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What characterises a business tenancy agreement?

What characterises a business tenancy agreement?

Svea Court of Appeal's judgment of 16 December 2014, Case no. T 11761-13

By Claude D Zacharias

Translated by James Hurst (Authorized Translator), ELT - English Law Translations

1. Background

1.1 'The Facility Company' pursues healthcare activities at premises in Stockholm. The healthcare is practised by doctors through their own companies ('the Medical Companies'). These Medical Companies have entered into verbal agreements with the Facility Company concerning the operation of their medical practices at the premises. The Medical Companies pay a portion of their turnover to the Facility Company. In this case it was claimed by the Medical Companies that the agreements meant that the rules laid down in Chapter 12 of the Land Code applied, which was contested by the Facility Company. The dispute arose after the Facility Company gave notice terminating the Medical Companies' agreements. The investigation into the case showed that the Facility Company, in addition to providing consulting rooms, treatment rooms, operating theatre, waiting room, dining room, meeting areas, changing room and sanitary facilities, also offered a telephone answering service, appointment booking service, patient counselling, case records and referrals processing, secretarial services, a joint medical records system, archiving, medical equipment, medical supplies, computer and telephony services and also, when necessary, nursing assistance. The Facility Company also invoiced some of patients of the Medical Companies. The patients paid for their doctor's appointments at the Facility Company's cash desk and the fees were deducted from the monthly payments that the Medical Companies made to the Facility Company.

1.2 The Facility Company also dealt with the invoicing of patients who failed to attend the doctor's appointments booked. In addition, the Facility Company was responsible for some other mandatory components of the activities, such as patient safety reports and appointment statistics. The work schedules for the doctors was ultimately determined by the Facility Company, and joint planning and staff meetings were held. The clinic was marketed as one unit and the doctors practising at the clinic were marketed as the Facility Company's doctors. Rooms were not permanently allocated in such a way that a particular room always belonged to a particular doctor, but were regarded as shared.

2. The adjudication

2.1 The courts concluded that the absolutely crucial issue at the time the agreement was entered into between parties was what remuneration the Medical Companies should pay to the Facility Company whose service in return – implicitly – was to allow the Medical Companies to pursue medical activities at the property in question with access to the services described in the introduction.

2.2 The legal implication of the rental agreement was a key issue for the adjudication of the courts. The District Court – whose judgment was upheld by the Court of Appeal – expressed the following opinion:

Turning to the issue of how the agreements entered into should be qualified from the legal perspective, the District Court initially concluded that one characteristic feature of a tenancy agreement is that it relates to a fixed area that the tenant controls to the exclusion of others (see, among others, Holmqvist/Thomsson's comments on the Tenancy Act, 9th edition, p. 5). The issue must involve 'full rights of use' in order for the Tenancy Act to apply. This means that authorisation to only make use of a property in certain respects does not constitute a tenancy right (Skorup/Underskog, Hyreslagarna [The Tenancy Acts], 8th edition, p. 12 and Westerlind's comments on Chapter 7 of the Land Code, p. 18). In the legal case NJA[1] 2001 p. 10, the Supreme Court pronounced that the fact that the location of the premises in the case was not clearly specified was a strong indication that the agreement should not be considered to constitute a tenancy agreement. A similar assessment was made by Svea Court of Appeal in a judgment of 29 October 1999 in Case no. T 951-98. That case related to the use of hairdressers' premises for business purposes together with the head tenant in return for turnover-based remuneration. … 389). … The amount of the remuneration that [the Medical Companies] paid to [the Facility Company] was also such that it is reasonable to conclude that it can only to a small extent be deemed to have referred to the access to the consulting rooms. The remuneration has also been paid in the form of a percentage proportion of the companies' revenues and was virtually in the nature of a profit share between the companies. It was also established through the investigation that the activities at [the Facility Company's] premises were pursued under the brand of [the Facility Company] and as a cohesive clinic. [The Medical Companies] did not conduct any marketing of their own … and it can consequently be claimed that the name signs found on the doors of the consulting rooms merely stated the name of each doctor. The activities that [the Medical Companies] pursued at the premises were also linked to the activities pursued by [the Facility Company] through the similar design of the premises and integrated positioning in the clinic. Neither has anything other been shown than that the [the Medical Companies] participated with responsibility for the activities at the clinic through their work within each specialist area, i.e. orthopaedics and plastic surgery. Nothing has been established in the case to indicate that the Medical Companies were not involved in the operation of the clinic and its common purpose. The activities pursued by [the Medical Companies] have thus not been independent in relation to the activities pursued by the grantor [the Facility Company]. A reasonable point of departure is that such cases should fall outside the ambit of Chapter 12 of the Land Code.

2.3 The District Court also referred to NJA 1971, p. 129. In that ruling the Supreme Court also considered that even if an agreement includes components involving a grant of business premises, such agreements shall under certain conditions still be deemed to be something other than a tenancy agreement. The situations concerned were those where the grant of business premises was only included as a subordinate component of the agreement or the circumstances deviated to such an extent from what happens in the case of a tenancy that the agreement could not reasonably have fallen within the scope of the tenancy legislation. With reference to that ruling, it was concluded that the activities pursued by the Medical Companies essentially involved intellectual services that did not require large business premises (cf. NJA 1971 p. 129 and NJA 1978, p. 389 which involved the serving of food).

3. Comments

3.1 In addition to the virtually obvious conclusion that a verbal agreement is generally an abomination that all too often results in costly disputes, it is interesting to note that for a tenancy agreement to exist at all it must involve a 'full right of use'. By this it is meant a fixed area that the tenant controls exclusively to the exclusion of others. To generally be allowed to make use of various parts of a property without a more detailed location of the location or exclusivity – as in the above ruling – should not constitute a ‘tenancy agreement’ within the meaning of the Act.

3.2 However, the view of the courts in respect of remuneration is slightly unclear as turnover-based rent by no means an uncommon part of the conditions, e.g. for premises at business and commercial centre properties. The courts possibly meant that a certain minimum rent should be payable to avoid the risk of the situation being such that the grant of business premises is considered to be a subordinate component.

3.3 Thus it is important to have a clear contract when entering into an agreement to pursue business activities at someone else's property. Such a contract should state that it concerns a business tenancy agreement. Furthermore, the agreement should specify what is being leased; business premises with a particular location specified, and the right of use should be exclusive.

3.4 A tenancy agreement for business premises is almost always worded using the standard form agreement drawn up by the Swedish Property Federation. However, on several occasions we have had cause at our law offices to stipulate different preconditions for the tenancy relationship in a separate appendix to the base agreement. This may involve, for instance, limiting the opportunities for tenants to assign their operations and the premises to a third party or to environmental issues. Business operators have every reason to be discerning when examining their tenancy agreements – whether actual or asserted – before signing them.

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[1] Translator's note: Nytt Juridiskt Arkiv - a renowned Swedish law report series.

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