Deferring payment of rent due to COVID-19 under ROZ lease agreements for office and commercial space
As a result of the COVID-19 outbreak, many businesses find themselves confronted with a potentially significant decrease in turnover without a clear indication of when this crisis will be resolved. Consequently, companies are trying to limit their costs in these difficult times. Often a company’s rental costs are particularly high and we have been asked by numerous clients what their options are to defer rent payments and what the legal consequences would be if they do. Naturally, this will depend on the wording of each specific lease agreement, but considering many lease agreements in the Netherlands are drafted based on the ROZ model, we can give general insight into frequently asked questions. For this purpose we refer to the 2015 ROZ model for office and commercial space (the ROZ Model).
- Can I waive or postpone my obligation to pay rent due to the COVID-19 outbreak based on the lease agreement?
In principle: no, you cannot. The ROZ Model stipulates that the rent must be paid in one instalment on or before the first day of the period to which the rent payment relates. If the rent is late, the tenant is immediately in default, without a default notice being required. At that moment, the tenant will – by operation of law – incur an immediately payable penalty equal to 1 per cent of the amount due per calendar month, with a minimum of €300 per month. The penalty will not be due if the tenant has made a substantiated claim regarding the rent to the landlord by registered mail, and the landlord has not responded within four weeks.
- If I do not pay the rent on the due date, can the landlord terminate the lease agreement and evict me?
No, the ROZ Model does not give the landlord the contractual right to prematurely terminate the lease agreement and evict a tenant in the case of a payment default. Please note that this is different for some previous ROZ models and can be differently worded in the specific clauses of a lease agreement.
However, Dutch law stipulates that a lease agreement can be partially or wholly dissolved by a court – at the landlord’s request – if a tenant is in default of its obligations under the lease agreement. This request will not be granted if the tenant can demonstrate that the default does not justify the dissolution of the lease agreement considering the special nature or minor materiality thereof. All circumstances at hand will be taken into consideration to determine whether this is the case or not. A temporary deferral of rent payments due to the COVID-19 outbreak may qualify as an exception that would not allow the landlord to dissolve the lease agreement. This will have to be determined through case law, which as of yet is not available. A landlord will normally claim for an eviction together with the dissolution of the lease agreement.
- If the landlord can terminate the lease agreement, is there anything I can do to stop the eviction?
Under Dutch law the tenant can apply for eviction protection if the lease agreement is terminated, unless (non-exhaustively) the lease is terminated by the tenant, the lease is terminated in joint consultation or the courts ordered the eviction of the tenant due to a default in its obligations under the lease agreement. So if the landlord is entitled to terminate the lease agreement due to non-payment by the tenant (as discussed above in question 2), eviction protection will likely not be allowed by the courts for the tenant. However, in other scenarios where the lease agreement is terminated and the exceptions mentioned here are not applicable, eviction protection will likely be available for the tenant.
If the tenant wants to postpone the eviction date, it must submit a formal request to the courts within two months after the first day the eviction would have commenced. By submitting such a request, the eviction itself is postponed until the court has ruled on the request. The court can decide to postpone the eviction for up to one year, which term can be extended by a further one year at the tenant’s request, up to two times.
During the postponement, the lease agreement is no longer in place, but the tenant will be obligated to pay compensation for the use of the property. This compensation can be determined by the parties or by the courts, but will normally be the same as the current rent. Any other rights and obligations that were in place prior to the termination of the lease agreement will still remain in full force and effect during the postponement.
- Does the COVID-19 outbreak qualify as unforeseen circumstances? If so, what does that mean for my obligation to pay rent?
Naturally, the ROZ Model does not account for the current situation of the COVID-19 outbreak. This omission in the ROZ Model can be addressed through the Dutch law principle of unforeseen circumstances. This relates to circumstances that have not been provided for in a contract and which could provide a basis for a party (the tenant in this case) to fully or partially dissolve a contract through a court request. However, before jumping right into legal proceedings, the principle of reasonableness and fairness can dictate that the parties should enter into negotiations first to determine how the current problem can be resolved. If those negotiations do not have the desired result, the legal route can then be followed.
In that case, the tenant will have to demonstrate that the unforeseen circumstances are such that it would be unreasonable for the counterparty to expect the contract to remain unchanged. A tenant may, for example, request that the lease agreement is partially dissolved so that the obligation to pay rent is waived during the months of March, April and May 2020. In our opinion the COVID-19 outbreak provides a sufficient basis to partially dissolve a lease agreement based on unforeseen circumstances, but it will have to be determined by case law whether a court is willing to rule in favour of such a request. It is interesting to note that when considering this request, a court will also take the initial risk allocation in the lease agreement into consideration. The ROZ Model is known to be generally landlord-friendly so this could work out in favour of the landlord.
- Is there anything else I should think about as tenant?
We understand that many parties think of force majeure in relation to the COVID-19 outbreak. It is, however, often overlooked that force majeure is not a circumstance that necessarily applies to a contract as a whole, but will have to be assessed for each obligation whether the COVID-19 outbreak gives grounds to invoke force majeure.
The ROZ Model does not contain any force majeure provisions and parties must therefore turn to the Dutch Civil Code. The Dutch Civil Code stipulates that force majeure occurs if “a non-performance cannot be attributed to the debtor if he is not to blame for it nor accountable for it by virtue of law, a legal act or generally accepted principles (common opinion).” While it can indeed be argued that the COVID-19 outbreak is not a circumstance that the tenant is accountable for, a tenant will also have to demonstrate that the COVID-19 outbreak makes it impossible for it to comply with its payment obligations under the lease agreement, before it can successfully claim force majeure under the Dutch Civil Code. The commercial preference not to pay rent or to defer such payments will in our opinion not be enough to consider it ‘impossible’ to fulfil your payment obligations.
Further, a tenant may consider a more general claim on the basis of the Dutch law principle of reasonableness and fairness. In relation to rent payments, the tenant could claim that the obligation to pay rent during this COVID-19 outbreak is unacceptable and therefore this obligation should be rendered non-applicable, at least temporarily. Whether the COVID-19 outbreak indeed results in an unacceptable situation under a lease agreement, will have to be demonstrated taking into account all relevant circumstances at hand.
Lastly, there are certain VAT benefits that a tenant may consider discussing with the landlord. For more detailed information on this, we would be happy to put you in contact with our dedicated Tax team.
We would always recommend contacting your tenant or landlord directly to discuss the consequences of the COVID-19 outbreak for the lease. In our experience, parties that are on good terms will be willing to seek an appropriate solution for any problems they may face together. These are extraordinary times that should be treated as such and with a little understanding and support from both sides of the table we believe the best results can be achieved.