Do The Mandatory Provisions Of The Law On Commercial Leases Apply Automatically To A “Shop In A Shop”?
by Lieven Peeters, Partner Real Estate
More and more “shops in a shop” are appearing on the retail landscape. They can be organised as a truly separate shop or just a display of specific brand products amongst the other products, be it in shopping centres, department stores or just regular shops allocating some square meters to another (complimentary) brand. Regularly, parties to the contractual documentation for such a “shop in a shop” do not always expressly apply the provisions of the Law on Commercial Leases. Recently, the Belgian Supreme Court had to decide whether the mandatory provisions of the Law of 30 April 1951 on Commercial Leases automatically apply even though the parties did not provide for that law in the contractual documentation.
This Supreme Court judgment dealt with the issues of whether a direct contact with the general public is possible for a “shop in a shop”, and whether the Law on Commercial Leases applies to such a “shop in a shop”, regardless of the particular characterisation given to it by the parties. Article 1 of the Law on Commercial Leases determines that it applies to the lease of real estate property (or parts thereof) “for the execution of a retail trade or for the company of a craftsman who is in direct contact with the general public”.
To be perfectly clear, it does not relate to the situation where parties have explicitly applied the Law on Commercial Leases to their agreement.
The case at hand related to a butcher’s shop that had rented space in a department store that, as a whole, was open to the general public. The tenant operated its business as an independent in the department store. The first judge ordered the contractual arrangement to be a sui generis agreement without triggering the application of the Law on Commercial Leases. The appeal court ordered that the Law on Commercial Leases needed to apply as the arrangement fell within its scope. The case was then brought before the Supreme Court.
The Supreme Court started its judgment with further defining the condition of “directly in contact with the general public” for retail traders. According to the Supreme Court, they must be in direct contact with the general public in such a way that they can build up their own clientele. When it concerns a retail trader renting space in a department store, an even more specific condition has to be fulfilled.
We can distill from the judgment that in such a case, the retail trader has to be in direct contact with the general public in such a way that it “has the possibility to build up its own clientele which is significantly distinguishable from the clientele of the department store”. The Supreme Court stated that there is no presumption on this point, as the clientele in a department store that is open to the general public is firstly the clientele of that department store itself.
To determine whether, despite the other characterisation given by the parties, such lease still falls within the scope of the Law on Commercial Leases, the judge must verify whether the tenant, given the special circumstances and the terms of the establishment, such as
- the location,
- the permanent and fixed nature of the leased space,
- the access to that space, and
- the autonomous nature of the operations,
- could build up its own clientele that is significantly distinguishable and distinguished from the clientele of the department store.
Upon answering this question as to whether the (protection of the) Law on Commercial Leases applies, the criterion of building up “significantly distinguished clientele” must be established. However, the proportion and the number of clientele which is significantly distinguished still must be determined.
The Supreme Court already stated that it is not sufficient to determine that:
- the tenant can perfectly build up its own clientele without it being identical to the clientele of the landlord;
- the fact that the tenant works for its own account;
- the tenant “only sees customers buying its products, when it launches special actions, and who do not buy products at all from the (landlord)”.
According to the Supreme Court, it must be verified whether the tenant, given the four abovementioned special circumstances and the terms of operating the “shop in a shop”, has the possibility to build up its own clientele that is significantly distinguished from the clientele of the department store.
If this is the situation, the Law on Commercial Leases does automatically apply to the “shop in a shop” lease agreement, otherwise it will not automatically apply to such an agreement.
The application and the protection of the Law on Commercial Leases is obviously essential for all parties involved, the owner-investor, the landlord and the (sub-)tenants.
Please do not hesitate to contact us should you have any questions about this legal development or if you would like to have specific situations assessed.