Since the outbreak of the coronavirus, many lessees struggled to pay rent to their landlord. Consultations between lessees and lessors generally do not (quickly enough) lead to results that, in the lessees' opinion, are satisfactory, despite the call from politicians to share the 'pain of this crisis' between parties. This leads to lessees going to court.
The first court rulings on rent reduction date from May 2020. At the time of writing (March 2021), case law has presented a relatively unambiguous picture of rent reductions concerning commercial leases within the meaning of Section 7:290 of the Dutch Civil Code (DCC), i.e. stores, not office spaces. This blog sets out a first assessment based on these cases.
Under Dutch law, a lessee can claim rent reduction if the rented object has a 'defect' within the meaning of article 7:204 sub 2 of the DCC. The word 'defect' does not refer exclusively to a physical issue. A defect is a condition or characteristic of a circumstance not attributable to the lessee and as a result of which, the circumstance cannot give the lessee the enjoyment that, upon entering into the agreement, a lessee was entitled to expect from a properly maintained space of the kind to which the agreement relates. Accordingly, a 'defect' may also include an (unexpected) government measure, such as the forced closure of a business.
However, parties often exclude the applicability of article 7:204 DCC in their contracts. Yet the lessee is not completely powerless against the lessor. The lessee may argue that the current corona crisis is an 'unforeseen circumstance' within the meaning of art. 6:256 DCC. Recent preliminary tenancy law rulings show that courts accepts this argument.
To invoke the unforeseen circumstance argument successfully, there must be a fundamental imbalance in the agreement. With regard to tenancy law, this means that although the lessor is able to make the rented property available, that making the property available to the lessee has lost all sense. For example, because the rented property cannot be exploited due to a risk on the part of the lessor.
The judge can restore the balance through article 6:256 DCC, by changing, or even dissolving, the agreement. Recent preliminary law rulings show that parties have to share the negative consequences of the corona crisis. The rationale is that neither party contributed to the emergence of the corona crisis. Therefore, it is not reasonable to pass on the consequence in full to the lessee.
The judge looks at all the circumstances of the case to answer the question whether and to what extent the parties share the consequences. Recent case law in preliminary relief proceedings shows that the judge looks in particular at:
- the social position and mutual relationships of the parties;
- the nature and seriousness of the interests involved of both parties;
- the magnitude of the lessee's financial loss as a result of the corona crisis;
- the lessee's financial situation prior to the corona crisis;
- to what extent making the rented property available to the lessee has lost all meaning;
- to what extent the relationship between performance and consideration has become unbalanced;
- whether there is a fundamental disturbance in the balance of the lease;
- what measures the lessee has taken to limit its costs; and
- to what extent the lessor is dependent on the rent in connection with, for example, financing costs.
Judges attach importance to a lessee requesting a rent reduction giving insight into their finances.
Virtually all rulings about rent reduction due to the corona crisis show that the lessee must provide full and accurate insight into his financial circumstances. This must show that the lessee is in acute financial distress and that there is too little liquidity to meet the rental obligations. It must also be clear that the loss of a large part of the turnover is due to the corona crisis, that any government support turned out to be insufficient and that the measures it has taken itself to limit its costs have had insufficient effect. It must be noted that most judgments come from preliminary relief judges. Even so, however, this says about the chances in a substantive procedure.
Recent case law in summary proceedings
The abovementioned criteria derives from recent case law in summary proceedings. A recent case in main proceedings (which holds more authority than summary proceedings) gives lessees a helping hand during these harsh financial times. The matter at hand involves a lessee (that operates a restaurant in the rented property) being sued by the (institutional) lessor for defaulting on their rental payments. The lessor is of the opinion that the rental contract had to be dissolved, the lessee evicted, and the unpaid rent paid. The lessee argued that due to the Corona restrictions imposed on restaurants, he could not generate any income, which amounts up to an unforeseen circumstance or force majeure. Secondly, the principle of reasonableness and fairness justify the non-payment. And thirdly, he argued that due to the restrictions he could not enjoy the property as expected, and there is a defect of the rental contract.
The court ruled on the lessees' arguments as follows:
Defect. The court first established the definition of a defect, in the context of the legal history of the relevant article. A defect is a condition or characteristic of the property or another circumstance not attributable to the tenant, as a result of which the object cannot provide the tenant with the enjoyment that a tenant may expect (when entering into the agreement) from a well-maintained property. Not only is the material condition of the rented object of essence: any related circumstance that limits the enjoyment constitutes a defect. The latter includes (unforeseen) government measures. Furthermore, the court opines that a defect does not need to be attributable to the lessor in order to occur. That parties have agreed in writing that a rent reduction is not allowed, does not stand in the way of a reduction since the lessee also invokes the ground unforeseen circumstances and reasonableness and fairness.
Unforeseen circumstances. On the basis of this article, the court may, at the request of one of the parties, change the content (and thus the legal consequences) of an agreement or dissolve it (in whole or in part). This is allowed if the unforeseen circumstances are of such nature that the other party is not expected to maintain the (unchanged) agreement in light of the standards of reasonableness and fairness. Retroactive effect can be assigned to the change or dissolution.
The court is of the opinion that there are no grounds to assume that parties had predicted a global health crisis that required governmental measures, with the effect that the property could not be used for a long period. Facts such as prior viruses, economic crises, and experience of the lessee as a restaurant owner, do not deprive the lessee of his right to claim a reduction. Since the parties did not predict the health crisis and the subsequent impact on the economy and society, there is an unforeseen circumstance.
After deliberation of the claims of the lessee, the court opined about the consequences of the Corona crisis and the measures. It concluded that these events have created a fundamental disturbance in the balance of the rental agreement, and that an unaltered continuation of the agreement go against the principles of reasonableness and fairness. Since none of the parties can be held liable for the Corona crisis, the financial damage has to be divided amongst parties. Furthermore, the court opined that the take-away revenue, combined with the received government aid, shows that there is still some room to pay rent.
The court concluded, based on its findings, that only 50% of the rent should be paid by the lessee. The court gives this ruling a retroactive effect and orders that it applies to the period of 15 March 2020 until 31 May 2020, and from 15 October until the restrictions end. Lastly, the court denied the lessor's claim that the contractual penalty for non-payment of the rent must be paid for every month the lessee did not pay.
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