real estate market and these are discussed below. The first question is whether it is possible under Polish law to buy real estate in the form of a single purchase of an NFT representing a specific property, and if so, under what rules.
An NFT is a token. According to the current definition, tokens are used to represent an asset, such as a good or right, in the form of a digital record1. This means, among other things, that when ownership of the token is transferred, ownership of the asset the token represents is also transferred. Tokens can be fungible or non-fungible. In an economic sense, the principle of fungibility is that the item in question represents the same value as another item of the same type, and thus they can be easily exchanged2. Non-fungible tokens (which is what NFTs are) are a unique resource that cannot be easily exchanged for another token of the same type3. The authenticity of the link between an NFT and the relevant asset – in the current case property – which is authenticity written into a blockchain, is intended to ensure4 that when the ownership right of the relevant NFT is transferred, in reality we transfer the right represented by the token. In turn, an NFT smart contract contains a precise description of that right.
For further argument, it is assumed that ownership of real property is actually registered in a smart contract, and the property is individually identifiable within the meaning of the art. 155 § 1 of the Civil Code5, identified by a number in the land and mortgage register, by area and registered plot number, while formal concerns about the immovable property that the individual NFT represents are excluded.
In a blockchain transaction regarding an NFT, a specific asset belonging to the holder of a particular portfolio is assigned to the holder of another portfolio. The transaction should be completed when both parties declare, using their portfolio keys, that the transaction – an asset transfer – has actually taken place. When assigned to a specified person, the key can be considered a signature, but at best it confirms that the declarations of the parties have been documented (art. 772 of the Civil Code). This is because a signature placed in the form of a portfolio key cannot be considered to fulfill the electronic format requirement according to Art. 781 of the Civil Code, i.e. to be a qualified signature.
According to Polish law, the special form, i.e. notary public, must be followed for the transfer of title to immovable property. This applies in the same way to a single agreement where a property transfer obligation is made and a transfer is made, and where the property transfer obligation and the property transfer agreements are separate (art. 158 of the Civil Code). The form requirement is particularly important because it specifies the role of the notary – a person with public trust – to ensure that the transaction is safe for the parties themselves and for civil law transactions in general. On the other hand, the requirements for a notarial deed are specified in art. 92 in the Act on the Notary Profession6. The duties of the notary include precise scrutiny of the parties to the transaction, verifying their citizenship, giving appropriate instructions and advice, ensuring that the parties understand the wording of the declarations made, and ensuring that the declarations reflect their wishes (art. 94 § 1 of the Act on the Notary Profession).
This means that if the smart contract is directly related to the transfer of real estate, the smart contract will be completely invalid under Polish law, regardless of whether it exclusively provides an obligation to transfer ownership of immovable property, or it is intended as an agreement where an obligation to transfer ownership is assumed and transfer is made. In such a case, the buyer of the chip will not be able to demand that the seller obliges the performance to sell the property or transfer the ownership of the property because there is no legal basis for it. The buyer is only left with a claim that the funds paid into the seller’s account must be returned, due to the fact that due performance has not been performed.
Is it therefore possible to structure an NFT smart contract as a preliminary agreement where the property owner has an obligation to enter into an agreement on the sale of the property in the future? The answer is that it is possible, subject to the consequences that follow from the form in which the contract is entered into. Under art. 390 § 2 of the Civil Code, the conclusion of a final agreement can only be successfully claimed when the preliminary agreement has been entered into in the form prescribed for the final agreement. If the preliminary agreement is entered into in document form, as is the procedure today in NFT transactions, the parties can each successfully apply to the other for compensation for damage as a result of the agreement not being entered into. Therefore, since ownership of the property will not ultimately be effectively transferred until after the parties have met in the presence of a notary public, this approach to using NFTs in real estate transactions may be counterproductive, as it is intended to simplify and make the transaction secure.
On the other hand, this does not mean that NFTs cannot be used effectively in the real estate market in a different way that reflects the economic rationale of potential investors, even if it involves greater risk than buying in a conventional way. One of the most common methods used in practice is to use symbols to represent shares in commercial companies, where the sole property is or will be immovable property, and where the laws of the country where the company is registered do not require the special form for the sale. This was the method used for one of the first and most prominent transactions of this type in the market, where in May 2021, according to reports, real estate in Kiev was sold represented by an NFT registered on a blockchain7. The startup Lofty8 operates in a similar way. It allows investment of a minimum of USD 50 in the purchase of a token representing a shareholding in a company that will purchase a particular property once funds have been raised. This must be qualified once again by noting that in fact, in the cases described, the transactions are not related to the property itself, but to shares, especially LLCs registered in the state of Delaware in the United States.
Where NFT smart contracts are appropriately structured, leases can be entered into, with the right to grant additional access, in respect of whole properties or even very small parts of property, where hundreds of investors are involved at once. It is also possible to create closed markets or communities that only holders of specific tokens have access to, offering property that is not available to a wider audience9. Offers to purchase virtual property, which functions exclusively in the metaverse, without material representation, is a completely different matter, even with regard to the law10.
The enthusiasm that follows NFTs around the world cannot be ignored and is also reflected to some extent in the real estate market as well. Today’s legal framework, for which there are strong reasons due to the need to secure trade, requires some restraint with regard to the use of this technology in the real estate market. At the same time, this does not mean that the use of tokens to represent property should not continue to develop. Provided that there will be greater certainty with regard to the parties to a transaction, the terms of the transaction, and – above all – the subject of the agreement itself (which must be linked by simple and technical means to the register that includes real estate on the basis of registrations in and mortgage registers), there may (more likely in the next ten to twenty years) be grounds to consider establishing a legal framework to open up the market for this technology.
