Contributed by Kolcuoglu Demirkan Kocakli.
1. REAL ESTATE OWNERSHIP
1.1 Legal framework
Under the Turkish Constitution (Constitution), everyone has the right to own and inherit property and these rights may be restricted only in the public interest. In addition to the protection of the Constitution and the Turkish courts, the property right is also protected by the European Convention on Human Rights and Fundamental Freedoms (ECHR), the First Protocol to the Convention, and the European Court of Human Rights. Although the Constitution recognizes the property right as a fundamental right, similar to the ECHR, it allows for expropriation and nationalization provided that appropriate compensation is paid, if it is set forth in the law, is in the public interest, and is proportional. Additionally, the Constitution prohibits any restriction that prejudices the spirit of the property right.
The key sources of Turkish law regarding real estate ownership and protection are the Turkish Civil Code (TCC), Land Registry Law, Cadastre Law, Law on Expropriation, Zoning Law, Forestry Law, and Coastal Law. The Turkish real estate legislation is accepted as stable and structured. There are also well-established court precedents in terms of real estate ownership and protection.
The TCC has comprehensive regulations on real estate and recognizes different types of ownership rights (i.e., real property ownership, condominium ownership, permanent and independent construction right), rights in rem (e.g., usufruct right and other easements), personal rights (e.g., pre-emption right and redemption right), and property restrictions (e.g., mortgages and pledges).
Although the right to own property is a right that everyone is entitled to, there are some restrictions when it comes to the real estate acquisition of foreigners, as explained under section 2.4.
Both consumers and investaors follow the trends closely to enjoy their rights to own property through more economical and easier ways. In recent years, utilization of real estate certificates, real estate investment funds (REIFs), and infrastructure real estate investment trusts (REITs) as financial resources have become more common and provided more opportunities to real estate investors. Within the last decade, the residential real estate market has been positively affected by the legislative amendments that allow foreigners to acquire Turkish citizenship by investing in real estate. Large residential projects, the campaigns launched by real estate developers and banks, migration-driven demand, and hikes in foreign currency have boosted residential sales.
1.1 Registration of ownership
All real estate is registered with the land registry with exceptions that are explained further below. As per the Land Registry By-Law, lands, permanent and independent rights, and independent units subject to condominium ownership must be registered as real property with the land registry. Real properties that are reserved for public use and not subject to private ownership are not registered in the land registry so long as rights in rem are not established on such real properties in favor of third parties. For instance, forests, coastlines, and archaeological sites are not registered as these are not subject to private ownership. Additionally, rights in rem and personal real property rights that are defined in the law can be registered with the land registry, but personal rights that are not defined in the law cannot be registered.
The state is responsible for keeping true and accurate records of real estate through land registries which are established in each district. The entries in the land registry are kept both physically and electronically. The physical entries are recorded in the title books that are kept by the district land registry offices and the electronic entries are recorded under the unified online system named TAKBIS (Land and Cadastre Information System).
Finally, it is worth mentioning that the Turkish Consulate General in Berlin has a division operating as a land registry office, and the General Directorate of Land Registry and Cadastre is in the process of establishing new land registry offices abroad. This expansion will allow the parties who reside abroad to conclude their transactions remotely, without being obliged to personally attend the land registry offices in Turkey.
1.2 Publicity of real estate register
Land registries are open to the public, and anyone who has a legitimate interest in reviewing the entries is allowed to do so by proving their interest. The owner of the real property, the holder of rights in rem, and tenants are accepted among those who have a legitimate interest. Lawyers and trainee lawyers are allowed to review land registry records without submitting a power of attorney. Individuals holding a Capital Markets Board license, banks, and survey engineers may review the land registry records as well.
1.3 Protection of ownership
The entries in the land registry are binding. The transfer of ownership and acquisition of rights in rem become valid and gain effect once they are registered with the land registry. Agreements that result in the transfer of ownership or rights in rem, and agreements establishing rights in rem in favor of third parties are subject to strict form requirements. Under the applicable legislation, sale and purchase agreements must be drafted by the land registry in the standard form. This practice is adopted to prevent any invalid or conditional transactions. The agreements regarding rights in rem are also examined by the land registry officers before they are executed by the parties. Both types of agreements are signed before the land registry office after a careful examination of the parties’ legal competence. Agreements executed between parties in simple form are invalid.
As for personal real estate rights that are defined under the legislation (such as lease agreements and pre-emption rights), in principle, these are not required to be registered and the entries regarding personal rights are accepted as explanatory entries.
As stated under section 1.2., the state is responsible for keeping true and accurate records of real estate transactions. Both the state and the land registry officers are liable for damages caused to third parties due to inaccurate or false land registry records. If an unauthorized disposal is made due to the land registry officer’s fault (for instance, due to insufficient examination) the owner can make a claim to the state and the relevant officer for their damages. If an individual or a legal entity becomes entitled to an ownership right or another right in rem based on their trust in the land registry, then their entitlement is protected. This principle is also known as the principle of trust. However, if a right in rem is established illicitly then those who are, or should be, aware of this illicit establishment, cannot rely on such faulty land registry record. A record is illicit when it is based on a non-binding legal transaction or does not have a legal reason. If a person’s right in rem is harmed due to an illicit land registry record, then such an injured person may claim remedy against the ones who were not acting in good faith.
2. REAL ESTATE ACQUISTION
2.1 Share deal or asset deal?
There are two common real estate acquisition structures: (a) asset deal and (b) share deal. In an asset deal, the purchaser directly acquires the ownership of real property, whereas, in a share deal, the purchaser acquires the shares of a company owning the target real property. In a share deal, the investor acquires the entire business of the target company including, but not limited to, the real estate, other assets, agreements, permits, and licenses, as well as the employees and liabilities. A share deal is only possible if the owner of the target real property is a legal entity.
The parties mainly structure the transaction depending on the parties’ needs and expectations and the transaction costs. The tax implications are very important to consider when structuring a transaction. To find the most tax-efficient structure, investors engage professional tax consultants. These consultants determine the possible tax implications of the transaction and develop the most suitable acquisition model for carrying out the transaction. For instance, if the target real property is owned by a legal entity, investors may prefer a share deal to avoid VAT (in particular cases) and the land registry charges. Despite its high costs, an asset deal may still be preferable, if the legal entity owning the target real property entails certain financial risks (due to its legal background/previous transactions, etc.). Additionally, since a share deal requires more comprehensive due diligence, the parties generally choose to proceed with an asset deal if they intend to close the transaction as soon as possible. Another way of acquiring real estate may be through a spin-off. A spin-off of the target real property into a newly established company and acquisition of this new company’s shares may be also considered by the parties.
2.2 Share deal
Upon the parties’ decision on consummating the business transaction, the parties generally execute a term sheet, letter of intent, or an agreement of a similar nature in written form to express the party’s interest in carrying out the transaction. Such an agreement is generally non-binding and merely outlines the main terms of the transaction and the parties’ conditions for the consummation of the transaction (e.g., satisfactory completion of the due diligence, obtaining regulatory and internal approvals).
Subsequently, the purchaser conducts due diligence exercises on the target company (e.g., legal, financial, accounting, business, tax) through its advisers. The due diligence allows the purchaser to understand the strengths, challenges, and opportunities of the target’s operations, and it helps the purchaser to rationalize the acquisition decision and to establish the purchase price to be paid. If the outcome of the due diligence exercise is satisfactory for the investor, the parties start negotiating binding transaction agreements. In the case of a tender, the investor places a bid for the target upon completion of a satisfactory due diligence review and then the parties execute binding transaction agreements.
In a share deal, the parties enter into binding agreements, such as a share purchase agreement (SPA), a joint-venture agreement, or a share subscription agreement. Under these agreements, the parties may address, mitigate and settle the financial, tax, legal, or operational risks and/or exposures of the target company. The seller may provide representation and warranties to the buyer and the parties may agree to close the transaction once certain conditions precedent (CPs) are fulfilled. If there are any CPs, an interim period will be established where the sellers will remain as the owner of the target company but be under the obligation to close the transaction when the CPs (i.e., obtaining approvals, financing of the transaction) are met or waived. If there are assets or other elements of the target company that are not intended to be acquired, these are carved out from the company through separate legal transactions prior to the share transfer transaction and, to procure this result, such an undertaking should be regulated as a CP or a pre-completion covenant under the SPA.
SPAs are exempt from stamp tax. In a share deal, the transfer of shares is subject to (i) a corporate tax corresponding to 25% for the year 2021 and 23% for the year 2022 over capital gains derived from the transaction, if the seller is a legal entity; or (ii) an income tax from between 15% to 40% depending on the income gained from the transaction if the seller is an individual. A share deal is not subject to land registry fees.
Capital gains derived from the transfer of shares in a Turkish company are 75% exempt from corporate tax and 100% exempt from income tax (if the seller is an individual and the company has issued share certificates representing such shares) if the relevant shares have been held for at least two years prior to their transfer.
As the tax rates change from time to time, investors should consult with professional tax advisors before investing in real estate.
2.3 Asset deal
In an asset deal, the investors either close the transaction by directly purchasing the real estate through a title transfer before the relevant land registry if the due diligence is satisfactory, or the parties enter into a promise-to-sell agreement if there are CPs that need to be fulfilled before the transfer of title and/or the purchaser wishes to create contractual exclusivity over the target real property prior to the transfer of title. In an asset sale transaction, the purchaser’s risk is generally limited and directly related to the real estate itself. The investors choose the method of executing a promise-to-sell agreement and include special terms to this agreement to address, mitigate, and settle the risks and/or exposures, as it is impossible to include non-standard terms in an official share and purchase agreement. These agreements may be annotated with the land registry. Once they are annotated, they become binding on third parties.
The due diligence works carried out in the context of a real estate-related business combination differ from share deals and asset deals. In an asset deal, the legal due diligence review is mainly conducted in relation to (i) the land registry records and cadastral records, (ii) the zoning plans, construction licenses, and building usage permits, and (iii) the material agreements.
Real estate sale and purchase agreements are exempt from the stamp duty charge. However, real estate sale transactions are subject to a land registry fee corresponding to 4% of the sale value stated in the official deed that is to be paid equally by the seller and the purchaser (i.e., 2% on each side). If the sale value is less than the real estate tax base of the property, then the land registry fee is calculated over the real estate tax base. Additionally, a working capital fee arises out of each transaction.
If the real estate is sold by a Turkish company before a two-year period elapses following the acquisition of the real estate, the income generated from the sale of real estate will be subject to corporate tax at 25%. This rate is expected to be 23% for 2022. Additionally, such sale transactions will be subject to Value Added Tax (VAT). The rate of VAT for the sale of residential flats having a surface area of less than 150 square meters is 1% and the VAT rate for the sale of any other type of real estate is 18% of the sale price.
However, if the real estate is sold two years after the real estate’s acquisition, then 50% of the income will be exempt from the corporate tax provided that certain conditions are met. The sale of real estate that has been held for at least two years by its owner will not be subject to VAT provided that the Company does not engage in commercial activities, as explained above.
Additionally, the sale of real estate owned by individuals is exempt from VAT. However, such sales are subject to income tax if the real estate is sold before a five-year period elapses following the acquisition of the real estate. Capital gains arising from the sale of real property by individuals are subject to income tax at rates that vary depending on the income gained from the sale transaction.
As the tax rates change from time to time, investors should consult with professional tax advisors before investing in real estate.
2.4 Disposal process
Real estate promise to sell agreements must be prepared in statutory form and executed before a notary public in order to be valid. Although real estate promise to sell agreements are currently exempt from stamp duty, they are subject to notary fees and charges that change depending on the number of the signatories and the number of pages.
For a real estate sale and purchase agreement to be valid and take effect, it must be drafted by the land registry officers in the standard form and executed by the parties in the official form (e.g., in the land registry office, in front of a camera). In practice, non-standard terms may not be included in an official sale and purchase agreement.
As to the transfer of shares in a joint stock corporation, there are two types of shares in a joint stock corporation (i.e., registered shares and bearer shares). For registered shares, a share transfer is completed by the endorsement of the share certificates (if any). For bearer shares, delivery of the relevant share certificate is sufficient to complete the share transfer. For both registered and bearer shares, subject to certain exceptions, there is no need for registration with the trade registry and if the shares (of joint stock corporations) that are to be transferred are represented by share certificates, SPAs are not subject to any special form requirement. However, the share transfer must be recorded in the company’s share ledger, so that such transfer is valid for the company. If the relevant joint stock corporation has not issued any share certificates, a SPA in written form must also be executed between the parties.
As for limited liability companies, SPAs must be made in written form and notarized.
Under Turkish law, there are certain restrictions regarding foreign individuals, foreign companies, and foreign capital companies’ acquisition of real property. The Land Registry Law prohibits foreign companies incorporated and resident abroad, from directly purchasing real property in Turkey. There are only three exceptions to this general prohibition. Accordingly, foreign companies carrying out their businesses within the scope of the Turkish Petroleum Law, Tourism Incentive Law, and Industrial Zones Law may acquire real property in Turkey.
Foreign capital companies incorporated in Turkey that have foreign shareholders (i) individually or collectively holding 50% or more shares of the said company, or (ii) having the right to assign or dismiss the majority of persons in the company management, may acquire real property in Turkey subject to a permission process. In order to purchase real property, the foreign capital company must complete a series of bureaucratic transactions.
To directly purchase real property, Turkish companies that are foreign capitalized are required to apply to the corresponding real property’s governorship. The governorship and the military and police departments will determine whether the target real property is located within a military or special security zone and, if so, whether the purchase of the particular property by the applicant endangers national security or not. Upon a positive assessment of the governmental authorities, the governorship informs the applicant company and the relevant land registry office that the requested purchase may be completed.
The same principles will apply if a foreign investor directly or indirectly acquires 50% or more shares of a Turkish company that owns real property (i.e., share deal). In such an event, the relevant company must notify the Ministry of Economy, which will trigger the approval procedure explained above. If the relevant foreign capitalized Turkish company owns a real property located in military and special security zones and the governmental authorities decide that the new shareholder’s acquisition endangers national security, the company may be forced to dispose of the real property.
On a final note, there are approval procedures to acquire real estate in special zones such as organized industrial zones. As per the legislation regulating organized industrial zones (the OIZs), it is obligatory to obtain the relevant OIZ’s permission to transfer ownership of the real property located in the OIZs.
No documents are mandatorily handed over to the purchaser upon the disposal, such as architectural projects, permits, and licenses, which are kept by the administrative authorities.
2.5 Registration of change of ownership
In the event of an asset deal, once the sale and purchase agreement is signed by the parties before the land registry, the ownership of the real property automatically passes onto the purchaser and the land registry officer registers the real property in the name of the purchaser.
For a share deal, since the subject real property is already registered in the target company’s name, no further transactions at the land registry are necessary. In the event of a merger or a spin-off, once the share deal is completed, the trade registry will inform the land registry and the land registry will correct its records if needed.
2.6 Risks to be considered
As per the TCC, each joint owner of real property has a pre-emption right on the subject property. Such pre-emption right can be exercised when a joint owner sells their shares partially or in its entirety to a third person.
In the event of a share deal, pre-emptive rights can only be exercised if such pre-emptive rights are regulated in the company’s articles of association or in a shareholders’ agreement.
The Turkish Code of Obligations (TCO) regulates the buyer’s inspection obligation. Accordingly, buyers are obliged to inspect the acquired assets at their earliest convenience. Conducting due diligence reviews on the target real property or company is just an extension of this inspection obligation. If the defects of real property remain undetected in the due diligence process, then the buyer’s remedy options would vary depending on the defect and the parties’ agreement. For instance, in the case of a structural defect in a building, the purchaser will have the option to request a remedy from the contractor of the building as per the TCO. The buyer does not have a uniform option with respect to requesting remedy for the damages arising from the defects.
3. REAL ESTATE FINANCING
3.1 Key sources of financing
Investors often prefer to finance the lower percentage of their contemplated real property investment projects through their own savings and the remaining parts by using loans from both public and private sources, investment banks, development banks, and lending agencies.
Banks and other financing institutions determine the amount of the loan in line with the Earnings Before Interest, Taxes, Depreciation, and Amortization values of the borrower. In addition, the parties are free to determine the interest rates in line with current market rates that are to be accrued for three, six, or 12 months under loan agreements. Banks or financing institutions often require that the applicants prepare market, technical, financial due diligence reports and, most importantly, appraisal reports for the real property, which may vary according to the nature of a contemplated project, in order to negotiate the loan amount to be borrowed by loan applicants. In practice, investors execute loan agreements with a term of 10–12 years in order to finance their commercial real estate investments.
In addition to loans, sale and leaseback transactions, corporate bonds and Islamic financing structures are also commonly used. For major international projects, the Turkish Government can fund companies' debt in build-operate-transfer and build-lease-transfer models.
It is also worth mentioning that the Turkish real estate market has developed a financing method called “construction agreement in return for land share (or construction agreement in return for flat).” These contracts are mixed contracts that are not defined under the law and they are flexible enough to adjust for the special needs of the project. Under these agreements, the contractor undertakes the construction works and, in return, the landowner promises to transfer a certain ratio of its land share to the contractor. Depending on the project, the landowner may transfer its land in its entity to the contractor at the beginning of the construction by establishing a mortgage on the property or obtaining a letter of guarantee from the contractor. The contractor then transfers the predetermined independent units (flats) to the landowner once the construction is finished. This method allows the contractors to avoid land costs and enables them to sell the independent units constructed on third-party land to finance the project.
Finally, some of the construction companies provide their individual customers with credit possibility/payment plans. Payment plans help to increase the feasibility of real estate sales.
3.2 Protection of creditors
Although each project and investment have their special conditions, real estate investors usually utilize their real estate as security. Mortgages and assignments of lease receivables are among the most common securities for real estate investments. Letters of guarantee, account pledges, commercial enterprise pledges, and share pledges are commonly used as well.
4. REAL ESTATE TAXES
4.1 Transfer taxes
Please refer to our explanations under section 2.4.
4.2 Specific real estate taxes
Real estate in Turkey is subject to annual property tax according to their qualification. Real estate in the qualification of buildings is subject to annual property tax rates varying between 0.1% and 0.4%, whereas real estate in the qualification of lands is subject to annual property tax rates varying between 0.1% and 0.6%. These tax rates apply over the real estate tax base. Annual taxes are paid in two equal installments in May and November.
Recently, a valuable house tax has also been introduced in Turkey. Accordingly, if the value of the residential property is (i) between TRY 5 million and TRY 7.5 million, for the amount exceeding TRY 5 million, a valuable house tax in the amount of 0.3% will be payable for the amount exceeding TRY 5 million; (ii) up to TRY 10 million, TRY 7,500 for TRY 7 million, and a valuable house tax in the amount of 0.6% for the exceeding amount, and (iii) exceeding TRY 10 million, TRY 22,500 for TRY 10 million, and a valuable house tax in the amount of 0.10% for the exceeding amount will be borne.
As the tax rates change from time to time, investors should consult with professional tax advisors before investing in real estate.
5.1 Legal framework for condominiums
Condominiums exist under Turkish law as a special type of real estate which can be registered with the land registry. These are usually referred to as independent units. Condominium ownership grants the owner basic rights and benefits attached to ordinary real estate. As per the Condominium Law, condominium ownership is established on the independent units of a building structure constructed on land, which can be utilized separately on their own (such as residential flats, business offices, shops, stores, cellars, warehouses).
Before establishing condominium ownership and as a first step, condominium servitude is established on the land where the independent units will be constructed based on the condominium principles agreed to in the management plan and the architectural projects of the building. Once the construction of the building structure is complete, the condominium servitude is converted into condominium ownership.
Condominium ownership provides the co-owners with the freehold title of their independent unit and a land share (which is calculated based on the value of their independent unit in comparison to the whole real estate). Even when the building structure is demolished, the co-owners’ ownership rights continue on the land at their land share.
5.2 Rights and duties of co-owners
As per the Condominium Law, condominium owners have all rights and powers that the TCC grants to real estate owners and condominium owners can exercise such rights on the independent units belonging to them. Condominium owners can transfer their title to third parties and establish mortgages on their independent units. Additionally, condominium ownership grants the co-owners a right to utilize their respective buildings and the main real property’s (i) common areas, (ii) infrastructure and installations (such as the elevators, general coal bunker, garage, terrace, laundry, and laundry drying areas is proportional), and (iii) appurtenances.
The Condominium Law allows condominium owners to make repairs, installations, and changes in their independent units that will not affect or harm the main real property or other independent units without obtaining the consent of the other co-owners. If a repair, installation or a change to be made in an independent unit affects the connected parts (parts that are connected to each other with a ceiling, floor, or wall) of multiple independent units, then these works can be made with the mutual consent of the affected units’ co-owners.
Similar to condominium ownership, condominium servitude is also a transferrable and mortgageable right under Turkish law. Condominium servitude also gives their holders a right to demand and file a lawsuit for the fulfillment of the obligations regarding the completion of the building to be built on the land.
When using their independent units, appurtenances, and common places, co-owners are obliged not to cause disturbance to one another, not to violate each other's rights, and to comply with the provisions of the management plan.
Co-owners are obliged to care for the main property and meticulously protect its architectural condition, beauty, and durability.
Co-owners can make no repairs, installations, or changes regarding their own independent units if these will damage the main property.
5.3 Liability of co-owners
Each co-owner is liable towards the other co-owners for the damages caused to the main real property and other independent units.
Each co-owner is obliged to bear the common expenses of the main property unless otherwise agreed in a management plan or another agreement. The co-owners cannot refrain from bearing the common expenses allocated to their independent unit, even if they do not use, or need to use, the common areas. If the co-owners do not cover their share of the common expenses, then any co-owner may file a lawsuit or initiate enforcement proceedings against such owner.
The tenants who use the independent units based on a lease agreement are also jointly and severally liable for the common expenses allocated to their independent unit. However, the tenant's liability is limited to the amount of rent he/she is obliged to pay.
5.4 Rights and duties of condominium associations
Condominium associations convene at least once a year with a qualified majority, which means that more than one-half of the co-owners and more than one-half of land share owners must be represented at the general assembly. All decisions, except for the ones that require a special quorum, are taken by the majority of the votes. Each co-owner has one right to vote, regardless of their land share. All condominium owners and their successors, managers, and auditors are obliged to comply with the decisions of the condominium associations.
The condominium associations prepare and amend the management plan; decide on the management style of the main property; appoint and dismiss the managers; audit the management operation projects, and income and expenditure reports submitted by the managers.
The disputes that may arise due to the use or management of the main property (i) between the co-owners; or (ii) between the co-owners and the manager and the supervisors; or (iii) between the supervisors and the managers, are also resolved and settled by the condominium associations.
The rights and duties of the manager of the condominium association are extensive. Performing the decisions made by the condominium association, making sure that the main property is being used in line with its purpose, insuring the main property, and accepting the services that concern all of the whole co-owners are among the manager’s rights and duties.
6. COMMERCIAL LEASES
6.1 Form and contents of a lease agreement
Under the TCO there is no form requirement regarding the validity of lease agreements and the lessors are not required to own the leased properties for a lease agreement to be duly executed.
The TCO also allows foreign legal entities or individuals to lease real property in Turkey. In principle, foreigners may freely lease real property in Turkey, subject to the same terms and conditions applicable to Turkish legal entities and individuals. However, foreigners are not allowed to lease real properties that are located within military zones and they must obtain written pre-approval from the governor’s office to lease real properties that are located within special security zones.
The TCO does not set forth a time limit for lease agreements and they can be executed with a definite or an indefinite term. However, lease agreements with governmental and administrative bodies are subject to certain time limits.
From the tenant’s perspective, the total investment amount made for commercial real property is one of the key factors when determining the term of the lease. In general, commercial leases are executed for five or 10 years for constructed premises. The term extends to 20 or even 30 years if the tenant undertakes to construct a building on the premises. In any event, it is common to include an early termination right in favor of the tenant in the agreement.
When it comes to provisions regarding the premises, a clear description of the leased premises and the condition of the premises at the time the landlord delivers it to the tenant should be stated in the agreement. Additionally, before entering into a lease agreement, the tenant should ensure that: (i) the leased premises are vacant and free from any other claims for tenancy or possession; (ii) there are no encumbrances on the premises that may hinder the tenant’s lease; and (iii) the permitted usage type of the premises suits the tenant’s prospective activities within the premises. Usually, all of these matters are stated in the agreements. It also is helpful to have the lease state that the leased premises are structurally sound, in good and proper working order, and in compliance with all laws, rules, and regulations.
For the leasing of stores in shopping malls, it is common to agree on a turnover-based rent. In these types of leases, tenants undertake to pay the base rent, regardless of their turnover, as well as the difference between the base rent and the turnover rent provided that a fixed percentage of their turnover exceeds the base rent. For office leases and other commercial leases, the rent is usually agreed as fixed rent subject to periodic adjustment or as step rent.
6.2 Regulation of leases
The TCO does not distinguish between residential and commercial leases and has a very protective approach towards tenants for historical reasons. Most of the TCO’s provisions in connection with commercial leases are statutory in favor of tenants and cannot be altered to the disadvantage of the tenants.
6.3 Registration of leases
Although it is possible to register lease agreements with the land registry, it is not a requirement of validity. On the other hand, registering the lease agreement with the land registry helps tenants to secure their leases in the event that the leased premises are sold to a third party.
When premises that are occupied by a tenant are sold to a third party, the new owner automatically becomes a party to the lease agreement. However, the new owner may file a lawsuit for the tenant’s eviction based on their own (or a particular relative’s) need for the premises. To prevent the eviction risk, a lease agreement should be registered with the land registry. Once a lease agreement is registered, the new owner will be deemed to have acquired the premises together with the lease and, therefore, will not be entitled to evict the tenant until the expiration of the lease term.
In practice, tenants prefer to register the lease agreement if they have made a significant investment into the leased premises or if the leased premises are significant for their operations. While registering a lease agreement related to leased premises in a shopping mall may not be critical due to the low risk of eviction based on the landlord’s own need for use, it is recommended that leases of stand-alone buildings be registered.
6.4 Termination of leases and renewals
As per the TCO, leases automatically and consecutively extend for one year, unless the tenants serve a notice to terminate the agreement at least 15 days prior to the expiry date. In principle, landlords cannot prevent the extension of the lease agreements until the tenth extension year following the initial lease term. During this ten-year extension period, the landlords may only request the eviction of the property from the court, based on the grounds exhaustively listed under the TCO. However, after the tenth extension year, the lessors may terminate the agreement based on the expiry of the term by serving notice at least three months prior to the expiry date.
Both parties are allowed to terminate the agreement if the lease relationship becomes unbearable for them due to a material reason.
The grounds on which landlords are allowed to terminate a lease are listed exhaustively and the parties cannot deem every breach as a material breach and grounds for termination. Although the parties may determine additional termination grounds in favor of landlords, the validity of such provisions is much-debated among the scholars and, in any event, subject to the court’s review. Termination grounds listed in the TCO are (i) the non-payment of rent, (ii) the landlord’s need to use the premises for its own (or a particular relative’s) need, (iii) the necessity to make material modifications to the premises, (iv) the tenant’s written promise to evict the premises on a certain date, and (v) the tenant owns other habitable premises in the same area as the leased premises. To exercise its termination right based on the above grounds, the landlord must file a lawsuit.
The landlords may also terminate the agreement by serving a termination notice if the tenants fail to exercise due care for the premises and due consideration for others who share the building or for neighbors. However, until an eviction decision is rendered by the court, the tenant may continue to occupy the premises. The landlords may not terminate lease agreements without cause.
The tenants are allowed to terminate the lease if there is a material defect in the leased premises. The parties may determine additional termination grounds in favor of the tenants in the lease agreements.
If a tenant terminates the lease without cause before its expiry, their obligation to pay the rent continues until the landlord can find a suitable new tenant. In practice, the courts usually rule for the payment of up to six months‘ rent depending on the nature of the property. To avoid paying compensation, the tenants usually request a unilateral early termination right.
6.5 Rent regulations and rent reviews
Under the TCO, the parties may freely determine the rent while executing a lease agreement. However, due to the recent rapid fluctuations in exchange rates, an amendment was made to Decree no. 32 on Protection of the Value of Turkish Currency (Decree) on September 13, 2018, to restrict the use of foreign currency in certain types of agreements. As per the Decree, the rent and other contractual payment obligations cannot be denominated in or indexed to foreign currencies in the lease agreements executed between Turkish residents in connection with real properties. However, there are exemptions to this restriction. The rental fee may be denominated in a foreign currency if the tenant is a foreign individual/entity, or is a foreign capitalized Turkish company.
The TCO also provides a restriction on rental increases for residences and roofed workplaces leases. As per this restriction, if the rent is denominated in Turkish currency, the annual rent increase rate cannot be more than the average of the change in the consumer price index in the last 12 months to be announced by the Turkish Statistics Institute within each five-year lease term. On the other hand, if the rent is determined in foreign currency, the rent cannot be subject to an annual increase until the end of each five-year lease term. Additionally, both parties are allowed to initiate a lawsuit after five years for adjustment of the rent by the court based on its market value.
6.6 Services to be provided together with the lease
Services to be provided together with the lease may be agreed upon by the parties. However, as per the TCO, if the validity or continuity of a lease agreement is conditional upon the tenant’s undertaking of another obligation that does not benefit the tenant and that is not directly connected to the utilization of the leased premises, the agreement that is linked to the lease becomes null and void.
6.7 Fit-out works and their regulation
The tenant may make alterations and renewals to the premises by obtaining the landlord’s prior consent. If the landlord provides their consent to the tenant for the tenant’s intended fit-out, the landlord cannot require the tenant to reinstate the leased premises to its original condition when it was delivered to the tenant and the tenant cannot request the value of its investment from the landlord unless the parties have agreed otherwise.
6.8 Transfer of leases and leased assets
As per the TCO, the tenants are not allowed to sublease the leased premises or transfer the lease agreement to a third party without obtaining the landlord’s consent. For commercial leases, the landlord cannot refrain from giving their consent to the transfer of the lease without a valid reason. When a lease is transferred, the transferor remains liable to the landlord for up to two years.
According to the TCO, if the leased property is transferred to a third party for any reason after the conclusion of the lease agreement, the new owner becomes a party to the lease agreement. This rule also applies when a third party acquires a right in rem on the leased property that affects the tenant’s rights.