Lessees of retail space are highly protected by tenancy law. Lessors may terminate leases against the lessee’s will only if they comply with the grounds and terms for termination specified by law.
Over the past few years lessors have increasingly faced unprofitable exploitation of their properties, and the demand for termination possibilities has grown. The Courts appear to be sympathetic.
If a lessor feels that its interest in terminating the lease exceeds the lessee's interest in continuation, the lessor may terminate the lease invoking a general weighing of interests. Lessors may invoke that general weighing of interests only if the lease has been ongoing for at least ten years.
In the general weighing of interests by the Court the lessee's right of continuation has always been a priority. General arguments such as the long terms of leases, the importance and ambiance of a specific location, limited possibilities of recouping removal and investment costs were usually considered overriding. They still carry considerable weight but increasingly these arguments are no longer regarded as decisive.
Courts explicitly recognise that a lease is finite, in principle. After a long-term lease the lessee's need for protection loses strength as an argument to restrict the lessor’s right to do with the real property as it pleases. In cases in which the lessee's need for protection is less evident the Court awards more importance to the lessor's interest in being able to improve returns.
In recent case law Courts give lessors room to exploit their properties in the most profitable way possible, enabling them to determine how they wish to deal with the recession. Please note that these cases (almost) always concerned improvement of returns by redevelopment, renovation or expansion.
There is a trend towards bigger retail units. Generally speaking, premises that have been divided up into (too) small units cannot be renovated if the existing leases are upheld. The target lessees of bigger units are usually not the same as those of smaller units. If the lessor can demonstrate that alterations of the premises will improve returns, it could be difficult for lessees to substantiate that their interests outweigh those of the lessor. In one case, for instance, the Court held that following renovation the lessor did not have to accept loss-making exploitation and that a current lessee could not stop the expansion possibilities of the leasable surface area.
The above trend does not imply that sitting tenants are powerless. However, strict or stricter requirements have been set for the lessee's obligation to substantiate arguments (i) that no similar property is available, (ii) the lessee depends on this lease, (iii) the customers are evidently tied to the location and (iv) the possibilities of recouping removal and investment costs. Any non-specific arguments appear to fail in court.
The general weighing of interests obviously differs per case and there are many arguments supporting the interests of either party.
For more information, please contact Joris Bal.