Retail sector comes first among the sectors most affected by the COVID-19 outbreak (“Coronavirus”) around the whole world along with our country and causes disruptions in functioning and sustainability of certain sectors such as retail, logistics, health, automotive, and textile. Alongside the decrease in demand in the retail sector, many stores were obliged to cease or suspend their activities as a result of other precautions taken by the government and the consideration of the general public health and interests.

In this context, despite the decrease in operational profit, the sector players (both Shopping Malls and Street stores) continued to fulfil their obligations arising from Lease Agreements concluded for both stores in Shopping Malls and street stores branded as “flagship stores”, considering the pacta sunt servanda within the framework of good faith principle. However, since the continuation of the current situation under the effect of Coronavirus for a long period, sector players have faced difficulties in the performance of their obligations arising from the lease agreements. Therefore, the necessity has arisen to revise the provisions of the lease agreements especially in terms of lease payments and other relevant provisions in accordance with the equity and fairness principle considering the force majeure events.

In this context, the answers of possible legal and practical questions regarding the steps to be taken to keep economic impacts of Coronavirus at a minimum and manageable level are provided below:

1. Which Steps Should be Taken Before Filing an Adaption Lawsuit?

First of all, filing a lawsuit for adaption of a lease agreement may fail to provide maximum benefits expected in this period due to the long-lasting litigation process. Therefore, it could be more efficient to negotiate the issues subject to revision among the contractual parties and to adapt the provisions to the current terms of the agreement if there are adaption conditions in the lease agreements.  Furthermore, if the parties reach a mutual agreement, it will be advisable for the parties to sign an amendment protocol regulating the lease payment obligations. However, if the parties cannot mutually agree on the adaption or revision of the conditions and if there is no provision for adaption in the lease agreements, or if the implementation of the adaption provisions has unfair consequences, it will be inevitable to file an adaption lawsuit.

 

2. What Are the Differences Between the Lawsuit on Determination of Lease Amount and Adaption Lawsuit?

The Adaption Lawsuit

Lawsuit on Determination of Lease Amount

Even though there is a prevailing opinion that the adaption lawsuit can only be applicable for long term lease agreements; the article 138 of the  Turkish Code Of Obligations (the “TCO”) does not regulate a provision for the duration of the lease agreements, moreover the existing High Court of Appeals’ decisions[1] strengthen our opinion which illustrates that the adaption lawsuits can be also filed for short-term agreements.

May be filed for all lease agreements which foresees lease amount increase when the renewal periods come.

Although there is no statutory period for filing an adaption lawsuit, no adaption requests can be made for past lease amounts which have not been paid without reservations. The adaption lawsuit is a kind of lawsuit which will be forward effective from the filing date.

The lease amount which is determined by the court binds the tenant from the beginning of the new lease period if the lawsuit is filed until the end of the new lease period following if the tenant is notified at the latest thirty days before the beginning of the new lease period or provided that the tenant has been informed that the lease amount will be increased during this period.

All objective and subjective conditions such characteristic, condition, duration, unexpected economic changes, the qualification of the leased property, and the interests of both parties should be considered and evaluated within the scope of the existing agreement.

The lease amount shall be determined by evaluating the location, region, quality, value and features of the leased property. Furthermore, the current market value and lease amounts of the peers of the leased property shall also be taken into consideration by the court.

 

 

3. Are Parties Obliged to Have a Mediation Process Before Filing a Lawsuit?

According to Article 5 of the Turkish Commercial Code Law No. 6102 (the “TCC”) and Article 20 of the Law No. 7155 The Law on Starting Execution Proceedings for Monetary Receivables Arise from Subscription Agreements (“Law No.7155”), it is a requirement to apply to the mediator in commercial cases before filing a lawsuit about the receivable and compensation claims that are subject to a certain amount of money. In this context, it will be necessary to apply for compulsory mediation before filing the lawsuit in a case where the demand for the adaption of the financial obligations of the “commercial type” lease agreement will be determined, considering the determination of the financial liabilities that have arisen or have not yet arisen and the purpose of the mediation arrangement which is to cover the wider types of cases.

4. What are the Conditions of Adaption Lawsuit?

According to Article 138 of the TCO the following conditions must be complied with to take legal action.

  1. an extraordinary event, which is neither foreseen nor expected to be foreseen by the parties before signing the agreement, must occur,
  2. the extraordinary event must not be caused by the obligor himself/herself,
  3. due to the extraordinary event, non-beneficial change of demands of the fulfilment of the Agreement from the obligor, as not in the good faith and
  4. the obligor must have fulfilled the obligations under the agreement by reserving the rights based on the excessive deterioration of balances or not yet have fulfilled the obligations.

5. How Can We Prove That Adaption of the Lease Agreement is Necessary?

The burden of proving the existence of these conditions in the adaption lawsuit shall be on the plaintiff. Within this context, although it is obvious that the Coronavirus pandemic is an extraordinary event, which is neither foreseen nor expected to be foreseen by the parties and which is not caused by the obligor, whether requesting fulfillment of the agreement has changed against the obligor as contrary to the rule of integrity, each agreement will be evaluated separately on the basis of the parties and the leased property. Furthermore, it is crucial to make lease payments by reserving the rights i.e. without prejudice to any other rights starting from the date which extraordinary event is occurred. Indeed, in the event of a possible lawsuit, if the lease payments are not made by reserving the rights, the claim of requesting performance of the agreement will violate the principle of good-faith and can also undermine the claim before the courts.

6. What is the Place of Jurisdiction, Which Court is Competent for the Lawsuits on the Adaption of Lease Agreements and What is the Approximate Cost of Such Lawsuits?

Regarding the lawsuits on the adaption of lease agreements, the competent court is the Civil Court of Peace and the place of jurisdiction is the location of the leased property subject to the lawsuit.

According to the Act of Fees numbered 492, the legal fee set for filing the lawsuits on the adaption of lease agreements is a proportional fee calculated based on the difference between the current lease amount and the annual lease amount claimed within the lawsuit. In this scope, the proportional fee rate is 68,31 per thousand (The proportional fee rate determined according to the Legal Fees Tariff for 2020) of the difference between the current annual lease amount and the annual lease amount claimed with the lawsuit, and one-quarter of such proportional fee must be paid in advance when filing the lawsuit. However, if the court orders for the dismissal of the lawsuit, such proportional fee shall be returned to the plaintiff by the treasury upon deducting the fixed fee on the amount of TRY 25.00 –as of 2020.

7. Is It Possible for the Tenant to Pay the Lease Partially Before the Lawsuit on the Adaption of Lease Agreements?

In principle, in an adaption lawsuit, the tenant is obliged to pay the lease amount until the lawsuit is finalised. However, the balance between the current lease amount and the lease amount determined by the court calculated as of the filing date of the lawsuit shall be set off from the next lease terms’ annual amount.

In the letter of law, there are no obstacles for the tenant to file the adaption lawsuit by paying the lease partially. Since the relevant Article 138 of TCO consists of a provision such as “…the obligor who has not fulfilled its obligations…”, it may be deemed possible for the tenant to pay the lease partially by reserving its rights in case of partial or full performance.

Although an adaption lawsuit may be filed with a partial performance; according to Provisional Article 2 of the Law Amending Certain Laws numbered 7226 and dated 26 March 2020, it is provided that the lease agreements cannot be terminated between 1 March 2020 and 30 June 2020, and the tenant cannot be evicted due to non-payment of the lease amounts of the workplaces during the aforementioned term. In case such term is not extended in the upcoming days, it will be possible for the landlords to commence an execution proceeding and claim eviction against the tenant who has partially paid the lease amount as of 30 June 2020.

8. If There is an Adaption Provision Included Within the Lease Agreement, Does Such Provision Have to be Implemented as it is? Does the Tenant Have the Right to File an Adaption Lawsuit, Even if s/he Has Waived From his/her Right to Request Adaption by a Provision in the Agreement?

If there is a positive adaption provision in the lease agreement, requesting the ad-verbum adaption of the agreement pursuant to such provision can be considered as an act contrary to good faith principles. Therefore, if there is an excessive imbalance between the obligations of the parties despite the adaption provision, an adaption lawsuit can still be filed against the adaption method set in the agreement. As a matter of fact, in a decision of the Hight Court of Appeals dated to 2012, it is stated that in order to adapt the agreement to changing situations and conditions, it is essential that there is no provision for adaption in the agreement and the law, although sometimes a positive or negative revision provision may be included in the agreement. Based on such provision, High Court of Appeals acknowledges that the request of the agreement to be implemented in full with the provision may be considered as a misuse of the right according to Article 2.2 of the Turkish Civil Code numbered 4721 (the “Law No. 4721”). In this regard, if there is an excessive imbalance between obligations of the parties of a lease agreement, an adaption lawsuit may be filed despite the adaption provision.[2]

In addition, while maintaining the principles of fairness and good faith with the adaption, claiming that the agreement’s ad verbum implementation of a negative adaption provision (waiver of the adaption) may also mean misuse of a right. As a matter of fact, in the recent High Court of Appeals’ decisions, it is stated that the Articles 1, 2 and 4 of the Law No. 4721 should be used as a source for the settlement of disputes related to the collapse of the transaction grounds. In this regard, “It is a requirement for the act of good faith to consider that the grounds of the transaction have collapsed.” It is stated that claiming the ad verbum implementation of the provisions of the agreements based on the negative adaption provision would be deemed as a misuse of a right.[3]

9. Do Adaption Lawsuits Only Apply to the Long-Term Lease Agreements?

In order to adapt the lease agreements to the recent conditions due to the collapse of the transaction grounds as agreed by the parties, Assembly of Civil Chambers of the High Court of Appeals has decided that the adaption lawsuit may be also filed for short term lease agreements since the relevant Article 138 of TCO does not consist of any provisions regarding durations of lease agreements, although there are doctrinal opinions and other High Court of Appeals’ decisions stating that the adaption lawsuits cannot be filed for the lease agreements which have been executed for a term less than a year.[4] In this context, we are of the opinion that the adaption lawsuits can be also filed for short-term agreements due to the hardship caused by the Coronavirus outbreak.

10. Is it possible to claim a Provisional Injunction Order When Filing an Adaption Lawsuit?

Although it is not explicitly regulated under the legislation, according to the generally accepted principles in teaching and current practice, no provisional injunction may be ordered to resolve the core issue of the lawsuit; in other words, backdating the outcome of the original lawsuit. Although there are opposite opinions and decisions[5]; according to the dominant opinion; no provisional injunction orders may be given in a manner that resolves the core issue of the lawsuit, as the judicial authority’s freedom of determining the content of the injunctions is limited.[6] There is an opinion that defends when a provisional injunction order has been given in an adaption lawsuit, such order including the lease amount shall be paid over a certain amount or for a certain period, which is the core of the dispute, must be dismissed, since such injunction orders shall be treated equally as it resolves the core issue of the lawsuit.

On the other hand, since the issues that may subject to a provisional injunction order are not limited by the relevant legislation; in situations where it is clear and certain that there is a danger or a significant loss in delay, the court may order for a provisional injunction according to the nature of the event. Therefore, even it is rarely accepted by the courts, it is possible to request provisional injunction when filing an adaption lawsuit on the condition of depositing a fair guarantee (approximately 10-15% of the claim).

Even though it is likely for the court to dismiss the provisional injunction requests; if the request is accepted, execution proceedings with evacuation requests which are commenced by the landlords due to the partial performance may be prevented.

11.Which Provisions of the Agreement May Be Claimed to be Adapted?

Since the judge is free to determine the amount and method of adaption, he/she is free to choose the adaption method which is the most appropriate to the balance of interest between the parties, unlike the adaption method requested by the plaintiff. If the judge decides to adapt the agreement to current conditions, he/she shall make the adaptions that fit best to the purpose and meaning of the agreement with taking the interests of both parties into account. In a decision by the High Court of Appeals dated 2014 as “Adaptions can be made in the form of decreasing the performance obligation or increasing the counterpart, or in any way that the judge deems appropriate, such as changing the due date or the performance method”; it is stated that the provisions regarding performance, maturity and performance in the agreement may be adapted as a result of an adaption lawsuit. [7]

Furthermore, even if the party who claims the adaption informs the judge on the conditions of the agreement preferred to be adapted, the judge has the right to make adaptions in other provisions of the agreement other than those which were claimed to be adapted. For instance, although the tenant claimed an adaption in the lease amount, the judge may only adapt the increase rate of the lease amount or shorten the duration of the agreement.[8] In this context, with the adaption lawsuit; not only the lease amount but other provisions such as duration, increase rate, etc. may also be also subject to an adaption and the adaption may be made on the provisions which are deemed appropriate by the judge other than those that are claimed to be adapted.

12. Is it Also Possible to Claim the Termination of the Agreement in an Adaption Lawsuit?

As stated in Article 138 of the TCO; before claiming the termination of the agreement; adaption of the agreement must be claimed first. If the adaption is not possible, then the termination of the agreement may be claimed. Therefore, solely requesting the termination of the agreement without requesting the adaption first is not possible.

[1] High Court of Appeals – Assembly of Civil Chambers, Decision No. 2002/13-852 – 2002/864, dated 30October 2002

[2] High Court of Appeals 3rd Circuit of Civil Law, Decision No. 2012/8973 – 2012/13817, dated 30 May 2012

[3] High Court of Appeals 3rd Circuit of Civil Law, Decision No. 2017/8316 – 2019/2336, dated 20 March 2019

[4] High Court of Appeals 3rd Circuit of Civil Law, Decision No. 2002/13-852 – 2002/864, dated 30 October 2002

[5] Pekcanıtez, Atalay, Özekes, Medeni Usul Hukuku Ders Kitabı, p. 551 ff.

[6] Evrim Erişir, Geçici Hukuki Korumanın Temelleri ve İhtiyati Tedbir Türleri, p. 384 ff.,

[7] High Court of Appeals 3rd Circuit of Civil Law, Decision No. 2013/16898 – 2014/18895

[8] Gümüş, Mustafa Alper. Borçlar Hukuku Özel Hükümler Cilt 1., p. 253.