Turkey – Commercial Leases Rules

Lease

Commercial real property investments are in rapid increase in Turkey for a decade. 301 shopping centers are operational in Turkey and 95 new shopping centers are expected to be opened. Istanbul’s office market has grown by 138% between 2005 and 2015. These developments in the real estate sector make Turkey a tempting alternative for both local and foreign investors.

The developing economy and rapid increase in commercial leases (office, stores, hotel and private hospital leases) has led to an increase in real estate prices. The significant increase in real estate prices and construction costs inevitably compels investors to borrow loans from financial institutions, to acquire and develop real properties.

Financial institutions require certain securities while granting high amounts of loans, in order to ensure repayment of the loan. A common way to secure repayment is to establish a mortgage on the property. Turkish Civil Code Article 851 enables to establish a lien in foreign currency, in favor of financial institutions.

Commercial real property investors tend to lease newly constructed units to third parties, instead of selling such units. For this reason, the rental fee to be received from the prospective tenants of shops and office leases becomes a key factor to increase the bankability of investors’ planning projects. Usually, investors assign their rental fee receivables directly to the financial institution, in order to secure repayment of the loan. The tenants pay their rental fees directly to the relevant financial institution. Most of the loans borrowed from financial institutions are in foreign currencies (usually in USD or in Euro). It becomes crucial that rental fees are also determined in the same foreign currency to eliminate currency conversion related risks. Moreover, rental fees determined in foreign currency should be subject to a certain increase, in order to align the rental fees with the inflation rate as well as the continuously increasing market prices of real property.

The determination and the increase of the rental fee in a foreign currency and ensuring the payment of the rental fee for the whole rental term are key factors for investors to increase the bankability of their investments. Given that lease agreements are governed under the Turkish Code of Obligations, the determination and increase of rental fees in foreign currency as well as penalty provisions in lease agreements will be subject to the Turkish Code of Obligations. The rental fee may be agreed in a foreign currency. However, the rental fee determined in foreign currency cannot be subjected to an increase before five years.

On the other hand, the landlord (i.e. investor) cannot impose any obligations to the tenant other than the rental fee and common expenses. In this regard, penalty or acceleration clause provisions under lease agreements in the event of non-payment of the rental fee are not valid.

Due to the fact that these provisions have heavily impaired commercial leases and the bankability of investments of developers, they were criticized during the preparation period of the Turkish Code of Obligations. After heavy lobbying in the lead of shopping center investors, it was determined that the entry into force of these provisions was postponed until 2020 for commercial lease agreements (where the parties are merchants or public legal entities). By doing so, the lawmaker implicitly acknowledged that there is a difference between a residential lease and a commercial lease.

The parties to a commercial lease agreement are enjoying the principle of freedom of contract on rental fee related provisions since the enactment of Law No. 6570 on Real Property Leases. The freedom will likely be over in 2020. The lawmaker will certainly consider enacting a specific law for commercial leases, whereby merchants may be able to fully enjoy the freedom of contract.

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