Penalties for prohibited subletting: unfair terms?

Last September 8, the Supreme Court issued a ruling on how sanctions for prohibited subletting should be tested against European regulations. This ruling shows that the way parties formulate their mutual agreements could be crucial to whether or not these agreements can stand.

Case study

In the case in question, the parties had entered into a lease agreement and had declared the General Provisions of the Lease Agreement for Living Space of the Real Estate Council (2003 version) applicable. Among other things, these general provisions state that the tenant is not authorized to sublet the leased property without the landlord's consent. If the tenant nevertheless sublets the property, the following provision applies:

"In the event that the Tenant acts in violation of the provisions of 1.3, he forfeits to the Landlord an immediately payable penalty equal to three times the rent applicable to the Tenant at that time per day, with a minimum of €45 per day, without prejudice to the Landlord's right to demand performance or dissolution for non-performance, as well as damages to the extent that the damages exceed the penalty. Furthermore, the lessee must remit to the lessor all income obtained as a result."

It is important to note that this provision actually attaches two sanctions to prohibited subletting. First, the (main) tenant owes a fine; second, he must remit to the landlord all income obtained by subletting.

The tenant sublet the property without the landlord's consent during the period from 2006 to 2014. The landlord subsequently demanded - in addition to eviction - payment of the forfeited fines and remittance of the collected sublease fees.

However, the tenant takes the position that there is an "unfair term" within the meaning of the European Directive on Unfair Terms in Consumer Contracts (Directive 93/13/EEC). This Directive provides that an agreement with a consumer qualifies as an "unfair term" if, among other things, (a) the term has not been individually negotiated, and (b) the term, contrary to good faith, substantially disturbs the balance of the parties' rights and obligations under the contract to the detriment of the consumer.

The directive cites as an example of such an "unfair term" an agreement whose purpose is to impose disproportionately high damages on a consumer who fails to fulfill his commitments.

Two agreements, one clause

The Subdistrict Court ruled at first instance that the provision quoted above qualified as an unfair term within the meaning of the Directive. The landlord appealed and took the position that the penalty on the one hand and the mandatory remittance of rental income on the other hand should actually be regarded as two separate agreements. According to the landlord, the Subdistrict Court should therefore have assessed them separately and come to the conclusion that the mandatory remittance of rental income does not qualify as an unfair term within the meaning of the Directive.

The Amsterdam Court of Appeal agreed and ruled that the obligatory remittance of rent payments was not an unfair term within the meaning of the Directive, as it only concerned the remittance of income obtained by the (main) tenant from the prohibited subletting. According to the Court of Appeal, there is no question of disproportionately high damages.

The Supreme Court rules otherwise. It cites a ruling by the Court of Justice of the European Union and considers that in a case such as the present one, where a clause links two sanctions to prohibited subletting, the court must examine whether the cumulative effect of these sanctions results in the existence of an unfair clause as referred to in the Directive.

The Supreme Court then referred the case to the Court of Appeal of The Hague to assess whether, in light of the above, the clause actually qualifies as an unreasonable clause within the meaning of the Directive.

Advice for practice

The question is how this would have turned out if the penalty and the mandatory remittance of rental income had been included in two separate provisions. This judgment - especially when viewed in conjunction with the opinion of the Amsterdam Court of Appeal - seems to imply that the mandatory remittance of rental income would not qualify as an unfair clause if it had been included in a separate provision. However, now that the two sanctions have been included in one provision, the mandatory remittance will already fall on the mere fact that the penalty qualifies as an unfair clause. It is therefore (highly) advisable to include the mandatory remittance of rental income from prohibited subletting in the lease agreement as a separate sanction, in addition to the general provisions.

The discussed judgment can be found here.