This article gives you an overview of the type of defects that do not relate to the physical condition of a tenancy - the so-called legal defects.
Legal deficiencies include, for example, when a residential lease is not approved for residential use or a commercial lease is rented out for a use that contradicts the local plan.
If a lease suffers from a legal defect, the landlord risks that the tenant can terminate the lease and claim compensation if the landlord cannot remedy the defect. It is therefore important that the landlord makes the tenant aware of, and includes in the lease, any restrictions on the tenant's availability when the lease is signed.
Legal defects affect both residential and commercial leases, but this article will focus on commercial leases.
What constitutes a legal defect in a tenancy?
Legal defects mean that a tenant does not obtain all or part of the rights, and thus the right of use, to which the tenant is entitled under the lease agreement with the landlord. Section 22(1), first indent of the Danish Commercial Tenancy Act refers to this type of defect as follows:
If the use of the leased property is wholly or partly contrary to legislation, other public regulations, easements or other similar rights over the property that were in force at the time the agreement was entered into, the lessee may ...
Thus, legal defects do not relate to the physical conditions of a tenancy.
It goes without saying that a landlord cannot rent out a lease in a property that he does not own, just as the landlord cannot rent out the same lease to several different tenants at the same time. If the landlord does this, and the tenant is therefore unable to obtain the agreed right of use, there is a legal defect for which the landlord is liable.
In addition, it is often seen in practice that local planning regulations or owner association bylaws restrict the use of a commercial lease, which the landlord must therefore take into account before entering into a commercial lease.
However, if the damage has occurred because the parties have already concluded a commercial lease, the question arises as to what remedies for breach the tenant can assert.
What are the consequences of a legal defect in a lease?
The big difference between legal and physical defects in a lease is that the landlord is objectively liable for legal defects - i.e. the landlord is liable for damages, regardless of whether the landlord had knowledge of the legal defect or whether the landlord acted negligently/carelessly.
Section 22(1), second indent of the Danish Commercial Tenancy Act sets out the tenant's remedies for breach of contract, and it follows that the tenant can:
... demand a proportionate reduction in rent and compensation. The tenant may also terminate the rental agreement if the use is significantly restricted or the landlord has acted fraudulently.
What a tenant can claim depends on a specific assessment, but a few examples can be highlighted from case law:
- The landlord had agreed to a surrender supplement, which stated that the lease was to be used by the incoming tenant as a grill bar. However, the use of the lease for the operation of a grill bar was contrary to the owner association's articles of association, and the landlord was therefore ordered to pay compensation to the incoming tenant.
- At the effective date of a newly built lease, there was no occupancy permit or energy label. As the landlord obtained a temporary occupancy permit quickly enough, the tenant was not entitled to terminate the commercial lease, but was instead entitled to a proportional reduction in rent of 20%.
The landlord has a right to remedy a legal defect, but unlike physical defects, it can often be difficult for a landlord to remedy a legal defect, as it often requires the involvement and acceptance of third parties/public authorities - e.g. in the form of a local planning compensation or a change to the owner association's bylaws.
What precautions can the landlord take to limit the risk of legal defects?
First and foremost, it's important that the landlord is aware of any restrictions on the property, such as local plans, registered easements and any owner association statutes.
If there are easements registered on the property that regulate the use of the lease, landlords should consider attaching these as an appendix to the lease so that the tenant is made aware of them prior to entering into a commercial lease.
Furthermore, the landlord must be aware of what the parties agree in the use clause of the lease, as it is the agreed use that forms the basis for assessing whether the tenant can obtain the agreed right of use.
If a landlord does not have sufficient insight into the tenant's usage wishes - or if the landlord wants to protect itself in the best possible way, the parties can agree that the tenant is responsible for ensuring that its use of the leased space does not violate legislation, public regulations, registered easements, local plans or other public planning. Such a term, like all other lease terms, requires the tenant to accept it - and such a term can have an impact on the rent setting, which is why landlords should be careful not to include it as a standard term.
(The article was published in the magazine Danske Udlejere in November 2024)
If you have any questions regarding this article or the consequences of a legal defect in a commercial lease, please contact CLEMENS specialists.
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