The COVID-19 pandemic is showing the effects all over the world and as for Turkey, has taken immense measures to prevent the spread of COVID-19. Various government bodies issued decrees to prevent the spread of COVID-19. As we mentioned in our previous articles, The Republic of Turkey and the Ministry of Internal Affairs decided to temporarily close workplaces. This process, which started with an additional circular sent to all governorates on March 15, 2020, has already halted the activities of more than 200,000 businesses. In addition, on 22.03.2020, it was decided to stop all enforcement and bankruptcy proceedings with the Presidency Decision No. 2279. Later on, with the Provisional Article 2 of the Law No. 7226 which dated on 26.03.2020, it was concluded that the rental fees that were not paid between 1.3.2020-30.6.2020 will not constitute the reason for the termination of the lease contracts and evacuation of the workplaces. Problems have arisen as to whether the measures introduced in terms of lease contracts will be paid in respect of rental fees. In this article an assessment will be made on this issue.
1. The Status of Lease Agreements for Workplaces Closed by the Republic of Turkey Ministry of Internal Affairs Decree
Republic of Turkey’s Ministry of Internal Affairs has decided to stop the activities of some businesses across the country with a decree on the basis of COVID-19 measures. The probability of a problem is obvious in terms of the effect of the said circulars on debt relations. The question is based upon the businesses whose activities stopped for the prevention of spreading COVID-19 will be affected in relations with their current lease contracts and whether there is an obligation to pay the rental fees. Evaluations on the subject;
- Temporary impossibility,
- Hardship or
- Based on the provisions of default, may lead to certain conclusions such as, the lessee does not have to pay any rental fees if any subject stated above. However, as for the lessor it brings a burden in regard to the lessee who does not pays the rental fees and can cause unexpected situations. Furthermore, in this article it will be assessed whether the legal reasons to be relied on will eliminate the problems within the scope of the lease agreement in Turkey.
First of all, it should be noted that if there is a provision in the contract between the parties regarding an unpredictable situation and stated in the contract if an unpredictable event occurred the provision of freedom of contract will came in to force and both parties shall solve the situation in accordance with the contract provisions. In this article, the evaluation will be valid if there is no regulation in the contract that can be applied to such an event.
With the decrees on the COVID-19 pandemic, The Republic of Turkey the Ministries of Internal Affairs has decided to uphold the activities of some businesses across the country and it has been stated that the firms whose activities have been stopped with the decree, will not have to pay the rental fees in this period on the basis of impossibility of performance. However, from a standing point the impossibility of performance would be only applicable to the lessor in which the lessor's obligation is only to keep the lease at the intended use for the period stated in the contract. As it stated in Article 301 of Turkish Code of Obligations No. 6098 (‘’TCO’’); ‘’On the agreed date of the contract, the lessor is obliged to deliver it in a convenient condition and keep it in this condition for the duration of the contract. ’’ From the current problems occurring in Turkey, the prevention of spreading the pandemic further, the Ministry of Internal Affairs shut down all of the businesses. Therefore, the lessor could not fulfil his/her obligation to keep the chartered available for use. In the current situation, although the lessor would more likely to want to fulfil his/her debt, however unable to do so. If the decree is to be interpreted, it is considered that the impossibility of performance is temporary, considering that the restriction of activity is brought for a temporary period. It is expected that the current measures will end with the spread of COVID-19 pandemic. It should be noted that, if the existence of the impossibility is acknowledged, it would be not possible for the lessor, since the lessor would be faultless in the current measures. Therefore, the impossibility to perform would only be possible if it is an objective impossibility. According to Article 136 of TCO;
‘’If the performance of the debt becomes impossible due to the reasons that the debtor cannot be held responsible, the debt ends. The debtor, who has recovered from debt due to impossibility in contracts with mutual debts, is obliged to return the performance he/she received from the other party in accordance with the provisions of the enrichment without reason, and loses his/her right to request the act that has not yet been performed. The cases in which the damage arising before the performance of the debt by the law or contract is imposed on the creditor are excluded from this provision. If the borrower does not report to the creditor without delay and does not take the necessary measures to prevent the loss, it is obliged to eliminate the losses arising from this.’’
If we evaluate the relevant provision with the decree, it may be considered that the debt becomes impossible within the scope of the lessor's obligation to keep the renter suitable for the tenant's use. It can be based on the second paragraph of the related article and accordingly saves the tenant to pay the rental fees. Therefore, even the lessee payed the rental fees accordingly to the contract; the lessor has to give it back to the lessee in regard that the lessor’s obligation is not possible due to the circumstances. It should be noted that; Article 136 of TCO defines the impossibility of permanent performance in terms of the rapid executional contracts. The debt will terminate with the impossibility. If current events are taken into account, it is clear that the extraordinary situations experienced within the scope of the COVID-19 pandemic may be at the expense of the parties in which in any reason the contracts are terminated.
On the other hand, in cases where impossibility exists, this provision can only be applied in cases where impossibility is permanent. For this reason, in cases where the impossibility is accepted, it is necessary to determine whether this is temporary or permanent. In the event that the impossibility is consistent, the provisions of 112 and 136 of TCO will be in force depending on whether the debtor has any faults or not, while there no explicit provision in the law regarding these cases where the debt becomes temporarily impossible. Therefore, various ideas have been proposed upon to which provisions that could apply. The opinion of the Supreme Court in cases of temporary impossibility - if it is also compatible with the consent of the parties - is to postpone until the date when the impossibility of performance has ended. When the current measures evaluated, an uncertainty occurred due to the fact that the decree in question closed businesses indefinitely and it is not known when the COVID-19 pandemic will end. An example can be given as to whether the impossibility is temporary or permanent. In China, where the virus originated, a 3-month quarantine application was carried out and the process of returning to normal was initiated after the period ended. The quarantine period was terminated on 07.04.2020 and this example can be interpreted as impossibility for a temporary period. However, due to the fact that the path followed by each country is different in any way, (for example Italy), it is not currently possible to determine for how long the parties should tolerate adhering to the existing lease agreements.
It has been stated that the Republic of Turkey’s Ministry of Internal Affairs has decided to uphold the activities of businesses across the country with the decree on the COVID-19 measures in which the tenantry could be defected. According to the article 305 of TOC; the lessee may request the reduction of the tenantry or may request to repair the defect tenantry from the lessor.
‘’If the leased becomes defective afterwards, the lessee may ask the lessor to remedy the defects or to make a discount proportional to the defect or to remedy the loss. However, the request for remedying the defect does not prevent the exercise of other optional rights. In the event of material defect, the lessee reserves the right to terminate the contract.’’
The deduction of the rental value based on the defective provisions does not require the condition of the lessor's fault to be exercised in order to exercise its elective right. Even if there is no defect, the tenant's right to exercise his electoral rights is reserved if it becomes defective in any way. In addition, it will not be possible to call as defect when the lessor has no knowledge of the lessee’s activity or the activity not specified in the contract. For this reason, even in cases where the obligations cannot be performed, there will be no defect, even if the activity is unknown or not specified in the contract.
If it is deemed that the leaseholder's debt has not made it possible, with the closure of the workplaces within the scope of the coronavirus measures issued by the Ministry of Internal Affairs, the tenant will be obliged to pay the price even if he / she does not operate or have any profit. When the situations regarding COVID-19 measures are evaluated, in cases where there is no impossibility and the tenant is obliged to pay the rental price, Article 138 of TOC will come into force and an adaptation may be requested. Article 138 of TOC states that;
‘’An extraordinary situation which is not foreseen by the parties at the time of the contract and which is not expected to be anticipated, arises from a reason not due to the debtor and changes the existing facts at the time against the debtor in such a way as to violate the rules of honesty, If the debtor has not yet fulfilled his / her obligations arising from the excessive difficulty of the performance, the debtor shall have the right to request from the judge the adaptation of the contract to the new conditions and to revoke the contract if this is not possible. In contracts of continuing obligations, the debtor could terminate the contract. This provision also applies to foreign currency debts.’’
Our ‘’The Effects of COVID-19 Pandemic on Contract Law in Turkey’’ article dated 27.03.2020 also stated that, adaptation procedure is an application aimed at sustaining the contract in which ending the contract or rescission an agreement is a more severe result than the adaptation. The reason is that, the contract is no longer standing when the debtor revokes the agreement. For the adaptation of the contract, the debtor may request an adaptation from the judge in the first instance. It is believed that the legal basis for requesting the intervention of judges in all commercial contracts, lease contracts and other private law contracts throughout our country by reason of force majeure can only be evaluated within the scope of "Hardship" in Article 138 of the Turkish Code of Obligations. However, in cases where the lessor has to keep the tenantry in condition for the duration of the contract is not impossible, the lessee’s obligation to pay lease fees would still continue. In this situation the lessor could base upon Article 331 of TOC and it states that;
"Each party may terminate the contract at any time by complying with the legal termination notice period if there are significant reasons that make the continuation of the tenancy unbearable. The judge may decide on the monetary consequences of the extraordinary termination notice, taking into account the situation and circumstances.’’
Even if the situation in question is obviously unfair, there is no action to be taken against it. Due to the temporary impossibility, the contractual obligations will be suspended during that period and the lessee will not be able to make any money during this duration. For this reason, in our opinion the path that needs to be followed will be that the lessor should accepts the request of the adaptation of the contract or to terminate it. Otherwise, there could be a major loss for both the parties.
2. The Effect of the Presidential Decree No. 2279 on the Payment of Rental Fees within the Scope of Provisional Article 2 of the Law No.7726
According to the “Provisional Article 2” clause of the Law on the Amendment of Certain Laws No. 7226 that entered into force on 26.03.2020;
“Failure to pay the rental fees between 1/3/2020 to 30/6/2020 does not constitute the reason for the termination of the contract and evacuation of the tenantry.”
The provision of the law is applicable only in terms of workplace rental prices. The aforementioned provision states that; Article 2 will find application in all workplace lease agreements. In the continuation of the article, an evaluation will be made regarding the termination of the contract and the reason for evacuation.
Termination of The Contract
The termination of the contract is regulated in Article 315 of the TOC. According to the related article;
"If the lessee does not fulfil the obligation to pay the tenantry fee or a late payment of the current lease, the lessor may inform the lessee in accordance with the other that he/she will terminate the contract if the lessee does not perform his/her obligation accordingly."
As principle, the lessee’s obligation is to pay the rent as it stated in the contract. The tenant's delay in paying the lease amount, which is his primary debt, may reveal the termination of the lease by the lessor in a continuous debt relationship. With the decree of Provisional Article 2 of the Law No. 7226, the article 315 of TOC will become inapplicable in workplace rents between 01.03.2020 to 30.06.2020 and both parties will not be able to terminate lease agreement.
Evacuation of The Tenantry
In accordance with Provisional Article 2 of the Law No. 7226, it would be more correct to interpret the situation as per the paragraph 2 of Article 352 of the TOC. The lessor will have an opportunity to start the proceedings for the evacuation of the tenantry in relations with Article 352/2 of TOC, especially in long-term lease contracts without waiting for the end of the lease period if the lessee does not pay his/her debt on time. However, it has been stated that the evacuation of the workplace rents cannot be carried out between 01.03.2020 to 31.04.2020.
Evaluation of the Payment of Workplace Rental Fees
Provisional Article 2 of the Law No. 7226 and the Presidential Decree No. 2279 have emerged as an effect on whether the rental prices should be paid or not. In accordance with Provisional Article 2 of the Law No. 7226, there is no statement for preventing the payment of workplace rental fees. On the contrary, precautions and issues to be taken in case of non-payment are specified. The lessee will continue to be the lease debtor, and the lessor as lease creditor and has the right to claim the delayed rental fees with an interest. On March 22nd, 2020; The Presidency of Republic of Turkey published 2279 No. decree in the 31076 No. Official Gazette and stated that; In accordance with the Article 330 of the Enforcement and Bankruptcy Law, enforcement proceedings were suspended until April 30, 2020. In additionally, The Union of Turkish Bar Association has announced that no new enforcement proceedings will be opened until 30.04.2020.
The period determined in the Execution and Bankruptcy Law and other laws related to the pursuance law and within this scope the periods determined by the judge or the Execution and Bankruptcy departments, all Execution and Bankruptcy pursuance, except for the execution pursuance for alimony receivables, party and pursuance transactions, the receipt of new execution and Bankruptcy requests, transactions related to the execution and execution of injunction orders are suspended from 22 March 2020 until 30 April 2020.
It should be noted that; in cases where the rent is not paid, the lessor will not be able to perform any execution proceedings between the timeline of 01.03.2020 and 30.04.2020, will only be able to start a follow-up as of 01.05.2020. It should be added that the date of 01.05.2020 is the time specified currently. It is necessary to underline that this period may be extended if the measures are not enough. It can be concluded that; sending a protest letter to the lessee, other than a payment order, will not be beneficial to the lessor. The reason is that; as of the end of the period given with the protest letter, the lessor will not be able to terminate the contract.
After the specified timeline, the lessor will be in a position to request the payment of the rent by applying the periods specified in the TOC. In Article 315 of TOC; '' The period to be given to the lessee is at least ten days, and at least thirty days for the office rents. This period starts from the day following the date of written notification to the lessee.'' If this is taken into consideration, the period of 30 days is for residential and roofed office rents and after the written notification of the lessee. If the lessee would like to pay the rental fees, firstly he/she has to pay the fee with an interest in 30-day period. In contrast with the 30-day period, the lessee has not paid the rent, the lessor may continue with enforcement proceedings. Furthermore, because of the provisional Article 2 of Law No.7226. the lessor cannot terminate the lease agreement based on Article 315 of TOC.
At the present time, the measures taken against to prevent COVID-19 pandemic caused many shopping malls to close down in which directly disabled income for many brands. The current problems relating to the payment of the rent fees should be subjected as hardship in which many brands do not have a profit during these difficult times. In order to prevent the rapid spread of the epidemic disease in Turkey, closed shopping centres are economically disrupted, and workplaces are experiencing a great deal of performance difficulties. The reason for problem would be the inability to pay the rental fees in the context of an obligation for the lessee in regard to the brands that have multiple stores in multiple locations throughout the country is facing a huge impact on the cash flow. The same difficulty may be in question in terms of the lessor. The lessor has difficulty in carrying out the closure of the tenantry because he/she has to keep the lessee conveniently within the lease term. In this process, the lessee will be able to avoid performing his / her debt because the lessor would not be able to perform his/her obligations. Considering these circumstances, it should not be ignored that such arrangements may produce unfair results. Even so, the end of the COVID-19 pandemic could not lead to the possibility of the economic revival that rapid. Therefore, the lessee may not be able to pay the rental fees with an interest immediately. This will be especially realisable for businesses of small or medium-sized companies. Given that large companies already have contingency plans for such situations, businesses of small or medium-sized companies may face a more unfair situation. For further detailed information, you can contact us via the following information.
By Ali Guden, Partner, and Dilara Nihal Tunc, Associate, Guden