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31 Dec 2021 Rent reduction through corona measures

Can tenants of certain business premises claim a reduction in rent as a result of the corona crisis, and if so, how should that reduction be calculated? Society feels a certain need to share the enormous damage of the corona measures in a certain way between tenants and landlords, but the legal design was not clear until now. On 24 December, the Supreme Court gave an answer to the questions of the District Court of Limburg on this subject.

In a previous article, I already discussed that it follows from case law on the subject of rent and corona that, in principle, a tenant is entitled to a rent reduction because there is either a defect or unforeseen circumstances, provided that the tenant can demonstrate that it has been hit by the consequences of the corona crisis, including the government-imposed closure, and the tenant can demonstrate that it has lost turnover as a result. Other circumstances are also taken into account, such as the relief the tenant has received from the government. As the case was not completely clear, the District Court of Limburg asked the Supreme Court in a case so-called 'preliminary questions' (legal questions from a judge to a higher court concerning the interpretation of a legal rule).

This concerned the following questions:

1. Should the government-imposed closure of the hotel and catering industry as a result of the Corona crisis be regarded as a defect within the meaning of Section 7:204 (2) of the Dutch Civil Code?
2. If so, on the basis of which criteria should the degree of rent reduction be assessed?
3. (Or) does the restriction on the use of the rented property constitute an unforeseen circumstance that may lead to a reduction in rent?
4. If so, what circumstances of the case will be taken into account in determining or apportioning the loss?

Unforeseen circumstance

The Supreme Court confirmed in its judgment of 24 December 2021 that a tenant of so-called 290 business premises (such as catering establishments, shops and supermarkets) is entitled to a rent reduction as a result of the corona measures taken by the government. The corona measures are so drastic that the landlord cannot reasonably expect the tenant to continue paying the full rent.

The Supreme Court ruled that the corona crisis is an unforeseen circumstance but not a defect within the meaning of Section 7:204 of the Dutch Civil Code:

"An unforeseen circumstance as referred to in Section 6:258 of the DCC is a circumstance that at the time of the conclusion of the contract is still situated in the future and that has not been taken into account. Whether the latter is the case must be determined by interpreting the contract.

The circumstance that, as a result of government measures in connection with the coronapandemic, a tenant whose turnover depends on the arrival of members of the public cannot, or can only to a limited extent, operate the 290 business premises rented by him is an exceptional circumstance of a general nature that affects public health. In the absence of concrete indications to the contrary, it must be assumed that, in any event, that circumstance has not been taken into account in contract concluded before 15 March 2020. This is equally true if, for example, the rent excludes the right to a reduction in rent due to defects that the landlord did not know or should not have known about at the time of entering into the rent, or holds the tenant responsible for obtaining and maintaining permits, exemptions and consents that are necessary for the use of the rented property in accordance with the agreed purpose, or provides for a basic rent that is supplemented depending on the turnover."

The answer to the third question is thus as follows: The circumstance that, as a result of government measures in connection with the coronapandemic, a tanant whose turnover depends on the arrival of members of the public cannot, or can only to a limited extent, exploit the 290 business premises rented by him is, in the case of a lease concluded before 15 March 2020, in the absence of concrete indications to the contrary, an unforeseeable circumstance within the meaning of Section 6:258 of the Dutch Civil Code on the basis of which the court may adjust the contract by reducing the rent. For contracts concluded after that date, it must be assessed per case whether such an unforeseen circumstance exists.

Calculation model

In its ruling, the Supreme Court provides a calculation model for the calculation of the rent reduction. The Supreme Court indicated that, as a rule, the disadvantage caused does not fall within the sphere of risk of either the tenant or the landlord. The disruption of the value relationship between the two parties is therefore, in principle, best dealt with by dividing this disadvantage - if not already compensated by the financial support from the government to the tenant in the form of the Tegemoetkoming Vaste Lasten (TVL) - equally between the landlord and the tenant.

Reasonableness and fairness may dictate that on the basis of circumstances, such as the capacity of a tenant or landlord or the financial position of one of the parties, it is deviated from the equal division of the disadvantage.

If the distribution of the disadvantage is found to be justified, the reduction of the rent can be calculated according to the so-called fixed costs method. The application of this results in a percentage reduction of the contractually payable rent. The obvious method is to calculate the rent reduction per term for which the rent is due.

The fixed charge method has the following steps to calculate the rent reduction.
a. The agreed rent is expressed as a percentage of the total fixed charges.
b. The portion of the TVL to which the tenant is entitled, corresponding to that percentage, is deducted from the amount of the agreed rent.
c. The percentage reduction in turnover is determined by comparing the turnover in the period over which the rent reduction is calculated (hereinafter: the lower turnover) with the turnover in a comparable period prior to the corona pandemic (hereinafter: the reference turnover) according to the formula: 100% - (100% x (the lower turnover : the reference turnover)).
d. The disadvantage associated with the disruption to the value ratio shall be equally distributed between the landlord and the tenant (each 50% of the disadvantage), unless another distribution follows from the reasonableness and fairness referred to in Section 6:258, subsection 1, of the Dutch Civil Code.

The amount of the rent reduction can then be calculated according to the formula: (agreed rent - proportion of TVL attributable to rent) x percentage reduction in turnover x 50%.

Working out the calculation on the basis of fictitious amounts, whereby the rent is € 4,500, the fixed costs € 25,000, the TVL € 10,000, the lower turnover achieved € 20,000 and the reference turnover € 100,000, the calculation is as follows. a. First the percentage of the fixed costs involved in payment of the agreed rent is determined (100% x (€ 4,500 : € 25,000) = 18%). b. Because the tenant is entitled to TVL, 18% of the TVL of € 10,000 (= € 1,800) is deducted from the agreed rent. c. Next, the percentage of the decline in turnover is calculated (100% - (100% x (€ 20,000 : € 100,000)) = 80%), and based on this percentage it is determined what part of the rent remaining after step b is related to the decline in turnover. d. Finally, the disadvantage resulting from the distortion of the value ratio is divided equally between the landlord and the tenant (each 50% of the disadvantage).

In this example, this results in the following rent reduction: (€4,500 - €1,800) x 80% x 50% = €1,080, therefore 24% of the agreed rent.

The District Court of Limburg will now continue the case and take the answers of the Supreme Court into account in its ruling.

Do you have any questions about your position as a tenant or landlord, or do you need help negotiating with your landlord or tenant? Please feel free to contact one of our lawyers without any obligation. We wish you a very happy New Year and we will be happy to be of service to you again in the New Year!

SPEE advocaten & mediation Maastricht

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