The Netherlands

Author: | Published: 3 Apr 2003
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Real estate is an investment category with highly non-transparent features. This is not only attributable to the difference in the objects concerned and the confidential nature of most real estate transactions that take place in the market. The relevant laws and customs may also vary from one country to another, making it difficult to assess whether a specific investment strategy that proved successful elsewhere should be applied for The Netherlands. How are the returns affected by landlord and tenant law? Are the markets growing as a consequence of an increasing appetite for structured transactions such as securitization of assets or outsourcing? What are the specific legal issues with respect to the financing and conveyancing of property?

Landlord and tenant

Dutch landlord and tenant law distinguishes between three types of lease: (i) residential leases; (ii) retail sector leases, including retail shops, hotels, restaurants and bars and the like; or (iii) other commercial leases, such as office, industrial site and warehouse leases. Different rules apply to each category.

Residential lease agreements are primarily governed by the mandatory provisions of articles 1623a-1623o of Book 7A of The Netherlands Civil Code (Burgerlijk Wetboek, or CC). Residential lease agreements may furthermore be subject to the rules contained in the Residential Tenancies (Rent) Act of 1979 (Huurprijzenwet woonruimte) and the Act on the Rent Assessment Committee of 1979 (Wet op de Huurcommissies). Articles 7A:1624 to 1636 CC contain mandatory rules specifically applicable to retail leases. Specific mandatory rules on office, industrial site and warehouse lease, finally, are laid down in the Rent Act of 1950 (Huurwet).

The mandatory provisions referred to above are supplemented by general provisions on lease agreements in articles 7A:1586 to 1616/1623, most of which apply equally to the lease of moveable property and to all three categories of real estate lease referred to above, and the general principles of contract law in Books 3 and 6 of the CC. These supplementary provisions are generally of a non-mandatory nature, meaning that they can be set aside by contract. It should be noted that, in practice, standard form lease agreements prepared by the Council of Real Properties (Raad voor Onroerende Zaken, or ROZ) are frequently used for all three categories.

Disputes regarding lease, can be brought before a separate division within the district courts. In case of residential lease, parties may also decide to address the Rent Assessment Committee (Huurcommissie). This committee has the authority to investigate matters and give non binding judgments.

As a general rule, where a tenant is in default on payment of rent the landlord may seek to terminate the lease agreement for reasons of behaviour unfit to a good tenant or request the competent district court to dissolve the agreement. For residential leases and for leases with respect to retail property judicial interference is required in order to terminate the lease agreement, even in the event of the defaulting tenant. Such judicial protection does not apply to the termination by the landlord of other commercial leases. However, following such termination, the tenant's obligation to vacate the premises is automatically suspended for two months in order to allow for the tenant to file a request to the district court for a further suspension. The maximum term of the suspension to be granted - depending on a balancing of all interests involved - amounts to three years and two months.

Judicial interference is furthermore not required in case of insolvency of the tenant. If the landlord terminates the lease agreement on the grounds that the tenant has been declared bankrupt, the lease agreement ceases to exist with the lapse of three months or after a period corresponding with the amount of rent paid in advance. The trustee in the bankruptcy of the tenant, too, can terminate the lease on a three months' notice.

Human rights legislation plays only a minor role in the landlord/tenant relationship in The Netherlands. Occasionally, an appeal to the European Convention on Human Rights (ECHR) is made, in particular to articles 8 (right to respect for private and family life) and 10 (freedom of expression) thereof. The most common examples in case law concern disputes over the right of a tenant to receive and impart information on a worldwide scale under Article 10 of the ECHR and the interest of the landlord (and other tenants) in upholding a prohibition on transmitters under the lease agreement. Depending on the circumstances, such appeals to Article 10 of the ECHR may either be granted or dismissed.

A tenant wishing to divest himself of surplus property may either seek to sublease such property or transfer his rights from the lease agreement to a third party. As a general rule, however, Article 7A:1595 of the CC prohibits a tenant to sublease property or transfer his rights without the prior approval of the landlord. The ROZ forms for lease agreements too, are based on this principle. By mandatory law, there are a few exceptions to this rule. If residential accommodation is sublet, regardless of whether such sublease was permitted under the terms of the head lease, the sublease will be continued by the landlord upon termination of the head lease by operation of law. Within six months the landlord may request the district court to dissolve its contractual relationship with the former tenant, which request can be granted only on a limited number of statutory grounds. Furthermore, a residential tenant may through judicial intervention force an exchange of tenants - a housing swap - on its landlord under certain conditions. In the same way, the tenant of retail property may request the district court in the event of a transfer of its business to assign the lease to its successor in business under certain conditions.

Securitization of real estate assets

The securitization market in The Netherlands appears still to be growing, and is valued at approximately € 20 billion ($22 billion). Up to now residential mortgage-backed securitizations (RMBS) have predominated the market, and it is likely that this will continue. However, there is still growth in asset classes other than RMBS, in particular commercial mortgage-backed securities (CMBS) and operating leases. RMBS has become more or less plain vanilla in the Dutch market, and there is a growing interest in synthetic securitizations and new assets such as real estate. A lot of commercial real estate funds are looking at securitization, and corporates are considering securitizing their property portfolios. This is expected to involve rental property lease portfolios with highly diversified retail market portfolios, or single tenant buildings with triple-A rated tenants. Potential originators include real estate funds that will look to CMBS as an alternative funding source. Pension funds might also issue CMBS, because they have over exposure to this asset, and want to restructure their balance sheet. However, it is to say that securitization of real estate portfolios by corporates poses some problems. Some of the corporates are lacking a rating and there are also legal and fiscal issues to be resolved. Fiscal problems include the question whether the corporate portfolios would be exempt from tax or not, and how a transfer of assets would be structured.

In 2001, Westfalische Hypothekenbank issued the first Dutch CMBS transaction, the €198.9 million Dutch Dream synthetic transaction. To date, three CMBS deals have emerged: Euromax II MBS; Duke 2002, a synthetic CMBS deal; and Vesteda Residential Funding, the first funded CMBS deal securitizing a portfolio of Dutch rental units.

In The Netherlands, the parties are under no duty to disclose the lease terms on a formal registry. Yet, one of the legal issues that comes up in a securitization of rent instalments relates to the fact that under Dutch law for the purpose of assigning or creating security over receivables it is important to distinguish between 'current' receivables (bestaande vorderingen) and 'future' receivables (toekomstige vorderingen). If receivables are to be regarded as future receivables, an assignment and/or pledge thereof will not be effective to the extent the receivable comes into existence after or on the date on which the assignor, or as the case may be, the pledgeor has been declared bankrupt or granted a suspension of payments. Rent instalments are considered to be future receivables. The consequence is that the structure which is most frequently used in The Netherlands in a securitization of receivables - ie RMBS - cannot be used in a securitization of lease rentals. The fact that a more complicated structure needs to be implemented in order to get a satisfactory credit rating on the notes to be issued may be a reason why up to date the number of real estate securitization transactions in The Netherlands is limited. However, as was stated above, it is nevertheless expected that this number will increase in the next coming years.

Like in other (public) securitizations, the rating agencies may play an important role in real estate securitization transactions. They are the first that need to be convinced that a new structure provides the required certainty for the investors so that a triple-A rating can be assigned to the notes to be issued. Generally, Dutch investors attach significant importance to the credit ratings assigned by the rating agencies.

Property outsourcing

Property outsourcing is - compared to US practices - a relatively new phenomenon in The Netherlands but is increasingly seen as a tool to free up capital to invest in the core business. Recent transactions include the sale and lease back by the employee staffing company Randstad Holding of 14 office buildings and the outsourcing by the Dutch broadcasting company NOB of the Media Park. In the latter, the prospective purchaser was requested to carry out park management services.

Once it has been decided as a strategy to outsource real estate assets it is only logical that the demand for new real estate assets to be operated in the core business is no longer put to the market in traditional terms but in integrated formulae such as design construct finance maintenance contracts (DCFM). In 2002, after the government having concluded its first private finance initiative (PFI) deals in the infrastructure sector, of which the contract for the High Speed Link-South (HSL-South) is best known, the public-private partnership (PPP) Knowledge Centre of the Dutch Ministry of Finance set up a pilot programme for the realization of schools through DCFM. The primary goal is to show that PPP is effective and yields more value for money for such projects than traditional procurement. So far, PPP initiatives have met a lot of scepticism in The Netherlands.

Along with the tendency for property outsourcing, specialized service providers offering properties in combination with IT and/or human resource services are entering the real estate market. Yet, the Dutch market does not yet seem convinced that such an integrated outsourcing of facilities is a strategic option.

In The Netherlands the effect of Enron and other accounting scandals have caused both corporates and accountants to consider off-balance sheet transactions with the utmost reserve. With more than 40 Dutch companies being listed in the US and many other US listed companies being active in The Netherlands through Dutch subsidiaries, Dutch accountants will be bound by the provisions of the Sarbanes-Oxley Act pursuant to which details of such transactions are to be disclosed in the annual accounts.

Financing of real estate transactions

The most common method to finance the acquisition of real estate transactions is by way of mortgage loan. Under Dutch law, a stamp duty does not exist. A small duty (€3) is levied upon registration of each notarial deed or private instrument related to real estate transactions. Yet, the acquisition of real estate or of a real estate company is subject to 6% transfer fax. The law provides for a number of exemptions, inter alia if value added tax is payable on the transaction and this value added tax cannot be partially or wholly deducted. In general, parties are under no duty to disclose the financial terms of a real estate transaction in a formal registry. However, the right of mortgage is vested by notarial deed which specifies the type of mortgage loan effected and occasionally - depending on the effected type of loan - may hold the details of such loan. A copy of the relevant notarial deed is to be registered in the Land Registry.

In The Netherlands, no debate exists as to who holds the legal title of a mortgaged property. The ownership title generally lies with the mortgagor, whereas the right of mortgage under Article 3:227 of the CC is regarded a limited real right derived from ownership.

Conveyancing issues

In relation to property ownership, under Netherlands law a distinction is drawn between rights in rem and rights in personam. The most inclusive right in rem is the right of absolute ownership. Furthermore, in respect of real estate, limited rights in rem - derived from the right of ownership - exist such as the right of leasehold, the right of superficies, condominium rights and the right of mortgage. All of these rights in rem, including the limited rights, are absolute. Rights in personam have relative effect only. Rights in personam with respect to real estate could for instance constitute the entitlement to transfer arising from a purchase agreement or the right of beneficial ownership of an object.

Other than the general principles of contract law governing the agreements between parties, in The Netherlands an important role is reserved for civil-law notaries engaged in real estate transactions. The civil-law notary involved not only draws up the purchase agreement and the notarial deed, but also investigates the vendor's entitlement to dispose of the real estate and the legal status - ie existing mortgages or other charges, encumbrances or liens - of the real estate. The timely engagement of an expert civil-law notary is therefore absolutely essential. In The Netherlands e-conveyancing does not (yet) play a significant role with regard to property transactions. This is partly the result of the strict formal requirements applicable to property transactions on the one hand and the prominent role civil-law notaries have in such transactions on the other. In recent years, however, digital information services from the Land Registry have expanded and in 1998 a covenant was entered into between the Land Registry and the Royal Notary Association (Koninklijke Notariële Beroepsorganisatie) with the purpose of enabling online registration of property in the near future.

The practice of vendors wishing to take advantage of development uplifts is common in Netherlands property transactions. Several possibilities exist to secure such value. In general lawyers achieve this by reserving for their vendor client in the purchase agreement a share - usually a fixed fee or a percentage - of the possible future planning gain. Thus, the development uplift is reserved as a personal obligation of the purchaser to pay sums to the vendor on the occasion of a trigger event, eg the granting of a building permit. By formulating such obligation as a so called "perpetual clause" one can achieve that a subsequent purchaser is bound.

In the event of adverse possession, the bona fide possessor will acquire title to real property by continuous possession for a period of 10 years. If the possessor is not bona fide, the title will not be acquired until a claim for revindication is barred by the statues of limitation, which is normally after 20 years.


Loyens & Loeff
Fred Roeskestraat 100
1076 ED Amsterdam
The Netherlands
Tel: +31 20 578 5785
Fax: +31 20 578 5888