COVID-19-related mandatory closures of rented premises: The consequences for lessors and lessees
Preliminary questions referred to the Dutch Supreme Court
As part of its measures to protect the public from COVID-19, the Dutch government ordered the closure of retail and hospitality businesses in the Netherlands, which had a severe effect on these sectors financially. Since the outbreak of the pandemic, numerous discussions have been raging in both the courtroom and the legal literature about whether the financial consequences should be shared by lessors and lessees. According to the case law, in certain cases, forced closure of leased property may constitute a “defect” within the meaning of article 7:204(2) of the Dutch Civil Code. Tenants have been able to claim a reduction in rent on that basis. The case law to date has further shown that sometimes lessors and lessees may rely on the principle of “unforeseen circumstance” within the meaning of article 6:258 of the Dutch Civil Code to obtain compensation for the financial consequences of COVID-19.
Preliminary questions have been referred to the Supreme Court on this matter. In its decision of 31 March 2021 (ECLI:NL:RBLIM:2021:2982), a cantonal judge in the Limburg Court referred preliminary questions to the Supreme Court of the Netherlands about the defect principle in article 7:204(2) of the Dutch Civil Code and the unforeseen-circumstance principle in article 6:258 of the Dutch Civil Code.
On the 30th of September, Deputy Procurator General M.H. Wissink (P-G) drafted an advisory opinion in response to the preliminary questions referred to the Supreme Court. It's very likely that the Supreme Court will follow the P-G in his advice.
The Supreme Court’s ruling on these “preliminary reference questions” (prejudiciële beslissing) will have a significant effect. This is because the ruling will (amongst other things) determine whether the harmful consequences of COVID-19 measures are to be shared by both landlords and tenants. The Supreme Court's decision will be important not just for leases in the hospitality and retail sectors, but also for other leases in which tenants have been adversely affected by the measures. There have been COVID-19-related government-mandated closures in other sectors as well (e.g. sports clubs, hair and beauty care businesses and cultural institutions). If the Supreme Court finds that this kind of measure is a “defect” within the meaning of article 7:204(2) of the Dutch Civil Code, this ruling would also similarly apply to other sectors in which leases are for article 7:290 business premises or article 7:230a business premises.
The underlying facts in this case
International brewery giant Heineken leases out many hospitality properties in the Netherlands. Some are owned by Heineken; others are leased by Heineken and then subleased out to others. At the instigation of Koninklijke Horeca Nederland (an association representing many businesses in the Dutch hospitality sector), Heineken decided to waive two months' rent for the bars and other hospitality businesses that were renting from it. This waiver applied both to situations in which Heineken was the owner/lessor of the property and to those in which Heineken was leasing the property and then subleasing it out to a hospitality business. In the subleasing situations, Heineken asked the owner/lessors to agree to a proposal in which they would pay one of the two months' rent. A large proportion of the landlords agreed to this. For this reason and in view of the special and extreme circumstances, Heineken decided to go ahead with its plan to waive two months' rent for its sublessees. Not every owner/lessor was willing to cooperate, but Heineken went ahead and implemented the plan in full. In a case brought in the cantonal sector of the Limburg Court, one of the arguments submitted by an owner/lessor was that Heineken was unauthorized to pass on to the owner/lessor the rent reduction it had granted to its sublessees. The owner/lessor believed that he was actually being forced to waive one month's rent even though he himself was a hospitality business owner affected by the COVID-19 measures. He had ongoing mortgage payments and other obligations. Because of this proposal, he was being forced to indirectly support a competitor (Heineken’s sublessee).
Was earlier case law based on articles 7:204(2) and 6:258 of the DCC applicable?
Heineken’s view was that the case law so far had indicated that Heineken, as a lessee, was entitled to claim a reduction of at least 50% of the rent. This was possible under article 7:207 of the Dutch Civil Code because, as a result of the government measures, there had been a reduction in the enjoyment of the leased property. This constituted a “defect” in the leased property within the meaning of article 7:204 (2) of the Dutch Civil Code. In addition, the COVID-19 pandemic was an “unforeseen circumstance” within the meaning of article 6:258 of the Dutch Civil Code. In previous cases, a 50% rent reduction had usually been considered reasonable.
The owner/lessor argued that, although this was correct in principle, Heineken and the owner/lessor had a different type of tenancy relationship than the one in the case law. In accordance with that case law, the obligation to pay rent should be divided between the sublessor (Heineken) and the sublessee and not between the owner/lessor and lessee/sublessor (Heineken). In Heineken's proposal, the sublessee ended up contributing nothing.
Preliminary question referred to the Supreme Court
At the hearing, the court consulted with the parties and soon took an entirely different tack: the option of submitting preliminary reference questions to the Supreme Court was exercised. It appears from the judgment that the court ultimately submitted the following preliminary questions to the Supreme Court:
1. Should the government-imposed closure of the hospitality sector as a result of the COVID-19 crisis be regarded as a “defect” within the meaning of article 7:204 (2) of the Dutch Civil Code?
2. If so, on the basis of which criteria should the degree of rent reduction be assessed?
3. (Alternatively) does the restriction in the use of the leased property constitute an “unforeseen circumstance” that can lead to a reduction in rent?
4. If so, what circumstances of the case have weight in determining or apportioning the loss or damage?
The court considered it useful to ask these preliminary questions because it was felt that there was a certain societal need to divide the losses resulting from COVID-19 measures between landlords and tenants. But it had not become been clear how this should be legally framed. This legal framework would be necessary, however, to determine the standards by which this and similar issues should be assessed. This issue was currently the subject of many lawsuits nationwide and was expected to be the subject of many more.
Procedure for referring preliminary questions to the Supreme Court
The option of referring preliminary questions to the Supreme Court is found in article 392 of the Dutch Code of Civil Procedure. Either of its own motion or at the request of a party, a court may refer one or more questions on points of law to the Supreme Court. The Supreme Court answers the questions referred to it by way of a preliminary ruling. The Supreme Court is thus asked to explain or interpret certain specific laws. A condition for the submission of a preliminary reference question is that the answer be necessary for the court to make a decision on a claim in specific proceedings and that (to state it briefly) the answer be relevant to a number of cases. The court must give the parties an opportunity to express their views on the intention to ask preliminary reference questions and on the substance of the questions. The referring court is to reserve its decision on the claim until the decision of the Supreme Court is received. Incidentally, in other pending proceedings, if the answers to the preliminary reference questions are directly relevant to deciding the claim in those proceedings, a decision may be made, either by the court on its own motion or at the request of the parties, to stay the decision until the Supreme Court has made its decision on the preliminary reference questions.
Before deciding preliminary references questions, the Supreme Court is to give the parties to the proceedings the opportunity to make written submissions, in principle within a period of three months. The Supreme Court may also decide to give “anyone” the opportunity to make written submissions. If the Supreme Court decides to do this, an announcement is to be published in nationally distributed newspapers and/or on the website of the Supreme Court and/or other bodies, such as the Council for the Judiciary and the Netherlands Bar Association. Non-parties may, with the assistance of a lawyer qualified to appear before the Supreme Court, apply to the Supreme Court for permission to make written submissions.
When the term to make written submissions comes to an end, the Procurator General of the Supreme court will give an advice on the matter. The Procurator General is the head of the Procurator General's Office at the Supreme Court. This office is an independent part of the judiciary in the Netherlands. The main task of the Procurator general of the Supreme Court is to provide the members of The Supreme Court with independent advice - known as an 'advisory opinion' - on how tot rule in the proceedings before them. The advice given to the Supreme Court is completely independent and the Court is free to decide whether it will follow that advice.
There is no statutorily mandated period within which the Supreme Court must answer preliminary questions, but the Supreme Court itself assumes it will ordinarily take an average of six to twelve months. Cases of great social importance are given priority.
The outcome of the preliminary reference question is highly relevant
In this situation, the court’s preliminary reference questions were posed in a case involving a lease of business premises as referred to article 7:290 of the Dutch Civil Code, specifically the operation of a hospitality business. However, the Supreme Court's decision will be just as significant for other leases in which tenants in other sectors (e.g. sports clubs, hair and beauty care businesses, cultural institutions) have adversely been affected by COVID-19 measures because of a government-imposed COVID-19-related closure. If the Supreme Court decides that this measure constitutes a “defect” within the meaning of article 7:204(2) of the Dutch Civil Code, this will be just as applicable to similar situations in other sectors where the leases are for article 7:290 business premises and/or article 7:230a business premises.
Furthermore, the preliminary reference questions on the “unforeseen circumstance” provision may also be relevant to other mutual agreements. After all, the same COVID-19 measures that restricted a tenant's use of a leased property have also affected other mutual agreements, such as building contracts. If the Supreme Court allows third parties to make written submissions, someone may ask the Supreme Court not to limit the preliminary reference ruling just to the mandatory closure period, but also to address other governmentally imposed restrictive measures.
The Deputy Procurator General’s advisory opinion on the matter
On the 30th of September, Deputy Procurator General M.H. Wissink (P-G) drafted an advisory opinion in response to the preliminary questions asked to the Supreme Court. These questions were referred to the Supreme Court by the cantonal judge in the Limburg Court on March 31st 2021. The advisory opinion is detailed, wort reading, answers many unanswered questions and provides practical guidelines for judicial practice. The preliminary procedure is eminently suitable to quickly provide answers for the legal practice on fundamental legal questions, such as those that are at issue here.
The P-G believes the COVID-19 pandemic constitutes to a defect within the meaning of Article 7:204(2) of the Dutch Civil Code and unforeseen circumstances. According to the the P-G, tenants are entitled to a rent discount, because the corona pandemic could not have been foreseen when the rental agreement was agreed upon. The question then arises: how should the rental discount be determined? The starting point is a (50/50) distribution of the financial loss. The 'fixed charges method' as applied by the Amsterdam Court of Appeal on 15 September 2021 (ECLI:NL:GHAMS:2021:2728) is the most suitable for determining the financial loss, according to the advice. The compensation for fixed charges is deducted from the total fixed costs of the tenant in order to determine the size of the financial loss.
Not just Heineken and the plaintiff in these proceedings are eagerly awaiting the Supreme Court’s decision on these preliminary reference questions. Many other lessors, sublessors and lessees are as well. This will provide definitive clarity on whether losses resulting from the government’s COVID-19 measures (i.e. mandatory closure) can lead to rent reductions.The advisory opinion of Deputy Procurator General Wissink gives us an insight in what we can expect. It's very likely that the Supreme Court will follow the P-G in his advice. It is still unknown when the Supreme Court will make their important decision. We expect that the Supreme Court will decide in the short term because of the significant societal interests involved. For now we will have to be patient.