The Amendments and Innovations Brought by the New Financial Leasing Law - Turkey
Call the Attorney at +90 212 2807433
This article is a comparative study which points the differences between the Law on Financial Leasing, Factoring and Financing Companies and the repealed Financial Leasing Law.
The Law on the Financial Leasing, Factoring and Financing Companies (the “New Law”) has entered into force as of its publication in the Official Gazette dated December 13, 2012. The New Law, which has abolished (i) the Financial Leasing Law numbered 3226 (the “Former Law”) and (ii) the Decree in Force of Law on Loan Transactions numbered 90, and combined the provisions regarding the establishment and operation procedures of financial leasing, factoring and financing companies and the agreements related to the same under a single roof.
As can be seen below the New Law provides numerous radical amendments regarding financial leases, i.e. the execution of agreements, registration procedures, cross-border financial leases, terms, insurance, assignment of the agreement by the lessee, sell and leaseback, non-liability clause, remedies for the lessor in case the lessee does not exercise its purchase right, termination and taxes.
The Union will be Established
The most significant innovation provided under the New Law is the establishment of the Union of Financial Leasing, Factoring and Financing Companies (“Union”) as a public occupational organization. According to the New Law, each financial leasing, factoring and financing company must join this union. The Union will be established within six months of the enforcement date of the New Law, which is December 13, 2012. The regulation detailing the structure of the Union and the representation in the same, rules of procedures and the scope of business of the Union, will be prepared by Financial Leasing Association (FIDER), Factoring Association and Association of Financing Companies (TUFIDER) upon the assent of the Banking Regulation and Supervision Agency (“BRSA”) and entered into force with a Council of Minister’s decree.
The authorities provided by the New Law for the Union is stated herein below under the related headings.
Leasable Good Types are Increased
The Former Law provided that intellectual property and industrial rights cannot be the subject of financial lease agreements. This provision remains the same under the New Law, but with an exemption: The New Law states that copies of computer software can be the subject of a lease agreement.
Under the New Law, the type of products which may be leased is extended to include parts or accessories of a property, which do not alter the basic nature of the original lease.
Form of the Agreement is Softened
Pursuant to the New Law, a financial lease agreement (an “Agreement”) must be in writing. In contrast to the Former Law, the New Law does not provide the Agreement to be drafted ex officio by and executed before a Turkish Notary Public. This new provision will definitely reduce the transaction costs in favor of both the lessor and the lessee. In practice, the notaries were not drafting these Agreements ex officio as they should, but only adjusting the agreement, which had been agreed by the parties, in accordance with the official form provided under the Former Law.
Registration Procedure is Changing
The New Law has established a new provision regarding the registration procedures of the movable assets. According to this provision, Agreements related to movable assets will be registered with a special registry. Therefore, an Agreement related to an aircraft will be registered with the aircraft registry. In any case, the lessor must notify the Union on such registration.
The New Law also provides that Agreements related to the movable estates which do not have a special registry will be registered with the Union.
Under the reasoning of the New Law, it is stated that such registration system is needed because the system of registration with the Turkish Notary Public is not sufficient to prevent any bona fide acquisition by third parties who are not on notice of the lessor's rights in the leased movable. The New Law expressly emphasizes that the registry to be held by the Union will be public, similar to the land registry, and that therefore, no one could claim that they were not on notice of the records kept in such registry. This provision is quite important with respect to the financial leases transacted by foreigners in Turkey, because it builds trust in favor of the lessors.
The procedures and principles regarding the registration of Agreements with a special registry will be provided by the Union and until such procedures and principles are provided, the provisions on registration under the Former Law will continue to apply.
Cross-Border Financial Leases
a. Minimum Rental Amount
The Former Law provided that the payments in case of cross-border leases may not be less than US$ 25,000 per annum (the BRSA was authorized to increase or decrease this amount). The New Law does not provide for such a minimum threshold for cross-border financial leases. However, such a threshold may be determined by the Union, because the New Law states that the procedures and principles regarding cross-border leases will be determined by the Union.
b. Registration
It is stated under the New Law that the cross-border Agreements must be registered with the Union Registry, instead of the BRSA. As a transition provision, the New Law states that the provisions of the Former Law on registration of cross-border Agreements will continue to be registered with the BRSA until the establishment of the Union.
Lease Term Limitation
The Former law provided that the term of the Agreements should be at least four years and could be shortened by the Council of Ministers with a regulation. This mandatory period of four years was decreased to two years by an additional article to the Former Law, related to “the cross-border financial leases of aircraft, their engines and their equipments and parts to the airway companies operating in transportation of passengers and freight”.
The New Law does not stipulate any time limitation with respect to the lease term. As a matter of the fact, the New Law abolished the necessity of the existence of the minimum time limitation for the validity of the Agreement.
As a transition provision, the New Law states that the mandatory lease term provided under the Former Law will continue to apply for the Agreements executed pursuant to the Former Law. We interpret a contrario that the New Law will apply to all of the Agreements executed during the effect of the Former Law, except the term provision under the Former Law.
Collecting the Rents of the Undelivered Properties
According to the New Law, rents may be collected for goods prior to delivery and even prior to production. This provision aims to break the bond between the delivery of the leased property and the collection of rents. However, in order to protect the lessee the law also states that delivery of such goods must occur within two years of the date of the Agreement.
Insurer can be Determined in the Agreement
The New Law keeps the provision of the Former Law that obliges the leased property to be insured. Under the Former Law, the lessee was responsible for purchasing insurance, and there was some disagreement in the marketplace over whether or not that provision was mandatory. However, the New Law eliminates the ambiguity by stipulating that the property must be insured but leaving it up to the parties to decide which of them will be responsible for acquiring insurance.
The Assignment of the Rights and Duties of the Lessee
The Former Law prohibited the assignment of the rights and duties of the lessee except for leases related to housing finance or providing investment finance. This was amended under the New Law, so has now become possible for the lessee to assign the Agreement and all of the rights and duties arising therefrom.
Sell and Lease Back
The New Law provides “purchasing directly from the lessee” option as one of the methods by which a lessor may acquire property. Consequently, the previous requirement that a lease could only be acquired from the third parties is eliminated and “sell and lease back” has become possible, as stated under the reasoning of the New Law. Sell and lease back provides the lessee with cash, by letting it to sell its own property to the leasing company and lease back such property to continue to its business. In our opinion, sell and lease back is very important for the continuity of business during times where there is decreased cash flow.
Although the Former Law did not explicitly prohibit parties from selling and leasing back property, a decision of a Supreme Court Assembly of Civil Chambers dated 27.12.1995 and numbered 1995/12-787E., 1995/1157 K. evaluated such action as contrary to law. The New Law provided clarification in respect of this matter.
Non-liability Clause with respect to the Properties Provided by Third Parties
The New Law provides explicitly that a lessor cannot be held liable for the defects on the leased property, if the lease property is acquired by the lessor either (i) from a third party per the request or choice of the lessee; or (ii) from the lessee directly.
What happens if the Lessee does not Exercise Purchase Option?
The New Law provides that the lessor will be entitled to take any actions unilaterally in order to transfer the title of ownership of the leased property to the lessee, should (i) a purchase option is granted to the lessee under the Agreement; (ii) the lessor is entitled to transfer the title of ownership of the leased property to the lessee under the Agreement; (iii) the lessee fails to exercise its purchase option within 30 days; (iv) the lessee refrains from returning the leased property to the lessor; and also (v) the lessor delivers a prior written notice to the lessee to such effect.
The New Law explicitly states that the competent registries must meet the demand of the lessor in such cases. The legislature needs to pass secondary legislation to provide further guidance on this subject to the competent registries (land registry, ship registry, aircraft registry etc.).
Limited Liability in Incentive Certificate
The Former Law stated that if the property is purchased under an incentive certificate issued in the name of the lessee, the lessor who effectuated the purchase will take advantage of the respective incentives is the same as provided under the Former Law.
In order to clarify the subject matter, the New Law provides that the liability of the lessor with respect to the incentive certificate issued in the name of the lessee will be limited to the specific property that was leased.
Termination
According to the Former Law, an Agreement automatically and immediately terminates upon the occurrence of any of the following events:
i. expiry of the term of the Agreement;
ii. bankruptcy of the lessee;
iii. death of the lessee; or
iv. lessee’s loss of capacity to act.
Pursuant to the New Law, an Agreement may also be terminated upon the request of the lessee and before the expiry of its term if liquidation proceedings against the same are commenced.
The New Law further provides for an additional power of termination in favor of the lessor in case of a payment default by the lessee. If the lessee is given notice due to its failure to meet its payment obligations twice in a row or three times within one year the lessor may terminate the agreement.
In Terms of the Cape Town Convention
Article 31 of the New Law conflicts with the provisions of the Cape Town Convention (“CTC”) to which Turkey is a party. The termination provision of the CTC provides the lessor with an immediate termination if the lessee defaults on a payment. Depending on the argument defending that the CTC is related to fundamental rights and freedoms; one may conclude that the CTC provisions prevail according to Article 90/5 of the Constitution of Turkey. In case such argument is not upheld, in support of the argument that the CTC prevails, the New Law should include a provision stating that; “applicable without prejudice to the CTC, in case of any contradiction arises”.
Documents and Transactions Exempted from Stamp Tax and Charges
The Former Law stated only that the Agreements were exempted from any and all kinds of tax and charges. The New Law provides more clarity, stating explicitly that, in addition to the Agreements, any other documents issued related to the assignment, amendment and security of the Agreements are also exempted from stamp tax.
Moreover, for the sell and lease back agreements related to real estate, the New Law provides that in cases where the lessee opts to purchases the real estate at the end of the lease period, that sale is exempted from charges.
What is the Abolished Legislation?
The New Law, abolished both the Former Law and the Decree in Force of Law on Loan Transactions together with all of their annexes and amendments. The regulations issued based on such abolished legislation will continue to apply until the new regulations enter into force, except, of course, for any regulations that are contrary to the New Law,
The New Law further provides that the term provision of the Former Law will continue to apply to the Agreements executed when the Former Law was in force. This implies that the New Law, except for the term provision, will apply to Agreements signed will the Former Law was in effect. This appears to be an exception to the rule that transactions are ruled by the laws in force the time of their execution.
Conclusion is Pleasing
As described above, the New Law has brought many innovations relating to financial lease agreements, as well as compiled into one piece of legislation all of the provisions on the establishment and operation of the financial leasing, factoring and financing companies and related agreements. Such innovations are welcome since they constitute new transaction types for financial leasing companies. Furthermore, the New Law expands the types of property that can be leased and the types of leases that are available. It also creates a more orderly registration procedure for both domestic and cross-border financial leases, facilitates the registration procedures of the cross-border financial lease agreements and eliminates the term limitation for the Agreements.
ABOUT THE AUTHOR: Serap Zuvin and Duygu Beyazo
Serap Zuvin, who is the sole partner in the firm, has previously worked as International Legal Counsel for White & Case, LLP. Drawing on her previous experience where she represented several international corporate clients, Ms. Zuvin has specialized on corporate finance and in particular equipment finance. She has been extensively involved in various cross-border joint ventures and mergers and acquisitions. Ms. Zuvin is widely recognized in the profession for her expertise in aviation law and in particular aircraft financing where she has represented major airline companies. Ms. Zuvin is a member of both the Istanbul Bar and the International Bar Association (IBA).
Duygu Beyazo is a graduate of Istanbul Bilgi University, Faculty of Law. She was admitted to the Istanbul Bar in 2012. Her spoken languages are Turkish, English and German. Her practice areas are corporate and commercial law, aviation law, mergers and acquisitions, tourism law and pharmaceutical law.
Copyright Serap Zuvin Law Offices
More information about Serap Zuvin Law Offices
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
As can be seen below the New Law provides numerous radical amendments regarding financial leases, i.e. the execution of agreements, registration procedures, cross-border financial leases, terms, insurance, assignment of the agreement by the lessee, sell and leaseback, non-liability clause, remedies for the lessor in case the lessee does not exercise its purchase right, termination and taxes.
The Union will be Established
The most significant innovation provided under the New Law is the establishment of the Union of Financial Leasing, Factoring and Financing Companies (“Union”) as a public occupational organization. According to the New Law, each financial leasing, factoring and financing company must join this union. The Union will be established within six months of the enforcement date of the New Law, which is December 13, 2012. The regulation detailing the structure of the Union and the representation in the same, rules of procedures and the scope of business of the Union, will be prepared by Financial Leasing Association (FIDER), Factoring Association and Association of Financing Companies (TUFIDER) upon the assent of the Banking Regulation and Supervision Agency (“BRSA”) and entered into force with a Council of Minister’s decree.
The authorities provided by the New Law for the Union is stated herein below under the related headings.
Leasable Good Types are Increased
The Former Law provided that intellectual property and industrial rights cannot be the subject of financial lease agreements. This provision remains the same under the New Law, but with an exemption: The New Law states that copies of computer software can be the subject of a lease agreement.
Under the New Law, the type of products which may be leased is extended to include parts or accessories of a property, which do not alter the basic nature of the original lease.
Form of the Agreement is Softened
Pursuant to the New Law, a financial lease agreement (an “Agreement”) must be in writing. In contrast to the Former Law, the New Law does not provide the Agreement to be drafted ex officio by and executed before a Turkish Notary Public. This new provision will definitely reduce the transaction costs in favor of both the lessor and the lessee. In practice, the notaries were not drafting these Agreements ex officio as they should, but only adjusting the agreement, which had been agreed by the parties, in accordance with the official form provided under the Former Law.
Registration Procedure is Changing
The New Law has established a new provision regarding the registration procedures of the movable assets. According to this provision, Agreements related to movable assets will be registered with a special registry. Therefore, an Agreement related to an aircraft will be registered with the aircraft registry. In any case, the lessor must notify the Union on such registration.
The New Law also provides that Agreements related to the movable estates which do not have a special registry will be registered with the Union.
Under the reasoning of the New Law, it is stated that such registration system is needed because the system of registration with the Turkish Notary Public is not sufficient to prevent any bona fide acquisition by third parties who are not on notice of the lessor's rights in the leased movable. The New Law expressly emphasizes that the registry to be held by the Union will be public, similar to the land registry, and that therefore, no one could claim that they were not on notice of the records kept in such registry. This provision is quite important with respect to the financial leases transacted by foreigners in Turkey, because it builds trust in favor of the lessors.
The procedures and principles regarding the registration of Agreements with a special registry will be provided by the Union and until such procedures and principles are provided, the provisions on registration under the Former Law will continue to apply.
Cross-Border Financial Leases
a. Minimum Rental Amount
The Former Law provided that the payments in case of cross-border leases may not be less than US$ 25,000 per annum (the BRSA was authorized to increase or decrease this amount). The New Law does not provide for such a minimum threshold for cross-border financial leases. However, such a threshold may be determined by the Union, because the New Law states that the procedures and principles regarding cross-border leases will be determined by the Union.
b. Registration
It is stated under the New Law that the cross-border Agreements must be registered with the Union Registry, instead of the BRSA. As a transition provision, the New Law states that the provisions of the Former Law on registration of cross-border Agreements will continue to be registered with the BRSA until the establishment of the Union.
Lease Term Limitation
The Former law provided that the term of the Agreements should be at least four years and could be shortened by the Council of Ministers with a regulation. This mandatory period of four years was decreased to two years by an additional article to the Former Law, related to “the cross-border financial leases of aircraft, their engines and their equipments and parts to the airway companies operating in transportation of passengers and freight”.
The New Law does not stipulate any time limitation with respect to the lease term. As a matter of the fact, the New Law abolished the necessity of the existence of the minimum time limitation for the validity of the Agreement.
As a transition provision, the New Law states that the mandatory lease term provided under the Former Law will continue to apply for the Agreements executed pursuant to the Former Law. We interpret a contrario that the New Law will apply to all of the Agreements executed during the effect of the Former Law, except the term provision under the Former Law.
Collecting the Rents of the Undelivered Properties
According to the New Law, rents may be collected for goods prior to delivery and even prior to production. This provision aims to break the bond between the delivery of the leased property and the collection of rents. However, in order to protect the lessee the law also states that delivery of such goods must occur within two years of the date of the Agreement.
Insurer can be Determined in the Agreement
The New Law keeps the provision of the Former Law that obliges the leased property to be insured. Under the Former Law, the lessee was responsible for purchasing insurance, and there was some disagreement in the marketplace over whether or not that provision was mandatory. However, the New Law eliminates the ambiguity by stipulating that the property must be insured but leaving it up to the parties to decide which of them will be responsible for acquiring insurance.
The Assignment of the Rights and Duties of the Lessee
The Former Law prohibited the assignment of the rights and duties of the lessee except for leases related to housing finance or providing investment finance. This was amended under the New Law, so has now become possible for the lessee to assign the Agreement and all of the rights and duties arising therefrom.
Sell and Lease Back
The New Law provides “purchasing directly from the lessee” option as one of the methods by which a lessor may acquire property. Consequently, the previous requirement that a lease could only be acquired from the third parties is eliminated and “sell and lease back” has become possible, as stated under the reasoning of the New Law. Sell and lease back provides the lessee with cash, by letting it to sell its own property to the leasing company and lease back such property to continue to its business. In our opinion, sell and lease back is very important for the continuity of business during times where there is decreased cash flow.
Although the Former Law did not explicitly prohibit parties from selling and leasing back property, a decision of a Supreme Court Assembly of Civil Chambers dated 27.12.1995 and numbered 1995/12-787E., 1995/1157 K. evaluated such action as contrary to law. The New Law provided clarification in respect of this matter.
Non-liability Clause with respect to the Properties Provided by Third Parties
The New Law provides explicitly that a lessor cannot be held liable for the defects on the leased property, if the lease property is acquired by the lessor either (i) from a third party per the request or choice of the lessee; or (ii) from the lessee directly.
What happens if the Lessee does not Exercise Purchase Option?
The New Law provides that the lessor will be entitled to take any actions unilaterally in order to transfer the title of ownership of the leased property to the lessee, should (i) a purchase option is granted to the lessee under the Agreement; (ii) the lessor is entitled to transfer the title of ownership of the leased property to the lessee under the Agreement; (iii) the lessee fails to exercise its purchase option within 30 days; (iv) the lessee refrains from returning the leased property to the lessor; and also (v) the lessor delivers a prior written notice to the lessee to such effect.
The New Law explicitly states that the competent registries must meet the demand of the lessor in such cases. The legislature needs to pass secondary legislation to provide further guidance on this subject to the competent registries (land registry, ship registry, aircraft registry etc.).
Limited Liability in Incentive Certificate
The Former Law stated that if the property is purchased under an incentive certificate issued in the name of the lessee, the lessor who effectuated the purchase will take advantage of the respective incentives is the same as provided under the Former Law.
In order to clarify the subject matter, the New Law provides that the liability of the lessor with respect to the incentive certificate issued in the name of the lessee will be limited to the specific property that was leased.
Termination
According to the Former Law, an Agreement automatically and immediately terminates upon the occurrence of any of the following events:
i. expiry of the term of the Agreement;
ii. bankruptcy of the lessee;
iii. death of the lessee; or
iv. lessee’s loss of capacity to act.
Pursuant to the New Law, an Agreement may also be terminated upon the request of the lessee and before the expiry of its term if liquidation proceedings against the same are commenced.
The New Law further provides for an additional power of termination in favor of the lessor in case of a payment default by the lessee. If the lessee is given notice due to its failure to meet its payment obligations twice in a row or three times within one year the lessor may terminate the agreement.
In Terms of the Cape Town Convention
Article 31 of the New Law conflicts with the provisions of the Cape Town Convention (“CTC”) to which Turkey is a party. The termination provision of the CTC provides the lessor with an immediate termination if the lessee defaults on a payment. Depending on the argument defending that the CTC is related to fundamental rights and freedoms; one may conclude that the CTC provisions prevail according to Article 90/5 of the Constitution of Turkey. In case such argument is not upheld, in support of the argument that the CTC prevails, the New Law should include a provision stating that; “applicable without prejudice to the CTC, in case of any contradiction arises”.
Documents and Transactions Exempted from Stamp Tax and Charges
The Former Law stated only that the Agreements were exempted from any and all kinds of tax and charges. The New Law provides more clarity, stating explicitly that, in addition to the Agreements, any other documents issued related to the assignment, amendment and security of the Agreements are also exempted from stamp tax.
Moreover, for the sell and lease back agreements related to real estate, the New Law provides that in cases where the lessee opts to purchases the real estate at the end of the lease period, that sale is exempted from charges.
What is the Abolished Legislation?
The New Law, abolished both the Former Law and the Decree in Force of Law on Loan Transactions together with all of their annexes and amendments. The regulations issued based on such abolished legislation will continue to apply until the new regulations enter into force, except, of course, for any regulations that are contrary to the New Law,
The New Law further provides that the term provision of the Former Law will continue to apply to the Agreements executed when the Former Law was in force. This implies that the New Law, except for the term provision, will apply to Agreements signed will the Former Law was in effect. This appears to be an exception to the rule that transactions are ruled by the laws in force the time of their execution.
Conclusion is Pleasing
As described above, the New Law has brought many innovations relating to financial lease agreements, as well as compiled into one piece of legislation all of the provisions on the establishment and operation of the financial leasing, factoring and financing companies and related agreements. Such innovations are welcome since they constitute new transaction types for financial leasing companies. Furthermore, the New Law expands the types of property that can be leased and the types of leases that are available. It also creates a more orderly registration procedure for both domestic and cross-border financial leases, facilitates the registration procedures of the cross-border financial lease agreements and eliminates the term limitation for the Agreements.
ABOUT THE AUTHOR: Serap Zuvin and Duygu Beyazo
Serap Zuvin, who is the sole partner in the firm, has previously worked as International Legal Counsel for White & Case, LLP. Drawing on her previous experience where she represented several international corporate clients, Ms. Zuvin has specialized on corporate finance and in particular equipment finance. She has been extensively involved in various cross-border joint ventures and mergers and acquisitions. Ms. Zuvin is widely recognized in the profession for her expertise in aviation law and in particular aircraft financing where she has represented major airline companies. Ms. Zuvin is a member of both the Istanbul Bar and the International Bar Association (IBA).
Duygu Beyazo is a graduate of Istanbul Bilgi University, Faculty of Law. She was admitted to the Istanbul Bar in 2012. Her spoken languages are Turkish, English and German. Her practice areas are corporate and commercial law, aviation law, mergers and acquisitions, tourism law and pharmaceutical law.
Copyright Serap Zuvin Law Offices
More information about Serap Zuvin Law Offices
View all articles published by Serap Zuvin Law Offices
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
