Real estate transactions and national security

Recent media coverage has highlighted how both the Norwegian Police Security Service (PST) and the Norwegian Government view the scrutiny of property acquisitions as a focus area for protecting national security. There have been cases where Russian citizens with possible connections to President Putin have purchased properties with views directly over military facilities, as well as discussions relating to Chinese interest in the port of Kirkenes in Northern Norway. The Norwegian government has recently stated that it might intervene in activities related to establishment in the port of Kirkenes. 

The Ministry of Trade, Industry, and Fisheries has notified Kirkenes Port KF that they will initiate processes to assess the port's significance for national security interests in accordance with the National Security Act. The Ministry will also consider if there is a need to identify specific assets that require special protection, and whether other businesses connected to the port should be covered by the Security Act.

The Norwegian Government also recently intervened, under the Norwegian Security Act, in the potential sale of a company owning strategic property on the island of Svalbard, on the basis that the sale could disrupt stability and potentially jeopardise Norwegian interests. 

In this article we provide an overview of the current situation relating to national security considerations in connection with property sales, as well as appropriate risk mitigation strategies. 

The Norwegian real estate market and national security 

The Norwegian real estate market is open, and the sale of real estate seldom requires consent from the authorities. Real estate can also be acquired through legal persons, which can have complex and opaque ownership structures, involving shell companies and trusts established outside of Norway. Registration of property ownership is not mandatory in Norway, and for various (also legitimate) reasons blank transfer deeds are used with the consequence that the seller remains the registered owner while the real owner is not publicly known. While Norway is currently establishing a register of beneficial owners for legal persons, information will not be easily accessible, and the real estate market remains vulnerable to economic crime and strategic investments by threat actors. The Norwegian government recently launched 47 measures to tackle financial crime, where several measures are aimed at the Norwegian real estate market.

Against this backdrop, the risk of threat actors acquiring property of strategic interest is complex to handle and interference from the authorities is dependent on such transactions coming to their attention in time to interfere with the transaction. In the Svalbard-case it is perhaps not so challenging to understand why the proposed sale came onto the radar of the authorities, given the property was marketed as a "unique opportunity to acquire the Company holding the only privately owned land on Svalbard with significant environmental, geopolitical, scientific and strategic importance."

The Norwegian Government used the Norwegian Act relating to National Security (the "Security Act") Section 2-5, known as the safety valve, to intervene with the marketing and impose conditions of consent from government. 

The Norwegian Security Act and real estate transactions  

The Security Act is aimed at certain Norwegian public organs and entities, as well as on private organisations and entities which by decision of the National Security Authority or a competent Ministry is designated under 1-3 due to the undertaking's significance for national security. The Security Act imposes strict requirements of risk management, protection of information and critical objects and infrastructure, requirements relating to classified procurements and ownership control (FDI). For example, certain changes in ownership or control over undertakings subject to the act will be subject to the review provisions provided for in Chapter 10 of the Security Act. In the Svalbard case, however, the company was not subject to the Security Act under Section 1-3. A property sale in itself is also not specifically regulated by the Security Act, even though amendments introduced in 2023 have increased the focus on property generally speaking.

A crucial element of the Security Act, therefore, is the identification of information systems, objects and infrastructure that perform fundamental national functions. It is the role of the relevant Ministries and the National Security Authority to make these designations, usually after some consultation with the undertaking(s) concerned.

In 2023, Section 7-6 of the Security Act was introduced, which states that properties located such that they can facilitate security-threatening activities against a protected object or infrastructure shall be considered as properties of security significance. However, Section 7-6 only has consequences for undertakings subject to the Security Act. Section 7-3 requires such undertaking(s) to perform a risk review, hereunder identify properties of security significance and implement security measures to maintain an adequate level of security. If the property poses a risk to the undertaking's protected object or infrastructure and it is not possible to maintain an adequate security level through the measures stipulated in Section 7-3, the Norwegian National Security Authority or the relevant supervisory authority shall be notified. 

However, such notification does not mean that the relevant Ministry or National Security Authority will take steps to make a decision that the Security Act shall apply to the owner or other undertakings controlling the property. For the owner of the property, a sale of the property of security significance does not as of today trigger a mandatory reporting duty to the authorities.

There are also a number of challenging issues related to the lack of transparency in the real estate market as mentioned above. Consequently, whether the authorities actually detect transactions of properties of security significance is still more or less random. In practice, due diligence carried out by private businesses will play a significant role in the protection of national security in the area of real estate transactions. 

The Ministry of Justice and Public Security has said that it will look into how authorities can more effectively detect potential security-threatening activities related to property in the future, and that it could be relevant to consider the Finnish Act on Transfer of Real Estate Requiring Special Permission (470/2019).That Act requires that buyers from outside the EU and EEA need permission for real estate transactions in Finland. Real estate transactions are also an important focus area in the Norwegian parliamentary report on strengthening efforts to prevent and combat financial crime.

After debate in the Norwegian Parliament on the parliamentary report, the government has been requested to return a proposal to introduce mandatory ownership registration of real estate and a general prohibition of blank transfers, and to investigate whether there should be an obligation for buyers to seek permission to purchase certain properties.

The Security Act Section 2-5 and the Svalbard case 

When the Security Act does not specifically regulate an action, the government can still intervene using Section 2-5, as seen in both the Svalbard case and in an earlier case where a Russian acquisition of the company Bergen Engines was stopped due to inter alia the company's contracts with the Norwegian navy. 

The Security Act Section 2-5 opens for the King in Council to make necessary decisions to prevent activities which present a threat to security or other planned or ongoing "activities" which may present a "not insignificant" risk of a threat to national security interests. The section further states that such a decision may be made without regard to the restrictions in Section 35 of the Public Administration Act, and regardless of whether an activity is permitted under another act or decision. 

The wording "activity" is to be interpreted broadly and must not be directly aimed at organisations covered by the Security Act see Prop. 153 L (2016-2017) p. 168. The provision is a safety valve in order to prevent activities that have the potential to pose a significant risk to national security interests. 

Any decision taken under Section 2-5 must not be more burdensome than is necessary and reasonable in the specific case. This follows from the requirement for "necessary decisions" in the wording, but is also emphasised in the Act's preparatory works. The threshold for an interference subject to Security Act 2-5 is therefore particularly high.

In the Svalbard case the Norwegian government made a decision under Section 2-5 to prohibit negotiations and the completion of acquisitions of the property Søre Fagerfjord on Spitsbergen, and any acquisition of direct or indirect ownership in the company Kulspits, the owner of the property, without prior and explicit consent from the Ministry of Trade, Industry and Fisheries.

There were several factors underlying the decision of the Ministry. First, the lawyer acting for the current owner suggested that the buyer appeared to have a very long-term perspective on the investment, where political and strategic aspects are of central importance. Second, the lawyer also indicated that it is relevant to sell the company to interested parties from countries with which Norway does not have a security cooperation and who are willing to challenge the regulations applicable on Svalbard. Third, the indicated sales price of 300 million euros could not be commercially or economically justified, and in the Ministry's view, could only be rationalised by a buyer's desire to utilise the property, in the short or long term, in a way that is incompatible with the area's status as a national park. In this context, the Ministry pointed out that the owner refers to the possibility of setting up stations for downloading satellite data and mentions the potential for increased shipping in the area. 

In assessing whether the measure was necessary and proportionate, reference was made to the ownership control provisions in Chapter 10 of the Security Act. The requirements outlined in Chapter 10 —such as the obligation to notify the Ministry when acquiring an ownership interest and the extent of this notification, along with the assessments the ministry must make—were deemed crucial for determining whether the decision under Section 2-5 was proportionate.

The Ministry also considered whether it was necessary to escalate the matter to expropriate the property. However, the decision to require notification and consent for negotiations and sales was deemed a sufficient measure to reduce risk at this time. Nonetheless, the possibility of resorting to expropriation if these requirements are not fulfilled was not dismissed.

Uncertainty for private businesses due to the scope of the safety valve

The conditions for applying Section 2-5 and what measures which can be taken under it are rather opaque. The provision's intended use as a safety valve is in cases where other provisions in the Security Act do not apply. Parts of the assessment on whether to prevent an activity under Section 2-5 may also be classified in accordance with Section 5-3 of the Security Act and thereby not published. This was also applied to parts of the assessment in the Svalbard case. 

In addition to the fact that the decision must be suitable for preventing the activity in question, neither the provision's preparatory work or The Norwegian National Security Authority's Guide to using the Security Act to counteract security-threatening investments and acquisitions provide guidance on the scope of the decision. However, the recent comments from the ministry regarding the Svalbard case, where expropriation was considered if other measures were insufficient, illustrate the extensive reach of Section 2-5, which may be used to prevent a potential transaction and even reverse a completed transaction. Since transactions carried out by undertakings not covered by the Security Act, cf. Section 1-3 second paragraph, are not required to be notified under Chapter 10 and due to the governments limited opportunities to detect certain transactions as described above, the ability to look into completed deals will be particularly relevant. However, this use of Section 2-5 creates uncertainty for private businesses and can negatively impact investment enthusiasm.

Nonetheless, the recently suggested proposals on measures to combat financial crime and regulate the ownership of properties through a pre-approval system for non-European investments might mitigate the above mentioned challenges. A pre-approval system could include clearer and more specific objective conditions for vetting investments by non-EEA citizens. It is to be welcomed as a measure to enhance predictability for foreign investments while maintaining Norway's national security. 

In the meantime, any seller of a potentially strategic property should undertake due diligence of any potential buyer and their motives. Not only to limit the risk of the sale being prohibited by a governmental decision under the Security Act Section 2-5, but to mitigate other risks, such as money-laundering, corruption, sanctions and tax evasion.