The main sources of law in Sweden are legislative acts resolved by the parliament and government, such as written laws and ordinances, as well as case law from the supreme court and the supreme administrative court and the courts of appeal. By tradition, the preparatory works for the enactments are also treated as important sources for interpretation of the legal acts. Legal acts and principles of the EU are also of importance, although real estate law is mainly local in nature.
During the past 12 months, due to the coronavirus pandemic, the transaction market has been rather hesitant moving to intense transactional activity at the end of 2020 and in the beginning of 2021. Notwithstanding the potential long-term effects of the downturn in mainly retail and leisure, the volume of transactions has essentially remained intact at a high level. Important trends involve the introduction of new international investors and several initial public offerings (IPOs).
There is certainly adaption to new technologies, but it is not expected that this will have a significant impact on the real estate market over the next 12 months.
The structuring of real estate transactions is very much based on tax considerations. Recent trends over the last few years in legislative work involve efforts to increase the basis for taxation and minimise transaction-structuring in order to avoid or limit taxation. Most recently, a proposal for stamp duty on certain property amalgamation measures (currently tax-exempt) has been discussed.
Categories of Property Rights That Can Be Acquired
Swedish real estate may be acquired with full ownership by essentially any legal or natural person. Ownership to real estate may be transferred freely by sale and purchase, exchange, gift, inheritance, estate division or certain corporate structuring measures such as mergers.
Site leasehold (in Swedish: tomträtt)
As an alternative to full title ownership, a long-term right of use to a property called a site-leasehold right may be granted under Swedish law, legally constructed to be essentially comparable to ownership (from the site leaseholder’s perspective). A site leasehold is granted for a property in its entirety, generally for a longer time period (normally 20 to 60 years per term) against an annual fee. Site leaseholds were introduced in order to enable public-property owners, such as the state and municipalities, to retain the long-term market value increase of the land while still being able to distribute land for private interests (both residential and commercial).
Leases (in Swedish: hyra)
Lease agreements may be granted orally or in writing under Swedish law (written contracts are, of course, to be recommended). A lease constitutes an exclusive right granted for the use of a house or part of a house in return for remuneration. Swedish lease law is extensively regulated under statute and is essentially mandatory to the benefit of the tenant, irrespective of the size and strength of the tenant.
Land leasehold (in Swedish: arrende)
A land leasehold is a right to use land for a specific purpose, eg, residential, agricultural or commercial, against a fee. Land leaseholds may be granted indefinitely or for a fixed term, but will be binding for a maximum of 25 or 50 years (depending on the existence of a zoning plan for the leased land) - the maximum contract period for any usufruct, including leases. In comparison to leases, the main object of a land leasehold is land, rather than a building.
Easements (in Swedish: servitut)
Easements may be created on a property following a written agreement between two (or more) property owners (or, if applicable, site leaseholders) or through a cadastral procedure. An easement grants one property (the dominant property) a specific right to use a part of another property (the serving property) for a specifically defined purpose, such as for passage, sewage and water facilities, evacuation purposes, etc. Agreements on easements must comply with certain formal criteria and may only be created in order to satisfy a long-term, sustainable need for the dominant property.
Joint facilities (in Swedish: gemensamhetsanläggning)
A joint facility constitutes a form of shared ownership and/or use of property related facilities such as, eg, roads, sewage facilities, power stations, a parking areas, etc. Joint facilities are created by cadastral procedure, granting each of the properties participating in the facility arrangement a right to use the facility in question, as well as an obligation to carry a share of the total construction and operational costs related to the joint facility. A property’s share in a joint facility is appurtenant to the property and automatically follows the transfer of the property.
Transfer of title to real estate is governed by statutes in the Swedish Land Code (in Swedish: jordabalken), imposing certain formal requirements on form and content for a transfer agreement to be legally binding. Requirements include written form, signature by both parties, statement of purchase price and any conditions precedent. These requirements apply to all direct transfers of real estate, irrespective of the type of property involved.
A few specific (additional) requirements/limitations may apply with respect to certain property types. This includes statutory restrictions for business entities to acquire agricultural land from natural persons (requires a permit from the Swedish Board of Agriculture (in Swedish: Jordbruksverket)) and a right of first refusal for a tenant-ownership association (in Swedish: bostadsrättsförening) in connection with the sale of a residential property where residential units are leased to the members of the tenant-ownership association, if certain legally prescribed criteria are met.
Legal title to real estate is generally transferred immediately when a binding transfer agreement is executed (see 2.2 Laws Applicable to Transfer of Title), unless there are specific conditions precedent. If conditions precedent are prescribed, transfer of title will be completed once the conditions are satisfied, typically evidenced by issuing a separate bill of sale.
Ownership and other real estate-related rights/encumbrances are registered in the public Swedish Land Register, administered by the Swedish government agency the Land Registry (in Swedish: inskrivningsmyndigheten). The Land Register is easily accessible online and generally considered to be very reliable.
Registration of ownership creates a strong presumption for title for the registered owner but does not directly affect the legal validity of the underlying acquisition. A legally binding written contract, verifying the buyer’s acquisition, must, however, be submitted to the Land Registry to obtain registered title. Anyone purchasing Swedish real estate is required under law to apply for registered title following the acquisition.
As a result of the generally perceived high reliability of the land-registration system in Sweden, insurances specifically covering title issues are uncommon on the Swedish market. Representations and warranties regarding ownership and title included in sale-and-purchase agreements may, however, be covered by a general warranties and indemnities insurance policy. Such insurances are more common, particularly in transactions involving exit-position sellers wanting to limit their formal residual seller liability.
The legal due diligence (DD) normally includes all company and real estate information and any information on disputes or litigation and similar matters, excluding tax and VAT, financial issues and technical or environmental issues (unless it concerns disputes or similar issues). Typically, M&A and real estate lawyers conduct the legal DD. There is a great variety in scope and thresholds, as well as reporting format, depending on the individual client’s needs. Usually, international investors and Nordic institutions request full DD, while Swedish real estate companies and private investors normally complete parts of the DD themselves, with their own personnel. Other specialists involved, other than lawyers, are accountant firms, corporate finance houses and technical or environmental consultants. Normally, more thorough DD activities are initiated at quite a late stage of negotiations, after agreement on exclusivity or some kind of cost coverage by the seller, since DD will drive costs for the buyer.
On certain occasions, the seller initiates vendor DD, in order to introduce and organise the data room in an effective manner and in order to reduce the need for buyer DD, but more often in order to clean up the company or property documentation or information to be presentable to investors.
Information on title, bankruptcy, litigation, etc, is normally found in the data room presented by the seller, as supported by representations and warranties relating to the accuracy of the data room information and independent searches by the buyer in public registers or information. Title issues rarely occur regarding commercial properties in Sweden. The Land Registry provides online information on title to real estate, supported by the government. In addition to this, full DD is normally conducted with regard to title to shares with uncapped representations and warranties by the seller to support this position.
No significant changes in buyer behaviour in terms of DD procedures as a result of the coronavirus pandemic have been seen. Legal, financial and tax DD is generally conducted using digital platforms. The possibility to conduct technical/environmental DD or other on-site inspections has essentially remained unchanged, possibly because of the limited coronavirus-related restrictions imposed by Swedish authorities so far, in comparison to other countries.
Standard representations and warranties specific to real estate would relate to the property as such, including representations and warranties on:
Remedies in the event of misrepresentation/breach of warranty are typically limited to coin-by-coin compensation for direct damages through price reduction and/or damages.
Statutory law provides general default rules on defects and breaches of contract, these are, however, generally excluded in agreements and replaced by DD and seller representations and warranties. Buyers are generally expected to perform a relatively thorough DD and sellers are generally discharged from liability regarding any potential physical or legal defects pertaining to the target property, excluding matters explicitly covered by representations and warranties included in the agreement.
In addition to representations and warranties, indemnities may be included but these are regularly very specific. Typically, they would relate to specific DD-findings (known circumstances) with inherent risks that are not covered by any price deduction. Typical areas of concern and regulation may be tax (including VAT) issues and faulting mandatory inspections (ie, inspections of technical installations that should be completed within a certain time-period). Normally, the seller will try to manage such issues (if feasible) within a certain time post-closing, with an obligation to indemnify the buyer should the seller not succeed, sometimes with a capped liability.
This will vary to some degree, depending on the type(s) of property involved, but areas of law which generally should be considered include property ownership/title and transferability, mortgaging/financing, leases, property-related encumbrances, zoning and permit matters, compliance in terms of health and safety including mandatory inspections, environmental issues and tax. As most acquisitions are effected as share transfers, corporate law and disputes/litigations will generally be of importance as well.
Swedish environmental law is based on the “polluter pays” principle. The polluter is liable towards the public authorities to investigate possible pollution/contamination originating from the polluter’s activities and to take appropriate actions to remediate such pollution (to a reasonable extent, considering, eg, the polluter’s contribution to the pollution and the permissible land use at the time the polluting activities were conducted).
In certain circumstances, a property-owner may also be liable for pollution. The property-owner’s liability is, however, secondary to that of the polluter, and will only arise if there is no polluter to be held accountable, eg, because of bankruptcy. In such a case, all current and previous owners who have acquired ownership to the property after 1 January 1999 (the date on which the Swedish Environmental Code first entered into force) are jointly and severally liable. The property-owner’s liability will not exceed the potential liability of the polluter.
Planning and zoning is mainly governed at municipal level, with the Swedish municipalities as the only competent decision-making authority in terms of detailed planning and zoning (commonly referred to as the “municipal planning monopoly”). Zoning plans are developed and adopted by the municipalities’ city planning administrative divisions, often at the request of and in consultation with a private developer or property owner. The adoption of a zoning plan is followed by an implementation period ranging between five to fifteen years. During this time, the municipality may not alter the plan without compensating any affected property-owners. This right to develop land pursuant to an adopted zoning plan during the implementation period is generally referred to as a building right.
The decision to adopt, alter or repeal a zoning plan is, however, made at the municipality’s discretion. A private developer can make a formal request to the municipality to initiate a zoning process, in which case the municipality must respond but may freely decide to deny the request or to discontinue the zoning process at any time.
In connection with a zoning process, the municipality will often require a private developer to enter into different development agreements regarding the zoning and implementation process, mainly for the purpose of allocating zoning and public land improvement costs on the developer and, if relevant, redistribute land between the parties for private and public use. Such agreements will, however, not impose any obligation on the municipality to undertake zoning measures.
Expropriation of real estate is possible under Swedish law, but not commonly practised, as public access to privately owned land normally can be secured with the use of zoning plans requiring private land-owners to surrender private land to the municipality for public use. Expropriation may be exercised by the state, a municipality or a private entity after receiving permission from the Swedish government. Expropriation is only allowed for certain purposes as prescribed under statutory law and must serve a “particular public interest”. Expropriation may be permitted for, eg, large-scale development, infrastructure or defence projects or to preserve areas of environmental, cultural or historical importance.
Property-owners forfeiting land to expropriation have a statutory right to compensation from the expropriating party, corresponding to 125% of an estimated market value of the forfeited property, or if applicable, the market value reduction caused by the expropriation.
Direct real estate transfers carry a stamp duty of (currently) 4.25% for legal entities (less for physical or private persons and some specific legal entities), based on the higher of the purchase price and the tax value of the property the year before the transfer. If there is no tax value on the property – because it involves a property category that under law is exempt from property tax (such as certain public-service properties, for instance schools or care properties) or involves a newly established property through land-parcelling measures – there will be a need for a valuation report. Currently, there is no stamp duty on the transfer of shares in real estate companies. This means that most transactions, from a processing and documentation standpoint, are made as indirect share transfer deals, rather than direct property transfers.
The typical structure of a real estate transaction is through a sale and purchase of the shares in a limited-liability special-purpose vehicle (SPV) holding the real estate or property in question. In Sweden there are, as of now, no "thin capitalisation"’ or similar rules, meaning that a dormant limited-liability company (in Swedish: Aktiebolag, for short AB) with only SEK25,000 in share capital may purchase real estate worth SEK100 million (or more, with no limitation based on legal requirements), establishing an SPV structure for sale of the property (known as "packaging"). The background behind this structuring is that, since 2003, such share transfers are, as a general rule, tax-exempt, meaning that there will be zero income tax on the profits made on the sale of the shares. Applicable taxes will then be stamp duty and income tax on the property transfer into the SPV. However, the property transfer into the SPV will normally be made on a price or value equal to the tax residual value involving zero income tax also in this step of the structuring.
No such restrictions currently exist under Swedish law.
As described in 2.10 Taxes Applicable to a Transaction, most transactions in Sweden are - for tax reasons - conducted by transfer of the shares in an SPV company holding the real estate.
Financings of real estate transactions are generally asset-based, involving pledge of mortgages in the property as well as pledge of the shares in the purchasing SPV. Other forms of financing for real estate companies involve bond issues, both for single assets and real estate portfolios, often at very competitive pricing based on credit rating. This is a rather common form of financing, also arranged at international markets and attracting international capital, for real estate companies owning larger portfolios.
The typical sorts of security for asset-based financings are pledge of mortgages and shares, in combination with extensive pledges of the rights to rents and other income related to the property. Different forms of guarantees are commonly used in combination.
There are generally no restrictions on granting security over real estate to foreign lenders, except what follows from internationally applicable principles to anti-money laundering activities and similar.
There is a stamp duty on taking out mortgages in real estate, which in commercial relations corresponds to 2% of the value of the mortgages.
There are no specific requirements that must be complied with before an entity can give valid security over its real estate assets, other than general corporate principles applicable to lending and provision of valid security, relating to loan/security to certain forbidden parties/relationships and corporate benefit rules.
In general, measures for enforcement of security require the involvement of the authorities. Any private enforcement through auction/sale will require the lender to deliver any surplus over the secured amount back to the borrower. Thus, except for forms of acceleration under the applicable loan agreement, enforcement would normally involve the Swedish Enforcement Agency (in Swedish: Kronofogdemyndigheten) or, in the case of bankruptcy, the bankruptcy trustee (in Swedish: Konkursförvaltaren).
In order to subordinate existing debt to newly created debt, an agreement (inter-creditor or bilateral agreement) with the other lender(s) and the borrower would normally be needed.
Banks and other regulated lenders holding or enforcing security over real estate are generally exempt from liability for pollution under the Swedish Environmental Code (in Swedish: Miljöbalken) and there is no case law indicating a principle of lenders’ liability under environmental laws. See 2.7 Soil Pollution or Environmental Contamination regarding the environmental liability of owners to polluted real estate.
Security interests created prior to or in connection with bankruptcy may be recovered under creditor protection rules in the Bankruptcy Act (in Swedish: konkurslagen). Securities may also be deemed void if granted in violation of restrictions on loan/security to certain forbidden parties/relationships or corporate benefit rules.
Loans on the Swedish market are generally linked to the Stockholm Inter-Bank Offered Rate (STIBOR) or the Euro Interbank Offered Rate (EURIBOR). Changes in applicable interest rates would normally be managed by regulations in the loan agreement.
Detailed planning and zoning is mainly managed and controlled at municipal level pursuant to the Planning and Building Act (in Swedish: Plan- och bygglagen), with the use of overview development (long term municipal planning) and zoning (detailed land use regulations) plans. The planning and zoning process may however (to varying degrees) involve consultation with other public authorities, such as the Land Surveying Authority (in Swedish: Lantmäteriet), the National Board of Housing, Building and Planning (in Swedish: Boverket), the Transport Administration (in Swedish: Trafikverket), the County Administrative Board (in Swedish: Länsstyrelsen) and regional assemblies. Development and zoning plans are reviewed and may in some instances be repealed by the County Administrative Board.
The municipal planning process allows for neighbours and others affected by the suggested development to express concerns/suggest alterations, but the municipal council may, however, ultimately decide to adopt a plan irrespective of any popular opposition. Municipal decisions on planning can, however, be appealed against and contested in court, but under normal circumstances only by a party who has submitted written comments during the planning process, which have been disregarded in the municipality’s final proposal.
Prior to the initiation of any development project, a developer must generally seek and obtain a construction permit from the municipal building committee. Permits are required for essentially any demolition, groundwork, re-development, construction works or altered use of a building, but will be granted provided that the suggested development complies with the provisions set forth in the applicable zoning plan.
Following a permit application, additional documentation and consultation with the building committee and other official functions is required in order to obtain a starting clearance, permitting the physical initiation of the project. After approval at final construction inspection, a final clearance must be obtained from the building committee before the finalised building may be taken into use.
Permitted development and designated use of land is governed at municipal level under planning and zoning laws; see 2.8 Permitted Uses of Real Estate under Zoning or Planning Law and 4.1 Legislative and Governmental Controls Applicable to Strategic Planning and Zoning.
See 4.2 Legislative and Governmental Controls Applicable to Design, Appearance and Method of Construction for general comments on the construction permit process. Permit applications are distributed to neighbours and other potentially affected third parties, who are entitled to submit comments and/or appeal against permit decisions within a certain time-period from the decision.
Construction permit decisions (to grant or reject) may be appealed against by any affected party. A municipality’s decision to adopt/alter a zoning plan may be appealed against by an affected party only if that party has submitted written comments during the zoning review process which have been disregarded in the final zoning proposal. A municipality’s decision not to initiate or to discontinue an initiated zoning process, or not to adopt a final zoning plan proposal, may, however, not be appealed against.
As previously mentioned, different “development agreements” are often entered into between private developers and the municipality, prior to or during the zoning stage of a development project regarding planning and implementation issues and costs. Such agreements may also involve the purchase of public land for private development.
In some cases, similar agreements are negotiated and entered into with public transportation-providers and other potentially affected parties in order to secure the temporary or permanent use of land necessary for the project, or to agree on principles for compensation in the case of intrusions or disturbances. These issues are generally project-specific and a number of different agreements with different parties may be needed in order to enable or facilitate certain aspects of a project, outside the scope of the zoning and permit process.
Such restrictions are typically enforced using penalty fees and/or injunctions from the municipal supervisory authority. In the case of more serious offences which also involve environmental law violations, criminal liability may occur.
The most common type of entity to hold real estate is a Swedish limited liability company (AB). The property-owning entity (Propco AB) will in turn normally be owned by one or more Swedish holding companies (Holdco AB). The packaging of real estate into a Propco AB, and the Holdco AB structuring, are due to tax reasons, as described in 2.10 Taxes Applicable to a Transaction. International investors normally set up an investment vehicle, as an ultimate Holdco, in jurisdictions with a beneficial investment climate, such as Luxembourg.
The main features of a Swedish AB include limitation of liability to the registered share capital - and normally a corresponding ring-fencing and non-recourse in financing structures – in combination with no thin-capitalisation rules.
The minimum capital is SEK25,000 in share capital to set up a Swedish AB.
At the minimum level of capital requirement, as per the above, there are minimum rules of corporate governance. One single board member is sufficient, with one deputy. No auditor is required, but the board will have to complete annual accounts and submit them to the Swedish Companies Register (in Swedish: Bolagsverket) and submit tax returns to the Swedish Tax Agency (in Swedish: Skatteverket). An annual shareholders’ general meeting and board meeting must be formally held and documented.
It is very difficult to assess the actual cost for annual maintenance and accounting for each entity owning real estate. Accounting and reporting requirements do not depend only on the entity itself, but rather on the requirements on the property-owning group in each case. However, for the most basic administrative maintenance of an individual Propco AB the annual cost would probably not exceed SEK20-50,000 (excluding valuations and other property-related costs).
See 2.1 Categories of Property Rights.
The Swedish Lease Act (in Swedish: hyreslagen) differentiates between leases for residential and commercial purposes, without any particular sub-categories based on specific commercial purposes.
Rents for commercial leases are freely negotiable within certain boundaries when entering into a new lease agreement (see 6.6 Determination of New Rent). In renegotiation, the new rent level should be based on market rent (see 6.6 Determination of New Rent). The maximum term of a lease is 25 years on land covered by a zoning plan (otherwise 50 years, see 2.1 Categories of Property Rights) and certain minimum requirements on termination notice periods apply under law.
The coronavirus pandemic has not led to amended legislation in terms of rents, lease terms or payment requirements as applicable to new or existing contracts. The Swedish government has, however, introduced temporary subsidies for rental rebates to tenants in particularly exposed business sectors, such as retail, hotels, and food and beverages. This was in implemented during the first half of 2020 and further support actions are being discussed.
Typical terms of a commercial lease on the Swedish market include the following.
Standard lease contract forms for a variety of purposes are provided by the industry organisation the Swedish Property Federation (in Swedish: Fastighetsägarna) and are often used as the basis for commercial lease agreements, with specific regulations in appendices.
As a general rule, the rent amount must be stipulated in the lease agreement and will remain the same for the duration of the lease term, but may be renegotiated following termination by a party at the expiry of the term. Some exceptions do, however, exist. Charges for utilities may be variable (or based on consumption if measurable), and turnover-based rent and other variable rent calculations are permitted. Most commercial leases include index clauses, allowing rent adjustment based on changes in the Consumer Price Index. However, such clauses are permitted only for leases with a lease term of three years or longer.
A party terminating a lease for renegotiation must inform the other party about the terms demanded for prolongation. If the landlord subsequently refuses to prolong the lease on reasonable market terms, the tenant has a principle right to indemnification from the landlord, unless the landlord can present certain legally prescribed grounds for not prolonging the lease. Damages to be paid by a landlord under these provisions may reach substantial amounts, creating a strong incentive for landlords to agree to prolongation on market rent.
The tenant’s right to compensation can, under certain circumstances, be voluntarily surrendered, which is not uncommon for parties to agree upon for short-term leases or in connection with development projects. Approval by the Regional Rent and Tenancy Tribunal is generally required for such an arrangement to be valid.
VAT is payable on rent for commercial premises, provided that both the landlord and the tenant, as well as the business conducted within the premises, are VAT-liable.
There are generally no costs payable by a tenant at the start of a lease, unless specifically agreed upon (such as for tenant-specific adaptations to the premises' finances by the landlord or security deposits).
Commercial tenants are typically liable for most of the operating expenses pertaining to the leased premises, while interior and exterior repairs, including to the building itself, and the maintenance/repair of common areas and facilities, are generally carried by the landlord. It is, however, not uncommon to allocate expenses related to common areas/facilities between the tenants in a multi-tenant property. Nevertheless, the landlord will typically bear the responsibility for any structural maintenance/repairs.
This is typically paid for in arrears, based on individual consumption (to the extent that individual measurement is possible) or allocated between tenants, based on each tenant’s share of the total cost for the property.
Swedish commercial real estate is typically insured “at full value”, with cover for practically any type of physical damage, including 24 to 36 months’ rent loss. The property-owner will generally carry the cost of property insurance, except in cases of "triple net" lease solutions.
A lease agreement will generally specify the permitted use of the premises and violations may enable the landlord to terminate the lease prematurely under law. Restrictions are also imposed under zoning and construction regulations, and an altered use of a building or part thereof may lead to authority injunctions or penalty fees, typically directed towards the property-owner.
There is no general right under law for commercial tenants to alter or improve the premises, but this is generally regulated in the lease agreement. The tenant will typically be required to seek and obtain permission from the landlord before making any material changes to the premises.
As mentioned in 6.2 Types of Commercial Leases, the Swedish Lease Act only differentiates between leases for residential and commercial purposes. See 6.3 Regulation of Rents or Lease Terms for comments on temporary government support provided to certain tenant categories.
A tenant’s insolvency will typically constitute a ground for termination. A tenant’s bankruptcy estate may choose to enter into the lease agreement (in substitution of the bankrupt tenant) and will in such a case be directly liable for any rent-payment obligations.
The parties are free to agree on essentially any type of security. Parent-company guarantees, bank guarantees and deposits are most commonly used on the market.
If a lease is terminated, the tenant may be granted a prolonged occupancy period for up to two years, following an application with the Regional Rent and Tenancy Tribunal. The tenant’s right to prolonged occupancy can under certain circumstances be voluntarily surrendered. Approval by the Regional Rent and Tenancy Tribunal is generally required for such an arrangement to be valid.
In principle, a tenant is also not entitled to transfer/assign a lease without the landlord’s approval. An assignment may, however, be effected irrespective of the landlord’s opinion if the assignment is made as part of a transfer of the business operation conducted within the leased premises. Approval by the Regional Rent and Tenancy Tribunal is required. A tenant is not entitled to sub-lease the premises without the landlord’s consent. In certain cases, approval may instead be sought and obtained from the Regional Rent and Tenancy Tribunal, when the landlord’s consent is denied.
In addition to sufficient financial capacity, a landlord will generally want to ensure that a new tenant/sub-tenant is VAT-liable, in order to retain VAT-deductibility for the premises.
Events which would typically constitute legal ground for termination include:
Lease agreements may be registered in the Land Register, but this is uncommon and generally not considered necessary, as lease rights are protected under law.
Failure by a tenant to pay rent will generally constitute a ground for (premature) termination. The eviction of a tenant (who is vacating voluntarily) will generally require the involvement of the Enforcement Agency and a court order for eviction. This process can take anywhere between six to 18 months.
A lease can under extraordinary circumstances be expropriated under law, effectively terminating the lease agreement, but this is very unusual. In practice, the tenant will not receive any substantial compensation as leases are typically not considered to have market value.
Other authority orders, such as a ban on the use of a building not complying with health and safety regulations or permit/certificate requirements (see 4.2 Legislative and Governmental Controls Applicable to Design, Appearance and Method of Construction), could also result in the termination of a lease agreement. In such a case, compensation will typically be payable by the party responsible for ensuring compliance with the requirements in question.
Both fixed-price and cost-plus pricing structures are commonly used, often with different variations such as incentive mechanisms, price ceilings and price indexation. The use of standard contract forms (General Conditions) provided by the Construction Contract Committee is market standard practice, typically with project-specific additions/adaptations. The General Conditions also provides for alterations and additions to be implemented during the course of a project and mechanisms for the contractor’s right to compensation for such works. Alterations and additions are very common and a frequent subject of discussion in the context of commercial construction projects.
In large-scale development projects, a single contractor is often engaged for the planning/design and the construction phase under a turnkey (design and construct) contract based on the applicable General Conditions (ABT 06), assigning the general responsibility for both design and construction on the contractor. The contractor will typically sub-contract consultants and/or contractors on harmonising standard contracts.
A contractor may also be engaged under a performance contract (also based on General Conditions for such contracts – AB 04), under which the contractor’s responsibility is limited to performance of construction and excludes responsibility for planning and design. Planning and design works are in such cases normally procured separately by engaging consultants on the applicable General Conditions for consultancy contracts (ABK 09).
Construction works are inspected at completion by an independent inspector appointed by the employer and the contractor is liable to remedy any defects noted at inspection. Contract works are also, according to the applicable General Conditions, generally covered by a five-year warranty period (two years for materials and goods) and a ten-year liability period for defects arising from the contractor’s negligence. Some additional limitations in liability are prescribed in the General Conditions, but very few legal (statutory) limitations apply, as commercial construction contracts are not specifically regulated by law.
If stipulated in the contract, the employer is entitled to liquidated damages (penalty fees) under the General Conditions if the agreed completion dates are exceeded. Penalty fees are usually calculated as a percentage of the total contract price per week of delay. As a last resort and in the case of a material breach of contract, the employer may be entitled to terminate the contract and seek compensation for damages.
Security is generally demanded (depending on the size/financial strength of the contractor) in the form of parent-company or bank guarantees, often limited to a percentage (generally up to 10%) of the total contract price.
Recently, the use of separate project-insurance solutions, in addition to security from the contractor, has become more common.
Such liens/encumbrances could in theory be created by using the property as collateral; however, this is not a common practice. A contractor will generally have to rely on the employer’s financial ability and other security provided, such as parent-company or bank guarantees. There are also specific guarantee insurance solutions available on the market, which may provide additional comfort in terms of the employer’s payment obligations. A contractor is generally entitled to suspend the works in the case of failure by the employer to fulfil payment obligations, or terminate the contract in the case of a material breach.
Following approval at final construction inspection, as carried out by an independent inspector, the project must be given final clearance from the municipal building committee before being taken into use. See 4.2 Legislative and Governmental Controls Applicable to Design, Appearance and Method of Construction.
VAT is not payable on the sale or purchase of real estate.
Stamp duty on real estate acquisitions may be limited or avoided by structuring the transaction as a sale of shares in the property-holding company rather than a direct transfer of real estate. As described in 2.10 Taxes Applicable to a Transaction, profits from share sales are also generally tax-exempt. Stamp duty may in some cases also be avoided by transferring land using property reallotment/amalgamation measures. However, a recent proposal has been made to amend this legislation, see 1.4 Proposals for Reform.
Municipal taxes are not paid on the occupation of business premises.
No income tax withholding is imposed on real estate investments. Dividends to foreign individuals and companies may be subject to a withholding tax of 30%, but several exemptions exist and the rate may be reduced under tax treaties. Rental income is not subject to any specific taxation; profits from real estate holdings, including profits from (direct) property sales, are subject to corporate tax at entity level of (currently) 20.6%. See 2.10 Taxes Applicable to a Transaction on tax-exemption for share sales.
Depreciation, interest, maintenance, and operational costs are generally deductible, subject to specific tax law regulations and requirements. As a general rule, VAT on capital expenditures (capex) costs is deductible for commercial premises, but not for residential premises.
Certain Aspects of COVID-19’s Effects on the Swedish Real Estate Market – Struggling Tenants and Focus on Residential Investments
COVID-19’s effect on the Swedish lease market – struggling tenants
The outbreak of COVID-19 has hit most industries hard, and the hotel and restaurant industries, as well as the retail industry, have been particularly affected. A major expense for these industries is the rent that many tenants now find it difficult to pay.
In Sweden, the government has not yet ordered a complete lock-down of malls, restaurants and hotels, etc, which is understood to have been done in several other jurisdictions. However, the government has ordered certain restrictions regarding, inter alia, the number of persons that may enter into a commercial premises such as stores, restaurants and restrictions regarding public events (eg, cinemas, sports and theatres) and with respect to the selling of alcohol at restaurants and entry bans for travellers to Sweden, to reduce the risk for the spread of COVID-19. The Public Health Agency (in Swedish: Folkhälsomyndigheten) in Sweden has in addition issued general guidelines to restrain the COVID-19 outbreak, which, together with the shift in behaviour due to the outbreak, have had a great impact on the business activities of many tenants. The financial struggling of tenants has, of course, affected landlords, given that many tenants in the aforementioned industries have had difficulties in paying the rent. The short-term consequences of the COVID-19 pandemic that have been observed relating to the real estate market are discussions regarding rental discounts, early termination of leases, re-negotiation of leases and governmental support actions, as described in the section State aid for rental discounts due to COVID-19, as well as insolvency and bankruptcy procedures vis-à-vis tenants concerning mainly the retail and hospitality sectors.
However, there might be a positive trend ahead. According to a survey conducted by the Swedish Property Owners Federation, the requests for rental discounts from tenants have decreased by 40% during the first quarter of 2021, compared to the last quarter of 2020.
Of course, not only the retail and hospitality segments are adversely affected by the pandemic. Pursuant to a report issued by Cushman & Wakefield for the fourth quarter of 2020, the COVID-19 pandemic has accelerated the trend of subletting office space, whereby tenants are putting excess space for lease on the subletting market until their lease agreement expires. This is mainly due to two factors; the economic perspective to reduce costs and the structural perspective to adapt to more flexible working habits, such as working from home.
The government has adopted certain support measures to reduce the effect of COVID-19 on businesses. Following is a brief description of the state aid for rental discounts and for companies that have suffered loss of revenue due to COVID-19 about which many enquiries have been received during the pandemic. In addition, there are state aids with respect to, inter alia, short-time lay-offs of personnel, respites from the payment of certain taxes and specific regulations regarding compensation, should the government order a lock-down. Such regulations are not covered by the following description.
State aid for rental discounts due to COVID-19
With the aim to facilitate temporary rent discounts to be agreed upon by landlords with tenants during this critical time, in the industries referred to below, the government allocated SEK5 billion in state aid for the period April 2020 until June 2020. In March 2021, the Swedish government notified the European Commission for approval of its proposal to re-introduce rental support for a three-month period, from January to March 2021, by allocating an additional SEK3 billion.
The rental support targets businesses that depend on physical proximity to customers, such as retail and hospitality, as well as parts of the consumer goods sector and service sectors which are deemed particularly vulnerable.
Landlords who decrease fixed rents for tenants during the aforementioned periods have been/will be eligible to be compensated for 50% of the decreased fixed rent. In order to qualify for rental support for the period January to March 2021, the lease must have been entered into prior to 2021 and a written agreement between landlord and tenant on a rental discount shall have been entered into no later than the end of April 2021. Landlords may then apply for the support, between April and June 2021.
The state aid for rental discounts has been criticised by property-owners, as well as tenants, due to the fact that the regulations are administratively burdensome and that the property-owners will both carry 50% of the rental support and act as an authority, since property-owners may, using their own judgement, determine which tenants will be subject to an agreement on a rent discount and hence will be entitled to the governmental support, and will thus take the risk that the support will in fact be granted.
State aid for companies that have suffered loss of revenue due to COVID-19
Companies which have had a decrease in revenue due to the COVID-19 pandemic may further be entitled to reorientation support (in Swedish: omställningsstöd), which is a form of financial allowance offered to businesses that suffered a significant decline in turnover from March 2020 until February 2021 (as well as for March and April 2021, for which months regulations have, however, not yet entered into force). Currently, reorientation support may be applied for with respect to the following three periods: (i) August to October 2020, (ii) November to December 2020 and (iii) January to February 2021. However, it is expected that the reorientation support will be extended to June 2021.
In order for a business to qualify for reorientation support for the period August 2020 to February 2021, a company shall, inter alia:
The minimum amount of reorientation support that can be granted for the period August 2020 to February 2021 is SEK5,000 and the maximum allowance that can be approved is SEK97 million per company (or group of companies) for the entire three periods. There are several factors to determine the size of a company's allowance, one of which is the company's fixed costs. The allowance is granted with an amount corresponding to 70-90% of such costs.
In order for a company to be eligible for reorientation support for the period August 2020 to February 2021, the company must have suffered a substantial decline in net turnover compared with the preceding year. The rates of decline for the different allowance periods are as follows (i) August to October 2020: a company's turnover must have decreased by more than 40% compared with the same period in 2019, and (ii) November to December 2020, as well as January to February 2021: a company's turnover must have decreased by more than 30% compared with the same period in 2019. This decrease in a company's turnover shall mainly have been a consequence of the COVID-19 pandemic.
Finally, it is worth noting that, when calculating fixed costs, any rental discounts shall be deducted from the rental cost, ie, only the part of the rent that remains after the rent support has been subtracted is eligible for reorientation support. The Tax Authority (in Swedish: Skatteverket) may, inter alia:
COVID-19’s Effect on the Transaction Market – Investors' Focus and Certain Aspects of Residential Rental Regulations
In general, the Swedish economy has stayed strong throughout the COVID-19 pandemic in comparison with many other jurisdictions, and the real estate transaction market has been very active. According to a report presented by Pangea Property Partners from January 2021, the volume of transactions amounted to SEK189bn in 2020. The Swedish transaction market is very liquid and transparent, with a strong capital market and low interest rates.
The increased insecurity within the retail and hospitality sectors has strengthened the previous trends (public property and logistics) and increased the focus on residential. Pursuant to the report presented by Pangea Property Partners in January 2021, investor focus has, following the COVID-19 pandemic, been on the residential, public property and logistic segments. Further, according to that report, the residential segment is deemed to be a stable segment with low risk, with an increasing interest from international investors, and which has had steadily rising transaction volumes for five consecutive years. The residential segment is also deemed to be one of the hottest segments and a clear "winner" in the COVID-19 pandemic and, in addition, there is a growing appetite for residentials built with government investment support (in Swedish: investeringsstöd).
Further, according to a survey conducted by Cushman & Wakefield for the first quarter of 2021, the best potential for total return in the coming six months (from March 2021) is anticipated by investors to come from public properties followed by residentials and logistics, with those sectors profiting from behavioural shifts due to the COVID-19 pandemic. For an investor interested in conducting transactions on the Swedish residential market, it is important to have knowledge of the Swedish legal system concerning this segment. In the following paragraphs is a brief description of two factors which may have to be evaluated when investing in the Swedish residential rental real estate market and which may be considered to be of interest to highlight.
Utility value system
In Sweden, the rent for residential premises may not, in general, be set to market level by an agreement between the parties. Instead, the rent for residential premises is determined in accordance with the utility value system (in Sweden: bruksvärdessystemet), which means that the condition and features of the premises – such as location, environment, size and level of modernity – are compared with other similar premises within the same area. The rent is not deemed reasonable if it is considerably higher than the rent for premises with an equivalent utility value. If no agreement is possible, the tenant or the landlord shall refer the decision to the Rent Tribunal (in Swedish: hyresnämnden), which will either mediate or conduct a utility-value review to establish the rent for individual apartments. Tenants can always require a utility-value review for the rent of their own apartment. This also applies in cases where the rent is determined through collective negotiations. If the rent is found to be too high, the landlord shall thereafter follow the amount of rent determined by the Rent Tribunal. There is an exception to the aforementioned limitation as regards buildings that are newly produced or part of existing buildings that have been rebuilt to residential premises, in which case a landlord and the tenants' association (in Swedish: hyresgästförening) can agree that the rent may exceed the utility value. Any such agreement shall include all the residential premises within the new building or all the residential premises in the part of the building that has been rebuilt. The main purpose of such regulation is to assure a landlord that the rent will cover the costs for the premises if a dispute arises in the Rent Tribunal regarding the rent.
Investment support to arrange rental housing and housing for students
Rental projects with investment support may be perceived as a good investment opportunity for many investors. The purpose of the governmental investment support is to arrange rental housing and housing for students, as well as to stimulate the construction of more apartments leased with right of tenancy, which, among other things, shall have reasonable living costs and lower energy consumption than other newly developed apartments. Support may only be provided for housing arranged through new construction, extension or conversion of all or part of a building that has not been used for housing during the past eight years. The amount of the support is decided by factors such as where in Sweden the housing is located, the type of housing and the size of the apartments.
The granting of investment support is subject to certain conditions, with which the support recipient agrees to comply for a period of 15 years following the date of the resolution to disburse the support. These conditions entail that, inter alia:
The requirement relating to statutory rent levels under the fourth point above means that the "standard rent" (in Swedish: normhyra) for these apartments may not exceed a certain amount per square metre living area per year from the date of access (the amount depends on where in Sweden the apartment is situated), and do not increase more than the local average thereafter. The term "standard rent" is used by the National Board of Housing, Building and Planning (in Swedish: Boverket) that has developed a method for determining if a rent level is reasonable in relation to an apartment's attributes and size.
As previously mentioned, the conditions for granting the investment support apply for a time period of 15 years, during which the relevant County Administrative Board (in Swedish: länsstyrelse) shall follow up on the recipient's compliance with the conditions. Should the County Administrative Board find that any of the conditions have not been complied with, the recipient may become liable to repay the received investment support (or part thereof). If this were to happen, the recipient would be proportionally liable to repay the part of the investment support relating to the period of the default.