Over the last decade, commercial real property investments have
significantly developed in Turkey. 299 shopping centers are
operational in Turkey,1 with a total gross leasable area
of 8.2 million m2 and 82 new shopping centers are
expected to be opened. Istanbul's office market has grown by
128% through 2003 to 2013 and reached 3.4 million m2 and
there is still a gap between supply and demand. These developments
in the real estate sector make Turkey a tempting alternative for
both local and foreign investors/developers.
The developing economy and rapid increase in commercial leases
(e.g. office, store, hotel and private hospital etc. leases) has
led to an increase in real estate prices. The significant increase
in real estate prices and construction costs inevitably compels
investors to borrow loans from financial institutions, to acquire
and develop real properties.
Financial institutions require certain securities while granting
high amounts of loans, in order to ensure repayment of the loan. A
common way to secure repayment is to establish a mortgage on the
property. Under Article 851 of the Turkish Civil Code
("TCC"), it is also possible to
establish a lien in foreign currency, in favor of financial
Commercial real property investors tend to lease newly
constructed units to third parties, instead of selling such units.
For this reason, the rental fee to be received from the prospective
tenants of shops and office leases becomes a key factor to increase
the bankability of investors' contemplated projects. As a
common practice, investors assign their rental fee receivables
directly to the financial institution, in order to secure repayment
of the loan. Accordingly, the tenants pay their rental fees
directly to the relevant financial institution. Given that most of
the loans borrowed from financial institutions are in foreign
currencies (commonly in USD and Euro in Turkey), it becomes
critically important that rental fees are also determined in the
same foreign currency, to eliminate currency conversion related
risks. In addition, rental fees determined in foreign currency
should be subject to a certain increase, in order to align the
rental fees with the inflation rate as well as the continuously
increasing market prices of real property.
In this respect, (i) determination and increase of the rental
fee in a foreign currency and (ii) ensuring the payment of the
rental fee for the whole rental term are key factors for investors
to increase the bankability of their investments. Given that lease
agreements are governed under the Turkish Code of Obligations
("TCO"), the determination and increase
of rental fees in foreign currency as well as penalty provisions in
lease agreements will be subject to the TCO.
Under Article 344 of the TCO, the rental fee may be agreed in a
foreign currency. However, the rental fee determined in foreign
currency cannot be subjected to an increase before five years.
Similarly, under Article 346 of the TCO, the landlord (i.e.
investor) cannot impose any obligations to the tenant other than
the rental fee and common expenses. In this regard, penalty or
acceleration clause provisions under lease agreements in the event
of non-payment of the rental fee are not valid.
Due to the fact that these provisions have heavily impaired
commercial leases and the bankability of investments of developers,
they were criticized during the preparation period of the TCO.
After heavy lobbying efforts in the lead of shopping center
investor/developers, it was determined that the entry into force of
these provisions (along with other important provisions) was
postponed until 1 July 2020 for commercial lease agreements (where
the parties are merchants or public legal entities). By doing so,
for the first time, the lawmaker implicitly acknowledged that there
is a difference between a residential lease and a commercial
Accordingly, since the enactment of Law No. 6570 on Real
Property Leases back in 18 May 1955, the parties to a commercial
lease agreement are enjoying the principle of freedom of contract,
at least on rental fee related provisions. For now, it seems that
the freedom will last until July 2020. However, we are quite
hopeful that, now that the first step is taken, the lawmaker will
consider enacting a specific law for commercial leases, whereby
merchants may be able to fully enjoy the freedom of contract and
bear the responsibility of what they agree on.
Back in Issue 05 of IQ, we examined the decision in Yam Seng PTE Ltd v International Trade Corporation Ltd and looked at whether a general obligation of good faith could be implied into contracts made in accordance with English law.
A recent report1 by Global Construction Perspectives and Oxford Economics forecasts that by 2030 the volume of construction output will grow by 85% to US$15.5 trillion worldwide, with China, the US and India leading the way and accounting for 57% of all global growth.
There are not enough homes to meet demand in much of the UK, and the tragedy is that despite recent fine words, Government policy still seems on course to keep it that way.
Some comments from our readers The articles are extremely timely and highly applicable I often find critical information not available elsewhere As in-house counsel, Mondaqs service is of great value
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