Today 10 September, the Court of Justice decided a case concerning circumstances with a certain notoriety in the country it originates from - The Netherlands. The question stems from the complicated encounter between Airbnb and other forms of tourist rentals and regulated tenancy contracts: in other words, how vigorously can landlords of regulated rentals seek to use contract terms to prevent exploitation of low-price accommodation by the tenants?
The contract at stake in the main dispute contained a 5000 euro penalty in case the tenant did not use the apartment as main residence or sub-let it without the owner's approval. This is a common clause in Dutch "social" tenancy contracts. Remedies for the landlord under Dutch law, however, also include the possibility to claim disgorgement of any profit made by breaching an obligation - as a way of simplifying proof of damage for the claimant.
This means that, in the case which made its way to the CJEU, a tenant found in breach of the contract's terms was first evicted and then asked to both pay the 5000 euro penalty and transfer to the former landlord any profit made from sub-letting the apartment.
The referring court asked the CJEU whether, in assessing the penalty clause at stake under the unfair terms directive, account should be taken of other penalty clauses included in the contract, even though they were not cumulatively applicable to the breach under discussion. What seems clear, however, is that it was the combination between the penalty and Dutch law allowing for disgorgement of profit to keep the referring judges on the hedge.
Contrary to what the Court seems to have assumed when opting to go forward without AG opinion, the question is not moot. It implies both answering a specific question raised by the Directive's annex: when is a penalty clause excessive? And more in general reflecting on what the Directive's Article 4 means by stating that all other terms in the contract must be taken into account when deciding whether a term (penalty clause or other) is unfair. Can this be meant to include also the broad context of rules applicable to the contract?
The Court recalled, as to the first question, a number of previous decisions essentially trying to articulate when terms - and, especially - the consequences they dictate can be considered justified in relation to the breach they react to.
It is the referring court's task, the CJEU observed, to establish whether a certain penalty clause is unfair - without adding much content, the CJEU seems sympathetic to the Dutch court's claim that a social housing contract justifies a high penalty fee for illicit sub-letting.
Furthermore, the Court concludes that neither other penalty clauses in the contract must be considered - other terms count when there's a concrete chance of them exerting a cumulative effect - nor the possibility to demand disgorgement of profit next to the penalty. The latter not being a term, the CJEU places it beyond the scope of Directive 93/13.
This argument, in particular, seems questionable: of course the Dutch tort law rules must be beyond the scope of the unfair terms control, but the Court has several times reaffirmed that the background rules applicable to the contract matter in assessing unfairness: they cannot be unfair on their own, but why would they not contribute to assessing the term's likely impact?
Besides, the Dutch rule seems to already go a long way to fulfil the main purposes of penalty clauses - discouragement of breach and facilitation of recovery for the claimant -, so would that not count in assessing both the need for and proportionality of the penalty?
As difficult as it may be to have much sympathy for fraudulent tenants, the reasoning in this case does not really sit well with my understanding of penalty clauses - and unfair terms. Looking forward to hearing if someone has different thoughts!
