New ruling impacts recovery of vacancy damages: tips for tenant and landlord

On Feb. 17, 2017, the Supreme Court issued an important ruling ruling on enforcement of the bank guarantee in rental law. In fact, landlord and tenant often agree when concluding a lease that a bank guarantee will be provided. This guarantee serves as security for the fulfillment of the tenant's obligations towards the landlord. Until recently, it was unclear whether the bank guarantee could also serve to recover damages suffered by the landlord after the tenant's bankruptcy. The Supreme Court has put an end to that lack of clarity with its ruling on Feb. 17.

Lease termination in bankruptcy

First, a bit of background. If a tenant goes bankrupt, both the tenant's trustee in bankruptcy and the landlord can terminate the lease on the basis of Article 39, paragraph 1 of the Bankruptcy Act ("Fw"). A notice period of three months must be observed. In that case, from the day the tenant is declared bankrupt, the rent payments are part of the estate debt. However, the landlord may also recover the rent payments from the guarantor if the tenant has provided a bank guarantee for the landlord's benefit. In case of termination under article 39 Fw, the landlord is in principle not entitled to compensation for vacancy damages from the estate. If a bank guarantee has been provided, this may be different. However, the bankruptcy estate may not be adversely affected by the issued bank guarantee, one can conclude from the Supreme Court rulings of January 14, 2011 (Aukema/Uni-Invest) and November 15, 2013 (Romania Beheer).

Vacancy damage recovery under bank guarantee

What's New. The judgment handed down by the Supreme Court on Feb. 17, 2017, concerns payment under the bank guarantee in the event of vacancy damages. The landlord and tenant can agree on a clause whereby the tenant undertakes to compensate all damages (including vacancy damages) suffered by the landlord as a result of termination of the lease under section 39 Fw. With the new ruling, it has been determined that such a clause is not enforceable against the bankruptcy estate, but is enforceable against the tenant himself. Therefore, if a third party has guaranteed vacancy damages on the basis of such a clause, the landlord can require him or her to pay the damages.

However, the guarantor cannot make a recourse claim against the bankruptcy estate under Article 39 Fw. It is up to the trustee to oppose this. Suppose the guarantor takes recourse against the estate and the trustee recognizes the claim and does not oppose, for example, enforcement of collateral. Then this does not mean that the lessor is unjustly enriched at the expense of the estate, according to the Supreme Court in its February 17, 2017 ruling.

Conclusion

Suppose the tenant has provided a bank guarantee for the benefit of the landlord that includes the obligation to pay compensation for vacancy damages. And suppose the tenant goes bankrupt and the lease is terminated under article 39 Fw. Then, in principle, the bank is obliged to pay out the bank guarantee. Unless both parties have agreed otherwise.

Tip for landlord

We recommend that landlords include a clause in the lease agreement that allows recourse against a third party (e.g., the bank) in the event of vacancy damages. In addition, the text of the bank guarantee is in principle leading for the manner of its enforcement. So make sure that the literal text of the bank guarantee also contains the possibility of enforcement to cover damage caused by vacancy (after bankruptcy).

Tip for tenant

Tenants should take care that when entering into a lease agreement it is not agreed that a bank guarantee will (partly) lead to recovery of vacancy damages in case of bankruptcy. Indeed, we expect banks to adjust the text of their bank guarantees as a result of this Supreme Court ruling. As a tenant, you obviously want to avoid being unable to fulfill your obligations to the landlord. This can be done by making a reservation in the lease agreement for the literal text of the bank guarantee, which will most likely exclude vacancy damages in the near future.