COVID-19 and commercial rental agreements

Publication

17 April 2020

You might have read in the international news that big international companies such as The Cheesecake Factory, Adidas, H&M and others have announced to the landlords of their stores that they will stop paying rent because of a severe decrease in income due to the COVID-19 pandemic. If you rent a shop in a mall or if you are renting out properties for commercial use, you may wonder what the local rules are for rental agreements entered into before the COVID-19 pandemic. We will discuss some of the main questions landlords and tenants are currently faced with.

General rule: Agreements made remain binding

In principle, parties are legally bound to their agreements also if the economic situation changes. However, local law provides that all agreements are also governed by the rules of reasonability (redelijkheid en billijkheid). The rules of reasonability can entail that it is no longer reasonable to hold a party (fully) to an agreement after circumstances have drastically changed. Two examples of such exceptions are force majeure (overmacht) and the concept of ‘unforeseen circumstances’ (onvoorziene omstandigheden).

Exception: Force Majeure

The possibility to claim force majeure is quite limited according to our local laws. Force Majeure can only be invoked by the landlord or the tenant regarding their respective obligations under the rental agreement when the performance of the relevant obligation has become impossible and such impossibility cannot be attributed to that party. An example: Most commercial rental agreements for malls will include some kind of obligation for the landlord to keep the mall accessible and include obligatory opening hours that the tenant has to comply with. If the government issues COVID-19 measures which provide that malls have to be closed or specific (for example ‘non-essential’) businesses must close, the mall or respectively the tenant can invoke Force Majeure regarding the opening obligations in the rental agreement. However, in this situation it might not be possible to invoke Force Majeure for the obligation to pay rent because the COVID-19 measures do not make it directly impossible to pay rent.

When Force Majeure is successfully invoked for a specific obligation the consequence is that the other party cannot claim damages nor performance for that specific obligation. However, it does in principle not prevent the other party from terminating the rental agreement on the basis of non-performance if this can be justified.

Finally it is important to note that if the rental agreement provides a clause on Force Majeure, such clause  takes precedence over the general provisions of local law and its consequences as described above.

Exception: Unforeseen circumstances

Because all agreements are governed by the rules of reasonability parties need to take each other’s justified interests into account. In case of a drastic change of circumstances it is reasonable to expect parties to renegotiate an agreement. However, if unforeseen circumstances occur, a party remains free to accept or deny a reasonable proposal for amendment of an agreement from the counterparty. If renegotiations are unsuccessful, the party that wishes to change the agreement will need to petition the court.

Local law provides that unforeseen circumstances occur if after entering into an agreement circumstances take place which have not been taken into account when the agreement was negotiated and signed. The sole decline in revenue is in itself not sufficient to qualify as unforeseen circumstances. A pandemic such as COVID-19 however generally qualifies as an unforeseen circumstance if this has not been taken into account in the agreement. 

To successfully invoke unforeseen circumstances in court in order to petition the court to change (e.g. decrease rental payments) or terminate an agreement in whole or in part, these circumstances need to be of such a nature that the counterparty could not reasonably expect the agreement to remain the same.

If the court wishes to change an agreement due to unforeseen circumstances it has great liberty to make such changes. The agreement can be changed or terminated in part or in whole, and temporarily, and made subject to certain conditions. The court can also suspend certain obligations (temporarily) of one or both parties. The court can also apply changes or termination retroactively. 

In amending the agreement the court will aim to restore the original balance that existed between the contracting parties and will look for a fair division of the disadvantages caused by the unforeseen circumstances. As a general rule in case of loss of revenue due to unforeseen circumstances the court is likely to divide this loss 50/50 over both contracting parties; e.g. if the tenant were to lose 50% of its normal monthly revenue, the court might conclude that it is reasonable that the rent is decreased by 25%, the remainder of the loss would come for the account of the tenant. 

If you have questions about your obligations under a rental agreement, do not hesitate to contact me at huiskes@ekvandoorne.com.