What’s ‘smart building law’ all about?
The real estate market, and the regulatory environment relating to it, has traditionally been considered as being a stable sector – economically even a safe haven – which has been subject to slow structural changes. However, recent megatrends, like the increase of digitalisation in everyday life and the transformation of the services markets are also bringing interesting changes to the real estate market. These changes create new business opportunities for all sector participants including investors, contractors and developers.
While the regulation of real estate, construction and buildings has traditionally been primarily limited to liability issues, land use, security, ownership and usage matters, a new approach to building rules and regulation can already be detected. Smart building law can simply be seen as a developing area of law and regulation aimed at encouraging current and future construction, operation and usage of buildings more intelligently, without forgetting the aspect of sustainability.
Digitalisation and regulation
Digitalisation has already brought changes to our daily life. A good example is electric vehicles (EVs). Currently a Government Bill regarding charging capabilities and stations of EVs is under preparation, which aims to implement the EU Energy Efficiency Directive 2018/844/EU. Apartment owners purchase EVs which need to be charged at home. An apartment building needs to estimate the number of chargers needed, the most effective and safe technical alternatives and the impacts on the energy efficiency of the building.
An interesting question is also the allocation of costs – who is responsible for the expenses of up-grading the building technology? Should the chargers be purchased by the housing company which provides services in respect of the apartment building or by the individual apartment owners themselves? If there are several individual shareholders who are willing to purchase and pay for the chargers, do they need the acceptance from the other apartment owners in the same apartment building as well? The purchaser can also consider applying for a subsidy, since the Housing Finance and Development Centre of Finland (ARA) has granted financial aid for apartment housing companies to build chargers to EVs from 2018. In the recent budget proposal of the Finnish Government for 2020, the amount of subsidy was tripled demonstrating that the development of smart buildings is receiving support from the very highest level.
As another example, since November 2013, it has been possible to apply for a real estate mortgage in the form of a physical mortgage certificate or as an electronic mortgage certificate. Further, the 2016 regulatory reform of the Code of Real Estate (540/1995) provided for the digitalisation of the real estate mortgage certificates, as from 1 June 2017, real estate mortgage certificates were issued in electronic form only.
By the end of 2019, any mortgage certificates that are in paper form should be converted into electronic form, as from the beginning of 2020, an effective mortgage right needs to be established by using an electronic mortgage certificate. In other words, physical mortgage certificates may be used to establish effective mortgage rights only until the end of 2019.
As a part of natural development, the Act on the Residential and Commercial Property Information System (1328/2018), which came into force from the beginning of 2019, requires that new housing companies and mutual real estate companies, to which the Finnish Housing Companies Act (1599/2009) is applied, are founded electronically and the share registers are kept in electronic form maintained by the National Land Survey of Finland. The deadline for existing housing companies to transfer their share registers into the new register is 31 December 2022.
There is also currently an ongoing reform of the Land Use and Building Act (132/1999) (“LBA”). The new Government Programme outlined the main objectives of the reform, one of them being the improvement of digitalisation in building and land use. There is a plan to create a nationwide digital register of the built environment and a data platform on which to make land use and construction decisions.
These are only a few regulatory examples of digitalisation in real estate sector. Obviously, digitalisation is an important driver in future real estate development, and it will bring substantial change to the real estate sector, its day-to-day business and its regulatory environment.
Future use of buildings – SpaaS and LaaS
There are a number of well-known businesses which are based on platform economy business models. By way of example, Airbnb has successfully disrupted the tourism and hotel business, facilitating the use of real estate assets more effectively, as a result creating new service markets around private apartments.
As another example, the shared usage of space is already developing. Space-as-a-service (SpaaS) is a business model enabling us to have a new approach and view on using joint spaces – thanks to technological solutions and the changing ways of living and working. Apart from traditional commercial leasing, SpaaS companies often offer more flexible, short-time options that involve leasing a single desk for two months or a closed office area for five people for a longer period. This has already changed the way commercial landlords and investors think about lease terms, building solutions and adaptable use of facilities. Consequently, the role of commercial landlords is in many cases changing from pure rent collectors to more value-added service providers.
A similar phenomenon to SpaaS is Living-as-a-service (LaaS) where customers are charged a fixed monthly fee for rent, utilities and services. As an upgrade to a traditional apartment lease, the charge can cover for example furniture, utilities and additional services such as cleaning, surveillance and communication. LaaS can mean in practice co-living, where several tenants share a house or a larger apartment together with related services.
SpaaS and LaaS consists of three parties: the owner of the premises, the business operator and the lessee. As we know from the experience with Airbnb, from a legal point of view the new models of doing business can be complicated. The current regulatory environment, such as the Act on Residential Leases (481/1995) or the Act on Commercial Leases (482/1995), can be partly out-dated when addressing the demands of the new business models, for instance, with respect to how liabilities are allocated and what kind of contractual arrangements are most feasible.
Towards sustainable buildings
Buildings are responsible for approximately 40% of energy consumption and 36% of CO2 emissions in the EU, making them the single largest energy consumer in Europe. The energy efficiency and the sustainability of building solutions is therefore obviously an important part of the development of the real estate sector in the future.
The EU has established several directives to boost the energy performance of buildings requiring, amongst other items, that all new buildings must be nearly zero-energy buildings (NZEB) by the end of 2020. NZEBs are buildings of very high energy efficiency and very low-energy needs, the supply of which should be covered to a very large extent by renewable energy.
In Finland, the Ministry of Environment aims to include regulation on carbon footprint in the National Building Code by mid-2020. Therefore, it is no surprise, that as preparation for this change, the deployment of sustainable solutions in the real estate sector is growing substantially.
The production of energy is transforming, and also private households and apartment buildings can become energy producers and an active part of the overall energy system. There is a growing interest towards utilizing solar power and energy storage systems to increase both self-sufficiency and value of buildings and real estate. As a result, several new legal issues in relation to apartment buildings and households in terms of decision-making, permits, energy sales, service offering, and contractual responsibilities must be taken into account in order to ensure this new reality is legally compliant.
HPP is constantly following this transformation of the real estate market. HPP aims to provide its clients with the most up-to-date advisory services and highlight the future possibilities for its clients involved in the real estate sector.
This is the first article of HPP’s Smart Building article series, where HPP’s real estate team members share their thoughts regarding the transformation of the market. Read more specifics about the electronic register for housing companies and electronic mortgage certificates in HPP’s Partner Leif Laitinen’s and Associate Oskari Kemppinen’s upcoming post of this series.