The use of land leases as security for financing renewable energy projects in Finland

Typically, energy projects such as onshore and offshore wind farms and solar parks are financed through project finance. Project finance is a form of long-term financing typically used for large and long-term infrastructure and industrial projects. In project finance, the loan is typically secured and repaid based on the future cash flow generated by the energy project. To carry out the energy project, a project company (a special purpose vehicle; hereinafter referred to as the "SPV") is usually established and all rights and obligations relating to the project are transferred to it.

For example, in a wind or solar power project, the SPV will apply for the necessary building and other permits, act as a lessee in land leases and as a party to contracts with contractors, electricity purchasers, the power grid company and the wind turbine or solar panel supplier. In relation to financiers, the SPV acts as a borrower and provides security for the loan.

“To secure the loan, the SPV typically pledges all the energy project’s assets, such as all contracts that generate revenue and bank accounts. In addition, leasehold mortgages are usually registered in favour of the financier as security for the loan,” says Associate Johanna Smalén from DLA Piper’s Real Estate and Energy teams.

Key considerations for making a land lease mortgageable as security for project finance

Land lease agreements are governed by the Finnish Land Lease Act[1] (258/1966). A land lease agreement is an agreement under which a property or a specific part of a property identified in the agreement, e.g. by a map, is leased for a fixed term or until further notice in return for lease payments. The payment of the lease may be freely agreed between the parties. 

However, if no lease payment is agreed, the agreement is considered to be a right of use[2]  instead of a leasehold[3]. To be registered, the land lease agreement must be made in writing and signed by both parties.

Types of land leases under the Land Lease Act

The Land Lease Act differentiates five different types of land leases, each of which is subject to different rules. The leases are divided into site lease[4], other residential ground lease[5], farm and agricultural lease[6]  and other land lease[7]. When land is leased for industrial purposes or energy projects such as wind and solar farms and battery energy storage projects, the lease agreement typically falls under the category of leases of other land, which is governed by Chapter 5 of the Finnish Land Lease Act.

Such leases may be concluded for a fixed term of up to 100 years or until further notice. However, if the land lease agreement for other lease is made until further notice, the land lease agreement cannot be registered with a leasehold number, as described further below.

Compulsory registration for land lease agreements

A land lease agreement is subject to compulsory registration within six (6) months of signing the agreement with the Finnish National Land Survey[8] (“NLS”) if:

(i) the agreement is concluded for a fixed term

(ii) the agreement may be transferred to a third party without hearing the landowner and

(iii) the land contains buildings that belong to the lessee and/or the lessee is entitled to construct buildings or structures that belong to the lessee on the leased land.

Registration of the land lease agreement is shown as an encumbrance on the property and by registering the land lease agreement, the lessee's leasehold becomes public, and the leasehold will continue to encumber the property in the event of, for example, a future sale of the property to a third party.

The leasehold number and its security implications

When applying for the registration of the land lease agreement, the NLS will give the leaseholder a leasehold number[9] if the leasehold is mortgageable, i.e. if it fulfils the three criteria mentioned above. The leasehold number is an identifier of a mortgageable leasehold that appears on the property's certificate of mortgages and encumbrances.

The leasehold number consists of the property identification number, the letter L and a numerical identifier (e.g. 999-8-77-6-L1). This is important from a security perspective, as only leaseholds that have been registered with a leasehold number can be mortgaged, e.g. in favour of the project financier.

Challenges with transferability and registration practices

Of the three criteria, the second, criterion (ii), i.e. transferability raises the most questions as it is the most open to interpretation. There are also slightly different registration practices in the NLS depending on who is handling the registration application. In addition, landlords often try to protect their position by restricting the lessee's right to freely transfer the lease to a third party. For a leasehold to be mortgageable, it must be freely transferable to a third party without the landowner's consent.

However, according to the NLS’s Manual of Registration Procedures[10] (dated 7 March 2024), the land lease agreement may contain certain restrictions on transferability. The NLS decides in each case whether the restriction is so significant that the leasehold can no longer be considered freely transferable. This raises the question of whether the pool of potential transferees is large enough to ensure that, despite the restriction, there would be a sufficient number of potential purchasers in the event of a forced sale of the leasehold.

Ensuring transferability for mortgageability

If the condition restricts the number of potential purchasers too narrowly, the agreement must be regarded as non-transferrable. If the agreement contains a condition that the transferee must be approved by the lessor, the leasehold will not be registered with a leasehold number in the NLS.

To ensure that the land lease agreement is registered with a leasehold number, the agreement shall state that the lessee has the right to transfer the leasehold to a third party without the consent of the landowner and without any restrictions on transferability.

Satisfying registration requirements for construction rights

 As regards the third criterion, (iii), i.e. that the leased land contains buildings belonging to the lessee and/or that the lessee has the right to construct buildings or structures belonging to the lessee on the leased land, it does not matter whether any such buildings or structures actually exist on the leased land. In general, the land lease agreement needs to only contain a general statement of the lessee's right to construct buildings and/or structures belonging to the lessee on the leased land, which is sufficient to satisfy the registration requirement.

Equipment and machinery registration under the Finnish Land Code

Under the Finnish Land Code[11] (540/1995), it is possible to register equipment and machinery, such as wind turbines, main stations and switching stations, used in the lessee’s business as fixtures and appurtenances[12] of the leasehold (i.e. rather than consisting moveable assets and thereby falling within the scope of a business mortgage). From a bankability perspective, this is beneficial when considering enforcement scenarios. From the perspective of enforcement in bankruptcy, it is preferable to enforce real estate mortgages rather than business mortgages due to the better priority ranking.

“In our experience, it can be very difficult, costly, time-consuming and sometimes impossible to amend land lease agreements once they have been signed, so it is important to seek external expertise at an early stage of an energy project,” Johanna Smalén advises.

If you need assistance with drafting a land lease agreement that can be used as security for project financing or with other energy related/project matters in your company, please contact DLA Piper’s Energy team.