The rapidly changing retail market has not yet created a new reality. The preference for online shopping and the increasing costs of wages and production continue to threaten the margins of retailers and, indirectly, rent prices. As a result, rent for retail space has been dropping for six consecutive years. Due to the increased costs of wages and production, more bankruptcies may follow the ones we have seen already in the Netherlands, and more retailers may decide to stop operating their shops to minimize losses.
In this blog post, we will focus on the obligation to operate retail space and recent verdicts relating to interoperating retail space contracts.According to the most commonly used contract for retail space in the Netherlands, the model issued by the ROZ (Dutch Real Estate Council), a tenant is obliged to operate a retail space during the whole term of the lease. Although most case law in this respect tends to be in favor of the landlord, a recent verdict from the court of The Hague made an exception in a verdict on 26 November 2019.
The case involved Hudson Bay in the Dutch market, and the verdict led to the bankruptcy of the Dutch branch in the beginning of 2020. Prior to the case, Hudson Bay announced it would close all of its shops in the Netherlands. One of its landlords requested to order Hudson Bay to continue to operate two stores (one in Maastricht and one in The Hague). Both of the lease agreements contained an explicit description of tenant’s obligation to operate the retail space till a defined moment in time (five years after the rent commencement date) and provided for sufficient warranties for the obligation to pay rent.
Altogether, the judge considered that ending the operation of the retail space in December 2019 did not differ from ending the operation five years after the rent commencement date since in both cases the landlord would not suffer any loss of rental income because of the warranties in place. Together, with the fact (acknowledged by the landlord) that the continuation of the exploitation would lead to significant damage for Hudson Bay, the judge ruled in favor of Hudson Bay and denied the request from the landlord.
What makes this remarkable is that the same day of the verdict, the court of appeal in Amsterdam confirmed a verdict of the court of Amsterdam by which Hudson Bay was ordered to continue the operation of a retail unit. The circumstances were similar and the lease agreement contained the same language as the lease agreements pertaining to the stores in The Hague and Maastricht. However, the court of appeal was – in short – of the opinion that Hudson Bay did not prove that operating the unit was impossible, and terminating the operation of the unit would have a negative impact on other retailers that rented in the same shopping center. Therefore, the court ruled in favor of the landlord.
These verdicts do not only prove that the outcome of legal proceedings remain very hard to predict, but also show that the same language can be interpreted differently by different judges. The verdicts stress the importance of the quality of drafting any contractual clause that deviates from the commonly used models. In these particular cases, the obligation to operate the unit was not combined with a penalty in case of default, which may have influenced the outcome of the proceedings.