Finnish Land Use Agreement, Land Use Payment, and Development Fee Regime Under Revision
22 July 2020
Authors: Noora Britschgi and Klaus Metsä-Simola
Our clients consistently have questions regarding land use agreements (in Finnish: maankäyttösopimus), land use payments (in Finnish: maankäyttömaksu), and development fees (in Finnish: kehittämiskorvaus) with respect to infrastructure and real property transactions in particular in Finnish city plan areas. In practice, city planning does not progress unless the property owner enters into a land use agreement with the municipality and commits to pay a land use payment. Municipalities thus have the power to dictate the terms of such agreements and decide on the payments quite freely.
Land use payments and development fees as well as the legal aspects of practices related to land use agreements are also one of the matters to be reviewed in connection with the currently ongoing comprehensive revision of the Finnish Land Use and Building Act. This blog post presents the current legal framework related to the matter.
Land Use Agreements
Pursuant to the Finnish Land Use and Building Act (132/1999, as amended, later the “LUB Act”), a municipality may enter into a land use agreement with a property owner regarding city planning. Such agreement cannot be binding with respect to the contents of the city plan or an amendment thereto and may only be entered into with binding effect once the city plan draft or proposal has been published. In addition, under the LUB Act, a municipality may also enter into an agreement regarding the commencement of city planning. However, based on a study of the legal aspects of practices related to land use agreements, land use fees, and development compensations published by the Ministry of the Environment in March 2020 (2020:4, later the “Study”), entering into separate agreements regarding the commencement of city planning alone is not a general practice in all municipalities, such as the City of Helsinki. Nevertheless, collaboration agreements entered into by these municipalities may include provisions regarding the commencement of city planning.
Interestingly, based on the Study, municipalities do not, in general, city plan privately owned areas. Therefore, in practice, land use agreements are mainly entered into with respect to city plan amendments relating to additional and infill construction. This practice is not entirely in line with the purpose of the current legislation on land use agreements, land use payments, and development fees, which was originally developed in order to create a regime to facilitate the city planning of privately owned areas.
Land Use Payments and Development Fees
The LUB Act provides that the property owner is under an obligation to participate in the costs of the construction of municipal infrastructure when a city plan or an alteration of the city plan results in considerable financial gain for the property owner. Primarily, the municipality should agree on the participation with the property owner by a land use agreement. If the parties fail to reach an agreement, the LUB Act provides that the municipality may order the property owner to pay a development fee that covers the estimated costs of the development of the city plan area in proportion to the increase in the value of the property. The development fee may, however, only be charged if the city plan or the city plan amendment results in considerable financial gain for the property owner. A development fee may also become payable in areas where the infrastructure is already established if the financial gain is particularly significant. In such a case, the basis for the development fee is defined based on the estimated costs for constructing the already existing infrastructure.
The increase in the value may, in practice, result from additional building volume or a change in the allowed use of the property and is defined, as appropriate, in accordance with the provisions of the Expropriation Act (603/1977, as amended). Prior to making the decision on the development fee and prior to approving the city plan, the municipality needs to request a statement from the National Land Survey and to hear the property owner about the suggested decision. The municipality can only deviate from the National Land Survey’s statement regarding the valuation if there are special grounds for this. According to the Study, the calculation method for the increase in the value of the property as applied by the municipalities in connection with defining the land use payments is not systematic or transparent, and the threshold of considerable financial gain varies depending on the municipality.
Within the limits set out in legislation, municipalities have discretion to decide on guidelines for defining the land use payments and development fees. Based on the Study, municipalities order development fees extremely rarely, and it is more usual that the city planning of a property ceases if a land use agreement is not entered into. In practice, the municipalities that have discretion to decide whether the city planning progresses have been quite free to dictate the terms of land use agreements and decide on the payments without the property owners having much say in the matter. However, the provisions regarding development fees may be used as an indicator in order to assess the fairness of land use payments. Under the LUB Act, the amount of the development fee is tied to the costs of the construction of the municipal infrastructure but may not exceed 60% of the increase in the value of the property deriving from the city plan or the city plan amendment. In practice, based on the Study, land use payments are normally constructed schematically based on a set percentage, normally a maximum of 40–60% of the increase in the value of the property, whereas the actual costs of the construction of the municipal infrastructure are rarely identified in land use agreements. For example, in the City of Helsinki, the land use payment or development fee is currently 35% of the increase in the value of the property deriving from a city plan amendment that exceeds EUR 700,000, which is the minimum limit for considerable financial gain in the City of Helsinki.
Instead of a city plan amendment, an individual property developer may obtain a similar right to an additional building right or a change in the allowed use of a property by a deviation permit. Traditionally, municipalities have entered into land use agreements and charged land use payments also with respect to issued deviation permits, but in the light of the Supreme Administrative Court’s decision of 10 June 2016 (KHO 2016:89), such practice is not lawful. According to the Supreme Administrative Court, the provisions of the LUB Act regarding land use agreements were not applicable to an agreement which was entered into simultaneously with the property owner applying for additional building right of 9,000 floor square metres based on a deviation permit, as the legislation is explicitly related to city planning. Furthermore, the amount of the compensation under the agreement was deemed to be related to the additional building right and not the costs of the construction of the municipal infrastructure. The Supreme Administrative Court thus upheld the Administrative Court’s decision to annul the municipal council’s decision to approve the land use agreement due to the exceedance of power and unlawfulness.
Despite the Supreme Administrative Court’s decision, municipalities are still reluctant to renounce the income from land use payments relating to issued deviation permits. A change of the purpose of use of the property or an additional building right pursuant to a deviation permit may still result in a land use payment or development fee payable at a later stage. For example, according to a decision by the City Board of the City of Helsinki dated 13 February 2017, the City of Helsinki will take any significant gain resulting from deviation permits issued after 10 June 2016 into account in connection with future city planning.
The practices related to land use agreements, land use payments, and development fees vary depending on the municipality, which may result in unequal treatment. The regime is likely to be reviewed in connection with the comprehensive revision of the LUB Act, but at this point, it is still unclear which approach the Ministry of the Environment will take in the legislative drafting, as the government bill regarding the revised LUB Act is not scheduled to be released until the end of year 2021. Based on the Study, clarifying the relationship between land use agreements and development fees, implementing more detailed regulation on the content of land use agreements, and enhancing transparency are among the suggested improvements with respect to land use agreements and related compensations. In addition, specific legislation on the relation of land use payments and deviation permits could clarify the current situation.
Our Environment and Natural Resources team is closely following the comprehensive revision of the LUB Act and is happy to answer any related legal questions.