Corona: implications for your rental relationship?

As a result of the coronavirus outbreak, several sectors have been faced with sharp drops in sales. The hospitality and aviation sectors, but also the events industry, for example, are telling examples. A clear distinction is occurring in the retail sector. On the one hand, there are the stores in the inner cities that have to deal with emptier shopping streets and lower sales every time an "intelligent lockdown" is declared. On the other hand, there are supermarkets, hardware stores and DIY stores that have never had such high sales. They face empty shelves and stocks that can hardly be replenished. But will it stay that way? Or will the government decide to close non-essential stores, like in many countries around us, when a "third wave" occurs? And what can you as a retailer do then? Do you have to keep paying the rent? And what do you do if you (sub)rent? Will you continue to have an undiminished claim to payment of the rent?

Is a tenant entitled to rent reduction?

A number of rulings have since been made. There are several lessons to be learned from them. The common denominator is that tenants request rent reductions. On the one hand, because there is a defect. On the other with an appeal to the doctrine of unforeseen circumstances. Usually this goes well (for the tenant), but not always. And just the latest rulings, including one from an appellate court, show a more nuanced picture. A sampling of rental law practice.

Dutch Retail Sector Agreement

It is important to keep in mind that in the retail sector an agreement was reached by various parties (IVBN, INretail, Vastgoed Belang, Detailhandel Nederland, EZK, NVB and VGO) after the first outbreak. The starting point of this agreement is that, if the tenant gets into payment problems due to the crisis, the tenant and the landlord must sit down together. In this consultation, the parties seek customized solutions in which all relevant circumstances are taken into account. Think of the size of the rental object, the rent, but also the size of the impact the crisis has on the tenant in question.

Experience shows, so far, that tenant and landlord often manage to find each other by mutual agreement for the time being. An excellent thing, because a procedure is generally neither in the interest of the tenant nor in the interest of the landlord. After all, it is also in the landlord's interest not to enforce full payment of the rent immediately. If the landlord does, he runs the risk that the tenant will terminate the lease or file for bankruptcy. Attracting new tenants for vacant commercial space in the crisis-hit market is not always easy. Reason enough for good consultation.

But if the parties cannot reach an agreement, legal proceedings will follow. Know that the judge will then also look at all the circumstances of the case and what is customary in the industry and the agreement agreed upon in the sector, in addition to, of course, the specific content of a lease.

Lack

One of the two grounds that comes up in proceedings between landlord and tenant is whether there is a "tenancy defect."

When people think of a defect in rental law, the first thing that often comes to mind is a physical defect, such as broken glazing, leaks, a faulty heating system or electricity problems, for example. However, the concept of defect in rental law goes beyond that. Anything that interferes with the expected enjoyment of rent can essentially be considered a defect. Does the corona crisis (or are its consequences) qualify as a defect in rental law?

One of the questions currently in the case law is whether government regulations that interfere with rental enjoyment actually qualify as defects?

On May 27, 2020, the District Court of Northern Netherlands was among the first to rule on the question of whether there was a defect. It concerned a situation involving a landlord, who leased a catering premises to Inbev. Inbev, in turn, allowed a third party to operate the leased premises. As a preliminary judgment, the court found in favor of Inbev. For the time being, it was assumed that:"(...) the closure of the leased property as a result of a government measure such as the one at issue here constitutes a defect within the meaning of Section 7:204 of the Dutch Civil Code, so that a lessee can, in principle (with retroactive effect) claim rent reduction pursuant to Section 7:207 of the Dutch Civil Code." 

On June 3, 2020, however, the court in Zwolle ruled that there was no defect and that the losses belonged to the entrepreneurial risk of the lessee. And between these two rulings, on May 29, 2020, the judge in Arnhem ruled (about the Gelredome) that there was a defect, but that it had not been (sufficiently) proven that the lessee suffered damages. In short: divided case law. For more judgments, see the blog of my colleague Eline Holtland on pvdb.nl.

It is important to keep in mind that all the aforementioned judgments are from interim injunction courts. Thorough investigation only takes place in proceedings on the merits and it is expected that the Supreme Court will eventually have to determine the real situation. A considerable amount of time will have passed before we reach that point. One of the questions the Supreme Court will have to answer is whether a defect that applies to one person need not apply to another. Such an interpretation would mean a subjective approach to the concept of defect, and that approach would be new in tenancy law.

Incidentally, a defect should not be confused with force majeure. For force majeure applies: the fact that a tenant cannot pay does not mean that he does not have to pay. If a court determines that there is a defect, this is different. In that case the tenant can claim a rent reduction.

But beware: most leases contain exceptions to the defect rule. These exceptions mean that a tenant often cannot claim a rent reduction even if there is a defect. It is advisable to have your lease checked now. Because guarantees may have been issued by a landlord. For example, that the leased premises must always be easily accessible to customers. In such a case, a tenant may still be able to claim a rent reduction. But what if the defect rule does not provide the tenant with relief? What then?

Unforeseen circumstances

In the event that the defect rule does not help a tenant, invoking the doctrine of unforeseen circumstances is a common step. In almost all judgments rendered to date, tenants have also sought rent reductions due to unforeseen circumstances.

Case law is also divided on this point. Whether the court grants a request for rent reduction when contingencies are invoked again depends on several aspects.

First, judges must determine whether the corona crisis and government actions are "unforeseen" at all. business owners questions how it is foreseeable that in a rapidly developing pandemic, they will have to close their business indefinitely from one moment to the next. The same is true for many other businesses that depend on visitors. Again, indefinite closure in one case is different than in another. If a global virus outbreak is not a contingency, what else is?

It appears that most judges to date share that view and assume that a plea of contingency succeeds. Parties did not have to take into account the corona crisis and government measures at the time of contracting, in all cases contracts entered into before the crisis.

The question is justified whether judges will continue to rule this way in the coming period. Especially if it concerns (mandatory) closures in the fall or at a later date. Recently (November 3), for example, the judge of the Central Netherlands District Court ruled, where it concerned measures promulgated since October 15, 2020, that the turnover reduction was insufficiently substantiated, so that a rent reduction of 50% was not allowed. A factor here was that up to and including August 2020 there had apparently been sufficient funds to pay the rent. Whether the current line of case law will be followed therefore remains to be seen.

In any case, when entering into new rental agreements, it is important as parties to consider the consequences that may occur if there is a pandemic, such as corona. In certain countries where they had to deal with the SARS virus before, you already see more often that there are (rental) contracts, where this has been taken into account.

If the court assumes that an invocation of unforeseen circumstances (in proceedings on the merits) will succeed, judges then decide what the risk allocation between tenant and landlord should be. Courts have granted various rent reductions, such as 60%, 50%, 25%, but also 0%. At this point, everything depends on the specific circumstances at hand. What is the amount of the rent? And how big is the tenant's business? But also whether the tenant's problems are indeed the result of the corona crisis and promulgated measures. If a tenant had payment problems before (before the corona outbreak), then a claim for rent reduction is unlikely to succeed.

Answering all those questions can play a role in determining the size of the entrepreneurial risk. Furthermore, a business owner will have to substantiate how the corona crisis has led to a decline in sales and prove that actual damages have been suffered. Especially in the case of DIY and hardware stores, this is not a foregone conclusion. Not even if a mandatory closure would eventually follow. A judge will therefore certainly take into account the increase in turnover in recent months.

Recent rulings, new insights?

As indicated, there have been some different rulings by judges recently. A more critical look is being taken at the content of the lease agreement. For example, in a November 2, 2020 ruling, the Amsterdam court assessed how the parties had divided between themselves who is responsible for what? For example, was a clear duty to operate the leased property included and is the tenant responsible for ensuring that it can be operated? Then why should the landlord bear the consequences of a (mandatory) closure due to the corona crisis. A landlord also often has obligations.

In a judgment dated November 6, 2020, the Amsterdam Court of Appeal did still assume that there were unforeseen circumstances as a result of which the operating restrictions imposed justified a rent reduction. But whether there was a defect was left undecided, just as the subdistrict court had already done. On the one hand because summary proceedings do not lend themselves to in-depth investigation. But on the other hand because it is questionable whether in general an operating restriction imposed by the government in connection with corona is sufficiently related to the leased property to qualify as a defect. Moreover, the court pointed to the general description of the leased property. The landlord was only required to provide premises. And finally, the landlord had covered himself well. Liability of the landlord for defects was largely excluded.

An interesting ruling because one of the first appellate decisions on the impact of corona on rental law practice.

Conclusion: what to do in a rent dispute due to the corona crisis?

The judiciary is currently considered a Pandora's box. For some, that will be precisely an incentive to go to court and for others to stay away from it. Recently, the line in case law seems to be turning in favor of landlords. Therefore, the preliminary motto is: first sit down together and try to make lasting agreements. Time will have to tell how the risks are distributed. And during that time, market parties will have to search among themselves for tailor-made solutions, while the courts take their course.