FINLAND: An Introduction to Real Estate

Market Review

Over the past year, the Finnish property market has been expecting a positive shift, but no such change has materialised, nor does it appear imminent. According to the latest market review published in November last year by KTI Finland, a Finnish research and advisory organisation specialising in the real estate sector, prime yields have stabilised, though no immediate decline is anticipated. The office market is also experiencing turbulence due to evolving space demands and quality requirements for office premises. While the decline in central bank reference rates is a promising indicator of gradual economic improvement, we believe that any positive impact on the property market will be delayed.

Real estate investments have recently garnered public attention in the past month following reports of real estate funds freezing withdrawals. Fund managers have argued that liquidating assets to meet withdrawal requests in the current market would further diminish real estate asset values, thereby creating an imbalance between withdrawing and remaining investors. The Finnish Financial Supervisory Authority has acknowledged that the Finnish financial sector faces substantial real estate-related risks but maintains that operators are protected by strong financial buffers.

Reform of the Land Code

A partial reform of the Land Code, which governs private law relationships concerning real estate, including ownership transfers, special property rights, registration matters, and mortgage rights, came into effect on 1 November 2024. The reform applies to provisions that have been in force since the beginning of 1997.

One key aspect of the reform is a partial relaxation of the principle of full invalidity. In the future, parties to a real estate preliminary sale and purchase agreement made without the required form may still validly agree on compensation for withdrawing from the agreement, such as a contract penalty. Previously, such penalties or withdrawal compensation were unenforceable. In practice, this means that parties planning a real estate transaction can now effectively and legally agree on a withdrawal penalty without involving a notary public or an electronic transaction system. However, such informal agreements remain non-binding on the parties in the real estate transaction itself.

Before the reform, property owners could not register non-pledging commitments in the Land and Mortgage Register that limit the pledging competence of a property owner. Despite being commonly used in commercial real estate financing, such “negative pledge” commitments previously lacked the necessary binding effect to serve as effective security against third parties, such as creditors or mortgage holders. The reform now allows these commitments to be registered in the Land and Mortgage Register, ensuring they are publicly validated and legally binding even against third parties. In practice, this is significant in cases where a property owner engaged in business activities cannot establish new mortgages on the property without the consent of a specific creditor.

Under previous legislation, a leasehold or other temporary usage right could be registered for real property located on water areas, but there was uncertainty about whether such rights could be used as collateral. The reform clarifies this by making leasehold rights on water areas, including those with transferable building rights, registerable and mortgageable. This change is particularly relevant for offshore wind projects and their financing packages, as such projects frequently involve leasehold rights on water areas.

Joint ownership agreements are a common and practical way to organise the management of properties with joint ownership. Although common, the Land Code’s regulation of these agreements was previously limited. The reform adds provisions to clarify when these agreements are valid and enforceable. The reform now allows a property joint ownership agreement to be registered even before a joint ownership relationship is established. This means that the division of property management can be formalised during, for example, the construction phase before the sale of shares or parts of the property.

Previously, the law required that an object, such as machinery or equipment on a property, be constructed or brought onto the land under a lease or comparable agreement to be registered as the property of a third party. This made certain “sale and leaseback” arrangements problematic for registration. The reform now allows the registration of rights related to buildings or equipment on a property, regardless of whether they were brought onto the land under such an agreement. This clarifies and expands the options for financing and security arrangements involving real estate.

The land code used to require the submission of the original deed (eg, a deed of lease or a will) in registration procedures. The reform removes this requirement, allowing scanned or other copies to be submitted, although the authorities can still request to see the original documents if necessary. This change streamlines the registration process and reduces the administrative burden.

Reform of the Land Use and Building Act

The old Finnish Land Use and Building Act was reformed with the new Finnish Building Act, which came into force on 1 January 2025. One of the most widely discussed changes is the relaxation of certain building permission thresholds, allowing the construction of buildings under 30 square metres in area (provided they do not exceed 120 cubic metres in volume) without requiring a permit.

However, in our view, this amendment concerning small buildings is not the most relevant change for our client base. Other modifications are likely to have a greater impact. First, a deviation permit can be applied for to change the purpose of use of a building to residential even when residential use is not allowed under the city plan. A less favourable change is that under the reformed act, building permits take longer to gain legal force. Now, a permit only becomes legally binding after a seven-day service of notice period, followed by a 30-day appeal period.

Taxation

As of 1 January 2025, no new tax legislation has come into force impacting tax on acquisition or holding of Finnish real estate or taxes levied upon exit.

However, the Finnish government is currently working on the reform of property tax payable annually by real estate owners. Under the new system, the tax base of the property tax will be based on the fair market value of each real estate, which can result in a material increase in tax. The details of the reform are not available, and its timetable is also unknown.