Two cases involving rental guarantees
Sale and purchase agreements concerning new office buildings, other buildings and shops often include rental guarantees. Such guarantees ensure that the buyer’s risk of vacancy in a building is limited, which increases the purchase price.
Rental guarantees are phrased in various ways: the seller and buyer may agree, for example, that the buyer is guaranteed compensation for vacant spaces for a specific period of time, or, alternatively, that the seller will become the lessee who is entitled to sublet the spaces.
That it is important to phrase a rental guarantee – and consequently to avoid misunderstandings – follows from the fact that the Dutch Supreme Court rendered two judgments in December 2016 concerning the validity and interpretation of rental guarantees. The first judgment was rendered on 2 December 2016 and the second on 9 December 2016.
The judgment of 2 December 2016 concerned a case in which the seller and buyer agreed on a rental guarantee in the sale and purchase agreement (concluded on 31 October 2000) in respect of vacant space. On the transfer date – 27 March 2002 – the sale and purchase agreement was replaced by a lease between the seller and buyer. The parties agreed that following the buyer’s approval, the seller would let (or sublet) the vacant space based on a number of basic assumptions, including minimum and maximum rental amounts and periods of 5 and 10 years, respectively. The head lease had been concluded for a period of 7 years. Subsequently, a situation arose as of 2004 where the market-level rental amounts were lower than the minimum rental amount and where the seller would have to conclude leases (or subleases) for periods that exceeded that of the head lease. The lessor was of the opinion that it did not have to cooperate in concluding subleases for periods that exceeded that of the head lease at prices that were lower than the contractual minimum rental amount. The sub-district court and the court of appeal were of the opinion that the sale and purchase agreement contained a void that had to be filled based on the principle of reasonableness and fairness. The Dutch Supreme Court ruled that sound reasoning was lacking and referred the case to a different court of appeal.
The second judgment concerned different facts. That case involved a seller who had provided a rental guarantee regarding the vacant part of a building under which the seller would pay the buyer a specific amount from the transfer date up to and including the day on which the lessee - found by the seller for that space - paid its first rent instalment. The buyer then resold the building, likewise with a rental guarantee, albeit for a lower amount. The buyer sought the seller’s fulfilment of the guarantee. In the first instance, the district court ruled in the buyer’s favour, but the court of appeal ruled in the seller’s favour. The Dutch Supreme Court set aside the court of appeal’s judgment. In interpreting the sale and purchase agreement between the parties, the court of appeal had erroneously decided what the parties would have agreed on if they had taken the resale of the building into consideration. However, the court of appeal should have addressed the question of how, under the given circumstances, the parties could, within reason, interpret the provision in the event that the building was resold, and what they could reasonably expect from one another in that respect. The Supreme Court subsequently held that the court of appeal had provided insufficient substantiation for its ruling that the rental guarantee had ended on the date of transfer of the building. This case was also referred to a different court of appeal.
The outcome of these two proceedings is uncertain. However, it must be concluded that sellers and buyers would do well to be as comprehensive and accurate as possible in their wording of rental guarantees, paying attention to situations that may arise in the future, in order to prevent lengthy proceedings.