Turkey: Financial Leasing Agreements Concluded By Sale And Lease Back Method

Financial leasing agreements gained legal force under Turkish Law with the Financial Leasing Law No. 3226 dated 28 June 1985 ("Annulled Law") and Statutory Decree No. 90 dated 30 September 1983 on Loan Transaction.  Said legislation had remained in force for almost 30 years; however, considering the practical drawbacks and the necessities in business life, it has been repealed with the Financial Leasing, Factoring and Financing Companies Law No. 6361 dated 13 December 2012 (Law No. 6361).

In this article, financial leasing agreements concluded by sale and lease back method (sale and lease back agreements), a new notion brought by the Law No. 6361, is analyzed.

What is Sale and Lease Back Method?

Sale and lease back is the financial leasing method which enables businesses to sell an asset, property rights of which is owned by said business, to a financing company and continue to use such asset by leasing it back from the same financing company by means of a financial leasing agreement. Immovable properties (real estate) and movable goods with second hand value can be the subject matter of sale and lease back transactions. In this context; immovable assets such as office buildings, stores, hotels, factory buildings, depots and movable assets such as machinery, equipment, production lines, air, sea and land vehicles and their equipment may be the subject matter of sale and lease back transactions.

Sale and Lease Back Agreements under the Context of Annulled Law

Article 4 of the Annulled Law defines the financial leasing agreement as; "the agreement giving lessee the possession of the good, which is requested and selected by the lessee him/herself and purchased from a third party by the lessor or procured by any other legal means by the lessor, entitling the lessee with full benefits; on the condition that such agreement shall not be terminated for a certain period of time in return of a rental fee." In some of their decisions, the Court of Appeals (Yargıtay) and the Council of State (Danıştay), ruled that sale and lease back transactions are not within the scope of financial leasing agreements1. In this context, Court of Appeals and the Council of State concluded that financial leasing agreements are based on the involvement of three parties, and therefore it is mandatory for the lessor to procure the subject matter of the financial leasing agreement from third parties; from this point of view, above said Courts reasoned, since only two parties involve in sale and lease back transactions, such transactions are not in the scope of Annulled Law.

Sale and Lease Back Agreements under the Context of Law No. 6361

Article 18 of the Law No. 6361 defines the financial leasing agreements as; "the agreement giving lessee the possession of the good, which is requested and selected by lessee him/herself and shall be purchased from third parties or from lessee him/herself by lessor or procured through any other legal means by lessor, entitling lessee full benefit during the term of lease in return for lease payment to lessor."

The Law No. 6361 sets forth without any further hesitation that sale and lease back transactions are within the scope of financial leasing agreements by clearly stating that the subject matter of the financial leasing agreement can be acquired directly from the lessee.

The fundamental difference of a financial leasing agreement concluded by sale and lease back method compared to a regular financial leasing agreement is the party from whom the subject matter of the financial leasing is acquired. In sale and lease back transactions, the financial leasing company purchases the subject matter of the agreement directly from the lessee, and immediately leases it back to the lessee2. Thus, in a financial leasing agreement concluded by sale and lease back method; promise for sale and promise for lease, and sale, and finally financial leasing are all intertwined together. More precisely, in the first step, prospective lessee promises to sell the subject matter of the leasing agreement and lease it back from the lessor; in the same way, the lessor promises to purchase the subject matter of the leasing agreement and then lease it back to the lessee. In the second step, the subject matter of the financial leasing agreement is sold to lessor by lessee, and in return of the transfer of the subject matter of the financial leasing to the lessor, lessee is provided with financing. In the third step, the subject matter of the financial leasing agreement, property right of which is now transferred to the financing company, is leased back to the lessee so that lessee can continue to use it for the price and term specified under the financial leasing agreement. The last step is to retransfer the property right of the subject matter of the lease agreement from lessor to lessee at the end agreement's term.

Why Sale and Lease Back?

  • Sale and lease back agreements enable those companies to take place in public procurements which otherwise could not since they are unable to match the ratios specified under the public procurement legislation because of the un-updated value of their immovable or could not obtain the letter of reference from the banks regarding their financial stability.
  • This method enables companies to raise additional financing in their working capital. For example, if certain immovable properties under company's operating asset are not used directly for production of goods or services in company's commercial activity, but they were earlier purchased for investment or operational purposes and became idle over time, such assets could be encashed without hindering operations of the company.
  • Financial leasing agreements concluded by sale and lease back method allow short term debts of companies to be restructured and thus such short-term debts can be converted into manageable long or medium term debts.

Advantages of the Sale and Lease Back Method in Terms of Taxation

  • Income obtained from the sale of immovable property subject to sale and lease back agreement is completely exempted from corporate income tax provided that the property right of such immovable is repurchased at the end of lease term.
  • Provided that the property rights of the subject immovable property of the leasing agreement is retransferred to the lessee at the end of the lease term; sale, lease and transfer transactions are all exempted from VAT.
  • Financial leasing agreements concluded by sale and lease back method and any related agreements therein (such as transfer, amendment and security agreements) are exempted from the stamp tax.
  • With regard to the sale of immovable property subject to sale and lease back agreement, provided that property rights of the subject immovable of the leasing agreement is repurchased at the end of lease term, only 0 4,55 title deed fee is paid by transferor (lessee) for the sale of said immovable to the lessor. No title deed fee is accrued for the sale of the immovable back to the lessee at the end of lease term.

The Form Requirement for Sale and Lease Back Agreements

Article 8 of the Annulled Law stated that financial leasing agreements shall be drafted by and concluded before notary public. However, Article 22 of the Law No. 6361 states that financial leasing agreements shall be concluded in written form. In this regard, Law No. 6361 does not require an additional requirement with regard to financial leasing agreements to be concluded by sale and lease back method.

Significant Issues Regarding Sale and Lease Back Agreements

In the pre-contractual period, sufficient due diligence regarding the financial and legal conditions of the company, which is to sell and lease back the subject matter of the leasing agreement, should be carried out by the financial leasing company. Among other financial risks, there exists a risk to become party to a lawsuit filed by relevant third parties for annulment of title deed, claiming that subject immovable of the financial leasing agreement is sold and transferred for the purposes of hiding assets.

On the other hand, subject immovable of the financial leasing agreement is valued and priced by "Real Estate Appraisal Companies".  These companies carry out their activities under the capital markets legislation and determine, independently and objectively, the estimated value of real estate, real-estate project or rights and benefits attributed to real estate. The companies carry out these activities through appraisal specialists. These specialists produce their appraisal reports in compliance with internationally recognized appraisal standards upon analyzing the conditions of the market and business environment independently and objectively. Across Turkey, there are approximately 250 appraisal companies.

Different real estate appraisal companies can find different results regarding the value of the appraised real estate. Among other variables, this is mainly because of the appraisal method used by the real estate appraisal company to determine the value of the real estate.  Furthermore, potential clients request financial leasing companies to over value their real estate with the intentions of gaining additional benefits. Given the conditions of competition in the market, considering to meet such requests may result in disadvantage of the financial leasing companies for various reasons. In order to prevent this, it is in the best interest of financial leasing companies to act collectively. Since said appraisal reports are vitally important while determining the amount of financing to be provided by the financial leasing company, any inconsistency in such reports poses a risk both for the appraisal company and financial leasing company. Article 10 of the Communiqué on Principles Regarding Appraisal Companies and their Listings by the Board states that "Real estate appraisal companies and appraisal expert who signs the appraisal report are jointly responsible for the losses and the damages to their customers and the third parties making use of that report."

Financial leasing agreements concluded by sale and lease back method involves more complex transactions compared to a traditional one. When the subject matter of the leasing agreement is a real-estate, legal obligations and principles of real-estate law should be taken into account. In practice, financial leasing agreements are drafted by the financial leasing companies as standard agreements and provisions of such standard agreements apply to the sale and lease back transactions as well.

However, financial leasing agreements concluded by sale and lease back method involve a few intertwined legal transactions by nature when compared to a traditional financial leasing agreement; accordingly, each of these transactions should be established separately and legal obligations of which should be satisfied separately. Indeed, this principle is adopted in certain jurisdictions of the United States. In this respect, sale and lease back agreement is concluded in the first place. Terms and conditions of the sale and lease of the subject real-estate are specified under "sale agreement" and "financial leasing agreement" attached to the said "sale and lease back agreement" to be executed simultaneously.

It should be provided in the financial leasing agreement that the prospective lessee pay punitive damages if such lessee does not sell the subject real estate of the leasing agreement after concluding the sale and lease back agreement.

Standardized Terms and Conditions under Sale and Lease Back Agreements

Another issue to be analyzed herein is the applicability of standard terms and conditions to the financial leasing agreements concluded by sale and lease back method. Article 20 to 25 sets forth certain implications of standard terms and conditions. In accordance with the Article 20 of the Code of Obligations, standard terms and conditions are defined as:

"Standard Terms are contractual stipulations which have been drafted solely by a party and submitted to the other party in advance of a contract is concluded so as to be used in many similar contracts to be concluded subsequently. When classifying these terms, no regard should be made upon their scope, font type or shape or whether they are located in the text or annex of the contract."

In accordance with this article, in case; a) one of the parties to an agreement drafts provisions of such agreement unilaterally, b) provisions of agreement are drafted in order to be used in similar agreements to be concluded in the future, c) unilaterally drafted agreement is submitted to other party without negotiation and deliberation, then relevant provisions of such agreement are deemed as standardized terms and conditions and in accordance with Article 21 of the Turkish Code of Obligations such standardized terms and conditions are deemed as "unwritten." Furthermore, in accordance with Article 22 of the Turkish Code of Obligations, if standard terms and conditions in an agreement are deemed "unwritten", provisions other than such standard terms and conditions prevail (remain in force). Accordingly, the party drafted the standard terms and conditions cannot claim that he/she would not have concluded the agreement with remaining provisions if the provisions deemed unwritten were not in the agreement.

Therefore, in order to prevent provisions of financial leasing agreements concluded by sale and lease back method to be deemed as standard terms and conditions and to ensure such provisions remain in force, opposite party to the agreement should be clearly informed about the said provisions and such party should agree on accept them. As stated above, important criteria for determining certain provisions of the agreement as standard terms and conditions is to submit them to the opposite party without negotiation and deliberation. In order for such provisions not to be defined as standard terms and conditions, each provision should be negotiated with and accepted by the other party and most importantly this issue should be proved in case a dispute has arisen between the parties. In light of these, we are of the opinion that drafting a custom made agreement which is specifically prepared considering the needs of the opposite party is the best solution to prevent the provisions of financial leasing agreement to be defined as standard terms and conditions. However, we believe that such standard terms and conditions protecting interests of both parties should remain in force as long as the opposite party has been clearly informed concerning the cons of such provisions and above stated principles and prohibitions under the Turkish Code of Obligations are taken into consideration.

Footnotes

1 [1] 1 Yarg. HGK 27.12.1995 T. E.1995/12-787 K. 1995/1157, Yarg. 12HD. 11.06.2002 T. 2002/11320E., 2002/12506K. Danıştay 7.D, E. 1999/1904, K. 1999/4122

2 Murat Topuz, 6361 Sayılı Finansal Kiralama, Faktöring ve Finansman Şirketleri Kanunu Çerçevesinde Finansal Kiralama Sözleşmesi, Ankara, Adalet Yayınevi, 2013, s. 74.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Erdem & Erdem Law
Kolcuoglu Demirkan Kocakli Attorneys at Law
Erdem & Erdem Law
 
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, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Erdem & Erdem Law
Kolcuoglu Demirkan Kocakli Attorneys at Law
Erdem & Erdem Law
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions