Recently, there has been much to do about rent reductions due to the corona crisis. Many retailers and catering businesses are in serious trouble and appeal to their lessors (in a more or less balanced way) to suspend and/or temporarily reduce the rent payment obligations. There is a flood of publications in which lessees and lessors are advised about the rights they may enforce in connection with the corona crisis on grounds of force majeure (Section 6:74 Dutch Civil Code), reasonableness and fairness (Section 6:248 DCC), unforeseen circumstances (Section 6:258 DCC), or a ‘defect in the leased property’ (Section 7:204 subsection 2 DCC). We have also written about this topic before; see our article ‘Tenancy Rights regarding retail space and the corona virus; who bears the risks?’ of early March. What was hypothetical back then, has now become a harsh reality. But what about the regular right for rent review under Dutch lease law? A (semi) mandatory right that cannot be underestimated in the changing retail landscape.
Legal framework
The basic principle is that parties are free to determine and change the rent for commercial business premises, like retail shops or catering establishments. The right to apply for a rent review is regulated in Sections 7:303 and 7:304 DCC. Both lessor and lessee may demand that the court shall determine the rent, if either party believes it does not correspond (anymore) to that of comparable local commercial premises. Depending on the circumstances, such a demand may lead to an increase or a decrease of the rent. In brief, a right that both parties may use to their advantage.
Time
An action for review of the rent can be made as of the end of the (initial or extended) agreed lease term, or if no definite term has been agreed, upon expiry of each five-year period. This means that in principle, the rent cannot be reviewed during the current lease term (except in the case of unforeseen circumstances and/or in mutual consultation between the parties).
Way of determination
In specifying the rent, the court will consider the average applicable rent for comparable local commercial premises in the five-year period prior to the institution of the action. The starting point is therefore the rent level of comparable business premises on the market. However, as the rent level is considered over a five-year period, the influence of cyclical fluctuations is diminished. While the term usually used is ‘market rent', the correct term would actually be ‘reference rent’, measured over a longer period of time.
Expert advice
The action must be accompanied by an expert advice on the new rent, jointly appointed by the parties. Where the parties cannot agree on the appointment of an expert, the court will appoint an expert. The expert advice must be drawn-up on the basis of afore-mentioned criteria and give detailed insight how the advised rent was established. If there is no applicable reference material, the court will make an estimate. Incidentally, the court is not obliged to follow the expert advice, but where it deviates from this advice, the court will have to substantiate so. The court may also take the initiative to appoint a new expert.
Reference Standard
What ‘comparable business premises’ are will often depend on factors like location, size, layout, quality level, accessibility and the presence of facilities in and around the business premises, such as parking facilities. The contractual designated use and the business operations carried out inside the business premises are not taken into account. The substantiation of the term ‘local’ will depend on the number of reference objects in the immediate surroundings of the leased property. In principle, the reference objects must be located nearby. If there are insufficient reference objects in the neighbourhood, another, comparable location must be looked for where comparable business accommodation is available.
Commencement Date
The rent specified by the court usually takes effect as from the date on which it was demanded.. If necessary, this can be with retroactive effect, but it can never be before the commencement of the new lease term. If the circumstances of the case give rise to this, the court may also set a different commencement date, or may rule that the rent will be adjusted in stages.
Semi-mandatory law
The risk of a review of the rent often makes parties to deviate from the statutory regime, or even to exclude the option of relying on it altogether in their lease agreement. This way they wish to create more certainty about the rent level in the future. However, the right to a review of the rent is of semi-mandatory law. This means that if it is deviated from to the detriment of the lessee, this can only be done with the court's approval prior to entering into the lease. If this path is not followed, such a deviation or exclusion in the lease will be voidable, on the understanding that it is only the lessee that make invoke its voidability; for the lessor, it is impossible to escape the binding force of the lease agreement.
Conclusion
To be clear: the right to a review of the rent works two ways. In an upward market where demand is big and rent prices are on the increase, the lessor will benefit from having the option to review the rent, because the rent agreed may be (many times) lower than the market rent. The other way round, in a downward market with growing rental voids and falling rent prices, the rent review mechanism may be helpful to the lessee, since the rent agreed may no longer be in accordance with the market rent. Although the full scope of the corona crisis is still unknown, it is already clear that the retail and horeca landscape will change and the current level will come under pressure. Instead of long and uncertain proceedings based on unforeseen circumstances, applying for the legal right to rent review may offer more solace in these crisis times. Of course, this will depend on whether the agreed lease term is about to expire soon. However, in doing so, parties must bear in mind that the reference rent is not the same as – and may yet be higher than – the actual market rent. This has to do with the condition that the courts, when specifying the rent, have to consider the average applicable rent for comparable local commercial premises in the past five-year period.
Please feel free to contact Nico Jacobs and/or Loes ter Meer if you have any questions.
