Amendment to Turkish Code of Obligations: Recent Developments on Real Estate Lease Agreements

Amendment to Turkish Code of Obligations: Recent Developments on Real Estate Lease Agreements

New Cap on Lease Amount Increase Rate: Consumer Price Index
It was determined in the Medium-Term Plan pertaining to the years 2019-2023, published last September, that the cap on lease amount increase rate will be the Consumer Price Index (the “CPI”) rather than the Producer Price Index (the “PPI”), as the PPI rate was highly affected by fluctuations in foreign currency and commodity prices. In this regard, initially, the Communique on Decree No. 32 on Protection of the Value of Turkish Currency (the “Communique on Decree No. 32”) was amended to regulate that under certain circumstances, the lease amount of residences and roofed workplaces will be increased by the CPI. Accordingly, it was expected that the upper limit on lease amount increase rate for leases of residences and roofed workplaces set forth under the Turkish Code of Obligations No.6089 (the “TCO”) would be amended to the CPI. The awaited amendment is finally introduced by the Law on Amendments to the Tax Laws and Certain Laws and Decree Laws No. 7161 (the “Omnibus Bill”), which was published in the Official Gazette dated 18 January 2019 and entered into force on 1 January 2019.

Foreign Currency Leases
The paragraph setting forth that the foreign currency lease amounts cannot be changed during the initial five years term of the lease agreement, has been amended to include an additional sentence, stating that the provisions of Protection of the Value of Turkish Currency Law No 1567 will not be prejudiced. Thus, the interpretation of the respective provision as that the agreement prices may be freely determined in foreign currency is precluded, and it is clarified that this provision will only be applicable for the ones benefitting from the exemption of the ban on foreign currency transactions within the scope of Communique on Decree No.32.

Commercial Leases
On the other hand, the Omnibus Bill did not amend the statutory provision stating that some provisions, including Article 344 of the TCO, will not apply to workplace leases, where the lessee is an individual deemed as merchant under Turkish law or a private law or public law entity (“Commercial Leases”), until 1 July 2020. Thus, we believe that “freedom of contract” will apply to Commercial Leases (restrictions on foreign currency transactions reserved) until 1 July 2020. In this regard, the parties of lease agreements with lease amounts denominated in Turkish lira can freely determine the lease amount increase rate, regardless of the CPI cap until 1 July 2020. In addition, until 1 July 2020, the parties of lease agreements who can agree on a foreign currency lease amount as per the Communique on Decree No.32, will not be required to wait for five years to change the lease amount and will not be subject to a cap while determining the increase rate.

New Cap on Lease Amount Increase Rate: Consumer Price Index
It was determined in the Medium-Term Plan pertaining to the years 2019-2023, published last September, that the cap on lease amount increase rate will be the Consumer Price Index (the “CPI”) rather than the Producer Price Index (the “PPI”), as the PPI rate was highly affected by fluctuations in foreign currency and commodity prices. In this regard, initially, the Communique on Decree No. 32 on Protection of the Value of Turkish Currency (the “Communique on Decree No. 32”) was amended to regulate that under certain circumstances, the lease amount of residences and roofed workplaces will be increased by the CPI. Accordingly, it was expected that the upper limit on lease amount increase rate for leases of residences and roofed workplaces set forth under the Turkish Code of Obligations No.6089 (the “TCO”) would be amended to the CPI. The awaited amendment is finally introduced by the Law on Amendments to the Tax Laws and Certain Laws and Decree Laws No. 7161 (the “Omnibus Bill”), which was published in the Official Gazette dated 18 January 2019 and entered into force on 1 January 2019.

Foreign Currency Leases
The paragraph setting forth that the foreign currency lease amounts cannot be changed during the initial five years term of the lease agreement, has been amended to include an additional sentence, stating that the provisions of Protection of the Value of Turkish Currency Law No 1567 will not be prejudiced. Thus, the interpretation of the respective provision as that the agreement prices may be freely determined in foreign currency is precluded, and it is clarified that this provision will only be applicable for the ones benefitting from the exemption of the ban on foreign currency transactions within the scope of Communique on Decree No.32.

Commercial Leases
On the other hand, the Omnibus Bill did not amend the statutory provision stating that some provisions, including Article 344 of the TCO, will not apply to workplace leases, where the lessee is an individual deemed as merchant under Turkish law or a private law or public law entity (“Commercial Leases”), until 1 July 2020. Thus, we believe that “freedom of contract” will apply to Commercial Leases (restrictions on foreign currency transactions reserved) until 1 July 2020. In this regard, the parties of lease agreements with lease amounts denominated in Turkish lira can freely determine the lease amount increase rate, regardless of the CPI cap until 1 July 2020. In addition, until 1 July 2020, the parties of lease agreements who can agree on a foreign currency lease amount as per the Communique on Decree No.32, will not be required to wait for five years to change the lease amount and will not be subject to a cap while determining the increase rate.