Legal split of a company: an unpleasant surprise for the landlord

A landlord can be unpleasantly surprised by a legal split. The new tenant who is forced upon the landlord as a result of the division may be a financially weak party or a party that is not acceptable to him for other reasons. In a legal division, replacement of the tenant takes place without the involvement of the landlord. His permission is not required and the substitution procedure as laid down in Article 7:307 of the Dutch Civil Code does not have to be followed. A legal split whose consequences can still lead to problems in practice is the takeover of Super de Boer by supermarket chain Jumbo, with the resale of a large number of stores to Schuitema. When that transaction was completed, a number of landlords of retail space acquired a new tenant without being consulted about it, let alone having given permission for this.

After all, after the division, the landlords were confronted with a new tenant/debtor who only owns part of the original assets of the demerging legal entity, which were intended for the recovery of their claims.

The law does offer some protection to the landlord who is confronted with a legal division. In article 2:334k jo. Article 334l of the Dutch Civil Code stipulates that any counterparty of a party to the demerger may object to the demerger proposal if the demerging parties refuse to provide adequate guarantees for the payment of their claim.

As a result of the division, a lessor can get a new tenant whose assets offer fewer guarantees than those of his original tenant. After all, the property of the splitting tenant is divided over one or more legal entities. If a loss-making part of an otherwise healthy company is split off together with the rental contract relating to that part of the company, it appears in advance that the lessor would have insufficient guarantees for payment of his claim after splitting. Incidentally, the protection, as it appears, only applies to existing claims. Future lease terms are probably not included. This means that the protection of Book 2 of the Civil Code is very limited for the landlord.

The objection is also rejected if the landlord has sufficient guarantees, or if the financial situation of his tenant after splitting does not offer less guarantee for satisfaction than before.

Another possibility for the lessor to oppose a legal division is the claim for amendment or dissolution of the tenancy agreement. (Section 2:334r of the Dutch Civil Code) The court can amend or dissolve the agreement at the request of one of the parties,  if this agreement should not remain unchanged as a result of the division according to standards of reasonableness and fairness. If the other party, usually the landlord, suffers damage as a result of the change or dissolution, the relevant party to the division, usually the tenant, is obliged to compensate this.

The law therefore gives the landlord the opportunity to have the court assess whether the consequences of the legal division should entail amendment or dissolution of the tenancy agreement. Although no case law regarding the amendment or dissolution has been published at this time, it is likely that all circumstances of the case must be taken into account in the assessment.

Article 2:334r of the Dutch Civil Code can therefore be an effective entry point for the landlord who has objections against his new tenant. However, this effectiveness can be negated if the landlord does not notice in time that the legal division has taken place. The possibility to act on the basis of this article expires after six months after the deed of division has been filed with the trade register by the demerging and acquiring legal entity. In practice, it will often happen that the landlord does not notice the split in time, certainly not if the trade name and bank account of the split tenant were transferred to the new tenant at the split. Without a contractual provision, the tenant will therefore often miss out.

Ludwig & Van Dam franchise attorneys, franchise legal advice