Public authority liability when ground lease policy is changed
Municipality withdraws ground lease policy without warning leaseholders
On 25 January 2007, the municipal council of Zaanstad, meeting behind closed doors, agreed to the immediate withdrawal of the implementing rules then in force for converting a ground lease into full ownership. Leaseholders who had not submitted an application before 7.30 pm that same day could no longer invoke the old conversion policy. Four months earlier, that same council had adopted a transitional measure with step-by-step declining interest rates running up to and including the fourth quarter of 2007. That transitional period had not yet ended at the time of the withdrawal.
The Zaanstad Leaseholders' Association (Belangenvereniging Erfpachters Zaanstad, BEZ) and five individual leaseholders brought proceedings before the District Court of The Hague. They argued that both the manner in which the new conversion policy came about and its content were unlawful. In addition, BEZ sought a ruling that a number of provisions in the General Provisions 1978 and 1991 were unreasonably onerous. The court partially allowed the claims.
The new 2007 policy had far-reaching financial consequences. Whereas under the old regime leaseholders were still permitted to take the redeemed land value as their starting point, the municipality now calculated on the basis of the current market value using WOZ (statutory property valuation) data. In specific cases the purchase price of the freehold reversion rose by 55 to 100 per cent.
Withdrawal without prior notice breaches the principle of due care
The court held that, in bringing about the 2007 Conversion Policy, the municipality had breached the formal principle of due care. The complaint has three limbs. First: the municipality withdrew the earlier implementing rules without any prior notice, even though those rules had been in force for only four months and provided for an orderly transitional period. Second: the meeting was closed, so that leaseholders had no opportunity to anticipate the impending change. Third: the new policy contained no transitional arrangement and had immediate effect, whereas the earlier policy documents had themselves endorsed the need for a transition.
In paras 4.26-4.28 the court put it as follows: in bringing about the 2007 Conversion Policy, the municipality had given insufficient weight to the interests of leaseholders of privately owned residential building sites, contrary to Section 3:4(1) Awb, whether or not read in conjunction with the unwritten principle of legitimate expectations. In doing so, the court took into account that the memorandum accompanying the council proposal for the new policy did indeed acknowledge that leaseholders would have little support for the higher purchase prices, but did not substantiate why no transitional arrangement was nonetheless required.
The fact that the democratic process had been followed and that the municipal council had been actively involved did not alter this. The earlier rules had by then already been withdrawn, and democratic decision-making does not release a municipality from its obligation to give demonstrable consideration to the interests of those affected when bringing about policy.
The content of the conversion policy itself — taking the current, market-based land value as the starting point — was not considered unlawful by the court. A landowner may ask the current market value as the purchase price. That the ground lease gives the leaseholder no claim to the increase in value of the freehold reversion follows from the nature of Section 5:85 DCC: a ground lease confers the right to hold and use immovable property belonging to another, not to share in the change in value of the land.
What does this mean for leaseholders and their legal protection?
Leaseholders faced with a change of policy or a new conversion offer can test the manner in which that policy came about against the general principles of good administration. Did the municipality give demonstrable consideration to the interests of leaseholders? Was there a transitional arrangement or prior notice? Where these were absent, while earlier policy did provide for an orderly transition, there are grounds for a claim of unlawfulness.
In addition, the court confirmed that ground lease terms which provide for dispute resolution by binding advice, without giving the leaseholder the option of submitting the dispute to the ordinary courts, are unreasonably onerous under Section 6:233(a) DCC and Section 6:236(n) DCC. Article 7(4) of the General Provisions 1978 was annulled for that reason. The Unfair Terms Directive (93/13/EEC) plays a role here for agreements concluded after 31 December 1994.
For leaseholders dealing with a conversion offer or a ground rent review that raises questions about the procedure or the terms, legal advice is warranted.real estate and ground lease matters.
Frequently asked questions
Can a municipality simply change its conversion policy for ground leases?
A municipality has discretion to change its conversion policy, but in doing so is bound by the general principles of good administration. A far-reaching change of policy without prior notice and without a transitional arrangement, while earlier policy did provide for a transitional period, may conflict with the formal principle of due care under Section 3:4(1) Awb.
What are unreasonably onerous terms in ground lease conditions?
Ground lease terms can be tested against Section 6:233 DCC. A term that allows disputes to be resolved solely by binding advice — without giving the leaseholder the option of submitting the dispute to a court — is unreasonably onerous under Section 6:236(n) DCC. Directive 93/13/EEC provides additional protection for agreements concluded after 31 December 1994.
May a municipality take the current market value as the starting point when selling the freehold reversion?
Yes, in principle it may. When converting a ground lease into full ownership, a landowner may ask the current market-based value of the freehold reversion as the purchase price. The ground lease gives no claim to the increase in value of the land: a ground lease serves solely to use another's immovable property (Section 5:85 DCC), not to co-own the land value.
District Court of The Hague, 28 November 2018, ECLI:NL:RBDHA:2018:14139.
Cited case law
District Courts: ECLI:NL:RBDHA:2018:14139