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Provisional rental discounts in times of COVID-19

Voorlopige huurkortingen in coronatijd

Provisional rental discounts in times of COVID-19

14.08.2020 NL law

Recent interim injunctions indicate that the corona crisis can, in principle, be an unforeseen circumstance that may be a reason to amend a commercial lease agreement. If the parties are unwilling to amend the lease together, the court may amend the lease for them; recent interim injunctions cautiously indicate which circumstances are relevant, and how the lease can be amended by the court.

Pursuant to article 6:258 (1) of the Dutch Civil Code ("DCC"), the court may amend or even dissolve an agreement at the claim of one of the parties if i) there is an unforeseen circumstance and ii) that unforeseen circumstance is of such a nature that it would be unreasonable and unfair to leave the agreement unchanged. The court may deviate from all provisions of the lease agreement. This competence to amend or dissolve cannot be excluded in the lease agreement, because article 6:258 (1) DCC is mandatory law (art. 6:250 DCC). Contractual exclusion of rent reduction, rent suspension, or dissolution of the lease agreement (found in many ROZ models) is therefore rendered ineffective in such circumstances.

The corona crisis as an unforeseen circumstance

An unforeseen circumstance is a circumstance that lies in the future and that has not (actively or tacitly) been taken into account by the parties in the agreement. In the context of the corona crisis, in general, parties will not have taken the current pandemic and its consequences (including economic effects) into account in the lease agreement.

In the D-rt Retail judgment (ECLI:NL:RBNNE:2020:2540), the preliminary relief judge deemed it plausible that the corona crisis will be considered as an unforeseen circumstance by the court that subsequently judges the proceeding on the merits. That judgment is substantiated by the fact that government measures at national and international level having such an impact on the business activities of a travel agent such as D-rt Retail is an unprecedented situation. The economic problems caused by the global pandemic – unlike those caused by a ‘regular’ economic crisis - are not inherent to fluctuations in the market in which D-rt Retail operates. The preliminary relief judge did not consider it likely that a crisis of this magnitude should always be entirely at the expense of the lessee.

From this and other recent interim injunctions (see also ECLI:NL:RBAMS:2020:3508, ECLI:NL:RBAMS:2020:3494) it appears that the corona crisis should, in principle, be considered as an unforeseen circumstance. Contrary to an economic crisis, such as the one that arose in 2008, the corona crisis is not caused by fluctuations in the market. Therefore, the consequences of the corona crisis are not, in principle, considered part of the normal entrepreneurial risk.

Circumstances leading to a change in the lease agreement

Once assumed that the corona crisis qualifies as an unforeseen circumstance, the discussion concentrates on whether the corona crisis is an unforeseen circumstance of such a nature that the lease agreement must be amended. From the W Hotel judgment (ECLI:NL:RBAMS:2020:3494) and the D-rt Retail judgment (ECLI:NL:RBNNE:2020:2540), we conclude that the following circumstances are generally important:

  • the social position of the parties;
  • the extent to which the use of the leased property is or was limited due to national and international government measures;
  • the extent to which the parties have been (financially) affected by the corona crisis;
  • the extent to which the parties can bear the (financial) consequences of the corona crisis;
  • the expectations for the near future;
  • any amicable arrangement(s) that the parties have offered to each other but have not been accepted.

For interim injunctions, it is particularly relevant that the lessee can sufficiently demonstrate that he has been significantly affected by the corona crisis and that he has an urgent need for a temporary rent reduction. For example, D-rt Retail (in this case the lessee) had sufficiently substantiated its interest in a temporary rent reduction, and the lessor was not considered to be unable to await the outcome of proceedings on the merits. The rent reduction was therefore granted, but on the condition that D-rt Retail commenced proceedings on the merits within two weeks after the judgment. In the Museum Hotel judgment (ECLI:NL:RBAMS:2020:3508), the preliminary relief judge rejected the claim of the Amsterdam Museum Hotel on the basis that it was insufficiently clear whether and, if so, which part of the loss of turnover could be attributed to the corona crisis. In this case, the loss of turnover was largely caused by the renovation of the hotel.

Therefore, although in principle the corona crisis qualifies as an unforeseen circumstance, the circumstances of the case, or an inability to substantiate the lessee's position, may provide reason for the preliminary relief judge not to temporarily amend the lease agreement.

Amending the lease agreement due to unforeseen circumstances

Our expectation is that an amendment in the lease agreement will usually consist of a temporary rent reduction. It is difficult to predict how high the rent reduction may be; general guidelines are not easily discerned, as it will depend on the specific circumstances of each case. Moreover, there are still no judgments on the merits to provide guidance.

However, pending the outcome of the proceedings on the merits, preliminary relief judges appear to be prepared to grant considerable rent discounts in the retail and hospitality sector. In the D-rt Retail judgment (ECLI:NL:RBNNE:2020:2540), the preliminary relief judge granted a rent discount of 50% for the period 1 June to 31 December 2020. In the W Hotel judgment (ECLI:NL:RBAMS:2020:3494), the preliminary relief judge granted a rent discount of 50% over Q2 2020, 40% over Q3 2020 and 25% over Q4 2020.

Although D-rt Retail and the lessee of the W Hotel successfully enforced a rent reduction, that success may still turn out to be a Pyrrhic victory. The court on the merits may decide otherwise, in which case the full rent will have to be retroactively paid back later. Lessees will have to consider this.

More about the coronavirus

You can read more publications on the impact of the coronavirus on our website. Here you will also find a list of contacts within our office who can advise you with questions about the implications of the coronavirus for your company.

Team

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