Recently, the Supreme Court issued a ruling on the question of whether a ground lease rent that became due after the date of bankruptcy is an estate debt. In this article, I first explain what estate debts are and the relevance of the question answered by the Supreme Court for practice. I then discuss the judgment.
What are estate debts?
Estate debts can be considered the cost of bankruptcy. Only when the estate debts can be paid in full can it be acceded to distribution to creditors with priority rights (or preferential creditors). Only when the preferential creditors can be fully satisfied can it be acceded to payout to creditors without rights of priority, or unsecured creditors. In the vast majority of bankruptcies, there are insufficient financial resources to make a payment to unsecured creditors. The chance that an estate claim will be satisfied is therefore much higher than the chance that an ordinary unsecured claim can be satisfied. Moreover, in principle, estate claims must be paid immediately. This is in contrast to ordinary preferential and unsecured claims, which have to be submitted for verification.
By the way, pledge and mortgage holders have a special position, called the separatist position, by which they basically do not have to worry about other creditors.
What are the grounds for creating estate debts?
The law provides in some cases that a debt of a bankrupt is an estate debt. This is the case, for example, insofar as amounts become due after the date of bankruptcy, for rent and leases (Article 39 Bankruptcy Code), as well as an employee’s salary (Article 40 Bankruptcy Code).
In the important 2013 Koot Beheer v. Tideman q.q. ruling, the Supreme Court clarified when estate debts exist. These are only those debts that give an immediate claim to the bankruptcy estate, either
- (i) pursuant to law,
- (ii) because they were entered into by the trustee in his capacity (in the sense that his will was directed thereto),
- (iii) because they result from an act of the trustee in violation of an obligation or duty to be observed by him in his capacity.
The right of leasehold and ground rent
The right of leasehold is the right that gives the leaseholder the authority to hold and use another person’s immovable property. In the case of ground lease, it can be agreed in the deed of establishment that the ground leaseholder must pay a ground lease rent. This is a sum of money that must be paid all at once or at regular or non-regular intervals. The law does not stipulate that ground rent from after the date of bankruptcy is an estate debt (unlike rent and lease).
Does ground rent from after date of bankruptcy create an estate debt?
The situation on which the Supreme Court recently handed down a judgment involved a leaseholder who had gone bankrupt. The leaseholder’s receiver refused to consider the ground lease rent that had become due during bankruptcy as an estate debt. The leaseholder initiated proceedings and claimed payment. The trustee mounted a defense and was vindicated in the District Court and the Court of Appeal.
In cassation it was argued by the ground lease lessee that ground lease is similar to lease and rent and would therefore similarly give rise to an estate debt. It was also argued that a canon payment obligation is property law in nature and therefore can be enforced outside the concurrence of unsecured creditors.
The Supreme Court does not agree and dismisses the appeal. It notes that in the set of the Civil Code, the obligation to pay ground lease rent is not an obligation under property law, but a qualitative obligation resting on the ground leaseholder. Furthermore, the Supreme Court points to the special regulation on payment and termination in the case of ground lease. According to the Supreme Court, the payment of ground rent insofar as it becomes due after the date of bankruptcy is therefore not an estate debt pursuant to or by virtue of the Civil Code or the Bankruptcy Act.
Payment and termination for ground leases
As noted above, the Supreme Court referred to the special regulation governing payment and termination of the ground lease. Briefly, this regulation means that the ground lease can be terminated by the owner if the ground leaseholder defaults in paying the ground rent for the two consecutive years or seriously fails to fulfill his other obligations. Furthermore, the law provides that after transfer of the leasehold, both the transferee and the predecessor in title are jointly and severally liable for the canon owed by the predecessor in title that became due and payable during the previous five years. This rule also simply applies in the event of a leaseholder’s bankruptcy.
Increasing clarity on estate debts
With the Koot Beheer v. Tideman q.q. ruling in 2013 and subsequently, the Supreme Court has created more and more clarity about estate debts. For example, in 2015 the Supreme Court ruled that rent of movable property after the date of bankruptcy also constitutes an estate debt. And in 2021, the Supreme Court held that interest on an estate debt is also an estate debt. And now there can also be no doubt that – in a situation where there is already an emphyteusis on date of bankruptcy – emphyteusis rent that becomes due after date of bankruptcy is not an estate debt.
Looking for a lawyer insolvency law in Rotterdam?
If you wish to seek advice in the area of insolvency law, such as on the rights of the landlord in the event of a tenant’s bankruptcy, estate debts, security interests and the ranking of creditors, please contact Peter de Graaf of LVH Advocaten.
