Impact of COVID-19 on leases
The COVID-19 virus outbreak already has a major impact on the international economy and businesses worldwide. Among the effected in the Netherlands are landlords and tenants of commercial real estate. In response to the many questions we are receiving with respect to the impact of the COVID-19 virus on the legal position of landlords respectively tenants, we have set out the following key points at issue.
Based on the (standard) ROZ lease agreements and its general conditions (“ROZ GC”) that are commonly used in the Netherlands a tenant is not allowed to suspend, reduce, deduct or set off its payment obligation. Furthermore, Dutch tenancy law prescribes that a tenant can only claim a rent reduction (clause 7:207 DCC) and – under circumstances – damages (clause 7:208 DCC) in the event of a so called ‘defect’ regarding the leased space.
A defect can be described as a condition or characteristic of the leased space (or any other circumstance that cannot be attributed to the tenant), as a result of which the tenant does not have the enjoyment of the leased space that could have been expected at the commencement of the lease.
Please note that according to the (commonly used) ROZ GC a tenant in general cannot claim rent reduction and damages (such as indirect damage and loss of profit) under the lease, unless in case of a serious failure that is attributable to the landlord or if the landlord fails to remedy such defect within a reasonable term.
Customer reduction/turnover decline
The fact that the number of customers (drastically) reduces and – as a result thereof – the turnover of a tenant declines, commonly does not qualify as a defect under the lease, which means that the landlord cannot be held liable in case the number of customers reduces and/or turnover declines due to the COVID-19 virus. The current situation is very similar to an economic crisis/recession and in general recessions and economic crises are considered circumstances that a tenant must take into account as its (own) entrepreneurial risk. Thus, generally a tenant cannot claim rent reduction and/or damages from the landlord under these circumstances. This might be different in case parties have agreed to deviate from the GC, e.g. in case the landlord has guaranteed a minimum number of customers and/or turnover.
Closure of the leased space, either by landlord or by tenant
In several situations either landlord or tenant can decide – or is forced – to close the leased space.
A tenant chooses to stop operating its business due to the COVID-19 virus
Various scenarios are imaginable where a tenant decides to close the leased space. For example: the tenant gets the virus him/herself or employees no longer come to work. In general, based on most commercial lease agreements, a tenant is obliged to fully and actually operate the leased premises during the term of the lease. Should the tenant breach this obligation, the landlord may – in addition to demanding compliance of the lease agreement – claim damages and/or the contractual penalties. As mentioned above, the current situation re the COVID-19 virus in general falls under the tenant’s (own) entrepreneurial risk and therefore does not provide the tenant any rights to e.g. (temporarily) stop operating the leased space, unless agreed upon otherwise in the underlying lease agreement or in the situation that operating cannot reasonably be expected of the tenant. Should the tenant nevertheless e.g. (temporarily) close its business, the landlord may hold the tenant liable with respect to its (exploitation) obligations under the lease.
However, please note that as the current situation is an exceptional and unprecedented situation, it may be ruled that operating its business cannot reasonably be expected of the tenant under the given circumstances. Furthermore, the tenant may be able to appeal to unforeseen circumstances (clause 6:258 DCC). In that case, the lease agreement can be changed or terminated (fully or partially) in court. Whether the Coronavirus qualifies as an unforeseen circumstance cannot be excluded in advance.
A tenant stops operating her business due to government measures
Most lease agreements oblige tenants to actually use the leased space, in which case the landlord will have a right to insist on the obligation of the tenant to use. However, most leases also include obligations on the tenant to comply with legislative requirements. If complying with legislation prevents a tenant from operating from the leased space, it is likely that it would not be in breach of an ‘obligation to use’ clause.
The landlord closes the leased space due to government measures
In case the government imposes a closure and the landlord e.g. closes an entire shopping center or office building, it is not likely that the landlord will be liable: the landlord will have to follow these measures and also the tenant is obliged to do so, since (as said) most leases include obligations for the tenant to comply with legislative requirements. Since the closure cannot be described as a serious failure that is attributable to the landlord, the tenant in general cannot claim rent reduction and/or damages.
The landlord chooses to close the leased premises
Also in case the landlord voluntary chooses to close the leased space due to the COVID-19 virus, this will (in case the ROZ GC are applicable) not lead to a successful claim (for rent reduction or damages) of the tenant towards the landlord, since these claims are excluded in the ROZ GC. However, under circumstances – which will differ from case to case – a decision from the landlord to close a building of which a leased space forms part, might be attributable to the landlord, so it cannot completely be excluded that a landlord will be liable in this situation.
Easter agreement
On Friday 10 April 2020, stakeholders and representatives of real estate parties and retailers in the Netherlands, the Ministry of Economic Affairs and Climate Policy and the members of the Commercial Real Estate Committee of the Dutch Banking Association have agreed on a package of (support) measures to divide the economic consequences of the Corona crisis as equally as possible between the parties involved, such as retailers (and their shareholders), landlords, banks and the government. This so-called Easter agreement (Paasakkoord) is intended to provide the parties involved (short-term) point of references with respect to tailor-made solutions per retailer, per landlord and/or per location. For example, parties can agree on applying a rent suspension of three months as of April 2020 (which amounts to at least 50%), provided that the retailer can demonstrate that it has suffered a loss of turnover of at least 25% in April – May – June. In addition, this loss of turnover must be a direct consequence of the Corona crisis.
For further conditions and details of this Easter agreement please be referred our article in this regard.
In conclusion, as the current situation is an exceptional and unprecedented situation, we recommend contacting your landlord(s) respectively tenant(s) to reach workable (mutual) solutions for the time being.
Please contact us if you have any questions or require assistance in relation to the above.
