There have already been numerous legal proceedings concerning rent reductions resulting from the mandatory closure of businesses. As this type of dispute is relatively new, various rulings have been handed down regarding rent reductions due to the coronavirus and how these should be calculated. The Supreme Court has now finally provided an answer to the question of whether there is a right to a rent reduction due to the coronavirus pandemic and how this should be calculated.
Are you entitled to a rent reduction?
According to the Supreme Court, for tenancy agreements entered into before 15 March 2020, a right to a rent reduction due to the coronavirus pandemic may arise following an assessment of all the facts and circumstances. Each case must be assessed individually to determine whether an unforeseen circumstance exists. It is therefore not automatically the case that there is a right to a rent reduction due to the coronavirus pandemic. Indeed, there have also been cases decided against the tenant, ruling that there was no entitlement to a rent reduction. All the facts and circumstances must therefore be assessed to determine whether a tenant is entitled to a rent reduction due to the coronavirus pandemic. The tenant will need to provide thorough evidence to support this claim.
Amount of rent reduction
The Supreme Court has also clarified how the rent reduction should be calculated if it is established that a tenant is entitled to a rent reduction. Put very simply, the following formula should be used: agreed rent – portion of the TVL allocated to the rent) × percentage reduction in turnover × 50%.
To clarify this, the Supreme Court has provided an example of how this should be applied;
The fixed-cost method involves the following steps for calculating the rent reduction.
a. The agreed rent is expressed as a percentage of the total amount of fixed costs.
b. The portion of the TVL to which the tenant is entitled, corresponding to that percentage, shall be deducted from the agreed rent.
c. The percentage reduction in turnover is determined by comparing the turnover for the period over which the rent reduction is calculated (hereinafter: the lower turnover) with the turnover for a comparable period prior to the coronavirus pandemic (hereinafter: the reference turnover) using the following formula: 100% – (100% × (the lower turnover : the reference turnover)).
d. The loss arising from the distortion of the value ratio shall be shared equally between the landlord and the tenant (each bearing 50% of the loss), unless the principles of reasonableness and equity referred to in Article 6:258(1) of the Dutch Civil Code dictate a different allocation.
The amount of the rent reduction can then be calculated using the following formula: (agreed rent – the portion of the TVL allocated to the rent) × percentage reduction in turnover × 50%.
Calculated using fictitious figures, with the rent at €4,500, the fixed costs at €25,000, the TVL at €10,000, the shortfall in turnover at €20,000 and the reference turnover at €100,000, the calculation is as follows.
a. First, the percentage of the fixed costs accounted for by the agreed rent is determined (100% × (€4,500 : €25,000) = 18%).
b. As the tenant is eligible for TVL, the TVL amount of €10,000 (= €1,800) will be deducted from the agreed rent of 18%.
c. The percentage decrease in turnover is then calculated (100% – (100% × (€20,000 : €100,000)) = 80%), and this percentage is used to determine what proportion of the rent remaining after step b is attributable to the decline in turnover.
d. Finally, the loss arising from the distortion of the value ratio is shared equally between the landlord and the tenant (each bearing 50% of the loss).
In this example, this results in the following reduction in rent: (€4,500 – €1,800) x 80% x 50% = €1,080, which is therefore 24% of the agreed rent.
Is that clear?
As indicated above, entitlement to a rent reduction is not automatic; furthermore, the formula to be applied is not straightforward to complete. In addition, the tenant must provide details of their financial circumstances; otherwise, it is not possible to calculate the rent reduction.
If you are a tenant or a landlord and need assistance, you can always contact our legal adviser (G.A.J. Brinkman, LL.B.). See the Supreme Court’s full reasoning here: ECLI:NL:HR:2021:1974, Supreme Court, 21/01584 (rechtspraak.nl)