Commercial Security Deposits and Bank Guarantees in Finland

In Finland's commercial real estate market, security is governed by the Act on Commercial Leases (Laki liikehuoneiston vuokrauksesta 482/1995, LHVL), which came into force on 1 May 1995. Unlike residential leases, which are strictly capped at three months' rent, commercial leases operate under the principle of freedom of contract.

1. No Statutory Cap for Commercial Deposits

A common legal error in Finnish property management is the assumption that the 3-month deposit cap applies to commercial units.

• The Reality: Section 7 of the LHVL states that it can be agreed to provide reasonable security against a contracting party failing to fulfill its obligations. The Act does not set a maximum limit.
• Market Practice: For retail, office, and logistics properties, security amounts typically range from 3 to 6 months' rent (including VAT).
• Enforceability: If a tenant fails to provide the agreed security, the landlord has a statutory right to terminate the lease (LHVL § 7).

2. Forms of Security in Finland

Professional landlords in Finland typically use three main instruments to mitigate risk:

A. Bank Guarantee (Pankkitakaus)

The institutional standard. The tenant’s bank provides a guarantee (usually an "on-demand" or "first-demand" guarantee) to the landlord.

• Key Advantage: The landlord does not need to manage a separate bank account or handle cash.
• Critical Timeline: Ensure the guarantee is valid for the entire lease term plus at least 3–6 months after the lease ends to allow for repair cost reconciliations.

B. Cash Security (Vakuus / Käteisvakuus)

The tenant transfers cash to the landlord or a pledged account.

• Interest: Unless otherwise agreed, the landlord is not typically required to pay interest on a commercial cash deposit, but it is best practice to define this in the lease.
• Return: The deposit must be returned without delay once all lease obligations are fulfilled.

C. Parent Company Guarantee (Emoyhtiötakaus)

Common when the tenant is a local subsidiary. The parent corporation guarantees the performance of the lease. This is often used alongside a smaller 3-month bank guarantee.

3. Scope of the Security

The lease should explicitly state that the security covers all obligations arising from the lease, including:

• Rent and service charge arrears.
• Interest on late payments.
• Damages to the premises beyond normal wear and tear.
• Legal costs incurred in the event of an eviction through the District Court (käräjäoikeus).

Best Practices for Landlords

1. Verify the Guarantee Wording: Ensure the bank guarantee is "unconditional" and "on-demand." Avoid "conditional" guarantees that require you to prove a breach in court before receiving payment.
2. VAT Consideration: Always calculate the security amount based on the gross rent (including VAT), as your primary loss in a default will include the VAT liability.
3. Pledge the Account: If using a cash deposit, use a pledged bank account where the funds are held by the bank and released only with mutual consent or a court order.

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