Commercial real estate law and rules in the Netherlands

Any legal “person” may own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.

Partnerships (e.g. limited partnerships, public partnerships, undisclosed partnerships) cannot legally own real estate in their own name (only beneficially).

Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies, charities, the government and local authorities.

There are no restrictions preventing foreign nationals or companies from owning real estate.

Legal ownership of real estate in The Netherlands is classed as either freehold (including apartment rights) or leasehold.

Only title to freehold will be registered at the Land Registry (Kadaster) including any property interests.

All land in The Netherlands is ultimately owned by the State of the Netherlands and passes back to the State of the Netherlands if there is no owner.

Real estate property may also be held on trust by a legal owner for a beneficiary (e.g. in case of partnerships). Also, where more than one person has ownership, they classify as joint participants.

It is also possible to acquire rights over land (such as a right of way or even the real estate property itself) by way of acquisitive prescription by exercising the relevant right, after ten or twenty years depending on the relevant time of possession, normally twenty years and in case of good faith ten years.

Ownership extends to buildings, structures and trees and plants on or beneath the land and the airspace above it, unless restrictive rights are vested to the contrary. Reference to “land” generally includes the buildings and structures on that land – similarly “property” includes both land and buildings unless limitations are created.

There is only one type of unrestricted legal ownership in The Netherlands: absolute ownership. The other property interests are called restrictive rights. The restrictive rights are also transferable. Absolute ownership and the restrictive rights are rights in rem.

Property interests which exist in The Netherlands include:

• absolute ownership (including apartment right)
• right of usufruct
• ground lease
• easements
• right of superficies

Absolute ownership (including co-ownership) is the equivalent of freehold title in England and Wales and a right in rem.

Right of usufruct is the next closest class of title to absolute ownership as is possible according to Dutch law and a right in rem. The owner of the right of usufruct has all the rights and obligations of the owner, except the right to sell the property. The right of usufruct perishes when the owner of it passes away, the company is dissolved or if the property itself ceases to exist. If the beneficiary is a legal entity the maximum period for which usufruct may be created is 30 years.

A ground lease is a right (in rem) to use and hold the land without owning it. There are no restrictions in The Netherlands on how long ground leases can be. The most common lengths of institutionally acceptable ground leases tend to be 10, 15 or 25 year terms and provide for the payment of a market rent. Long ground lease interests tend to be for 50 years or perpetual; such ground leases are normally granted on payment of a premium (yearly or as a lump sum) with only low or nominal rents payable.

An easement is a right (in rem) which burdens one piece of land and benefits another’s registered land.

The right of superficies is a right to own a property in, on top of or above another property. If items are fixed to the property, the presumption is that they form part of it and belong to the owner of the property. By the use of a right of superficies this rule can be circumvented. A right of superficies is a right in rem.

An apartment right divides a building into units giving entitlement to the exclusive use by the owner of an apartment right. One can own an apartment right, which is a right in rem. The ownership of the building is exercised by all the owners of the apartment rights together and an owner’s association (VvE) will always be one of the (co-)owners of the building in respect of the general spaces.

Typical employment issues which may be relevant to real estate transactions include the transfer of undertakings, redundancies due to restructuring and changing terms and conditions of employment.

The transfer of undertakings (in Dutch: "overgang van onderneming") are likely to be the most significant employment issue. Transfer of undertakings applies when an undertaking or business (or part of one) is transferred from one party to another or where there is a service provision change (either an outsourcing, change of provider or in-sourcing). It may therefore apply when there is the sale or transfer of a business or lease of a property or the outsourcing of the management of a property to a third party. For example, this might occur in the sale of a shopping centre having its own management and security staff.

The broad effects of transfer of undertakings are that:

With effect from completion of the transfer, the buyer or new service provider assumes responsibility for employees working in the business or services transferred

• Accrued continuity of employment is preserved
• Dismissal for a reason connected to the transfer is not allowed- unless for an “economic, technical or organisational reason entailing changes in the workforce”
• Employees transfer with their existing terms and conditions intact. Exceptions with regard to pension apply.
• If the buyer/new provider changes terms and conditions by reason of the transfer, these changes are generally ineffective
• The works council must be consulted for advice
• If stated in the applicable collective bargaining agreement the trade unions should be informed

Although the legal effects of the transfer of undertakings cannot be avoided since the transfer will be effective by operation of law, it is possible to apportion the transfer of undertakings liabilities by agreement between the seller and the buyer (or outgoing and incoming service provider). Normally the seller (or outgoing service provider) will agree to be responsible for all claims and liabilities relating to employees up to the date of transfer, and the buyer (or incoming service provider) will take on all post-transfer employment liabilities.

Redundancies due to economic reasons may arise on the closure of a business or part of a business or where there is a reduction in the number of employees required.

An employer may decide to change or harmonise terms and conditions of employment on the acquisition of a new business. This can be a difficult process, especially where there has been a transfer of undertakings (see above).

Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers or Dutch lawyers for the seller and the buyer. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and meant not to be legally binding. They form the basis of the documents to be drafted.

Once the heads of terms have been finalised and all information relating to the property is collected (through, for example, due diligence), a sale and purchase agreement (contract) is drafted by the seller’s lawyers and amended by the buyer’s lawyers. The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases have already been granted to tenants. Once the contract is in agreed form, the property needs to be legally transferred.

Legal completion of the sale and purchase transaction (transfer of the property) must occur in person or by written authorisation at a civil law notary’s office. Completion (transfer) may take place at the same time as exchange, depending on the acquisition timetable. Where the purchase is made with borrowed finance a charge over the property will be completed at the same time. The lender of the finance may instruct its own lawyers to carry out due diligence procedures on its behalf and negotiate security documentation.

Following completion, the civil law notary needs to deal with registration of the transfer documents (and any charging documents) at the Land Registry and payment of tax, which is assessed on the price paid for the property.

An agreement for the sale and purchase of land can be in writing or in any other form. An agreement with a private person to buy or sell a house must be in writing. It should contain or clearly refer to all applicable main terms and conditions. When the sale and purchase transaction is completed at a civil law notary’s office a written agreement is to be signed which must be registered at the Land Registry’s office.

Real estate contracts with private persons purchasing residential property commonly incorporate standard terms. Standardised contracts and conditions, issued by the Netherlands Association of Real Estate Brokers and Immovable Property Experts (NVM) are usually used.

It is common for the sale and purchase agreement to provide for a deposit of between 5–10% of the purchase price on exchange of agreements, where there is to be a gap between exchange and completion. The civil law notary usually holds deposits.

Where there are matters of title affecting the property, such as restrictive rights, the seller may require reciprocal obligations from the buyer and an indemnity in respect of any liability the seller may still have following completion of the transaction.

Real estate contracts with private persons commonly incorporate standard terms. Where incorporated, the conditions will apply unless the contract expressly provides otherwise. When a private person is the buyer of residential real property, that person has a right of annulment of the (written) agreement within three days after the agreement is signed by both the buyer and the seller (cooling-off period). The Dutch Supreme Court has ruled that the same right applies to the seller when he also is a private person.

Provisions relating to value added tax and/or transfer tax will be included where relevant to ensure that the agreed tax position is preserved between exchange and completion.

Contracts for sale of property subject to occupational interests such as leases will include clauses to cover ongoing management matters, and provide for apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.

If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor and persons such as the architect in order to safeguard the buyer against defective design or workmanship.

Some of the most significant are as follows:

• Buyer Beware (“Caveat Emptor”) – the overriding point of principle under Dutch civil law is “caveat emptor” – let the buyer beware. The buyer must satisfy itself in all respects as to the nature of the property he is acquiring. However, this does not absolve the seller from the obligation to provide truthful replies to enquiries raised by the buyer(’s lawyers). It does not absolve the seller from giving information to the buyer (even without enquiry of the buyer) if the seller already knows or should know that this information is essential for the buyer in respect to the buyer’s stated intentions
• Unregistered interests – where a registrable interest is not registered against a property’s title number at the Land Registry, a buyer will take the property without being subject to it. An exception to this rule is the presence of a right that is created by prescription, which will not be registered, but the buyer will be subject to it
• Misdescription and misrepresentation – there are statutory rules which protect against clear misrepresentations or misdescriptions of fact made by the seller to the buyer which have the effect of inducing the buyer to enter into a transfer of land. In such cases, damages may be payable to the buyer or the buyer may be entitled to withdraw from the transaction
• Unfair terms – sale and purchase agreements that include exemption clauses, which seek to allocate risk, are subject to evaluation in legal proceedings. Statutory provisions restrict or render void the effect of clauses that unreasonably attempt to exclude liability, taking all relevant matters into account including the capacity of the parties
• Pre-contractual good faith – under Dutch law, it is an established principle that (also) in the pre-contractual stages of an agreement, parties are obliged to take account of each other’s justifiable interests. Therefore, the negotiation process is actually of an obligatory nature. A Dutch court will assess an agreement in light of the expectations that the involved parties may have had when entering into the agreement. In determining the scope of an existing written contract, a Dutch court may assess whether the pre-contractual good faith principle has been observed and may vary the written contract if it finds that the principle was breached by a party to the subsequent agreement. Another consequence of this pre-contractual approach is that the parties may not be at liberty to break off negotiations on a whim and may find themselves bound to continue them, particularly if the principle foundations of the agreement are deemed to be present
• Overriding principles of reasonableness and fairness – an existing contract may be altered by a Dutch court on the basis of the overriding reasonableness and fairness principle. The parties to an agreement are not at liberty to disengage the effects of this overriding principle. A possible cause to alter the contract may be a change in circumstances. The judicial authority to change existing agreements is of a discretionary nature and any variations may be ordered to take effect retrospectively. A change may also include the (partial) rescission of an existing agreement. A contract may be altered if one of the parties can sufficiently demonstrate that the occurrence of certain conditions was unforeseeable and that as a result of such occurrences, the unimpaired subsistence of the agreement would lead to an unfair and/or unreasonable result. The effects of the change may be contrary to what the parties originally agreed in the contract. As a result, Dutch contracts can be shrouded in a blanket of uncertainty as they are capable of being altered by the Dutch courts at a future date

The prudent buyer is likely to commission a survey of the building and in appropriate cases, ground water, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-exchange due diligence by the buyer’s lawyers.

Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Land Register and where relevant historic title documents. From the Land Registry, the buyer’s lawyers will receive confirmation of whether or not the title is registered. Additional details of the registered interests then also need to be retrieved from the Land Registry.

Where restrictive rights are established on the property, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to the transaction.

Secondly, the buyer’s lawyers conduct their due diligence, which will include various searches to check the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name listed with the Chamber of Commerce to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.

The investigation of existing lease agreements has become increasingly important. The lawyers investigate how these agreements affect the purchase price, because this price is often based on the rental income.

Thirdly, the buyer’s lawyers will raise pre-contract enquiries of the seller’s lawyers to obtain information regarding a large number of practical matters which may affect the property and ask any relevant questions in relation to the title to the property. Whilst a seller must not knowingly or negligently mislead a buyer the general rule is “caveat emptor” (buyer beware). The seller generally gives replies, which may be actionable if wrong or misleading.

After exchange of agreements and before completion the buyer’s lawyers will raise requisitions. These ask the seller to confirm that replies to pre-exchange enquiries remain correct and to divulge any further information that has arisen since exchange. The requisitions also deal with completion formalities such as the seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-completion searches including a priority search of the Land Registry.

Before exchange of agreements the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.

The Netherlands have a central Land Registry. The Land Registry is run through regional district land registries which are responsible for specific areas of the country. Registration of land is compulsory.

When a party acquires a registrable interest in land, it must apply for registration of that interest at the appropriate district land registry. Only when the registration is complete can the party properly prove its right in rem.

The title register for a particular property comprises:

• a description of the property (location, address);
• details of the registered owner of the property;
• any registered interests (rights in rem) in respect to the property
• any mortgages and registrable claims to the property
• the title register may also contain, where appropriate, special entries that restrict the registered owner’s ability to deal with its title without obtaining the consent of another person

There is a requirement for notarisation of title in The Netherlands. Contracts for the disposal and acquisition of interests in real estate are signed by or on behalf of the parties at a notary’s office. Instruments affecting the sale of the interest itself have to comply with certain formalities relating to execution.

Applications to obtain a ‘single environmental permit’ (In Dutch: ‘omgevingsvergunning’), including planning permission for the development of land, must be filed with the local government authority which has the responsibility for controlling the use and development of land in its area, usually the municipality. Local government authorities have statutory time periods within which a decision must be made as to whether or not the single environmental permit is being issued. There are various statutory rights in relation to appeals, which can be made if an application is refused, and rights of challenge regarding the validity of any permission granted. For developments that are likely to cause significant environmental impact, an environmental impact assessment (EIA) will need to be submitted with the application for the single environmental permit, explaining the likely environmental impact of the development.

Generally, a single environmental permit will be required for the construction of a “new build” property, work that is proposed for refurbishment of an existing building, and where an existing use (for example office space) is to be transformed into another distinct use (for example retail or hotel). The single environmental permit, when granted, benefits the licensee (but is in general transferable to the new owner of the property) and will contain conditions which will regulate the impact of the development. Minor building works or simple changes of use may be exempted.

When it is proposed to do work with respect to historically or architecturally important buildings (mostly referred to as monumental buildings), the single environmental permit must also be obtained and will in that case contain at least two permissions: permission to perform the requested works regarding to that particular and in most cases protected monumental building and the building permission itself. Whilst some work to such buildings may not require a permit because it is exempted, the work could be seen as affecting the building’s importance, and consent would then still be required.

Larger districts or areas of buildings (called “beschermde stads- en dorpsgezichten”) that have architectural or historical importance may also be subject to a separate regime of control that requires consent to be obtained before work is carried out that would damage the character and appearance of the area that the local government authority wishes to conserve and enhance. During the consultation period that the local government authority must undertake when considering the development, third party groups are able to put forward objections that should be considered by the authority before deciding whether or not the permit should be granted. In addition, even after a permission has been obtained, there will in most cases be a certain period within which a third party group is entitled to challenge the validity of granting the permit, or request interim measures in court; this should be kept in mind by lawyers and agents acting for the developer, before any work on the permitted development actually begins.

Before a sale is contemplated, insurance of the property is generally the responsibility of the owner of the property and, in some cases, follows the property. However, where such property is the subject of a lease, the terms of the lease will prescribe which party has responsibility to insure. Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible, for example glazing.

The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if available, terrorism.

Generally, it is the buildings and not the land, which are insured for the reinstatement cost rather than the reinstatement value.

Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.

Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery.

In some cases (e.g. policies insuring the seller’s interest to maintain the property), rights under the insurance policy will automatically transfer on sale. However, the policy will expire if the new owner does not confirm to the insurer that the policy should continue within two months after the transfer, while the insurer has a right to terminate. In other cases insurance policies are personal and will not automatically transfer on sale. It is important to check each policy carefully to ascertain the precise position.

Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement. It is common market practice for the parties to agree that the seller will continue to insure occupied property until completion.

Third party liability risks (e.g. environmental or personal damage) are intrinsic to almost every property. It is important to have third party liability insurance which properly covers these risks.

Real estate may be contaminated as a result of current and former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any ill-effects it causes. However, environment laws may also operate to make future owners and/or occupiers liable for contamination already present in the real estate when it was acquired. This can only occur if:

• the substance is causing, or there is still potential for it to cause, actual harm to humans, to real estate, to personal property, to protected ecosystems or pollution of groundwater or surface waters; and
• either the new owner or occupier knows about the presence of the substance but fails to take adequate action to limit the harm it causes, or no person more directly responsible for causing or knowingly permitting the substance to be present in the real estate can be found (for example, because a more directly responsible company has since been wound up)

If development is proposed, then the single environmental permit may be made conditional upon the proper investigation and remediation, if necessary, of potential historic contamination. If the planned development is of a type considered potentially detrimental to the environment, the application for the single environmental permit may need to be supported by an assessment of the development’s likely future environmental impact.

Those who have control of places of work are obliged to assess the risk of asbestos being present in the fabric of the building and are obliged to manage the human health risks posed by any asbestos found.

Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protective measures in respect of any existing contamination related losses that may arise in the future. Such measures may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of first party loss or third party claims, or specialist historic liabilities environment insurance to cover any of these risks.

Pricing of (commercial) real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the yield that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account.

The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre (lettabble floor area). The market rental value will take into account factors such as the location of the property, its type and condition, the length of the lease term(s), the quality and stature of the tenants and market situation. And in case of retail shops, the rent of the property may have differential values according to the positioning of the floor space. The rental values of the various areas will in that case be added together to provide an overall rental value for such properties.

The supply of immovable property situated in the Netherlands is exempted from 21% value added tax (VAT).

However, in the following three situations the supply of immovable property is subject to 21% VAT:

• the supply of building land
• the supply of buildings or parts of buildings, including the accompanying land, prior to, on, or two years after the moment the building has been taken into use (“newly constructed immovable property”)
• the supply of a completely renovated building is a newly constructed immovable property for VAT purposes, or
• where the property is the subject of a valid election to waive the statutory exemption from the VAT regime. The buyer may make its own election immediately prior to or upon completion, provided that he will use the property for at least 90% for VAT-taxable activities.

An advantage of opting for revision VAT or VAT on property is that the parties may be able to recover any VAT on professional fees associated with the transaction

The exception to the rule that VAT is payable on the sale of an (elected) property is where the transaction constitutes a “transfer of a going concern”, where the property is let and operated.

Transfer tax (6% over the purchase price, however 2% for residential real estate) is due where the purchaser acquires the legal ownership or the economic interest in an immovable property which is situated in the Netherlands. The acquisition of shares in a company is also subject to 6%/2% transfer tax if:

• 50% or more of the assets of the company consists of immovable property (or right in rem) and at the same time 30% or more of the assets consist of immovable property situated in the Netherlands and
• the company exploits the immovable property (for at least 30%) and
• the purchaser acquires at least 33 1/3% of all shares in the concerning company.

In principle, transfer tax will not be due in case of the – direct or indirect – supply of building land or a newly constructed immovable property (see above).