Financial Leasing Agreements

Att. Leyla Orak Celikboya, December 2012

Introduction

Until December 13, 2012, financial leasing, factoring, financing and loan activities were regulated by the Financial Leasing Law No. 3226 (the “Abrogated Law”), the By-Law regarding Money Lending Activities No. 90 and the relevant secondary legislation. The Financial Leasing, Factoring and Financing Companies Law No. 6361 (the “Law No. 6361”) which was promulgated by the Turkish Grand National Assembly on November 21, 2012, entered into force through publication in the Official Gazette dated December 13, 2012 and numbered 28496. Law No. 6361 regulating all companies engaging in the abovementioned activities repeals and replaces the Abrogated Law and the decree No. 90.
Law No. 6361 introduces important changes to the financial leasing agreements. In this month’s newsletter article, the financial leasing agreements and the material changes introduced with the new provisions shall be analyzed.

Execution of the Agreement and Property Rights

The Financial leasing agreement is an agreement under which the lessor transfers possession of a good they provide to the lessee in exchange for a leasing price. Pursuant to Law No. 6361 investment, participation and development banks as well as financial leasing companies may be party to a financial leasing agreement as the lessor. Thereby, the limitation under the Abrogated Law that only a financial leasing company could be the lessor is no longer preserved. Further, under the Abrogated Law it was not clear whether the lessor could purchase the good from the lessee first and then lease it under a financial lease agreement. Article 18/1 of Law No. 6361 now explicitly enables the lessor to purchase the leased good from a third person or even from the lessee.

The leased good may be movable or real-estate. Law No. 6361 enables, for the first time, reproduced copies of computer software to be leased under a financial leasing agreement. Any good which individually constitutes an asset may be leased under this agreement.

Contrary to the Abrogated Law, financial leasing agreements are not required to establish a minimum period in which it may not be terminated.

It is no longer required for the agreement to be executed by a public notary. The financial leasing agreement may be executed in writing. Real estate and movable goods leased under financial leasing agreements shall be annotated or registered to the land registry, to the special registries for movable goods, if any, and be notified to the Association of Financial Leasing, Factoring and Financing Companies[i] (the “Association”). Movable goods not registered to a special registry shall be registered to the special registry to be kept by the Association. The registry to be kept by the Association shall be accessible to the public; and therefore persons not party to the financial leasing agreement may not allege that a lease annotation was unbeknownst to them.

Rights and Obligations of the Parties

The lessor and the lessee undertake reciprocal obligations by entering into a financial leasing agreement. The lessor undertakes to transfer the possession of the good, and the lessee undertakes to pay the leasing price. Law No. 6361 also regulates other obligations and certain rights of the parties.
Under this section, the provisions of Law No. 6361 governing the rights and obligations of the parties shall be analyzed.

The rights and obligations of the lessee

The lessee is obliged to pay the leasing price. The financial leasing price and the terms of payment shall be regulated under the agreement. The provision under the Abrogated Law requiring the annual leasing price for financial leasing from abroad to be at least equivalent to 25,000.- US Dollars is not preserved in Law No. 6361. The Association shall regulate the procedures and principles of financial leasing from abroad.

Pursuant to another important change introduced by Law No. 6361, even if the leased good is not yet produced or its possession is not yet transferred, it may be regulated in the agreement that the lessee shall commence payment of the lease as of the date of the agreement.

As under the Abrogated Law, the lessee shall be the possessor of the leased good. It shall use the good in compliance with the agreement and with diligence and it may benefit from the good. The leased good must be insured and the lessee shall pay the premiums. Unlike the Abrogated Law, Law No. 6361 does not specify the insurer; it shall be regulated under the agreement.

The lessee may be granted a purchase right under the agreement.

The lessee shall be responsible for all loss and damages on the good for the duration of the agreement. The lessor shall not be responsible for any defects on the good.

The Abrogated Law included a provision which stated that the lessee could not transfer possession of the leased good. In 2007 new provisions were introduced enabling the lessee to transfer possession (a) by obtaining the written approval of the lessor for leasing transactions for the purpose of providing housing to consumers and financing investments, (b) solely by notifying the lessor of leasing transactions regarding housing finance and (c) in accordance with the provisions of the leasing agreements for other types of leasing transactions.

Law No. 6361 facilitated the transfer of possession of the leased good and even the change of the lessee. Accordingly, even if there is no contractual provision enabling such transfer, the lessee may transfer its rights and obligations under the agreement or the agreement itself with the written approval of the lessor. There is no obligation to obtain the approval of the lessor for transfers under lease agreements in relation to housing finance; the lessee may transfer possession of the good to a third person by notifying the lessor of the transfer.

The rights and obligations of the lessor

The lessor is under the obligation to transfer the possession of the leased good to the lessee. Unless regulated otherwise under the agreement, the leased good shall be transferred to the lessee at the latest within two years as of the date of the agreement.

If the leased good may not be delivered to the lessee due to the lack of execution of an agreement by the lessor with the producer or the seller of the leased good in due time, the provisions of the Code of Obligations in relation to the rights of the non-violating party, in the event of non-execution of obligations of the other party, shall be applicable.

Law No. 6361 no longer preserves the provision stating that the lessor shall be the insurer of the leased good. Pursuant to the new provisions, the agreement shall specify the party who shall insure the leased good.

The agreement may grant the lessee a purchase right over the leased good. In the event the agreement regulates this opportunity, and provided a notice is served to the lessee, in the event the lessee fails to exercise its purchase right within thirty days starting from the generation of the right or to return the leased good to the lessor, the lessor may unilaterally realize any action necessary for the transfer of ownership of the good to the lessee.

Unless regulated otherwise in the financial leasing agreement, the lessor may transfer the property of the leased good to another lessor (as defined under Law No. 6361). The transfer must be notified to the lessee.

Termination of the Agreement

As was under the Abrogated Law, unless regulated otherwise, the agreement shall be deemed terminated at the end of its term, and in the event of bankruptcy, death or loss of legal capacity of the lessor. The parties may agree to extend the term of the lease agreement three months prior to the lapse of its term. The event of unsuccessful execution proceedings against the lessee is no longer preserved as grounds for termination. On the other hand, Law No. 6361 regulates that the lessee may terminate the agreement prior to its term in the event the lessee or its enterprise to which the leased good is allocated is in the process of liquidation.

In the event the lessor defaults in the payment of the leasing price and does not make the payment within the thirty-day period (this period may not be less than sixty days if the agreement grants a purchase right), which the lessor will grant to the lessee, the lessor may terminate the agreement. Law No. 6361 further regulates that if the lessee is issued notifications due to non-payment three times, or two times in a row within the same year, the lessor may terminate the agreement.

Law No. 6361 maintains the provision that if due to violation of one party it may not be expected for the other party to carry on with the agreement, the agreement may be terminated. Accordingly, the termination right shall arise only if one of the parties acts in violation of the agreement and if this violation results in a situation in which it may no longer be expected for the other party to be bound by the agreement. The issue as to whether a financial leasing agreement could be terminated due to a fundamental change of circumstances or based on just cause, which was not resolved under the Abrogated Law, is therefore not resolved with the provisions of Law No. 6361 either.

In any event, if the agreement is terminated, the lessee who does not exercise or who does not have a purchase right shall immediately return the leased good to the lessor.

The Abrogated Law regulated that in the event the lessor terminates the agreement, the lessee shall be obliged to return the leased good, pay all undue lease payments and compensate any exceeding damages. The Law No. 6361 did not preserve this provision. Pursuant to the new provisions, in the event the lessor (or the lessee, due to liquidation of the lessee or its enterprise) terminates the agreement, the lessee, who shall return the leased good, may additionally be obliged to make an additional payment. If the total amount of undue lease payments of the lessee and the exceeding loss of the lessor is less than the sale or lease price of the leased good to be sold or financially leased to a third person by the lessor, the lessee shall pay the difference to the lessor. Otherwise, the lessor shall pay the lessee the difference. If the lessee terminates the agreement (other than due to the liquidation of the lessee or its enterprise), the lessee may request compensation from the lessor of the damages it incurs.

The provision of the Abrogated Law stating that the agreement may not be terminated for a minimum period of four years is not preserved under Law No. 6361.

Conclusion

Law No. 6361 abrogated the Abrogated Law and the by-law No. 90 through its entry into force on December 13, 2012. This law regulates the financial leasing, factoring and financing companies and the agreements which fall under its scope. These regulations introduce certain material changes.

The definition of the lessor which may enter into financial leasing agreements is widened. The agreement may be executed in writing, and the leased good shall be annotated or registered to the land registry, to its own registry or to the special registry kept by the Association. A minimum term of validity of the agreement is not regulated.

The Lessee may transfer the agreement with the written approval of the lessor. The lessor may transfer ownership of the leased good to another lessor by notifying the lessee. If the agreement grants a purchase right, in the event the lessee does not return the leased good at the end of its term, subject to certain conditions, the lessor may unilaterally transfer ownership of the leased good to the lessee.

If the lessee defaults in the payment of the lease price and does not make the payment within the specified period, defaults in the payment three times, or two times in a row in a given year, the lessor may terminate the agreement.


[i] Pursuant to the Law numbered 6361, the Association shall be established within six months as of the entry into force of the law.