Supreme Court provides guidance on the distribution of loss between tenants and landlords due to forced corona closure

Dutch judges have the possibility to ask the Supreme Court so-called preliminary questions. These are legal questions on the interpretation of legal rules on which the Supreme Court has not ruled before. The court in Limburg made use of this possibility in a case between a tenant and landlord of hospitality space.

The hospitality space had to be closed due to corona measures, which resulted in less revenu for the tenant. The tenant therefore asked the landlord to reduce the rent. In short, the tenant argued that the forced closure of the rented space was not foreseen at the conclusion of the lease. As a result, the tenant lost revenue and that loss should be compensated by a (temporary) adjustment of the rent. Legal experts speak of restoring the balance of the contract. The landlord refused to cooperate.

This tenant dispute was submitted to the judge in Limburg. This judge asked the Supreme Court whether a forced closure by the government indeed qualifies as ‘unforeseen circumstances’ as a result of which a reduction of the rent is possible. In addition, the judge asked the Supreme Court whether the forced closure of the rented space must be regarded as a defect of the rented space; after all, the tenant cannot use the space as intended.

The Supreme Court answered the first question in the affirmative. In general, the tenant of a retail or catering space who generated less revenue because the space is (temporarily) closed due to corona measures, will be entitled to a reduction in the rent. Two conditions apply in this respect: (i) the corona measures were unforeseen at the time the lease was concluded and (ii) the consequences of a temporary closure have not been factored into the lease.

The Supreme Court answered the second question in the negative. As a rule, the temporary closure of a retail or catering space does not qualify as a defect. This is because the closure does not relate to the property, but only to the operation of the business located therein. Because the closure does not qualify as a defect, the tenant continues to owe the rent. And the landlord cannot invoke any contractual clause that places risks of defects on the tenant.

The Supreme Court makes it clear that the solution to disputes over reduction of rent due to corona closure must be found in the doctrine of unforeseen circumstances. But the Supreme Court goes further. In the ruling, it provides a formula by which the rent reduction can be calculated. This formula is as follows: (agreed rent – part of the TVL that is allocated to the rent) x percentage of revenue reduction x 50%. The calculation model is also known as the ‘fixed charge method’ and results in the disadvantage caused by the corona closure being divided equally between the tenant and landlord.

The Supreme Court’s answers are useful for tenants who have experienced reduced turnover due to the forced corona closure and have not yet found a solution with their landlord regarding rent reduction. In addition, the answers provide guidance for similar situations in the future. It should be kept in mind that corona-like situations are taken into account in the drafting of contracts nowadays, which means that this is factored into the agreement to a greater or lesser extent.

For questions or advice on this topic, please contact Sander Pieroelie (+31-6-222 878 65) or Sabine Chan (+31-6-578 911 13).

This article was published in the Newsletter Vestius of September 2022