The subdistrict court in Roermond has asked the Supreme Court to answer a question that has been occupied the lower courts for some time: can the consequences of the government-imposed closure of the catering industry in connection with the corona crisis be regarded as a “defect” or unforeseen circumstance? And if so, how should a rent reduction be calculated?
Shortly before Christmas – on December 24, 2021 – the Supreme Court brought light into the darkness. In answering the question, the Supreme Court incidentally broadened the case beyond the lease of catering spaces in that its ruling also covers the lease of other retail and industrial spaces as referred to in Section 7:290 of the Dutch Civil Code.
First of all, the Supreme Court ruled that a tenant who is dependent for their turnover on the arrival of the public and who is unable to exploit the business space they have leased or can only exploit it to a limited extent due to government measures and who has concluded a lease agreement before 15 March 2020 can invoke an unforeseen circumstance as referred to in Section 6:258 of the Dutch Civil Code. The judge can then adjust the lease by reducing the rent.
The Supreme Court further ruled that from the legislative history of Section 7:204 of the Dutch Civil Code it does not follow that general government measures that are unforeseeable for the parties and that are aimed at restrictions in the conduct of the business can be regarded as a defect within the meaning of the law. After all, the closure of the catering industry and other business premises imposed by the government does not relate to the leased property itself. In short: the corona measures are not a defect.
Rental discount calculation
The Supreme Court has also provided a tool for calculating the rent discount on the basis of unforeseen circumstances. This is in line with the “fixed burden method” referred to earlier by the Amsterdam Court of Appeal. The steps to be taken are listed in the decision of 24 December 2021. It is not all that simple, but the outcome seems reasonable.
a. The agreed rental price is expressed as a percentage of the total amount of fixed costs.
b. The part of the Tegemoetkoming Vaste Lasten/ Compensation for Fixed Charges corresponding to that percentage to which the tenant can claim, is deducted from the amount of the agreed rent.
c. The percentage reduction in turnover is determined by comparing the turnover in the period over which the rent reduction is calculated (hereinafter: the lower turnover) with the turnover in a comparable period prior to the corona pandemic (hereinafter: the reference turnover) according to the formula: 100% – ( 100% x (the lower turnover : the reference turnover)).
d. The disadvantage associated with the disruption of the value relationship is equally divided between the landlord and the tenant (each 50% of the disadvantage), unless it is reasonable to follow a different distribution. The amount of the rental discount can therefore be calculated according to the formula: (agreed rent – part of the Tegemoetkoming Vaste Lasten/ Compensation for Fixed Charges that is allocated to the rent) x percentage reduction in turnover x 50%.
The decision of the Supreme Court did not really come as a surprise to many, in the sense that the consequences of the corona measures must be regarded as an unforeseen circumstance and justify a rent reduction. The fact that the corona pandemic and the resulting measures do not result in a defect may be interesting for lawyers, but perhaps less so in practice. Landlords and tenants will be particularly interested in the (level of) rent discount that can be negotiated and less in the legal basis.
Finally, in consideration 2.4 of the judgment, the following principle of the Supreme Court is described: “There is a need in society to divide the damage of the corona government measures for tenants of industrial space between tenants and landlords.”
I think that the need to share “the pain” of corona with landlords is felt especially among the tenants of retail and commercial space and not so much with society. Because that same company would then also be concerned about the landlords, who, despite the damage they suffer due to rent reductions, still have to repay their banks and pay interest. I am not aware of such social compassion. Rather, it seems that tenants’ trade associations (INretail and KHN) have fought for the interests of their members with (more) success than their colleagues on the landlords’ side.