In our Belgian Real Estate & Retail Newsletters, we inform you of the latest legal developments. In this edition: a look at the Belgian Supreme Court's decision of 9 September 2019. This decision confirms the nullity of a contractual clause triggering the tenant's loss of a contractually agreed advantage if the tenant uses its statutory right to terminate the lease.
The tenant's statutory right to terminate the lease for convenience at the end of year three and six
Further to article 3 par. 3 of the federal Retail Lease Act, a retail tenant has the statutory right to terminate a retail lease for convenience ("opzeg"/"résiliation") at the end of every three-year period, observing a six months' notice period.
This termination right applies automatically and by law, even if this right is not mentioned or is excluded in the lease agreement.
The Supreme Court invalidates "claw back" clauses
The present case deals with a retail lease in which the landlord and tenant agreed on the following contractual clauses:
- A rent-free clause stipulating that the tenant benefits from a rent-free period covering contract years 1, 2 and 3; and
- A claw back clause stipulating that if the tenant terminates the lease for convenience at the end of year three, the tenant "loses" the advantage of the rent-free clause, meaning that the tenant is required to pay the landlord an amount equaling the total rent of the first three years, increased with contractual interest.
In the case at hand, (i) the tenant terminated the lease for convenience at the end of year three, (ii) the landlord applied the contractual claw back clause and as a result required the tenant to pay three years of rent plus interest, and (iii) the tenant refused to pay and invoked the nullity of the claw back clause.
Court of first instance: the claw back clause is valid
The Brussels' Court of first instance (acting as a Court of Appeal against a Justice of the Peace judgment) accepted the validity of the claw back clause. According to the Court of first instance, the clause does not provide for an additional financial sanction for the tenant, but merely provides for the payment of the rent stipulated from the outset. In the Court’s view, the clause does not limit or complicate the tenant's ability to terminate the lease at the end of a three-year period as provided for in article 3 par. 3 of the Retail Lease Act.
Supreme Court: the claw back clause is invalid
On 9 September 2019, the Supreme Court (“Hof van Cassatie”/“Cour de Cassation”) rejected the validity of the claw back clause and hence annulled the abovementioned decision of the Brussels' Court of first instance.
According to the Supreme Court, the claw back clause constitutes a prohibited and tenant-adverse derogation from the tenant's lease termination right under article 3 par. 3 of the Retail Lease Act.
Under article 3 par. 3 of the Retail Lease Act, the parties cannot deprive the tenant of its right to terminate the lease for convenience at the end of a three-year period. Also, the parties cannot render the reliance on such a termination right more costly or difficult for the tenant.
The Supreme Court considered that the claw back clause violates article 3 par. 3 of the Retail Lease Act. Indeed, this clause subjects the tenant's mandatory right to terminate the lease to additional, more costly conditions other than those provided for under article 3 par. 3 of the Retail Lease Act and is therefore null and void. This nullity also applies if these additional conditions are imposed on the tenant in exchange for an advantage (a “quid pro quo”) specifically requested by the tenant and confirmed by contract.
As a result of the Supreme Court's decision, in this instance, the tenant was not required to pay rent and subsequently benefited from a three year rent-free lease, despite the tenant's exit at the end of year three.
Supreme Court’s decision is in line with previous case law
Previous case law already provided some guidance on the application of article 3 par. 3 of the Retail Lease Act. As the statutory right to terminate the lease for convenience at three-year intervals constitutes a mandatory and unconditional right for the tenant, Belgian Courts have considered the following lease clauses, that weaken the tenant's position, to be null and void:
- A clause providing that the tenant’s security provided to the landlord shall be forfeited to the landlord if the tenant does not occupy the premises for at least 4 consecutive years;
- A clause that obliges the tenant to specifically and expressly justify the reason for giving notice of termination for convenience;
- A clause charging rent in advance (e.g. requiring rent payment in year three covering year four) and stipulating that the rent already paid will remain with the landlord in the event of an early termination (e.g. at the end of year three); and
- A clause providing for the exclusion of tenant's early termination right, as the landlord substantially invested in the premises.
However, a derogation from article 3 par. 3 of the Retail Lease Act is not in itself unlawful: clauses improving the tenant's position – for example by allowing the tenant to terminate the lease for convenience at the end of every contract year – are valid under the Retail Lease Act.
Conclusion: what landlords and tenants should keep in mind
By law, a retail tenant has the statutory right to terminate its lease for convenience at the end of every three-year period (art. 3 par. 3 of the Retail Lease Act). The Supreme Court's decision of 9 September 2019 is in line with previous case law by confirming the mandatory nature of this termination right.
The parties can improve the tenant's termination right in a contract. However, the parties cannot validly weaken the tenant's position in case the tenant effectively terminates the lease for convenience. For example, a lease clause stipulating that the tenant loses a contractually agreed incentive if the tenant terminates the lease at the end of year three or six is invalid.
Incentives given by the landlord to the tenant (e.g. substantive investments in the premises, a rent-free period, etc.) cannot be made subject to a counterpart obligation on the part of the tenant to stay for more than three or six years. In such cases, the Supreme Court considers that the conditionality of the commercial incentive invalidly restricts the tenant’s overriding right to terminate for convenience. Consequently, the commercial incentive will remain with the tenant while the incentive's counterpart cannot be enforced by law. In conclusion, landlords may want to consider alternative incentives.
Disclaimer: This newsletter is intended to provide information of general interest to the public and is not intended to offer legal advice about specific situations or issues. This newsletter is based on legislation as publicly available on 18 December 2019. AKD does not intend to create an attorney-client relationship by offering this newsletter.