Termination of lease agreement: what about the phosphate rights?

Upon termination of a lease agreement, the phosphate rights generally belong to the lessee. In principle, the lessee is not required to transfer them to the lessor and may dispose of them freely. There is one important exception to this general rule: if the lessor has made land or buildings available for an extended period that were of predominant importance to the dairy farm, the lessee may nevertheless be obliged to transfer the rights under strict, cumulative conditions, upon payment of 50% of the market value. The Supreme Court confirmed this framework on December 15, 2023. Those wishing to avoid disputes should establish the phosphate rights in the lease agreement in advance.

What are phosphate rights?

Phosphate rights are production rights that have applied to dairy farmers in the Netherlands since 2018. The phosphate rights system limits the production of phosphate (via the manure of dairy cattle). Each farm was allocated a quantity of rights, expressed in kilograms of phosphate. A dairy farmer may not produce more phosphate than the number of rights he holds.

Important for practical purposes: phosphate rights can be freely disposed of. They are tradable and can be sold or transferred. As a result, they represent significant economic value. The market price per kilogram of phosphate fluctuates and depends on supply and demand, but it quickly involves large sums. It is precisely this value that raises the question at the end of a lease: to whom do the phosphate rights belong?

To whom do the phosphate rights belong at the end of the lease?

The rights were granted at the time to the entrepreneur who kept the dairy cattle: the tenant. The Fertilizers Act does not oblige the tenant to transfer those rights to the lessor at the end of the lease. Nor is there any established custom (customary law) that compels a transfer; the system is too new for that.

Because many older lease agreements do not regulate phosphate rights, the court must fall back on the requirements of reasonableness and fairness (Article 6:248 paragraph 1 of the Dutch Civil Code). The Lease Chamber and later the Supreme Court have derived an additional rule from this: if the parties have not agreed otherwise, the phosphate rights in principle remain with the lessee, unless a number of cumulative conditions are met.

The exception: when can the lessor claim?

On December 15, 2023, the Supreme Court confirmed an earlier line of reasoning in which a lessor is, subject to conditions, entitled to (a portion of) the phosphate rights after all. The underlying rationale: if the lessor has made the means of production available for a long period that helped make the dairy farm possible, it is reasonable that he shares in the value of the rights accrued thereby.

According to this case law, briefly summarized, the following conditions, among others, apply concurrently:

• On the reference date (July 2, 2015), there existed a regular lease agreement, or a liberalized lease agreement that lasts twelve years or longer at the time of entering into.
• This concerns farm lease, lease of a substantial area of ​​land, or a building that is specifically equipped and necessary for dairy farming and that has been made available by the lessor.
• The land and buildings made available were at the service of the tenant for the livestock kept.
• The lessor pays the lessee 50% of the market value of the phosphate rights to be transferred, calculated as on the date the lease ends.

If these conditions are met, the lessee may be required to transfer the phosphate rights attributable to the leased property against that compensation of 50%. If one of the conditions is not met, the general rule remains in effect and the lessee retains the rights. Moreover, the court may deviate from this supplementary rule in the exceptional circumstances of the case.

Please note: this is a summary of the main points. The precise application depends heavily on the type of lease, the reference date, the duration, and the actual situation at the business. Whether a building or a specific number of hectares of land falls within the exception depends on the specific circumstances. Therefore, always have your own situation legally assessed before drawing any conclusions.

How is the amount to be transferred calculated?

Not all phosphate rights of the company fall under the potential transfer, but only the portion attributable to the leased property. In case law, this attribution is based on a distribution whereby the rights are attributed partly to the buildings and partly to the land available to the lessee on the reference date (July 2, 2015) for keeping livestock. Subsequently, the proportion attributable to the leased property is determined proportionally.

For the valuation, the market value at the time the lease ends applies. Because the price per kilogram of phosphate can fluctuate significantly, it is advisable to have a current, independent valuation prepared around the time of termination. This will prevent disputes regarding the amount of the 50% compensation.

What does this mean for tenant and landlord?

For the lessee , the following applies: in principle, you are in a strong position. Unless otherwise agreed and outside the aforementioned exception, the phosphate rights remain yours and you are free to sell or transfer them. However, you would be well advised to record your position in writing at the start and end of the lease to prevent any disputes regarding this matter later.

For the lessor , the following applies: you are only entitled to (a part of) the value under strict, cumulative conditions, and even then only upon payment of 50% of the market value. If you want certainty regarding the rights or a share in the value, arrange this explicitly in the lease agreement instead of relying on the additional rule from case law.

Because phosphate rights represent substantial value, interests often diverge widely upon the termination of a lease. An unclear or tacit agreement is therefore a source of conflict and sometimes lengthy proceedings. Those who cannot reach an agreement together can submit the case to the Lease Chamber; even then, having a well-documented position helps. Read more about your options regarding legal assistance and disputes.

Avoid disputes: arrange for phosphate rights in the lease agreement

The most important lesson from this case law is practical in nature: do not let it come to legal proceedings, but make clear agreements in advance. In the lease agreement, for example, you can stipulate that:

• the phosphate rights permanently belong to the lessee and remain with him after the expiration of the lease;
• the lessor has the right to acquire the rights at the end of the lease at a pre-agreed price or valuation method;
• is clear how the market value is determined at the time of transfer and by whom.

With clear clauses, both lessee and lessor know where they stand, and you prevent the judge from having to determine afterwards, based on reasonableness and fairness, what the parties should have agreed upon. A carefully drafted agreement is therefore not a formality here, but a way to avoid expensive proceedings. You can read more about the importance of good agreements in our contract law section.

A good lease agreement regulates not only the land and the price, but also the phosphate rights and what happens to them when the lease ends.

Our legal experts draft your lease agreement or assess an existing contract for risks. This prevents unnecessary disputes and ensures that you, as a lessee or lessor, have clarity in advance, including regarding phosphate rights. Would you like to have a contract reviewed or drafted? View our assistance with contracts and agreements.

Frequently asked questions about phosphate rights and lease

Do the phosphate rights belong to the lessee or the lessor?

In principle, belonging to the lessee. The rights were granted to the entrepreneur who kept the dairy cattle. Only under strict, cumulative conditions can the lessor claim transfer, and then against payment of 50% of the market value to the lessee.

Does the lessee have to transfer the phosphate rights at the end of the lease?

Not automatically. Unless otherwise agreed, the lessee is in principle not required to transfer the rights. The situation is only different if the conditions for exception arising from the case law of the Supreme Court are met.

What has the Supreme Court ruled regarding phosphate rights and leases?

On December 15, 2023, the Supreme Court confirmed that phosphate rights in principle remain with the lessee, but that the lessor is entitled to transfer them subject to conditions against compensation of 50% of the market value. Whether those conditions apply in a specific case depends heavily on the type and duration of the lease and the factual circumstances.

Which reference date applies to phosphate rights for leases?

The assessment is based on the reference date of July 2, 2015. On that date, among other things, a qualifying lease agreement must have existed, and the land and buildings must have been at the lessee's disposal for the keeping of livestock. That date is therefore decisive for determining whether the exception applies at all.

How do I avoid a conflict regarding phosphate rights?

By including clear agreements in the lease agreement in advance regarding who holds the rights, whether and at what price they are transferred, and how the value is determined. Have the agreement drafted or reviewed by a lawyer.

What is the value of phosphate rights?

Phosphate rights are traded per kilogram of phosphate and represent significant value. The market price fluctuates due to supply and demand, so have a current valuation prepared before selling or transferring rights.

Have a lease agreement drafted or reviewed?

Are you unsure about the phosphate rights in your lease, or do you want to avoid a conflict at the end of the agreement? Our legal experts help both tenants and landlords with clear agreements and risk assessment.

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