Real Estate 2019 Comparisons

Last Updated April 30, 2019

Contributed By DLA Piper Denmark

Law and Practice

Authors



DLA Piper Denmark has a market-leading real estate offering, with an international multidisciplinary team of lawyers that can serve client needs globally across the real estate sector. The firm has more than 750 real estate lawyers operating in more than 40 countries around the world, serving clients in key real estate markets, with strongly established teams in the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA Piper works with clients through all stages of the real estate life cycle, including planning, acquiring, finding, developing, leasing, completing, trading and divesting. Working through this cycle, it offers the following services: financing; acquisitions and disposals; asset management; construction; cross-border investment; development; fund formation; joint ventures; leasing; litigation; planning, zoning and environmental issues; public private partnerships; REITs; restructuring; and tax. The team works alongside investors, lenders, developers and managers on every aspect of their real estate activities.

Danish real estate law is influenced by a wide range of regulation and legislation. Like Danish law in general, real estate law is influenced primarily by legislation rather than case law. Danish case law does, however, complement the legislation in many areas.

The regulation of real estate is based on Danish contract law, and consists of a wide range of special regulations, from the surveying and registration of real estate to area planning and zoning, and the laws governing the rights of tenants and landlords, pollution, construction, etc.

Denmark has one single, digital Land Registry where (almost) all rights in real estate can be registered. Each individual property has its own section, where all registrations may be retrieved, including the title holder, date of purchase, purchase price, and copies of mortgages and easements, providing absolute transparency when assessing the rights pertaining to a property. By registering a right in the Land Register, said right is protected against third parties and future opposing rights.

When investing in rental properties, the Danish lease law is of material importance, and particularly the legalisation on residential leases, which is characterised by a very detailed and strict legal framework. Furthermore, for certain properties not divided into owner-occupied flats, a transfer of the property is subject to a mandatory pre-emption right, whereby the landlord must offer the property to the tenants before selling to a third party.

Transaction and development activity in the major cities of Denmark has been steadily increasing since 2012, with 2017 being a record-setting year measured by the total number of transactions. Even though 2018 continued the streak, with a historic high number of transactions, the total number of transactions came in slightly under the record-breaking year of 2017.

Foreign investors still play a major role in the market for Danish real estate transactions, with approximately 50% of the deals in 2018 involving foreign investors. Because of many years with stable rental prices and a strong economy, the Danish real estate market is still considered an attractive place to invest. Furthermore, the unique Danish mortgage credit system allows for favourable ways of financing real estate. New foreign investors continue to enter the market, such as Italian Generali with its acquisition of a high-street property in Copenhagen and South Korean AIP with its acquisition of a large domicile office property in Søborg (Copenhagen).

The market for residential development in particular has been booming in recent years, resulting in thousands of new homes in Copenhagen alone, leading to stagnation in housing sales prices in 2018. However, activity within residential development remains high, and there has also been increased development and interest from investors looking outside the major cities of Copenhagen and Aarhus.

Residential properties continue to be the most traded segment, with investors like Blackstone and Heimstaden being among the most active within the segment. One of the major residential property deals was NREP and Partners Group’s sale of the 'Nordic Living' portfolio to Heimstaden, comprising eight residential properties.

Student housing development continued to see high activity in 2018 and expected continued demand. The market also showed further increased focus on development within senior-friendly accommodation, and accommodation with a focus on sustainability is another trend with many new and existing players, such as Eco Village and BaseCamp.

The market also showed an increase in demand for well-located office space, and an increased popularity for properties focused on shared workspaces and serviced properties. Further, the rising growth in private consumption and e-commerce continues to increase the demand within the industrial and logistics segments. Finally, the hotel segment continues to experience increased interest, in line with the development in tourism and demand in Copenhagen particularly.

The main categories of property rights obtainable in real estate are legal ownership (title), right of use (easement) and security rights (encumbrance).

Legal ownership of a property will generally consist of title to the land, including all buildings. It may also concern a building on leased land, although this property type is not very common. Another common property type is a property divided into owner-occupied units. For this type, the owner will have title to the owner-occupied unit(s), whereas the surroundings such as the land, common areas, external of the building, etc, are owned jointly by the owners of the units through an owners’ association.

Rights of use will usually be partial and non-possessory – eg, lease of a certain part of the property or a right to use a road on a property. Such rights can be registered as easements or restrictive covenants on the property in the Land Register.

The transfer of title to real estate is generally governed by the principles of Danish contract law, together with the regulation on registration in the Land Register.

The direct transfer of real estate in Denmark is completed according to standard procedures, which are set out in the purchase agreement. The buyer generally makes an escrow deposit or provides a bank guarantee for the full purchase price, after which a digital deed of conveyance is signed and filed for registration with the Land Register. The purchase price will then be released to the seller once clear and final title has been registered.

In order to perfect a transfer of title, said transfer must be registered in the Land Register. The registration of title is not a validity requirement, but merely an act of perfection in order for the buyer to be protected against (non-registered) existing rights and future conflicting rights.

The Danish State is liable for faulty registrations and errors in the Land Register. As such, title insurance is neither available nor necessary in Denmark.

When a commercial investor acquires commercial real estate in Denmark, a due diligence investigation of the property is usually carried out. The investigations will most commonly be carried out in the period between the signing of a letter of intent/head of terms and the signing of the purchase agreement, or after the signing of a purchase agreement, conditional upon satisfactory completion of the buyer’s due diligence. 

In a structured sales process where the seller invites several potential buyers to submit a tender for a property or a portfolio, the seller will sometimes carry out due diligence investigations and present the due diligence reports to potential buyers as part of the sales material, with a subsequent period for confirmatory/supplementary due diligence investigations to be carried out by the buyer, if relevant. The final buyer will obtain reliance from the seller’s advisers with respect to due diligence reports, which in effect should limit the extent of the buyer’s investigations. 

The due diligence investigations for an asset deal will include general property matters such as title, easements and charges registered in the Land Register, planning and zoning, environmental information, permits, service contracts, insurances, property taxes and owners’ associations, together with a review of the lease agreements and lease matters relating to the property. In addition, a technical due diligence will usually be completed to determine the physical state of the property and consequently the future needs and costs for maintenance. For development properties, the due diligence will extend to the legal basis for future developments, existing permits, construction contracts, etc, and thorough environmental investigations.

For share deals, the investigations extend to a review of the company in question, liabilities, accounting and financial information, and tax and VAT matters, in which case a financial and tax adviser will usually carry out the investigations.

The warranties provided by the seller are defined in the purchase agreement. In an asset deal, the unqualified warranties will generally be limited to fundamental matters such as title, encumbrances, pending disputes and certain material information relating to the leases. Aside from these fundamental matters, the property is transferred 'as is', and warranties with respect to hidden defects, pollution, etc, will be qualified by the knowledge of the seller. For share deals, the share purchase agreement will include further (unqualified) warranties with respect to corporate matters, accounting, taxes and VAT, liabilities and employees.

As a general rule, the seller is obligated to observe its general 'duty to disclose' all relevant information that the seller knows or should have known, and a general warranty regarding fulfilment of this duty will generally be included if the purchase agreement provides for a limitation of liability to breach of warranty.

In the purchase agreement, the buyer’s remedies for breach of warranties will most commonly be limited to financial compensation. For share deals, a threshold, de minimis amount, cap and time limitation will usually be agreed upon with the expectation of certain fundamental warranties, such as ownership/title, taxes and VAT.

Lease legislation is one of the most important areas of law for an investor to consider when investing in rental properties. In particular, the residential lease regulation is key, as it provides for a very detailed legal framework, with strong protection for residential tenants. Zoning, planning, environmental and building regulation would be the most important areas of law for investors investing in development properties.

In accordance with the 'polluter pays' principle, an owner of land cannot be held responsible for pre-existing soil contamination. However, existing contamination will often result in limitations and obligations with respect to future development and change of use of the property.

The permitted use of real estate is set out in the municipal plans covering the principles and limitations for properties within the municipality, and in local development plans covering minor areas within the municipality. The permitted use of a property is stated in the municipal plan and the local plan, to the extent that these are available for the area in question.

For existing buildings, the permitted use is regulated by the plans in force at the time of the construction of the property. The permitted use of an existing property is therefore not affected by changes in the local planning. For development properties or in cases of reconstructions or changes in the use of existing properties, the permitted use is regulated by the planning in force at the time of issuance of the building permit. If an existing building is reconstructed, the planning in place at that time must therefore be complied with. 

Development agreements between private and public parties are often entered into for major projects. However, a public entity cannot guarantee a certain outcome of a new or revised municipality or local plan when entering into an agreement with a private developer. Adopting or revising local plans must follow normal procedures, regardless of any development agreements the public entity might have entered into. Consequently, any agreements between public and private entities will often be qualified by the adoption of a new or revised local plan.

Under the Danish Constitution and the Expropriation Act, the Danish State is entitled to require compulsory purchase of real estate in Denmark, provided that the purchase is necessary for the benefit of the common good of society, authorised by law, and conducted at market value, offering the owner full compensation.

The transfer of real estate is subject to taxation of the capital gains. For corporate owners (resident or non-resident), the tax rate was 22% in 2018.

The sale of real estate is generally not subject to VAT. However, an exception applies with respect to the sale of building sites and new buildings sold less than five years after the date of completion, which are subject to 25% VAT. The VAT is paid by the seller, and the purchase agreement will (or should) always include regulation on whether the stated purchase price is inclusive or exclusive of VAT, especially in situations where it is not clear if the tax authorities will regard the transfer as being subject to VAT. If the purchase agreement is silent, the purchase price is regarded as being inclusive of VAT, and the seller will not be able to charge VAT in addition.

The buyer generally has the right to recover VAT charged by the seller if the buyer is a VAT taxpayer carrying out transactions that are subject to VAT, and provided that the acquired real estate forms part of these activities.

The fee for registration of a deed of conveyance (ie, the transfer of title) for commercial properties is DKK1,660 plus 0.6% of the purchase price or the official property valuation, whichever is higher. The registration fee for the transfer of title is generally paid by the buyer.

If the transaction is completed as a share deal, the capital gains from the transfer of the shares are generally not subject to Danish taxation. However, the buyer will normally require the deferred taxes on capital gains on the property to be deducted from the purchase price (ie, included as a liability when determining the net equity), in whole or in part. This is subject to negotiations and most often the deferred taxes are deducted by 50%. If the transaction is completed as a share deal, the fee for registration of the deed of conveyance and any VAT on the transfer of building sites/new buildings is also avoided. 

Foreign companies and citizens need permission from the Danish Ministry of Justice to purchase real estate in Denmark. However, companies domiciled within the EU or EEA can acquire real estate without permission, provided that the property is acquired to establish a business in Denmark. As the restriction applies only to direct acquisitions, the rules can be avoided by establishing a Danish subsidiary company and acquiring the property through this legal entity.

The acquisition of commercial real estate in Denmark is primarily financed by a combination of equity and mortgage financing. The Danish mortgage system is unique, as there is a direct match between the mortgage loan and the covered bonds issued to fund the mortgage loan. This provides for a high level of financial stability and forms the basis for transparent competitive loan costs and a flexible early repayment system found nowhere else in the world.

Mortgage loans are committed loans providing for a high degree of security compared to alternative financing, which is usually renegotiated each year.

The Danish mortgage credit institutions offer three main types of mortgage loans, with credit facilities up to 30 years: fixed-rate loans, adjustable-rate loans and floating-rate loans (with or without interest-rate caps) – and almost all loans may be combined with interest-only periods for up to ten years, subject to individual credit approval. All mortgage loans are limited to the statutory maximum loan-to-value ratio based on the assessed value of the property: 40% for development properties, 60% for commercial properties and 80% for residential rental properties.

The recurring loan costs on a mortgage loan consist of interest as well as a margin. The interest rate of a mortgage loan and the repayment price are directly reflected in the price of the mortgage bonds funding the loan. The margin charged by the mortgage credit institutions is a percentage of the outstanding debt corresponding to the interest margin of a universal bank; however, the rate is generally lower. The margin percentage is subject to individual negotiation and may be adjusted during the term of the loan, unless otherwise agreed.

With respect to the financing of a share deal, the debt portion of the financing will usually consist of a bridge credit facility with subsequent refinancing by a mortgage credit loan to be affected after closing (in which case, the prohibition against self-financing rules must be adhered to – see below). To avoid the need for bridge financing, it is sometimes agreed that the seller of a real estate company will assist with the company, taking out a mortgage loan (as instructed by the buyer) for refinancing the existing debt and distributing any excess proceeds prior to closing.

In general, the security package for the financing of acquisition and development projects is tailored to each transaction, depending on the specific circumstances and the risk profile of the borrower.

Mortgage loans are secured through a mortgage deed registered on the property, and, depending on the circumstances, this security will be combined with other types of security, such as pledge over the shares in the borrower, suretyship/guarantees and certain covenants. For other types of loans, the security may also consist of a sub-pledge of an owner’s mortgage deed. For development projects, in addition to the security in the property, the security package will most commonly include pledge in shares, suretyship/guarantees, a right of subrogation in construction agreements, assignment of construction securities and certain covenants.

There are no restrictions on granting security over real estate to foreign lenders, or on payments made to foreign lenders under a security document or loan agreement. However, interest payments made to a controlled or controlling entity established in a jurisdiction outside the EU with which Denmark has not entered into any double taxation treaty may be subject to Danish withholding tax in certain circumstances.

Registration of a mortgage deed in the Danish Land Register is subject to a registration fee of DKK1,660 plus 1.5% of the mortgage amount. However, under certain circumstances the borrower may be able to reuse registration fees paid on mortgage deeds already registered on the property. Registration of a sub-pledge of an already registered owner’s mortgage is only subject to the fixed fee of DKK1,660.

When enforcing a mortgage on the property, the lender shall first obtain an execution/lien from the enforcement court, after which a forced sale by foreclosure auction can be initiated. The fee payable for the execution/lien amounts to DKK300 plus 0.5% of the amount above DKK3,000, and the fee for a request for a foreclosure auction amounts to DKK800.

For a Danish legal entity to give valid security over any of its assets, the entity must comply with its signing rules and the corporate benefit rules, meaning that the decision to grant security must be in the best interest of the company.

Furthermore, the rules on financial assistance prohibit a company from (directly or indirectly) providing security for the acquisition of its own shares or the shares of its parent company. The prohibition does not apply to security granted for the refinancing of existing debt in the target company. The distribution of dividends takes precedence over the prohibition against self-financing, meaning that a subsequent mortgage loan in the target company may be used to repay acquisition debt by distribution of the proceeds as dividend, in accordance with the statutory requirements.

The security documents and the underlying loan agreements usually include specific details on the process to be followed in case of default.

As a general matter, the lender shall obtain an execution/lien at the enforcement court before they are able to initiate a forced sale of the property. When the lender has obtained the execution, the lender is able to initiate a forced sale by foreclosure auction, which requires fulfilment of certain formal requirements.

In general, mortgages on real estate will be ranked in the priority order according to the time of creation. To maintain this priority, the mortgage must be registered in the Land Register, as otherwise it will be extinguished and subordinated to a new mortgage registered in good faith. In the case of a secondary sub-pledge of an owner’s mortgage deed, the secondary mortgagee must – in addition to the registration in the Land Register – give notice to the primary mortgagee in order to be protected against the primary mortgagee’s extension of the underlying debt in good faith.

Furthermore, as a general matter, newly created debt may be secured in place of an existing mortgage in connection with or following a repayment of the senior mortgage debt. New debt can also be secured by a sub-pledge of an existing owner's mortgage with preceding priority. The priority position of the existing secured debt will, however, be maintained.

Finally, a creditor may contractually agree to subordinate the existing secured debt to newly created debt by entering into a subordination agreement and registration of an endorsement of subordination.

In accordance with the 'polluter pays' principle, a lender holding or enforcing security over real estate cannot be held liable under environmental laws.

Generally, the onset of insolvency proceedings does not affect a security interest, although only the trustee of the estate can implement the enforcement of the security. If the trustee has not applied for the sale of a mortgaged property by foreclosure auction within six months, the lender is entitled to demand initiation of a public auction without further delay.

During the insolvency proceedings, any security created and perfected (ie, registered in the Land Register) less than three months before the reference date can be made void if the security has been granted after the creation of the debt (ie, security for 'old debt'), or if the security has not been perfected without undue delay after the creation of the debt.

The Danish planning and zoning system consists of an overall state regulation of framework planning conditions, whereas local planning is the responsibility of the Danish municipalities. Planning is regulated in the Danish Planning Act.

The municipalities set out overall local planning principles and requirements in structure plans (municipal plans) governing the municipality as a whole, and in local development plans regulating smaller areas within the municipality. Both types of plans are subject to public enquiry and political approval. The local plans will often be prepared in dialogue with the developer or investor who owns or wishes to purchase the area in question.

Local plans are directly binding, not only on landowners but also on lessees, infrastructure owners and other parties who use properties within the area of the district plan. A local plan can regulate a wide range of issues, including appearance, design, development of the area, designated use of the area, etc. The possible use of an area and the content of a local plan for the area widely depend on the zone status of the area – whether the area is laid out as an urban, rural or holiday-house zone. To exemplify, the possibilities for erecting new buildings in rural areas are highly restricted.

However, it is important to note that, even though almost anything can be regulated via the planning and zoning system, nothing can be regulated retroactively.

In addition to the regulation following from local planning, the requirements in the Danish Act on Construction and the ancillary executive order ‘The Building Regulations 2018’ setting out the technical requirements for new buildings must be adhered to both in green-field projects and in major refurbishment projects.

A building permit must be obtained from the municipality before any construction work is commenced, and an occupation permit from the same source must be obtained before the building is taken into use. The process of obtaining a building permit may also include an application for exemption from the planning rules – ie, a municipality plan or a local plan. When assessing an application for a building permit, the municipality overall ensures that the relevant rules (including any local plan) and the building regulations are followed; the municipality will normally specify and clarify a number of requirements in the building permit. In this way, the building permit will serve as an extension of the planning and the building regulations. However, in the end it is the developer’s responsibility to ensure that all necessary permissions and exemptions from local plans or other relevant regulations regarding restrictions on construction are obtained.

The rules are interpreted and enforced strictly. If a new building or major refurbishment is completed without or in non-compliance with a building permit, the building may be ordered to be changed or demolished, at the cost of the developer.

If a project is expected to affect other parties directly (eg, neighbours), and particularly if the project requires exemptions from either the Construction Act, the building regulations or local planning, it is likely that any such directly affected parties will be consulted in the approval process, giving them the opportunity to object to the project.

Local plan, building permits or non-permits, and decisions on exemptions from local planning rules can also be appealed to other authorities or tried in court by the applicant or any other directly affected parties.

The Danish municipalities are keen on working together with real estate developers, but it is important to note that it is not possible to enter into agreements with a municipality to ‘circumvent’ the planning and zoning system. The adoption or revision of local plans must follow normal procedures regardless of any development agreements entered into by the public entity.

The municipalities have a duty to carry out supervision of houses and buildings in the relevant municipality. If the council becomes aware that use of a building may entail a potential health risk or an increased risk of fire, the council has an obligation under the Danish Urban Renewal Act to investigate the matter and to prohibit residential use (condemnation) of the building.

The municipalities also have a duty to carry out supervision of compliance with the planning and zoning regulation, and the municipality can enforce the rules by enforcement or prohibition notice.

Generally, any entity with legal capacity can hold real estate in Denmark. The types of corporate entities of relevance are as follows:

  • public limited company (Aktieselskab – A/S);
  • private limited company (Anpartsselskab - ApS);
  • limited partnership (Kommanditselskab – K/S); and
  • limited partnership company (Partnerselskab – P/S).

The most common preferred entities used to acquire real estate are the limited liability companies (A/S and ApS). The limited partnership company (P/S) is also commonly used.

The public limited company (Aktieselskab) is a limited liability company in which the shareholders' liability is limited to their respective capital contributions. A public limited company is governed by the Danish Companies Act, and the applicable rules under the Danish Companies Act for this company are more extensive compared to a private limited company.

The private limited company (Anpartsselskab) is also a limited liability company in which the shareholders' liability is limited to their respective capital contributions. A private limited company is governed by the Danish Companies Act, but with more flexible regulation compared to public limited companies, including with respect to the management structure of the company.

The limited partnership (Kommanditselskab) consists of at least one general partner with personal and unlimited liability for the liabilities of the limited partnership, and one or more limited partners with liability limited to their capital contributions. Consequently, the general partner is often a private limited company or a public limited company. A limited partnership is tax transparent and is not governed by the Danish Companies Act. However, certain provisions of the Act on Certain Commercial Undertakings apply – for example, regarding the name, power of procuration and the requirement for administrative and financial powers of the general partner.

The limited partnership company (Partnerselskab) is a public limited company consisting of limited partners (shareholders) and a general partner with unlimited liability. The shareholders’ liability is limited to their respective capital contributions. A limited partnership company is considered transparent for tax purposes. The limited partnership company is governed by the Danish Companies Act, and the applicable rules are similar to those applicable to the public limited company, with necessary adjustments.

The minimum capital requirement for a private limited company (Anpartsselskab) is DKK40,000, while the minimum requirement for a public limited company (Aktieselskab) or a limited partnership company (Partnerselskab) is DKK400,000. There is no minimum capital requirement to set up a limited partnership (Kommanditselskab).

With respect to management, a public limited company (Aktieselskab) and a limited partnership company (Partnerselskab) may have either an executive board and a board of directors, or an executive board and a supervisory board. A private limited company (Anpartsselskab) may instead choose to have an executive board only. The board of directors for a public limited company and a limited partnership company must consist of at least three members.

Where management is divided between an executive board and a board of directors (the classical Danish two-tier system), the executive board is in charge of day-to-day management under the guidelines and directions issued by the board of directors. If there is no board of directors, the executive board for public limited companies and partnerships must be appointed by a supervisory board that oversees the executive board (modified two-tier system). The private limited company is allowed to operate with an executive board only (one-tier-system).

Unless otherwise agreed, the shareholders have a right to pass resolutions, which is exercised at the general meeting. A general meeting must be held no more than five months after the end of each financial year. The annual accounts accompanied by the auditor's adopted annual report, the resolutions passed concerning the adoption of the accounts, the allocation of profits or the covering of losses, as well as any other business prescribed by the articles of association, must be presented at the general meeting.

Extraordinary general meetings must be held upon the request of the central governing body, the supervisory board or the auditor elected by the general meeting, or when otherwise required by the law. Shareholders in public limited companies and limited partnership companies that hold minimum 5% of the share capital can also request an extraordinary general meeting in writing, as can any shareholder in private limited companies.

There are no corporate governance requirements for a limited partnership.

Mandatory corporate compliance costs will normally be between DKK10,000 and DKK25,000 annually for a simple small company.

In general, Danish law differentiates between limited rights of use of real estate (easements, such as a right of passage) and general rights of use of the whole or part of the property (such as leases). Leases are protected against opposing rights of third parties without registration in the Land Register to the extent that the lease agreement does not provide for more extensive rights compared to the lease law. It is possible for a tenant to register the lease agreement in the Land Register, in order to ensure protection of any extended rights against third parties. 

In general, there are three types of lease in Denmark: residential leases, commercial leases, and tenancies (forpagtning).

Residential leases are governed by the Danish Lease Act (Lejeloven), together with the Danish Housing Regulation Act (Boligreguleringsloven) applicable in regulated municipalities. The legislation is comprehensive and complex, with most of the provisions being mandatory. For example, the legislation provides mandatory formality requirements, and specific rules on rent fixation, rent adjustment, maintenance, refurbishment and termination. It is generally not possible to enter into residential leases for a fixed period and, with a few limited exceptions, the landlord can only terminate the lease in case of default. 

Commercial leases are governed by the Danish Commercial Lease Act (Erhvervslejeloven), which applies to leases of building premises for any use other than residential. The Commercial Lease Act provides for a high degree of freedom of contract, except for some mandatory rules that cannot be derogated from, such as formality requirements for agreements on expenses in addition to the rent, fixed-term leases, and the landlord’s right to terminate. As with residential leases, it is generally not possible to enter into fixed-term commercial leases, and the landlord’s ability to terminate the lease is limited, except for termination for breach. The lease of land and of unbounded areas, such as parking spaces, is not governed by the Commercial Lease Act and will not be further elaborated on.

Tenancies (forpagtning) are generally used in commercial relations and deal with various types of use of real estate and/or the operation of a business from the premises. These types of leases are not governed by the Danish Commercial Lease Act and will not be further elaborated on.

Length of the lease term

Generally, commercial leases are entered into for an unlimited period, with a minimum term during which the lease is non-terminable. A fixed-term contract is only valid if the fixed term is necessary due to the landlord’s condition.

The agreed period of non-terminability varies depending on the type of lease and the landlord’s investments in preparing the premises for the tenant. The agreed period is usually twice as long for the landlord. Besides termination for breach, the landlord has very limited rights to terminate the lease upon the expiry of an agreed non-terminability period.

Maintenance and repair

Unless otherwise agreed, the landlord is responsible for the internal and external maintenance of the property. The parties are free to agree on the responsibilities with respect to maintenance, and commercial lease contracts usually include detailed regulation with respect to the division, extent and definition of the maintenance obligations.

It is most commonly agreed that the internal maintenance is carried out by the tenant and the external maintenance is carried out by the landlord. If the tenant is the sole tenant of the property, the full maintenance obligation will often be imposed on the tenant.

Sublease and right of assignment

Unless otherwise agreed, a tenant is not entitled to sublease the leased premises without the prior consent of the landlord. The tenant is generally entitled to assign the lease to another tenant within the same line of business, unless the landlord has material reasons to oppose such assignment – eg, in relation to the assignee's financial position or knowledge of the business. Lease agreements often limit the tenant's right of assignment, together with change of control clauses deeming a transfer of majority shares as an (unlawful) assignment. 

Frequency of rent payment

Unless otherwise agreed, the rent shall be paid monthly in advance. The parties most commonly agree on monthly or quarterly payment in advance.

Rent fixation

Determination of the rent for commercial leases is subject to contractual freedom. A limited rent rebate period is sometimes agreed upon. Furthermore, retail leases sometimes include agreements on rent determination based on the tenant’s turnover with or without minimum rent.

Expenses in addition to the rent

It is commonly agreed that the tenant shall pay its share of the landlord’s operating expenses in addition to the rent, such as taxes, maintenance of common areas, common utility costs, insurance premium, etc, to be divided between the tenants in accordance with an agreed distribution number.

The Commercial Lease Act provided strict formality requirements to be fulfilled in order for an agreement on payments in addition to the rent to be valid (the so-called “specification requirement”). The lease agreement must specify which expenses the tenant shall pay in addition to the rent, including both specification of the type of expense and the estimated amount of each expense. The same rule applies with respect to utility expenses to be paid in addition to the rent.

Rent adjustment

With respect to rent adjustment, the parties will most commonly agree upon a yearly rent adjustment based on the increase in the net price index (NPI), and often with an agreed minimum (and maximum) percentage adjustment regardless of the change in the NPI.

If the tenant does not pay taxes and duties in addition to the rent, the landlord is entitled to increase the rent following an increase in the taxes and duties charged on the property, or if new taxes or duties are imposed. On the other hand, if the taxes and duties are decreased, the landlord is obligated to adjust the rent accordingly, unless otherwise agreed.

In general, the landlord and the tenant are entitled to demand the rent to be adjusted to the “market rent” if the rent paid is significantly lower or higher than the market rent. According to present case law, a significant discrepancy corresponds to 10-15 %. The rent may be adjusted to market rent at the earliest four years after commencement of the lease. The market rent adjustment may be derogated from in full or in part, and it is often agreed that the parties are not entitled to market rent adjustment during the tenant’s non-terminability period.

If the landlord has registered the leased premises for VAT (which is often the case), VAT of 25% will be added to the rent. Lease agreements most commonly include a regulation that all payments under the contract are subject to VAT, or that the landlord is entitled to register the premise for VAT, after which all payments will be subject to VAT. If the lease agreement is silent on the matter, the agreed rent is regarded as being inclusive of VAT.

It will most often be agreed that the tenant shall pay a cash deposit at the start of the lease as security for their obligations under the lease agreement – see further below regarding security. There are no other costs payable upon entering a lease.

If the tenant chooses to register the lease agreement in the Land Register, the fee for such registration amounts to DKK1,660.

The maintenance of common areas used by multiple occupiers/tenants is carried out by the landlord. However, it is often agreed that the tenants shall pay a share of the common costs in addition to the rent – see above regarding determination of the rent and expenses in addition to the rent. The costs will be divided based on the agreed distribution number, which is usually based on the size of the area leased.

Costs for telecommunications and electricity are normally paid for directly by the tenant to the supplier. It is usually agreed that other utility costs are paid by the tenant, in addition to the rent. Pure fuel costs will normally be divided between the tenants based on utility meters (if any), and other costs will be divided in accordance with the agreed distribution number, which is usually based on the size of the area leased.

Reference is made to the section above regarding determination of the rent and the specification requirement in relation to agreements on payment of expenses in addition to the rent, which must also be fulfilled with respect to payment of utility costs in addition to the rent.

The landlord usually takes out building and fire insurance with coverage for fire, storm, water damage, fungal damage and electrical faults. It may be agreed that the tenant shall pay a share of the insurance premium costs in addition to the rent – see further above regarding determination of the rent and expenses in addition to the rent.

The lease agreement will normally include regulation on the permitted use of the premises, which is usually narrowly defined in accordance with the tenant’s planned use of the premises. Any changes require the landlord’s prior consent.

The use of the leased premises is also regulated by the planning law, together with relevant legislation relating to the operation. The lease agreement will often state that the landlord guarantees that the premises may lawfully be used in accordance with the stated use in the lease agreement, and that the tenant is at any time responsible for the compliance of legislation and regulations regarding the operation, such as fire safety, working environment, etc.

Furthermore, the tenant is generally obligated to treat the leased premises with due care, and the landlord will be entitled to terminate for breach in case of neglect.

A tenant is generally not entitled to alter the leased premises without the prior consent of the landlord, with the exception of certain customary alterations, installations and signage.

Upon termination of the lease, the landlord is entitled to require re-establishment of the premises in accordance with the state of the premises at commencement.

If the tenant has improved the leased premises with the landlord’s prior consent, such improvements are not to be included in any assessment of the market rent. The re-establishment of alterations made with the prior consent of the landlord depends on the agreement.

Reference is made to the section above regarding types of leases and regulation. There is no specific regulation on certain types of commercial leases, as all leases regarding building premises for any use other than residential are governed by the Danish Commercial Lease Act.

Residential leases are governed by the Danish Lease Act together with the Danish Housing Regulation Act for leases in regulated municipalities, which is the case for most municipalities. The legislation provides strict rules on formality requirements, rent fixation, rent adjustment, maintenance, refurbishment and termination. The rules on rent fixation are particularly important to grasp when investing in a residential rental property. There are generally three different principles for rent fixation, depending on the type of property:

  • cost-determined rent, which is the general rule;
  • rent based on the value of the leased property, which generally applies for premises that have been thoroughly improved under certain circumstances; and
  • unrestricted rent determination, which applies to properties taken into use after 1991.

Another important impact of the residential lease legislation is the mandatory pre-emption right, after which a landlord is obligated to offer the tenants to acquire the property (through the establishment of a co-operative association) at the same price and terms before selling to a third party. The rule applies to properties not divided into owner-occupied flats, with a minimum of six residential units for residential properties and 13 residential units for mixed-use properties. The rule also applies in an indirect sale by the transfer of the shares in the company owning the property. The pre-emption right is most commonly triggered in the sale of town houses or older properties where division into owner-occupied flats is not possible.

When a tenant is declared bankrupt, the estate must decide whether to continue or discontinue the lease. If the lease is continued, the estate is liable to pay rent and comply with all terms the lease agreement. However, the estate is entitled to terminate the lease at any time, with one month’s notice. Regardless of the estate continuing the lease, the estate’s liability under the agreement can be reduced to three to six months’ payment. Any claims exceeding this period (eg, claims for rent loss during a non-terminability period) will be treated by the estate as an unsecured claim.

The security to be provided by the tenant is subject to agreement between the parties. It will most often be agreed that the tenant shall deliver a cash deposit, a bank guarantee, or a combination of the two, for an amount corresponding to between three and 12 months’ rent.

In a termination of the lease, the tenant shall vacate the premises upon the expiry of the notice period, and immediately in case of termination for breach. In a termination for breach, the notification from the landlord will usually include a specific deadline for vacation of the premises.

For a fixed-term lease, the tenant shall vacate upon the expiry of the lease. However, if the tenant continues to occupy the premises with the landlord’s knowledge, and without the landlord requesting the tenant to vacate the premises, the lease will continue on the same terms, as an unlimited lease.

Subject to an agreed non-terminability period and with the expectation of fixed-term leases, the tenant is entitled to terminate the lease for any reason at the agreed notice period. If a tenant decides to terminate a lease within an agreed non-terminability period, the tenant is liable for rent, etc, during the remaining period; however, the landlord has a general duty to mitigate the loss and re-let the lease.

The landlord is entitled to terminate the lease for breach – ie, default in payment, neglect, illegal use of the lease, unjustified transfer of the lease, if a store is not open during opening hours, etc.

Besides termination for breach, the landlord’s right to terminate is limited to the specific instances in the Commercial Lease Act. The most relevant instances are where the landlord wants to use the leased premises itself, in which case the termination must be reasonable, and where vacation of the premises is necessary due to demolition or conversion of the property, in which case the landlord must offer the tenant to lease premises of the same nature upon completion. For business protected leases, which are used when the location of the specific premises is of essential importance to the tenant’s business, the landlord must pay damages to the tenant for the loss suffered by the tenant as a consequence of the termination and loss of goodwill.

The landlord is only entitled to force the tenant to vacate at the expiry of a fixed-term lease or in the event of (justified) termination. In case of termination of the lease, the tenant shall vacate the premises upon the expiry of the notice period and immediately in case of termination for breach. If the tenant does not vacate the property, the landlord can seek a court order permitting the recovery of possession of the premises. This procedure can take up to a year, and sometimes even more.

Generally, third parties are not entitled to terminate a lease. However, the Danish State can terminate a lease in connection with an expropriation case, subject to the payment of compensation.

General Conditions

Most Danish construction contracts are entered into subject to the general conditions for building and construction works and supplies, called AB 92, which is an ‘agreed document’. There are similar general conditions for consultancy services for building and constructions works, called ABR 89, and general conditions for design and build contracts (turnkey projects), called ABT 93.

The ‘AB’ documents are generally considered suitable when entering into construction contracts, regardless of the concerned party’s position as either a contractor or an employer. It is noteworthy that today almost all Danish construction contracts are based on AB 92, with or without amendments, whether the project concerns major construction works or small private construction works.

The agreed documents used for construction contracts, consulting services and turnkey projects (AB 92, ABR 89 and ABT 93) have recently been revised; the revised conditions became effective on 1 January 2019 and are now named AB 18, ABR 18 and ABT 18. The new general conditions have led to multiple changes and aim to ensure a closer partnership between contractors, architects and engineers.

The revised versions are expected to be used as part of all tender documents on or after 1 January 2019. However, there will be a transitional period between the former agreed document and the newly revised conditions. As AB 18 is a revised version of the prior AB 92, the general set-up is much the same, but some changes have been made.

Price and Payments

A construction contract will usually include a total fixed price based on the contractor’s tender. If a total fixed price has been agreed upon, subsequent alterations of the project will result in discussions with the contractor about the exact scope of the changes and resulting additional or reduced payments.

Alternatively, the construction contract will set out unit prices for work, material and/or supplies, either for the entire work or for some parts of the work. The unit prices are usually the contractor’s cost prices plus an agreed contribution margin to the contractor, combined with an open-book principle.

If the AB 92 or ABT 93 have been agreed upon, the contractor is entitled, upon written request to the owner, to receive payment once a month for work performed during that period. Under the new revised AB terms (AB 18/ABT 18), the contractor is entitled to receive payment twice instead of once a month.

Alternatively, the parties can agree on payment being affected in accordance with a payment schedule that follows the time schedule of the construction project and stipulates the times for payment of the contract price or parts thereof.

A project is normally laid out by the owner as a project in which the owner maintains full responsibility for the design throughout the construction period (AB 92/AB 18) or as a turnkey project (ABT 93/ABT 18).

In the first case, where the owner chooses to maintain full responsibility for the design throughout the construction period, the owner will enter into a contract with a main contractor and/or specialised contractors. AB 92/AB 18 lays down in detail the parties’ obligations and responsibilities.

In a turnkey project, the owner will initially be working with a design team. However, from the time of contracting, the turnkey contractor will take over the responsibility for the design, and possibly also the initial design team. ABT 93/ABT 18 regulates in detail the parties’ obligations and responsibilities.

The third agreed document, ABR 89/ABR 18, is used for contracts between the owner and the design team, engineers and other consultants. The detailed obligations and responsibilities, especially for the consultant, are laid down in the parties’ contract. ABR 89 and, in particular, the revised ABR 18 provide clarity on the specific requirements to the agreed performance by the consultant.

Insurance

According to the AB 92 and ABT 93, the owner must take out fire and storm damage insurance from the commencement of works until any defects identified at the time of handover have been rectified. On request, the contractor and any subcontractors must be included as insureds under the insurance policy. Under the new AB 18/ABT 18, the contractor and any subcontractors must automatically be named as insureds under the insurance policy.

Today, most owners take out additional insurance aside from the fire and storm damage insurance. These insurances and the scope of coverage are more or less the same as those available to contractors and subcontractors in Denmark (see below).

All contractors and subcontractors must take out the usual liability insurance covering any injury or damage they may cause by negligence during their work. The contractors usually take out additional insurances, with the most common including the following:

  • all-risk insurance covering the construction works;
  • all-risk insurance covering the owner’s existing buildings and building installations;
  • general liability insurance;
  • pollution liability insurance;
  • insurance of property; and
  • workers’ compensation insurance.

There is no statutory limit on the contractor’s liability to a third party, but the insurer may limit the coverage of the insurance policy in respect of a particular risk, which may expose the contractor to liability for damages exceeding the coverage.

Handing-over and Liability for Defects

The construction works are handed over to the owner by conclusion of a handing-over meeting, where the works are inspected and any claims for defects are listed. Furthermore, inspection meetings are convened one year and five years after the handing-over for determination of any additional defects. The contractor is obligated and entitled to rectify any defects discovered in connection with the handing-over, and until five years thereafter. The contractor’s liability for defects generally ceases within five years of the handing-over of the works.

The contractor is liable for compensation for losses due to defects in the work, where such defects are caused by errors or negligence on the part of the contractor or if the defect relates to a specific guarantee. As a general rule, the contractor is not liable for operational losses, loss of profit or other indirect losses.

If delays are caused by changes ordered by the owner or by the other specific instances regulated in AB/ABT concerning external factors for which the contractor is not responsible, the contractor will generally be entitled to a reasonable extension of the construction period, including compensation for the costs of upholding the building site during the period of extension.

If the contractor does not complete and hand over the works on the agreed date without being entitled to an extension of time due to changes or other external factors, the owner will be entitled to compensation. The construction contract normally includes provisions for liquidated damages or other special penalties, often in the form of fines imposed in daily units, until the works are completed and handed over. If such provisions have been agreed upon, the owner cannot claim additional damages. If no provisions have been made for liquidated damages, the owner’s loss is determined in accordance with the general law of damages in Denmark.

Both the contractors and the owner must provide security for the performance of their respective obligations under the construction contract. The performance bond must be in the form of an adequate bank guarantee, fidelity insurance or some other adequate type of security.

Unless the contract states otherwise, the contractor must provide a performance bond corresponding to 15% of the contract price. Provided that the contractor has rectified all defects, this bond can be reduced to 10% of the contract price in the first year after the contractor’s completion and handing over of the works, and thereafter to 2% of the contract price until five years after the handing-over, after which the bond can be cancelled. A minor change has been made in the revised versions, stipulating that the contractor is not obligated to provide a performance bond if the contract sum is less than DKK1 million, unless the owner has required this in the tender documents.

According to AB 92/ABT 93, the owner must provide a performance bond, if required by the contractor, corresponding to three months’ payment to the contractor or 10% of the contract price, whichever is higher. Under the new AB 18/ABT 18 terms, an owner must always provide a performance bond, unless the owner is in the public sector or a social housing organisation, or as otherwise agreed.

The contractor may stop work after having given notice of five working days (three working days under AB 18) if the owner fails to pay an amount by the due date for payment.

Furthermore, the contractor is entitled to stop work immediately if the owner is declared bankrupt or subjected to reconstruction proceedings, or if the owner’s financial situation in general proves to be of such a nature that the owner must be assumed to be unable to fulfil its obligations under the construction contract. However, if the owner provides adequate security for the performance of the remaining part of the contract, either independently or at the request of the contractor, the contractor must resume work.

Danish law imposes certain requirements in relation to the construction and renovation of buildings. For example, it is required to obtain a building permit prior to commencement of any construction, and an occupation permit is required before the building can be taken into use – see further above regarding planning and zoning.

The owner usually arranges for the necessary approval of the design from the public authorities and pays the associated expenses. This also applies to any part of the design prepared by the contractor. The contractor is responsible for the required notifications, applying for necessary permits, requesting inspections, providing certificates relating to the actual execution of the works, and paying the associated expenses.

If the contract is a turnkey project, it is regulated by ABT 93/ABT 18, where the contractor has the responsibility for the design. In this case, the contractor is obligated to arrange for the necessary approval of the design and to keep the owner informed thereof. If it is agreed that the contractor is also to pay the associated expenses, etc, the tender sum is adjusted in the event of the introduction, abolishment or changes of expenses, etc, after the submission of the tender.

The sale and purchase of real estate is – as a general rule – not subject to VAT. However, the commercial sale of new buildings (with or without land), building sites (irrespective of whether they are developed or not), and built-up sites is subject to 25% VAT. The rules apply to companies as well as individuals carrying on a business activity.

A building is considered new if it is sold before its first occupation, or if it is sold less than five years after the date of completion, which is no later than the day of the first occupation. An extended or reconstructed building is also considered a new building under certain circumstances, depending on the costs of the works carried out on the building.

The buyer has the right to recover the VAT charged by the seller if the buyer is a VAT taxpayer carrying out transactions that are subject to VAT, and provided that the real estate forms part of the activities subject to VAT.

The transfer of real estate is subject to taxation of the capital gains. For corporate owners (resident or non-resident) the tax rate is 22% in 2019. Corporate bodies that own real estate may both reduce and offset their tax liability, but this depends on their specific circumstances.

Through the indirect transfer of real estate via a share deal, taxation of capital gains is avoided, as capital gains from a transfer of shares held by corporate entities are generally not subject to Danish taxation. However, the buyer will most commonly require the deferred taxes on capital gains on the property to be deducted from the share price in full or in part (ie, included as a liability when calculating the net equity). Furthermore, by indirect transfer of a property through the transfer of shares, the registration fee for the conveyance and VAT (if relevant) are also avoided.

In case of a change in ownership for certain companies in certain circumstances as part of a merger, demerger, reorganisation or transfer of assets, the registration fee for the transfer of the title is reduced to the fixed fee of DKK1,660. Under certain circumstances, it is possible for an owner to prepare for a transaction to be completed as a share deal (and thereby avoid the registration fee) by transferring the property to a newly established company as part of a contribution in kind in connection with the incorporation of or capital increase in the company.

Taxes payable by the owner of real estate on a recurring basis consist of property taxes and tax on income generated by the property.

The official land value of properties used for commercial rental is taxed at a rate between 1.6% and 3.4%, depending on their location. Properties used for commercial activities are taxed on a similar basis, provided none of the owners use any part of the property for residential purposes. The land value is assessed every two years. A new land value assessment system has been enacted, but new assessments are not expected until 2019 for residential properties and 2020 for properties used for commercial activities. The property tax is deductible against taxable income.

Properties used for commercial activities may be subject to an additional tax levied by the municipal authorities (Dækningsafgift), which is based on the value of the buildings. The individual municipal authority is free to choose whether to levy the municipal charge, at a rate of up to 1% of the value of the building. The municipal charge is levied primarily by municipalities near the major Danish cities, and is a tax on the value of buildings used for offices, shops, hotels, factories, workshops or similar purposes. The object of the municipal charge is to contribute towards the expenditure for roads, streets, parking spaces, fire service, etc, inflicted on the municipality by commercial properties.

Income from real estate forms part of taxable income. For corporate owners, such income is taxed at the corporate tax rate of 22%. Depending on the specific circumstance and the nature of the property, income tax liability can sometimes be reduced.

In general, limited partnerships and limited partnership companies are transparent for Danish tax purposes, so the limited partners are taxed directly. Shareholders in opaque companies may be subject to taxation on dividends distributed by a corporate vehicle; however, dividends are tax-free if the shareholder is a company holding 10% or more of the capital of the dividend paying company. Tax may be eliminated or reduced under either the EU Parent-Subsidiary Directive or an applicable tax treaty.

Rates

For individual shareholders, the rate of taxation on dividends is progressive. Dividends are currently taxed at a rate of 27% for income up to DKK52,900. Income exceeding DKK52,900 is taxed at a rate of 42%. The threshold is adjusted annually.

For corporate shareholders, dividends on 'subsidiary shares' and 'group shares' are generally tax-exempt, whereas dividends on 'portfolio shares' are taxed at the corporate tax rate of 22%; however, dividends from portfolio shares in unlisted companies are only taxable on 70% of the dividend amount.

Subsidiary shares are shares where the corporate shareholder holds at least 10% of the nominal capital share of the company and the company is Danish, or the company is foreign, and the EU Parent-Subsidiary Directive applies, or the subsidiary is resident in a country that has concluded a tax treaty or a tax information agreement with Denmark.

Group shares are shares where the shareholder and the company are subject to mandatory Danish tax consolidation or voluntary Danish international tax consolidation (or qualify for the latter but have not elected to be subject to such treatment).

Portfolio shares are shares that do not qualify as subsidiary shares or group shares – ie, generally where the corporate shareholder holds less than 10% of the nominal capital share of the company.

Withholding

Generally, a company resident in Denmark must withhold tax at a rate of 27% when it declares dividends to non-resident shareholders. The obligation to withhold tax applies to the declaration of dividends to all types of shareholders, whether individuals or companies, resident in Denmark or abroad.

When the withholding tax rate exceeds the final tax rate applicable to the foreign company shareholder, the shareholder is entitled to claim a refund of the tax withheld in excess of the final rate. The statute of limitations on claims for a refund of dividend withholding tax is three years.

Dividends paid to a corporate shareholder abroad are exempt from withholding tax if the following conditions are met:

  • If the corporate shareholder holds subsidiary shares, dividends will be exempt from withholding tax if Danish taxation of the dividends will be reduced or waived under the EU Parent-Subsidiary Directive, a tax treaty or a tax information agreement. An additional condition is that the corporate shareholder is treated as the beneficial owner of the dividends.
  • If the corporate shareholder holds group shares, dividends will be exempt from withholding tax if the shareholder is resident in the EU/EEA and Danish taxation of the dividends would have been reduced or waived under the EU Parent-Subsidiary Directive, a tax treaty or a tax information agreement, if the shares had been subsidiary shares.

Certain additional exemptions and certain restrictions apply to such corporate shareholders.

Buildings used for commercial purposes are generally depreciable, with certain exceptions such as office buildings, buildings used for financial enterprise, post offices, buildings used for residential purposes, hospitals and clinics. Furthermore, costs for refurbishment and improvements of depreciable buildings are also subject to depreciation. The depreciation is calculated on a straight-line basis, and the tax payer may determine the depreciation rate between 0% and 4% each year.

DLA Piper Denmark Law Firm P/S

Raadhuspladsen 4
Copenhagen
DK-1550
Denmark

+45 33 34 00 00

+45 33 34 00 01

info@dlapiper.com www.dlapiper.com
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Law and Practice in Denmark

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DLA Piper Denmark has a market-leading real estate offering, with an international multidisciplinary team of lawyers that can serve client needs globally across the real estate sector. The firm has more than 750 real estate lawyers operating in more than 40 countries around the world, serving clients in key real estate markets, with strongly established teams in the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA Piper works with clients through all stages of the real estate life cycle, including planning, acquiring, finding, developing, leasing, completing, trading and divesting. Working through this cycle, it offers the following services: financing; acquisitions and disposals; asset management; construction; cross-border investment; development; fund formation; joint ventures; leasing; litigation; planning, zoning and environmental issues; public private partnerships; REITs; restructuring; and tax. The team works alongside investors, lenders, developers and managers on every aspect of their real estate activities.