Date: Sept. 21, 2021
Modified November 14, 2023
Reading time: +/- 2 minutes
Reuse is becoming increasingly popular. A relatively new form of circular business involves a consumer not buying a particular product, but renting it. This allows the lessor to re-rent the rented product - possibly after repair or restoration - to someone else. From an economic and environmental perspective, this is a nice development. Legally, however, there are some snags in circular entrepreneurship. In this article I explain how circular entrepreneurship can lead to unwanted loss of property through the formation of constituent elements and accession and what you can do to avoid these risks as much as possible.
Among other things, circular entrepreneurship focuses on reusing products and raw materials so that their loss of value is kept to a minimum. For example, many business owners are already thinking about the circularity of their products and materials during the design phase. Perhaps the remaining material can be reused during the production process or the entire product. To ensure that reuse is possible, the owner will choose high-quality materials. This cuts both ways. On the one hand, the customer has a high-quality product and on the other hand, the owner will be able to give his product to someone else to use without having to make too many repairs. This form of business offers opportunities for business owners from both a financial and reputation perspective. To a certain extent, circularity is the future, which is why many companies pay attention to it or even base their entire business plan on it.
[campaigns]
Reuse of products can be legally shaped in many ways. Sale of used products is a well-known form, but loaning or donating an already used product is also possible. However, these frequently seen forms of reuse carry little risk because transfer of ownership occurs or because there are no financial interests involved. In fact, there is a degree of circularity in every form of reuse. As far as I am concerned, therefore, buying or renting already occupied or used can also be considered a form of circularity. For all these cases, however, the law already contains many specific regulations.
This is different for the increasingly common business model seen in the circular economy, where companies rent out objects other than buildings. In this - from a legal perspective - I distinguish two forms of circular business. The first form focuses on renting out initially detached objects; so-called movable goods. Think of washing machines, refrigerators or lamps. The second form focuses on incorporating movable objects into immovable property. Immovables are objects that are permanently united with the land. The best known and, in this context, most relevant category of immovable property is buildings. It follows from the law that items that are not immovable are automatically movable. Concrete examples of this are the installation of facades, bathrooms or kitchens only to remove them later, for reuse.
Circular business can be risky from a legal perspective from the standpoint of constituent formation and accession. With constituent formation, one thing becomes part of another thing: the principal object. Then the owner of the main thing becomes the owner of all the constituent parts. This process is called accession. Substance formation occurs when a thing is either 1) part of another thing that is considered the principal thing according to the concept of traffic, or 2) when a thing cannot be removed from the principal thing without damage. Incidentally, if the item can be removed without damage, this does not mean that the item is not a component according to the concept of traffic. Traffic opinion means the shared view of the majority of Dutch people or a circle of specialists. Classic examples of component formation and accession are a chip in a computer or an engine in a vehicle.
Two forms of circular business were discussed above. Whether the first form - rental of movable property - leads to accession depends in part on how the movable property is rented out. If washing machines, refrigerators or lamps are rented out as separate products, this will not easily lead to accession. However, even with regard to the rental of movable property, a critical examination must always be made to determine whether there is a danger of accession. Built-in refrigerators, as part of a kitchen, may be traced by the kitchen and subsequently by (the ground under) the building. The same could apply to lamps rented out as headlights of a car, for example. Once the leased product becomes part of a thing owned by the lessee, the lessor loses ownership of that product as a result of accession. The lessee thus becomes the owner of the leased item. The lessor can only stipulate damages in exchange for the loss of ownership. As a result, re-renting the product is no longer possible, which also calls into question the circular business model. business owners should be aware of this risk and will have to adjust their business model accordingly to ensure circularity. Yet this is not the biggest problem. Especially if the incorporation of movable items is avoided, the risk of constituent formation and natrekking is also significantly reduced.
For the second form of business - the incorporation of movable property into immovable property - it is more difficult to avoid component formation and accession. This is because it is virtually impossible not to incorporate products such as facades, kitchens or bathrooms. As a result, these often will not be able to be removed without damage. Even if these types of products can be removed without damage, the doctrine of traffic will often reveal that facades, kitchens or bathrooms are an integral part of a home. As a result, as a component, these are still part of the dwelling in which it is located. As a result, these products are traced through the dwelling by the land, making the owner of the dwelling also the owner of its constituents. Therefore, leasing facades, kitchens or bathrooms as independent items cannot be done easily.
Might a so-called building and planting right be the solution? A building and planting right makes it possible to create a right whereby a building, work or planting in, on or above an immovable property, such as a house, remains the property of the owner of the building and planting right. A building and planting right effectively breaks the effect of accession. A building and planting right can only be established with respect to immovable property. This means that a building lease must be established by notarial deed. With respect to movable property, a building and planting right will not be a remedy against an undesirable effect of accession.
There is debate in the legal community as to whether a right of superficies can be established for the benefit of a façade, kitchen or bathroom. This has to do with the concept of traffic. It is generally assumed that this is not possible. Nevertheless, given this discussion, there will undoubtedly be notaries willing to establish such a building lien. The fact that a notary would draw up and register such a deed, however, does not mean that such a deed would stand up in court proceedings. Therefore, always keep in mind that the risk of loss of ownership remains. Practically speaking, this situation will almost only occur if the tenant has (high) debts, as a result of which a receiver or bank, for example, will claim the leased product as the property of the tenant. After all, should the lessee himself take this position and there is no question of debts, he will have to pay an amount of compensation equal to the value of the product. In principle, this fact will have to demotivate the lessee from taking this position. This can be further reinforced by including a penalty clause on this point in the lease.
If a building is not mortgaged, only the owner of the property will have to agree to the lease and the establishment of the building lease. However, most buildings are often mortgaged. In concrete terms, this means that 1) the mortgage holder - usually a bank - will have to give permission for the building lease to be established and 2) in the event of foreclosure of the immovable property, the mortgage holder does not have to take the building lease into account. Therefore, the mortgagee will also be allowed to execute the leased property.
As a result, banks may be reluctant to provide financing for circular initiatives. Therefore, always think carefully about how you will overcome these legal obstacles and incorporate that into your business plan.
Do you have a circular initiative focused on chattel rental? If so, keep the following in mind:
As attorneys for business owners , we understand the importance of staying ahead. Together with us, you will have all the opportunities and risks in sight. Feel free to contact us and get personalized information about our services.