In the Swedish housing market, there has been an increasing trend for companies, municipalities and others subleasing dwellings to let to, for example, employees, students, asylum seekers and other groups. This is often done though block leasing. During the first six months of 2018, the Rent Tribunals (Sw. Hyresnämnderna) in Stockholm, Gothenburg and Malmö together received twice as many applications as they did in the first six months of 2016. This increase can be partly explained by the increased demand from asylum seekers. Another explanation is the general housing shortage in urban areas, which has resulted in more companies entering into block leasing agreements in order to offer accommodation to their employees. There has also been increased interest in what are known as long-stay hotels, that is, apartment hotels renting out rooms or apartments monthly or for a longer period of time.
So what is block leasing? Block leasing means that one landlord rents out a number of separate dwellings within the frame of one lease agreement, known as a “block,” instead of entering into a separate lease agreement for each dwelling. When entering into a block lease agreement, the presumption is that the provisions of the Rent Act (Sw. hyreslagen) regarding residential apartments shall apply. The provisions of the Rent Act grants residential tenants particularly strong protection, but when entering into a block lease agreement, both landlord and tenant are allowed to make exceptions regarding some of these provisions (see below). However, in relation to the premises, the conditions of a block lease agreement may not conflict with the provisions stipulated in the Rent Act. Consequently, since both landlord and tenant enjoy a higher degree of freedom of contract, a block lease agreement resembles a lease agreement over premises more than a lease agreement over dwellings.
A prerequisite when determining that block leasing, in accordance with the provisions of the Rent Act, is applicable is that the lease agreement covers at least three residential apartments, which the first tenant shall sublet individually or on a cooperative basis. If these prerequisites are met, the landlord and the first tenant shall agree on the conditions that conflict with the Rent Act’s provisions for block lease agreements. The most common exceptions include:
- the condition of the apartments
- maintenance of the apartments
- determination of rent
- indexation of rent
- terms of termination
Regarding the condition and maintenance, it may be possible, depending on the nature of the apartment, to agree on a lower standard than that of the main principle of law governing residential apartments. Under the main principle, each apartment shall be fully fit for purpose, meaning that there is a lowest acceptable standard, and that standard depends on the standard of similar apartments in the same city. However, it must be highlighted that the potential to agree on a lower standard only applies to agreements between the landlord and the block lease tenant. In the next step, that is, when the block lease tenant enter into agreements with each resident, the principle of the lowest acceptable standard applies, meaning that the block lease tenant may have to keep the apartments in better condition than the landlord has to. However, there has been no decisive case law in this area, and it is difficult to predict what will constitute “acceptable condition of the apartment” in relation to the main principle of lowest acceptable standard. The landlord should therefore exercise caution when applying this exception.
Regarding the maintenance of apartments, in a block lease agreement the landlord is able to transfer a bigger part of the responsibility to the block lease tenant. This possibility is mainly motivated by the fact that these apartments are often subject to a higher degree of wear and tear, since tenants tend move in and out of these apartments more frequently, compared to typical residential apartments. Even in this case, for the benefit of the residents, the block lease tenant is obliged to meet the Rent Act’s provisions regarding maintenance of the apartments.
The determination of rent on residential apartments is based on what is known as the utility value principle (Sw. bruksvärdesprincipen), according to which, apartments of an equal standard shall be subject to the same rent. In practice, when negotiating in accordance with this principle, the landlord negotiates with the tenant associations and the parties compare different housing objects with each other before they enter into an agreement regarding a suitable rent level based on the rent of the objects of comparison. Instead of having a fixed rent specified, in a block leasing agreement, which covers a term of more than three years, the landlord may apply the Rent Act’s provisions regarding other rent calculation methods. However, the presumption that rent should be determined in accordance with the utility value principle remains, whilst the landlord may charge a supplement for, for example, indexation of the rent and high levels of wear and tear to the apartment. Nevertheless, the rent calculation method must be stated clearly and accurately in the lease agreement, or the provision is invalid.
Finally, the parties often agree on a longer term of termination than three months, which is standard for lease agreements regarding residents.
It is a common misconception that the Rent Tribunal must accept all kinds of block leasing agreements. The decisions of the Rent Tribunal do not cover an entire block lease agreement as such. Instead, only the conditions the parties may have agreed on and that deviate from the Rent Act’s provisions are subject to the Rent Tribunal’s decisions. Accordingly, a landlord and a tenant may always enter into a block lease agreement, as long as the content of the agreement is not in conflict with the Rent Act’s provisions regarding rent of residential objects. The Rent Tribunal’s acceptance of the deviating conditions are not necessary when it comes to this kind of block lease agreement.
However, conditions that are in conflict with the Rent Act’s provisions regarding residential apartments must be approved by the Rent Tribunal in order to be valid. Furthermore, before reaching a decision, the Rent Tribunal must consider whether there is a real need for the block leasing, which would motivate the exceptions from the regulations regarding residential apartments. The latter requirement does not follow from the wording in the Act itself, rather it follows from the preparatory work. In the preparatory work it is stated that “serious need” includes an educational institution’s need to offer student housing or an employer’s need to offer housing to its employees. Recent decisions from the Rent Tribunal make it clear that asylum housing constitutes a serious need, since these premises are often leased through a block lease agreement with the state (normally through the migration Authority (Sw. Migrationsverket) as the block lease tenant.
Exceptions from the Rent Act’s regulations regarding residential tenancy must be approved by the Rent Tribunal because the legislator wants to avoid a situation where less serious property owners try to circumvent the mandatory regulations governing residential leases. However, it is not necessary to obtain the Rent Tribunal’s approval if the landlord is the state, a municipality, a county council or a similar public entity. This latter provision is unclear since, when it comes to block leasing, the property owner and the block lease tenant are landlords. From the preparatory work though, it is apparent that the exception only applies when the state, etc. owns the property. Thus, if the state, etc. is tenant, the Rent Tribunal must approve conditions that are in conflict with the Rent Act. There are examples of decisions where the Rent Tribunal has approved the complete block leasing agreement instead of just the conditions that are in conflict with the Rent Act. However, we recommend, when it comes to applying to the Rent Tribunal, that it is clearly stated for which conditions (ie, the exceptions from the residential lease provisions) the approval of the Rent Tribunal is being sought. Where the Rent Tribunal does not approve the exceptions, it is worth noting that there is no right of appeal. Finally, by way of warning, it should be noted that there is a risk that the tenants of the block lease tenant may request a customary review of the rent in accordance with the principle of utility value. If such a review proves that the tenant pays a higher rent than they would have done if the principle of utility value had been applied, a situation may arise where the block lease tenant subsidizes the rent of the resident, since the block lease tenant is unable to charge rent which corresponds to the amount paid to the property owner.