Strict Application of Penalty Clauses in Leases
Judicial Power of Mitigation Regarding Penalty
Clauses
After the judicial power of mitigation regarding penalty clause
was introduced in the 1990's (Section 6:94 of the Dutch Civil
Code), courts have been making ample use of this power. However, in
2007 the Supreme Court imposed restraints on this power of
mitigation. In its judgment of 27 April 2007 (LJN AZ6638,
NJ 2007, 262) the Supreme Court ruled that a court may
only use its power of mitigation if the application of a penalty
clause would lead to an excessive and therefore unacceptable result
in the given circumstances. In its consideration the court must not
only take the relationship between the actual damage and the amount
of the penalty into account, but also the nature of the agreement,
the contents and purport of the penalty clause and the
circumstances under which it has been relied on.
Initially, this standard for the power of mitigation was strictly
applied mostly by the Courts of Appeal (e.g. Court of Appeal of
Arnhem, 1 June 2010, LJN BM6037 and Court of Appeal of Amsterdam,
13 January 2009, LJN BH2193). Lower courts still seemed prepared
now and then to mitigate a penalty agreed by contract under less
strict conditions. But this is now changing too. To illustrate
this, I will discuss a judgment of the Subdistrict Court of Arnhem
of last year.
Court of Arnhem, Subdistrict Section, 2 August 2010 (LJN
BO 0181)
The law firm Reintjes Advocaten (“Reintjes”) had
been renting about 250 m² of office space since 1 April 2004 from
Rijn en IJssel Project Developers (“RIJP”). The lease between the
parties ended on 1 April 2009. The lease was subject to general
terms and conditions, which provided, inter alia, that the
lessee was not entitled to rent reduction, and that the lessee was
not allowed to set off or suspend any payment obligation in the
event of a diminished quiet enjoyment as a result of defects.
Besides, Article 18.2 stipulated that the lessee would owe an
immediately payable penalty of 2% of the monthly amount due, with a
minimum of € 300 per month, if he would not pay the rent on time.
Nevertheless, during the lease period Reintjes did not always pay
the rent on time in order to put some pressure on RIJP to fix a
number of defects in the leased property, such as defects in the
cooling system, the elevator system, the illumination in the
stairwell and the intercom system. Reintjes had complained to RIJP
about these defects several times, but to no avail.
The question is whether Reintjes was allowed to suspend the rent
payments in connection with the defects it had discovered. The
Subdistrict Court held that Reintjes should have used other means
to induce RIJP to remedy the defects, because Reintjes was
contractually prohibited from suspending the rent payments.
Reintjes has therefore defaulted on timely payments of the rent, so
that Reintjes owes the penalty agreed to RIJP under the general
terms and conditions.
Reintjes' reliance on mitigation of the penalty was to no
avail. The Subdistrict Court first and foremost made clear that it
had to observe reticence in the mitigation of penalties that have
been agreed. The Subdistrict Court considered that Reintjes should
have been aware from the start of the lease that it was not allowed
to defer paying the rent in order to put pressure on RIJP. Reintjes
made the conscious choice to do so, which choice has appeared
wrong. According to the Subdistrict Court, fairness apparently does
not require that the consequences of this conscious choice should
be mitigated. The order claimed by RIJP for Reintjes to pay the
total amount of penalties forfeited of € 24,300, plus statutory
commercial interest, was therefore allowed by the Subdistrict Court
in full.
Points of Attention
- This judgment makes clear that Subdistrict Courts too are
using the strict standard for the mitigation of penalties
agreed in leases.
- Lessees should therefore find out whether their lease, or
the general terms and conditions applicable to it, includes a
penalty clause, before deciding – for example – not to pay the
rent on time (for whatever reason). Recent case law in this
field has revealed that such conduct may make the lessee pay
dearly, not only because of penalties forfeited, but also
because of the possible increase of the total amount of
penalties by statutory (commercial) interest. Furthermore,
courts will only mitigate a penalty contractually agreed in
very exceptional cases. In order to prevent any penalties in
this respect, paying or performance without assuming the
obligation is usually a better option than failing to pay (on
time) or non-performance.
- For lessors, the above means that it is worthwhile to claim
the maximum amount of the penalty contractually agreed,
especially since this amount may also be increased by statutory
(commercial) interest where appropriate.