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  • Real Estate
  • 03-05-2018

Most leases for commercial space contain a penalty clause under which a tenant forfeits a penalty to the landlord if the tenant fails to meet its payment obligations pursuant to the lease (or fails to do so in good time). In one of the model leases adopted by the Real Estate Council of the Netherlands [Raad voor Onroerende Zaken] (“ROZ”), the penalty clause is included in the general provisions. The interpretation of these provisions has become the subject of debate.

This penalty clause is phrased differently in the various ROZ models, but they are all essentially the same. The premise is payment of a percentage per month, with an applicable minimum. To the extent relevant, the penalty clause (Clause 23.2) in the 2015 ROZ model for 230a commercial space reads as follows: 

“… the Tenant will forfeit to the Landlord by operation of law an immediately due and payable penalty of 1% of the amount owed per calendar month, for each calendar month from the date of defaulting on that payment, with each month that has commenced counting as a full month, with a minimum penalty amount of EUR 300 per month.….”

In practice, the interpretation of this provision is the subject of regular disputes. As far as case law on this penalty provision is concerned, it can be roughly divided into two schools of thought. One school supports interpreting the penalty provision cumulatively, with a new penalty being payable on all individual outstanding monthly instalments owed at that point for each subsequent month. The other school supports a limited interpretation of the penalty provision, with the penalty payable being recalculated each subsequent month on the total outstanding monthly instalments owed (as a whole).

The minimum penalty amount, EUR 300 for each month that the rent instalment remains unpaid, does not depend on the amount of the rent. The ratio between the penalty amount and the rent also varies, subject to the proviso that the penalty can never be less than 1% of the rent. The lower the rent, the higher the penalty is in proportion to that rent. If the monthly rent is EUR 10,000, the penalty is equal to 3% of the monthly rent, but if the monthly rent is EUR 1,250, the penalty is equal to 24% of the monthly rent and 288% of that amount would be owed per year. That makes the penalty increasingly significant in proportion to how low the rent is.

The penalty is not intended to serve only as performance, but certainly as damages as well. The contractual obligation to which the penalty relates is a contractual obligation to pay damages. Under the law, the loss attributable to failing to perform this contractual obligation in good time is expressed in the statutory rate of interest, which currently stands at 8% per year. This means that if the rent is EUR 1,250, the penalty is 36 times as much as the statutory interest rate, which is the amount in damages owed by law.

The sample calculation below shows that the difference in interpretation is no small matter:

Tenant owes 6 monthly rent instalments of EUR   15,000 each

Cumulative   interpretation

Limited   interpretation

Arrears

Penalty owed

Arrears

Penalty owed

1 month

EUR 300

1 month

EUR 300

2 months

EUR 900

2 months

EUR 600

3 months

EUR 1,800

3 months

EUR 900

4 months

EUR 3,000

4 months

EUR 1,200

5 months

EUR 4,500

5 months

EUR 1,500

6 months

EUR 6,300

6 months

EUR 1,800

 

This conflict in case law and in the interpretation of the penalty clause was raised last month in a judgment by the preliminary relief judge of the Overijssel District Court (in Dutch). The preliminary relief judge explicitly found that the penalties forfeited would not be based on the cumulative interpretation of Clause 23, paragraph 2, of the general provisions as contained in the judgment rendered by the Amsterdam Court of Appeal on 8 September 2015, which was cited by the claimant, since it was never the intention of the author of the general provisions to allow the minimum penalty of EUR 300 to be imposed each month based on the total number of rent instalments that remained unpaid. The preliminary relief judge based this calculation of the penalties forfeited on the interpretation used by the Arnhem-Leeuwarden Court of Appeal in its judgment of 23 January 2018. The preliminary relief judge thus followed the limited interpretation – which is more favourable to the tenant.

The above does not give either tenants or landlords much to go on regarding the enforceability of the penalty provision. As a landlord, you want assurance that if your tenant defaults on rent payment, you will be able to invoke the penalty provision under a cumulative interpretation, which is exactly what a tenant wants to prevent.

One solution in this case might be to include a special provision in the lease in which the parties express their intentions, possibly including a sample calculation. The provision could also state why the penalty provision is being included, what the penalty amount will be, and what loss the landlord will incur if the tenant fails to perform its obligations. Another benefit of such a provision would be a decreased chance that a court would reduce the penalty on the grounds that it is excessive and that its imposition would thus lead to an unacceptable result.

Pursuant to Section 6:92 Dutch Civil Code, moreover, the penalty is intended to replace the damages provided for by law. Since Section 6:92 Dutch Civil Code is regulatory in nature, however, parties can deviate from it in a lease. This has not been done in the ROZ provisions relating to a tenant’s late payment, which means that the tenant is not liable to statutory interest in addition to the penalty of 2% or 1% per month. If the landlord wishes to be able to claim the statutory interest in addition to the penalty, it will have to include a clause in the special provisions of the lease.

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