The Finnish Property Market 2012 - KTI

Rental practices
Rental practices vary in the Finnish commercial property
market. The liberal legislation regulating leases gives parties
freedom to agree on terms and conditions.
“Finnish legislation
conserning rental
agreements is very
liberal”
A common term in Finnish lease agreements is “until further
notice”: an indefinite contract is valid until either the tenant
or landlord wishes to terminate it after an agreed notice
period, which is typically three, six or 12 months. These
indefinite lease terms are especially popular in multi-tenant
buildings and smaller office units, but are also widely used in
other property types. The landlord must, however, have an
acceptable cause to terminate the contract: rent adjustment,
16
The Finnish Property Market 2012
Photo: NCC / Sini Pennanen
2005–2007, the use of auction processes in large transactions
became common. In current market conditions, no auction
processes are carried out, as the number of participants
has decreased. However, in the quiet markets, the advisor’s
role increases again, as he or she serves to interconnect the
parties and their objectives.
“Transaction processes
last long in current
market conditions”
Other phenomenon brought about by the slowdown is
the lengthening of the transaction processes. Currently,
the processes are also lengthened due to the lenders’
involvement in negotiations, especially in cases when assets
with complicated financial structures are sold due to nonperforming
loans. The slowdown has also resulted in a
significant decrease in the average size of transactions.
tenant mix changes, or rearrangement of the property
portfolio are among the conditions used to justify lease
termination.
The indefinite leases often last long, as both parties
typically tolerate temporary fluctuations in the market. This
means that at the peak of the market tenants might pay less
than the current rental value, whereas in the downturn they
pay more. Both parties normally accept this, and do not
exercise the break clause easily. For its part, the landlord
wants to avoid periodic vacancy and the cost of searching
for a new tenant. In turn, tenants are not willing to pay the
cost of searching for new premises and the costs of moving.
This kind of flexibility is based on the assumption that in the
longer term, the contract rent is adjusted to correspond to
the long term rental value.
Where fixed terms are used, the contract periods are
typically quite short compared with international practices.
In multi-tenant office buildings, a typical fixed term is from
three to five years. In the commercial property market, it is also
common to agree on a fixed-term lease, which then continues
automatically for an indefinite period – with an agreed notice
period – until one party wishes to terminate it.
For larger units, longer fixed-term agreements are
commonly applied. For a purpose-built, single-tenant
office building, a net lease of ten years or more is common.
Agreements in large single-tenant buildings in, for example,
sale-and-leaseback arrangements, often have lease terms
of up to 20 years. The popularity and terms of this kind of
agreements are driven by both financial market conditions as
well as accounting issues. The planned new IFRS17 standard
might affect large companies’ interest in long leases, as all