The Impact of the Coronavirus (Covid-⁠19) Outbreak on Lease Agreements

Can the parties terminate a lease agreement unilaterally? What is force majeure? Can the coronavirus outbreak be considered force majeure?

Because of the Coronavirus (Covid-⁠19) outbreak, which emerged in the city of Wuhan, China, and was declared a “Pandemic” by the World Health Organization as of March 11, 2020, many countries took measures to combat the disease. In this context, some of the measures taken by our country are listed below:

- As published in the supplementary issue of the Official Gazette of March 26, 2020, under Provisional Article 2 of the Law, failure to pay workplace rent accruing from March 1, 2020 to June 30, 2020 will not constitute a ground for termination of the lease agreement and eviction,

- The suspension of enforcement actions and proceedings, except for maintenance claims, until April 30, 2020,

- The closure of places of entertainment open to the public, under the circular issued by the Ministry of the Interior on March 16, 2020,

- The ban on persons over 65 and those with chronic illnesses going outside,

- Under the additional circular sent by the Ministry of the Interior to all governorships, eateries and restaurants being limited to takeaway service only from March 22, 2020,

- The recommendation decision of the Association of Shopping Centers and Investors of March 20, 2020 on the closure of shopping malls,

- The closure of barbershops and beauty salons from March 21, 2020,

- The ban, from March 28, 2020, on picnicking and doing sports in parks, recreation areas and picnic areas, and on fishing along coastlines,

- The temporary suspension, from March 27, 2020, of the activities of all open-air markets, except markets where essential goods are sold,

- The suspension of all international and domestic transport services and the introduction of travel bans,

- The temporary closure of 149,382 workplaces by the State as a result of the measures taken.

Economic life has been considerably affected as a result of these and similar measures and the encouragement of social isolation. Under these adverse conditions, it is expected that merchants may experience difficulties in paying their rent. Consequently, a number of concerns are arising about the fate of lease agreements.

1. Can the parties terminate a lease agreement unilaterally?

As a rule, the parties are free to determine the content of a contract within the scope of freedom of contract. However, compared with other contracts, lease agreements contain more mandatory provisions from which the parties cannot derogate by agreement. Although there is no right of arbitrary unilateral termination in lease agreements, each of the parties has been given the right to terminate the contract unilaterally if certain conditions are met.

With regard to workplaces, certain arrangements may be made in lease agreements on the basis of extraordinary reasons. The process we are currently in is an example of extraordinary situations and may be considered “force majeure”. The remedies specific to such situations are explained below.

2. What is force majeure?

There is no definition of force majeure in the law. According to the Court of Cassation (Yargıtay) and legal doctrine, force majeure is an extraordinary event that occurs outside the activity and business of the liable person or the debtor, that leads absolutely and inevitably to the breach of a general norm of conduct or of an obligation, and that can be neither foreseen nor resisted. Because of force majeure, the performance of contractual liability becomes partially or completely, temporarily or permanently impossible. As a result of this situation, the parties’ liability ceases, is suspended for a certain period, or the nature of the liability changes.

3. Can the coronavirus outbreak be considered force majeure?

In its judgment dated June 27, 2018, the Assembly of Civil Chambers of the Court of Cassation (YHGK) stated: “Natural disasters such as earthquakes, floods, fires and epidemic diseases are deemed force majeure.” (YHGK, Docket No. 2017/11-90, Decision No. 2018/1259, 27.06.2018). This outbreak, which is spreading in our country and around the world and for which measures are imperative, may be considered force majeure by the courts.

4. What legal remedies are available in the case of force majeure?

In their most basic form, the conditions of force majeure are tied to the fact of “impossibility”. Where impossibility of performance is at issue, Articles 136, 137 and 138 of the Turkish Code of Obligations No. 6098 (TBK) will come into play.

- TBK Art. 136: Impossibility of Performance

- TBK Art. 137: Partial Impossibility of Performance

- TBK Art. 138: Excessive Difficulty of Performance

The point to note here is that force majeure must be assessed specifically for each case. It must be assessed whether the contracting party has experienced impossibility in the present case and whether the impossibility is partial. Which of the three statutory provisions explained below will be taken as the basis for resorting to legal remedies will become clear as a result of an assessment of the existing conditions of each case.

5. What is impossibility of performance, and what are its conditions?

“Article 136: If performance of the obligation becomes impossible for reasons for which the debtor cannot be held responsible, the obligation is extinguished. In contracts imposing reciprocal obligations, a debtor released from the obligation because of impossibility is obliged to return the performance received from the other party in accordance with the provisions on unjust enrichment, and loses the right to claim the performance not yet rendered to it. Cases in which the risk of loss arising before performance of the obligation has been placed on the creditor by law or by contract are excluded from this provision. If the debtor does not notify the creditor without delay that performance has become impossible and does not take the measures necessary to prevent the damage from increasing, the debtor is obliged to compensate for the resulting damage.”

Impossibility of performance may be defined as the situation in which one or both of the parties to an obligational relationship are definitively unable to render the performance they owe because of an extraordinary reason that does not originate from them. For impossibility of performance to exist, the three conditions set out below must be present at the same time:

a. Performance of the obligation must have become impossible,

b. The impossibility must have arisen after the contract was concluded,

c. The debtor must not be responsible for the cause that made the obligation impossible or for the state of impossibility.

6. Does the obligation to pay rent continue in the case of impossibility of performance?

Since it was decided under the Ministry of the Interior Circular of March 16, 2020 that the activities of certain businesses be suspended, the payment obligation arising from the lease agreement, such as rent, minimum rent, turnover rent, etc., will cease. In other words, no obligation to pay rent will arise for the tenant during this period. As a natural consequence of this, if the use of the leased premises is not possible for an objective reason that is unrelated to the person of the tenant and applies to everyone (for example, being unable to enter the building because of a contagious disease, or the house burning down completely without the tenant’s fault), the tenant cannot be compelled to pay the rent.

The same cannot be said for businesses not closed by the Ministry of the Interior circular that face no obstacle to continuing their activities. For these businesses, one may speak not of impossibility of performance but of “difficulty of performance”. The obligation of these businesses to pay rent continues. However, provided that they have made their rent payments with a reservation, their right to request adaptation (a change in the rent) is reserved.

7. When can the lease agreement be terminated because of impossibility of performance?

For businesses closed by the Ministry of the Interior Circular, if the workplace remains closed for a long time and this becomes unbearable for the parties, unilateral termination of the lease agreement will come into play. In this case, the rent obligation ceases because of impossibility without fault.

Where the impossibility existing at the time the contract is formed is in the nature of a temporary impossibility, in other words where the impossibility is of a kind that may cease to exist, the question arises as to how long the parties will remain bound by this contract. “The rule on this matter is that the parties are held bound by the contract under the principle of "pacta sunt servanda, fidelity to one’s word". However, there are certain special situations in which regarding the parties as bound by that contract would both restrict the parties’ economic freedom and eliminate the opportunity to conclude a contract with someone else. In practice, the period during which the parties are held bound by that contract in the case of temporary impossibility is called the "contractual tolerance period" (akde tahammül süresi). Whether this period has elapsed must be assessed according to each specific case and within the framework of the existing conditions” (YHGK, Docket No. 2010/15-193, Decision No. 2010/235, 28.04.2010). The impossibility caused by the outbreak we are currently experiencing is temporary in nature. Depending on the circumstances of the present case, if the contractual tolerance period is exceeded, it may be possible to terminate or rescind the contract.

For businesses not closed by the Ministry of the Interior circular, however, termination of the contract because of impossibility of performance will not be possible, but adaptation (a change in the rent) will be. A detailed explanation of this situation is given below.

8. If only part of the workplace was closed under the Ministry of the Interior Circular, does impossibility of performance arise for the whole workplace?

“Article 137: If performance of the obligation becomes partially impossible for reasons for which the debtor cannot be held responsible, the debtor is released only from the part of the obligation that has become impossible. However, if it is clearly understood that the parties would not have concluded such a contract had this partial impossibility of performance been foreseen in advance, the entire obligation is extinguished. In contracts imposing reciprocal obligations, if the obligation of one party becomes partially impossible and the creditor accepts partial performance, the counter-performance is also rendered in that proportion. If the creditor does not accept such performance or the counter-performance is indivisible, the provisions on total impossibility apply.”

This article, which is an application of the “principle that the useful part is not affected by the useless part”, may be applied to businesses that have suffered partial damage. In the process we are going through, the impossibility experienced by some businesses will be partial. For example, partial impossibility will arise for a workplace that both runs a cafeteria and operates like a grocery store where buying and selling take place. This is because, while there are measures concerning cafeterias, there is currently no ban on grocery stores. If the closed part of the business relates to the main activities of the business, it may then be said that impossibility of performance has arisen for the business as a whole.

9. What is excessive difficulty of performance? What are its conditions?

“Article 138: If an extraordinary situation that was not foreseen by the parties at the time the contract was concluded, and could not have been expected to be foreseen, arises for a reason not attributable to the debtor and changes the facts existing at the time the contract was concluded to the detriment of the debtor to such an extent that requiring performance from the debtor would be contrary to the rules of good faith, and the debtor has not yet performed the obligation or has performed it while reserving the rights arising from the excessive difficulty of performance, the debtor has the right to request the judge to adapt the contract to the new conditions or, if this is not possible, to rescind the contract. In contracts involving continuing performance, the debtor, as a rule, exercises the right of termination instead of the right of rescission.”

“Excessive Difficulty of Performance” comes into play in situations where performance is not impossible but fulfilling the obligations has become difficult. The elements taken into account in this article are unforeseeability and the collapse of the basis of the transaction. “The reasoning of the relevant article also states: “This new provision concerns the "collapse of the basis of the transaction", which is accepted in doctrine and practice as one of the exceptions to the principle of adherence to contract (pacta sunt servanda). The basis of a request for adaptation based on excessive difficulty of performance, which differs from the concept of impossibility, is the rule of good faith provided for in Article 2 of the Turkish Civil Code.”(Court of Cassation, 3rd Civil Chamber, Docket No. 2017/14562, Decision No. 2019/9074, 12.11.2019). In order to make a request under this article, the following are required:

a. The existence of a valid contract,

b. The occurrence of extraordinary events that could not have been anticipated, foreseen or taken into account in advance,

c. The debtor not having caused the extraordinary situation, and this situation creating difficulty of performance,

ç. The debtor not having performed the obligation or having performed it with a reservation.

10. Can adaptation (a change in the rent) be requested because of difficulty of performance?

This provision may be relevant especially for workplaces that the state has not closed within the scope of the measures. Considering also that a curfew is not currently being applied, the parties to the lease agreement may request adaptation of the contract on the basis of Article 138 of the TBK.

“...It may therefore be said that, where it is proven that, because of the extraordinary conditions that adaptation requires, the balance between the performances has changed excessively to the detriment of the (tenant) plaintiff, adaptation may be carried out in respect of the provision of the contract concerning the rent, due to the collapse of the basis of the transaction.” (Court of Cassation, 3rd Civil Chamber, Docket No. 2000/2648, Decision No. 2000/2640, 27.3.2000)

11. What must those relying on impossibility of performance or excessive difficulty of performance do?

The party relying on force majeure must inform the other party of this situation immediately. Where notification is not made in time or is not made at all, force majeure cannot be relied upon, or liability may arise for the resulting damage.

Notifications must be made via Registered Electronic Mail (KEP) and/or through a notary. These notifications must state clearly and comprehensibly which matters constitute force majeure, how the force majeure affects the use of the leased premises and the tenant’s situation, the tenant’s requests/proposals regarding the process, that the right of termination and all legal rights will remain reserved even if payment is made, and that payment is made with a reservation.

Unlike impossibility of performance, in the case of excessive difficulty of performance the rent payments must be made regularly. However, for each payment, it must be specifically stated, with reference to the notification made at the outset, that the payment is made with a reservation.

During this process, the tenant must make the reasonable effort required to minimize all negative effects arising from the force majeure.

12. Is extraordinary termination possible under TBK Art. 331?

“Article 331: Either party may terminate the contract at any time, in compliance with the statutory notice period, if there are important reasons that make the continuation of the lease relationship unbearable for that party. The judge, taking the circumstances and conditions into account, decides on the financial consequences of the notice of extraordinary termination.”

Under this article, as a result of important reasons that make the lease relationship unbearable for the parties, the lease agreement may be terminated by both the tenant and the landlord, in compliance with the statutory notice periods. The important reasons must be related to the lease agreement and must be unbearable. An important reason may arise from the fault of one or both of the parties, or from reasons that cannot be attributed to the parties. Reasons specifically regulated in the law (e.g. the tenant’s default, failure to use the leased premises with care, failure to keep the leased premises ready for use) are not deemed important reasons within the scope of TBK Art. 331. The view of the Court of Cassation on this matter is that “termination of the lease agreement cannot be requested in cases where rectification is possible.”

A footnote in the Law states: “This article shall not be applied for a period of 8 years from July 1, 2012. In this case, with respect to the matters set out in these articles, the provisions of the lease agreement shall apply to lease agreements in accordance with freedom of contract.” For this reason, the application of the article has been postponed until July 1, 2020. Should the current process be prolonged, a request may be made on the basis of this statutory provision.

13. Can the state be liable for damage caused by the outbreak?

Certain risks may arise because people live together. This situation is called social risk. Under the principle of social risk, the state becomes liable for damage that occurs in the turmoil in which society finds itself. Under Art. 125 of the Constitution, the State is liable for all actions it performs. In the event of an outbreak, where private individuals suffer damage as a result of certain measures taken by the State, compensation for the sacrifice that individuals make in the face of the public interest may come into question. No court decision has yet been rendered on this matter.

14. If the state declares a curfew, do tenants have to continue paying rent?

If a curfew is imposed, since performance will become impossible for all businesses, contractual liability will become completely and permanently impossible. As a result, the parties’ obligations arising from the lease agreement are suspended for a certain period, or the nature of the obligation changes.

15. Can enforcement proceedings and/or eviction be carried out against tenants who cannot pay their rent because of the coronavirus outbreak?

Enforcement proceedings, including enforcement proceedings with a request for eviction, may be initiated for rent receivables left unpaid because of the coronavirus outbreak. Since enforcement actions and proceedings, except for maintenance claims, were suspended until April 30, 2020, there is no obstacle to initiating enforcement proceedings after this date.

In addition, as for eviction proceedings, it was laid down in the Official Gazette published on March 26, 2020 that failure to pay workplace rent accruing from March 1, 2020 to June 30, 2020 would not constitute a ground for termination of the lease agreement and eviction of the leased premises. Nevertheless, it is possible to initiate enforcement proceedings for rent receivables arising between these dates.

16. How will contributions to common expenses be made in cases of impossibility of performance or excessive difficulty of performance?

Certain routine expenses arise during the use of leased workplaces. Expense items such as clean water, heating, lighting, security, landscaping, wastewater and cleaning are referred to as common expenses, especially for workplaces in shopping malls and office buildings. Under the Condominium Law, the tenant is jointly and severally liable with the landlord for common expenses.

Where workplaces and shopping malls are closed, since the common expense items will decrease or disappear altogether, it will be necessary to reduce payments for common expenses in that proportion or not to collect any common expense payment. If the payment for common expenses has not been adapted in proportion to the changed conditions, a refund of the amount overpaid may then come into question under the provisions on unjust enrichment set out in TBK Art. 77 et seq.

This extraordinary situation will also bring with it many legal disputes. In order not to suffer a loss of rights in all these processes, it will be in the parties’ interest to obtain legal support from a lawyer.

Kind regards,

Att. Taha Hüseyin Çebi

Trainee Att. Batuhan Özata

This article is a general assessment prepared in accordance with the legislation in force on its date of publication; it does not constitute a legal opinion. This English text is a translation of the Turkish original; in case of any discrepancy, the Turkish version prevails.