Supreme Court clarifies rent reductions for catering and retail businesses during corona period
On 24 December 2021, the Supreme Court ruled on the preliminary questions of the District Court of Limburg. In these preliminary ruling proceedings, the key question was – in brief – whether tenants of business premises as referred to in Section 7:290 of the Dutch Civil Code (such as hotels, restaurants, cafes and shops) are entitled to a rent reduction as a result of government measures in connection with the corona pandemic and, if so, how that rent reduction should be calculated.
Prior to this Supreme Court ruling, lower courts had given divergent rulings on the question of how the rent reduction should be calculated. In addition, there was still no unambiguous answer to the question of whether the forced closure of the catering establishments and other business premises as a result of the corona pandemic qualifies as a defect. With its ruling, the Supreme Court has put an end to this legal uncertainty.
Corona crisis as an unforeseen circumstance
Firstly, the Supreme Court confirmed the line taken in lower courts whereby, as a result of government measures in connection with the corona pandemic, a tenant whose turnover depends on the arrival of public cannot (or can only to a limited extent) operate the 290 business premises leased under a lease concluded before 15 March 2020, qualifies as an unforeseen circumstance as referred to in Section 6:258 (1) of the Dutch Civil Code, unless there are concrete indications to the contrary. On this ground, the court may amend the lease by reducing the rent.
According to the Supreme Court, this principle also applies if the lease, for example, excludes the right to a rent reduction due to defects that the landlord did not know or should not have known about at the time of entering into the lease, or holds the tenant responsible for obtaining and maintaining permits, exemptions and consents required for the use of the leased property in accordance with the agreed purpose, or provides for a basic rent that is supplemented depending on the turnover.
If in a lease concluded before the corona pandemic an exoneration for illness or an epidemic is stipulated, it is not automatically given that the extreme impact of the corona pandemic is also meant to be covered, according to Advocate General Wissink in his opinion on the ruling. The Supreme Court did not address such a case; therefore, it cannot be excluded that even in the case of such an exoneration, there may be an unforeseen circumstance.
Besides, when amending the lease on the basis of unforeseen circumstances, it is not necessary to consider only a rent reduction. Another possibility is an extension of payment terms and/or a restriction or exclusion of the contractual obligation to pay interest or penalties.
For leases concluded after 15 March 2020 (i.e. after the start of the 'intelligent lockdown'), whether government measures in connection with the corona pandemic qualify as unforeseen circumstances must be assessed on a case-by-case basis. In this respect, we consider relevant the question whether - and if so, in which manner - the parties have tried to mitigate the consequences of (the development of) the corona crisis in the lease.
Calculation of rent reduction based on fixed charge method
Secondly, the Supreme Court provides a model that provides a guide for calculating the rent reduction, either in court proceedings or in mutual agreement between the parties.
The starting point is that the disadvantage caused by the government measures in connection with the corona pandemic – in so far as this has not already been compensated by the financial support from the government to the tenant in the form of the Reimbursement Fixed Costs (RFC) – should be equally shared between the landlord and the tenant (the so-called 'share the pain' principle). Reasonableness and fairness may require deviation from this principle on the basis of circumstances such as the capacity or financial position of the tenant or landlord.
The Supreme Court does not elaborate on the latter point. However, Advocate General Wissink mentions the following circumstances in his opinion on the ruling: (i) whether the tenant is a large retailer or a small sole proprietorship, (ii) whether the lessor is an institutional investor or a private investor, and (iii) whether the tenant or landlord is an entrepreneur with other profitable activities, such as turnover from online sales via a web shop.
According to the Supreme Court, the reduction of the rent can be calculated according to what is termed the fixed charge method. The fixed charge method has the following steps to calculate the rent reduction:
- The agreed rent shall be expressed as a percentage of the total amount of fixed charges;
- The part of the RFC to which the tenant is entitled, corresponding to that percentage, is deducted from the agreed amount of rent.
- The percentage turnover reduction 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)).
- The disadvantage associated with the disruption to the value ratio shall be equally distributed between the landlord and the tenant (each 50% of the disadvantage), unless another distribution follows from the reasonableness and fairness referred to in Section 6:258 (1) of the Dutch Civil Code.
The amount of the rent reduction can then be calculated according to the formula: (agreed rent - proportion of TVL attributed to rent) x percentage turnover reduction x 50%.
The application of this formula results in a percentage by which the agreed rent will be reduced. In doing so, the obvious approach is to calculate the rent reduction per term for which the rent is due.
Imposed closure not qualifying as defect
Finally, the Supreme Court ruled that the closure of 290 business premises imposed by the government in connection with the corona pandemic does not qualify as a defect as referred to in Section 7:204 (2) of the Dutch Civil Code.
The closure of catering establishments and other business premises imposed by the government is the result of exceptional circumstances of a general nature affecting public health and having far-reaching consequences for society as a whole. In the interest of public health, it restricts the possibility of operating 290 business premises. The closure does not concern the leased property itself.
It does not follow from the legislative history of Section 7:204 of the Dutch Civil Code that it is intended to classify as a default general government measures that are unforeseeable for the parties and that are aimed at limiting the conduct of the business. Nor does it follow from this that the tenant may expect the landlord to indemnify him against such restrictions, according to the Supreme Court. A possible reduction of the rent can therefore not be based on the regulation of defects (Section 7:207 of the Dutch Civil Code).
