Leasehold termination in case of canon arrears: here's what to watch out for

Leasehold is a right in rem that gives the leaseholder the right to use another person's real estate. It is usually subject to the payment of a periodic fee. This is called the canon. But what if the leaseholder does not pay that canon (in full)? When may the bare owner terminate the ground lease?

Termination for payment delays of two consecutive years

In principle, the law is clear about this. By virtue of Article 5:87 paragraph 2 BW the bare owner may terminate the ground lease if the ground leaseholder is in default of paying the ground rent for two consecutive years, or if he is in serious breach of his other obligations. This provision is mandatory in nature: this ground for termination cannot be deviated from to the detriment of the leaseholder. Therefore, it cannot be included in the ground lease conditions that termination is already possible after a payment arrears of one year. Or when the arrears reach a certain amount.

What payments are charged against determines whether cancellation can be made

In practice, leasehold terms sometimes stipulate that payments on the canon are first written off against the youngest term. This deviates from the legal regulation of article 6:43 BW. In that case, a leaseholder who pays a small portion of the canon each time can avoid formally being in arrears for two full consecutive years. Meanwhile, the arrears do accumulate, but the bare owner does not acquire the power of termination.

Applies even if there is no payment delay of exactly two consecutive years

But, the Court of Appeal of The Hague in 2003 (ECLI:NL:GHSGR:2003:AN8025 / KG 2003 / 232) held that a delay in payment that does not relate exactly to two complete consecutive years, but that has existed during and with respect to several years, can also justify termination. According to the Court, a reasonable interpretation of the law means that in such a situation the conditions of Section 5:87 of the DCC are still met.

“6.2.3 The court rejected HTC's position to the effect that this arrears did not mean that the requirement of default in paying the ground rent for two consecutive years had been met, on the grounds that, at the time of HTC's termination, a portion of each ground rent due on January 1 of the said years had been paid. Indeed, this would lead to the consequence that the leaseholder, by paying a small portion of the canon each year, could frustrate the right of termination for failure to pay the canon. The court is of the opinion that this is not in accordance with the intention of the legislator.

Advice on leasehold deed dispute by specialist lawyer

The Supreme Court has not had to consider this interpretation. It cannot be ruled out that it will apply the statutory criterion more strictly. Until there is more clarity on this, parties would be wise to include in the ground lease deed clear agreements on the method of writing off payments. In addition, both parties have an interest in clear definition of what is meant by “grossly inadequate” should be understood. A properly drafted deed prevents subsequent discussion.