Why Hudson's Bay is unable to part with its expensive, unused retail premises and how similar situations can be avoided.

There is over 30 million square metres of retail space in the Netherlands, of which over two million square metres was up for sale in 2019. Although there is a slight decrease in the demand for retail space — even in traditionally popular areas — the Dutch retail market offers opportunities for entrepreneurs and investors. When it comes to renting retail space, tenancy law in the Netherlands is marked by a number of idiosyncrasies that were designed to protect the tenant, but which actually could turn out to be problematic for tenants in certain circumstances.

These short-term agreements can still allow for a possible continuation. This can be done operationally or through an extension. The first situation arises when, after the expiry of the agreed upon period, the use of the retail premises does not reach its conclusion; the tenant does not terminate (nor does he leave) and the lessor does not terminate. The second situation is also conceivable: tenant and lessor both see reasons to extend the rental agreement with another one or two years after the expiry of the agreed upon two years.

This makes sense, but both parties should realise that they are no longer in a rental agreement with a duration of less than two years. The security of tenure is then in full (!) force and effect and the tenant has the right to use the store premises for (a total of) 10 years.

This could create an unfortunate situation (especially) for the lessor. After all, it may be the case that the lessor initially profits from renting out his retail premises, but that profit might disappear (or decrease) if the agreed upon rent price is, in face, far too low. In that case, there will be a need to increase the rental price or to index it. This might create a financial stimulus for the tenant to, after a number of years, leave the rented premises after all.

Note: there are diverse options in that area and, not unimportantly, they are not restricted by law. It might, for instance, be an option to agree upon an alternative indexation (in the rental agreement), based on, say, the so-called ‘fixed denominator method’ (‘vastenoemermethode’ in Dutch) — the initial rental price is multiplied by an increasing percentage each time — instead of the (usual and therefore often in standard agreements incorporated) ‘year-on-year method’ (‘jaar-op-jaarmethode’) that is based on the use of a fixed percentage vis-à-vis the previous year. A deeper analysis of these belongs outside of the scope of this piece. I will outline the relevant options in a different article.

Approval for deviating clauses

After entering into a short-term rental agreement, there is the option to ask a judge for permission to deviate from the legal protection rules. This request may be submitted by the tenant as well as the lessor; it can even be done jointly.

Such requests are not mere formalities, however; the contents of the request will be reviewed by a judge, and the judge will need to assess whether the clause that deviates from the statutory regulation is not ‘substantially affecting’ the rights of the tenant, also taking into account the societal position of the tenant in relation to the lessor, and the degree to which the tenant requires legal protection.

The judge’s test is two-fold and an active attitude is expected from the judge. It’s possible that a joint request (made by the lessor and tenant) is rejected by the judge because, in the specific case, the tenant needs to be protected against himself. Whether a specific deviating clause will pass this test cannot be answered generally.

The law does not state that such a request has to be submitted before entering into the rental agreement. This makes sense. Except for mandatory provisions, parties are free to detail the rental agreement. Moreover, in a number of cases it will not be deemed necessary to request consent in lieu or people will not realise that what was agreed upon was contrary to the law.

Knowledge of the (possibly) not being applicable of a special clause will usually only arise when an appeal is made on this provision. If the tenant claims that the clause is not valid, the lessor will be able to submit a request for approval of the deviating clause.

In the situation that both parties do realise that there is a deviating clause, it is preferential, in my opinion, to request consent in lieu before entering into the rental agreement, or at least before the renting starts. After all, and as was stated before, requesting consent is also subject to a substantive test and can therefore be declined. If the consent in lieu relates to the duration of the rental agreement, for instance, and the request is declined, the legal term (remember the ‘five plus five years’) applies.

In order to make sure that the tenant does not pull out while the request is pending, it is useful to enter into the rental agreement under a suspensive condition. In other words: we are now entering into a rental agreement in which the tenant as well as the lessor are bound, but that will only enter into effect if the consent in lieu is awarded by the judge.

Property lawyer

The Dutch market offers room for property investors as well as opportunities to operate a retail business. Renting (or letting) commercial space — especially retail premises — is an important part of this. Dutch law has a number of important provisions, however, that cannot (easily) be deviated from, even though they can be highly decisive for the financial position of both lessor and tenant. Sound knowledge of the Dutch (rental) legislation is indispensable in that regard.

Are you considering investing in Dutch property and letting said property? Or are you planning to operate a retail business in the Netherlands, but fearful of unintentional consequences (like those suffered by HBC)? Please contact the law firm of IJzer Advocaten, lawyers specialising in property, without obligation.