9 August 2023

Substitution

By Wouter de Veer

An important legal principle is the principle of contractual freedom. Parties may agree what they want with each other, as long as the agreements do not violate the law and morals.

In addition, parties may decide with whom they want to enter into a contract. Therefore, you may think that you cannot be forced to enter into a contract with a party if you do not want to. In practice in the rental branch, however, this appears to be different.

An important exception to the principle of contractual freedom is the statutory regulation of substitution in leases of business premises, such as hotels, shops and restaurants. In fact, lessees of commercial premises can force a third party to take over the lessee’s position, provided that statutory conditions are met. Even if the lessor disagrees. In that case, a lessor is confronted with a new lessee against its wishes. That could have far-reaching consequences. This article explains how the legal regime works and what you should pay attention to.

What does the law say?

The statutory substitution scheme can be found in Article 7:307 of the Dutch Civil Code (Burgerlijk Wetboek). This is important because it limits the regulation to leases of business premises. In other leases, such as rental agreements involving residential or office space, a tenant cannot invoke the statutory substitution regulation.

Briefly, the law stipulates that there must be:

  1. a transfer of the business conducted in the leased property, and
  2. a major interest of the lessee, and
  3. sufficient safeguards for compliance with the lease and proper business operations by the new lessee.

If these three requirements are met, the court balances the interests of the lessee and the lessor. The lessee will then either be authorised or not be authorised to substitute the third party as the new lessee.

Actual business transfer

The new lessee is not required to continue to operate exactly the same business. For example, a change in the sales formula and/or purchasing organisation does not necessarily prevent a substitution. But ultimately there must be a business transfer. Indications of this include the transfer of staff, stocks, inventory, suppliers and service contracts. In order to realise a substitution, it is important that its transfer is properly included in the purchase agreement. In practice, things go wrong on this issue quite frequently.

Major interest

The second requirement is that the lessee must have a major interest. That interest may be purely financial in nature, such as to provide for a pension or because a business is loss-making.

Sufficient safeguards

For a successful claim for substitution, the lessee will also have to prove that the new lessee offers sufficient guarantees for compliance with the lease and that it will conduct business properly. When assessing this, the court particularly considers the financial stability of the new lessee as well as whether it has any collateral and a business plan.

Balancing of interests

If the statutory requirements are met, the court is left to balance the interests. This involves balancing the interests of the lessor and the incumbent lessee.

In conclusion

The substitution scheme puts the lessee in a strong position if it wants to sell its business. However, the lessor does not simply have to accept a proposed substitution. Such requests from lessees are usually subject to considerable scrutiny and there is always the issue of whether all legal requirements have been met. The provision of additional security may also be enforced. In other words, lessors are certainly not powerless.

Are you faced with a request for substitution? Or do you want to transfer the lease to a third party because of the sale of your business? If so, please feel free to contact me or one of the other specialists at GMW advocaten to discuss your options.

Wouter de Veer

Wouter de Veer

Lawyer

Wouter works as a lawyer in real estate & tenancy law.

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