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Editorial

Introduction to rent-setting principles and tenancy rights according to the Swedish Tenancy Act

The Swedish tenancy legislation is protective legislation for tenants of commercial premises as well as residential tenants, where different rules apply for the protection of tenancy rights and rent-setting depending on whether the tenancy is related to a residential house or apartment or to premises to be used for commercial purposes. The purpose of this article is to illustrate the differences which currently exist between rents for commercial premises and rents for residential dwellings, as guidance for those who may be considering investing in apartment blocks in Sweden or are otherwise interested in the regulations governing the Swedish tenancy market. The article provides a survey of the fundamental principles which govern rent-setting in Sweden and provide protection of the rights of the tenants in the event of any rebuilding or demolition.

THE TENANCY ACT

If a property owner makes dwellings or other premises in his building available in re­turn for payment, the Tenancy Act applies between the parties. The Tenancy Act con­tains a comprehensive regulatory system, and much of it is mandatory in favour of the tenant. A distinction is made between two types of property:  

  • Residential and  
  • Non- residential property (e.g. shops, offices warehousing and garages)

In various essential respects, e.g. security of tenure and setting of rents, different rules apply to residential and non-residential properties.

Residential security of tenure

A residential tenant has security of tenure, i.e. a basic right to prolong the tenancy if the landlord gives notice of the lease expiring at the end of the term of tenancy. In some situations, however, there is no security of tenure at all and in other situations the security of tenure is broken and the tenant must vacate. Matters of this kind are ad­judicated by the regional rent tribunal.

Demolitions and Alterations of residential flats  

When it comes to demolition and alterations of residential flats the tenants have still full security of tenure, but in respect of the owner of the property, the tenant has to vacate provided that the landlord offers the tenant a similar apartment. The landlord gives notice and if the tenant does not vacate to the new flat, the landlord has to take legal action by applying to the district court or the Rent Tribunal.

Residential rents

Since a residential tenant has direct security of tenure, certain rules are necessary con­cerning the setting of rent. A landlord unable to evict a tenant on objective grounds is not allowed to force him out by demanding an unfair rent. The actual value of the dwelling has to be assessed with refe­rence to its nature and other factors in relation to comparable dwellings in the locality. Factors that are of importance are the size of the dwelling, how mo­dern it is, its layout, its stan­dard of repair and other factors affecting the value of the dwelling for the tenants in relation to other dwellings. Primarily a comparison is made to rents charged for flats owned by municipal housing companies, which in principle determine rents in re­lation to cost price.

Regulated rental market for residential leases

Rents and conditions relating to flats may be changed in fol­lowing manners:

  • Individual negotiation between landlord and tenant or
  • Collective negotiation between landlord and organisation of tenants

The usual procedure is for rents to be altered following a col­lective negotiation under the Rent Negotiation Act. About 90% of all dwellings come under the collective negotiat­ing system. Standard form contracts are often used and the typical contract is a two-page document. Residential leases are generally entered into for an indefinite term with a three-month period of notice. With regard to residential leases the Land Code stipulates mandatory regulations in favour of the tenants. As a rule, the rents for residential leases shall not substantially exceed the rents set by the municipality housing companies. Thus, there is in principle no free rental market for residential leases for “old properties” in Sweden. For newly built properties it is possible to set a free rent and to keep that under a ten (10) year period. Regulation of housing is complicated and far-reaching. Under the Rental Act, residential premises must be in usable condition with a complete kitchen and bathroom. The landlord is obliged to maintain the common areas of the building and the inside of the flats. The tenant is obliged under the Rental Act to take good care of the flat. Rent usually includes water, refuse collection, cleaning of common areas, taxes, etc. and is based on the actual cost of non-profit housing utility (municipal hou­sing compa­nies). Residential rents can not be linked to an in­dexing system. By international standards, Sweden has a relatively high stan­dard of housing and there is relatively little segregation.

Security of tenure for the non-residential tenant - Damages

This means that if the landlord gives notice of the expiry of the lease at the end of the term of tenancy and no agreement is reached on a new tenancy, the tenant will have to vacate. He cannot force the landlord to renew his tenancy. Instead of a right of renewal, the non-residential tenant has the opportunity to obtain damages from the landlord if, for example, notice is given on unreasonable grounds. There are a number of exceptions to this rule. Furthermore, security of tenure does not always apply, for example in connection with demolition or alterations. In this case no economic compensation for damages is payable if the landlord offers the tenant comparable premises. The landlord gives notice and if the tenant does not vacate, the landlord has to take legal action by applying to the court. It is not possible for the landlord to give notice for the tenants to move out before the end of the terms of the lease agreement. However the landlord and tenant can voluntarily agree on the tenant moving out before the date of expire, but the tenant will in all likelihood claim economic compensation. If the damages come to an end as a result of unjustified refu­sal to renew it, the tenant is always entitled to a minimum compensation amounting to damages corresponding to one year rent. If the tenant sustains an economic loss which is not covered by the minimum compen­sation, he can obtain full compensation for loss of profits if he can prove his loss. There are no differences between shops and offices as to the liability of the landlord to pay damages due to early termination of a tenancy agreement. The liability amounts to a fixed sum of the yearly rent (swe: “årshyra”) unless the terminated agreement concerns residential buildings or flats. Observe that an unjustified termination by the landlord, or termination by him without acceptable reasons can increase his liability if the tenant can proof that his damages exceed the yearly rent.

Market rent for non-residential premises

 If the landlord makes renewal of tenancy conditional on a rent which is not fair, or if he lays down other conditions which are contrary to accepted tenancy practice or are ot­herwise unfair, he will be liable to pay compensation.

Non-residential tenancy is essentially market-driven, which means that the landlord is at liberty to demand the rent that the premise would command on the open market at the time when he gives notice to revise the terms of tenancy. If the landlord requests a rent that exceeds market rent when the tenancy expires, the requested rent is unfair. The market rent is determined by compari­son to the rents of other non-residential properties which is roughly comparable as regards type of premises, location, size and standard.

By rent (swe: “hyra”) generally means the total rental cost including the basal rent and all costs paid by the tenant; costs for heating, water, real estate tax, index adjustments et cetera. In case a tenant pays a turnover rent (swe: “omsättningshyra”) this is included in the yearly rent in addition to the other costs he has to pay for. If the yearly rent is submitted in full through one payment and the tenant in addition to this has undertaken to pay for the maintenance or services of the premises the total value of these undertakings shall be added to the rent.

By yearly rent (swe: “årshyra”) generally means the total rent within a twelve month period from the termination of the agreement. If the agreement has endured for less than twelve months the yearly rent is estimated based upon the rent paid during the time of the agreement. If the rent is submitted in full through one payment the paid amount will be divided proportionately over the time and the yearly rent decided to what relates to the twelve month period.

The premises must not be shut down by the landlord during the time of the agreement unless it’s proceeded by a notice of termination. Without prior notice of termination a shutting of the premises will be considered a breach of contract which causes liability for damages up to the tenant’s real damages. A shutting will also construe a crime (unlawful dispossession). The liability for damages includes costs for finding another premises and same principles for calculating the damages are used as in the Swedish Expropriation Act. This means that the liability cannot by avoided by the landlord by direct the tenant a new premises, although such an assignment will reduce the liability in total.

Letting

Non-residential premises

The most common period of lease has so far been three years, but longer leases of 5 to 10 years are not unknown. The usual period of notice in connection to three year leases is mutually nine months. In Sweden market rents apply. To change the rent both parties have to give notice at the end of expiry of contract. Index system linked to the consumer price index is only allowed for three years leases or more, and is very common. The lease states whether the rent is "total rent” or whether the tenant has to pay supple­ments such as property tax, index, VAT, heating, water, cooling or other utilities. Usually the te­nants are responsible for maintenance of their premises.

Shops

Premises for shops are generally let without fittings. Various kinds of charges may be made above and beyond rent for services, above all in shopping arcades.

Standard agreements

Standard agreements are generally used when premises are let. The most common agreement is drawn up by the Swedish Federation for Rental Property Owners in coop­eration with the Swedish Retail Federation, the Organization for Tenants of Premises and the Swedish Federation for Free Enterprises.

Commercial lease regulations tied to the Land Code

Generally, commercial leases are entered into for a term of three to five years, with rents linked to changes in the Consumer Price Index. Further, the Land Code stipulates mandatory regulations in favour of the tenant. Standard contracts for commercial leases are usually used in Sweden. A normal contract consists of a four-page document with single-page appendices regarding the index-linked rent and a property tax clause. Since parties are generally familiar with these contracts, the result is often that shorter time for negotiating and analyzing lease contracts is needed which means often lower legal fees. Rent levels must be set at a reasonable rental market value (swe: “Skälig marknadshyra”). If the parties cannot agree on the rent level, ultimately the Rental Tribunal can determine what constitutes a reasonable rental market value for the premises in question, by com­paring similar premises at similar locations. However, the Rental Tribunal may only determine the market rent in connection with the extension of the lease. As regards the initial lease period, it is up to the landlord and the tenant to agree on the rent.

If the landlord and tenant do not come to an agreement about new conditions the tenant has to vacate from the premises. The landlord and tenant have a right in some situations to make a claim in the Rent Tribunal for respite for the tenant’s vacation for up to two years. The only situation when this does not apply is when the tenant gives notice for termination for his moving out. In situations when the landlord has given notice for termination about al­terations and demolition, the Rent Tribunal will usually give respite for no more than two years until the start of the alterations and demolition.

Giving notice to non residential and to residential tenant

Residential tenant

The procedure is to give notice to the tenant to move from the flat by mail as a registered letter. Normally the notice period is three months. If the Tenant does not move, the landlord has to take legal action by applying to the Rent Tribunal and try the case. The deci­sion can be appealed to a court of appeal.

Non residential tenant

The procedure differs depending on if it is the landlord or the tenant who gives notice. Both parties can give notice for changing the terms of conditions in the lease agree­ment, the rent and other rental conditions. The tenant as well as the landlord can give notice for the tenant to move out of the premises at the end of the term of the lease.

If the tenant gives notice it is enough if he sends it by ordinary mail as a registered letter to the landlord.

It is far more complicated for the landlord to give notice to the tenant with service of process in a proper way. Therefore it is very common that landlords use special and qualified persons (a writ server).

Procedure in Rent Tribunal

It is always the tenant applying to the Rent Tribunal for mediation when the landlord, as well as the tenant have given notice, within two months from service of process. The Rent Tribunal will mediate between the parties in order for them to come to an agreement for a new lease period. If they fail the tenant has to vacate but can apply for respite (se above). When the landlord has given notice for alterations and demoli­tions, the tenant has to apply to the Rent Tribunal to maintain his right for compensation for damages if the landlord does not direct the tenant to comparable new premises. The Rent Tribunal can also examine if the premises are comparable and their statement will have the status of a conclusive presumption (swe: “presumtionsverkan”) in the district court about the tenant’s litiga­tion for damages.

For more information please visit our website http://www.foyen.se/   

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