No defect

The Supreme Court ruled that government measures in connection with the COVID-19 pandemic do not qualify as a “defect” within the meaning of section 7:204(2) of the Dutch Civil Code. 

The COVID-19 pandemic is an unforeseen circumstance for leases concluded before 15 March 2020

While claims on the basis of a “defect” are often already contractually excluded (for example in leases on the basis of the format of the Dutch Council for Real Estate), most claims are based on the principle of “unforeseen circumstances” within the meaning of section 6:258 of the Dutch Civil Code. 

The Supreme Court ruled that the COVID-19 pandemic can indeed be regarded as an unforeseen circumstance if the tenant is dependent for its turnover on the attendance of the public and provided that the lease agreement was concluded before 15 March 2020 (i.e. the date on which retail premises were forced to close for the first time in the Netherlands due to the COVID-19 pandemic), even if rent discounts are contractually excluded. For leases concluded after this date, it should be assessed on a case-by-case basis whether the COVID-19 pandemic constitutes an unforeseen circumstance.

Calculation of rent reduction

For the calculation of the actual amount of rent reduction, the Supreme Court provided a formula based on the so-called “fixed charge method”. Starting point is that the financial burden suffered by the tenant as a result of the COVID-19 pandemic must be equally divided between the landlord and the tenant, in which the support that the tenant received from the government (in the form of ‘Tegemoetkoming Vaste Lasten’, often abbreviated as TVL) designated for rent payments should be taken into account. The principle of reasonableness and fairness could, however, lead to a different division of the financial burden. 

The formula provided by the Supreme Court is as follows:

(agreed rent – TVL support designated for rent payments) x percentage of turnover decrease x 50%

In practice this means that the following steps are to be taken when calculating a rent reduction: 

1.    determination of the percentage of the tenant’s fixed charges that relate to the contractual rent; 
2.    deducting the received TVL support designated for rent payments from the contractual rent; 
3.    calculation of the percentage of the tenant’s turnover decrease; and 
4.    equal division (i.e. 50% each) between the landlord and the tenant of the calculated loss. 

Authored by Carola Houpst