Usufruct on rent payments: Dutch Supreme Court limits freedom of contract within property law

NL Law

A right of usufruct on a claim cannot be used to appropriate what is received through collection of that claim, as the Dutch Supreme Court ruled in its decision of 30 September 2022 (ECLI:NL:HR:2022:1331), in a case between KPN and Telecom Vastgoed about an alleged right of usufruct on rent payments.

Background: telephone antennas

KPN is a provider of mobile telephony and has installed telephone antennas throughout the Netherlands for that purpose, also on buildings. KPN has entered into leases for these antennas with the owners of those buildings. Telecom Vastgoed (TV) is an investor that subsequently entered into agreements with the building owners. Those agreements provide that TV is entitled to all cash flows related to the antenna sites in exchange for a lump sum. TV therefore intends to obtain the rent payments payable by KPN to the building owners. To this end, TV and the building owners established a usufruct for TV on the “rent payments” due by KPN. TV then claimed payment of the rent from KPN. KPN refused, however, and paid the rent to the building owners. According to KPN, TV had not obtained a valid right of usufruct.

What is a right of usufruct?

Usufruct is a right in property law, which can therefore be invoked by the usufructuary against anyone. It entitles the usufructuary to use an object or an item and to enjoy the fruits (Article 3:201 Dutch Civil Code (“DCC”). In Latin: the right of usus and fructus. A usufruct on an apple tree, for example, grants the usufructuary the right to use the tree and to obtain the apples growing on it as natural fruits. A usufruct may also be established on an intangible asset, such as a claim. In that case, the usufructuary is entitled, for instance, to the interest on that claim as a “civil” usufruct. The usufructuary may furthermore demand performance of the claim and collect payments on that claim (Article 3:210(1) DCC). In that case, the payment received replaces the original claim. The payment therefore belongs to the principal beneficiary (the party granting the usufruct) and is also subject to usufruct (Article 3:213(1) DCC). The provisions on usufruct in the DCC grant contractual freedom. On the establishment of the usufruct, the parties may “specify” what should be considered a fruit of the right of usufruct established (Article 3:216 DCC).

As a usufructuary, TV would therefore be entitled to collect the rent payments from KPN if a legally valid usufruct was established. When KPN refused to pay, TV initiated proceedings and claimed the rent payments, among other things. The District Court allowed TV’s claims, but the Court of Appeal rejected them.

Supreme Court’s decision

TV appealed to the Supreme Court, arguing that the right of usufruct agreed on between TV and the building owners was within the limits of contractual freedom provided by the DCC. However, the Supreme Court agreed with the Court of Appeal that TV had not established a valid right of usufruct, in line with the advisory opinion of the Advocate General. The Supreme Court ruled that a usufruct on a claim does not serve to appropriate what is received by collection of that claim, as TV intended, since it wanted to obtain all the rent payments relating to the antenna sites. What is received through collection of the claim would then simultaneously be the asset subject to usufruct and the fruit of that usufruct. That is at odds with the definition of usufruct in the DCC and therefore does not give rise to a valid right of usufruct.

The Supreme Court thereby limited the freedom of contract when establishing a right of usufruct. In my opinion, this is justified. The “usufruct” envisaged by TV ignores the essence of usufruct, namely that it is a limited right of use of a good belonging to another party. The power granted to parties in the DCC to “specify” what is to be considered a fruit of the established right of usufruct would be overstretched if it allowed the establishment of a property law right in violation of the essence of a usufruct.

Further observations

Looking at this case, the question arises why TV did not choose another legal form to get what it wanted: the right to the rental income in exchange for the payment of a lump sum to the building owners. In her advisory opinion, the Advocate General noted that it would appear that TV did not want to obtain the rent payments through assignment, because that would not be bankruptcy-proof; nor did it wish to establish a right of usufruct on the antenna site (instead of the actual rent payments), because that would have certain tax and rental law consequences.

Another question would be whether TV is not still entitled under (only) contract law to collect the rental payments from KPN on the basis of the agreements made with the building owners. In principle, the fact that they have no effect under property law does not detract from their effect under contract law and the law of obligations in general. TV argued before the Supreme Court that the Court of Appeal also should have examined ex officio (on its own initiative) whether KPN was required to pay the rent to TV under the law of obligations. However, as the Advocate General notes, TV put its money in the proceedings on its alleged right of usufruct under property law and the party debate was conducted on that basis. In her view, this argument therefore could not succeed either. The Supreme Court apparently agreed, since it rejected TV’s appeal in its entirety (without expressly addressing this argument).