When negotiating a lease for hotel space, parties often talk about what will happen to the facilities applied in the leased property (whether or not by the lessee) when the lease ends. It is not unusual for parties to agree that the lessee will leave these facilities behind (whether or not at the lessor's request), for example to facilitate a continuation (by the lessor) of the hotel operations and/or to attract a new hotel operator faster. Alternatively, the leased property must be restored to its original condition. The financial implications of such arrangements will often be part of the discussion, and it is understandable that they are paid attention to, considering the investments involved in a fit-out package and fixtures and fittings. However, a topic less likely to come up is what to do with goodwill or other benefits at the end of a lease. There is a statutory provision that covers this topic – Section 308 of Book 7 of the Dutch Civil Code – but in practice, this Section is rarely relied upon. Some people even refer to it as a ‘dead letter’. Is this Section underestimated? What are goodwill fees and other benefits upon the end of the lease really all about?
Legal Framework of Section 7:308 DCC
If the lessor, having terminated a lease by notice, enjoys a benefit from the leased premises being subsequently used for operating a business similar to that conducted in those premises by the former lessee, the former lessee may demand to be fairly compensated by the lessor (with a goodwill fee). Below, we will discuss the requirements of this regulation from Section 7:308 DCC one by one.
Termination by lessor
The lessee is only entitled to compensation if the lease has ended by the lessor giving notice of termination. It cannot have ended in any other way, such as notice of termination by the lessee, mutual consent, the expiry of a term agreed, or rescission by a court. For example, there is no entitlement to compensation if the lease ends by operation of law upon expiry of the term agreed with the court's approval. Legal literature demonstrates that the same is true for a break option that was agreed with the court's approval in the case of disappointing business and a turnover-related rent, because in that case the lessee knows that the business activities in the leased property are temporary.
Benefit from similar business
The only eligible benefit is that enjoyed by the lessor because the business accommodation was used as a similar business. Examples of this benefit are building on a constant clientele and existing reputation, which results in lower marketing and sales costs and/or a shorter start-up period. The lessor may enjoy the benefit both from starting his own similar business (a hotel) in the building and from being able to lease the building to a new hotelier on more favourable terms (e.g. without a step-in rent or rent-free period). However, the benefit must be attributable to the business activity of the departing lessee, and the lessor must actually enjoy the benefit (which is probably harder to prove if lease terms are more favourable).
Arising from nature or location, or alterations made
Subsection 2 of Section 7:308 DCC provides that the benefit may not arise from ‘the nature or location’ of the business accommodation. The idea behind this is that such a benefit cannot be attributed to the business activity of the former lessee and can therefore not lead to compensation. This implies a (considerable) limitation to the concept of ‘goodwill’ within the meaning of Section 7:308 DCC. In practice it will not be easy to discover a benefit arising from the location, as opposed to a benefit from business activities of the former lessee. Besides, subsection 2 also provides that the benefit cannot arise from alterations made to the business accommodation, even if they consist of investments by the former lessee.
Fair compensation
The compensation the former lessee can claim from the lessor does not consist of damages. It is compensation for the benefit the lessor enjoys as a result of the business activities. Because it is not possible to make an exact calculation of this benefit, this compensation is awarded ‘in fairness’. According to legal history, attention will have to be paid to what is ‘customary’ in various sectors. Unfortunately, case law does not give us many practical examples of this.
Term
No compensation can be granted anymore if the leased property is used again for the operation of a similar business after more than one year has expired since the end of the lease. The idea behind this is that after the expiry of one year, the new operator no longer enjoys a (direct) benefit from the previous business activities of the former lessee.
Semi-mandatory law
The regulation in Section 7:308 DCC is of semi-mandatory law. This means that if it is deviated from to the detriment of the lessee (in other words: if the section is excluded), this can only be done with the court's approval prior to concluding the lease. In the absence of such approval, a deviation or exclusion in the lease made by the lessee will be voidable.
Conclusion
The fact that Section 7:308 DCC seems or appears to be a ‘dead letter’ in practice can largely be explained by the limitations and conditions described above. What is more, in view of the protective nature of Dutch rent laws, it will not happen often in practice that a lease ends by a straightforward notice given by the lessor, but rather by the lessee ceasing the operations in the leased property, or by termination for cause. Still, it is not inconceivable for Section 7:308 DCC to pop up, for example if a lease has been continued (tacitly or otherwise) after the expiry of the term agreed. In any case, it is worthwhile to consider Section 7:308 DCC when agreeing on or asking approval for deviating provisions. Who knows, the resuscitation of Section 7:308 DCC may give you something interesting to talk about at the negotiating table.
