Landlords be aware: option to interim termination for tenants under the Restructuring Act (WHOA)

Introduction

On 26 May 2020, the House of Representatives (Tweede Kamer) adopted the proposal for the Financial Restructuring Act, known in the Netherlands as the WHOA (Wet Homologatie Onderhands Akkoord) and the proposal was considered a formality in the Senate of the State General (Eerste Kamer) on 6 October 2020. The WHOA is expected to enter into force soon. The WHOA makes it easier for companies that cannot meet their debts, but are nevertheless viable, to offer and implement a restructuring. This is an important step in a process of reforming our bankruptcy law.

The contents of the WHOA

The WHOA enables businesses that are in financial distress, but nevertheless can survive after a debt restructuring, to offer a reorganization scheme which after approval by the bankruptcy court is binding upon all creditors  (including landlords) and shareholders (if applied in the scheme). This is new in the Netherlands. In the current situation, the debtor needs to seek approval from each and every creditor if it wishes to reorganize its debts. Consequently, at present a single creditor can in principle block a reorganization. Once the WHOA comes into force, non-cooperating creditors can under certain circumstances be forced into the scheme. For more information about the WHOA in a general sense, please be referred to our previous article on this.

Position of tenants before implementation of the WHOA

Under current legislation (apart from arrangements resulting from COVID-19 (please be referred to our previous article on this)) a tenant who is in financial difficulties has little or no opportunity to change this. If a tenant is in financial distress, the tenant can try to reach an extrajudicial private composition (buitengerechtelijk onderhands akkoord) with its creditors and thereby terminate certain of its obligations. All creditors must agree to such a composition. With certain exceptions, a single creditor (for example a landlord) can thus prevent the composition by not agreeing. The result is that no extrajudicial private composition is reached and the obligations that are the subject of the composition continue to exist.

Position of tenants after implementation of the WHOA

The WHOA offers the possibility to impose a composition on a debtor's creditors. This so-called compulsory composition can only be applicable if it is justified in the given circumstances. In this context, the criterion is that the debtor is in a position where it is reasonably likely that it will become insolvent (i.e. the debtor is still able to meet its current obligations, but foresees that there is no realistic perspective to avoid a bankruptcy). The debtor can then offer (some of its) creditors a settlement. A composition may entail that certain debts to creditors are partly repaid or current agreements (including rental agreements) are (partly) amended. This could include a reduction in the rent or declaration of non-application of certain obligations. Creditors with different positions in the debtor's assets recovery (different grades) should be divided into separate classes. Examples include unsecured or preferred creditors and creditors with or without security rights. If all concerned creditors agree to the proposal for a composition, it will of course not be necessary to approve it, as this is a extrajudicial private composition, as is also possible under current legislation. If the creditors do not agree, the debtor can request the court to approve or “approve” the composition. A composition approved  by a judge is binding on all persons entitled to vote. The persons entitled to vote concern all creditors involved in the composition. The composition therefore also applies to the opposing creditors and creditors who have not casted a vote. Would you like to know more or do you need assistance with a tenant who would like to amend its lease? Do you have questions about an impending bankruptcy of yourself or your tenants? Please feel free to contact Lucas Lustermans (l.lustermans@ploum.nl or +31619850096), Matthijs Bolkenstein (m.bolkenstein@ploum.nl or +31646630866), or Joost Kool (j.kool@ploum.nl or + 3160177339) who are gladly willing to assist.