In the past months, the Dutch courts rendered a range of rulings regarding the consequences of the Covid-19 pandemic and the lease of business space. In many proceedings unforeseen circumstances were relied upon, with the aim of altering the arrangements between the lessee and the lessor. In general, the courts acknowledged the Covid-19 pandemic is an unforeseen circumstance as such, but this did certainly not always result in an alteration of the agreement between the parties. On 17 July 2020, a recent judgment of the Court of Amsterdam was added to this list of rulings, concerning the lease of the W hotel in Amsterdam. Before discussing this judgment, we will briefly touch upon the statutory framework of unforeseen circumstances.
Statutory framework unforeseen circumstances
The doctrine of unforeseen circumstances is regulated in Section 258 of Book 6 of the Dutch Civil Code. The first subsection of this section reads as follows:
‘Upon request of either of the parties, the court may either modify the effects of a contract or set it aside in whole or in part, on the basis of unforeseen circumstances which are of such a nature that the other party, given those circumstances, cannot expect, in accordance with generally held standards of reasonableness and fairness, the unaltered contract to continue to be valid and enforceable. The court may grant such modification or setting aside a retroactive effect.’
First and foremost, the doctrine of unforeseen circumstances is applied with restraint by the courts. For a reliance on this doctrine to be successful, the following requirements must have been met. Firstly, circumstances must occur that are unforeseen. The decisive factor here is not whether the circumstances were foreseeable when the agreement was concluded, but which assumptions the parties took as their starting point. The question is whether the parties had the wish to account for unforeseen circumstances, and have provided for these circumstances in their agreement. Secondly, the circumstances have to be of such a nature that the unaltered continuation of the agreement cannot be expected. Restraint is in order here, since compliance with the agreements made is always the starting point. Thirdly, the second subsection provides that a reliance on unforeseen circumstances shall not hold to the extent that the person invoking the circumstances is accountable for them ‘pursuant to the very nature of the agreement or pursuant to generally accepted principles’.
Ruling in Preliminary Relief Proceedings, Court of Amsterdam, 17 July 2020
The Facts
Palace Hotel leases two buildings at the Spuistraat in Amsterdam from Deka since 6 October 2017. In these buildings, Palace Hotel operates the W hotel as well as three restaurants, shopping space and a nightclub. The monthly rent is € 580,255 exclusive of VAT and is increased by a percentage of the turnover. On 1 October 2020, the fixed rent component will be increased to €833,333.33 exclusive of VAT per month. According to the general terms and conditions applicable to the lease, Palace Hotel is not entitled to any suspension, discount, deduction or set-off.
Because of the Covid-19 pandemic, the restaurants in the leased property have been closed by government orders from 15 March to 31 May 2020. The hotel too was closed on 18 March 2020 due to a loss of turnover. Since 1 April 2020, the Palace Hotel has not been paying Deka any rent. Consultations between the parties about a reduction of the rent did not lead to solutions and Palace Hotel has brought preliminary relief proceedings before the Court.
Claims of Palace Hotel
In preliminary relief proceedings (being urgent proceedings for a preliminary measure in anticipation of proceedings on the merits), Palace Hotel claimed (in summary) a waiver of the rent for the period from 12 March up to and including 15 June 2020, and a reduction of the rent for the period from 15 June up to and including 31 December 2020. Palace Hotel based its claim, inter alia, on the arguments that due to the 1.5 metre distance requirement operating the hotel and the restaurants is only possible with limitations due to the 1.5 metre requirement, and that it normally welcomes mainly businessmen from the United States, who are currently prevented from travelling to the Netherlands due to restrictions. Palace Hotel estimates its aggregate loss of turnover for 2020 at approx. € 25.5 million.
Defence of Deka
The bottom line of Deka's defence is that it was Palace Hotel's own choice to close the hotel, and that the circumstance that most guests come from the United States is within the sphere of risk of Palace Hotel. According to Deka, Palace Hotel has insufficiently substantiated its financial position and the unforeseen circumstances are accounted for in the lease through the Triple Net Basis clause, on the basis of which all circumstances that limit the enjoyment of the leased property are for the account of Palace Hotel.
Ruling of the Court
First and foremost the Court stated that the Covid-19 pandemic, given its scope and its consequences for the economy and society, must in principle be designated as an unforeseen circumstance, and that the parties have not accounted for the consequences thereof in the lease.
Next, the Court held that the closure of the hotel in order to save costs was a ‘perfectly’ reasonable decision, which was caused directly by the consequences of the corona crisis. The occupancy rate of the hotel had fallen overnight to practically zero, and it was not responsible to keep incurring costs in order to remain operational, while no revenues were coming in. By closing the hotel costs could be saved.
Furthermore, the Court considered that although the hotel is now open again, the operating loss in quarter 2 was almost €1.9 million and an operating loss of €419,000 is expected for quarter 3. The occupancy rate of hotels in Amsterdam is still low, and the Court does not consider it likely that visits by the American guests of the W hotel will pick up any time soon.
All things considered, the Court is of the opinion that the corona crisis has compelling consequences for Palace Hotel, and that this has seriously disrupted the value ratio between the performances of the two parties. Under these circumstances, Deka cannot expect the unaltered continuation of the agreement according to standards of reasonableness and fairness. In this case it is not a matter of declining numbers of visitors due to changing market conditions, but the supply of visitors has almost completely disappeared due to the corona crisis and the ensuing government measures. These circumstances are not for the account of Palace Hotel and do not fall under the entrepreneurial risk.
Since neither party can be blamed for the occurrence of the unforeseen circumstances, the Court considers it obvious to divide the resulting financial loss among the parties. Therefore, the Court decides to partly suspend the obligation of Palace Hotel to pay rent: 50% for quarter 2, 40% for quarter 3, and 25% for quarter 4 of 2020. Eventually it will be for the court in proceedings on the merits to decide whether, and to what extent, tomorrow never comes (for the payment). Therefore the condition was imposed on Palace Hotel to start proceedings on the merits within one month.
Conclusion
As mentioned before, this is not the first ruling in which the Covid-19 pandemic is designated as an unforeseen circumstance. However, it is one of the most radical rulings so far with respect to encroaching on the contractual relationship between parties. An important note is that this is a preliminary measure, and that the urgent nature of preliminary relief proceedings limits an extensive consideration of the positions and arguments brought forward by the opposing parties. Therefore, some parts of the judgment are unmistakably cutting corners. In the end, proceedings on the merits between Palace Hotel and Deka will have to tell whether the suspended payment obligations must be performed after all. Or to put it differently, the last word has not yet been spoken about this matter. To be continued.
Feel free to contact Nico Jacobs or Loes ter Meer if you have any questions.
