Damages for loss of goodwill in the context of eviction of tenants from a property subject to Cyprus Rent Control

 

09 October 2017

Abstract

A tenant occupying a property which is subject to the Cyprus Rent (Control) Laws of 1983, as amended (the “Law”) may, under certain circumstances, claim damages for loss of goodwill in the event of a successful eviction by court order. This publication examines the legal and practical considerations in connection to the said subject matter and specifically discusses: all preliminary considerations, the conditions for eviction, the statutory prescribed compensation, the possibility of damages for loss of commercial value (goodwill),  the requisite legal elements in order to qualify for such compensation, as these arise from applicable case law,  and other practical considerations to be taken into account when negotiating a possible settlement, such as the length of eviction proceedings in Rent Control Court.

 

Preliminary Considerations

Preliminary, it is essential to make a distinction between two separate categories of rented properties in Cyprus and specifically, on the one hand, properties situated in defined controlled areas,  that have been developed by the 31st of December 1999, and thus are subject to the Law and the jurisdiction of the Rent Control Courts and, on the other hand , all other rented properties which are not subject to the Law, and thus any disputes in connection to such properties are settled as a matter of civil litigation in the relevant District Court on the basis of the relevant private tenancy agreement made between the parties.

Another distinction should be also made between “contractual” and “statutory” tenancies. Specifically, a “statutory tenant” is a tenant of rented property subject to the Law (for more than 6 months) whose first tenancy period, under the relevant agreement, has expired (or is properly terminated) but the tenant remains in possession of the property. All other tenants are contractual tenants.

The matter of compensation for loss of commercial value (goodwill) ,forming the subject matter of this publication, is relevant only for eviction of tenants of properties subject to the Law or statutory tenants for which the  Rent Control Court, established by virtue of the Law, maintains jurisdiction over recovery of possession, the determination of fair rent and other related matters to such properties, including compensation for eviction.

 

Eviction

The eviction of tenants of properties subject to the Law is a relatively difficult endeavour as the Law prescribes pre-defined and specific circumstances of when a landlord may be lawfully allowed to evict a tenant out of a property and only by securing a relevant court order. In all other cases, including mere expiration or termination of the tenancy agreement, landlords cannot evict tenants of rent controlled properties.

Historically, the Law was a result of a chain of legislative instruments following the Turkish military invasion in 1974 when many refugees relocated to the Greek Cypriot part of the island  thus creating a serious housing problem. It served as safeguard and protection afforded to tenants by preventing landlords from evicting them with ease. Statutory tenants in particular,  are specifically provided with protection in regards to necessary repairs, determination of rent increases and the right not to be evicted.

Of the thirteen or so pre-defined circumstances for which the owner of a property may claim repossession of the property through the court, the following two instances of Article 11 of the Law give right to compensation and other benefits to tenants of a store or a business in case of successful eviction:

“Article 11 (1) No judgement or order for the recovery of possession of any premises, to which this Law applies, or for the eviction of a statutory tenant therefrom, shall be given or made except in the following cases:…..

(g)     in the event where the property is reasonably required for occupation by the landlord, his spouse or his children and where none of the aforementioned individuals has been able to obtain another analogous and reasonably-priced property for their business or for the purposes of the business and the Court considers it reasonable to issue such a decision or decree:

Provided that no decision and no decree shall be issued under this paragraph, unless the Court is satisfied that, taking into account all the circumstances of each case, the adoption of such decision or decree would cause greater inconvenience than its refusal thereof or;

(h)    in the event where the property is reasonably required by the landlord;

(i) for its demolition thereof where this does not constitute an abuse of rights,

(ii) for its demolition and redevelopment of new property, or

(iii) for materially significant changes that entail substantial and significant alteration for the purposes of its exploitation; or

(iv) for the execution of works on a historically preserved building;

and the Court is convinced that the landlord has, for the purposes of the above, provided the necessary licenses and permissions for that purpose and that the owner can not reasonably proceed as mentioned in the above sub-declarations (i), (ii), (iii) and (iv)  without recovering the possession of the property, provided that the landlord has given to the tenant not less than four months' notice in writing to vacate the premises”.

 

Fixed Compensation

Where an eviction order is issued against concerning a tenant which operates a shop or a business, in accordance with paragraphs (g) and (h) of Article 11(1) of the Law, as explained above, Article 12 of the Law expressly provides that the Court has the discretion to order the applicant, namely the owner, to pay the tenant compensation an amount which shall not exceed 18-months of the prevailing rent.

 

Damages for Loss of Commercial Value (Goodwill)

Furthermore, Article 13 of the Law provides the legal basis on which a tenant may claim damages for loss of commercial value (goodwill) of a business in the case of an eviction under Articles 11(1) (g) or (h) in addition to the 18 months rent. The said provision was originally transposed in to domestic Cypriot law as adopted in its entirety by Article 4(1) of the Landlord and Tenant Act 1927of the English Laws.

Specifically,

“Article 13 - Where by reason of the carrying on by the tenant in the premises of a trade or business a commercial value (goodwill) is attached thereto increasing the rental value thereof and by reason of the loss of the possession of the premises the tenant shall suffer a loss, the Court, in giving a judgment or making an order under any of paragraphs (g) and (h) of sub-section (1) of section 11, may, if the Court considers the compensation prescribed  by section 12 insufficient, order the payment of additional compensation to the tenant, which does not exceed the loss of goodwill, taking into account all the conditions of the tenant, as well as the probability of increasing the rental value of the property due to the loss of commercial value, while the court decree or decision is not enforceable until the above amount of compensation is paid. "

The issue of compensation under Article 13 should be raised in the pleadings by the tenant. The burden of proof lies with the tenant being evicted (Nicolaides v Chrysostomou (1988) 1 C.L.R. 687). In other words its up to the tenant to prove, providing sufficient and relevant evidence, that the loss on the tenant from the eviction justifies the award of compensation greater than 18 months rents in accordance with Article 13 of the Law.

In adopting its decision, the Court, will order that the eviction decree is enforceable only if the amount of the compensation has been paid in advance.

 

Legal Analysis

From the wording of Article 13, the following preliminary preconditions can be identified as necessary to qualify for damages for loss of goodwill, namely:

  1. the building is subject to the Law;
  2. the tenant was operating a store or conducted business out of the premises;
  3. the tenant, due to the above the eviction order, will suffer a loss;
  4. the eviction order is issued for reasons (g) and (h) of Article 11 (1);
  5. the Court may consider the compensation of 18 months rent provided for in Article 12 to be insufficient,
  6. the aggregate compensation shall not exceed the loss of, and thus can match the commercial value (goodwill) of the trade or business;
  7. the Court will take into account all the conditions of the tenant;
  8. the Court will take into account the possibility of increase of the rental value of the property because of the commercial value (goodwill) attached to it.

The Cyprus courts have further clarified and interpreted above as to encompass 4 main requirements for compensation of loss of commercial value (goodwill) under Article 13 (Sulay v. Kazandjian, 24 C.L.R. 37):

(1)   that commercial value (goodwill)  became attached to the business premises in question by reason of the carrying thereon by the tenant of some trade or business;

(2)   that the rental value has been increased owing to such business having been carried on by the tenant;

(3)    that the landlord shall get the benefit of such increase; and

(4)   the tenant shall suffer a loss by giving up possession of such business premises.

 

Definition of Commercial Value (Goodwill)

The notion of the adherent goodwill seems to be definitive when it comes to the reasoning of the courts and the interpretation of Article 13 of the Law.

Goodwill or compensation for goodwill (αέρας) is not defined in the Law but it was considered in Charrington & Co. vs. Simpson (supra) to be inappropriate to describe a payment which is a payment in respect of an improved rental value attached to the premises.

The trial court has also proceeded with a definition of "commercial value" in the case of Nicolaides v Chrysochou  (1988) 1 CLR 687) as follows:

 “Commercial value' is the preference of clients and in consequence the value of the business as a going concern, with its clientele and turnover, its known trade name, without the capital, its stock and other assets.”

Concrete judgements from the English courts dating back to 1934 are openly adopted and transposed in the Cypriot legal order in connection to this matter (Nicolaides v Chrysostomou (1988) 1 C.L.R. 687). The notion was judicially considered in England in Whiteman Smith Motor Company Limited v. Chaplin and Another [1934] 2 K.B. 35, Charrington& Co. v. Simpson [1935] A.C. 325 H.L., Clift v. Taylor [1948] 2 All E.R. 113, Ireland v. Taylor [1948] 2 All E.R. 450, Mullins v. Wessex Motors Ltd. [1947] 2 All E.R. 727, C.A. and Rialto CinemasLtd. v.  Wolfe [1955] 1 W.L.R. 693.

When considering these judgements, it is apparent that the courts are more engaged to how such a value is calculated, rather than its exact definition. As such, and according to common law, the following principles can be extracted in regards to commercial value (goodwill) in the context of Article 13 of the Law (Kammitsi L.S, Speech for Rent Control Law, Cyprus Real Estate Association 24.6.2009):

  1. Goodwill is calculated as the difference between the rental value which at the date of the expiration of the lease a new tenant would pay if there had been no previous business carried on there and the rent which a new tenant would pay for premises which have been the home of a previous and similar business for so many years (Whiteman Smith Motor Company Limited v. Chaplin and Another, Scutton J/Nicolaides v Chrysochou  (1988) 1 CLR 687))
  1. Goodwill which can be an addition to the value of the premises in the hands of the landlord is that kind which has become attached to the premises, irrespective of their position, and which would naturally be reflected in a higher rent payable by a person carrying on a similar business ((Whiteman Smith Motor Company Limited v. Chaplin and Another, Scutton J/ Nicolaides v Chrysochou (1988) 1 CLR 687))
  1. The statutory adherent goodwill (αέρας) should be differentiated and has nothing in common with what is called (αέρας) or goodwill which is nowadays paid by incoming tenants to outgoing tenants (Nicolaides v Chrysochou  (1988) 1 CLR 687))
  1. Changes that have occurred in the area or the nature of the tenant's business, which do not result directly from the tenant's business, should be ignored in calculating the increase in the rental value.
  1. The measure of any compensation to the tenant in respect of it is not what he loses but what the landlord gains (Charrington and Co. v. Simpson [1935] A.C. 325)

 

Evidence brought before the court

Further to the considerations above, and in regards to the calculation of the damage to be awarded, it is paramount that the tenant shall present comprehensive evidence before the court through concrete facts and financial or other experts testimony, so the court may be fully convinced as to the existence of the adherent goodwill and the increase of the value of the premises created by the carrying of the business of the tenant.

In the case of Kosmos Ltd v Fylaktou (1992) 1 (B) A.A.Δ the following was stated on the matter:

“The business of shoe sales by the appellants in the disputed shop for many years does not automatically entail the creation of goodwill that can be valued at an amount, albeit approximate, which the Court can assess solely and in the absence of any testimony concerning its value. And even if we assume that the Court could, in its testimony, make a finding as to the value of this commercial advantage and a further finding that the appellants, abandoning the shop, suffered a loss equal to that favor, the claim of the applicants would still be doomed to be dismissed unless the Court could satisfy the respondent owners that they were entitled to all or part of the amount representing that loss. In such a case, the Court would only allow the appellants compensation as compensation for the amount paid to the respondents as a result of the increase in the rental value of the property at issue, which resulted solely from the goodwill created by the appellants and subsequently lost it with the loss of possession store”

The submission of an expert opinion as evidence of the value of such goodwill is significant for the determination of the damages to be awarded to the claimant. The following extract by the judgement in Nicolaides v Phylactou is submitted to this end:

“It would have been useful for the Court, if there had been adduced positive evidence, if possible by an expert, regarding the rent without commercial value and rent with such value. In such a case the difference would have been made apparent. The evidence in respect of the rental value cannot, due to its nature, be other than hypothetical. […] The intelligent guess, however, to which referrence was made in Whiteman Smith Motor Company Limited v. Chaplin and Another(supra), must be made by an expert witness considered by the Court to be honest and competent and accepted as accurate - (Ireland v. Taylor [1948] 2 All E.R. 450, at p. 453)”

The Trial court awarded additional damages for £10.000 in the case of Nicolaides v Phylactou, a decision which was dismissed by the Supreme Court with justification that the burden of proof was not discharged as there was no evidence sufficient to the adherent goodwill, or the measure of damages or the actual increase in the rental value arising from the exercise by the carrying on of the respondents of their trade or business in the said shops. There was also no evidence as to what the landlord will gain by any addition to the rental value due to the carrying on of the business by the tenants.

 

Entitlement to receive new lease

Where the tenant’s eviction was achieved on the basis of the case (h) of Article 11 of the law (i.e. demolition and rebuilding or substantial changes, or for the execution of works in a listed building) Article 14 provides that the tenant may be entitled to receive a new lease from the owner, when the building is resurrected.

In order to be entitled to a new lease, the tenants store or business must be connected to the store for the last five years. It is apparent from the case law that the premises should have been utilised for operating a business rather than for domestic purposes, and the tenant has been practicing this profession for the last five years. The connection between the tenant's occupation and the store should be such that the tenant suffers damage if the tenant transfers and continues the tenants business in another store. Provided that the new building should include a shop.

 In order for the tenant to be entitled to the new rental the tenant must submit a claim to the landlord by serving a written notice to him within three months of the decision or decree being issued. This claim must include the claim for a new lease with a new rental offer. The tenant, after the termination or expiration of the new lease, becomes a new tenant. In the absence of an agreement, the rent shall be determined every two years by the Court, but without any limitation. This paradox of the application of this clause is that the new tenant is still considered as a statutory tenant under the Law despite the fact that the building is completely new. At the same time, there is no limit to the increase in rent, except that it is invalidated by the Court. If the owner refuses to re-rent or fails to notify his wish to do so within two months of service, the tenant may apply to the Court for a new lease.

Reasonable rent is defined in this case as in Article 8 (5), i.e taking into account the market rent and the average prices of rent in the area, without taking into account the scarcity of similar real estate and, furthermore, account is taken of age, character, size, location, condition of the property and the facilities provided (Article 14).

The Court may, if it considers that a new lease is reasonable under all circumstances, order a new rent to be paid for a reasonable rent and for the period and under the conditions judged by the Court to be appropriate unless the parties agree otherwise. In such a case, it is stipulated that the tenant must immediately return the indemnity paid to him under Articles 12 and 13, that is to say, the compensation consisting of rents not exceeding 18 months and the compensation for the loss of commercial value (goodwill).

The notice of a new rental requirement does not need to be served if the tenant requires a new lease to be redeemed in return for the request for possession, provided the previous provisions are applied.

 

Practical Considerations

While the legal analysis above identifies the parameters and elements to be considered as to whether, and the extent, damages are  paid in case of eviction of tenants of rent controlled property, stakeholders, and especially the owners,  must duly consider the practical aspects of the matter before commencing eviction proceedings for reason stipulated under section (h) and (g) of Artilce 11.

As the matters stands in practice, such proceeding brought before Rent Control Courts can take up to 4 years for a final decision to be made and success in achieving the eviction order is not guaranteed as the wording of the Law permits the court discretion to refuse such an order if deemed abusive.  Even when the eviction order is achieved the owner must apply for execution of the order, and namely for recovery of possession, which again in practice can take some time, up to a year or more. In the meantime the tenant, as customary can appeal the decision for eviction and request that the execution of the order is suspended pending the decision of the appeal.  Due to the seriousness of the issue, but also depending on the facts of the case, it is not unlikely that such an order to suspend execution of the eviction order will likely be granted.  The appear process may take another 4 years, in practice, thus prolonging the entire process for up to 8 years in total.

For the above reasons, owners who are time sensitive in securing possession of the subject matter property  and are eager to commence construction in order to fully exploit their property should, on the one end, consider the legal analysis above but, on the other hand,  should also greatly consider their opportunity cost in entering into such lengthy litigation proceedings and ideally seek an out of court settlement with the tenant in respect to, inter alia,  the damages award.

 

Conclusion

A tenant operating a store or a business in premises subject to rent control under the Law who is evicted by the owner for reasons of “own use” or “reconstruction” (as provided under Article 11 (g) and (h) of the Law) may be entitled to damages amounting up to 18 months rent and additional damages for loss of commercial value (goodwill), provided that the tenant can substantially prove that losses of  commercial value (goodwill) suffered is greater that the 18 months rent amount. In order to succeed, commercial value (goodwill), as such term has been interpreted by applicable case law in the context of Article 13 of the Law, must be proven by expert testimony and other evidence. Additionally, the tenant may seek, and force the owner, to re-rent the premises when reconstruction finishes under certain circumstances provided that any damages paid are returned to the owner in full. Any decision to commence eviction proceeding in Rent Control Courts for reasons which permit compensation to the tenant must ideally take into account the practical considerations of such eviction including the fact that the entire process, including appeals, may take up to 8 years in total. Where the opportunity cost is high for the owner, they should ideally seek to resolve the issue of damages in out of court proceedings, if possible, with a proposed settlement amount which takes into account both the legal entitlements of the tenant under the Law, as analysed above, but also the opportunity cost of entering into lengthy eviction proceeding in Rent Control Courts.

 

For more information feel free to contact us. 

 

Authors

Varnavas Playbell, Eleni Miltiadous