Gazumping, Gazundering and Smart Contracts
Perhaps two of the most flamboyant words in the dictionary. Their meanings, well… you certainly wouldn’t want to find out when you are close to purchasing or selling property!
Imagine that you’re buying your first home. You’ve saved for the deposit for years. Combined income is just enough to convince the bank that you can afford a mortgage. Now that you’ve found a house, it ticks most of the boxes, if not all of them. A price has been verbally agreed with the owner and there’s an estimated date to complete the transaction.
So you get the paperwork sorted, probably hiring a lawyer to assist with the process. You’ve told your landlord that you’ll be leaving. Your whole life is in boxes, waiting to move into a new house. Your own house.
Now guess what. You’re ready to sign the contract—it’s right in front of you—but you see that the price is 10% higher than agreed. The poker-faced owner tells you that market conditions have changed and that he has new potential buyers willing to match this price.
In some jurisdictions, there’s no way to (legally) prevent this undesirable practice from happening. The same can be said of the opposite situation—one where it’s the buyer who decides to lower the offer at the last minute, citing whatever reason. This is called gazundering.
To provide some degree of protection against gazumping and gazundering, some countries like Spain have legal documents called pre-contracts, where broad terms and conditions of the agreement are set, as well as penalties and compensations in case any of the parties desists from going ahead with the deal.
As useful as pre-contracts are, they still need to be reviewed by lawyers to make sure terms are enforceable and compliant with current legislation. Buyers and/or sellers might not be willing to fork additional fees for this, or to simply go through the additional hassle.
But we live in the era of blockchain and we have a new tool called a smart-contract that simplifies things.
You’re ready to sign the contract—it’s right in front of you—but you see that the price is 10% higher than agreed. The poker-faced owner tells you that market conditions have changed and that he has new potential buyers willing to match this price. You have been gazumped.
Let’s suppose that at the time of agreeing on a price and date with the owner, you both log into a cloud-based platform where a smart wizard helps pre-define legal terms for the operation. What is being sold, at what price, jurisdiction, deposit amounts, dates for final payments, conditions that need to happen for the transaction to go ahead (surveying reports, verification of landowner registry, clearance of encumbrance), etc. The system can even hold and release cryptocurrency payments for the purchase—according to pre-defined rules— making sure legislation is followed throughout the process.
The contract is automatically written into code with IFs and THENs. This means that certain actions will be executed only when specific requirements are met, such as dates, payments, etc. Now the interesting part starts when this line of code—the smart-contract—gets added to a blockchain ledger accessible to multiple witnesses throughout the world. The terms of the contract are unchangeable, the agreement will remain valid no matter what changes of mind the parties involved may have; and values will be transferred as soon as the pre-defined conditions are met. No space for gazumping or gazundering.
The terms of the contract are unchangeable, the agreement will remain valid no matter what changes of mind the parties involved may have; and values will be transferred as soon as the pre-defined conditions are met.
When we thought about upgrading the Urbytus platform to cloud-based blockchain technology, we had transparency and efficiency in mind. We hear horror stories all the time, as our business is to help communities of homeowners with their administrative needs.
Every now and then, someone in a community lists their house for sale through our platform. The beauty of it is that as the listing is distributed among fellow community members, there is a sense of bona fide when someone approaches with an enquiry. They are, after all, members of the same community, as well as users of the same platform. Their reputations are there for everyone to see.
Outside of our platform, though, people sometimes value an extra 10 thousand euros more than a good name, so they feel little pressure to maintain the original terms of an offer. Bring some crypto programming into the equation—together with peer-to-peer ledger distribution—and suddenly the problem disappears.
We’re also thinking about using smart-contracts to document other types of private contracts pertaining property ownership, such as wills or agreements with service providers. Any recommendations on how this should be done?