Dutch Real Estate: Beware of Potential Leasehold Terminations as a Result of Offences

Recent case law emphasizes that non-compliance (criminal activities including potentially economic offences) on a leasehold (erfpacht) plot can constitute a violation of the obligations under the Dutch leasehold law (Gerechtshof 's-Hertogenbosch 5 maart 2024, ECLI:NL:GHSHE:2024:718).

In a recent case, the police searched the residence and shed on a property and uncovered firearms, a large quantity of cannabis tops, and equipment for processing and manufacturing cannabis, all belonging to the leaseholder's partner. The court concluded that the possession of such a significant number of weapons and cannabis on the plot, considering the inherent risks involved, the potential negative impact on the surroundings, and the fact that these criminal activities occurred in the context of operating a cannabis cultivation facility elsewhere, constitute a serious breach of the leaseholder's obligations.

As stated by the Court, the plot should not be knowingly and systematically used for criminal activities. Additionally, the fact that the potential danger posed by the possession of firearms did not materialize does not diminish the seriousness of the breach. Both the leaseholder and the leaseholder's partner breached their obligations under the leasehold agreement. The leaseholder herself was also acting contrary to the leasehold conditions, as it would have been possible and incumbent upon her to terminate the illegal possession of firearms. Her omission constituted a breach of her obligations toward the municipality as the owner of the plot. The severity of the breach and the uncertainty regarding the prevention of similar conduct on the plot in the future justify the municipality's legitimate interest in terminating the leasehold agreement, the court concluded.

The criminal facts in this case were severe. The verdict shows that a termination because of an economic non-compliance will not be accepted light-heartedly by the courts. Serious economic offences (such as high-impact environmental non-compliance) may nevertheless qualify as a breach allowing for termination of the leasehold. Such potential offences should therefore be part of a due diligence investigation prior to an acquisition of a company that operates its business under a right of leasehold.