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Lease Agreements in Retail Industry: A Two-Dimensional View

Lease Agreements in Retail Industry: A Two-Dimensional View

Turkey
Typography

Retail industry leads Turkish economy in recent years and shopping malls are the most essential figures of such industry. Shopping malls have recently undergone a challenging period by virtue of social and economic developments throughout the country.

Tending to grow together; they have faced with substantial declines as to decreases in footfalls due to recent adverse events as well as reduction on consumption appetite due to economic constriction. In this direction, shopping malls have been adversely affected regarding on leases; since the retailer profitability has been declined and the foreign exchange rates have been increased significantly.

The fact that shopping mall rents are determined with foreign currencies; creates an independent concern on accounts of retail industry. Thus, retailers have been demanding incentives from shopping mall managements such as; fixed exchange rate, rent reduction or payment possibilities with domestic currency. On the other hand, since retailers’ revenue feasibilities are figured out by expectation of foreign exchange income; shopping mall investors who mostly paid back their loans in foreign currency for at least 5 to 9 years, forced to be cautious regarding aforementioned demands. 

Today, 118 of 371 shopping malls in Turkey are collecting their rents with domestic currency namely Turkish Lira, meanwhile the remaining 253 are collecting with foreign currency. 6 of these foreign currency collector shopping malls have converted their lease agreements and started to collect with Turkish Lira, in consequence of President Mr. Recep Tayyip Erdogan’s call to those who drafted their lease agreements with foreign currencies should amend the payment clauses by means of determining Turkish Lira as the new payment instrument.

In this peace of article we evaluated the cases and possibilities of adaptation of rents in retail industry in the light of essential adverse developments from two dimensions of Shopping Mall and Retailers.

Conditions to Demand Lease Rate Adaptation for Deduction Purposes 

In view of above mentioned precedents existence of all four conditions is required for adaptation of rent amount which are:

  1. An unexpected development that can not be foreseen by the Parties should arise during a long contractual term;
  2. Such extraordinary development should arise under a reason not originated from Lessee.
  3. Conditions that were determined at the commencement date of the relation should be essentially changed against Lessee due to such unexpected development;
  4. The Lessee, at time of adaptation request, either should not perform its obligations or should perform such obligation with reservation of adaptation request.
Contractual Status of Retailers

Regarding the lease agreements between the merchant parties, condition of predictability is interpreted by the Supreme Court very strictly where Courts expect a prudent merchant must envisage crisis and locate the risk of fluctuation on foreign exchange rates in advance. For instance; despite the fact that Turkey’s inflation rate does not navigate regularly, an adaptation claim regarding the contract concluded after February 2000 crisis, the period when adaptation demands are accepted more, has been rejected on the ground that “a prudent merchant should have foreseen the economic changes during a crisis period”.

From the Point of Shopping Mall Investors:

In the light of legislation and legal practice the position of Shopping Mall Investor seems crystal clear. On the other hand, even the legal protection shield protect lessors until Supreme Court change its approach; the reality is that a shopping mall may only protect its value with a strong and sustainable shop mix and brands. Therefore, even if the shopping mall investors seem to be protected by the law against retailers’ adaptation requests, it is clear that they should not remain unresponsive retailers’ expectations. The big picture demonstrates the fact that industry players can only win together.

Conclusion;

When we review the current conjuncture of Turkey, apart from the uncertainty of inflation rate, the devaluations happened in the past, or the current exchange rate fluctuations; the fact that Turkey has faced with difficult socio-economic developments, consecutive terror attacks, coup attempt on July 15th 2016 sequent negative evolvements, and after the events affecting the economy in recent years such as the US president elections; it is foreseeable that course of industries will be negatively affected. However in recent history, there is no court ruling that formulates the solution as the inflation increase as double or such will not be deemed as unforeseeable extraordinary occasion; when past court rulings and Supreme Court’s general attitude have taken into consideration, it is a moral certainty that courts would evaluate and rule the Turkish market conditions as foreseeable.

Despite the above stated Turkey reality, shopping mall investors do evaluate, and also should, under a sustainable win-win principle that the Parties need each other for life for creation of an environment that provides long-term profitable market. 

By Vefa Resat Moral, Managing Partner, and Eylul Bengisu Gumuş, Junior Associate, Moral Law Firm

Turkey Knowledge Partner

Founded in 1990, TURUNÇ is a leading, full-service Turkish law firm providing cutting-edge legal advice and representation to a global clientele. We provide the highest quality of legal service in each of our practice areas and we take pride in the work we do. Since our founding, we have always maintained a friendly, open and inclusive firm culture in which individuality and independent thinking are highly prized. Our lawyers work in collaborative, collegial teams across our practice areas.

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