Turkey: Acquisition of Real Property in Turkey: Avoiding the Liquidation Risk for Foreign Investors

The Republic of Turkey has always been sensitive on the transfer of ownership of immovable property to foreigners since her establishment in October 29, 1923. Due to her unique geopolitical position, legislating on selling immovable property to foreigners has been an important agenda item issue for the Turkish governments.

The Land Registry Law^[1] ("Land Registry Law"), enacted in 1934 and established Turkey's approach on the sale of immovable property to foreigners, had restrictions on acquisitions such as requiring reciprocity. The Amendment Law to the Land Registry Law^[2] ("Amendment Law"), however, briefly abolished such reciprocity requirement and eased the procedures for the foreigners who are willing to acquire real estate in Turkey. The general spirit of the Land Registry Law and the Amendment Law, restrictions and requirements introduced by the same were already discussed in our first article titled "Acquisition of Real Property in Turkey: Ambiguities, Challenges and Risks for Foreign Investors" published on October 12, 2015.

Furthermore, our second article "Acquisition of Real Property In Turkey: Time Consuming Processes for Foreign Investors", published on November 18, 2015, analyses time consuming processes that the foreign investors have to encounter in acquiring real estate in Turkey. 

This time, the scope of this article is limited only to the liquidation risk of foreign investors who had acquired a real estate in Turkey.

What if the real property acquired by foreign real persons is liquidated?

Following the abolishment of the reciprocity requirement by the Amendment Law in 2012, the Land Registry Law entitled the Council of Ministers of Turkey to determine on the names of the countries whose citizens can acquire real property and limited real rights in Turkey. The Council of Ministers has then composed a list of such countries; regardless of existence of reciprocity between the same.

Furthermore, according to the Land Registry Law, as amended by the Amendment Law, the maximum area that a foreign real person may acquire country-wide cannot exceed 30 hectares within Turkey (per person) and cannot exceed 10% of the surface area of the district at which the private property is located, either.

The Land Registry Law, as amended by the Amendment Law, provides that real properties and limited real rights, as acquired through inheritance without complying with the provided size and country list limitations (in case of acquisitions of real property by foreign real persons who are not citizens of the countries listed by the Council of Ministers, and acquisitions exceeding 30 hectares) must be liquidated. The liquidation proceeds will be paid to the respective heirs, if the real property is not liquidated directly by its owner within one (1) year following the transfer of the ownership to such foreigner through inheritance.

How does the liquidation remedy affect the legal entities with foreign shareholders?

Pursuant to Article 36 of the Land Registry Law, the foreign investment legal entities may use or acquire real property and/or limited real rights to carry out the activities under their Articles of Association if:

• 50% or more than 50% of the shares of the relevant foreign investment company are owned by (i) foreign real persons; (ii) legal persons who are subject to foreign legislations; and/or (iii) international institutions; or

• the foregoing persons are entitled to appoint or dismiss majority of the persons who manage that company.

Article 36 of the Land Registry Law provides that the same principles specified thereunder will be applicable, if the shareholding structure of the legal entities with foreign shareholders meets the foregoing criteria following a share transfer.

Furthermore, without prejudice to the provisions of the Law of Military Forbidden Zones and Security Zones^[3] ("Military Law"); the Land Registry Law gives the legal entities with foreign shareholders the opportunity to acquire real estate in private security zones, military forbidden zones, military security zones and other zones determined by the Military Law. In this case, if the property to be acquired is in military forbidden zones, military security zones or other zones determined by the Military Law; the company must receive a permit in advance from the relevant Army Commandership or the respective governorship in case the real estate is in private security zones.

Meanwhile, the Regulation on the Land Registry Law^[4] provides that companies with foreign shareholders must apply to the Governorship of the place where the property to be acquired is located. The Governorship then communicates with the relevant Army Commandership to receive the required information with respect to the property in order to decide whether it will issue its permission for the acquisition of such property or not.

Article 36 of the Land Registry Law provides that real properties and limited real rights are acquired or used by legal entities with foreign shareholders without complying with it, those real properties and limited real rights will be liquidated, if they have not already been done so by the owner within the time period as provided by the Ministry of Finance. As we already mentioned above, this part of Article 36 will also be applied if the legal entity has more than %50 foreign shareholders following a share transfer.

What happens if a shareholder of a legal entity transfers her shares to a foreign person, in the absence of the consent of other shareholders, and the foreign shareholder percentage exceeds 50%?

There is always a possibility that one shareholder of the company owning a real estate in Turkey may transfer her shares to a foreign investor, which leads the company having 50% or more foreign shareholders. In this case, the company may face the risk of liquidation of its real estate and naturally such liquidation will damage the remaining shareholders.

It is generally thought that restricting the transfer of shares by the articles of association of a company can be a solution to this problem. However, the foreign investors generally prefer establishing a joint stock company ("JSC") since this type of company has its unique advantages when compared to other types of companies. According to the Turkish Commercial Code^[5] ("TCC") the shares of a JSC can freely be transferred. Furthermore, the TCC provides that it can be determined under the articles of association of the JSC that the share transfers will be subject to the approval of the JSC. However, the JSC can only refrain from approving a share transfer provided that a "valid reason" is determined under the articles of association. Here the question arises: What can be considered as a valid reason? The TCC provides that the JSC may refrain from approving a share transfer in case the provisions of the articles of association relating to the composition of the shareholders justify the disapproval with respect to the purpose and scope or economic independence of the JSC. Therefore, if a reason determined in the articles of association justifies the disapproval with respect to the purpose and scope or economic independence of the JSC, then it will be considered as a valid reason. Consequently, the JSC cannot refrain from approving a share transfer by justifying on an ordinary reason, even it is determined so in the articles of association of legal entities. In practice, we come across broad share transfer restriction clauses in the articles of associations such as pre-emption rights, tag along rights, put/call options most of which cannot be considered as a valid reason under the TCC.

Therefore, we recommend that shareholders of companies owning a real estate in Turkey, should not rely on the restrictions relating to the transfer of shares on the articles of association in order not to face a liquidation risk of the real estate. Because other shareholders may transfer their shares to a foreign person (which leads the company to have 50% or more foreign shareholders) without notifying either the company or the shareholders and the real estate of the company may be liquidated according to Article 36 of the Land Registry Law.