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In brief: real estate acquisitions and leases in Finland – Lexology

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Acquisitions and leases
Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.
Direct ownership of real estate (freehold) in Finland grants the owner an exclusive right to:
However, some restrictions may limit the owner's rights, for example planning legislation regarding land use.
Real estate can also be jointly owned by more than one person or entity.
Ownership of housing and corporate buildings in Finland is frequently arranged through indirect ownership through a limited liability company (typically a mutual real estate company (MREC)) with the express purpose of owning the relevant real estate, including the buildings on it.
If the land and buildings on it are owned by different persons, the owner of the buildings usually has a tenancy right (leasehold) to use the land granted by the landowner under a fixed-term land lease. The buildings are not registered as separate units.
Most of the rights to real estate (eg, title, certain leasehold, security interest, right of way and certain easements) can be registered with the Title and Mortgage Register. In the case of co-owners of a real estate, it is typical to agree on a division of possession agreement between the co-owners, including provisions on the use of the property, ownership and possession of the different areas of the property, easements and rights of way, maintenance responsibilities, etc. and to register the agreement with the Title and Mortgage Register.
New Finnish legislation was introduced in 2018, according to which the formation of three-dimensional real estate is enabled alongside the traditional two-dimensional real estate. Title to real estate was formerly linked to an area formed by the x- and y-coordinates at ground level, that is, title to real estate also included the areas above and below the ground (two-dimensional real estate). Therefore, the underground or air space could not be separately owned in the past and division of possession agreements had to be used to effectively divide the ownership and possession of the underground, ground-level and above-ground areas. Following the new legislation, the dimension of real estate is determined also by the z-coordinate, making the formation of a separate real estate of an area above or below ground level possible (three-dimensional real estate). It is therefore nowadays possible to form, for example, an underground car park as a separate real estate. The first three-dimensional real estate was registered in the city of Espoo in January 2020, as a division of the possession of a property with underground or above-ground structures is still mostly organised through division of possession agreements.
With regard to the ownership and occupancy of any individual space in a building, such as multi-family, retail, industrial and office, an MREC is the most used structure in Finland. The MREC is either the owner of the real estate or the leasehold and the buildings on it, but pursuant to a special provision in the articles of association of an MREC, the shares in an MREC provide shareholders with the exclusive right to possess and use an independently functioning specific part of the premises (such as a flat or a floor of office space). Further, if a property owned by an MREC is leased to a third-party, rental income from the property owned by the MREC is paid directly to the shareholders of the MREC and not to the MREC itself.
What are the typical pre-contractual steps?
Preliminary agreements typically entered into between the parties during the initial phase of the sale negotiations include:
Unlike exclusivity agreements and non-disclosure agreements, a letter of intent mainly reflects the intention of the parties to agree on the proposed sale, and is not usually legally binding (however, it may also include provisions on exclusivity). If any of the terms and conditions of the letter of intent are meant to be legally binding, this should be clearly stated in the letter of intent. If an exclusivity is agreed between the parties, the property is not actively marketed during the exclusivity period and no discussions on the sale of the property may be held with any other party than the bidder having exclusivity.
In direct real estate transactions, a preliminary real estate sale and purchase agreement is sometimes executed between the parties. This agreement may be agreed to be binding only on the other contracting party, and not both of the parties. If binding on a party, the other party may claim for execution of the sale and purchase as agreed under the preliminary agreement and claim for damages from the other party incurred due to a breach of the preliminary agreement. Furthermore, if the real estate is sold to another party not party to the preliminary agreement, the buyer under the preliminary agreement is entitled to claim for damages from the seller.
Brokers are very often involved in the early marketing of real estate sales, and usually prepare, for example, the information memorandum and other sales material.
Financing is typically obtained via a separate work stream and brokers are not typically involved in financing negotiations.
Brokers do not necessarily need to be qualified to broke real estate, but many professional brokers are licensed real estate agents. Most of the broking activity is regulated by mandatory law, which includes, for example, a vast disclosure obligation on information to the buyer prior to purchase. There is no set cap for commission, but the amount of commission should be reasonable considering the tasks conducted by the broker.
What are typical provisions in a contract of sale?
The main real estate provisions of a typical share purchase agreement include details of:
Further, the seller is bound under Finnish law by certain statutory warranty obligations regarding the direct sale of real estate, including those relating to:
The seller usually strives to limit its warranties to matters within the seller's knowledge. The amount and quality of warranties vary heavily on from case to case, depending on the target, seller, warranty and indemnity insurance, etc. Full title warranty is, however, typically always given by the seller. The costs and taxes relating to the time prior to and up to closing are typically the responsibility of the seller (as are all the income from the real estate, for example lease income), and thereafter the buyer is responsible for the costs and expenses and entitled to the profit from the real estate. The tax year is typically a calendar year.
Typically, in professional indirect real estate sale and purchase in Finland, there is no down payment. The title to real estate may be confirmed from the public register at nominal cost. The state is liable for damages caused by:
If the damage is caused by an error in the information sent to the Title and Mortgage register, the damage is not compensated by the state.
Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?
As it has generally been a seller’s market in Finnish real estate for the past few years, typically the buyer bears the risk of any environmental clean-up post-closing. Survival provisions are not common. A typical warranty provided by the seller is that the seller is not aware of any environmental contamination (however, they have typically not conducted any soil or other further analysis in this respect). Only if the seller breaches this warranty (ie, if the seller would actually have been aware of an environmental contamination and did not share the information with the buyer) would the seller need to compensate the buyer for future environmental clean-up. Further, however, on certain individual deals the seller may provide further warranties on environmental contamination or liability, and in certain cases the buyer may obtain insurance cover for environmental damage (in force typically for 12–24 months post-closing). Finally, if environmental liability is known prior to the purchase, it is typically taken into account in pricing or otherwise.
What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?
Lease agreements are typically thoroughly reviewed in due diligence and the seller typically warrants that all the lease agreements are in force as disclosed. Warranty on the rent roll is typically pushed by the buyer and often (but not always) obtained. Information on the lease payments and tenants is also disclosed in the data room and forms part of the disclosure material, the correctness and completeness of which is warranted by the seller.
Between signing and closing, typical covenants by the seller include that the seller will not execute new leases or amend or terminate existing leases without the consent of the buyer, whereas the business otherwise needs to be typically carried out in the ordinary course (ie, all tenant improvement or other reparation or construction work on the real estate needs to be continued in the ordinary course, etc). If the seller or target has asset management or brokerage agreements in place, these agreements typically terminate at closing. Estoppel certificates are not market practice in Finland.
Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?
For a land lease, any mortgage registered on the land lease has priority in payment order over other (non-secured) creditors of the leaseholder.
With respect to other leases (eg, lease of office premises) the lease receivables under the lease agreement are typically pledged to a third-party financier of the landlord, which has a priority to those lease payments by a separate security agreement. If not pledged, the landlord has the first priority to the lease payments.
What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?
Lease security is a commonly used instrument. Lease security in Finland is typically in the form of a bank guarantee, deposit or pledge of a bank account, but different security instruments may be agreed between the landlord and the tenant freely. If the lease security is not provided on time, the landlord is entitled to terminate the lease agreement. The rents are typically tied to a minimum fixed annual increase or to increases in the Finnish cost-of-living index over the lease period.
What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?
Real estate due diligence is typically performed by the relevant professionals, such as legal, technical, environmental, financial and tax advisers. The results of due diligence are often presented in reports, which include relevant findings and related recommendations. Due diligence is typically conducted in stages prior to (and possibly after) the signing of the purchase agreement, but before closing.
Due diligence typically covers:
The special rights that may be registered against real estate and mortgages have priority based on the date on which the application for registration of the right or mortgage was registered as received in the Title and Mortgage Register. If all the holders of the special rights or mortgages that have a priority agree, the order of priority may later be amended so that a later registered right or mortgage may be ranked higher in priority to the earlier registered rights or mortgages.
Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?
Yes. Technical due diligence and environmental due diligence are often conducted on the target. Such due diligence requires site visits and documentation on the real estate and is often not exhaustive (for example no deep drilling to the ground to confirm soil contamination is typically conducted). The seller does not typically provide comprehensive warranties on the environmental or technical condition of the target, but the targets are being sold ‘as is’. In certain deals, environmental insurance is available.
Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?
Sometimes only lawyers review the leases, but it might be that a Big4 company (Ernst & Young, Deloitte, KPMG or PricewaterhouseCoopers) reviews the leases and the lawyers do a top-up review based on the Big4 review.
Typical issues are:
Payments under asset management agreements are typically allowed if no default has occurred under the finance documents.
What other agreements does a lawyer customarily review?
All service and maintenance agreements, utility agreements, division of possession or easement agreements, security agreements, asset management agreements and construction agreements are reviewed.
All of the register extracts pertaining to the real estate and applicable detailed plan are also reviewed, as well as any disputes or claims, general corporate documentation, etc.
How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?
The closing is typically divided between transaction closing and financing closing (if acquisition financing is obtained).
Typical deliveries on the transaction or deal side include:
Typical deliveries on the financing side include:
Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?
Typically, every type of closing is done in person at the offices of a law firm. Financing closings are sometimes completed remotely if possible (eg, share certificates might need to be endorsed in person). Direct real estate transactions will always need to be closed in person, as a notary public must be present at the closing to notarise the transfer agreement. In the case of a share deal, it is market practice to have in-person closing. Leasing closing can in most cases be done completely remotely, but for high-profile leases closing is typically done in person.
What are the remedies for breach of a contract to sell or finance real estate?
The remedies depend on what has been agreed under the agreement and the type of breach. If the sale and purchase have been agreed (signing) and all the closing conditions have been fulfilled, but the other party refuses to close, the sale and purchase agreement can typically be specifically enforced by the other party in court or through arbitration. Alternatively, liquidated damages or a down payment may have been agreed for the eventuality of a failure to close.
What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?
The remedies depend on what has been agreed under the agreement and the type of breach and lease. Most of the provisions of lease agreements can be agreed freely between the parties, but for residential leases certain provisions derive from mandatory law and cannot be agreed otherwise to the detriment of the tenant.
As for remedies, for example, if the tenant fails to pay rent, the landlord is typically entitled to deduct the default payment from the lease security, terminate the lease, or both. Also damages or payment of late interest are typically available.
If the leased premises are not in the agreed condition or the tenant may not use the leased premises, the tenant is typically entitled to rent reduction, rent-free periods or termination of the lease and claim for damages.
If the lease agreement has been terminated and the tenant has not moved out of the premises, the landlord is entitled to apply to the district court for eviction. After a positive ruling on the eviction, the landlord will forward the ruling to an enforcement official, who will then issue a removal notification to the tenant with a set deadline (typically within two to three weeks of the date of notification). If the tenant has not moved out by the set date, the enforcement official will remove the tenant’s belongings from the premises. The whole eviction process typically takes from two to six months.
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