Does A Lease Agreement Terminate If A Company Ceases Operations?

I. Introduction

Companies may partially or entirely cease their operations due to economic conditions, restructuring, changes in intra-group organisation, the relocation of production to another country or facility, or withdrawal from a particular market. However, a company's cessation of its actual operations at a workplace does not automatically extinguish its legal personality or terminate the agreements to which it is a party. This article examines the options available to companies for terminating a lease agreement before the end of its term or returning the leased premises early, with reference to the relevant provisions of the Turkish Code of Obligations No. 6098 (the "TCO"), potential legal grounds, associated risks and practical courses of action.

II. Applicable Legal Grounds

A. Article 325 of the TCO - Return of the Leased Premises Before the End of the Lease

Where a company no longer requires the leased premises, the most relevant provision in practice is Article 325 of the TCO. Article 325 provides that, where the tenant returns the leased premises without observing the contractual term or the applicable termination period, its obligations arising from the lease agreement do not immediately and entirely cease, but continue for the reasonable period during which the leased premises may be re-let under similar conditions. Certain views in legal doctrine characterise Article 325 as a special form of extraordinary termination and regard it as an independent ground for termination.

As regards the point at which the lease agreement is deemed to terminate following an early return, the prevailing view in legal doctrine is that the lease agreement does not terminate upon the early return and that the payments due from the tenant during the reasonable period remain rent payments. Under this approach, the lease agreement may be considered to terminate at the end of the reasonable period. Other views in legal doctrine, however, maintain that the lease agreement is terminated by the tenant at the time of the early return.

The reasonable period must be assessed separately in each case. Factors such as the location, size, intended use and technical characteristics of the leased premises, whether they have a specialised nature such as a production facility or factory, the market rent for comparable premises and the prevailing market conditions may affect this assessment. The period required to re-let a standard office will not be the same as the period required to re-let a factory adapted to a specific production activity.

B. Article 331 of the TCO - Extraordinary Termination for Good Cause

A second legal ground that may be considered where operations are discontinued is Article 331 of the TCO.

Under Article 331 of the TCO, where good cause makes the continuation of the lease relationship intolerable for either party, either party may terminate the lease agreement at any time by observing the statutory notice period. The court determines the financial consequences of such extraordinary termination in light of the circumstances of the case.

At first glance, the complete cessation of a company's operations and the disappearance of the purpose for which the leased premises were used may render the continuation of the lease relationship economically meaningless. However, being "economically meaningless" is not equivalent to being "intolerable" within the meaning of the law. In particular, the landlord may argue that the company's withdrawal from a particular market, relocation of production to another country or closure of a facility as a result of a business decision falls within the tenant's own sphere of commercial risk.

In its decision dated 11 July 2012, numbered E. 2012/8076 and K. 2012/10537, the 6th Civil Chamber of the Court of Cassation held that a commercial company's termination of an agreement due to economic difficulties could not be regarded as termination for good cause and that no person may derive an advantage from their own wrongful conduct.

C. Assessment from the Perspective of Liquidation and Bankruptcy

A company's entry into liquidation is not a circumstance that automatically terminates a lease agreement. Since a company in liquidation retains its legal personality, it remains a party to the lease agreement. Accordingly, it would not be correct to conclude that "the lease agreement automatically terminates due to liquidation". The mere fact that a company is expected to enter into liquidation in the future likewise does not automatically terminate the lease agreement. In its decision dated 20 October 2011, numbered E. 2011/5258 and K. 2011/11306, the 6th Civil Chamber of the Court of Cassation similarly emphasised that, in bilateral agreements, the cessation of operations by one party does not automatically terminate the agreement.

A lease agreement does not automatically cease to exist solely as a result of a bankruptcy decision either. Article 332 of the TCO entitles the landlord to request security for rent that will accrue if the tenant becomes bankrupt after the leased premises have been handed over. If the security is not provided within an appropriate period, the landlord may terminate the agreement without observing any notice period. Bankruptcy therefore does not directly terminate the lease agreement; rather, it creates a specific termination mechanism that may be exercised subject to the statutory conditions.

D. Article 346 of the TCO - Early Exit Penalties and Acceleration of Remaining Rent Payments

Lease agreements frequently include provisions requiring the tenant to pay a contractual penalty if it vacates the leased premises before a specified date or providing that all remaining rent payments will become immediately due. Where the leased premises qualify as residential premises or a roofed workplace, these provisions must also be assessed under Article 346 of the TCO.

Under Article 346 of the TCO, no payment obligation other than the rent and ancillary expenses may be imposed on the tenant. In particular, agreements providing for a contractual penalty if the rent is not paid on time or for the acceleration of subsequent rent payments are invalid. In decisions concerning roofed workplace leases to which Article 346 of the TCO has applied since 1 July 2020, the Court of Cassation has also held invalid contractual penalties that are triggered by early termination and impose on the tenant an additional payment obligation beyond the rent and ancillary expenses.

However, the invalidity of a contractual penalty does not eliminate the tenant's liability under Article 325 of the TCO for the reasonable re-letting period. In other words, even if the landlord cannot claim an invalid early exit penalty, it may still claim the rent corresponding to the reasonable period required to re-let the leased premises and any other contractual receivables that it can substantiate.

III. Conclusion

A company's cessation of its operations, discontinuation of its use of the workplace or entry into liquidation does not automatically terminate the lease agreement. As a rule, the obligation to pay rent continues as long as the leased premises remain fit for use and the non-use is attributable to the tenant.

Where a company must vacate the leased premises before the end of the contractual term, the most predictable statutory mechanism is the early return procedure under Article 325 of the TCO. In this case, liability is determined by reference to the reasonable period during which the leased premises may be re-let under similar conditions, rather than the entire remaining term of the agreement. Termination for good cause under Article 331 of the TCO is an exceptional remedy that depends on the specific circumstances of the case and leaves the financial consequences to the court's discretion.

Accordingly, implementing a corporate decision to cease operations on the assumption that the lease relationship has also ended may give rise to significant financial risks. A separate termination plan should therefore be developed by assessing the nature of the lease agreement, its early exit provisions, the re-letting prospects of the leased premises and the reasons for the company's cessation of operations as a whole.

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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.