The article explains that in retroactive termination the parties may take back what they have given under the provisions on unjust enrichment, and that, according to decisions of the Court of Cassation (Yargıtay), retroactive termination is not possible for construction that is 90% complete.
According to the article, in retroactive termination the landowner may also request the cancellation of the title deed shares that the contractor transferred to third parties, and these persons cannot benefit from the good-faith protection under Art. 1023 of the Turkish Civil Code (TMK).
The article explains that in prospective termination the contractor earns land share in proportion to the work it has completed, and that, for the shares that must be returned, cancellation and registration will be ordered starting with the title deeds most recently transferred to third parties.
The construction agreement in exchange for land share, a type of contract for work, creates mutual rights and obligations for the parties. The contractor provides the financing and undertakes to construct a building on the landowner’s property, while the landowner promises, in exchange for the building to be constructed, to transfer to the contractor ownership of some of the independent units in this building. Given these characteristics, construction agreements in exchange for land share are mixed contracts combining two contract types. In this contract, the performance of constructing a building, which is the subject of a contract for work, is combined with the obligation to transfer ownership found in a contract for the sale of immovable property.
Under a construction agreement in exchange for land share, the transfer of some of the title deed shares to the contractor at the very beginning of the work is in the nature of an advance. The contractor may assign its receivables to third parties to the extent that it has earned them. Since the assignments of land share that the landowners make to the contractor under the construction-for-flats agreement are made in order to make financing easier for the contractor, the contractor acquires, to the extent that it has performed the obligation it undertook, a claim against the landowners and, to the same extent, a right of ownership over the shares assigned to it.
In this article, we will examine cases of retroactive/prospective termination of the contract by the landowner, and the position of third parties to whom the contractor has assigned/sold and transferred independent units. There is no difference between a third party acquiring the independent unit by assignment through a promise-to-sell agreement for real estate and acquiring it through a sales contract executed at the land registry.
If the termination has retroactive effect, the contract will be deemed never to have been concluded, and the parties will be able to take back from each other what they have given under the provisions on unjust enrichment. In prospective termination, however, the result is different. In prospective termination, the landowner is obliged to transfer land share to the contractor in proportion to the construction the contractor has carried out, but may demand compensation for the damage it has suffered due to the contractor’s fault. In decisions of the Assembly of Civil Chambers of the Court of Cassation, completion of 90% of the construction has been taken as the threshold for whether the contract can be terminated with prospective or retroactive effect. Likewise, as has become settled in decisions of the Court of Cassation, while prospective termination is possible at every stage of construction, retroactive termination of a construction that is 90% complete is not possible. Although some decisions of the Court of Cassation state that, for the contract to be terminated with prospective effect, the construction must have reached a level of 90% or more, the meaning intended here is that retroactive termination is no longer possible for constructions that are 90% complete.
“In construction agreements in exchange for land share, which are a type of contract for work, where the contract is terminated by the client because the contractor, through its own fault, failed to complete the work within a certain time and thus fell into default, the dispute must, as a rule, be resolved within the framework of Articles 106–108 of the Code of Obligations No. 818, which was in force on the date of the action. Although termination is an extinctive formative right aimed at ending the contractual relationship, and it is accepted that termination ends the contractual relationship with retroactive effect, in cases where, given the level the construction has reached, retroactive termination of the contract would offend the sense of justice, it is accepted, pursuant to the decision of the Grand Assembly for the Unification of Case Law of the Court of Cassation dated 25.01.1984, No. 3/1, that the termination produces prospective effects. It is useful here to dwell on the consequences of termination having retroactive or prospective effect. If the termination has retroactive effect, since it produces its consequences by deeming the contract never to have been concluded (non-existent), the parties may take back from each other what they have given under the provisions on unjust enrichment. For example, if a certain amount of land share has been transferred as an advance, it may be claimed back by the landowner, and if part of the work has been carried out in compliance with the law, its value may also be claimed by the contractor. In prospective termination, however, the result is different. Here, the landowner is obliged to transfer land share in proportion to the construction carried out by the contractor, but also claims compensation for the damage it has suffered due to the contractor’s fault. However, in the decisions of both this Chamber and the Assembly of Civil Chambers, for the contract to be terminated with prospective effect, the construction must have reached a level of 90% or more.” (Court of Cassation, 23rd Civil Chamber, Docket No. 2015/10148, Decision No. 2017/3800, 21.12.2017)
“However, in the decisions of both this Chamber and the Assembly of Civil Chambers, for the contract to be terminated with prospective effect, the construction must have reached a level of 90% or more. For this purpose, it is necessary to determine the physical state of the construction on the date the contractor abandoned the work and to establish the ratio of the work done to the entire work. In this way, the particular characteristics of the work must be assessed together with its scope, and it must be considered whether the termination will produce prospective or retroactive effects. In cases where the request for prospective termination must be granted, merely confining the decision to prospective termination will give rise to new actions, so it cannot be said that the dispute has been resolved (...) In this situation, although the conditions for prospective termination of the contract were not met, since the building construction in respect of which the landowner, despite a completion level of 77.50%, filed the action requesting prospective termination of the construction-for-flats agreement had not, in terms of its level, been built to the ratio specified in the decision of the Grand Assembly for the Unification of Case Law of the Court of Cassation dated 25.01.1984, Docket No. 1983/3, Decision No. 1984/1, as also stated in this Chamber’s judgment dated 07.04.2004, Docket No. 2003/4795, Decision No. 2004/1968, in cases where the plaintiff landowner, who could request retroactive termination, requests prospective termination of the contract of its own will, while the court should have ruled, regardless of the level of completion of the work, for prospective termination of the contract, liquidation of the contract, compensation for delay, if its conditions were met, from the date on which delivery was due until the date on which prospective termination was requested, and, since the landowner may request the determination of the independent units belonging to it, for the determination of the independent units to be left to the landowner, the dismissal of the action through an erroneous assessment and incomplete examination was not correct, and it was found appropriate to reverse the judgment.” (Court of Cassation, 15th Civil Chamber, Docket No. 2018/4947, Decision No. 2019/3227, 8.7.2019)
IN CASE OF RETROACTIVE TERMINATION OF THE LAND-SHARE (CONSTRUCTION-FOR-FLATS) AGREEMENT
If the contractor does not perform its obligation, the landowner acquires the right to request termination of the contract and cancellation of the title deed. In the event of retroactive termination of the contract, the title deed shares return to the landowner upon request. If the contractor does not perform its obligation arising from the contract, the landowner may, through retroactive termination of the contract, request the cancellation not only of the title deed shares it transferred to the contractor, but also of the title deed shares that the contractor transferred to third parties. In other words, for the third party’s right of ownership to arise, the contractor who transferred the share to it must have performed its obligation and become entitled to ownership. Otherwise, in the event of retroactive termination, all land registry records entered in the names of the contractor and of the third party who received a share from it become devoid of a legal cause, and the transactions carried out become wrongful registrations.
Nor is it possible for the acquisitions of third parties (that is, the persons to whom the contractor sold and transferred the land shares transferred to it, and the subsequent persons who acquired from them) to be protected under Art. 1023 of the Turkish Civil Code (TMK). The third-party buyers cannot be regarded as being in good faith. On the contrary, it must be accepted that they are not in good faith. This is because, since the third party acquired the share in question in exchange for an independent unit to be built on the property, it is in a position to know that the contractor will obtain its right against the landowner only if it performs its own obligation. It is not possible for a person who buys an independent unit that has not yet been completed not to see the construction, or not to know who the real owner in the land register and the seller are. The opposite view would be contrary to the ordinary course of life.
Our laws contain no provision on actions for cancellation of title and registration filed on the basis of a third party’s acquisition by assignment of an independent unit from the contractor under the construction agreement in exchange for land share concluded between the landowner and the contractor. In such actions, the court must first clarify whether the contractor has performed its obligation (its obligation to produce and deliver the work), and then whether it has performed its other obligations under the contract provisions, such as the occupancy condition (occupancy permit). For this purpose, the contractor’s obligations under the construction agreement in exchange for land share concluded between the landowner and the contractor must be examined and assessed within the framework of the contract provisions. It is clear that, in order to say that a work acceptable to the landowners has been produced, there must be a work built in compliance with the zoning rules, the construction-for-flats agreement, science and engineering, and the approved project.
“If the plaintiff has acquired by assignment from the contractor the independent unit that, under the construction agreement in exchange for land share concluded between the landowner and the contractor, was agreed to be left to the contractor, certain conditions must exist for the plaintiff to be able to compel the landowner to perform. Under Article 188 of the Turkish Code of Obligations: “The debtor may also assert against the assignee the defenses it had against the assignor at the time it learned of the assignment.” Accordingly, the landowner who learns of the assignment may raise against the new creditor (the plaintiff assignee) the same defenses that it could have raised against the previous creditor (the contractor) had there been no assignment. Since the subject of the assignment will be whatever actual receivable the contractor has become entitled to under the contract it made with the landowner, the assigning contractor’s assignment to a third party of a right that it has not earned from the landowner is of no significance for the landowner. On the other hand, if the contractor has assigned to a third party (the plaintiff) the personal right it will earn, without fully or partially performing its obligation toward the landowner, the third party (the plaintiff) cannot compel the landowner, who is entitled to benefit from Article 97 of the Turkish Code of Obligations, to perform.” (Court of Cassation, 15th Civil Chamber, Docket No. 2020/1505, Decision No. 2021/426, 23.2.2021)
“Even a very simple examination of the half-finished construction would make it possible to understand that the land does not belong to the contractor. This is because it is not possible for a person who buys a share in a construction that has not yet been completed not to see the construction, or not to know who the real owner and the seller are. Since the two defendants mentioned, as buyers, know and are in a position to know, even where a third party not party to the action stands in between, that the land does not in fact belong to the contractor, that this share was given to the contractor in exchange for flats, and that if the contractor does not perform its obligation no right will arise for it in the independent units and land shares allocated to it, they take over the title deed accepting the risk that the land share given as an advance by the landowner will be canceled. No claim of good faith can be raised in respect of them, nor is it possible to apply Article 1023 of the TMK. Since the contract has been terminated retroactively because the contractor did not perform its obligation, the court must also order the cancellation of the title deed shares belonging to the defendants.” (Assembly of Civil Chambers of the Court of Cassation, Docket No. 2018/23-240, Decision No. 2020/43, 21.1.2020)
IN CASE OF PROSPECTIVE TERMINATION OF THE LAND-SHARE (CONSTRUCTION-FOR-FLATS) AGREEMENT
The contractor may acquire a personal right to the extent that it has performed the obligation it undertook in compliance with the provisions of the contract and the law and with the rules of science and art, and may transfer the personal right it has acquired to third parties. However, where the construction agreement in exchange for land share concluded between the landowner and the contractor ends in full performance, or where the contract is terminated in a manner producing prospective effects, the rights of the contractor or of those who have acquired a personal right from the contractor may turn into a right in rem.
Prospective termination means that the contractor receives consideration in proportion to the work it has carried out. The consideration the contractor will receive is the independent units and the corresponding land share found by applying the level to which the contractor has brought the work to the independent units and the corresponding land share that the contractor would have received had it fully performed the work. That is, to the extent that the work is left incomplete, the contractor will not be entitled to receive independent units and the corresponding land share. As a result, if the termination has been made so as to produce prospective effects, or if the conditions for this have been met, the contractor may, in the liquidation carried out as the natural consequence of the termination, request the transfer of the title deeds of the independent units corresponding to the physical level to which the work has been brought. In other words, the provisions on restitution do not apply; the contractor becomes entitled to the value of the part it has built, in the form of land share in that amount, and returns only the land share corresponding to the part it has not built, if it has received that land share in advance.
When prospective termination is ordered, if the contractor has transferred all the title deeds it held or, although it has not transferred all of them, the title deeds it holds do not cover the amount it is obliged to return, the court will order the cancellation and registration of the title deeds the contractor transferred to third parties, starting with the title deeds it transferred most recently. As can be seen from this, the completion rate of the building is extremely important for the contractor’s ability to benefit from prospective termination and for determining the land share to which it will be entitled.
“In prospective termination, the construction level (completion rate) must first be determined; the method of comparison must be applied between the land share earned by the defendant contractor and the ratio of independent units and shares to be left to the landowners, on the one hand, and the ratio of independent units (and land share) agreed to be given to the contractor had the construction been completed, on the other; in this way, the in-kind equivalent of the partial performance made by the contractor must be established; if it is not possible to give independent units in kind, the liquidation must be carried out by adding a balancing payment according to the values to be determined for the work done and the independent units; and if, according to the existing work, there are independent units (land share) that must be taken back, it must be determined that these belong to the contractor. (...) To give an example, if the contractor would have received 10 independent units had it completed the work, and the work done by the contractor as a whole amounts to 80% of the entire work, then in prospective termination the contractor will have become entitled to the title deeds of 8 units. The court must show and explain the consequences of prospective termination in this way in the operative part of the judgment, carry out the liquidation and resolve the dispute. In other words, it must be determined how many independent units will be given to the contractor, together with their locations and land share ratios, and prospective termination of the contract must be ordered in an enforceable manner, explaining the existing rights of the parties in the existing construction, that is, also taking the liquidation into account. In this way, the landowners’ claims relating to the cost of incomplete work will have been met, since a deduction will have been made from the title deed records the contractor will receive. If there are incomplete and defective parts in the work, these must be taken into account when determining the physical rate of the construction. This is because the contractor can claim only the value of the work it has actually carried out (the transfer of the land share). In prospective termination, since the incomplete and defective work in the building is assessed in determining the construction level and fewer title deeds are accordingly transferred to the contractor, this does not create a problem in the liquidation. Also, in prospective termination, the result of the liquidation must be shown clearly in the decision, and the shares (independent units) that must belong to the parties must be determined, without giving rise to new disputes, in a manner that will not create doubt in enforcement, pursuant to Article 297 of the Code of Civil Procedure (HMK).” (Court of Cassation, 23rd Civil Chamber, Docket No. 2015/4452, Decision No. 2015/5980, 18.9.2015)
“If a decision of prospective termination is rendered, the liquidation must be carried out by determining the physical rate of the work carried out by the contractor in relation to all the work it undertook under the construction-for-flats agreement, taking into account and deducting incomplete and defective work as of the date of termination, applying this rate to the land share or number of independent units falling to the contractor according to the sharing arrangement agreed in the contract, and leaving to the contractor the land share or independent units it has earned, and cancellation of title and registration must be ordered with respect to the land shares and independent units the contractor has not earned and the shares held by third parties.” (Court of Cassation, 15th Civil Chamber, Docket No. 2019/1166, Decision No. 2019/2627, 30.5.2019)
“(...) In the case of prospective termination, liquidation must also be carried out, and while, if the conditions for prospective termination have been met, cancellation of title and registration should have been ordered with respect to the shares held by the contractor, according to the level, or by third parties, taking into account the dates of transfer, it is erroneous that no ruling was made on this matter.” (Court of Cassation, 15th Civil Chamber, Docket No. 2019/821, Decision No. 2019/2216, 9.5.2019)
We believe that it is always advisable to obtain legal support from a lawyer in order to avoid losing rights.
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.