Cancellation of loan agreement and requirements of reasonableness and fairness in the Netherlands

The basic principle of Dutch contract law is that agreements that have been concluded are binding. However, under certain circumstances, a court may intervene in agreements between the parties. One of the reasons for this can be the requirements of reasonableness and fairness. An old judgment in preliminary relief proceedings regarding a dispute between the municipality of Utrecht and a party to whom it had given a site on loan illustrates how the requirements of reasonableness and fairness can turn out. Dutch contract law lawyer Thomas van Vugt explains what happened in this situation and how the court in preliminary relief proceedings looked at the termination of the loan agreement The agreement that one party allows a third party to use an item without financial consideration under the condition that that party will return the item.
» Meer over loan agreement loan agreement.

Loan agreement with municipality

This case concerned a party that concluded a loan agreement with the municipality of Utrecht for an old fort and its outdoor areas. The party that received the site on loan was engaged in information and communication about utility crops and the production of seeds and plants. A loan agreement is an agreement whereby one party makes an item of property available to the other party on the condition that the other party returns the item of property after use or a certain time.

Content of loan agreement and termination

In the loan agreement, it had been specifically agreed that the objects could only be used as a storage area for seeds, an exhibition space, and stables for the livestock. The outdoor area could only be used as a meadow and as an ecological area. The agreement’s starting date was 8 November 1995. The loan agreement also stipulated that the municipality should always have access and that, at first notification, with a two-weeks’ notice period, the item of property given on loan should be vacated.

Municipality requested vacation of site in preliminary relief proceedings

At some point, the municipality noticed that there were more animals on the site than agreed. When a dispute arose about this and the parties did not appear to keep the agreements, the municipality eventually terminated the loan agreement. Because the borrower failed to comply with the termination and vacation of the site requested by the municipality, the municipality eventually brought preliminary relief proceedings against the borrower. It demanded vacation of the site by a certain time.

Dutch lawyer: ‘Case too complicated for preliminary relief proceedings’

The borrower’s lawyer argued, among other things, that the case was too complicated to be assessed in preliminary relief proceedings. Article 256 of the Dutch Code of Civil Procedure provides that if a court in preliminary relief proceedings finds that the case is too complicated for preliminary relief proceedings, it can refuse preliminary relief. It appears from case-law that this can be the case if the facts are unclear, the consequences cannot be overseen, or the legal issue is too complicated. The court in preliminary relief proceedings did not agree with this defence. It considered that these proceedings only concerned the question whether the requested vacation of the site was allowable on the grounds of the termination of the loan agreement by the municipality and that this was a question that could be considered in preliminary relief proceedings.

Can municipality terminate the loan agreement?

Therefore, these preliminary relief proceedings concerned the question whether the municipality was entitled to terminate the loan agreement. The court considered the following important for answering this question. It followed from the loan agreement that the municipality was entitled in principle to terminate the loan with a two-weeks’ notice period. Although the municipality’s right of termination in the agreement is not subject to any condition, the court still decided to assess whether this was reasonable. The court in preliminary relief proceedings found that it had to be considered that there was a special situation as the loan agreement had been in place since 1995.

Importance of continuation of loan agreement

On the one hand, the court recognised the borrower’s interest in the continuation of the loan agreement. On the other hand, the court also found that because the user had not kept certain agreements and had been warned that this might lead to termination, the weighing of interests ultimately had to be in favour of the municipality. According to the court, the municipality was allowed to terminate the loan agreement.

Notice period in Dutch loan agreement

The agreement itself provided for a two-weeks’ notice period. The court found this short period unacceptable from the point of view of reasonableness and fairness and therefore decided that the municipality could not reasonably invoke the two-weeks’ notice period included in the loan agreement. According to the court, the municipality had not made it plausible that it would use the site for a different purpose any time soon, while on the other hand, the borrower had made it plausible that it would need a more extended period to find other accommodation for the animals in question and to find a solution for the organisational problems resulting from the vacation of the site. A three-months’ notice period was considered reasonable for this purpose.

Requirements of reasonableness and fairness

This judgement shows that although the parties had apparently agreed on a two-weeks’ notice period, the court nevertheless adjusted the agreement between the parties under these circumstances. Based on the requirements of reasonableness and fairness, as laid down in Article 248 of Book 6 of the Dutch Civil Code, an agreement can, therefore, be adjusted.