Sunday, October 24, 2021

Calculation of rent reduction due to lockdown

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How does the court calculate a lower rent due to the lockdown? Does online turnover count? Does it matter whether the tenant or landlord is large or small?

By Reinier Russell

The bottom line in disputes over the lease of retail and hospitality space is clear: the tenant and the landlord must share the pain of the lockdown. Closure due to COVID-19 is an unforeseen circumstance. Therefore, it cannot be contractually excluded if the contracts were concluded before the pandemic. Exoneration clauses, which are included in many rental agreements as standard, are therefore usually not applied by the court.

Equal division of the consequences of loss of turnover

A common starting point for the court is to divide the consequences of the decline in turnover equally between tenant and landlord, resulting in a lower rent. In the event of a 50% loss in turnover, 25% will be for the account of the tenant and 25% will be for the account of the landlord. The court will in this case decide to grant a rent reduction of 25% to the tenant.

Calculation of loss of turnover

But how is the loss of turnover calculated? It seems simple: a shop that is completely closed has no more turnover. The loss of turnover then is 100%. But is that really the case? After all, there are other ways to generate turnover. And do government support measures not count as turnover? In a recent judgment, the Rotterdam District Court answered these questions. It concerned a dispute about the rent of one of the stores of fashion chain Scotch & Soda.

Group level assessment: loss of turnover counts

The court found that the Scotch & Soda stores had indeed suffered a major loss of turnover. However, Scotch & Soda is part of a group with its own online sales. Part of the turnover of the stores may therefore have been transferred to the webshop. The court does not consider the fact that the online turnover is achieved in another legal entity relevant. For that reason Scotch & Soda must first submit the figures for the online turnover in the Netherlands before the court can make a ruling.

Something similar holds for a restaurant that switches to delivery service. However, I think that it can be argued that additional costs incurred for such a switch should be deducted from the turnover. The same applies to savings due to the lockdown (less purchasing, energy consumption, etc.), which should be added to turnover.

Government compensation

Most courts include the reimbursement fixed costs (Tegemoetkoming Vaste Lasten, TVL) in their calculation of the rent reduction. After all, part of the reimbursement fixed costs is explicitly intended for paying the rent. Some judges calculate the rent reduction by adding the TVL to the turnover. Subsequently, they calculate the decline in turnover, and divide this in two. However, it would be more accurate to deduct the part of the TVL that is earmarked for the rent from the rent the tenant must pay. The Amsterdam Court of Appeal has used this calculation in a recent judgment. Only after this lower rent price has been calculated, the judge will take the loss of turnover into account. If the shops, hotels, restaurants or pubs have been closed during the lockdown, this calculation will usually result in less reduction of the rent.

That the NOW scheme is also added to the turnover is less obvious. This scheme is in fact meant to pay labour costs. However, there is something to be said for the reasoning of another Rotterdam judge. This judge states that wages are normally paid from the turnover and that the NOW income therefore counts towards the turnover.

Is the tenant entitled to compensation but has not applied for it? Then the court may rule that this is for the account of the tenant and add the compensation not obtained to the turnover.

Position of tenant and landlord

In the Scotch & Soda case, the position of the landlord was also discussed. After all, the landlord also suffers loss of income due to rent reductions, while the fixed costs continue. Because the loss of income usually remains below the 30% limit, there is usually no right to compensation. However, by the court, the landlord has to substantiate this claim with documents.

Proof of loss of turnover

Whoever wants a rent reduction must provide sufficient information to prove the loss of turnover. And they must be open about other sources of income. A landlord who does not want to reduce the rent will have to prove why this cannot be required from him.

Real estate lawyer

It is important to thoroughly substantiate a request for rent reduction. The real estate specialists at Russell Advocaten will be happy to help you. We will also be pleased to assist you in other disputes concerning rent, lease, purchase and sale of retail space and business premises.

Please contact us:
reinier.russell@russell.nl / +31 20 301 55 55

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