Penalty clauses in a tenancy agreement: all or nothing

Penalty clauses are common in most agreements. They ensure that a party that does not fulfil its obligations has to pay a sum of money. This serves legal certainty, but it can also lead to unreasonable consequences. In the Tijdschrift Overeenkomst in de Rechtspraktijk, Harriët Schelhaas, Professor of Private Law and vice dean of bachelor education at Erasmus School of Law, explains how penalty clauses in tenancy agreements are implemented. She does this together with her brother Egbert Schelhaas, tenancy law lawyer at Holla Advocaten.

Penalty clauses in tenancy agreements remain a point of discussion in case law. The discussion is often centred on the way in which clauses should be interpreted and possible moderation of these clauses. The clauses are intended to encourage a party to fulfil its contractual obligations. In the case of a tenancy agreement, the penalty clauses encourage tenants to pay their rent on time, which serves legal certainty.

The tenant pays the price

However, these clauses can also be very unreasonable for the weak contracting party, who is usually not equipped to negotiate an unreasonable penalty clause properly. This is especially evident in cases where several penalty clauses are included in the agreement. When this occurs, which turns out to be very often, the weaker party literally needs to pay a high price to maintain the contract. Fortunately, the law offers the possibility to limit a penalty clause by interpreting the penalty clause in a limited way, having it reduced by the court afterwards, or by making it inoperative because it is not in accordance with the principles of reasonableness and fairness.

The article by Schelhaas and Schelhaas examines the impact of these legal techniques, in particular with regard to penalty clauses that are commonly used in general terms and conditions of the Real Estate Council and penalty clauses against consumers. In the article, the authors also make some recommendations regarding penalty clauses in tenancy agreements:

“The penalty for delayed payment from standard general terms and conditions of the Real Estate Council is now unclear, it causes many procedures, and it should be reformulated. It is also recommended for tenants to be cautious: excessive penalty clauses are removed from the agreement completely, and the property owner is left empty-handed. It is, therefore, important to pay a lot of attention to drawing up these penalty clauses and to not force consumers to pay excessive fines. Because when it comes to penalty clauses, it is all or nothing", according to Schelhaas.

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