If a company wants to sell its business, it usually has an interest in also being able to transfer the lease to the buyer. But what if a landlord does not agree to the takeover of the contract? The law provides for so-called ‘substitution’ in the case of medium-sized business premises. This is a legal arrangement that may force a lessor to cooperate with the contract takeover. But that is not without conditions.
Tenants of medium-sized business premises for, for example, retail, bars, restaurants, hotels, catering and craft businesses (Section 7:290 of the Civil Code) enjoy more protection than tenants of other business premises such as office spaces (Section 7:230 of the Civil Code). For example, not only is it more difficult for the lessor of a medium-sized business space to terminate the lease with the tenant, but under certain circumstances the lessor may even be forced to agree to a new tenant if this is in the interests of the previous tenant. This arrangement is included in Section 7:307 of the Dutch Civil Code, and is also known as substitution.
The underlying idea behind these regulations is that the value of a medium-sized business is largely linked to the location where the business is located. As a rule, these companies have built up a permanent clientele and provide the premises with the necessary inventory to receive their clients. If a potential buyer is unable to make use of those acquisitions and/or facilities because the lease contract is not continued, the sales value of the company decreases significantly. It is for this reason that a scheme has been set up specifically for medium-sized business premises that seeks to protect these interests.
If a lessor does not voluntarily cooperate in the takeover of the contract, the lessee of a 7:290 BW business premises may apply to the subdistrict court for authorisation to put the new lessee in his place as lessee. A judge will assess such a request against the following criteria:
1) There must actually be a transfer of the business.
The primary objective of the contract takeover must be that the business is actually taken over and continued. If the new tenant takes over a supermarket, but does not have an interest in the inventory or the staff as well as current supply contracts, the claim for substitution will be rejected by the court. In this example, the new tenant is actually starting a new business and therefore there is no business transfer.
2) The tenant has a substantial interest in the transfer.
This may include illness or reaching retirement age, as a result of which the tenant can no longer continue the business. Serious financial problems can also be of major importance. An example of a claimed interest that was not judged by the court to be sufficiently important was a tenant’s claim that he no longer saw any opportunities for growth despite the fact that his business in its current form was profitable.
3) The new tenant must be able to provide sufficient guarantees for the fulfilment of the obligations arising from the lease.
The fact that a lessor may be forced to accept a new lessee constitutes a major infringement of the freedom of contract. For this reason, it is very important that sufficient guarantees can be provided that the new tenant is able to fulfil the obligations arising from the lease. In addition to sufficient solvency, factors such as reliability and how an entrepreneur has acted in the past are also important.
Weighing up the interests
If the tenant meets all the above conditions, the substitution will in principle be granted. Nevertheless, all the circumstances of the case will be taken into account in the final balancing of interests. This may therefore mean that the court does not agree to the substitution despite the fact that the tenant meets all the conditions. The judge will have to weigh the interests of the lessor against the interests of the (former) lessee. An example of a landlord’s interest may be that a newly proposed tenant does not contribute to an intended necessary new impulse for a shopping centre. This could be a reason to reject the request for substitution.
Tips for tenants and landlords
– As the lessee, submit the claim for substitution in time and do not wait until the business is transferred.
– As lessee, ensure that the conditions are met with certainty. This means having an interest in nominating a reliable and solvent new tenant.
– It is very important for the landlord that the new tenant explicitly takes note of all agreements made with the old landlord. It is therefore probably wise to put verbal agreements with the old tenant on paper before agreeing to take over the contract.
– As the lessor, do not hesitate to put forward your own specific interests in the event of a lawsuit. In particular, the balancing of interests is extremely casuistic in nature.
Do you have any further questions about substitution? Please feel free to contact M2 lawyers for advice.
Lawyer Ginio Beij (firstname.lastname@example.org)
Rent Business premises: Substitution at 7:290 BW business premises