The main source of private real estate law in the Netherlands is the Civil Code (Burgerlijk Wetboek). The main sources of public real estate law are the Spatial Planning Act (Wet ruimtelijke ordeningen) and the Environmental Permitting General Provisions Act (Wet algemene bepalingen omgevingsrecht).
The Parliament has accepted a large-scale systematic overhaul of planning and environmental law, consolidating inter alia the Spatial Planning Act and the Environmental Permitting General Provisions Act (and their subordinate regulations) into a single Environmental Act (Omgevingswet), which is expected to come into force in 2021.
The main trends have been the growing share of investment in the Dutch real estate market by foreign investors, the expansion of the logistics and residential sector, and a focus on intelligent energy-efficient buildings.
Significant deals include the sale of the "Mesdag Delta" portfolio by Breevast to Highbrook Investors, for approximately EUR600 million, and the sale of five shopping centres by CBRE Global Investors to a consortium led by Arc Real Estate Partners, for approx. EUR1.6 billion.
Disruptive technologies like blockchain have been introduced in some small pilot projects of lenders. Although it is predicted that disruptive technologies will have a large impact on the real estate market in the future, it is unlikely that these technologies will have a significant impact over the next 12 months.
There are currently no proposals for reform that would have a significant impact on real estate investment, ownership or development, nor are any such proposals being discussed.
The main types of property rights in the Netherlands are as follows:
The legislation that applies to real estate is:
No special laws apply to the transfer of any specific types of real estate, except for a consumer sale of residential real estate.
The purchase agreement forms the basis of the transfer deed, which is signed by all parties and executed by the civil law notary, who then submits a certified copy to the Land Registry. The transfer is completed when the certified copy has been registered.
In the Netherlands, the Land Registry records all important information concerning real estate. Every property has its own specific Land Registry code. The Land Registry is available online to everyone. It is impossible to acquire property without registration, except for acquisition on the basis of limitation.
Title insurance is not common, because the registration process usually offers the buyer an appropriate level of security.
The buyer will usually investigate title to the property, lease contracts, zoning, tax and environmental issues. Due diligence usually takes up to eight weeks.
The seller normally warrants that it has valid title to the property and that the property is free from any mortgages and attachments. The purchase agreement might include additional warranties relating to the state of the property, to leases and to public law aspects. Additional warranties can be negotiated by the parties, especially when both the seller and the buyer are commercial parties. In an “as is” transaction, the seller usually does not provide the purchaser with any warranties other than a title warranty.
The seller must provide the buyer with an energy label or a similar document, in accordance with the Energy Performance Buildings Decree (Besluit Energieprestatie gebouwen).
Buyers' remedies include:
Sale and purchase: a purchase agreement is subject to almost no mandatory provisions, save for a consumer sale.
Zoning: municipal zoning plans and decisions designate particular uses to specific plots and areas. Lower level zoning plans (eg, municipal zoning plans) must comply with upper level zoning plans (eg, provincial, regional and/or national zoning regulation).
Public-private relations: municipalities charge fees for public law co-operation (eg, permits and exemptions). The amounts are adopted in ordinances. In addition, municipalities may adopt exploitation ordinances, which govern municipal authorities' policy in contracting with private law parties in relation to land exploitation. This allows the municipal authorities to set fees payable in relation to such exploitation, and also details the rules on compensation for planning-related damages suffered by third parties.
Environmental permits: environmental law governs both strict (physical) environmental law and zoning-related environmental law. Environmental permits are required for carrying out specific activities (eg, demolition and construction) or for making specific use of real estate (eg, a use that deviates from the applicable municipal zoning plan).
In general, the polluter pays principle is applicable. However, the government can also force an owner to decontaminate, even if it cannot be established that said owner caused the pollution.
The buyer should investigate the applicable zoning law decisions, primarily the applicable municipal zoning plan, via a publicly available database. Use can be changed through a zoning plan amendment or a permitting procedure to allow deviation from the zoning plan. It is possible to enter into specific development agreements with relevant public authorities in order to facilitate a project.
Public law permits governmental bodies to expropriate property if it is in the public interest. Strict criteria must be met before this can be done.
Once the zoning plan has been finalised (and no further appeals are possible), expropriation begins with an administrative law procedure, under which objections and appeals in relation to the private interests of the landowners are possible. This is followed by a civil law procedure where experts are appointed to determine the damages suffered by the owners, tenants and others whose property has been subject to expropriation (based on the "full compensation" principle).
On the basis of the Municipal Preferential Rights Act, a municipality can oblige an owner to offer a property to the municipality before it is sold to a third party.
Real estate transfer tax (RETT) at 6% applies, unless residential property is involved. For residential properties, a rate of 2% is applicable.
RETT is based on either the fair market value of the property or the purchase price paid for the property, whichever is higher, and is payable on the acquisition of the legal and/or beneficial ownership of real property (and, in some circumstances, qualified shares or membership rights).
The civil law notary needs to receive the purchase price (including RETT) payable by the buyer prior to the execution of the transfer deed. The notary is jointly and severally liable with the buyer for the RETT, and will not execute the transfer deed before the RETT has been received on the notarial trust account. Notwithstanding this, it is possible for a buyer to pay the purchase price directly to the seller.
Transfers in respect of newly developed real estate or building sites are subject to value-added tax (VAT) at a rate of 21%. In this case, an exemption for RETT can be obtained.
RETT can also be payable in relation to share deals, and is triggered if the target company being acquired qualifies as a "real property company". This is a legal entity with capital divided into shares, whose assets at the moment of purchase or in the 12 months preceding the purchase consist or consisted of at least 50% immovable property and, at the same time, consist or consisted of at least 30% Dutch immovable property, and where at least 70% of the immovable property is being used for acquiring, selling and exploiting such immovable property assets.
There are no legal restrictions on foreign investors acquiring real estate.
Acquisitions of commercial real estate are generally financed by a mix of debt provided by financiers and equity provided by investors (in the form of either a subordinated loan or a capital injection). In the Dutch market, the majority of loans are still granted by traditional banks rather than alternative financiers (like pension funds, hedge funds, insurers, mezzanine lenders or private equity funds), although the market is opening up to such parties.
Real estate financing is usually structured in the form of term loans. Loans were previously documented in the relevant bank's standard form in combination with that bank's general terms of business, but it is becoming more and more standard to document loans in the form recommended by the LMA (Loan Market Association), which makes such loans more attractive to potential international purchasers.
While there is no general difference in financing options for acquisitions of large real estate portfolios or companies holding real estate compared to smaller loans, large real estate portfolios and large sponsors will often attract more financiers and have a broader range of financing products made available to them.
The most common form of security in the financing of real estate is a right of mortgage (hypotheekrecht) over the real estate. Mortgages are established by way of a notarial deed, which must be registered at the Land Registry. Mortgages secure a specific amount of money (usually the principal amount of the loan plus a surcharge of 40% for interest and costs) and can be divided into two categories: credit mortgages (krediethypotheek) and bank mortgages (bankhypotheek).
Credit mortgages only serve as security for obligations of the obligors under or in connection with a specific loan agreement, while bank mortgages secure all amounts owed by the borrower to the lender, including, but not limited to, a specific loan agreement, and can therefore cover various loans granted (or to be granted) by the same lender or even claims of the lender towards the borrower arising from other grounds.
In addition to a right of mortgage, borrowers usually create security over the following assets: rent receivables, insurance receivables, bank account receivables, receivables under management contracts, receivables under sales contracts or property development contracts and, if applicable, receivables under hedging agreements, movable assets located on the property or shares in the borrower.
Receivables can be pledged on a disclosed or undisclosed basis. A disclosed right of pledge (openbaar pandrecht) is notified to the relevant debtor. An undisclosed right of pledge (stil pandrecht) will not be notified to the debtors of the pledgor, and is perfected by offering its registration to the competent tax authorities.
There are no general restrictions on granting security over real estate to foreign lenders. However, along with national lenders, foreign lenders also need to comply with the Money Laundering and Terrorist Financing Prevention Act (Wet ter voorkoming van witwassen en financieren van terrorisme), according to which a financial institution needs to perform a thorough Client Due Diligence (CDD) and report any transaction that could involve money laundering or financing terrorism to the FIU-Nederland (Financial Intelligence Unit-Nederland).
There are no restrictions on payments made to foreign lenders under a security document or loan agreement.
No implications of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) on real estate finance transactions have yet been witnessed, although it should be noted that the volume of US investments in the Dutch market has been consistent in recent years.
As stated in 3.2 Typical Security Created by Commercial Investors, a right of mortgage will be created by means of a notarial deed. A certified copy of the notarial deed needs to be registered at the Land Registry, for which a legal charge of approximately EUR250 must be paid. Notarial fees are not fixed and depend on the work carried out by the relevant Dutch notary.
Ultra Vires or Corporate Benefit
Pursuant to Article 2:7 Civil Code, any legal person incorporated under Dutch law or, as is most frequently the case, its trustee in bankruptcy (faillissementscurator) may annul a legal act entered into by the legal person, if the act exceeded its objects (as set out in the objects clause in a company's articles of association) and its counterparty knew or (without investigation) should have known that the legal person's objects were exceeded.
Legal acts that are expressly permitted by a company's objects clause, or that may generally be assumed to be conducive to furthering the company's express objects, are a good indication that the legal act does not violate Article 2:7 Civil Code. However, according to the case law of the Supreme Court, all relevant circumstances of a case at hand, including the question as to whether the performance of the legal act is in the company's corporate interest, should be taken into account in order to determine whether a legal act exceeds a company's objects clause and consequently violates Article 2:7 Civil Code.
The Civil Code stipulates that neither a public company (naamloze vennootschap) nor any of its subsidiaries (dochtermaatschappijen) – including, most likely, foreign subsidiaries – may create security, grant a guarantee or otherwise accept liability (including providing loans that exceed statutory thresholds), with a view to (met het oog op) the taking or acquisition by third parties of shares in its capital. Any acts in contravention of this prohibition will violate Dutch law and most likely be void.
No financial assistance prohibition applies for private limited liability companies (besloten vennootschappen met beperkte aansprakelijkheid – B.V.s).
Conflict of Interest
The Civil Code stipulates that if there is a conflict of interest (tegenstrijdig belang) between a limited liability company or a private limited liability company and one or more of its managing or supervisory directors, any conflicted (supervisory) director is not allowed to participate in the deliberations and the adoption of the relevant resolution.
Although managing board resolutions taken contrary to the decision-making rules above are subject to nullification by any party that has a reasonable interest in the observance of such rules, a transaction with a third party will not be affected by these void resolutions if the third party was not or should not have been aware of the conflict of interest.
Security rights may be affected and limited by the general defences available to obligors under Dutch law in respect of the validity and enforceability of contractual obligations. Without purporting to be comprehensive, it is noted that the security documents may be voided if they were made through undue influence (misbruik van omstandigheden), fraud (bedrog), threat (bedreiging) or error (dwaling) of any of the parties thereto, and any claims under the security documents may be, or become, subject to set-off, counterclaim or suspension (opschorting). The rights and obligations of the parties to the security documents are subject to the principle of good faith/reasonableness and fairness (redelijkheid en billijkheid).
Formalities and Steps to be Taken
Upon the occurrence of an event of default, as defined in the notarial deed of mortgage or a deed of pledge, the mortgagee/pledgee may exercise its right of mortgage in accordance with a summary foreclosure procedure. This means that the mortgagee/pledgee may procure the forced sale of the mortgaged property or pledged property, as the case may be, and may pay its claim from the net forced sale proceeds in accordance with the ranking of its security right.
The forced sale of mortgaged property takes place by way of a public auction and can be initiated by a civil law notary (at the instruction of the mortgagee). Moreover, a private – non-public – sale may also be effected by an application made to the relevant district court (at the request of the mortgagee or mortgagor). In such a case, the district court must approve the relevant sale and purchase agreement, in which case the public auction will be cancelled.
The forced sale of pledged property usually takes place by way of a public auction (openbare verkoop). To prevent a public auction, the forced sale can also be initiated by means of an application made to the relevant district court in interlocutory proceedings (voorzieningenrechter) at the request of the pledgee or the pledgor, unless otherwise agreed in the pledge deed. At the request of the pledgee, the district court in interlocutory proceedings can rule that the pledged asset will be sold to the pledgee, in which case the court determines the purchase price.
At the same time as exercising the right of pledge, the pledgor and pledgee can, without approval of the district court in interlocutory proceedings, voluntarily agree on a sale that does not comply with a public auction procedure.
The mortgagor can seek a court order in summary proceedings to stop enforcement if it is of the opinion that enforcement is not justified. If successful, these summary proceedings will frustrate enforcement by the mortgagee.
Enforceability may also be restricted by general principles of Dutch law, such as the principle of reasonableness and fairness (redelijkheid en billijkheid) as provided for in the Civil Code, and may be subject to rescission in cases of imperfect agreement (wilsgebreken), which are undue influence (misbruik van omstandigheden), fraud (bedrog), threat (bedreiging) or error (dwaling).
Interests of Other Creditors
Under Dutch law, the following matters may affect the binding effect and enforceability of the security documents (including foreclosure on the secured assets):
Additionally, the right for a pledgee to seek recourse against any movable asset as envisaged by Article 22 Collection of State Taxes Act, 1990 (Invorderingswet) – being predominantly movable assets located on the premises of the pledgor which are deemed to be inventory – is restricted as a result of the pledgee being obliged, prior to seeking such recourse, to (i) notify the tax authorities of its intention to seek recourse against any relevant movable asset being pledged, and (ii) allow a period of a maximum of four weeks to expire during which the tax authorities must not have exercised their right of first priority over such movable assets in connection with certain taxes.
Creditors generally rank pari passu in the Netherlands, on which basis they have recourse to all of the debtor’s assets. A creditor can agree to subordinate its claims towards the claims of a specific creditor or towards all creditors of a debtor. A subordination agreement will regulate the subordination of the debt as well as matters such as rights of enforcement of security, turnover of proceeds by the subordinated creditors or the filing of claims during insolvency proceedings.
Secured creditors will have priority over non-secured creditors. If several security interests have been created over the same assets, the ranking of security rights is determined by the time of establishment. Rights of pledge and mortgage (in most cases) precede specific and general statutory privileged rights (algemene en bijzondere voorrechten) over property.
Mortgagees can agree to change the ranking of the right of mortgage (provided that all secured creditors agree). Such change of ranking must be registered at the Land Registry. Legal literature casts doubt on whether or not the priority of a right of pledge can be changed. As long as this is not confirmed by legislation or case law, it is believed that a change of ranking of rights of pledge is not possible, and the time of creation of the rights of pledge will be decisive for their ranking. Consequently, to alter the priority of an existing right of pledge it must be terminated, and new right(s) need to be created as agreed between the parties. Alternatively, an intercreditor agreement containing arrangements in respect of the application of enforcement proceeds will be sufficient to effectuate a de facto change of priority.
A mortgagee is generally not liable for environmental damage, provided that it does not itself cause or knowingly permit damage to the environment (or influence the acts of the landowner/mortgagor to do so).
Generally, a borrower's insolvency does not affect the security rights of secured creditors. Mortgagees and pledgees are referred to as "separatists" under Dutch law, which means that, if insolvency proceedings are commenced in respect of a debtor, the secured creditors may still enforce their security rights without regard to these insolvency proceedings.
However, a trustee in bankruptcy (faillissementscurator) can try to annul the security rights on the basis of the so-called actio pauliana or fraudulent conveyance if:
For the purposes of annulment of the relevant legal act, it is sufficient for the trustee in bankruptcy to declare the annulment. In practice, however, the trustee in bankruptcy will petition the court to order the beneficiary of the annulled legal act to undo the performance or benefit it received as a consequence of the legal act.
Additionally, please refer to 3.5 Legal Requirements Before an Entity Can Give Valid Security, which sets out several conflicts under general Dutch law that might affect the validity of security rights, and that can be evoked by the trustee in bankruptcy.
Finally, the rights of a pledgee or mortgagee to claim or seek recourse against an asset (goed) that belongs to an insolvent estate and in respect of which such pledgee or mortgagee has a security right may be suspended by any competent court in insolvency proceedings for a period of not more than four months. During this period, the pledgee or mortgagee of such asset may not exercise such rights without the court's consent.
There continue to be numerous real estate financings where a fixed interest applies. For these loans, the expiry of LIBOR or EURIBOR is not relevant.
For loans with a floating interest that have a term beyond 2021, the wording suggested by the LMA is included, which in summary stipulates that parties will agree on an alternative base funding rate if LIBOR/EURIBOR ceases to be applicable. So far, there have not been any extensive discussions or concerns on this point.
Dutch planning law encompasses both (i) planning law, which governs the designation of specifically demarcated areas for particular uses and which is laid down in zoning plans, and (ii) public law permits, which may allow deviation from such zoning plans.
The statutory law on zoning – the Spatial Planning Act (Wet ruimtelijke ordening) – accords zoning law authority to municipalities, and also to provincial and national authorities to set zoning law plans under certain conditions (eg, large-scale regional projects or projects of national interest). Additionally, secondary legislation, regulations, circulars and planning policy statements at multiple government levels determine the framework within which these zoning plans are adopted.
Design, appearance and methods of construction are subject to the general rules on construction – the Building Decree (Bouwbesluit) – and on environmental construction permitting under the Environmental Permitting General Provisions Act (EPGPA – Wet algemene bepalingen omgevingsrecht). Building permits are granted under the EPGPA as integrated environmental permits (omgevingsvergunningen).
The method of construction is governed by uniform building regulations in the Building Decree, which contains the technical regulations that represent minimum requirements for all buildings in the Netherlands. These requirements relate to safety, health, usability, energy efficiency and the environment.
The design and external appearance of new buildings is partially governed by the applicable (municipal) zoning plan and (if applicable) other zoning rules and regulation.
The national and provincial government adopt general spatial plans that sketch the outlines of the spatial planning policy; otherwise, local zoning is the domain of the municipal authorities. Subject to national and provincial plans and regulations, responsibility for regulating the development and designated use of individual parcels of land and the obligation to adopt zoning plans for all premises located within their municipal borders lies with the municipalities. Certain cases of regional or national interest can be referred to the provincial or national authorities for determination, such as the location of regional or national infrastructure projects or the location of military sites.
Typical restrictions include the demarcation of plots for specific use in a particular type of commercial activity – for example, the development of (heavy) industrial or commercial plots (eg, warehousing) is generally not permitted at retail locations, and vice versa.
Pursuant to the EPGPA, a building permit is needed to construct a new building. The use of a building must be in accordance with the applicable zoning plan and (if applicable) other zoning rules and regulations.
Should the zoning plan not allow the construction of the intended premises (eg, if a building height exceeds the allowable height under the zoning plan), a zoning law exemption is required. A zoning law exemption may also be necessary to allow a use that is not permitted under the zoning plan.
In general, the relevant municipality will decide whether to allow a deviation from the zoning plan. There are relatively few restrictions on the municipalities’ powers to assess the proposal. Administrative law entails a more elaborate procedure for specific types of permits (eg, large-scale non-zoning compliant construction or more permanent deviations from a zoning plan), which includes more elaborate motivation requirements relating to spatial permissibility, while a relatively simple procedure is available for construction activities that fit within the zoning plan.
In the first steps of the process to adopt a zoning plan, stakeholders may submit their views on the adoption or rejection of a draft zoning plan to the relevant municipality in the six weeks after the plan is published. Making a submission in this way is a legal prerequisite for lodging appeals against the final adopted zoning plan.
After the zoning plan has been adopted, stakeholders who have issued views (or stakeholders who have not submitted views but reasonably could not have been expected to submit views) with a particular interest may appeal the municipality’s decision at the Administrative Jurisdiction Division of the Council of State (Afdeling Bestuursrechtspraak van de Raad van State) within six weeks. Limited provisional recourse is available.
Stakeholders have recourse against permit decisions. Whether this recourse is available, what type of recourse is available and under which conditions the recourse is available depend on the specific permit and procedure, and the appellant's qualification as a stakeholder. In general, an administrative reconsideration precedes the appeals phase for simple procedural decisions, but otherwise a direct appeal following the adoption of the decision is available – again, subject to whether the appellant has submitted views and otherwise meets the statutory requirements for lodging an appeal.
Municipal authorities have the authority to charge costs for infrastructure and utilities developments related to the development project. The statutory preference is to agree such costs on a voluntary basis with developers (anterieure overeenkomsten).
In cases where agreement cannot be reached, municipal authorities are required to adopt exploitatieplannen – ie, rules that, inter alia, govern what costs the municipality may charge in relation to developments.
The planning authorities have three ways to enforce restrictions on development and designated use. They can:
Repeated violation of zoning rules is considered a violation under the Economic Offences Act (Wet op de economische delicten), which is subject to considerable fines and other penalties.
The main types of entities are:
Of the above, the more commonly used are private limited liability companies and limited partnerships.
The main features of the constitution of each type of entity are as follows:
There is only a minimum capital requirement for setting up a limited liability company, which is EUR45,000.
Private Limited Liability Company
Considerable flexibility on corporate governance can be agreed upon in the articles of association. It is possible to create different categories of shares with different rights. Non-voting shares and non-profit shares can be created, and there are few restrictions on the allocation of voting and profit rights. Shareholders appoint and dismiss directors, and may also have rights to approve management decisions, but the directors are responsible for day-to-day business decisions. The company can be managed either by a sole director or by a board of directors, and there can be a separate board of supervisory directors or a one-tier board with executive and non-executive directors. A supervisory board or one-tier board may be mandatory in certain specific circumstances.
Limited Liability Company
Considerable flexibility on corporate governance can be agreed upon in the articles of association. It is possible to create different categories of shares with different rights. There are few restrictions on the allocation of voting and profit rights. In principle, the shareholders appoint and remove the company directors. A sole director or board of directors manages the company. A supervisory board is often installed, and may be mandatory in certain specific circumstances. There may be a separate board of supervisory directors or a one-tier board with executive and non-executive directors.
Fiscal Investment Vehicle
The same rules apply as for private limited liability companies and limited liability companies.
The co-operative is a form of association, so has members instead of shareholders. It is possible to create different categories of members, with different financial rights. There are few restrictions on the allocation of voting rights, which are in principle attached to the memberships. Members appoint and dismiss directors, and may also have rights to approve management decisions, but the directors are responsible for day-to-day business decisions. The co-operative can be managed either by a sole director or by a board of directors, and there can be a separate board of supervisory directors. A members' committee with at least two members and/or a supervisory board may be mandatory in certain specific circumstances.
Considerable flexibility can be given in the partnership agreement. There are few restrictions on the allocation of voting and profit rights. The unlimited partner is, by law, the general partner. Limited partners may have certain limited approval rights regarding management decisions. Too much influence by a limited partner on the partnership's management creates a risk that the limited partner might lose its limited liability status.
The annual maintenance and accounting compliance costs are as follows:
Dutch law recognises publicly registered rights in rem, such as ownership, leasehold and superficies, and rights in personam (personal rights). Personal rights are not publicly registered and can only be enforced vis-à-vis specific persons or parties. The most comprehensive personal right to use real estate is a lease. In this context, Dutch law makes a distinction between a lease and a farm lease (pacht), with the latter being a lease whereby real estate (typically farmland including, as the case may be, a farm and machinery) is leased for agricultural use (landbouwbestemming). If real estate is given into use against no (monetary or non-monetary) consideration, this arrangement qualifies as a loan for use (bruikleen).
Other publicly registered rights to use real estate are the right of easement (erfdienstbaarheid) and the right of usufruct (vruchtgebruik). A right of easement is a burden vested on real estate (dienend erf) to the benefit of another piece of real estate (heersend erf). The burden entails an obligation to tolerate or to refrain from certain actions. The right of usufruct caters for the right to use goods, such as real estate, belonging to another owner and to enjoy the benefits of such goods.
Dutch lease law (Article 7:201-310 Civil Code) makes a distinction between four regimes, which follow the permitted use under the lease:
The regime for retail premises is intended to offer protection to the tenant by means of (semi-)mandatory provisions because of the location specificity of the tenant's business. Other (semi-)mandatory provisions also apply, including those concerning the lease and notice periods. With permission of the Subdistrict Court, it is possible to deviate from semi-mandatory law.
The majority of leases in the Netherlands are based on the standard model of the Dutch Council for Real Estate (Raad voor Onroerende Zaken – ROZ). This model lease and the appurtenant general conditions include the main rights and obligations of both the landlord and the tenant in addition to and/or in deviation of Dutch statutory law. The general conditions tend to be slightly favourable to the landlord. The ROZ has model leases for all relevant regimes.
The commencement rent payable under a lease is, in principle, freely negotiable, although this freedom is restricted for a lease regarding a residential space that is destined to be used for social housing purposes. The rent for these residential spaces should be in compliance with the so-called residential valuation system (woningwaarderingsstelsel). Tenants of residential space (social housing lease and private rented sector lease) are entitled to have the agreed rent verified by the lease assessment commission (huurcommissie) within six months of the commencement date of the lease.
With regard to retail leases, parties can agree on a turnover-related rent.
Leases can be entered into for a fixed period or an indefinite period of time.
With regard to residential leases and office or industrial leases, the parties are free to negotiate the term of their choice.
The term for a retail lease is subject to (semi-)mandatory law, which stipulates that leases should be entered into for an initial duration of at least five years; leases entered into for a shorter period are extended by operation of law to five years. Upon the expiry of the initial term, the lease will be extended by operation of law for a subsequent period to a total period of ten years, provided that the lease is not lawfully terminated. The ratio behind these (semi-)mandatory terms is that a tenant should be able to recoup its investments. There is one exception to the aforementioned (semi-)mandatory provision pertaining to the term of retail leases: it is possible to enter into a lease for two years or shorter. These short-term retail leases will only be extended to five years if the lease has not been terminated after two years.
A five- or ten-year term is common for office or industrial leases. In principle, the initial term of a retail lease will be five years, with an extension period of another five years.
According to Dutch law, the tenant is obliged to undertake minor day-to-day maintenance. The landlord is obliged to carry out any maintenance beyond such minor day-to-day maintenance – ie, major maintenance, repair and replacement. The parties are free to agree to deviate from such obligations.
Usually, the rent is paid monthly or quarterly in advance.
Parties often agree that the rent is indexed on a yearly basis. With regard to retail leases, parties have the possibility to request the court to adjust the rent to a market rent.
In principle, the rent as agreed between the parties is fixed. The agreed rent is not indexed by operation of law, which is why the parties usually agree to a rent subject to annual indexation, by way of the consumer price index (CPI). In addition to indexation of the rent by way of the CPI, the parties sometimes agree to a contractual rent adjustment, for instance in accordance with market rent.
With regard to retail space, both the tenant and the landlord are entitled to request the court to adjust and assess the rent in accordance with the rent of comparable local retail space after the initial term of the lease (being at least five years) and, in all other cases, each time five years lapse from the day on which (i) the rent was agreed between the parties for the last time, or (ii) the court assessed the rent. However, before submitting such request, the tenant and the landlord must first try to reach a mutual agreement on a new adjusted rent. If the parties do not succeed, they are then required to seek expert advice on such rent adjustment. If they cannot reach agreement on the adjusted rent after taking into account the advice of the expert, then either party can file a request for rent adjustment with the court. The rent adjustment is based on comparable retail space that is located in the same (shopping) area, and on rents of comparable local retail space during the previous five years. A rent revision procedure may take several years.
The leasing of real estate is exempt from VAT, except for leases of, for example, parking spaces or hotel rooms. Since an owner is only entitled to deduct the VAT on the development, acquisition and/or maintenance costs of the real estate at hand if the lease is subject to VAT, the owner in its capacity as landlord has an interest to opt for a lease that is subject to VAT. The option is only possible if the tenant is able to deduct at least 90% of the VAT charged over the rent. If the parties have rightfully opted for a VAT-levied lease, then the owner of the real estate can deduct the VAT development, acquisition and/or maintenance costs. It is not possible to opt for a VAT-levied lease for residential spaces.
Besides rent, tenants are usually required to pay VAT, if the parties have opted for a VAT-levied lease. In addition, the parties often agree that the landlord will provide certain additional services, for which service charges are levied. The pre-paid service charges are settled annually, based on the actual costs of the service charges. With regard to retail spaces in shopping centres, tenants are sometimes required to pay promotion costs, which are spent by the shop association to promote the shopping centre.
It is common for tenants to pay the landlord a pro rata contribution (as part of the service charges) for the maintenance and repair of the communal areas.
Usually, the tenants pay for these services pro rata via the service charges.
Neither the landlord nor the tenant is obliged to take out any specific insurance. Usually, however, the financing requirements and/or fund regulations stipulate that the landlord is obliged to take out buildings insurance. Should the insurance premium be higher than a "normal premium" due to the specific use by the tenant, then according to the ROZ general conditions the tenant is usually obliged to reimburse the amount in excess of the normal premium to the landlord.
A lease usually stipulates the permitted use of the leased premises. If the use of the leased premises by the tenant is not in accordance with the lease, the tenant is in breach of the lease.
In addition, public regulations may impose certain restrictions on the use of the leased premises by the tenant. If the leased premises are not used in accordance with the applicable zoning plan, the competent authorities may order termination of the unauthorised use. In default thereof, the tenant runs the risk of forfeiting a penalty and/or administrative enforcement. The tenant is responsible for compliance with public regulations such as the relevant zoning plan and is, in principle, obliged to obtain all permits that are required for the specific use of the leased premises.
A tenant is not allowed to make alterations to the leased premises without the consent of the landlord, unless the alterations can be removed at negligible cost. For other alterations, the consent of the landlord or the court is required. At the end of the lease, the tenant is, in principle, obliged to re-deliver the leased premises in the original state, as recorded in a record of delivery (proces verbaal van oplevering) that has been drawn up at the start of the lease. Should there be no such record of delivery in place, then pursuant to Dutch law the tenant is presumed to have received the leased premises in the state as it is found at the end of the lease, unless the landlord is able to prove the opposite. However, the lease usually stipulates that, in such event, the tenant is obliged to re-deliver the leased premises entirely vacated, clean and in a good state of repair.
As of 1 July 2016, the parties can enter into a lease for a period of two years or shorter (five years or shorter for leases for shared residential spaces). Such a short-term lease expires at the agreed date, on the condition that the landlord has sent a timely notice of termination. Other specific provisions in the Dutch Civil Code regarding residential leases relate to the mandatory notice period of the landlord of at least three to six months (depending on the duration of the lease), the notice period of the tenant (which has to be in accordance with the payment period, up to a maximum of three months), the mandatory termination grounds for the landlord, the legal consequences of the death of the tenant or the landlord, and the possibility to adjust the rent.
Tenants under this regime have vacation protection (ontruimingsbescherming), which means that a tenant's obligation to vacate the leased premises is suspended for a period of two months by law from the date of vacation as specified in the notice of termination as sent by the landlord. In such event, the tenant can request the court to extend the suspension period for one year, a maximum of three times, from the date of vacation specified in the notice of termination.
With regard to retail leases, the Dutch Civil Code contains a mandatory provision enabling the tenant to demand the substitution of a third party as tenant under the lease if the tenant transfers its business to such third party. If the landlord does not accept the substitution, the tenant can enforce such substitution through a court order, which replaces the approval of the landlord for the substitution. The court will deny a claim for substitution if (i) the tenant has no ponderous interest, (ii) the business is not actually transferred to the third party, and/or (iii) the third party is unable to safeguard that it will comply with the obligations under the lease and function properly. The court will weigh the interests of both parties involved, and may attach conditions to a substitution.
A lease entered into with regard to a property to be used as a hotel would qualify as a retail lease. However, the parties can also enter into a management or a hybrid lease with a (partial) revenue or turnover-based rent.
According to insolvency law, either the bankruptcy trustee or the landlord may terminate a lease when a tenant is declared bankrupt, in which case a notice period of three months is sufficient. If the landlord terminates the lease in such event, the bankruptcy trustee can start legal proceedings to continue the lease despite the termination of the landlord if a third party has the intention to take over the position of the tenant under the lease.
As security for the fulfilment by the tenant of its obligations under the lease, the landlord usually requests a security (zekerheidsstelling). The most widely used security is a bank guarantee, which is usually issued by the bank for an amount equalling a maximum of three months of rent, service charges and VAT charged over the rent and service charges for such period. Alternatives are a corporate guarantee, a deposit or a 403-statement (403-verklaring), the latter being a specific type of parent guarantee under Dutch law.
Industrial Leases and Leases of Other Types of Commercial Space (Office, Industrial, Non-retail)
Under an industrial/office lease, the obligation of the tenant to vacate the leased premises is suspended for a period of two months by law, from the date of vacation specified in the notice to vacate. The tenant can request the court to extend the suspension period for one year, a maximum of three times, if its interests are of more weight than those of the landlord. If the tenant does not make use of the suspension period, or if the suspension period expires, the landlord may commence eviction proceedings, if necessary.
The tenant is not entitled to a suspension of the obligation to vacate if:
Retail Leases (Including Hotels and Restaurants)
If a landlord wishes to terminate a retail lease, it is obliged to include a statutory ground for the termination in its notice letter. If the tenant disagrees with the landlord's termination, the landlord can only terminate the lease through a court order. The tenant is entitled to stay in the leased premises until the landlord rightfully enforces an irrevocable judgment in which the request for termination of the lease is granted.
A tenant is not permitted to assign its leasehold interest in the lease or sublease. The lessee is entitled to sublease the property, unless he had to assume that the lessor has reasonable objections against granting a sublease to a third party.
All leases can be terminated by mutual consent, irrespective of the applicable regime or whether they are entered into for fixed periods or an indefinite period.
An industrial/office lease is terminated by way of a notice of termination, taking into account the applicable notice period. Such notice must be given before the expiry of the lease, and should include the express notice to evict (aanzegging tot ontruiming).
A retail lease can only be terminated at the end of the relevant period by giving written notice of termination. The landlord must observe a (semi-)mandatory notice period of at least one year. The landlord is obliged to include a statutory (semi-)mandatory ground for the termination in its notice letter. The tenant does not have to rely on a termination ground if it wishes to terminate the lease.
There are no requirements or particular execution formalities in relation to leases. Leases cannot be recorded in the Land Records.
If a lease is entered into for a fixed period, it will not be possible for the landlord (or the tenant) to prematurely terminate the lease, unless the other party is in serious breach of its obligations under the lease. The obvious example in this context is non-payment of rent by the tenant for a significant period of time (according to case law, the arrears should generally amount to at least three months). Such non-payment constitutes a breach, which gives the landlord the right to dissolve the lease and claim eviction. According to Dutch Civil Law, the landlord is only able to enforce dissolution through a court order in the event of a breach. Regular court proceedings in this regard will generally take at least nine to 12 months. Alternatively, in the event of substantial rent in arrears, the landlord can choose to enforce eviction through summary proceedings (kort geding). Summary proceedings will take approximately two to four months.
The competent authorities have certain rights to compulsorily acquire or close properties, and this includes properties that are leased out to tenants. The competent authorities may only exercise these powers under restricted conditions and in the interest of the public – for instance, in the event of disturbance of the public order caused by drug nuisance.
There are various ways in which payments can be structured between parties. The most common contract fee pricing methods are to charge a fixed fee or to charge net costs plus a fee.
In the contract fee pricing method, the contractor shall specify a fixed fee for the work described in the relevant quotation. In the cost-plus pricing method, the contractor will cite the relevant pricing factors (such as hourly rates, surcharges, mark-ups and unit prices for the requisite materials). Traditionally, parties agree upon a fixed price in advance. If the construction agreement does not entail a construction fee, the client is obliged to pay a reasonable price, according to Dutch legislation.
Under the traditional construction contract, the client owns the property ("ground"), provides the contractor with the design and also guarantees the design ("design"), finances the construction ("finance"), maintains the constructed building ("maintenance") and operates the constructed building ("operation"), whereas the contractor is, in principle, only responsible for carrying out the works – ie, building the construction ("build"). There is an interaction between the responsibilities of these two parties during the performance of the works. For instance, a contractor is obliged to warn its client about obvious mistakes in the construction, working methods and/or instructions.
A variation in the traditional construction contract would be for the client and the contractor to join together with other professional parties into a construction team, the intention being that all members of the construction team make their specific experience and expertise available, with the purpose of achieving an optimal price-to-quality ratio for the project.
The integrated construction contract incorporates the following types of contract: design and build (D&B); design, build and maintenance (DBM); design, build, finance and maintenance (DBFM); and design, build, finance, maintenance and operation (DBFMO). Subject to the form of contract, the contractor has more or fewer responsibilities with respect to the design, finance, maintenance and operation during the construction phase and the realised building.
Under standard general conditions, it is often agreed that the contractor must adequately insure the works. Construction all risks (CAR) insurance is common, and provides insurance against risks during the construction process. To cover its liability as an employer, each party will have to take out the requisite liability insurance and business liability insurance. Additionally, parties must obtain professional indemnity insurance, as well as fire insurance and storm and tempest insurance.
Dutch legislation in relation to construction law is very limited, and most of its legal provisions are not mandatory. This means that parties have the flexibility to determine the various rights and obligations for both parties. For planning and schedules, it is very common for the parties to agree to a time schedule for the construction of the project, and to a remuneration or penalty if the contractor fails to meet the agreed milestones and/or completion dates.
It is very common for a contractor to provide a bank guarantee for the proper performance of its obligations under the construction agreement. Alternatively or additionally, the contractor could provide the client with a corporate guarantee or with warranty and indemnity insurance, and/or the client could hold a part of the contract sum in escrow.
In the case of non-payment, Dutch legislation permits contractors to exercise their right of retention over a property. This allows the contractor to take possession of the property exclusively until that contractor's rightful claim has been paid in full. However, the parties could agree that the contractor waives its right of retention. Normally, a contractor is only willing to waive this right if alternative security is given in respect of the payment due to it.
A property's actual use must be permitted by the relevant zoning plan. Where the property is held pursuant to a ground lease, the actual use must also be permitted by that ground lease. Where the intended use is residential, a housing permit might also be required.
In principle, a transfer of real estate is exempt from VAT. The following transfers are VAT taxable (at a rate of 21%):
VAT is, in principle, levied from the seller, unless a reverse charge mechanism applies. This is the case when a buyer and a seller have opted for a VAT taxable transfer, in which case VAT is levied from the buyer.
Real estate transfer tax (overdrachtsbelasting – RETT) at a rate of 6% (or 2% in the case of residential properties) is levied from the buyer upon the transfer (acquisition) of immovable properties and rights to immovable properties (eg, rights of usufruct and leasehold).
RETT is based on the fair market value of the relevant property or the purchase price paid for the property, whichever is higher. RETT is payable on the acquisition of the legal and/or beneficial ownership of real property (and, in some circumstances, qualified shares or membership rights).
A RETT exemption may be available when the transaction is subject to VAT (the so-called "concurrence exemption").
RETT may also be due in a share deal (instead of an asset deal). An acquisition of the shares of a real property entity will be subject to RETT if (i) the purchaser of those shares purchases shares representing one-third or more interest in the asset value of the entity, or (ii) after giving effect to the acquisition of the shares, the purchaser and any related parties will own one-third or more interest in the asset value of the entity. A real property entity is a legal entity with capital divided into shares, whose assets at the moment of purchase, or in the 12 months preceding the purchase, consist or consisted of at least 50% immovable property and, at the same time, consist or consisted of at least 30% Dutch immovable property, and where at least 70% of the immovable property is being used for acquiring, selling and exploiting such immovable property assets.
The acquisition of less than one-third of the shares in the entity/interest in the asset value of the entity should not be subject to RETT. The shares of affiliated investors will be accumulated for this one-third rule. A common method for transferring a large real estate portfolio is to use four (non-related) buyers who each acquire less than one-third (eg, 25%) of the real estate entity.
Property tax (onroerendezaakbelasting) is levied by a local Dutch municipality on an annual basis in relation to owners of immovable properties and (with respect to non-residential properties) users of immovable properties.
The property rate tax varies between municipalities (as it is a municipality tax) and is charged over the so-called "WOZ-value" of the property, which is the value established on the basis of the Valuation of Immovable Property Act (Wet waardering onroerende zaken – WOZ). For example, The Hague 2019 property tax was set at 0.233% for owners and 0.1969% for users of non-residential properties. Property tax does not apply to users of residential properties.
Both Dutch resident and non-resident companies that own real estate in the Netherlands pay corporate income tax on rental income and capital gains from the disposition of real estate. The corporate income tax is levied at a rate of 19% over the first EUR200,000 of taxable profit, and at a rate of 25% over taxable profit exceeding EUR200,000.
The Dutch corporate income tax rates will gradually be lowered in the next few years. As of 1 January 2021, the corporate income tax will be lowered to 15% over the first EUR200,000 of taxable profit and to 21.7% over taxable profit exceeding EUR200,000. For 2020, corporate income rates will drop to 16.5% (EUR200,000 threshold) and 25% (general tax rate).
Fiscal investment vehicles (companies that meet, inter alia, certain shareholder, financing and asset requirements) are subject to corporate income tax (CIT) at a rate of 0%.
If the real estate investment entity in question is a Dutch resident private limited company (besloten vennootschap), limited liability company (naamloze vennootschap), open-ended limited partnership (open commanditaire vennootschap) or company with share capital, the shareholder is, in principle, liable to Dutch dividend withholding tax, levied at a rate of 15%, to be withheld by the Dutch resident company. A company can be a Dutch resident company by virtue of its place of effective management or by virtue of its incorporation under Dutch law, in which case the company is deemed to be a resident of the Netherlands for corporate income tax and dividend withholding tax purposes.
If the shareholder is a Dutch resident company, a withholding exemption applies if such company may rely on the participation exemption. However, even if the withholding exemption does not apply, dividend withholding tax can, in principle, be set off against the Dutch corporate income tax as an advance levy in respect of such corporate income tax.
If the shareholder is a non-Dutch resident company, a withholding exemption generally applies if:
The withholding exemption may be denied if specific anti-abuse provisions apply.
If the domestic withholding exemption does not apply, a tax treaty may still reduce the withholding tax on dividends to a lower rate in exceptional circumstances. Dutch tax treaties typically reduce the withholding tax to between 0% and 15%, depending on the relationship between the shareholder and the company in question.
It must be noted that, after entering into effect, the so-called Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS may affect the application of the tax treaty in question, most importantly due to the possible application of the principle purpose test. This test effectively denies treaty benefits if the principal purpose of a specific investment structure implemented by a tax payer is to obtain the benefits under a specific tax treaty.
Finally, a tax credit in the shareholder's country of residence may be available for any Dutch dividend withholding tax paid.
For investment properties (ie, portfolio investments), the residual value equals the WOZ-value (see 8.3 Municipal Taxes). With respect to non-investment properties, the residual floor is currently set at 100% of the WOZ-value.
Market Trends and Developments
The Netherlands plays a competitive role in the world economy, partly due to its favourable economy, political stability, quality of infrastructure and labour market, and its strategic location as gateway (both by sea and air) to the other main European economies. As a consequence, the Dutch real estate market is still considered an interesting investment category and a vibrant sector that is constantly developing.
House prices have risen strongly in the Netherlands over the past couple of years. The main drivers for these rising prices were low interest rates, the growing deficiency of housing (especially in the country's major cities), the shortage of attractive investment opportunities and the "nitrogen crisis" (see hereafter). This has resulted in a growing number of houses becoming unaffordable for potential starters on the housing market.
Despite the rising prices, both national and foreign investors seemed very much interested in acquisitions of Dutch residential portfolios over the past year. Investors consider an investment in Dutch real estate as a safe investment thanks to the economic, political and social aspects mentioned above. However, the rising prices in the major cities have caused these investors to focus mainly on investment opportunities in the periphery of the major cities.
New foreign investors, representing both private and institutional capital, entered the Dutch residential market last year. A good example was Sweden's Heimstaden, which acquired almost 10,000 residential units at once for a transaction price of around EUR1.4 billion. Through this transaction, Heimstaden became the third-biggest residential real estate investor in the Netherlands.
Another clear trend is the interest by foreign investors in student housing in the main Dutch university cities. Developers of residential real estate have quickly responded to this trend by expanding their focus to the development of student housing in university cities as Amsterdam, Utrecht and Groningen.
On 29 May 2019, the Administrative Jurisdiction Division of the Council of State (ie, the highest Dutch administrative court) rendered a landmark decision in which the Dutch approach to nitrogen deposition was rendered in violation of the EU Habitats Directive. Since this ruling it must be assessed, on a case-by-case basis, whether a (residential) development results in nitrogen deposition that might adversely affect nature conservation areas. As a result, many Dutch residential developments have faced a (temporary) halt or slowdown. In spite of progress being made over the last few months, solutions are still being discussed between governments and involved market parties.
As in many other countries, the number of elderly people in the Netherlands is increasing. Also, elderly people are living longer. This so-called double greying leads to an increasing demand in elderly care, healthcare real estate and life cycle-proof real estate. Dutch healthcare real estate as an investment product is still developing, but market analysts are expecting growing investor appetite in the years ahead.
The economic growth over the past couple of years and the transformation of office space into other use during and shortly after the financial crisis have caused a steep decrease in vacancies in the office market. Due to good infrastructure, high education levels and high standards of living, the Netherlands and especially Amsterdam are generally considered an attractive place for doing business. Brexit has already caused some companies, as well as the European Medicine Agency, to move to Amsterdam and it is expected that more companies will follow.
The increasing demand for office space in the country's two prime business locations (ie, Amsterdam Zuidas business district and Amsterdam city centre) have caused rents to go up and incentives to be limited. For this reason, some tenants now prefer to move to alternative office locations within Amsterdam, a good example being CBRE, the international real estate adviser, which moved its Amsterdam office from the Zuidas business district to the lesser-known "Schinkel" district last year. Other companies even seem to prefer to move out of Amsterdam for this reason. The upcoming Utrecht Central Station district seems a popular alternative to the country's capital. Vodafone Ziggo was recently welcomed in Utrecht and McDonald’s has announced it will follow with its Netherlands head offices in November 2021.
Further, the authors have noticed an increasing demand from tenants for more flexible lease arrangements; for example, providing for co-working spaces or additional services to the office's users. In light of this development, some real estate developers express that they are shifting from pure real estate companies into "tech" companies, a good example being OVG Real Estate, which was recently rebranded as Edge Technologies.
The ongoing rise of e-commerce is transforming retail real estate markets worldwide, and the Netherlands is no exception. Online shopping is continuing to gain market share at the expense of bricks-and-mortar stores. In less densely populated areas in particular, retail vacancy rates are high and retail space is increasingly being transformed into offices, healthcare facilities, leisure or residential units.
The "A zones" within inner cities remain attractive, offering consumers retail as well as entertainment and other services. Also, shopping centres with a large catchment area and a strong offering of daily groceries continue to attract customers.
Retailers are facing the challenge of finding a successful balance between "clicks and bricks", and the authors expect that transformation of outdated and redundant retail space will gather pace in the coming years.
The rise of e-commerce and relatively stable economic conditions have contributed to strong demand in Dutch logistics real estate over the past years (transformation from "shop to shed"), especially in the country’s logistics hotspots near the ports and along the southern border. However, the supply of logistics property is increasingly scarce and construction costs are soaring. It is therefore generally expected that pressure on the logistics market will continue to grow, with rising rents as a consequence. However, there is increased public concern about the "boxing" of the Dutch landscape and calls on the Dutch government to restrict and control new logistics developments.
The authors see an increasing interest from investors in rooftop solar projects for logistics properties, generating onsite renewable energy and making efficient use of the often vast rooftop areas.
The growth of tourism, both international and domestic, is fuelling the hotel market in the Netherlands. In Amsterdam, occupancy rates and room prices have risen strongly over the past years and there is much demand for new hotels. At the same time, the local authorities are trying to manage mass tourism and limit the development of new hotels in the core of the city centre.
It is generally expected that the investment volume in the Dutch hotel sector will continue to climb in the years ahead. Loyens & Loeff has recently advised AXA on its acquisition of two major hotels in Amsterdam: the DoubleTree by Hilton near Amsterdam Central Station, and the newbuild 650-room Nhow Amsterdam RAI, which is one of the largest hotels in the Benelux.
Legal Trends and Developments
A clear trend in Dutch real estate transactions is the increasing number of transactions that are structured as a share deal. The choice for a share deal (instead of an asset deal) is – almost without exemption – made for reasons of tax savings, which can either benefit the seller or the buyer (or both). Most share deals are driven by (significant) savings in corporate income tax, which savings are typically commercially shared between the seller and the buyer (see the section "Tax Trends and Developments" below). Specific structuring of transactions can also result in real estate transfer tax exemptions (eg, in the case of multiple purchasers, that each acquires less than a third of the shares) or savings of non-deductible VAT (eg, in the case of newbuild residential real estate). The real estate transfer tax savings or VAT savings can in some cases even cumulate with the corporate income tax advantage.
On the other hand, the authors have noticed that institutional investors still appear to be very much reluctant to share transactions, causing them to miss out on several investment opportunities or forcing them to pay higher prices (in order to make up for a seller's loss of tax advantages). The lack of experience in this field and the higher risk aversion, compared to private capital-based investors, seem to be the main reasons for this.
A real estate-based share deal can generally be considered more complex than a "regular" asset deal, because it requires – apart from real estate law expertise – knowledge in the field of M&A law, accounting principles and tax law. The authors have seen that more specialised law firms (like Loyens & Loeff) jump into this relatively new market, combining their multidisciplinary expertise in these fields of law.
Warranty and indemnity insurance
In recent years, the use of warranty and indemnity insurance has become more popular in the real estate practice. W&I insurance is not only used in share deals, but also in asset deals, and can be a useful tool to optimise the sales process and facilitate a clean exit for the seller.
Current providers of W&I insurance offer policies covering a broad range of seller’s warranties, including warranties in respect of title to the property, leased status and disclosed information. Standard exclusions regard warranties with respect to the construction and environmental condition of the property – but sellers are typically not willing to give these warranties anyway.
W&I insurance is usually taken out by the purchaser, but sellers often initiate W&I insurance as part of a sales process. The seller would then inform potential purchasers that it is only prepared to give warranties that are covered by a W&I insurance. This way, the seller prevents lengthy negotiations about warranties and ensures its liability is limited. The purchaser negotiates the extent of the warranties and the limitations of liability with the insurer instead of the seller.
The premium of the W&I insurance depends on the scope of the insured warranties and the limitations of liability. Although premiums are reasonably affordable, a relatively high top-up is payable for coverage of title warranties. Title issues are not considered a material risk in the Netherlands, as parties are able to verify to a great extent title in the Dutch public registers for real estate. Sellers are therefore less hesitant to provide title warranties and purchasers are usually prepared to rely on these Additional W&I coverage for title warranties can then be left out.
In conclusion, if a seller wishes to limit its liability or if parties are keen to expedite the negotiation process, a W&I insurance can be of added value.
"As is where is"
In the current "sellers’ market", sellers of real estate are typically reluctant to give extensive warranties. To manage a purchaser’s expectations, already in the marketing phase of a sales process, transactions are mostly dubbed "as is where is".
Although this is not a clearly defined term under Dutch law, "as is where is" generally means that a seller is only willing to agree minimal warranties in the sale and purchase agreement, that any implied warranties under Dutch law are excluded and that a purchaser must rely on its own due diligence. The risk that adverse matters (including construction defects and adverse physical and environmental conditions) have not been revealed by the purchaser’s investigations is for the purchaser’s account, unless these are expressly warranted by the seller.
Even in an "as is where is" transaction, the authors typically see a range of warranties that is considered "minimum". These are warranties on title and authority, and the absence of mortgages and attachments upon transfer. Also basic warranties on rent – eg, that rents have not been transferred or pledged – can be expected, as well as a warranty on information disclosed. The wording, extent and firmness of these warranties can differ.
W&I insurance (see above) can be a useful tool to mitigate purchaser’s risks in an "as is where is" deal.
In focus: Developments in Residential Lease
Residential rent regulation – an introduction
In the Netherlands, residential rental units are divided into “liberalised units” and “regulated units”. For regulated units (which always include non-self-contained units), an extensive set of rent regulation is in place due to mandatory law. For liberalised units, the landlord and tenant are in principle free to agree upon the amount of rent and indexation.
A self-contained unit is considered regulated if the initial rent does not exceed the rent control ceiling (liberalisatiegrens). If the initial rent exceeds the rent control ceiling, the unit is in principle considered liberalised. However, tenants may, during the first six months of the lease, request for an assessment of the amount of initial rent by the Rental Committee (ie, an independent committee instituted by the Dutch government), on the basis of a so-called points system that determines whether the initial amount of rent for a specific unit should be regulated and if so, which amount of rent would be reasonable.
The rent control ceiling is set annually by the Dutch government as per January 1st. As of 1 January 2020, the rent control ceiling amounts to EUR737.14 per month.
Trend of urbanisation and housing shortage
Due to the economic growth over the recent years in the Netherlands and a trend of urbanisation, there is currently an imbalance between supply and demand on the residential rental market (see the section "Market Trends and Developments – Residential" above). This imbalance is especially present in the regulated and the "mid-market" housing sector (housing with a monthly rent between approximately EUR750 and 1,000).
In order to create more balance on the regulated and mid-market rental housing market, the Dutch government has investigated various new regulations, both on a national and on a local level.
Trends and developments on a national level
On a national level, the government will in the near future amend the above-mentioned “points system”. The “points” are attributed based on both the facilities of the unit on the one hand and on the market value of a unit (more specifically: the WOZ value) on the other hand. As market value of housing has kept increasing, the government has announced that the “points” relating to such value shall be limited. It is expected that due to this measure, more units (when leased out anew) become regulated instead of liberalised.
Further, in order to achieve a better distribution of regulated housing, the government intends to introduce legislation that allows for a steeper indexation of rent for households with a middle high or high income that still live in a regulated unit. This should encourage these households to move to a liberalised unit, so the regulated unit becomes available to a household with a lower income.
Trends and developments on a local level
On a local level, the municipalities already have various powers to provide tailor-made measures for the local housing market. With regard to the distribution of housing between prospective tenants, municipalities may order that only tenants with a specific status or household income can obtain a required housing permit (in practice, mostly for regulated and mid-market units) through public law housing regulations (huisvestingsverordening).
Further, municipalities have several other authorities by which they can influence the rental market. On the one hand, a municipality may, in its capacity of landowner, issue regulations through civil law, when selling land or issuing new rights of ground lease. These regulations may, for example, require the purchaser to use such land for regulated or mid-market units. On the other hand, the municipality may issue such regulations through the public law zoning plan or through public law building permits that are required for new developments.
As the mid-market sector is considered liberalised, there is no rent regulation possible in this sector based on the national civil tenancy law. In 2019, the government investigated the possibility to grant municipalities the authority to cap initial rents for existing properties in designated areas through their housing regulations. This "emergency button for mid-market rent" (noodknop middenhuur) would be a drastic measure and after heavy resistance from various stakeholders, the government has announced that other options to improve the balance in the mid-market sector will currently first be investigated. Whether the "emergency button" regulations will be introduced remains unclear.
Tax Trends and Developments
Corporate income tax in real estate transactions
As the real estate market is moving to the end of the economic cycle and gross initial yields are falling, the upward trend in the real estate market over the last years resulted in significant value increases. These increasing values generally result in corporate income tax due if the real estate is sold. Namely, corporate income tax is due on the difference between the tax book value (generally the acquisition costs minus depreciation expenses) and the sales price. As a result of the value increase over recent years, the amount of corporate income tax due in the case of a direct disposal of the real estate may be significant. Upon a share deal, no corporate income tax is due on the difference between the tax book value and the fair market value of the real estate (being the sales price in the case of an asset deal). The tax claim is deferred to a later date when the real estate is sold. As the buyer acquires an entity with a tax claim, the buyer will generally ask for a discount on the share price. The discount is an outcome of negotiations between parties, although a 50/50 share is often agreed upon in the market.
As such, a share deal generally results in a benefit for both the seller and buyer. Based on the current corporate income tax rates (headline rate of 25%), a 50/50 split would mean the buyer gets a discount on the shares of 50% times 25% of the capital gain (being the difference between the tax book value and the fair market value of the real estate).
Interpretation of abuse
A clear disadvantage of a share deal is that the acquiring (foreign) investor takes over (part of) the investment structure of the seller. This is particularly relevant for the dividend withholding tax that is due on distributions by Dutch entities in abusive situations. In practice, the question of whether an abusive situation is present is mainly relevant for foreign (corporate) investors. The interpretation of abuse has become even more relevant since the European Court of Justice (CJEU) shed more light on the interpretation of abuse in an EU context in February 2019 (the so-called Danish cases). Although the actual impact of the Danish cases in practice is as yet unclear, it seems the CJEU has broadened the EU definition of tax abuse. In order to avoid any discussions with the tax authorities, foreign (corporate) investors increasingly use investment structures in which these discussions are prevented. These alternative investment structures are, for example, an acquisition of real estate by a foreign entity. Any income derived by this foreign entity is normally subject to corporate income tax in the Netherlands. However, the Netherlands is not able to levy dividend withholding tax on distributions by a foreign entity.
Another alternative is to structure the investment in a Dutch Cooperative. Dividends distributed by a Cooperative are currently only subject to dividend withholding tax if the activities of the Cooperative predominantly consist of holding of shares. As such, if the assets of a Cooperative consist of real estate, no dividend withholding tax is due on dividends distributed by this Cooperative. Following these alternative investment structures, there is also an increasing trend in share deals with foreign entities and Cooperatives holding Dutch real estate.
The earnings stripping rule
Another relevant tax development for the real estate market is the earnings stripping rule that applies to financial years starting on or after 1 January 2019. Prior to 1 January 2019, interest paid to third parties and arm’s-length intercompany interest was generally deductible from the income derived from real estate and therefore reduced the taxable result and corporate income tax due. The new earnings stripping rule restricts deduction of net interest expenses (intra-group and third party) per taxpayer to the higher of (i) 30% of the EBITDA and (ii) an amount of EUR1,000,000 in financial years starting on or after 1 January 2019. Following the earnings stripping rule, the taxable result and thus corporate income tax due will be higher, which investors should factor in. Besides the impact this is likely to have on prices investors are willing to pay, the earnings stripping rule may also impact the benefit of share deals from a corporate income tax perspective. As non-deductible interest may be (partly) offset against the capital gain realised upon an asset deal, non-deductible interest that has been carried forward is no longer deductible upon a share deal.
Following the potential limitation of deductible interest and the introduction of interest withholding tax for interest payments to low-taxed and blacklisted jurisdictions at a rate of 21.7% (being the main corporate income tax rate as of 2021) as of 1 January 2021, foreign (offshore) investors may consider financing their investment with (more) equity instead of shareholder loans.
This chapter was prepared and describes the trends and developments shortly before the outbreak of COVID-19, which has had a sudden and significant impact on all aspects of people's lives and cast a shadow over the global economy.
Developments in the Dutch real estate sector as a direct result of the pandemic include an increased demand for online shopping at the expense of visits to physical stores, mass remote working and a focus on "de-densification" of office and leisure space. As such, the coronavirus seems to have accelerated some of the trends described in this chapter, whereas other trends are now being scrutinised.
The lasting effects of the outbreak on the Dutch real estate market and on legal and tax developments are currently unclear and difficult to predict. Analysts argue that the Dutch property market fundamentals remain strong and that the impact of the outbreak may be minimal in the long term. However, COVID-19 will undoubtedly change the way we live and work for the foreseeable future.