On 21 January 2021, the District Court of The Hague ruled in proceedings on the merits that a tenant actually has to pay less rent retroactively, during the duration of the government measures because of Corona. The tenant had invoked unforeseen circumstances because it had to close its catering establishment.
First, we briefly discuss contingencies. Then how this affects existing (rental) agreements and, finally, more on how this will affect current and future contract negotiations.
An unforeseen circumstance exists if a circumstance is of such a nature that, according to standards of reasonableness and fairness, a party may not expect unaltered maintenance of the contract. Unforeseen means that the parties did not foresee (or did not want to foresee) the possibility of the circumstance in question occurring, for instance by including an article on the circumstance in question. Or that the parties have not tacitly discounted that relevant circumstance in the contract, for example, given the nature of the contract and that the contract was concluded between commercial/professional parties.
Among other things, the unforeseen circumstance should not, by common sense, be for the account of the party invoking it.
Even if a circumstance were to be for a party's account and risk according to the common law, a serious disruption of the value ratio could still allow a successful invocation of contingencies.
The judge on the merits ruled that there was a contingency, namely by ruling:
"In view of what has been considered above, the corona crisis, in view of its extent and its consequences for the economy and society, must therefore be regarded as an unforeseen circumstance within the meaning of Section 6:258 of the Civil Code. The parties did not discount this pandemic and its consequences in the lease agreement concluded between them, nor could they mutually expect each other to do so (see, inter alia, Amsterdam Court of Appeal, 14 September 2020, ECLI:NL:GHAMS:2020:2604)."
In our view, there is certainly something to be said for this.
Considering the severity and duration of the government measures, the court ruled that it was unreasonable to impose the consequences on only one party. Distortion of value ratio was invoked. In that case, a comparison is made between a party's obligation in the light of normal circumstances and a party's obligation in the light of the government measures in question.
Here, however, only one disruption of the value ratio has to be so serious to get a court to honour a contingency. That requirement is not easily met.
By being able to prove the providing effects of the government measures, the tenant was able to convince the court to grant the contingency claim. The tenant will have to pay less rent during the period the relevant government measures are in force.
The Hague court's ruling concerned the lease of a property in which a catering business was operated.
However, the ruling may also affect other leases that have nothing to do with the hospitality industry. Think of the lease of a machine that can no longer be used due to government measures, the lease of cars, the lease of bicycles, the lease of printers, etc. Also to be considered is the rent of sports fields, the rent of commercial buildings, etc.
The Hague court's ruling may give the tenant an extra push to actually try to force adjustment of existing leases. This by invoking unforeseen circumstances.
The Hague court's ruling may also have implications for agreements other than lease agreements. The doctrine of unforeseen circumstances applies to all kinds of contracts.
One might think of a purchase agreement of, for example, a house, a purchase agreement of shares in a company, an issued surety bond, a money loan agreement, etc.
Even in those agreements, a party can invoke contingencies due to corona/ government measures.
Many parties have already made arrangements with each other as a result of the government measures. For instance, arrangements have been made to suspend rent, temporarily pay less rent, suspend payment of invoices, temporarily reduce the need to purchase products, etc.
What if a party still invokes unforeseen circumstances in court to challenge those arrangements or the underlying agreement?
It is then highly likely that there is no contingency. After all, the parties made the agreement at the time of the corona pandemic and the government measures.
A claim of serious disruption of the value relationship is also unlikely to succeed. This is because the other contracting party also watered down.
The Hague court's ruling will almost certainly result in landlords, suppliers, vendors, etc. including a comprehensive article on the impact of a pandemic/epidemic on the contractual relationship with the other party. For example, it may include what circumstances are not considered unforeseeable. It can also include what the consequences are when an unforeseeable circumstance does occur.
Tenants, buyers, purchasers, etc. will have to be aware of this. They will have to study the contract and the general terms and conditions even more carefully to avoid unpleasant surprises afterwards.
In negotiations, pandemics/ epidemics as well as any government measures in this regard will become a standard agenda item. The parties will have to consider at an early stage how this should be arranged.
If you wish to invoke contingencies, are faced with a contracting party invoking contingencies or intend to enter into an agreement, get timely and knowledgeable advice. We will be happy to help you.