A New Era in Lease Agreements
Introduction
Turkish Code of Obligations No. 6098 (“TCO”), which introduced comprehensive provisions with regard to the Turkish obligations law, entered into force on July 1, 2012. Within the scope of Provisional Article 2 added to Law No. 6217 on the Amendment of Certain Laws for the Acceleration of Judicial Services that came into effect immediately after the TCO, it was regulated that certain provisions related to workplace rents, in which the lessee is a person deemed to be a merchant under Turkish Commercial Code No. 6102 (“TCC”) or private and public entities, shall not apply for a period of 8 years.
Since the 8-year suspension period expires as of July 1, 2020, nine postponed Articles shall apply as of this date. In this Newsletter, the provisions of the TCO, which came into force as of July 1, 2020, are reviewed, and their effects on the lease agreements are addressed.
General Provisions
The provisions of the TCO regarding the lease agreement are included under the fourth part, and this part is comprised of three sections. The “first section” is titled “General Provisions”, and since the regulations in this section are of a general nature, they are applicable to any type of lease agreement under the TCO[1]. However, if there is a special provision in the provisions under the second or third sections regarding the concrete case, the general provisions will not be considered. The legal regulations set forth under the title of “General Provisions”, which shall apply as of July, 2020, are as follows:
Transfer of Lease Relationship (Article 323 of the TCO)
Within the scope of Article 323 of the TCO, the transfer of the lease relationship by the lessee is regulated. Therefore, a transfer relationship in which the lessor has changed will not be addressed in this article. According to the legal regulation, the lessee may not, unless she/he obtains the written consent of the lessor, transfer the lease relationship to another party. However, the lessor cannot refrain from giving such consent unless there is a justifiable reason in a workplace leasing case.
Joint and several liability is also regulated in the Article in the case of a transfer of lease relationship. In this context, the lessee who transfers shall be jointly and severally responsible with the transferee until the expiry of the lease agreement, for a maximum period of two years.
Return of the Leased Property Prior To the Expiry of the Contract (Article 325 of the TCO)
As a rule, the lessee is obliged to return the leased area in the same condition at the end of the lease agreement. To the contrary, however, in the case where the lessee hands back the leasehold in breach of the duration of the agreement or termination period, the lessee’s obligations shall survive for a reasonable period within which the leasehold may be leased with similar terms and conditions. As well, in the case where the lessee finds a new lessee whom the lessor may be expected to accept, and wherein he/she has means to pay the rental amount and is ready to take over the tenancy before such period expires, the obligations of the lessee originating from the lease agreement cease to exist. The lessor is obliged to deduct from the rental the costs from which the lessor is made exempt from incurring, as well as the benefits the lessor gained by using the leasehold in other manners, or those which the lessor intentionally refrained from gaining.
Prior to the enforcement of Article 325 of the TCO, there were no legal regulations in this direction under Law of Obligations No. 818 ("Law No. 818") and Law No. 6570 on Real Estate Rents ("Law No. 6570"). The Supreme Court decisions, which have a similar nature with Article 325 of the TCO, guide the practice[2]. In the relevant Supreme Court decisions, it is decided that the lessee is responsible for the rental fee for a reasonable period of time from the turn-key date due to early release. With the enactment of Article 325 of the TCO, a legal regulation that is similar to the accepted view of the Court of Cassation shall apply.
Important Reasons for Extraordinary Termination (Article 331 of the TCO)
Pursuant to Article 331 of the TCO, each of the parties may, at any time, cancel the agreement by following the legal termination notification periods in the event of the existence of important causes that make the continuation of the tenancy unbearable for both parties.
There was a similar arrangement regarding this matter within the scope of Law No. 818. However, the second paragraph concerning the compensation obligation of the party who breaks the contract due to important reasons is not included within the context of Article 331 of the TCO. Instead, it is stated that the judge shall decide on the monetary consequences of the extraordinary termination notice by taking into account the situation and circumstances. In this case, it can be evaluated that the party giving notice of the termination is not obliged to pay full compensation in all cases as of the effective date.
Provisions on Leases of Residential Premises and Covered Workplaces
The concepts of “residence” or “workplace with a roof” are not defined in Article 339 of the TCO. In order to determine the content of these concepts, doctrine, practice and case law of the Supreme Court are taken into consideration. Special provisions, regulated in Articles 339 to 356, are applicable for residential and covered workplaces. However, roof-free workplace lease contracts are subject to general provisions. In addition, the provisions regarding rents of residential and covered workplace are not applicable to an immovable property that is, by its very nature, specifically used for a temporary period, and leased for six months or less. The legal regulations with respect to residential premises and covered workplaces, which shall apply as of July, 2020, are as follows:
Connected Contract (Article 340 of the TCO)
Article 340 of the TCO, one of the other legal arrangements that has no equivalent in the former legislation, concerns the prohibition of linked transactions. According to the provision, with respect to residence and covered workplace leases, if the conclusion or continuance of a contract, without lessee’s benefit, is tied up to the lessee’s obligation that is not directly related to use of a leasehold, the contract is invalid. The invalidity mentioned here is not related to the lease agreement, but only relates to the linked contract. The aim of this legal arrangement is to prevent the lessee from undertaking any obligations other than rent, by abusing the need to create a lease[3].
Assurance by the Lessee (Article 342 of the TCO)
Assurance, which is called “deposit” in practice, is regulated under Article 342 of the TCO. There was no such provision within the framework of the abrogated TCO. However, the provisions regarding the deposit that were added to the lease agreements were considered to be valid in the precedents of the Supreme Court[4].
Within the scope of the article that entered into force in July, 2020, if the lessee is obliged to provide assurance through the contract, the assurance is limited to a maximum three-month lease cost. If cash or negotiable papers are decided to be provided as security, the lessee shall pay the money into a forward savings account so as not to be withdrawn without approval of the lessor, or deposit negotiable papers in the bank. The bank may release such assurance only through the consent of both parties, upon finalization of the execution proceedings or decision of the court. Moreover, if the lessor did not notify the bank in writing within three months following the end of the lease agreement period that she/he has gone to court related to the lease contract, or has initiated execution or bankruptcy proceedings, the bank is obliged to release the security upon the request of the lessee.
Amendment of the Rental Fee (Article 343 of the TCO)
Pursuant to the Article in question, in lease contracts, making changes against the lessee is void as of July, 2020. The only exception to this rule is the determination of the lease price. On the other hand, the enforcement of the mentioned provision shall not create any change in practice, since a similar regulation is included in Article 9 of Law No. 6570.
Determination of the Rental Fee (Article 344 of the TCO)
This provision, which determines the principles regarding the determination of the rental value, is a new regulation not covered under Law No. 818 nor Law No. 6570. However, some amendments have been made through Articles 56 and 59 of the Law on the Amendment of Tax Laws and Certain Laws and Statutory Decrees No. 7161 (“Law No. 7161”), after the enforcement of Law No.6217. With this amendment made in 2019, the expression “increase in producer price index” in the first and second paragraphs of Article 344 was amended to “change in consumer price index (“CPI”) regarding the twelve month average”. Additionally, it was concluded within the provision added to Provisional Article 2 of Law No. 6217 that the said provision stating that the change in CPI regarding the twelve month average will be taken as a basis in the lease contracts, shall be applied to the lease contracts that the tenant is a person deemed to be a merchant in the TCC or private and public entities, as well as to the renewal of other lease contracts. It can be evaluated that the CPI clause in Article 344 of the TCO shall be applied in terms of the lease agreements related to the workplace rents, where the lessee is deemed to be a merchant or private and public legal entity without waiting for the date of July 1, 2020, when considering the justification[5] of the Article. Therefore, it may be said that the relevant Article is in effect as of January 1, 2019.
Pursuant to the third paragraph of the Article, without considering whether an agreement by the parties exists, the applicable lease price for lease contracts that are longer than five years, or are renewed after five years, shall be determined by the judge referring to the rate of increase in the producer price index, the condition of the leasehold, or comparable lease prices. In the lease year following each five years, the lease price determined by this procedure may be changed in accordance with the provisions in the previous paragraphs.
In the last paragraph of the Article, the principles to be taken into consideration in the determination of rental fees are included if the lease price is in foreign currency. Since there was no provision on this issue within the framework of the abrogated TCO, if the rent was in foreign currency, the parties could freely determine the increase rates within the framework of the freedom of contract principle. However, with the enforcement of this provision, the lease price cannot be changed unless five years have passed, provided that the provisions of Law on the Protection of the Value of the Turkish Currency No. 1567 are reserved[6].
Prohibition of Regulation against the Lessee (Article 346 of the TCO)
In accordance with Article 346 of the TCO, the lessee is not obliged to pay obligations other than the lease and subsidiary costs. In the continuation of the Article, it is regulated that the agreements that stipulate any payment of penalty in the event of delay in performance of the lease price, or that the upcoming lease costs shall be due are invalid. It can be said that the principles regarding this change, which will have an effect especially in terms of penal clause, will be understood by the decisions of the court of last resort.
Limitation of the Grounds for Action for Termination of the Contract through Litigation (Article 354 of the TCO)
Pursuant to the mentioned Article, provisions on the termination of the lease agreement by bringing a lawsuit cannot be changed against the lessee. In other words, cases where the lessor can request the eviction of the lessee through the lawsuit are limited to those specified in the TCO. Since a regulation of a similar nature is included in Article 8 of Law No. 6570, the end of the postponement shall not cause a serious change in practice.
Conclusion
With the end of the 8-year procrastination period, the legal regulations that have been explained above as a summary, especially the provisions in favor of the lessee, become effective. The effect of some of the new provisions, which have no equivalent in the abrogated legislation, and stipulate serious limitations to the lease agreements, will be seen over time; the procedures and principles regarding the implementation will be formed by the decisions of the high court.
[1] Yavuz, Cevdet; Law of Obligations Courses (Special Provisions), İstanbul, 2012, 10th Edition, p. 179.
[2] 3th Chamber of the Court of Cassation No. E. 2017/4599, K. 2018/12416, 05.12.2018; 6th Chamber of the Court of Cassation No. E. 2015/10215, K. 2016/5589, 03.10.2016.
[3] Yavuz, p.265.
[4] 3th Chamber of the Court of Cassation No. E. 2007/3101, K. 2007/3517, 13.03.2007; 3th Chamber of the Court of Cassation, E. 2019/2519, K. 2019/10687, 26.12.2019.
[5] For the justification of Law No. 7161, please see https://www2.tbmm.gov.tr/d27/2/2-1369.pdf (Access date: 27.06.2020)
[6] Except for the exceptions specified in the legislation, the parties cannot determine the rental value as foreign currency in the movable and immovable leases pursuant to Resolution No. 32 on Protection of the Value of Turkish Currency.
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