Skip to main content

Eversheds Global Estate Management

Iceland

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - is indefinite. In principle, a freeholder may acquire the right to own and use real estate by hand over, enforcement measures, marriage, inheritance or deed of transfer provided the freeholder is an Icelandic citizen/legal person or has a legal residence in Iceland.

Leasehold - there are mainly two kinds of lease contracts for real estate: land leases and housing leases. In regard to housing lease, the local law makes a distinction between private and business lease. In general, the lessor can assign the lease to a third party but not the lessee.

Common hold/Usufruct - not applicable

Condominium ownership - not applicable

Utilisation right - not applicable

Joint/Co-ownership – Many types of joint ownership are possible. Two or more individuals or companies can share ownership of real estate in any possible proportions. Special rules may apply to how certain decisions regarding the real estate should be made.

Registration - Registration of property rights is not mandatory. In order to obtain protection from an unsuspicious third party, property rights must, however, be registered in the Register of Deeds. If registration is not carried out, a later registered property right can override an earlier unregistered one. Foreign individuals or legal persons holding or buying property in Iceland must first satisfy the Register of Deeds as to their EEA status, or permission of the Minister of Economic Affairs, before being able to register a deed of transfer.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

Foreign individuals are required to seek the permission of the Minister of Economic Affairs to acquire ownership of real estate unless the following applies:- their legal residence is in Iceland;- they enjoy rights under the free trade contract between Iceland, Denmark or the Faroe Islands; or- they enjoy rights under the Contract on the European Economic Area (EEA) (European Union (EU) states plus Iceland, Norway and Liechtenstein) and the real estate shall be used as domicile in case of employees, is prerequisite for being able to provide services or establish independent business in Iceland.

Foreign legal persons are also required to seek the permission of the Minister of Economic Affairs to acquire ownership of real estate unless the following applies:- their legal residence has been registered in Iceland for at least five years;- it is connected to their business activities in Iceland or to hold its domicile;- they enjoy rights under the free trade contract between Iceland, Denmark or the Faroe Islands; or- they enjoy rights under the Contract on the European Economic Area (EEA) and the real estate is prerequisite for being able to provide services or establish independent business in Iceland.

Despite the above, permission from the Minister of Economic Affairs is not required where a property is leased for a term of three years or shorter or where a contract may be ended with one year’s notice or less.

In all other cases, permission from the Minister of Economic Affairs is required to acquire ownership of real estate in Iceland.

Having received permission, the foreign individual/legal person needs to be represented, in all matters relating to the property, by an agent who is domiciled in the jurisdiction of the real estate. Foreigners domiciled in Iceland may represent themselves.

 

Title to real estate

Title to real estate

Investigation of title - the buyer is responsible for investigating title. There is no notary involved. The research is usually carried out by a real estate agent.

Transfer of title – title is transferred as soon as the purchase agreement is signed. It is however common practice that the seller retains title until the buyer has paid the purchase price, or most of it.

Registration - registration is not mandatory, although it is usually carried out. In general, the purchase agreement is registered upon signing. The title deed is usually signed and registered at the time of handover. Foreign individuals or legal persons holding or buying property in Iceland must first satisfy the Register of Deeds as to their EEA status, or permission of the Minister of Economic Affairs, before being able to register a deed of transfer.

Information on the register - the Register of Deeds is public and provides evidence of title towards third persons. The registration shows a description of the real estate, the identity of the proprietor, the quality of the title and any matters benefiting and/or burdening the real estate such as mortgage or other kinds of encumbrances.

Commercial leases - not applicable.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - commercial terms are usually negotiated by the seller and the buyer through a real estate broker. Occasionally, and especially when dealing with commercial real estate, lawyers represent the parties. The contract evidencing the change of ownership is not required to be in any special form but shall contain specific information on the property sold and its signature must be confirmed by a notary, an attorney, a real estate broker or two witnesses.

Heads of terms – In most cases, and if not stated otherwise, heads of terms would be non-binding. If, however, the most important clauses of a purchase agreement, such as the purchase price, would already be agreed upon and the specification of the real estate would be sufficient, the heads of terms could be binding between the parties.

Investigation of title - the buyer is responsible for investigating title. There is no notary involved.

Purchase deed - not applicable.

Contracts - once the parties have executed a purchase agreement, it is usually submitted to the Register of Deeds for registration. With the registration the buyer acquires ownership of the real estate by the seller’s declaration in the contract or in a special document containing such declaration. While only the sale contract is registered in the Register of Deeds, and not the deed of transfer, the buyer and the seller are dependent on the other in such way that an approval of both is required for any change of ownership/title or other changes in the Register of Deeds.

Completion/closing - completion takes place when the deed of transfer is registered in the Register of Deeds. Registration is only possible once all the conditions in the underlying contract have been fulfilled and a declaration in the form of a deed has been issued by the seller to the buyer of the property.

Post completion - the deed should be registered in the Register of Deeds immediately as it protects the new owner’s interests. Furthermore, stamp duty increases if the deed is not registered within a certain period.

Leases - not applicable.

Transfer of ownership of leased property (alienation) - assignment of the leasing contract by the lessor is usually permitted without the lessee’s prior consent. However, the lessee is prohibited to assign the lease to a new lessee unless it is specially agreed upon in the lease contract.

Language requirement – Documents do not have to be in any specific language. Upon registration, the Register of deeds can demand an Icelandic translation by a certified translator to follow documents in foreign language.

Governance of lease signature/administration – Not applicable.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - the Icelandic rent act no. 36/1994 (the ‘Act’) applies to all types of leases, both private premises and business premises. The Act is pre-emptory in regard to private premises and therefore lease contracts cannot deprive lessees of their rights according to the Act or involve more obligations than the Act sets forth. However, for business premises the Act is only relevant if the parties have not agreed otherwise. The principle rules stipulated below apply to both private and business premises unless otherwise specifically stated.

Alterations/modifications - the lessee is not allowed to make alterations or improvements to the rented premises or their appurtenances without first obtaining the lessor's approval and agreeing on the division of the cost and the measures to be taken at the end of the rental period. If the lessee fails to do this, the lessor acquires ownership of the improvements at the end of the rental period without compensating the lessee. Alternatively, the lessor may, at or before the end of the rental period, demand that the lessee restores the rented premises to its original condition.

Assignment and sub/under letting - The lessee is not allowed to assign the premises to a third party without obtaining the lessor´s approval in advance.

Destruction/reinstatement - Not applicable

Duration of lease - If not stated otherwise in the contract, leasing is for an indefinite period.

Forfeiture/irritancy - Forfeiture is allowed if either party fails to fulfil its contractual or legal obligations. As for the lessor, forfeiture usually has to be preceded by a formal notice thereof.

Insurance - the Icelandic fire insurance act no. 48/1994 obliges all real estate owners to have insurance against the risk of fire.

Rent review - the parties are free to agree on the price of the rent and on whether, and how it may be reviewed during the rental period. Usually the cost of operating the rented premises is divided as follows: the lessee pays for water, electricity and heating costs, while the lessor pays all property rates, including property tax and insurance premiums. Occasionally, the parties agree on other arrangements.

Repair/decoration/furnishing - the lessee is usually obliged to return the leased premises in the same condition as it was at the beginning of the lease term having taken into account reasonable wear and tear. The lessor is obliged to tend to proper maintenance. The parties can however agree on different clauses in the contract.

Service charge - is not common, but can of course be agreed upon by the parties.

Tenant’s duties - The tenant´s main duty is to pay the rent. Apart from that, he has to comply with his contractual obligations. The lessor of a retail or restaurant premises has to maintain operations, unless suspension is necessary.

Termination/break clauses - a lease for a definite period cannot be terminated unless the contract stipulates such clause. A lease is for an indefinite period and may be terminated by either party. Notice of termination must be in writing and sent in a verifiable manner. The notice period for both parties is as follows:

  • for individual rooms, storage sheds and similar types of premises, irrespective of the purpose for which they are used – one month
  • in the case of a dwelling – six months
  • in the case of a dwelling for more than five years – one year
  • for business premises for the first five years of the rental period – six months
  • for business premises for the next five years – nine months
  • for business premises after a rental period of ten years – one year.
Increasing covenant strength Lease deposit - not applicable or as per "Bank guarantee" below.

Surety - a surety may be required in any of the forms listed below under "Bank guarantee"

Warranty - not applicable.

Rent deposit/Bank guarantee - a guarantee may be in one of the following forms:

  • a bank guarantee
  • a personal guarantee by one or more third parties
  • an insurance policy covering rent payments and the return of the rented premises in good order, purchased by the lessee from a recognised insurance company
  • a monetary deposit, paid by the lessee to the lessor and kept safe by the lessor
  • any other type of deposit proposed by the lessee and accepted by the lessor as valid and satisfactory.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - not applicable or as per "Bank guarantee" below.

Surety - a surety may be required in any of the forms listed below under "Bank guarantee"

Warranty - not applicable.

Rent deposit/Bank guarantee - a guarantee may be in one of the following forms:

  • a bank guarantee
  • a personal guarantee by one or more third parties
  • an insurance policy covering rent payments and the return of the rented premises in good order, purchased by the lessee from a recognised insurance company
  • a monetary deposit, paid by the lessee to the lessor and kept safe by the lessor
  • any other type of deposit proposed by the lessee and accepted by the lessor as valid and satisfactory.

 

Security of tenure

Security of tenure

A lease agreement is indefinite unless otherwise is clearly stated.

When two months have elapsed following the end of the rental period, and according to the notice of termination or the provisions of a lease made for a definite period, if the lessee continues to use the rented premises, the lessor may demand to have the lease renewed indefinitely. The lessee may make the same demand if the lessor does not ask the lessee to vacate the premises after the end of the rental period.

In general, the existent lessee has pre-emption to the premises over a third party. The existent lessee prevails over others if the premises are to be leased for at least a period of one year. However, this pre-emption only applies to dwellings and is subject to many exceptions, such as if the real estate is up for sale, the lessor inhabits the premises himself or it is uninhabitable, or if the lessee has failed to comply with the lease agreement in such a way that the lessor would have been able to forfeit the agreement.

 

Taxes

Taxes

On sale/acquisition of real estate - Stamp duty is levied on sale/acquisition of real estate. The amount of stamp duty is derived from the officially assessed value of the transferred real estate. The rates vary, as it is 0.8% of the value if the buyer is an individual, but 1.6% if the buyer is a legal person.

Immovable property tax - Municipalities levy a real estate tax on the officially assessed value of the real estate. The tax rates vary depending on the municipality.

Income tax - 70% of the income derived from the lease of a residence, which is rented out by an individual, is subject to capital tax. No deduction is generally allowed, although individuals are allowed to deduct the cost from leasing a residence for their personal use from the income derived from leasing another one. For legal persons the same rules apply to income derived from a lease as to any other income of the legal person. Accordingly, any operational cost relating to the lease can be deducted from the income derived.

Land tax - not applicable.

Lease tax - not applicable.

Local tax - not applicable.

Mortgage - Individuals who own a residence for their personal use and bear interest expenses are entitled to benefits from the state treasury. The amount is based on the interests of loans obtained for purchase of domicile, income and net wealth.

Other taxes - not applicable.

Property lease tax - not applicable.

Value added tax - not applicable.