The long-awaited answer from the Supreme Court to questions about rent reduction for 290 business spaces during the corona crisis.

Charles van Rijckevorsel and Sofie Happe of NewGround Law discuss the long-awaited answer from the Supreme Court to questions about rent reduction for 290 business spaces during the corona crisis.

On December 24, 2021, the long-awaited judgment of the Supreme Court was published that many real estate lawyers were looking forward to. The judgment answers four preliminary questions that the District Court of Limburg posed to the Supreme Court in a judgment dated 31 March 2021.^[1] District Court of Limburg, March 31,  2021, ECLI:NL:RBLIM:2021:2982.[2] See. a.o., District Court of Gelderland, February 2, 2021, In short, these questions came down to the following: can the agreed rent be reduced if a tenant of business premises whose turnover depends on public attendance, is unable, or only to a limited extent, to exploit this space as a result of government measures in connection with the corona pandemic. And if so, how must the rent reduction be calculated.

With the judgment, the Supreme Court creates clarity and provides guidelines for practice. Of particular importance for the legal practice is that the Supreme Court has ruled that the government measures that are taken in connection with the corona crisis do not qualify as a defect within the meaning of article 7:204 (2) of the Dutch Civil Code (DCC) and, under certain circumstances, do qualify as unforeseen circumstances within the meaning of article 6:258 of the DCC.

Existing corona case law until 24 December 2021

Since the outbreak of the corona crisis, there has been much discussion in the tenancy sector about whether tenants of 290-business premises can claim rent reduction. These discussions have led to many court cases (mostly summary proceedings) in which the question had to be answered whether the corona crisis can be regarded as a defect within the meaning of article 7:204 (2) DCC or as an unforeseen circumstance within the meaning of article 6:258 DCC and, if so, how the rent reduction should be calculated. The existing corona jurisprudence does not provide an unambiguous answer to this question. Understandable, since judges too have not previously had to deal with a pandemic of this magnitude. Until December 24, 2021, rent reductions were usually granted on the basis of unforeseen circumstances, but in lower courts it was also ruled with some regularity that the measures imposed by the government in connection with the corona crisis must be regarded as a defect.^[2]See. a.o., District Court of Gelderland, February 2, 2021, ECLI:NL:RBGEL:2021:479 and District Court of The Hague, January 21, 2021, ECLI:NL:RBDHA:2021:461. Clarity on this point was therefore highly desirable.

The decision of the Supreme Court

> Corona crisis = no defect
On December 24, 2021, the Supreme Court provided the desired clarity. First of all, the Supreme Court stated that the answers to the first and second question (which concern a defect), will also apply to other 290-business premises than the hotel and catering industry (e.g. stores).

With respect to the first preliminary question, the question whether the imposed closure of the hotel and catering industry (and therefore also stores) should be regarded as a defect within the meaning of article 7:204 (2) DCC, the answer of the Supreme Court is in the negative. In the Supreme Court’s opinion, the closure of 290-business premises is the result of exceptional circumstances of a general nature, concerning public health, which have far-reaching consequences for society as a whole. In the interest of public health, the closure restricts the possibility of operating 290-business premises, but the closure does not relate to the leased premises. The Supreme Court refers to the legislative history of article 7:204 DCC in this regard and states that it is not intended that general government measures – which are unforeseeable for the parties and aimed at restrictions in the operation of the business – should be regarded a defect. Nor can the tenant expect the lessor to indemnify him against these restrictions in the operation of his business.

Since the outbreak of the corona crisis, many tenants have taken the position in proceedings that there is a defect. The Supreme Court ruled that in such a case the court may give this tenant the opportunity to adjust its position. In any case, the Supreme Court has made one thing clear: the tenant’s appeal that the government-imposed closure of 290-business premises should be regarded as a defect, will have to be dismissed as of December 24, 2021.

The Supreme Court’s answer regarding a defect, only refers to the governmental measure that relates to the closure of the business premises. Since closure is the most far-reaching restrictive measure, other restrictive measures, which are also enjoyment-restricting (such as shortening of opening hours, limited number of visitors, etc.), will not qualify as a defect either.

Since the Supreme Court is of the opinion that the governmental measures do not constitute a defect, the second question, which criteria should be used to assess the extent of the reduction of rent on the basis of a defect, does not need to be answered.

In practice, the Supreme Court’s negative answer to the first preliminary question is important for lease agreements in which the right to a rent reduction due to a defect is not excluded. In ROZ leases, the right to a rent reduction is generally excluded and a rent reduction could thus only be achieved through unforeseen circumstances. However, in those lease agreements in which the right to rent reduction due to a defect is not excluded, before the ruling of the Supreme Court, this situation offered a possibility to claim up to 100% rent reduction under article 6:207 DCC. As the ruling excludes this, a tenant with a lease agreement in which a rent reduction is not contractually excluded, can only invoke unforeseen circumstances, resulting in a significantly lower rent reduction. Whereas before December 24, 2021, this tenant could still claim a rent reduction of 100% due to a defect in the leased premises on the basis of article 6:207 DCC, the rent reduction will now have to be calculated according to the fixed costs method, whereby the starting point is a more balanced distribution of the disadvantage, i.e. damage (we will look into this in more detail below).

> Corona crisis = under circumstances an unforeseen circumstance
The Supreme Court subsequently addressed the question of whether the restriction in the use of the leased premises (as a result of the government-imposed closure of the catering industry) constitutes an unforeseen circumstance that could lead to a rent reduction. It is no surprise that the Supreme Court answers this question in the affirmative, albeit with a minor reservation.

With regard to the third and fourth question, the Supreme Court notes, as with the first and second question, that the answer will also relate to other 290-business premises than the hotel and catering industry. The answer to the third and fourth question relates not only to the situation of 290-business premises that are forced to close by government order, but also to situations arising from other government measures as a result of which the leased premises cannot be exploited or can be exploited only to a limited extent.

According to the Supreme Court, an unforeseen circumstance within the meaning of article 6:258 DCC is a circumstance that, at the time of the conclusion of the contract, is still in the future and has not been taken into account. Whether that circumstance has been taken into account must be determined by interpretation. Except for specific indications to the contrary, it must be assumed that the circumstance has in any case not been taken into account in leases concluded before March 15, 2020 (the day on which the hotel and catering industry had to close its doors for the first time, also referred to as the ‘intelligent lock down’). Therefore, if the lease was concluded before March 15, 2020, and the tenant – who depends on the public attendance for his turnover – cannot or only slightly operate his business as a result of the government measures, the corona pandemic, except for specific indications to the contrary, can be regarded as an unforeseen circumstance that can form the basis for a rent reduction granted by the court.

The last remark made by the Supreme Court in paragraph 3.2.6 is important. For contracts concluded after March 15, 2020, it must be assessed on a case-by-case basis whether the government measures in connection with the corona crisis qualify as an unforeseen circumstance. In our opinion, and in line with the decision of the District Court of Limburg,^[3]In the judgment of the District Court of Limburg, the court ruled on an allonge on a lease concluded after March 15, 2020. District court of Limburg, June 7, 2021, ECLI:NL:RBLIM:2021:4779. circumstances such as whether the parties are professional parties, how extensively the agreement has been negotiated and, above all, whether the parties intended to factor the consequences of the corona crisis into the agreement, can be taken into account. In those cases, it will be a matter of explanation and the question will arise which circumstances of the case will be playing a role in determining or distributing the damage.

The fixed costs method

The last and fourth preliminary question the Supreme Court had to answer concerns the calculation of the rent reduction. The Supreme Court stated that the disadvantage – insofar as this disadvantage is not already compensated by government aid in the sense of ‘Tegemoetkoming Vaste Lasten’ (TVL) – must in principle be divided equally between the landlord and the tenant. On the grounds of reasonableness and fairness, this may be deviated from. In calculating the rent reduction, the so-called fixed costs method (TVL) – as introduced by the Court of Appeal of Amsterdam in its judgment of 14 September 2021^[4]Court of Appeal of Amsterdam, September 14, 2021, ECLI:NL:GHAMS:2021:2728. – must be used. The fixed costs method reads as follows:

(agreed rent – the portion of TVL attributed to rent) x percentage of turnover reduction x 50%.

The above calculation method does not take into account the situation in which the effective date of the lease is after the outbreak of the corona pandemic, i.e. after March 15, 2020, and there is nevertheless an unforeseen circumstance. In that case, two aspects are difficult to demonstrate in the calculation method: