Approval of Deviating Lease Clauses; How Does it Work Again?

The law protects lessees of hotels. Hotels fall within the lease category of ‘retail commercial space’ (also known as ‘290’ space, after Section 7:290 of the Dutch Civil Code). The legislator’s wish to protect this category of lessees was based on the belief that they should get a chance to build up a business and to generate income and goodwill.

Lessees of a hotel enjoy the following forms of protection, among others: fixed lease terms apply (of two consecutive five-year terms); the lessor can only terminate the lease on limited grounds for termination; and the lessee can request that the rent be adjusted to the market rent. We wrote about this last aspect in a previous article.

All arrangements that conflict with this (semi-mandatory) legal protection, and are detrimental to the lessee, are voidable. Of course, parties may jointly decide – sometimes as part of their greater package of arrangements – to deviate from the protection of the lessee. Such deviations (without the risk of being annulled by the tenant) can only be made with the court's approval. How does this work again, and what should be considered in this context? I will explain in this article.

Section 7:291 of the Dutch Civil Code (‘DCC’) provides that the sections on retail commercial space cannot be deviated from to the detriment of the lessee, unless such deviation was approved by the court. Both parties can seek such approval by submitting an application to the court. The application has to state the ground on which it is based and the text of the (deviating) clauses to be approved.

The court will only grant the approval if the deviating arrangement does not essentially curtail any rights the lessee derives from the law, or if the lessee’s social position, compared to that of the lessor, is such that he does not require the protection. According to the literal text of Section 7:291 DCC, at least one of these two conditions must be met. However, case law shows that some judges believe that the two conditions must be considered in relation to each other.

It happens often that parties deviate from the statutory lease term and the lessor’s limited grounds for termination. By law, two lease terms of five years each apply, after which the lease is extended for an indefinite period. Once the lease terms have expired, the lessor can only still terminate the lease on specific grounds, such as the property being urgently required for the lessor's own occupancy, or the lessee being a bad lessee. Since both the lessee and the lessor may want to have control and certainty about the lease term and its ending, they may prefer to agree on a fixed term of 10 years, after which the lease ends automatically. As this choice deviates from protective tenancy law, it is subject to approval. Another widespread example is that of a turnover rent (or component of the rent), where the parties agree to exclude the legal option of a rent review (based on the market rent).

In their application to the court, the parties have to clarify that the above-mentioned conditions have been met. This is often done by substantiating why a lessee does not need the legal protection, for example by providing information on the company’s size, sales data, experience, etc. Large lessees like multinationals or multiple site enterprises will usually have no problem to substantiate this, unlike smaller or inexperienced parties.

Whereas in the past court approval may have been regarded as a formality or ‘rubber-stamp job’, some courts appear to have changed their policies on this point. While courts used to assess applications only on the basis of the written documents, parties are now increasingly called to court to explain their situation in person. This happens especially to smaller lessees, about whom the court may doubt whether they waive their legal protection wrongly, or without proper consideration.

In principle, there is no deadline for submitting an application for approval to the court. Applications can still be submitted after a lease has commenced. However, given the essential importance of this approval – of a deviating lease term, for example – it is quite common for parties to include the court approval in the lease in the form of a condition precedent. The lease will then only enter into effect if and as soon as the court has granted the approval.

Deviation from protection under tenancy law is a common topic of negotiation between lessees and lessors of hotel space. Although it is generally easy to obtain the court’s approval for such deviating clauses, this may differ depending on the lessee’s business and the court to whom the application is addressed. Are you interested in other aspects of lease that are relevant to the lease of a hotel? Please read our previous articles in this series (in Dutch).