The Title Deed Law numbered 2644 ("Title Deed Law") allows foreign-controlled Turkish companies to acquire immovable properties with no limitations, apart from properties within or near military or security zones. Such a seemingly straightforward system gets rather complicated with the 'clearance' mechanism set-forth by the secondary legislation regarding the exception on the military/security zones. The following is a brief outline regarding this limitation, the relevant clearance mechanisms and how to address the risk of "no clearance" in share purchase agreements ("SPA").

1. The rule and the exception

Turkish companies with 50% or more direct or indirect foreign shareholding, or Turkish companies in which foreign shareholders, directly or indirectly, have the right to appoint 'the majority of seats with management rights' (each will be referred as a "Foreign-controlled Co.") are allowed to acquire immovable properties in Turkey.

However, acquisition of immovable properties within or near to military zones or military security zones as per the Law on Military Forbidden Zones and Security Zones numbered 2565 ("Military Zones"), are subject to the approval of either the Turkish Armed Forces General Staff, Provincial Directorate of Security or Provincial Gendarmerie Command ("Security Authorities") or the relevant Governor's Office.

The same applies to indirect acquisitions of immovable property by Foreign-controlled Co.'s through a share deal. However, the clearance can only be sought after the acquisition of the shares, which in effect complicates an already completed transaction.

2. Clearance mechanisms

The 'Regulation Regarding Acquisition of Immovable Property and Limited Rights-in-Rem by Companies Within the Meaning of Article 36 of the Title Deed Law Numbered 2644' ("Regulation") sets forth two different clearance mechanisms to be applied to a Foreign-controlled Co.'s acquisition of immovable property:

a. Direct acquisition of an immovable property("Direct Acquisition Clearance"):

To acquire an immovable property, a Foreign-controlled Co. shall first apply to the relevant Governor's Office. Upon application, the Governor's Office will request information from the relevant Security Authorities as to whether the immovable property in question is located within a Military Zone (save for Special Security Zones) and if so, whether the Foreign-controlled Co.'s acquisition will pose a threat against national security. The Governor's Office will determine whether the immovable property is located within Special Security Zones and if so, whether it can be acquired by the Foreign controlled Co.

In case of a negative decision by the relevant Security Authority or the Governor's Office, acquisition of such immovable property will not be permitted. The Foreign-controlled Co. has the right to challenge such administrative decision before courts.

b. Indirect acquisition of an immovable property through a share deal ("Share Deal Clearance"):

When it comes to acquiring an immovable property indirectly (i.e. by means of share deal), the above mentioned clearance mechanism becomes rather complicated. According to the Regulation, once a company that owns an immovable property becomes a Foreign-controlled Co., the underlying share transfer shall be notified to the Ministry of Economy[1], as per Article 5 of the Regulation on Application of Foreign Direct Investment Law.

The Ministry of Economy shares such information with the General Directorate of Land Registry and Cadastre. The General Directorate of Land Registry and Cadastre then compiles and delivers the information on the immovable properties owned by such company to the relevant Governor's Office.

The rest of the cycle is similar to the Direct Acquisition Clearance, whereby the Governor's Office will request the Security Authorities' response on whether the immovable properties are located within Military Zones, and if so, whether them being owned by the company that has now become a Foreign-controlled Co. will pose a threat against national security. Different from the above mechanism, in case the assessment rendered by the relevant Security Authority is negative, this might not be the final decision. In such case, the newly Foreign-controlled Co.'s response to such negative assessment will be requested and reviewed by a commission[2]. After such review either the commission will (i) request from the Foreign-controlled Co. to 'adjust the ownership so as not to pose a threat against national security[3]' or (ii) render a second negative assessment ("Final Negative Assessment"). 

Upon the Final Negative Assessment, and save for the right to challenge such administrative decision before courts, the Ministry of Finance will instruct the Foreign-controlled Co. to dispose of such immovable property within 6 months, which may be extended to 12 months.

Please also note that, even if a Foreign-controlled Co. is permitted to maintain its ownership of an immovable property that is located within Military Zones as a result of the Share Deal Clearance, such clearance shall be sought once again in case of a further change of foreign control.

3.How to address the risk of Final Negative Assessment in SPAs

As outlined above, upon the completion of a share transfer in a Foreign-controlled Co., the Share Deal Clearance mechanism will be commenced regarding the immovable properties owned by such company. Since, as opposed to the Direct Acquisition Clearance, the Share Deal Clearance is a mechanism that can only be triggered after the completion of transfer of shares, the parties cannot include obtainment of such clearance as a condition precedent to closing.

On the other hand, the seller will most likely be reluctant to provide any undertakings on such issue, since the locations of Military Zones may be confidential information.

In the light of the above, the purchaser may consider the below mentioned options against the risk of a Final Negative Assessment, depending on the importance of the immovable property/properties owned:

(i) Compensation in case of forced disposal

As a result of the Final Negative Assessment, the Foreign-controlled Co. may be forced to a fire sale and thus may suffer damages, which would be the negative difference between the value of the immovable property at the signing, and the consideration the purchaser receives after it has been forced to dispose that property. To be able to determine the amount of the compensation without falling into a dispute, it is advisable that the parties agree upon the value of the immovable as at the date of signing of the SPA.

However, such downside protection, when coupled with time pressure, may cause the purchaser to be reluctant to seek the "best market price" for the immovable property. Therefore, the seller may request to have a call-option to buy the property at the pre-agreed value, in order to be able to sell it later without facing the time-pressure.

(ii) Final Negative Assessment to Trigger the Unwinding of the Transaction

In case the immovable properties owned by the target company play a significant role in the operations of the company such that the purchaser would not have entered into the SPA in the absence of such immovable properties, the above compensation process may not be fair for either or both parties.

In such case, the parties may opt to reverse the transaction and re-exchange the purchase price and the shares if a Final Negative Assessment to be issued.

4. Final remarks

However remote it may be, a share deal concerning an immovable property owning Foreign-controlled Co. entails an inherent risk, which may have severe consequences on the business. On the other hand, Foreign-controlled Co.'s leasing of immovable property is not subject to the above restriction hence clearance mechanisms, although it is obvious that even a long-term lease agreement is not a match to ownership.

The above discussed risk does not stem from either party, especially the seller's, actions or omissions, therefore, the seller may be reluctant to negotiate a partially or wholly reversible deal. On the other hand, not having addressed such risk in the SPA may have a cost to the purchaser in case the risk of Final Negative Assessment materializes.

All in all, the parties should not turn a blind eye on this issue, and in order to manage foreseeable risks, should address the matter in the most suitable way for the transaction and business at hand.

[1] For companies whose shares are publicly traded, such notification shall be made with regards to foreign shareholders holding 10% or more shares provided that foreign investors, individually or together, have a 50% or more shareholding in the company for the last 3-months.

[2] Such commission will consist of the representatives of the Provincial Directorate of Security or Provincial Gendarmerie Command, Garrison Command and Coast Guard Command, chaired by the Governor or deputy Governor.

[3] The Regulation provides no information on how such adjustment may be made.

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.