By Liad Hadar, Director at Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s September 2024 edition
The Dutch legal principle “Huur Gaat Voor Koop” roughly translates to “the lease takes precedence over the sale” and is a significant doctrine in property law that property owners (and their lawyers) need to understand, particularly when acquiring properties with existing tenants and lease agreements.
Originating from Roman-Dutch law, this principle ensures that the rights of tenants are preserved even when the property they are leasing changes ownership. For landlords, this can have considerable implications, particularly when it comes to managing and maximizing the profitability of their investment. Understanding this principle from a landlord’s perspective is crucial to navigating property transactions and avoiding potential legal pitfalls.
The reason that I chose this topic for the month was because I was recently tasked with reviewing another attorney’s legal action for a client that was dismissed in Court on technical grounds, with costs ordered against the client. In doing so, I had to pinpoint the issue which directly led to this adverse result.
From a brief reading of the legal action, read against the tenant’s defence, it was obvious that the main issue that the attorneys had to overcome was to plead and prove that the client, as the new owner of the property, had inherited the lease agreement in the purchase of the property and, by virtue of this, had become the landlord in terms of the existing lease agreement.
I will deal with the impact of the principle on property owners who have purchased a property with tenants and lease agreements, strategic considerations prior to purchasing such properties and how to deal with this in legal action to avoid adverse consequences.
Impact of Huur Gaat Voor Koop on Landlords
When a landlord purchases a property that is subject to an existing lease, Huur Gaat Voor Koop means that the new owner is legally bound by the terms of that lease. The new owner steps into the shoes of the previous landlord, inheriting all the rights and obligations under the lease agreement. This can have several important implications:
- Rental Income Constraints: As a new landlord, you must accept the rental income as stipulated in the existing lease agreements, even if it is below the current market rate. This can be particularly challenging if the property was acquired with the expectation of generating higher rental yields. The inability to renegotiate the lease terms until the current leases expire can affect the property’s profitability and the return on investment.
- Limitations on Property Use: If the lease has several years remaining, the new landlord is restricted from changing the use of the property until the lease terms end. For instance, if a landlord purchases a property intending to redevelop it or convert it for a different purpose, such plans would need to be put on hold until the existing leases conclude. This can delay projects and impact the overall strategy for the property.
- Maintenance and Contractual Obligations: The new landlord inherits all the responsibilities outlined in the leases, including any maintenance and repair obligations. Failing to fulfil these duties could lead to disputes with the tenant, potentially resulting in costly legal battles or claims against the landlord. It’s important for landlords to review the leases carefully to understand their obligations fully before finalizing a property purchase.
Strategic Considerations for Landlords
Given these implications, landlords should take several strategic steps when considering the purchase of a property with existing tenants:
- Thorough Due Diligence: Before purchasing a property, landlords must conduct comprehensive due diligence. This includes reviewing all existing lease agreements to understand the terms and conditions that will transfer with the property. Landlords should also assess the tenant’s payment history and the condition of the property to avoid any unpleasant surprises after the purchase.
- Financial Planning: Landlords should incorporate the existing lease terms into their financial planning and property valuation. This means adjusting expectations for rental income, considering potential maintenance costs, and planning for the eventual expiration of the leases. Understanding the financial impact of these factors is crucial to making an informed investment decision.
Legal Pitfalls of Not Pleading Huur Gaat Voor Koop
For landlords involved in legal actions related to leased properties, failing to plead Huur Gaat Voor Koop can have significant consequences. If a landlord attempts to evict a tenant or take legal action without acknowledging the tenant’s rights under this principle and explaining that the new owner stepped into the shoes of the previous landlord, the legal action may be dismissed with costs ordered against the new owner, compounding its financial burden.
The simplest ways of doing this is to plead the following:
- the terms of the existing lease agreement which was entered into between the previous landlord and the tenant;
- confirmation of the registration of transfer of the property into the new owner’s name (attaching a Deeds Search to confirm it); and
- the principle of Huur Gaat Voor Koop.
The new owner must effectively plead that as from the date of registration of transfer of the property into its name, it took cession of all of the previous landlord’s rights, titles and obligations in respect of the lease agreement and became the landlord at the property.
It must further plead that by virtue of the principle of Huur Gaat Voor Koop, the new owner was substituted for the previous landlord as the new landlord at the property without the necessity for a cession of rights or an assignment of obligations.
Lastly, it would be prudent to plead that following the new owner’s purchase of the property of which the leased premises forms a part, the Defendant remained in such premises and abided by the agreement.
Conclusion
Huur Gaat Voor Koop is a fundamental principle that landlords must understand when dealing with properties that have existing tenants as it imposes significant obligations on new property owners.
By conducting thorough due diligence, planning strategically, and seeking appropriate legal advice when litigating as the new owner, landlords can navigate the challenges posed by this principle and ensure that their property investments are both legally compliant and financially sound.
Properly addressing Huur Gaat Voor Koop in legal actions is equally important to avoid costly mistakes and ensure that landlords can effectively manage their properties and legal risks.
If you purchased a property with existing tenants and lease agreements and would like to understand your rights or to take legal action as the new landlord, our property law specialist team can assist with your requirements.