Turkish Code of Obligation No. 6098 (TCO), which came into force in 2012, introduced quite a few reformist and comprehensive provisions in all aspects of the Turkish obligation laws. Nevertheless, not all articles of the TCO entered into effect on the same date, since the effective date of nine articles pertaining to lease relationships, where the lessee is a trader and the leased area is a workplace ("Commercial Lease Relationships"), has been postponed to 1 July 2020. To this end, as of today, in view of the fact that there is less than 1 year for nine articles to fully come into force, it is convenient to reawaken the subject regarding the potential impact of these nine articles on Commercial Lease Relationships.
An Introduction to the Postponed Articles
The articles under the TCO, which regulate the rent laws, are of a protective nature in favor the lessees. The rationale behind this idea stems from the assumed contractual inequality between the contracting parties, where it is commonly suggested that the lessor has the bargaining power, giving him greater leverage while setting down the terms and conditions of a lease agreement. This being the case, the legislature aimed to protect the lessees through ex parte mandatory provisions where, in principle, the parties shall not agree to the opposite of what the TCO mandates, if it weakens the lessee's position; whereas, they may deviate from the TCO only if the proposed clause provides better conditions to the lessee than that of the TCO.
On the other hand, when it comes to a rent relationship where the lessee is a trader and the leased area is a workplace, one may argue that with respect to the pre-contractual phase, it is no longer the battle of the unequal parties, especially from a financial standpoint, as the lessee has sufficient financial power and position to carry out the negotiations for its own commercial benefit. For this reason, the legislature has concluded that at least for a specific period of time, no party in such relationship should be more protected than the other through the law.
From this position, these nine articles i.e. Articles 323, 325, 331, 340, 342, 343, 344, 346 and 354, all of which protect lessees in lease agreements in different aspects, but are only limited to, the Commercial Lease Relationships, have been postponed to 1 July 2020. To this end, below are the evaluations of the articles of law which we consider to be of import in terms of legal consequences.
Early Termination – Article 325 of the TCO
Article 325 of the TCO regulates the premature termination of a lease agreement by the lessee and its consequences. The Article states that if the lessee terminates the lease agreement prior to the expiry date, the lease agreement shall, nevertheless, continue for a reasonable time in which the lessor may be leased under similar conditions. It also provides a lesser with an alternative for early termination if the lessee finds a new lessee who is capable of fulfilling the payment obligation and is willing to duly take over the leasing relationship. If that is the case, the lessee's obligations under the lease agreement immediately expire.
Prior to the TCO, where the abrogated Code of Obligation No. 818 ("aCO") was in force, there was no clause that regulated early termination, nor was there any reference with respect to a new lessee. Therefore, the disputes arising out of premature terminations were settled by precedent of the Court of Cassation ("CCass"). For this reason, with respect to Commercial Lease Relationships, the CCass's precedents are the main source for settling rent disputes. To this end, while the CCass widely accepts that the reasonable period in which the lessor may be leased under similar conditions is three months, it simply does not accept any rights with respect to finding a new lessee that would justify early termination, owing to fact that aCO contains no clause thereof.
That being the case, at the present time, with respect to Commercial Lease Relationships, although the lessee may find another lessee to take its place, thereby terminating the lease agreement earlier than the established end date, it still might be obliged to pay rent that is equivalent to a reasonable period, as the lessor has no obligation to accept the recommended new lessee under the aCO. In view of the above, in Commercial Lease Relationships, until 1 July 2020, the lessee shall not enjoy the rights set forth under Article 325 of the TCO to execute the early termination without paying the remaining rent, through finding a new lessee.
Deposit – Article 342 of the TCO
Article 342 of the TCO regulates the limits and the method of advance deposit payment required from the lessee at the signing phase of a lease agreement. It first mandates that concerning the rents of residential and covered workplaces, the amount of deposit shall not exceed the three-month rent amount under any reason whatsoever. It then introduces the method of payment where the lessee shall deposit the money into a bank account, not to be withdrawn without the consent of the lessor. Additionally, the bank shall return the deposit only with the consent of both parties, or with the finalization of the enforcement proceedings, or based on the final court decision. Consequently, if the foregoing process is not duly followed by the lessor, the lessee may reclaim its deposit from the lessor, based on unjust enrichment, as defined under the TCO.
During the course of aCO, no procedure or limits had been set for deposit; therefore, the lessee could be exposed to heavy deposit requirements, which is, as of the present day, still the case for Commercial Lease Relationships. As from 1 July 2020, for all rents respecting the rents for residential and covered workplaces, regardless of whether the lessee is a trader, or the leased area is a workplace or not, the procedure under Article 342 shall be followed in order for the lessors to duly receive the deposit, and to avoid any potential claims by the lessees to take the deposit back under unjust enrichment provisions.
Rent Increase – Article 344 of the TCO
Article 344 of the TCO covers the rent increase topic, and sets the limit for the maximum increase applied by lessors. It states that if the parties agree on the rate of change under the lease agreement it, nevertheless, shall not exceed the twelve-month averages of the consumer price index. Likewise, if the parties do not agree upon the rate of change under the lease agreement, the next lease year's rent will be determined by the judge using the principle of equity, provided that the rate of change shall not exceed the twelve-month averages in the consumer price index of the previous lease year.
Therefore, for today, but except for Commercial Rent Relationships, any rent increase applied to lease agreements shall not exceed the twelve-month averages in the consumer price index of the previous lease year; whereas, in Commercial Lease Relationships, there is no limit for to parties in which to determine the rate of change. Therefore, in practice, the lessors can rightfully set exorbitant increase rates, which are generally followed by revision requests by the lessees due to payment difficulties.
Being effective from 1 July 2020, Article 344 of the TCO, which limits the increase in rental rates, will apply to Commercial Lease Relationships, as well, and through this, any rate increase clauses as drafted under lease agreements, which, however, exceed the upper limit of the TCO, shall be deemed invalid. However, in order for Article 344 to be applicable to Commercial Lease Agreements, such agreements must come into effect after 1 June 2020, pursuant to Article 1 of the Law on the Enforcement and Application of the Turkish Code of Obligations No. 6101. The said Article states that for any action regarding the subjects other than default, termination and liquidation are subject to the provisions of the law that is in force at that time.
Acceleration and Penalty Clause – Article 346 of the TCO
Article 346 of the TCO, fundamentally, brings with it two limitations to lease agreements; the first being that the lessee shall not be obligated to make any payments other than rent and side expenses. No expenses under different names may be included into the rent price or side expenses, which are defined under Article 303 of the TCO. This is, indeed, a quite common practice in rental agreements, where the lessors intend to include the number of items into rental prices or side expenses, such as restoration expenses, installing an elevator, etc.
The second restriction under Article 346 pertains to the drafting penalty or acceleration clause, in the event of non-payment and/or late payment. Such types of clauses are under the hotlist of lease agreements, where the lessee becomes obliged to pay the penalty payment or the accelerated rent for the entire year, in the event of non-fulfilment of the payment obligations. Through this, the lessors seek to discourage the lessees from non-payment or late payment. Article 346 of the TCO prohibits such clauses and invalidates them, if still drafted.
For Commercial Lease Relationships, a penalty or an acceleration clause may be validly drafted by the contracting parties, as of today. However, being effective from 1 July 2020, this will no longer be possible under the TCO, thereby putting an end to one of the most commonly used clauses under lease agreements.
The postponed nine articles of the TCO with regard to lease agreements are about to come into force, if not deferred once again, on 1 July 2020. To this end, many practices frequently applied within the context of the Commercial Lease Agreements, such as deposit, rent increase, or penalty clauses will come to an end, which will mark a new period for Turkish contract law within the aspect of lease relationships.
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.