Real estate financing in Sweden – key legal considerations

This article outlines three primary factors that may limit the value of property security—defined as the amount a secured lender can expect to recover from the sale of a secured asset in an enforcement scenario:

• Market Value – The starting point is the market value of the asset, which sets the upper boundary for potential sale proceeds.
• Mortgage Certificates – The nominal amount of mortgage certificates pledged to the lender directly affects the recoverable amount.
• Corporate Law Restrictions – The Swedish Companies Act imposes limitations on transactions lacking commercial justification and on financial assistance. If these are not properly addressed, the security may be rendered entirely invalid.

Mortgage Certificates in Property Financing

Mortgage certificates are a critical component of property financing. The proceeds a lender may receive from the sale of a secured property can never exceed 115% of the face value of the mortgage certificates registered against that property. Registering new mortgage certificates incurs a stamp duty of 2% of the nominal amount.

Borrowers are often required to issue new mortgage certificates to ensure that the amount of mortgage certificates is equal to the loan amount. While this is standard practice in real estate financing, it is worth noting that such requirements are uncommon in non-asset-based financings, such as leveraged finance – even when lenders take security over real estate held by the borrower group.

The Concept of Springing Mortgages

Springing mortgages have previously been a common feature in real estate financing, and although rarely used today, it does still occur from time to time. Under this arrangement, the borrower would provide pre-signed application documents to the lender, who could, under certain conditions, submit the applications and obtain additional mortgage certificates for the pledged property thus in theory strengthening its security position.

This mechanism is intended to offer lenders added comfort in case of borrower distress, while allowing borrowers to avoid paying upfront stamp duty unnecessarily. However, its practical value can be questioned, especially when the trigger is tied to a loan-to-value covenant breach caused by a decline in property market value. Another concern is that new security granted shortly before insolvency may be vulnerable to claw-back during the hardening period. These risks can be partially mitigated by ensuring that the trigger for issuing additional mortgage certificates is activated earlier—before the property value or the borrower’s financial condition deteriorates too far.

Group Structure and Corporate Benefit

In Swedish real estate finance, a lender (a “Lender“) seeking robust property security must navigate several corporate law limitations. To avoid the 4.25% transfer stamp duty typically triggered by direct property acquisitions, transactions are often structured as share purchases in limited liability companies that own the property. This results in group structures where the borrowing entity (the “Borrower”) does not directly own real estate but holds it through subsidiaries (each a “Propco”).

Consequently, the key security asset—the property—is held by a Propco, raising corporate benefit concerns under Chapter 17 of the Swedish Companies Act. Under this provision, any security or guarantee issued by a company to support another party’s obligations (including its parent) must be commercially justified. In other words, the Propco must derive a tangible benefit from the debt it secures.

While Swedish law lacks a precise definition of “corporate benefit,” in the context of real estate finance it is generally interpreted as a test of whether the Propco gains a direct advantage from the financing. For example, if the Borrower on-lends funds to the Propco to refinance existing debt, it is typically seen as a clear benefit to the Propco and the refinanced amount would evidence the value of the security from a corporate benefit perspective.

For this reason, Lenders often assess the refinancing needs of the Borrower group and look for existing external or intragroup debt at the Propco level. Similarly, real estate companies should be cautious about repaying intragroup debt prematurely, as doing so may reduce the refinanceable amount and weaken the security structure for potential financing.

A common feature is for the Propco to pledge the property not only for the Borrower’s obligations towards the Lender but also for its own obligations under the downstream loan owed to the Borrower. The Borrower, in turn, pledges its rights under this downstream loan and its rights as pledgee of the property to the Lender. In enforcement scenarios, this structure allows the Lender to present a negotiable promissory note (Sw. löpande skuldebrev) as evidence of a direct claim against the Propco, simplifying recovery and strengthening the Lender’s position.

To summarise the foregoing, the value of property security is typically assessed as the lowest of the following:

(A) the market value of the property,

(B) the amount of mortgage certificates issued and pledged to the Lender (plus 15%), and

(C) the amount of refinanceable debt held at the Propco level.

Acquisitions and Financial Assistance

The use of share transfers in property acquisitions also triggers restrictions under Chapter 21 of the Swedish Companies Act, which prohibits financial assistance (loans, guarantees, or security) for the acquisition of shares in the company itself, its parent, or its sister companies. Breaches may result in criminal liability for directors, adverse tax consequences for beneficiaries, and the Lender being required to return the security unless it acted in good faith.

Market practice in Sweden often involves delaying the granting of security by the target group for up to three months post-acquisition. However, this delay does not resolve the upstreaming issues under Chapter 17 of the Swedish Companies Act, nor has it been validated by the Supreme Court.

Such delays are typically impractical and unacceptable to a Lender in real estate finance where the value lies in the underlying real property and the possibility to realise such security assets. To address this, the loans are often split into an acquisition facility and a refinancing facility to make clear that part of the loan is to be used for the refinancing of the Propcos and that the other part is to be used to finance the share purchase—the funds used for the refinancing of existing Propco debt inherently fall outside the scope of the acquisition financing and are (as outlined above) considered beneficial to the Propco.

Only the refinancing portion can be secured by the Propco while the Borrower or parent company can secure both facilities with its assets, such as the shares it holds in the Propcos and its rights under the downstream loans.

Merger as a Structural Solution

One way to avoid both corporate benefit and financial assistance limitations is through a merger between the Borrower and the Propco. Post-merger, the property and the debt reside in the same entity, allowing the company to secure its own obligations without restriction. The image below illustrates this with a simple Borrower-Propco structure where there is acquisition debt.

Prior to the merger, only one-third of the loans provided by the Lender were covered by mortgage security. Following the merger, the Lender benefits from full mortgage coverage across the entire loan amount.

It should be noted that mergers typically take 3–6 months to complete and may not suit all strategies—particularly in large portfolios where flexibility to divest individual properties is desired. In such cases, a consolidated structure may prove restrictive.

Conclusion

Real estate financing in Sweden involves legal and structural considerations with elements such as corporate benefit and financial assistance rules, claw-back issues, stamp duty and corporate mergers.

A clear understanding of these components and how to work around them—combined with careful transaction structuring—is essential for lenders and borrowers aiming to achieve commercially sound and legally robust outcomes.