THE LANDSLIDE DECISION BY THE SUPREME COURT OF THE NETHERLANDS COVERING THE REDUCTION OF LEASE PAYMENTS IN COVID TIMES SHOULD BE APPLIED TO AIRCRAFT

THE RECENT RULING OF THE SUPREME COURT OF THE NETHERLANDS CONCERNING ‘UNFORESEEN CIRCUMSTANCES’

AND

PROVIDING AN INNOVATIVE ‘CALCULATION MODEL’ TO DISCOUNT A LEASE PAYMENT FOR COMMERCIAL PROPERTY IN CORONA TIMES

The decision and unique method also apply to aircraft objects?

1.???Introduction

As my previous Post on LinkedIn expressed, on 24 December 2021 the Supreme Court of the Netherlands (SC) handed down the special ruling which clarified the matter of discounting lease (rental) payments which are due in Corona-related situations.

The SC was asked whether the limitation in the use of the leased commercial property constitutes an ‘unforeseen circumstance’ that can lead to a reduction of the lease payment? If so, which circumstances of the case are taken into account in determining or apportioning the ‘disadvantage’?

More specifically, central to this relatively swift ‘preliminary proceeding’ is the following matter. Can the agreed lease payment be reduced, and if so in what way, if a lessee of commercial property (‘bedrijfsruimte’ and ‘aanhorigheden’) (e.g., bar, restaurant, hotel, catering, component parts), which depends for its turnover on the presence of visiting customers, cannot exploit this object or only to a limited extent which is due to government measures that are related to the Corona pandemic.

In essence, the SC decided the following. Not, or only to a limited extent, being able to exploit the leased commercial property as a result of government Corona-related measures, is an unforeseen circumstance. Concrete facts and circumstances may lead, however, to a contrary outcome. It can be assumed that the lessor (tenant) and lessee (owner) did not take the grave effects of the Corona pandemic into account at the time that they entered into their lease agreements before 15 March 2020. This is the exact date that the Corona-associated compulsory restrictions entered into force.

In the event that the lease agreement has been concluded after the aforementioned date of the lockdown, it must be assessed on a case-by-case basis whether there exists an unforeseen circumstance.

My earlier Post on LinkedIn raised the question whether the SC ruling also applies to lease agreements covering expensive aircraft, helicopters and engines (together ‘aircraft objects’). Unfortunately, the SC did not clarify whether its decision also covered other forms of commercial property. Nevertheless, it did explicitly decide that its ruling not solely covers the food and beverage services market (‘horeca’) in the traditional sense (e.g., bar, restaurant, hotel, catering). Additionally, it applies not only on closure but also on other government measures, including government actions such as advice, in connection with the corona pandemic as a result of which the leased property cannot be exploited or can only be exploited to a limited extent.

Evidently, this most interesting topic requires more extensive legal research. However, there already exists a special ?legal regime for recorded (‘teboekgesteld’) aircraft which implies that, like real estate, these airplanes are ‘registered property’ ('registergoederen'). Furthermore, their economic goal, physical nature and manner of exploitation includes luggage, sleeping, food and beverage services. Accordingly, the modus operandi of the aviation practice reflects many similarities to the hotel, food and beverage services industry. Consequently, there are valid arguments to interpret and apply the broadly formulated SC decision analogously. In conclusion, the aforementioned resemblance substantiates that legally and practically an aircraft should be viewed as a ‘flying hotel’[1].

My previous Post resulted in thousands of views, many likes and comments. Moreover, I received questions which particularly concerned the SC-provided innovative method that calculates the lease payment reduction. However, this mode is formulated in a very detailed and quite complex manner. In addition, currently the ruling is only available in the Dutch language. Therefore, hopefully its explanation below, in English language, will clarify the matter at hand. For the sake of argumentation, the hypothetical example assumes that the SC ruling also applies to aircraft objects. Moreover, it is simplified by using fictitious and rounded amounts of moneys.

?2.???The calculation model to discount lease payments for commercial property in Covid times

As indicated above, the Supreme Court ruled that the Corona crisis can be regarded as an unforeseen circumstance, provided that the certain lease agreement was concluded before 15 March 2020. In these cases, the (lower) court can adjust the lease agreement by reducing the lease payments for the period of the loss of turnover. Considering the large number of similar court cases that had been initiated in the Netherlands, for this purpose the SC provided a ‘calculation model’. This method includes the local government aid which financially compensates the lessee.

In essence, the SC decided that the ‘disadvantage’ caused by the worldwide coronavirus crisis is generally neither in the risk sphere of the lessee, nor in that of the lessor. Therefore, the disruption of the ‘value ratio’, existing as a result of their contractually required performances, is in principle best compensated by establishing this disadvantage. In addition, the SC opined that the disadvantage caused by the corona measures must, in principle, be divided equally between the lessor and lessee. Assumedly, it is not yet compensated by the financial aid that has been provided by the local government. In practice, this monetary support may be available in the form of the ‘Fixed Charges Allowance’ (‘tegemoetkoming vaste lasten’) (FCA). The received FCA has to be taken into account.

3.???????The Fixed Costs Method

The reduction of the lease payment is calculated in accordance with the so-called ‘Fixed Costs Method’ (FCM). The application thereof results in a percentage by which the contractually payable amount is reduced. The lease payment is lowered per the term over which it is due. The FCM provides for the following steps to be taken with in order to calculate the lease payment reduction.

The agreed lease payment is a percentage of the total amount of the fixed costs. The part of the FCA corresponding to that percentage, which the lessee has claimed or is entitled to, is deducted from the amount of the original lease payment.

The percentage of the reduction in turnover is determined by the turnover in the period over which the lease payment reduction is calculated (hereinafter: ‘the lower turnover’). This in connection with the turnover in a comparable period prior to the corona pandemic (hereinafter: ‘the reference turnover’). Therefore, the following formula applies: 100% – (100% x (the lower turnover : the reference turnover)).

In general, the disadvantage which is due to the disruption of the value ratio is equally divided between the lessor and the lessee (each 50% of the loss).

The amount of the lease payment discount can then be calculated according to the formula:(agreed lease payment – part of the FCA that is allocated to the rent) x percentage reduction in turnover x 50%.

4.???A fictitious example calculating the reduction of the lease payment that may apply to aircraft objects

For the sake of argumentation, it is assumed that the SC ruling, including its calculation model, also applies to (commercially operated) aircraft, helicopters and engines. Besides, to simplify matters in the following example calculating the discounted lease payment entirely fictitious amounts of moneys are used:

·???????the lease payment € 45.000

·???????the fixed costs € 250.000

·???????the FCA € 100.000

·???????the achieved lower turnover € 200.000

·???????the reference turnover € 1.000.000

The Fixed Cost Method calculates the disadvantage as follows.

First, it is determined what percentage of the fixed costs is involved in the payment of the agreed lease payment (100% x (€ 45.000 : € 250.000) = 18%).

As the lessee can claim the FCA, the amount of the agreed rental price deducted 18% of the FCA of € 100.000 (= € 18.000).

Then the percentage of the decrease in turnover is calculated (100% – (100% x (€ 200.000 : € 1.000.000)) = 80%), and on the basis of this percentage it is determined which part of the lease payment which remains, is related to the decrease in turnover.

Finally, the disadvantage associated with the distortion of the ‘value ratio’ becomes equally divided between the lessor and lessee (each 50% of the disadvantage).

This imaginary example results in the following lease payment reduction: (€ 45.000 - € 18.000) x 80% x 50% = € 10.800. Consequently, it concerns 24% of the contractually agreed lease payment covering the aircraft object.

?5.???Some concluding remarks

Taking the relevant laws as well as recent views of doctrine in the Netherlands into consideration, it may be validly argued that the above addressed ruling of the Supreme Court should be analogously applied to aircraft objects. Besides, as a blueprint the SC’s innovative calculation model may be of interest to foreign courts having to decide similar cases. Moreover, the ruling may be educational to the local and foreign stakeholders of the international aviation lease practice. It may be central to the success of their aircraft, helicopters and engines lease agreements. Consequently, it is essential that the parties obtain?proper?legal advice when they negotiate and agree to a lease contract. This avoids drafting unenforceable provisions.

As always, questions and comments are very welcome!

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Indication of the contents of the ruling

Institution: the Supreme Court of the Netherlands

Date of judgment: 24-12-2021

Publication date: 24-12-2021

Language: Dutch

Case number: 21/01584

Formal relationships Conclusion: ECLI:NL:PHR:2021:902

Jurisdictions: Civil Law

Special features: Preliminary ruling

Content indication: Preliminary questions (art. 392 Dutch Code of Civil Procedure). Contract law. COVID-19. Corona pandemic. Lease of commercial property (art. 7:290 of the Dutch Civil Code/DCC). Sales decline due to government measures. Inability to exploit, or only to a limited extent, leased commercial property. Unforeseen circumstances (art. 6:258 DCC). Rent reduction, discounting Fixed Charges Allowance, calculation model, Fixed Costs Method. Defect as referred to in art. 7:204 paragraph 2 of the DCC.

www.rechtspraak.nl

[1] Comparatively, worldwide ‘cruise ships’ sailing the oceans and (international) rivers are viewed and advertised ‘floating hotels’. In the Netherlands, a particular example is the Sea Palace offering Chinese food. It is the first floating restaurant in Europe. It is permanently situated in the Centre of Amsterdam, near the Central Station. This Chinese pagoda-style restaurant, the size of which is possibly comparable to the largest type of aircraft, is physically ‘movable’. A while ago, indeed it was moved to a location nearby. Surely, the SC would legally qualify this floating restaurant as commercial property!?