Experience shows that on average, there is normally a year in between the issuing of summons and the passing of judgment by the court in normal proceedings on the merits in civil litigation. That is why the first judgment in proceedings on the merits took some time to appear. Corona hit our country in March 2020. Up to now the only judgments passed were in preliminary relief proceedings, which are by definition temporary in nature. Now we have the first published judgment in proceedings on the merits.
On 21 January 2021, the sub-district division of the District Court of The Hague decided on a corona-related dispute between a landlord and a tenant running a business in the hospitality industry. The issue naturally concerned the question whether the tenant was entitled to a rent reduction and if so, how much. I will not keep you in suspense on the outcome, the court pretty much followed the judgments of the preliminary relief judges: the pain was to be split 50%-50% between landlord and tenant for the period that the hospitality industry was forced to shut down. For the interim period the tenant only received a rent reduction of 25%, but only for those few weeks for which a substantial drop in revenue could be proven. The tenant did not receive a rent reduction for the remaining weeks.
Naturally this does not mean that every hospitality business renting a property is automatically entitled to a rent reduction of 50% / 25%. Each case is different: large/rich landlord or small landlord, tenant is part of a big chain or a sole trader or something in between, the tenant has or has not applied for and/or received government support, there is or there is not, or only partly, a causal link between government intervention and loss of revenue, the decision to remain closed even when the order to shut down was lifted was or was not made independently, how much revenue was earned through pick-up and delivery, etc., etc., etc. Anyone who wants to know more ins and outs and wishes to have more guidance on possible pending cases or disputes, for example with regard to the question whether and if so in what degree the loss of revenue must be proven, should continue reading. Note: trying to directly apply this judgment to the retail sector is not completely without risk, the situation there is somewhat different.
The tenant is an operator of a restaurant/cafe in The Hague (the matter actually concerned two tenants, but that is not really relevant here). Because of the forced closure of the hospitality industry by the government as of 15 March 2020, the tenant ceased to pay rent. The landlord was of the opinion that pursuant to the lease agreement, the case law and the fact that the tenant was receiving financial support from the government, while the landlord would not be receiving any support, this was not permitted.
The landlord did not waste any time and, in short, claimed annulment of the lease agreement and vacating of the premises. The tenant presented many counterclaims which, in short, entailed that he was entitled to a rent reduction (and there was thus no reason for annulment) because there was a defect (Art. 7:204 Dutch Civil Code) or unforeseen circumstances (Art. 6:258 Dutch Civil Code) due to government intervention and/or force majeure.
Defect
The court stated that although the landlord did rightly point out that the tenant could still make use of the rental property during the corona crisis, for example, for pick-up and delivery services, this did not entail that consequently the rental enjoyment had been provided that the tenant could expect when entering into the lease agreement. It ensues from the parliamentary history that not only the material condition of the rental property, but every circumstance relating to it which limits the enjoyment, constitutes a defect. The parliamentary history also shows that an (unforeseen) government measure is deemed a defect. In line with this reasoning the court decided that there was indeed a defect. The court then stated that the prohibition of a rent reduction in the general terms and conditions of the Real Estate Council of the Netherlands did not mean that a rent reduction is impossible, because such a reduction is possible by means of a claim of unforeseen circumstances.
Unforeseen circumstances (Art. 6:258 Dutch Civil Code) and reasonableness and fairness
On the basis of this article, if there are circumstances which are of such nature that the other party, in accordance with the criteria of reasonableness and fairness, may not expect that the agreement be maintained unaltered, the court can change, for example, the consequences of an agreement. This can be done with retroactive effect. What is decisive is whether the parties provided or wished to provide in the lease agreement for the possibility of the occurrence of unforeseen circumstances. That was not the case here. The corona crisis was unforeseen and led to a fundamental disruption of the balance of the positions of the parties in the lease agreement and was of such nature that maintaining the lease agreement unaltered would be unacceptable in accordance with the criteria of reasonableness and fairness. That there had been previous viruses or economic crises did not change this opinion.
When seeking to return balance to the lease agreement, the court paid attention to the fact that there was hardly any revenue, the degree in which support measures were effective, whether customers were offered the option of pick-up and/or delivery of meals and to what extent the tenant developed initiatives to generate more revenue. But above all, the court attached value to the evidence of loss of revenue as a result of the corona crisis which was presented by the tenant. The tenant submitted: an overview of the revenue figures for 2018, 2019 and 2020, a copy of all Tikkie payments (Tikkie is an online payment app) for pick-ups and deliveries, the till receipts from March 2020 to December 2020 and copies of bank statements showing the government support payments. This was apparently not enough. After oral arguments, the court asked the tenant to produce the financial statements. All in all, the court found the submitted evidence of the loss of revenue as a result of the crisis and going through the fixed costs to be sufficient. At the same time, the evidence had been provided that the support measures which were received (including the government TVL payment (Fixed Expenses Contribution)) was not sufficient to be able to pay the rent. The court included in its considerations that the TVL was not only intended for rent payments, but also for the other fixed expenses.
Decision
The court felt that the balance between the parties in the lease agreement would be restored by dividing the consequences of the corona crisis equally between the landlord and the tenant, in the following manner.
- Over the period that the rental property was closed (although open for pick-up and delivery) (15 March 2020 up to and including 31 May 2020 and 15 October up to and including the time that the order to shut down is lifted (still in the future, as the Netherlands is still in lockdown)): a rent reduction of 50%.
- Over the period that the rental property was not closed, but during which restrictions applied, for example with regard to dining capacity, with a demonstrated substantial loss of revenue (29 September to 14 October 2020): a rent reduction of 25%.
- Over the period that the rental property was not closed, but during which restrictions applied, for example with regard to dining capacity, but there was “only” a loss of revenue of 20% (1 June 2020 through 28 September 2020): no rent reduction.
The lease agreement was therefore altered accordingly. The contractual penalty over the total amount to be paid by the tenant, as claimed by the landlord, was fixed at nil. The tenant did owe the statutory commercial interest over the rent arrears. Each party was ordered to pay its own court costs.
Noteworthy
I purposely discussed the judgment in greater detail, in order to show how this court thinks, considers and determines. This judgment provides clear, concrete guidance for pending cases, although this one judgment does not immediately mean that every court will make the same considerations and the same findings. What I myself find noteworthy is that the judgment also extends to the near future (until the order to shut down has been lifted) and that the TVL – 85% (!) of the fixed expenses with a loss in revenue of at least 30% – will not prevent the tenant from receiving a substantial rent reduction. I think that an appeal court might award a somewhat lower reduction on the rent for the second lockdown period, as during that period the tenant received substantially more compensation from the government and was able to take measures to optimise pick-up and delivery. We shall see.
Finally, I see many initiatives in the market to include corona clauses in settlement agreements or in new lease agreements. In itself there is nothing wrong with this, provided the wording of the clause is carefully thought out and particularly what effect it will have in the near future, as we will be dealing with corona for the time being. The point is that in the future parties will not be able to base claims on this judgment, as they will no longer be able to speak of an unforeseen circumstance, but of a foreseeable circumstance!
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