Calculation method for rent reduction in case of mandatory closure of commercial space seems to be working. With a few open ends...
Date: Feb. 24, 2022
Modified November 14, 2023
Written by: Jeroen Brinkman
Reading time: +/- 2 minutes
Date: Feb. 24, 2022
Modified November 14, 2023
Written by: Jeroen Brinkman
Reading time: +/- 2 minutes
A brief discussion of the Supreme Court ruling of Dec. 24, 2021 (ECLI:NL:HR:2021:1974) and how the introduced calculation method works out in practice two months later.
Since the corona pandemic outbreak, the government has taken several measures affecting business owners . In particular, the mandatory closure of hospitality and other business premises has led to a development in case law in the area of tenancy law. Two main questions kept recurring.
On the one hand, the legal question of whether the corona pandemic created a rent shortfall or an unforeseen circumstance resulting in a rent reduction. On the other hand, the more practical question of exactly how that rent reduction was then to be calculated. In other words, what is the nature and extent of rent abatement during the period of the corona pandemic?
Several articles have been written about this recently. Jeroen Brinkman has also written a series of articles on this subject several times, which can be found on our website.
All the lack of clarity and various rulings by judges, prompted the District Court of Limburg to put preliminary questions on the matter to the Supreme Court on March 31, 2021(ECLI:NL:RBLIM:2021:2982). Questions to the Supreme Court that first had to be answered before the Limburg District Court itself could issue a final ruling. You can read more about this in this article by Lisa Witten. The court formulated the following questions:
Before the Supreme Court ruled, Attorney General M.H. Wissink first issued a comprehensive and well-reasoned opinion (Sept. 30, 2021, ECLI:NL:PHR:2021:902). In his October 1, 2021, article, Jeroen Brinkman discusses the opinion and expectations.
Finally, just before Christmas, came the long-awaited verdict.
In its ruling, the Supreme Court first answered the third and fourth preliminary questions of the Limburg District Court on corona as an unforeseen circumstance and the calculation of damages.
The Supreme Court rules that the corona pandemic is "an exceptional public health circumstance of a general nature." This circumstance, unless specific evidence shows otherwise, was not taken into account in leases concluded before March 15, 2020.
In other words, the corona pandemic is a contingency.
This may cause the balance between the performance of landlord and tenant to become upset. Because this circumstance is neither the tenant's nor the landlord's responsibility, adjustment of the rent is justified. This is different if there are circumstances that make it reasonable for the landlord to still claim the full rent. What these circumstances are, the Supreme Court does not make clear. Thus, tenants who entered into leases before March 15, 2020, and were forced to close their premises are in principle entitled to rent reductions. For cases after March 15, 2020, the unforeseen circumstances must be considered on a case-by-case basis.
Right to rent reduction, in other words. But how much then?
The Supreme Court follows the principle of "share the pain," meaning that tenant and landlord must fairly share the harm caused by the corona pandemic.
But what exactly is "the pain" then? That depends on the capacity and financial position of the parties. Business factors such as a poorly run business should not play a role in this. The starting point in the calculation is the costs associated with the rental property, rather than costs related to the business, such as labor costs. Incidentally, the rent reduction granted may also refer to a shorter period than a full lease term.
Specifically, the calculation method involves the following.
First, the Fixed Charges Allowance (TVL) must be included in the calculation. The support measures TOGS, TOZO and NOW are not considered by the Supreme Court. The TVL consists of several elements, one of which relates to rent. This amount must then be deducted from the rent. What remains is considered the pure rent burden.
After this, the percentage of turnover reduction must be calculated. The Supreme Court does this by using a reference turnover; the period for which rent reduction is claimed is compared to a period before corona.
Finally, this information is used to determine what the damages are, by multiplying the pure rent burden by the percentage of turnover reduction. The monetary amount resulting from this calculation should be borne equally by the tenant and the landlord.
For convenience, the formula is written down, namely:
(agreed rent - portion of TVL attributed to rent) x percentage turnover reduction x 50%.
The ruling then details the formula with an example.
And is that even a rent default, as the P-G suggested in his opinion?
The law states that a lease deficiency exists if the leased property cannot provide the enjoyment a tenant is entitled to expect under the lease.
The Supreme Court succinctly suffices with the sentence, "The closure does not relate to the leased property." Clearly, then, the government action resulting from coronapanda pandemic does not qualify as a rental defect.
The Supreme Court promotes legal unity and lawmaking; in its rulings it addresses how the law should be applied and stays away from overly factual or detailed elaborations. For this reason, the application of the law in concrete cases remains dependent on facts and circumstances. For this reason, there will always be some uncertainty as to how a specific case will be decided.
As for the following three aspects, it is clear that they require further elaboration.
First, the reference period. For now, it is up for debate how turnover should be calculated in the absence of an appropriate reference period. Consider, for example, a tenant who started his business shortly before March 15, 2020. Or the business owner who first rented at a totally incomparable location, with the result that the reference period is not representative of the turnover decline. Especially in those cases, finding a representative reference period for this reason remains customized.
Second, it remains unclear exactly what income should be included in sales. Is that only sales from the leased premises? Or is that also online sales? This issue already arose in an interlocutory ruling of the Rotterdam District Court. It focused on the question of whether when a branch of the Scotch & Soda clothing brand was closed, turnover was still obtained through online sales. P-G Wissink advised to disregard turnover from other companies, but the Supreme Court did not say a word about this. How practice will deal with this therefore remains to be seen. This applies all the more when online sales are booked within the same company. In short, to what extent should the turnover connect to the leased property?
Third, the financial position of the parties. The Supreme Court decides that the "financial position of one of the parties" can provide grounds for deviating from an equal division of damages. When is one of the parties in a financial position that it should bear more damages? Is that already the case when a tenant has pursued a prudent financial policy with his business and therefore has built up a good pension?
Or is that only in cases where a multinational leases a branch from a private landlord? The financial position is fodder for debate. This is because almost always one party will be more wealthy than the other. As a result, the least wealthy party can (and will) always argue that the financial position of the other party necessitates a different distribution. A business owner with a well conducted financial policy is then unjustly "punished" for this. The question is to what extent this is reasonable.
A number of judgments have since appeared in which the formula from the Supreme Court's ruling has been applied. For example, in two judgments(ECLI:NL:RBROT:2022:627 and ECLI:NL:RBROT:2022:707) of the District Court of Rotterdam dated January 28, in which the aforementioned questions were also addressed.
Online turnover is in principle not included, nor is turnover related to locations other than the rented location or linked to other activities. Entire periods for which TVL has been obtained are included in a table and in the case of large enterprises, TVL is divided over the number of establishments. With regard to the period over which rent reduction is calculated, the period in which there was no compulsory complete closure but limited operating capability is also included.
The fact that there is a large tenant such as H&M does not mean that this large tenant would not be able to claim rent reduction. Nor is there a requirement of a minimum amount of turnover loss that should have been suffered. It is further assessed whether there were loss mitigation actions taken by a tenant and to what extent that could be required. The absence of unaudited turnover figures is not considered an objection if there is no reason to doubt it. It is also reiterated that when a penalty clause is invoked by the landlord for late payment by the tenant, mitigation of the penalty to zero is appropriate.
All things considered, this Supreme Court ruling is useful as a thread for rental law practice, with the outstanding questions inviting you to continue to follow rental law jurisprudence with interest in the time ahead. But even better is for you to reach a settlement together, by mutual agreement. You know from this blog where you generally end up if you go to court.
As a result of this article, do you have questions about the meaning of this ruling on your situation? Or do you have questions about other issues concerning rent or real estate? If so, please contact Jeroen Brinkman(j.brinkman@pvdb.nl) or one of the other specialists on our team.
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