With the introduction of the Dutch Court Approval of a Private Composition (Prevention of Insolvency) Act (also known as the WHOA), the Dutch legislature has taken an important step to provide a way out for companies who are facing financial difficulties without having to immediately declare them bankrupt. The WHOA offers businesses the opportunity to negotiate with their creditors and shareholders regarding an agreement. Through this process, part of the company's debt may be forgiven or restructured. This agreement can then be homologated (i.e., approved) by the court, which provides creditors with certainty and protection while helping the company return to financial health.
In the WHOA procedure, the position of landlords has proved to be a unique one compared to other creditors, especially in light of the class distinction as outlined in Article 374 of the Dutch Bankruptcy Act. The District Court Zeeland-West Brabant recently ruled on this matter in a so-called WHOA aspect request. In the case discussed in this article, the question for the court was whether landlords with a (future) claim for damages due to the termination of a rental agreement could be placed in a separate class.
The case in short
A company seeks to cancel five lease agreements as part of a WHOA procedure and subsequently address the claims for damages arising from these cancellations. In its draft agreement, the applicant included landlords with a claim for damages due to the termination of lease agreements in a different class than unsecured creditors. However, the stakeholders in the aspect request argue that landlords should only be classified separately regarding the first three rental periods, as claims for these periods would be considered estate claims in the event of bankruptcy, as outlined in Article 39 of the Dutch Bankruptcy Act. Beyond this, they argue, landlords should be placed in the class of unsecured creditors. According to the stakeholders, the fact that a claim for damages arises only under the WHOA, and not in bankruptcy, is a reason not to place landlords in a separate class.
There is also a debate regarding the amount of the damages claim. The applicant has estimated the claim at nine months’ rent, assuming that the landlords will find a new tenant within twelve months after court approval of a composition. The first three months of this period fall under the notice period, meaning these are fully paid. The remainder constitutes damages and thus falls under the claim. The landlords disagree, estimating damages as the rent due for the entire remaining term of the lease. They argue that it will not be possible to find a new tenant within twelve months who will be willing to pay the same rent. They expect that the rental price will be at least €5,000 per year lower than the current rent (€90,000 per year). They also criticize the applicant for failing to take re-letting costs into account.
Judgment of the court
The question before the court, therefore, is whether landlords with a (future) claim for damages due to the termination of a lease agreement may be included in a separate class. According to Article 374 of the Dutch Bankruptcy Act, creditors are placed in different classes if their rights, as offered under the agreement or as they would be in bankruptcy, differ so significantly that they do not hold comparable positions. The provider of the agreement has considerable freedom in shaping the restructuring plan. Moreover, it is permissible to subdivide a category of creditors into different classes if necessary. The court indicated that the class classification, made by the provider of the plan, must be justified. In this case, the court ruled that the applicant had sufficiently justified that the position of landlords in bankruptcy is different from the position of the class of unsecured creditors and that the applicant wishes to make a different offer to the landlords. Therefore, there is no objection to placing landlords in a separate class.
As for the amount of the damages claim, the court ruled that the landlords did not sufficiently demonstrate that re-letting would be impossible. The landlords only claimed that it would be difficult to rent at the rental amount owed by the applicant. The applicant did not dispute that the rent might be lower. The landlords assumed that the rent would fall by approximately 5%. Since the exact amount of the damages can only be determined after the homologation of the agreement, the court did not specify a precise amount of damages but provided only a calculation method. This calculation method entails the following: the total damages amount to nine times the monthly rent plus 5% of the monthly rent multiplied by the remaining term of the lease, with a deduction of 12 months (from the date of homologation of the agreement).
The decision of the court can be reviewed here.
Conclusion
The provider of a restructuring agreement in the WHOA procedure has the freedom to place a landlord with a (future) claim for damages in a separate class, which may be beneficial. However, it is required that adequate justification be provided for why creditors are placed in a certain class. wel vereist dat er afdoende gemotiveerd wordt waarom schuldeisers in een bepaalde klasse worden ingedeeld.
The amount of the damages claim is calculated based on a calculation method. In the above case, this was nine months’ rent due to the assumption that a new tenant could be found within twelve months, with a three-month notice period. Additionally, 5% of the monthly rent for the remaining lease term beyond twelve months is included to account for a possible decrease in rent. In summary, a landlord can be compensated for both vacancy and potential rent reduction. As a result, the damages for landlords in a WHOA procedure are limited through this calculation method.
If you have questions regarding your position as a landlord in a WHOA procedure, or if you have other questions about the WHOA and/or your legal position in this context and/or its possibilities, the corporate law attorneys and legal experts at SPEE Advocaten & Mediation are happy to serve as your knowledgeable point of contact.