In March 2017, the Finnish Government published a draft bill proposing legislative reform which would introduce three-dimensional (3D) real estate to Finland. This bill is currently being circulated for consultation.
What is three-dimensional real estate?
Three-dimensional (3D) real estate is a term used to describe real estate that is defined horizontally, by traditional reference to coordinates on the ground level, and vertically, by reference to coordinates in the air or underground. 3D real estate already exists in other Nordic countries such as Sweden and Norway, but Finnish property laws currently in force do not recognize the concept, despite numerous initiatives taken in Finland over the past decade.
What is the current system and how does it work with financing arrangements?
Currently, title to real estate and other registered property interests is only recognized by reference to x and y coordinates on a two-dimensional (2D) map. As a result, Finnish Land Code (540/1995, as amended) only recognizes such traditional properties, as well as leaseholds and fractions of the same, as the object of a mortgage. For this reason, Finnish property law is currently not equipped to deal efficiently with situations where there is a need to register separate title to and, above all, separately encumber buildings or constructions situated under or above the ground level. This has required a fair amount of legal engineering to make the financing of large, multi-level and multi-party development projects bankable and commercially viable. These creative solutions include using the existing legal framework of fractional ownership of freehold or leasehold properties combined with possession sharing agreements (Fi: hallinnanjakosopimus) that specify which areas of the property (including, where applicable, buildings, fixtures and appurtenances thereon) belong to which owner, and joint arrangement agreements (Fi: yhteisjärjestelysopimus) to deal with various interface issues and the location and use of property infrastructure such as access, pipes and wires. Currently, also three-dimensionally defined land leases (Fi: maanvuokrasopimus) and housing or real estate companies, that may mortgage the property while the shareholders may pledge their shares, are used.
Although both possession sharing agreements and agreements on other joint arrangements may be registered in the property register and are therefore binding also towards third parties, these agreements are private law agreements, the contents of which are not shown in the public property register. Needless to say, the legal protection achieved by the use of these agreements is not in all respects the same as it would be if the properties would be created by proper 3D property formation.
What are the proposed legislative changes?
The Government Bill proposes amending the Real Estate Formation Act (554/1995, as amended, Fi: Kiinteistönmuodostamislaki), the Real Estate Register Act (392/1985, as amended, Fi: Kiinteistörekisterilaki) and the Land Use and Building Act (132/1999, as amended, Fi: Maankäyttö- ja rakennuslaki) to facilitate the creation and registration of 3D properties and security over the same. The laws will only be changed to the extent necessary to ensure that the law would treat 2D and 3D property units equivalently. The purpose of this development is to promote construction below ground and in air space and to clarify their legal status and facilitate their use as security. This legal revision will not replace the existing 2D system, but will exist alongside it as a new, more efficient option for certain kinds of real estate. While the zoning plan itself would remain two-dimensional, provisions concerning the required 3D real estate units would be presented in descriptive plan provisions. Because of the interaction of 3D property units with other 3D or 2D property units (e.g. in the form of shared walls), the dimensions and boundaries of 3D real property units would have to be very precisely defined and those definitions must be available at the building permit stage. The draft bill limits the creation of 3D property units to zoning areas and to circumstances where the use of 3D properties is necessary for the appropriate development of the properties.
What are the implications of this proposed reform?
While the number of 3D property units formed if the new legislation is enacted will likely be limited, the reform will facilitate the execution of large construction projects (typically in the main growth centers of Finland), such as publicly owned underground parking areas, shopping centers and other major construction projects located under or above traffic areas. The new 3D property legislation would, in particular, facilitate the use of real property as security in these kinds of projects. It would do this by creating a simpler and more transparent system for recording title to, and security over, constructions above or below ground in a manner allowing creditors to take security over an entire real estate unit, rather than just a fraction of one. The possibility of creating 3D properties without complex agreement structures should also reduce transaction costs.
The legislative changes significantly simplify the process of creating the relevant type of security and eliminate uncertainty from the point of view of the secured party. The change would be particularly significant in the case of underground properties. Currently, it is not possible to form an underground property unit that can be subject to ownership or a mortgage. This can be particularly problematic in cases involving underground parking garages built below multiple properties. Without the proposed legislative reform, these garages may have difficulties obtaining financing since no mortgages may be registered against the underground premises.
It should be noted that despite the obvious benefits of the proposed new 3D property system, owners and lenders would still have to critically consider the value of such real estate as collateral. Any 3D property unit, although an individual property unit, would still be dependent on one or more other properties and on the value of those properties, especially in the case of air space properties. The dependency on other properties and buildings would bring about challenges in the valuation of a 3D property. Further, the planned transition to a system that recognizes 3D property will not remove the need for complex contractual arrangements in its entirety, as the new system will present new challenges relating to the different parties operating in the same building. The 3D property system could actually increase the demand for contractual arrangements in situations that could previously be dealt within the property in question, including for example those relating to maintenance.
What is the bottom line?
The proposed legislative reform would change Finnish property laws only so far as necessary to allow the creation of 3D real property in some areas. Such changes would enable layered property ownership by defining the limits ownership by reference to z coordinates, while retaining the traditional 2D cadastral system. While the contemplated legal changes are minor, their practical ramifications for contractors and investors are significant. The reform will help to clarify property ownership and facilitate the execution and financing of complex building projects, especially those involving underground or air space properties.