Yes, Urban Area Is Transforming in Turkey; But How about the Elaboration of Risks?

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As a rapidly developing country with an emerging economy, Turkey spends substantial efforts to increase its activities in a variety of sectors; from energy to defense, construction, textile transportation, etc. Among all those, no other sector has been as vigorous as the construction sector.

Despite criticisms the Government has been more supportive to that sector, by providing generous incentives, launching many built operate transfer (BOT) projects etc. The efforts spent paid out and construction sector’s share in the Gross Domestic Product (GDP) has gradually increased through the years. While 4.6 % of the GDP was construction related in 2000, it hit an all-time high record
in 2016, with approximately 7.6 % share.

Besides various construction projects, urban transformation has been one of the major locomotives of the sector in the last couple of years. Due to the demographic structure of Turkey and increasing housing needs of people, it is anticipated that urban transformation activities will continue to grow in the following years. While it looks like a rewarding sector for the constructors, land owners and even third party purchasers , there are certain risks involved in those projects that need to be considered before jumping into it. In this article we will briefly inform you what urban transformation means and explain the most common problems encountered.

I. Urban Transformation in General

Urban Transformation term was brought to the Turkish legislation with the Law on the Transformation of the Areas under the Risk of Natural Disaster (“Urban Transformation Law”) . Urban Transformation Law, in general, regulates the procedures of demolishing the risky buildings and reconstructing them by providing their existing owners with temporary housing or provide financing to them to pay their rents throughout the reconstruction phase.

Pursuant to the Urban Transformation Law, in order to commence an urban transformation, a risk analysis must be carried out. To have such analysis made, the land owners or their legal representatives must apply to the qualified associations that are licensed by the Ministry of Environment and Urbanization of the Republic of Turkey (the “Ministry of Environment”). Once the analysis is complete, within 60 days, the risky status of the building shall be annotated to the Land Registry and a Building Consensus Protocol (Bina Ortak Karar Protokölü) must be issued by the land owners. If the subject protocol is signed by 2/3’s of the landowners, then the construction works may commence.

In a nutshell, urban transformation projects include three parties and two different contracts. (i) Construction Contract in Return for Land Share (Arsa Karşılığı İnşaat Sözleşmesi) between the constructor and land owners and (ii) Promise to Sell Contract (Gayrimenkul Satış Vaadi Sözleşmesi) between the constructor and third party purchaser who do not own a share on the land to be urbanized.

The commitment made by the land owners, namely a Construction Agreement in Return for Land Share (“Contract”), constitutes a mixed type of contract under Turkish laws., Their type is “mixed” because those contracts inherit the features and requirements of both the construction contracts and promise to sell contracts.

Under the Contract, the land owner promises to allocate his land for the construction and transfer the title of an agreed number of independent units to the constructor, following the completion of the construction. In return, and the constructor promises to complete the construction on the allocated piece of land within an agreed time and in accordance with the agreed construction plans. As a validity requirement, the Contract must be made drawn up by a Turkish notary public (ex officio) and its signatories must sign before the same. The Contracts made otherwise, do not constitute a valid Construction Agreement in Return for Land Share.

II. Outstanding Issues of Urban Transformation

While the procedure of commencing an urban transformation is challenging enough, both the land owners and third party purchasers, face a struggle after the commencement. The problems arise mostly due to (i) unrealistic time tables undertaken by the constructors for the completion dates, (ii) validity issues relating to of the Contracts, and (iii) delay or non-issuance of official title deed.

1. Unrealistic Completion Dates

Needless to say, undertaking a construction project entails conducting of substantial amount of work. It becomes only more burdensome in large-scale construction projects and gets more complicated by the involvement of multiple subcontractors and sponsors. On the other hand, however, irrespective of the scale and complexity of the construction, constructors are obliged to provide their customers (both third party purchasers and landowners) with a deadline for the completion of projects by considering the unexpected interruptions that may happen. Yet, in practice, constructors most of the time undertake unrealistic completion dates to be competitive.

In the event that a constructor cannot meet his undertaking, then landowners may exert their rights provided under Article 473/1 of the Turkish Code of Obligations (“TCO”). Under the article, the contract provider (landowner) is entitled to terminate the Contract if it is manifestly evident that the contractor will not be able to meet the deadline that he has undertook for the completion of the construction.due to (i) delay in starting the construction, (ii) delay in the completion, or (iii) a delay for a reason not attributable to the contract provider.

In case of termination, the contract provider is entitled to claim for the reimbursement of the amount paid if any, and also claim for compensation of the damages incurred due to the delay in completion of the work , unless the contractor proves that the damages are not attributable to him.

2. Validity of Promise to Sell Contracts

Promise to sell contracts are concluded between the seller (in this case the constructor) and the third party purchaser who do not own a share on the land to be urbanized. Under the promise to sell contracts, the constructor promises to enter into a sales agreement with the purchaser with the promise of selling and transferring the title of an immovable property upon completion of the construction.

Under the TCO, a promise to sell contract must be either (i) made in writing ex officio, before the head registrar of respective land registry office, or (ii) made ex officio before a notary public. This being the validity condition, contracts entered by and between the parties otherwise shall not be valid. This requirement of the law is of mandatory nature.

Unfortunately, , almost neither of the construction companies enter into promise to sell contracts ex officio before a notary public or land registrar in practice, simple in order to avoid payment of stamp tax, notary charges and land registry fees.

Since this non-compliance with the mandatory provision of the law, in relation to the entry into of the contracts, has become and established practice in the years, Turkish Supreme Court of Appeals has rendered decisions. for the purpose of protecting the purchasers on the basis of “good faith” principle of the Turkish Civil Law (“TCL”).

Unfortunately, some constructors either postpone or refrain from transferring the title deeds of the purchased premises to its right holder, by alleging the invalidity of the promise to sell contract submitted by the purchaser to get his title deed in return.

Consequently, even though the construction has been completed by the constructor, and the purchaser paid the purchase amount, it cannot receive its title deed for the property that he has purchased. In such cases, even though the promise to sell contract between the constructor and the purchaser has not been entered into in accordance with the mandatory provisions of the Turkish Law, the Turkish Supreme Court of Appeals try to establish a practice which regard those contracts as valid, and compel the constructor to transfer the title deed of the property to the purchaser who had already fulfilled his payment obligation.

3. What can be done against the constructor in default?

In case of the constructor being in default in honoring the terms of a validly executed promise to sell contract, following claims can be made by the purchaser; (i) action for performance case (Eda Davasi), or (ii) claim for compensation. Alternatively claim for unjust enrichment (Sebepsiz Zenginlesme Davası) should the promise to sell contract not be deemed valid by the court.

(i) Action for Performance

In the event that the constructor does not comply with the terms of a promise to sell contract, purchasers can file a court case against the constructor by claiming for the performance of the terms of the promise to sell contract. In case the court rules in favor of the purchaser, then the decision of the court shall constitute an obligation against the constructor to transfer the title to the purchaser of the property that has been purchased by him. Upon receipt of such a court decision, the land registry officer shall register the purchaser as the owner of the subject property.

Furthermore, pursuant to another decision of the of the Supreme Court of Appeal’s which establishes a precedent , “courts may directly order the transfer and registration of the title to the purchaser’s name pursuant to Article 716 of TCL for the sake of procedural economy, if (i) the buyer has paid the sales amount in full and the title deed is ready to be transferred to the purchaser”.

(ii) Claim for Compensation

Under the TCO, in case a contractor is in default on performing his obligations under a promise to sell contract, the purchaser may file a court case against him claiming for the compensation of the damages that he has incurred due to the failure of the contractor on performing his its obligations under the promise to sell contract, or (ii) not performing them within the agreed time frame.

III. Conclusion

It goes without saying that urban transformation and other major housing construction projects are attracting a significant interest. However allocating land to or purchasing immovable from these projects comes with its risks. The issues that are elaborated in the foregoing are the most common ones only and there may be other impediments as well. Anticipating those kinds of problems to the most possible extent and drafting custom-tailored agreements are the most reasonable precautions one can take. As Serap Zuvin Law Offices, we have solid expertise in Real Estate Law and Urban Transformation projects in particular. We always conduct an in depth evaluation and due diligence with respect to construction projects and constructor companies to foresee potential risks and advise on how to prevent them.

ABOUT THE AUTHOR: Ms. Serap Zuvin and Mr. Can Yilmaz
Ms. Serap Zuvin is the founding partner of Serap Zuvin Law Offices. Ms. Zuvin has specialized on corporate finance. She has been extensively involved in various cross-border joint ventures and mergers and acquisitions. She has established the subsidiaries and/or representative offices of multinational companies in Turkey.

Mr. Can Yilmaz is an associate lawyer at our office. Mr. Yilmaz focuses on corporate finance and aircraft finance law. Mr. Yilmaz provides legal assistance to corporate clients in cross border finance transactions with a focus on loan and acquisition financing.

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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.

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