Data Center on Leased Land in Finland – a Risk?
Data centers offer good investment opportunities on the real property market. Finland is an attractive target. There are plenty of suitable sites available. However, Finnish landowners, including municipalities, are often reluctant to sell the site: They prefer long-term lease arrangements. While this is easily perceived as a risk by international investors, leased land in Finland offers a safe option for building when done right.
Land lease agreements in Finland
In Finland, a land lease agreement is an agreement where land is leased either for a fixed period, typically for a long term, or until further notice. Land leases are regulated by the Finnish Tenancy Act 258/1966. According to the Tenancy Act, land lease can be categorized into four different types of leases: lease of a residential building plot; lease of other residential area; lease of developed farmland and agricultural land; and lease of other land. Where land is leased for industrial purposes, for example data centers, the lease agreement falls typically under the category of “other land”.
The Tenancy Act leaves the parties wide room for play for agreeing the terms of the lease. When leasing land for industrial use, it is common to agree on terms that grant the lessee a high degree of protection against any disturbances coming from the landowner’s sphere.
When the lease agreement meets certain criteria, the lease as such becomes a distinct register entity which can (and must) be registered in the Finnish land register. For a data center operator, meeting these criteria is critical:
The lease is made for a fixed period of time;
the lessee is entitled to erect buildings or structures on the leased land; and
the lease can be transferred to third parties without the land owner needing to consent.
With these criteria met, and with adequate contract drafting, the operator as the lessee enjoys materially the same protection as a land owner in all respects relevant for the data center operations.
Term and termination
The lease agreement is made for a fixed term, which may be up to 100 years. Typically, the lease agreement for a data center will be made for the expected lifespan of the data center, with options to extend the lease in case the data center is operated for a longer time. It is also possible to reserve the right of the operator to withdraw from the lease in case that data center operations should cease for whatever reason.
The landowner’s right to terminate the lease before expiry of the fixed term is limited by law and usually limited further by contract. A satisfactory arrangement needs to consider the operational interests of the lessee as well as the interest of financing institutions. Termination should be possible only as a consequence of material misconduct of the lessee (most prominently payment defaults), and only after adequate grace periods for remedying the default. Transparent procedures must be agreed in order to ensure that financing banks are informed and have the chance to step in and prevent termination.
In case of insolvency of the landlord, the registering also protects the tenant against the creditors of the landlord. Where the lease is registered, the later landowners cannot terminate the agreement, except by the reasons above.
Rights related to the leased land
By registering the lease, the same level of certainty is achieved as for owned property. Registering secures the rights of the tenant, as the lease becomes public and visible, which eases the enforcement of it and any rights connected to it. Registered tenants have, in practise, nearly all the same rights as the owners.
The land owner does not have any means to interfere in the data center operator’s usage of the land, as long as this remains in the framework as described in the registered lease agreement. As mentioned, the lessee may freely transfer the lease to any third parties without asking for the owner’s permission. This also makes the lease bankable: Step-in rights for financing institutions are easily implemented.
Registered leases can also function as security to the tenant. The tenant can use the lease as security by registering mortgages thereon, in exactly the same way as mortgages are registered in owned land.
Ownership of the building
The structures erected by the tenant on the leased land are and remain property of the tenant. Under Finnish law these assets are considered an integral part of the lease right, not of the real property. It is possible, albeit not obligatory, to clarify this relation in the land register.
This also means that the buildings and structure are fully accessible for use as security for financers. A mortgage registered on the land lease covers also the related buildings and structures.
Typical lease agreements include the tenant’s obligation to remove the structures at the end of the lease period. Tenants are often required to provide collateral for the related costs.
A well-drafted and registered land lease agreement provides an equally secure basis for a data center investment as compared to purchasing the same land. This is true in terms of operational requirements as well as from the perspective of financers in project financing.
For the land owners (often municipalities), the lease option has the benefit that the land can easily be recovered for other uses if for any reason the data center project does not materialize. The same aspect can be considered a benefit also for the investor who may not want to be stuck with land ownership if – for example – changes in the business environment render the project unfeasible.