A recent decision of the Supreme Court (in 26 Cdo 3644/2022-139, 14 March 2023) casts light on the issue whether a new tenant is obliged to pay compensation to their predecessor for the absorption of their customer base.
Author: Jitka Krocová, paralegal
In the case at hand, the plaintiff (the previous tenant) had demanded that the defendant (the subsequent tenant) pay a compensation for the acquisition of the customer base created by the former. The plaintiff argued that, over the course of the lease of the rental (municipal) building, it developed a customer base in the rental property which the defendant, as the new tenant of the building, could absorb and thus acquired an advantage for which it should have compensated the plaintiff pursuant to Sec. 2315 of the Civil Code.
When the court of first instance dismissed the claim, the plaintiff turned to the appellate court which, however, upheld the first-instance judgment. The plaintiff as tenant had entered into an unlimited lease agreement with the city as the landlord which could be terminated for convenience observing a four-year notice period. In the course of the lease, the plaintiff let the premises to third parties on a commercial basis. Shortly after the lease agreement expired, following termination by the city, the plaintiff began to conclude agreements with the defendant on a smooth change of operators of the local mall, according to which the sublessees were expected to enter into new subleases with the defendant by a certain date, on the same terms as previously agreed with the plaintiff.
Based on the findings of fact, the appellate court concluded that the defendant lacked standing to be sued in terms of the substantive-law aspects of the case, i.e., the claim for payment of compensation for the takeover of an established customer base as per Sec. 2315 of the Civil Code. The court noted that the previous tenant of commercial space may only ever demand such compensation from the former landlord but not from their successor in the lease, as such claim arises from a contract as opposed to being based in law. By the very nature of things, contractual parties cannot bind outsiders which are not a participant. Consequently, the obligation to pay compensation for the takeover of a customer base can only ever bind the landlord, irrespective of whether it is the landlord or the new tenant who draws an advantage from that customer base.
The plaintiff turned to the Supreme Court with an appeal against the appellate judgment of a point of law, as they were convinced that the obligation to pay compensation to the terminated previous tenant must bind the party who profits from the previous tenant’s efforts (often made over a number of years) to build a customer base on the rental premises which will provide the desired income – and does so essentially with having to move a finger. Therefore, the new tenant of the commercial premises ought to (also) have standing to be sued for compensation for the takeover of the customer base: it is them who derive an advantage from it.
The Supreme Court argued that Sec. 2315 of the Civil Code presupposes that the customer base, developed by the tenant within the context of its business operations on the rental premises, represents a commercially exploitable good and as such its takeover may justify a subsequent financial settlement, depending on the circumstances. More specifically, an obligation to compensate will arise if (1) the tenant created a customer base in the rental space, (2) the lease has been terminated by way of cancellation on the part of the landlord (other than on grounds of a gross breach of contract by the tenant), (3) the landlord who gave notice, or the new tenant of the said premises, attains an advantage by taking over the customer base from the terminated tenant.
The Supreme Court went on to say that, while the terminated tenant is doubtlessly the beneficiary of that obligation to compensate, the law does not expressly specify the obligor. At the same time, this is a contractual obligation which strictly binds the parties, who cannot oblige a third party without that party’s consent. Consequently, the Supreme Court concluded that the obligation to pay compensation for the takeover of the customer base strictly applies to the (former) landlord, for the claim came into existence based on the (defunct) lease between the landlord and the terminated tenant – i.e., the tenant may bring its claim as per Sec. 2315 of the Civil Code within the context of this relationship under the law of obligations against that entity which, at the time of the termination of the lease, was the landlord, but not against an entity who, at the time of termination (or thereafter), was in no legal relationship with the tenant (i.e., against the new tenant). On this basis, the Supreme Court dismissed the plaintiff’s request.
In closing, we may add the following observation: if the customer base is a commercially exploitable good which is directly tied to the business operations of the tenant on the rental premises, then the creation of the customer base may be seen to be a form of appreciation in value of the rental premises. If this is so, then compensation for the advantage thus attained should be rendered to the former tenant by none other than the entity whose premises enjoyed such enhancement during the lease – i.e., the landlord (and thus, in the case at hand, the city).
Source:
Supreme Court judgment 26 Cdo 3644/2022 of 14 March 2023