Secure, affluent public tenants attract investments from private property owners. There are also advantages for the public sector. The tenant avoids the initial investment cost, increases flexibility and is given the opportunity to find advantages of collaborating with the private sector.
It may sound simple: sale of land and a rental agreement – that’s it! But is it really that straightforward? Anyone delving deeper into the content discovers a plethora of legal issues, with real estate law naturally playing a crucial role, but with tax law, construction-contract law, competition law and, not least, the regulatory framework for public-procurement regulations also being updated.
Record interest in community properties
For many years, as regards external rentals the public sector has referred to rental exemption within procurement legislation. Rental exemption means that agreements on rental or other right of use for immovable property are exempt from the procurement obligation. In order not to be able – in a frivolous way – to circumvent procurement legislation in this regard, the courts’ decisions have in recent years reflected the development of a practice that means that rental of a building that has not yet been constructed or is to be preceded by wider-ranging redevelopment is likely to be subject to procurement – and thus not subject to the exemption provision.
We are noting record interest in community properties. At the same time there is increasing interest on the part of the Swedish Competition Authority and the Swedish Tax Agency in the way the projects are implemented and in ensuring that they are implemented in accordance with procurement and tax legislation.
The public operator often has access to procurers, but in some cases lacks specific expertise in this type of complex business. We are also seeing a need for private operators to increase their own expertise in the various areas concerned, not least in order to maximise their own returns. Each project must be considered as a whole, and all the components – both commercial and legal – must be interlinked.
Raises questions about procurement law and rental law
Purely in terms of procurement law, the question of how a procurement is to be implemented arises. Typically, the entire procurement, including rental agreements and construction work, can be subject to competition in one and the same procurement. Alternatively, the contracting authority may first enter into a rental agreement or other form of collaborative agreement with a selected private operator, and then “just” procure the construction work. It is important to know the pros and cons of the different options, regardless of whether the question is asked from a public standpoint or from the standpoint of a private property owner. Regardless of which option is selected, issues arise regarding who will or may do what, how payments in the form of rent are to be determined and how the expenses are to be allocated if for some reason the project does not come to fruition.
Property and rental law raise the issue of the nature of the rental agreement. A long-term rental agreement with a public tenant to some extent differs from an ordinary commercial rental agreement. The public tenant often has different needs and wishes. Can the rental agreement be unilaterally dictated by the public party, i.e. the future tenant? And what if the landlord wishes to negotiate specific terms and conditions or the roles and responsibilities? If the "package" also includes a land sale or development agreement, questions arise regarding valuation, return, pricing etc. In relation to a fixed rent, the question arises as to which of the parties will bear the risk of the contract work becoming more expensive or cheaper than expected. Or can the risk be shared, and if so, how?
Another issue that may also need investigating is whether the rental agreement is to be deemed a premises rental agreement or a housing rental agreement. The circumstances affecting the assessment in one regard or another include the scope of common spaces, the type of activity that will be carried out in the flat and the staff that will be on site. It is also not unusual for a public operator to sublet all or part of the premises, and this also creates demands as regards the nature of the subletting agreement.
In terms of tax law, a number of issues for both public and private actors also arise. Is there a right to deduct VAT for the contract, can the rent be wholly or partially subject to VAT, how is the right to deduct future operating costs dealt with, and will the tenant have the option of making a deduction from or receiving compensation for VAT paid on the rent or their own management costs? The issues are affected both by the activities to be carried out on the premises and the design of the premises in question. For example, in the case of contract work and leasing of special accommodation, the right to deduct VAT may depend on how the residential property is equipped, the type of common and ancillary spaces and how they are used, the design of the business areas and how they are separated off from other areas, services offered, length of stay etc. In some cases a public operator is even entitled to public compensation for the indirect VAT cost that often ensues in the form of increased rent when the property owner has no right to deduction when leasing residential property. How tax costs and any compensation are regulated and distributed among the parties has a direct impact on the parties’ respective project calculations, and may also be of crucial importance to the project’s implementation as such.
We feel there is a need for greater awareness of the above issues in the property industry, as well as a better knowledge of the complicated law regarding business linked to community properties. This would reduce the risk of unpleasant surprises and allow for better, often more profitable and better-thought-out business.
Do you want to know more about this topic, or did the article raise other questions? Please feel free to contact one of us or your regular contact at Lindahl.