Att. Kemal Guclu Erdogan
Turkish law applicable to contracts of lease is regulated under the Turkish Code of Obligations (“TCO”) which entered into effect on 01.07.2011. Reforms introduced by the TCO have regularly been criticized for being overprotective of tenants and for significantly upsetting the balance between the parties in favour of tenants. However, application of certain provisions thereunder were deferred to July 2020 in respect of lease agreements for offices where tenants are merchants. Thereby, the legislator aimed to create a transition period for office lease agreements and soften introduction of various fundamental changes brought by the TCO. In result of this, application of the deferred provisions remained limited to the leases of movable objects and real estate other than workplaces (domiciles, land etc.) until July 2020.
In short, deferred provisions of the TCO on contracts of lease became applicable to leases of workplaces as of 1 July 2020. Notable changes as we see are as follows:
1) Deposit Payment
Deposits to be paid to landlords when an office place is leased will no longer exceed 3 months’ rent as per article 342 of the TCO. The lessor shall not be able demand the deposit to be paid to him/her in hand. Deposit shall from now on have to be paid in a joint bank account (interest account) to be opened in the names of the lessee and the lessor. Funds deposited into the joint account shall only be payable to the lessor upon agreement of both parties or a court ruling.
If the deposit is procured to the lessor by way of submission of a promissory note, the promissory note shall have to be deposited to a bank. Similarly to the above, the promissory note shall be given to the lessor only upon agreement of both parties or a court ruling to that end.
Provision of deposits by way of submission of a promissory note to the lessor is in our view prone to be problematic. The limitation period applicable to promissory notes in Turkey is three years and cheques do have to be submitted to the relevant bank within 10 days from its value date. The cheques that are not presented to banks within the 10 day presentation period or promissory notes with value dates of 3 years of older shall no longer be able benefit from the fast-track enforcement procedures accredited by law to valuable papers. Considering that even the legal disputes arising from simple contracts of lease tend to take over 1 year to be litigated in Turkey and also considering the appeal procedures no shorter than 1 year, it would be more prudent in our opinion to not put the lessors at the risk of missing limitation or representation periods.
Assuming for a moment that there is no such obligation to deposit promissory notes to the banks, the lessor would then be able to demand from the lessee to renew the promissory note whose value date has arrived if and when the contract of lease is extended. Failing this, the lessor would then be in a position to enforce the promissory note as he/she sees fit as he/she would in that case be in possession of the original.
2) Yearly Increase of Rents
Another reform that was introduced by the TCO was that the yearly increase applicable to rents could no longer surpass the yearly Consumer Price Index (“CPI”). The yearly uplifts applicable to rents were freely determined in lease agreements for offices during the period of deferral. However, they will now be limited with the yearly CPI declared by the Turkish Institute of Statistics as of July 2020.
The ratio of yearly increase of monthly rents for contracts concluded in Turkey are commonly indexed to the average of Consumer Price Index and Producer Price Index (“PPI”). Historically, the CPI has been higher than the PPI in Turkey in years of economic stability and vice-versa in years of economic turmoil.
Contractual increases to be applicable to the yearly rents of workplaces shall be limited to the CPI where the PPI is higher even if the contract of lease foresees that the average of CPI and PPI shall be taken into account. However, the lessee shall in any case be able to benefit from potential low PPI ratios in that given scenario. In other words, the lessor shall not be able to benefit from indexing the rate of uplift to the average of PPI and CPI but instead shall be harmed for it where PPI is lower. It follows from this that there would be no logical reason from now on for indexing the rate of uplift applicable to yearly rents to the average of CPI and PPI as of July 2020.
Lastly, it should be noted that rents to be paid in foreign currencies are not bound by the rule cited above. The Turkish Law rule applicable to rents in currencies other than Turkish Lira is that no increase can be made to the agreed sum before the expiry of a 5 year lease period. However, there is no limit applicable to an increase to be made upon expiry of the said 5 year period. It should nevertheless be kept in mind here that Turkish legal or real persons are not in principle allowed to conduct deals in foreign currencies between themselves by the order of a renowned presidential decree.
3) Acceleration Clause and Punitive Damages
Acceleration clauses and punitive damages regularly come into play in lease contracts concluded in Turkey and are triggered by lessees’ default in making timely payment. Monthly rents for the remainder of contract accordingly become payable upon default by lessees. Article 346 of the TCO deems such clauses invalid. However, this provision was deferred in respect of leasing of office places. Acceleration clauses and punitive damages that are triggered by the default of lessees have therefore been construed as valid throughout the deferral period for office lease agreements. However, such clauses will be deemed invalid when used in lease agreements of offices as of July 2020 due to expiry of the said deferral period.
4) Assignment of Contract
It is a general rule under Turkish Law that leased properties can not be subleased to third parties in the wake of a consent given by the owner. Article 323 brought an exception to this long-standing rule of Turkish Law by stipulating that the lessor would not be entitled to holding back his/her consent in the absence of a legitimate reason to do so.
Although this criteria is apparently very vague and no elaboration was brought by law as to what should be understood from this “legitimate reason”, it nonetheless deprives lessors from their former right of absolute veto. Lessors now lost their right of absolute veto regarding sublease of the property to third parties also in respect of lease contracts of office places.
Additionally, in case of assignment and transfer of a lease agreement by the tenant to a third party, the lessee remains responsible by law against the landlord for the debts of the third party for a 2 year period. This rule is now applicable to the lease of workplaces since 01.07.2020.
5) Associated Contracts
As a matter of Turkish Law, conclusion or continuation of a contract of lease can not be tied up to an obligation to be performed by the lessee that is not directly related to the lease and/or use of the property. In other words, the lessor is not entitled to demand performance of a deed by the lessee as a condition of conclusion of the lease agreement which has no relation to the lease of the property. For instance, in the event that a property is leased to a tenant in return of an extra undertaking by the lessee to the effect that it shall also purchase the lessor’s car, the lease agreement shall remain intact but the contract of sale shall be deemed invalid.
Application of the rule explained above was among those that have been deferred. Associated obligations attributed to lessees that have no direct connections with lease of the property shall from now on be construed as invalid not only for lease contracts of other types but also for lease of office spaces.
Conclusion
As it can be seen above, material changes entered into effect as of July 2020 with respect to lease of office places. Although some of the rules cited above are compulsory in nature and therefore unalterable, some are not compulsory and therefore can be altered/limited by contracts. You may reach our office by e-mail (kgerdogan@aksoyerdogan.com) or phone (+90 212 909 07 07) for further information on this matter.
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Aksoy Erdoğan Law Firm, Attorney Oguzhan Aksoy, Attorney Kemal Guclu Erdogan, Rent, Lease, Tenant, Lessee, Lessor, Property Law, Real Estate Law, Commercial Law, Law of Contracts, Enforcement, Debt Collection