By Susanne van de Pest, Marc Houweling, Tijn Slegers, Brim Tonino, Jan Borman and Adinda de Jonge, Van der Feltz advocaten NV
This article explains the option of companies developing a property perfectly suited to its own needs, selling it to an investor and leasing it back (sale and leaseback). From a business perspective, this is an interesting option for companies who wish to both develop their own locations and release the equity for use elsewhere.
Brexit has had a major impact on imports and exports into and from the European Union. Since 1 January 2021, British companies exporting to the European Union have been facing longer waiting times at the border, more paperwork and higher VAT. To avoid the red tape, establishing a branch in the European Union is a solution for many of these companies. As a result of Brexit, Dutch business premises, including warehouses, distribution centres and data centres, are in high demand by British and other non-Dutch companies. The Netherlands is serving as a hub for the continent, companies are providing services to the European internal market from a central location in the Netherlands.
Companies looking to establish themselves in the Netherlands have several choices when it comes to finding suitable accommodation, including purchasing or leasing business space. The market for logistics real estate is scarce partly because of the strong growth of online sales, so these companies may also choose to build their own distribution centres. This article discusses from a legal perspective the combination of building business premises from scratch in the Netherlands and then subsequently selling it and leasing it back (in other words “a sale and leaseback”).
One option for a company seeking to set up a logistics centre or data centre in the Netherlands, is for the company to have such a facility built from scratch. The advantage of this is that the premises can be built entirely according to your own views and wishes. Generally speaking, there are two ways to give shape to such a building contract. There is the traditional contracting method, which involves a classic triangle between the client, architect and contractor. Alternatively, it can be done through the integrated contracting method, where at least the design and construction are united and done by a single party. Both methods will be briefly explained below.
The traditional course breaks down into design, bid and build. With this contracting method, the project owner negotiates and enters into separate contracts with design professionals (e.g. an architect) and a construction contractor. The project owner hires these design professionals to deliver design documents and construction contractors are requested to submit bids to perform the work based on the design as defined in the tender documents. The project owner enters into separate contracts. The contract is awarded to the lowest bidder or the bidder on the basis of the most economically advantageous bid.
Today, the traditional contracting method is still frequently used, especially in construction projects of a minor nature in terms of project size. Using two separate contracts, the most commonly employed standard conditions for contracts with design professionals are “The New Regulations 2005” governing the legal relationship between project owner/architect, engineer and advisor (DNR 2005, with minor updates dating from 2013). For contracts with contractors, project owners rely on the provisions of a set of standard conditions set out in the UAC 2012 (Uniform Administrative Conditions for the Execution of Works and Technical Installation Works 2012).
For projects of a more substantive nature, or if other circumstances so dictate (e.g. the wish to get a completed product), project owners are increasingly deciding not to conclude two separate contracts with design professionals on the one hand and a construction contractor on the other, but contract with only one party for the design and the realisation of a work by means of an integrated contract. The other party then undertakes to produce both the design and the execution of the work. In certain cases, the contract also includes the performance of the long-term maintenance of the completed work following its completion and acceptance. “Design & build”, “design & construct”, “turnkey”, “Bahama model” and “maintenance” are just some of the terms frequently used in this context. They are, however, fairly loosely defined. The umbrella term “integrated contracts” covers all these contract types. Current market practice is that project owners rely on the Model Agreement with corresponding Uniform Administrative Conditions for integrated contracts (UAV-GC 2005, which is currently under revision).
A characteristic of integrated contracts is that they combine several functions in the construction process. The functions of the construction process in the Model Agreement with corresponding UAV-GC 2005 are initiation, design, construction and long-term maintenance. As is the case in most other construction contracts, the project owner continues to play the role of initiator: the project owner specifies their expectations in their program of requirements. Under the Model Agreement with corresponding UAV-GC 2005, the contractor takes responsibility for (parts of) the design and construction functions: the contractor carries out design and construction work on the basis of the project owner’s requirements. At the project owner’s discretion, the scope of the contractor’s responsibilities may be extended to include long-term maintenance of that work. This is not necessary, but the Model Agreement with corresponding UAV-GC 2005 provides for this possibility in standard clauses. If the project owner makes use of this option, the long-term maintenance must be ordered simultaneously with the realisation of the work; that is, if the project owner wishes to declare the Model Agreement with corresponding UAV-GC 2005 applicable to the integrated contract. The contractor will then commence performance of the long-term maintenance on the day of completion and acceptance of the work performed.
Because investing in real estate is often not the core business of companies looking for logistics real estate, sale-and-leaseback transactions are increasingly being used in practice. Fully constructed business premises, e.g. a warehouse, distribution centre or data centre, is sold to a real estate investor and then leased back for a long period. The big advantage of this is that the capital is no longer tied up in bricks and mortar, but can be invested in the company’s core business. Usually, the lease payment and the sale price are closely related because they are agreed on as part of one composite transaction. A sale-and-leaseback transaction usually takes the form of a purchase agreement and separate lease agreement.
In commercial leasing law in the Netherlands, a distinction is made between two categories of business premises: “retail business premises” (DCC, art. 7:290) and “other business premises” (DCC, art. 7:230a). Examples of retail business premises are shops, hotels and restaurants. Offices, business premises, factories, distribution centres and data centres are examples of other business promises. General lease-related provisions in the Dutch Civil Code apply to both categories of business accommodation, but each category also has specific rules just for that category. Many of the rules are “mandatory” or “semi-mandatory” in nature. This means it is not possible to deviate from these provisions from the Dutch Civil Code to the detriment of the tenant, or it is possible to do so only with the permission of the court. Rental protection covers the rental price, terms and termination of the lease.
When drawing up a lease for “other business premises”, the parties have more freedom as to the contents of the lease to such extent that they adhere to the mandatory and semi-mandatory statutory provisions referred to above. The Real Estate Council for the Netherlands (ROZ) has developed model leases for the leasing of business and other types of premises. A ROZ model is frequently used as the starting point in a negotiations for a new lease. This is a standard model lease with accompanying general terms and conditions.
A regular lease is usually a contract between a lessor and lessee (or landlord and tenant) in which the lessee of the business premises undertakes to pay the rent and also to take care of the minor maintenance of the business premises. The major maintenance of the business premises, such as repair, maintenance and renovations, is borne by the landlord. A similar division of obligations and risks applies to insurance and taxes.
One way to shift the owner’s typical risks and expenses more to the lessee is to enter into a “triple-net lease”. This type of lease is increasingly being used in sale-and-leaseback (SLB) transactions, also in the Netherlands. In a triple-net lease, the parties agree that the costs that would ordinarily be for the account and risk of the lessor in a regular lease are for the account and risk of the lessee. The lease is called “triple net” because three types of expense are shifted to the tenant.
A triple-net lease creates a lessor-lessee relationship that is completely different from that created by a regular lease. The lessee assumes all of the work and costs normally borne by the landlord. The lessor merely owns the business premises.
There is no ROZ model for a triple-net lease, customised lease based is rather standard, which will be based on market practices including conditions stemming from the relevant ROZ model. Special attention should be paid to insurance, maintenance and defects, the tax aspects (including the owner’s property tax) and security. This last aspect will be briefly discussed below. A triple-net lease entails higher costs and is therefore financially more risky for the lessee. To compensate for this, a lower rent is usually agreed upon. The lessor, often an investor, knows what return on investment can be expected from the rental payments and does not have to take maintenance and other additional costs into account. In view of the heavier burden on lessees, it is not unusual for a lessor to require additional security in case a lessee finds itself in dire straits.
Usually, when entering into a lease, a lessee provides a bank guarantee as security for the proper performance of the lessee’s obligations under the lease. It is particularly important in a triple-net lease for the lessor to have sufficient security. If a lessee finds itself in financial difficulties, this would, in many cases, have an immediate adverse effect on the maintenance of the leased business premises. Particularly in the event of imminent or actual bankruptcy, this maintenance would not be carried out, and the value of the property would drop. By requiring – bankruptcy proof - securities, the lessor ensures it can recover from the guarantor the funds needed to compensate for any loss or damage caused by the lessee’s non-compliance with its obligations.
It is not a given that a bankrupt lessee will be obligated to continue paying the rental payments until the end of the agreed lease term. The lessee’s trustee in bankruptcy may terminate the lease subject to three months’ notice. This may result in a lessor losing rental income from the date of bankruptcy to the end of the current lease term, i.e. vacancy-related loss of rental income, which in Dutch is called leegstandschade. In principle, the lessor cannot recover this loss from a bankrupt lessee’s estate. However, a lease may include a special clause (leegstandschadebeding) stipulating that the lessee must compensate the lessor for this vacancy-related loss. Depending on the nature and scope of the security the tenant has provided, it is possible that vacancy-related loss would be covered. In 2013, the banks stopped automatically providing bank guarantees for vacancy-related losses. This has made it more difficult, on entering into a new lease, to obtain sufficient coverage by way of a bank guarantee for losses resulting from vacancy because of a lessee’s bankruptcy.
A third-party guarantee (borg) is another way of obtaining coverage for vacancy-related loss. In such a guarantee, the lessee’s parent company or another third party independently and explicitly undertakes to compensate a vacancy-related loss caused, for example, by termination of a lease because of the lessee’s bankruptcy.
Brexit has resulted in many British companies settling in the Netherlands. Many companies from other nations are also considering relocating to the Netherlands, an attractive Continental hub. For these companies, it is important to be on top of the legal aspects of arranging suitable business accommodations in the Netherlands.