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PropTech – What Does It Mean for the CEE Legal World?

PropTech – What Does It Mean for the CEE Legal World?

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A new buzzword has reached the Real Estate world and its service providers, including the legal community: “PropTech.” PropTech – or “Property Technology” – is simply shorthand for various IT applications that are specifically designed to address the needs of the real estate industry.

One of the earliest true PropTech applications was Building Information Modeling (BIM) – defined by the US National BIM Standard Project Committee as “a digital representation of physical and functional characteristics of a facility.” The first BIM software programs were developed around 1980. Since that time, most IT applications for real estate have been fairly basic (such as, for instance, programs for property management). Recently, however, a flurry of innovative tools and applications have appeared for the real estate industry, such as virtual reality tools enabling potential purchasers to look at properties without leaving their homes or offices, Internet platforms facilitating P2P or B2B rentals, cloud-based appraisal tools, cloud property management software solutions, and, last but not least, the application of Blockchain in the real estate world.

PropTech currently seems to be for the real estate universe of the late 2010s what the Dotcom-Economy was at the end of the last millennium: a source of an innumerable amount of startups, investors with deep pockets trying to separate the wheat from the chaff, and traditional brick-and-mortar-economy players desperately attempting to rejuvenate themselves by creating innovation or “disruption” departments and hanging around at a multitude of PropTech events.

The PropTech wave has now also reached the shores of Central and Eastern Europe. On June 5, 2018, Poland’s first PropTech conference took place. PropTech events in Berlin, London, and Vienna are emerging as platforms for the presentation of PropTech pioneers from Central and Eastern Europe. There will be much more to come, because CEE economies will turn out to be – on grounds of favorable tax and employment law systems, and a relatively easy-to-handle corporate environment – a fertile ground for startups.

As this is a promising new field of work for lawyers as well, what is there to know about PropTech for law firms and lawyers working in the CEE region?

From a legal viewpoint, PropTech is not, nor will it be, a new legal field. There is unlikely to be specific legislation or legal rules applicable to Property Technology. For a lawyer to work in the field of PropTech requires a combination of skills and knowledge of various legal disciplines. As always with legal matters involving real estate – as with other business fields and industries – a high degree of understanding of the practical and economic aspects of the field is indispensable. The individual legal specialties of relevance to PropTech are Corporate law, Tax law, Employment law, IP/IT law, and – last but not least – Data Protection law, owing to the fact that the most valuable resource that PropTech has at its core is not real estate, but data. It is surprising to learn that so many PropTech startups are so completely unaware of the data protection considerations relevant to their work and work product, which are even more relevant in light of the recent changes in EU Data Protection law.

The broad combination of legal disciplines involved makes it unlikely that smaller firms or solo practitioners will ever play a significant role in dealing with the legal aspects of PropTech. Instead, PropTech will be in the hands of larger firms that have the necessary experience in setting up investor-friendly legal structures, with the ability to protect the intellectual achievements and work products of their clients against the attacks of suitors and competitors, with knowledge in Corporate Finance, and – very importantly – with the legal skills necessary to set up compensation systems for employees that are not exclusively based on cash compensation, but rather on awarding stock options or “phantom shares,” which are among the most favored means of compensation for startups.

What remains to be seen is whether the law firms that are particularly active in this new field of legal advice will seek to have startups that they are advising compensate them with stock or stock options, as happened at the peak of the Dotcom-frenzy of the late 1990s/early 2000s. As this turned out to be a lottery with a substantial number of blanks last time, there is the question whether people have become any wiser since, or whether greed will again prevail. Because one thing that can be seen at all investor presentations and pitches that the PropTech industry is good at organizing seems pretty clear: most of the startups that sound interesting at first will unfortunately fail, and only a few will survive to be successful.

By Peter Oberlechner, Partner, Wolf Theiss

This Article was originally published in Issue 5.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.