Compensation for withdrawing from the lease of business premises

Written on 19 Nov 2015

The Judgment by the Supreme Court 3800/2015, of 15 September 2015, deliberates on a unilateral withdrawal of the future tenant in a promise agreement of lease of business premises. As a result of the tenant’s withdrawal, the landlord sought compensation both for damages and lost profits, equivalent to what the landlord would have received if the parties had signed the lease agreement on the premises.

With regard to the compensation criteria applicable to a tenant’s unilateral withdrawal from a residential houses lease agreement, article 11 of Law 29/1994, of 24 November, of the Urban Leases Act (“ULA 1994“), sets out that the parties may agree a compensation for the equivalent to one month’s rent for each remaining year until the agreement’s maturity.

Although only compensation for residential houses leases is legally contemplated, case law has tried to establish a criterion for leasing business premises.

In absence of an express legal provision for commercial leases, the landlord has two options. On the one hand, apply article 27.1 ULA 1994 and article 1.124 of the Civil Code and enforce the agreement including the payment of any remaining months to the maturity of the agreement. On the other hand, the landlord may decide to terminate the agreement and seek compensation for damages for an amount determined either by the parties or by the Courts. In this respect, the Provincial Courts have been following the criteria set out in Decree 4104/1946, of 24 December, which approved the consolidated text of the 1964 Urban Leasing Law (“ULA 1964“) and, thus, apply the criterion of one month per year of agreement. However, whether the compensation is contractually agreed or not, the Courts, on a case-by-case basis, have graded the amounts to be paid with the aim of preventing the landlord from receiving compensation for damages not actually suffered.

An example of the above is the possibility of the tenant to rent the business premises again, meaning the opportunities for marketing the premises again. In this sense, the Decision of the Provincial Court of Barcelona dated 23 October 2008, understands that compensation shall be limited to the time during which the premises, once vacated, remain empty and free to use. The Court understands that, if the premises are leased to a third party, it would result in the landlord’s unjust enrichment. In this respect, when it comes to deciding which damages may be considered lost profits, the case law proposes an evaluation based on facts (Judgment by the Supreme Court 1/07/2002). Indeed, if the premises were leased again the landlord might receive an unjust enrichment as the they would not only receive the compensation corresponding to lost profits but they would also receive any income derived from the new lease agreement (Judgment by the Supreme Court 18/03/2010).

In the Supreme Court’s Judgment18/03/2010 referred to above, the lanlord refurbished the premises for the supermarket chain’s use with which it had signed a promise agreement to rent the premises. The tenant requested the application of the case law which established that the compensation criterion to be applied was the one month rent for each remaining year of contract. However, the Supreme Court has backed the compensation reached by the parties as it understands that the criterion set out for property leases should not apply by analogy. Indeed, the landlord not only paid the costs of the refurbishment but also, having carried out the steps to rent the premises to a third party, when these were not leased, and only when negotiations failed, did the landlord file a claim against the tenant.