Rent Increase Rates, Rent Disputes, And Determining Rent In Foreign Currency

The rapidly increasing inflation in recent times has inevitably been reflected in rental fees, leading to a significant rise in the number of lawsuits arising from rent disputes. In our related article...
Turkey Real Estate and Construction

The rapidly increasing inflation in recent times has inevitably been reflected in rental fees, leading to a significant rise in the number of lawsuits arising from rent disputes.

In our related article, we have attempted to clarify the most important issues regarding this widely discussed topic in a structured manner.

1. RENT INCREASE RATES

A rent increase refers to the adjustment made to the rental amount of a property, typically at the beginning of a new rental period, to protect it against inflation. This increase rate is calculated based on the rental amount set for the previous rental period and the consumer price index ("CPI") for the past 12 months. The increase for the new rental period is determined provided that it does not exceed the twelve-month average change rate of the CPI from the previous year.

With Article 4 of Law No. 7409, published in the Official Gazette dated June 11, 2022, and numbered 31863, Provisional Article 1 was included to the Turkish Code of Obligations No. 6098 ("TCO"). According to this article, for residential rentals renewed between June 11, 2022, and July 1, 2023, the upper limit for rent increases was set as a fixed rate of 25%, instead of the average twelve-month change rate of the CPI from the previous rental year.

With Article 23 of Law No. 7456, published in the Official Gazette dated July 15, 2023, and numbered 32249, Provisional Article 2 was included to the TCO. This article stipulates that during the periods renewed between July 2, 2023, and July 1, 2024, agreements for residential rentals will be valid provided that the rent increase does not exceed 25% of the previous year's rental amount. According to this rule, if the twelve-month average change rate of the CPI from the previous rental year falls below 25%, the lower rate will apply.

This rule will also apply to rental agreements longer than one year, and any agreements made exceeding these rates will be invalid for the excess amount. This rule is also valid in cases where the rent amount is determined by a judge under Article 344 of the TCO if the parties do not reach an agreement on this matter. However, it will not apply to the third paragraph of Article 344 of the TCO. In other words, regardless of whether the parties have agreed on a rent increase rate in the rental agreement, for rental agreements longer than five years or renewed after five years, and at the end of each subsequent five-year period, the rent for the new rental year will continue to be determined by the judge in a fair manner, considering the twelve-month average change rate of the CPI, the condition of the rented property, and comparable rental prices. The 25% limit will not be applied in this context.

As of July 1, 2024, the 25% upper limit for residential rent increases has been lifted, and Article 344 of the TCO will apply to rent increases.

With the removal of the 25% limit on rent increases, the 25% upper limit will continue to apply for one more rental year for rental agreements renewed between July 1, 2023, and July 1, 2024, and no additional increase will be required on July 2 for these rental agreements.

As of July 1, 2024, if the parties have not agreed on a rent increase rate, the rent amount will be determined by a judge in a manner that does not exceed the twelve-month average change rate of the CPI for the previous rental year. If the rent increase rate is specified in the rental agreements, the renewed rental agreements after July 1, 2024, will be increased according to the rate stated in the agreements, provided that this rate does not exceed the twelve-month average change rate of the CPI for the previous rental year. The provision in the third paragraph of Article 344 of the TCO, which was not affected by the 25% limit, will continue to be applied as explained comprehensively above.

2. RENT DISPUTES

2.1 Lawsuit for Determination of Rent and Lawsuit for Adjustment of Rent

Although the lawsuits for the determination of rent and for the adjustment of rent are different types of cases, they are often confused in practice. First, a brief explanation of these lawsuits will be provided, followed by a discussion of their differences.

2.1.1 Lawsuit for Determination of Rent

A lawsuit for the determination of rent, regulated under Article 344 of the TCO, is a type of case where the rent amount is re-determined by a judge based on changing conditions within the limits set by law.

If there is no settlement between the parties regarding the rate of rent increase, or even if there is a settlement on the rent increase rate but the agreement is longer than five years, a new rent amount can be determined through a lawsuit for determination of rent.

The TCO does not stipulate a specific time frame for filing a lawsuit for determination of rent; it can be filed at any time. However, the date the lawsuit is filed determines the period for which the new rent amount, as decided by the court, will apply.

According to Article 345 of the TCO, if the lawsuit is filed at least 30 days before the beginning of the new rental period, or if the tenant is notified in writing of the rent increase, the court's decision will take effect from the beginning of the new rental period. If the 30-day period is missed, the new rent amount can only be determined for the next rental period following the new rental period.

According to Article 345/3 of the TCO, if the rental agreement stipulates a rent increase rate for the new rental period, the 30-day condition in Article 345/2 will not be required. A lawsuit for the determination of rent can be filed until the end of the new rental period, and the court can determine the rent based on comparable rental prices to be effective from the beginning of the new rental period.

2.1.2 Lawsuit for Adjustment of Rent

A lawsuit for the adjustment of rent, based on Article 138 of the TCO titled "Hardship," allows the debtor to request the adaptation of the agreement to new conditions if an extraordinary situation, which was unforeseen and not expected to be foreseen1 by the parties, arises after the agreement's inception and fundamentally alters the circumstances to the extent that performance can no longer be reasonably expected from the debtor, and if performance has not yet been rendered or has been rendered while reserving rights arising from excessive difficulty in performance. Provided these conditions are met, either the tenant or the landlord can file an adjustment lawsuit under Article 138 of the TCO. For a rent adjustment lawsuit to be filed, the following conditions must be met:

  • An extraordinary situation that was unforeseen and not expected to be foreseen by the parties at the time of the agreement.
  • This extraordinary situation did not arise from the debtor.
  • This extraordinary situation alters the current conditions to the extent that demanding performance from the debtor would be against the principle of good faith.
  • The debtor has not yet performed, or has performed while reserving rights arising from excessive difficulty in performance.

One of the most significant examples of situations where a rent adjustment lawsuit can be filed is the economic downturn caused by the COVID-19 pandemic, where people could not earn income and could thus request the court to adjust the rental agreement. Similarly, unforeseeable increases or decreases in the value of the rented property also serve as examples. This could happen, for instance, if a transportation network is established near a property previously not close to any transportation routes.

As seen, a rent adjustment lawsuit can only be filed under extraordinary and unforeseen circumstances and when specific conditions are met.

2.1.3 Differences Between the Lawsuit for Determination of Rent and the Lawsuit for Adjustment of Rent

To file a lawsuit for the determination of rent, there must be no agreement between the parties regarding the rent amount. In other words, there should be uncertainty regarding the rent increase rate (TCO Article 344/2), or even if the rent increase rate is determined, the rental agreement should be longer than five years (TCO Article 344/3). However, to request the adjustment of the rent, there is no need for uncertainty in the rent increase rate or for the rental agreement to have lasted longer than five years. As mentioned above, the existence of an extraordinary situation causing excessive hardship is required.

One of the main differences between the lawsuit for adjustment of rent and the lawsuit for determination of rent is that in the adjustment lawsuit, the judge is not bound by any limit, such as the CPI, when determining the new rent amount. This is because the conditions at the inception of the agreement have changed to such an extent due to an extraordinary situation that it has caused excessive difficulty in performance. In this case, the judge is expected to act within the framework of fairness and the principle of good faith, without being bound by any specific limits.

However, in the lawsuit for determination of rent, if the agreement duration is less than five years, the judge determines the rent based on the annual CPI rate. If the agreement duration is longer than five years, the judge can make a decision within the bounds of fairness, taking into account the CPI rate and conducting research on comparable rental prices.

3. DETERMINATION OF RENT IN FOREIGN CURRENCY

According to Decision No. 32 on the Protection of the Value of Turkish Currency and the Communiqué related to Decision No. 32 (Communiqué No. 2008-32/34), the areas where transactions and agreements can be made in foreign currency in our country have been limited to enhance the value of the Turkish Lira. This means that it is prohibited to determine amounts and financial obligations in certain agreements, included within this limitation, in foreign currency or indexed to foreign currency. This limitation includes the prohibition of determining rent in foreign currency and its exceptions.

According to the 2nd paragraph of Article 8 of the relevant Communiqué, residents of Turkey cannot agree among themselves on agreements for real estate leases, including residential and roofed workplace leases, which are located within the country, to determine the agreement amount and other payment obligations in foreign currency or indexed to foreign currency.

According to paragraph 27 of the same article, in agreements where it is not possible to determine the agreement amount and other payment obligations in foreign currency or indexed to foreign currency, the amounts specified in such agreements must be re-determined in Turkish Lira by the parties under the scope of Temporary Article 8 of Decision No. 32. Under Temporary Article 8, except for cases determined by the Ministry, the amounts in real estate rental agreements, which were specified in foreign currency or indexed to foreign currency before September 13, 2018, must be re-determined in Turkish Lira by the parties.

Pursuant to paragraph 28 of the same Article, if the parties cannot reach an agreement while redetermining the prices determined in foreign currency or foreign currency indexed prices in Turkish currency within the scope of Provisional Article 8 of the Decree No. 32; the prices determined in foreign currency or foreign currency indexed prices in the agreements concluded shall be determined by increasing the equivalent of such prices in Turkish currency calculated using the Central Bank of the Republic of Turkey's effective selling rate, which is an indicator determined on 2/1/2018, based on the CPI monthly change rates determined by the Turkish Statistical Institute for each month from 2/1/2018 to the date of redetermination of the prices.

Footnote

1 By unforeseen and unexpected situations, it is meant those circumstances that, according to objective criteria, were not considered by the debtor at the time of making the agreement and were not obligated to be considered in the ordinary course of life.

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.

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