Rent reduction due to COVID-19 measures?

Nienke Beun

Rent reduction due to COVID-19 measures? | JPR Advocaten

About the calculation of rent discount due to the COVID-19 crisis in Dutch case law

Introduction

On 7 July 2020, I wrote an article about rent reduction due to COVID-19 measures. Meanwhile, more ‘COVID-19 rulings’ have appeared, including some in main proceedings. This article provides an update based on three main proceedings.

A quick recap

The fact that a lessee cannot (fully) use the rented property due to government measures leads to ‘a defect’ according to most courts. The consequences of this defect should not (solely) be borne by the lessee, even if relying on those consequences is contractually excluded. This is often the case when it comes to the General Provisions (ROZ Real Estate Council of the Netherlands).

The COVID-19 crisis is regarded by various courts as an unforeseen circumstance. As a result of this unforeseen circumstance, the unaltered maintenance of the agreement is unacceptable according to standards of reasonableness and fairness. Whether those unforeseen circumstances should lead to a (partial) change of the agreement is assessed on a case-by-case basis.

A large number of lawsuits have been brought since March 2020. This mainly concerned preliminary relief proceedings. Many lessees, mainly catering entrepreneurs, enjoyed the support of the courts. However, things did not go well for (for example) Vitesse football club. Vitesse had failed to sufficiently substantiate that its dire financial situation was a (direct) result of the COVID-19 crisis.

In a nutshell: a lessee who wants a reduction in rent will have to substantiate this properly on the basis of, among other things, financial results. The court will not be satisfied with mere statements and/or a weak financial substantiation.

Rulings in preliminary relief proceedings provide a mere indication of how the main proceedings may turn out. This is due to the fact that no definitive ruling can be made in preliminary relief proceedings about the extent of the rent reduction. Only a suspension of the rent can be pronounced. Several rulings in main proceedings have since been published. I will discuss these rulings below.

Court of The Hague 21 January 2021 ECLI:NL:RBDHA:2021:461 (restaurant/pub)

The lessor is demanding the dissolution of the lease due to rent arrears. The lessee relies on a defect (due to government measures), as well as unforeseen circumstances or force majeure.

The court rejects the dissolution of the lease as claimed by the lessor. This is due to the limited rent arrears, which are only two months.

The court further finds the following (among other things):

“In view of the considerations above, the COVID-19 crisis, given its scale and the consequences for the economy and society, must therefore be deemed an unforeseen circumstance within the meaning of Article 6:258 of the Dutch Civil Code. The parties have not factored this pandemic and its consequences into the lease concluded between them and could not expect from each other that this would be the case (see i.a. Amsterdam Court of Appeal, 14 September 2020, ECLI:NL:GHAMS:2020:2604)”

In this case, the lessee has substantiated the extent of the loss of sales on the basis of annual figures, account statements and ‘Tikkie payments’. In this case, the court also took into account government support received. According to the court, the lessee has sufficiently substantiated that this support is not sufficient to be able to pay the full rent. Furthermore, according to the court, this government support is not just intended to be able to make the rent payments.

The court then assesses to what extent the lease needs to be adjusted and reaches the following decision:

“…..that the sub-district court rules that [defendants] owe 50% of the rent for the period from 15 March 2020 to 31 May 2020 and, for the period from 15 October 2020 up to and including the time when the closing measure ends. After all, during that period, the catering industry was closed, except for takeaways and delivery services.”

The rent discount for the period during which the catering industry was allowed to reopen its doors (with restrictions) is set by the court at 25%.

Given the background of the rent arrears, the lessor’s claim for a contractual fine (General Provisions (ROZ Real Estate Council of the Netherlands)) is rejected. The fact that the rent arrears amounted to (only) two months may have played a role in this as well.

Court of Amsterdam dated 10 December 2020 ECLI:NL:RBAMS:2020:7108 (hostel)

In preliminary relief proceedings, an eviction by order of the lessor had already been granted due to the rent arrears. Subsequently, the main proceedings concern the rent payments and the lessee’s claim for a rent reduction.

In this instance too, the court ruled that the COVID-19 crisis must be regarded as an unforeseen circumstance. This crisis has caused “the performance of the lessor (the possibility to have the rented property utilised) and the performance of the lessee (paying the rent) to become mismatched”, according to the court.

The lessee has submitted ledger accounts, sales figures and bank statements to substantiate his position. On this basis, it has been established that the fall in sales amounts to 83%. The court finds that this loss is related to the COVID-19 crisis. This is because national and international travel has been strongly restricted from mid-March 2020 and the lessee has made it sufficiently clear that his guests are mainly international travellers.

The court then comes up with a calculation on the basis of which the rent should be adjusted:

“If it has been established that there is a fall in sales as a result of the COVID-19 crisis, the rent must, in principle, be changed, in which the starting point is that the setback must be divided equally between the lessee and the lessor. This means that if the loss of sales amounts to 100%, the rent is, in principle, reduced by 50%. The reduction in rent is calculated as follows: the rent x percentage fall in sales x 50%.”

This calculation method is not entirely in line with previous rulings. In most cases, including the aforesaid ruling of the Court of The Hague, fixed percentages were applied (25 or 50%). The court now uses an ‘objective’ formula to determine the adjustment of the rent. The formula is based on the scope of the fall in sales.

The lessor’s reliance on a contractual exclusion of rent reduction has failed. This is because, according to the court, this provision does not apply on account of unforeseen circumstances.

In this case however, the court DOES award the contractual fine. According to the court, the situation does not justify systematically leaving the full rent unpaid. In the current situation, the lessor’s interests must be taken into account as well, according to the court.

Court of Amsterdam dated 9 March 2021 ECLI:NL:RBAMS:2021:937 (hotel)

In this case, it is not the lessor who initiated the main proceedings, but the lessee. The lessee is claiming a reduction in rent on account of the COVID-19 crisis.

In this ruling too, the starting point is that since neither party contributed to the emergence of the COVID-19 crisis, passing on the full scope of ‘this setback’ to the lessee is deemed unreasonable. In principle, the setback must be divided equally between both parties.

When asked to what extent the lease agreement (rent) must be adjusted, this court makes a number of interesting statements:

With regard to the allowance from the Dutch government:

“…. the newly introduced Temporary Emergency Bridging Measure for Sustained Employment (NOW) should be disregarded. Although this allowance forms part of the sales figures from an accounting point of view, it is an allowance that is earmarked to contribute to the wage costs. That part of the sales is therefore not relevant in determining the extent of the impaired quiet enjoyment under the lease. On the other hand, the part of the Fixed Cost Allowance (TVL) that is related to the rent does have to be included in the sales figures. After all, this part of the TVL is intended to cover the continuous rent and therefore has a direct remedial effect on the negative consequences of the impaired quiet enjoyment under the lease.”

With regard to the possibilities of generating sales in a different way:
“…being a hotel without its own restaurant, has made an effort to draw in customers. In doing so, it focused on the local market and homeworkers and offered strongly reduced prices. The fact that Hotel V should have fired its staff in order to be able to pay the rent does not stand up. After all, with regard to these costs, Hotel V is entitled to the NOW, under which it can be reimbursed for a large part of the wage costs. The existence of these wage costs therefore does not relate to the possibility or impossibility to pay rent.”

With regard to calculating the changed rent:
“As considered previously, the starting point is that if there is a drop in sales as a result of the COVID-19 crisis (hereinafter referred to as d), the rent must, in principle, be changed, in which the starting point is that the setback must be divided equally between the lessee and the lessor. If there is a drop in sales of 100%, the original rent (hereinafter referred to as or) is, in principle, reduced by 50%. The changed rent (hereinafter referred to as cr) can be calculated according to this formula: or – (d% ÷ 2) = cr.

In this case, the sales must be set off against sales generated in 2019. In 2020, a decline in sales of 75% has been determined compared to 2019. This leads to a reduction of the rent by 37.5%. As regards the lease for the 48 hotel rooms, for example, this means, in concrete terms, that the changed rent after 16 March 2020 up to and including December 2020 amounts to € 25,955.53 excluding VAT per month, i.e. € 41,528.84 - (75% ÷ 2 = 37.5 %)”

Therefore, no fixed discount percentages are used in this ruling either. A calculation is used instead. This calculation is in line with the calculation already applied by the Court of Amsterdam in its ruling of 10 December 2020.

In this case, the court further determines that the lessee must pay the changed rent until the end of the COVID-19 measures, or until sales have reached 2019 levels again. The lessee, however, is obliged to disclose his state of affairs by continuing to provide the lessor with the sales figures.

In this ruling, the lessor’s claim for a contractual fine is partly rejected. The court finds that, as the rent has changed, any fines, statutory interest and/or extrajudicial collection costs related to the collection of rent that exceed the changed rent are not owed. In other words, the fines ARE due on the unpaid reduced rent.

Conclusion

In any case, the following conclusions can be drawn from these three decisions in the main action:

If on the basis of financial data, it can be substantiated that government measures have resulted in a (significant) decline in sales, a reduction in rent due to unforeseen circumstances is obvious;
Any allowances by the government such as the TVL (Fixed Cost Allowance) are taken into account, on the understanding that according to the Court of Amsterdam, NOW is intended to cover wage costs and not to compensate for fixed rental expenditure;
The reduced rent can be calculated using the formula or - (d% ÷ 2) = cr. In this formula, “or” is the original rent, “d” the drop in sales as a result of the COVID-19 crisis and “cr” the changed rent. Or in more basic terms: % loss of sales x 50% = % discount on the rent;
Whether a contractual fine is due, depends on the situation. If no rent has been paid at all, or if too little has been paid even when allowing for the rent reduction, there is a possibility of fines being awarded;
In principle, lessees can also claim rent reduction with retroactive effect.

These are preliminary conclusions. First, because it cannot be ruled out other courts will arrive at a different calculation method. Second, because it is certain that an appeal has been lodged in one of the above cases. Time will tell whether the formula used will be and continues to be leading.

In addition, of course, claims, both on the part of the lessor and the lessee, must be properly substantiated. Every situation is different and this can also lead to different outcomes in proceedings. Each case is therefore judged on its merits, especially when relying on unforeseen circumstances.

Incidentally, it may also be that the lessee and the lessor reach mutual agreement on rent discount. If so, recording the agreements (for example in a rider) is preferred. When concluding new leases, including a ‘COVID-19 clause’ is an option worth considering.