Ercüment Erdem Att. Ozgur Kocabasoglu

Adaptation of Lease Agreements within the Scope of New Coronavirus (COVID-19)

October 2020

Introduction

The 4th Chamber of the Bursa Regional Court of Justice ("Court") ruled that the lease contract should be adapted due to the COVID-19 pandemic with its decision that may set a precedent. The 4th Chamber of the Bursa Regional Court of Justice handled the interim decision of the first degree court that rejected to rule for an interim measure regarding the payment of monthly TRY 11,500.00, effective from 01.05.2020, and while the effects of COVID-19 continue in decision numbered 2020/1103 E. 2020/1008 K. and dated 28.09.2020 (“Decision”).

The real property that is the subject of the request for adaptation and the interim measure was rented to the tenant with the lease starting on 01.01.2020, for a period of 8 years, and for the use as a restaurant with TRY 23,000.00 monthly rent.  The plaintiff / tenant claimed there was a decrease in the business due to the pandemic, and requested the adjustment of the rent to be made during the pandemic, and requested an interim measure to pay TRY 11,500.00 as the monthly rent during this period. The Court examined the conditions of "Hardship" regulated under Article 138 of the Turkish Code of Obligations ("TCO") numbered 6098, and ruled that a preliminary measure should be imposed on the payment of the rents that have been valid but which have not yet been paid since 01.05.2020, for the rents to be decreased as of the date of this decision, to 11,500.00 TL per month.

An Overview for “Hardship” as a Reason for Adaptation

Firstly, if there is a provision that can be applied regarding a pandemic or force majeure in the lease agreement concluded between the parties, then that provision shall be applied primarily in accordance with the principle of freedom of contract. In the lease agreements within this framework, the provisions stipulated in the contract, and the opportunities provided by the parties, shall be primarily applied, in the event that there is a clause regarding force majeure and “pandemic” is among the cases considered to be force majeure.

In the event that the pandemic and measures taken do not constitute force majeure, the contract may be adapted in accordance with “Hardship provision” under Article 138 of the TCO. Article 138 is a general provision regulates the adaptation of contracts and more importantly, it concerns lease contracts. The “Hardship” Clause has an importance for the adaptation of lease aggrements in foreign currency, and it is applied to lease aggrements in Turkish currency, as well.

Lease Contracts and the Conditions of Hardship

For a contract to be adapted by the judge, the following conditions must be satisfied under Article 138 of the TCO:

  • An extraordinary and unpredictable change in the conditions of the contract takes place;
  • The change is not caused by the debtor;
  • The change affects the facts existing at the time of conclusion of the contract against the debtor in such a way that contradicts with good faith; and
  • The debtor does not perform, or performs the contract, by reserving its rights arising from the excessive change of balance between the parties.

The Court suggests that the basis of the adaptation regarding “Hardship,” which is different from the concept of impossibility, is “Good Faith” under Article 2 of the Turkish Civil Code. However, the four conditions set out under Article 138 of the TCO must be satisfied in order to adapt the contract to the changing conditions, or to revoke the contract. If all of the conditions for the adaptation are met, the judge adapts the contract to the new conditions upon the request by the debtor. Below, the conditions under which Hardship, as described under Article 138 of the TCO, are assessed by the Court is examined, and in greater detail.

Extraordinary and Unforeseen Change in the Conditions of the Contract

In order for a contract to be adapted, under Article 138 of the TCO, an extraordinary situation that affects the performance of the contract after its conclusion must occur, and this extraordinary situation must cause a substantial change in the terms of the contract.[1]

In accordance with the Circular dated 16.03.2020 ("Circular") prepared by the Ministry of Internal Affairs, certain businesses, including restaurants and cafes, were temporarily suspended due to the COVID-19 pandemic. The decision by the Ministry of Internal Affairs that concerns many businesses, including the plaintiff, is as follows:

“The new coronavirus (COVID-19) pandemic started to be seen in our country in March, 2020, and various measures have been taken in order to control the spread. Within this scope, various measures, such as lockdowns, closure of workplaces or flexible working hours, and working from home, have been implemented from time to time depending on the need. The effects of the pandemic and the measures taken by the administration continue.

The epidemic of this size has caused unprecedented results, both in the world, and in our country, and it has been observed that some sectors are more affected by the pandemic and the measures taken."

Another condition stipulated by the TCO for the adaptation of the contract is that the extraordinary situation arising after the conclusion of the contract originates from a situation that cannot be foreseen or expected when the contract is concluded. Although the extraordinary situation may be predictable, its effect on the contract may not be predicted in advance by the parties when the contract is concluded.[2]

The Court stated that pandemic could not be predicted by the parties; the process of an epidemic disease is an extraordinary situation under Article 138 of the TCO. The decision also states that all contracts cannot be intervened in a predetermined way in the face of this extraordinary situation, since the effects of the measures taken within the scope of the pandemic differ in each industry and workplaces. The Court also emphasized that the effects of the pandemic, and the measures on the tenant, itself, should be considered for adaptation. The Court stated that the tenant’s business continued with take-out services within the rented property that was operated as a restaurant, but it also considered that the process and the measures taken could have certain effects on the business of the plaintiff.

The Debtor Should Not Cause the Change

The party requesting adaptation due to the extraordinary situation emerged after the conclusion of the contract by the parties should not have caused the situation.[3] Although it is not clearly stated in the Decision, it is clear that the plaintiff has no fault in the COVID-19 pandemic. In addition, within the framework of the events and change, the debtor's performance should not be expected according to good faith. In accordance with good faith, the debtor must act with care after the emergence of the extraordinary situation.[4]  Although the Court did not make a clear distinction as to whether this condition was met in this case, the plaintiff's continuing business with the take-away service may be interpreted as an expression that the plaintiff acted with care after the emergence of the extraordinary situation.

The Amendment Changes an Existing Condition at the Time of the Contract against the Debtor to the Extent that the Demand for Performance is in Violation of Good Faith

Another condition addressed by Article 138 of the TCO is that an existing condition at the time of the contract against the aggrieved party’s interests have changed to the extent that demanding performance of the contract is contrary to good faith.[5] The adaptation of the contract should be evaluated considering good faith. In the precedent cases of the Court of Cassation, it is determined that the fact that the performance of the contract became unbearable for the aggrieved party is a condition for adaptation of the contract.[6] Furthermore, for the adaptation of a contract, the extraordinary condition should clearly and severely remove the balance of the obligations in favor of one of the parties. If one of the parties should bear the risk of the change of conditions, then there will be no adaptation.[7]

Here, the Court held that neither of the parties caused this unfavorable condition, and that the contract shall be subjected to adaptation to distribute the burden to both of the parties. 

The Debtor Does Not Perform or Performs by Reserving Its Rights Arising From Hardship

In line with Article 138 of the TCO, a debtor should either not perform the contract, or should perform, by reserving its rights as to hardship. Article 138 of the TCO allows adaptation retroactively for an obligation that is already performed. However, performance should be made by reserving the rights arising from hardship. Therefore, the view arguing that the lawsuit for adaptation of the lease price may be filed proactively would not be significant by means of reserving the rights for adaptation.[8]

Another demand of the plaintiff that is evaluated in the Decision is an interim measure for the payment of the monthly amount of TRY 11,500 starting from 01.05.2020, and continues so long as the effects of the COVID-19 pandemic continue. The Court determined that the conditions of hardship are present. It is not understood from the Decision whether or not the tenant paid the previous rents and, if so, whether or not there is a reservation in this respect.  

The Interim Measure Decision

If the Court does not rule on an interim measure, the tenant must pay the rent fully until the case is settled, and it is understood that adaptation will have no benefit after default and evacuation take place. In the case regarding the adaptation of the rent, the Court ruled that the condition of "worrying whether serious harm will occur," as regulated under Article 389/1 of the Code of Civil Procedure is satisfied and, for this reason, an interim measure regarding the reduction of rent is necessary. However, since the COVID-19 pandemic is for a temporary period, the Court stated that the adaptation should cover only this temporary period, and the rent should be reinstated when the effects of the pandemic completely disappear and the tenant's business returns to normal.

Conclusion

The Decision is important in several respects. Firstly, it has been accepted by a higher degree Turkish court that the COVID-19 pandemic constitutes a force majeure in accordance with Article 138 of the TCO and, therefore, the lease agreement can be adapted.

In addition, the Court ruled that the Plaintiff's existing rents shall be adapted so long as the effects of the pandemic/force majeure continue, and considering the nature of the business done by the plaintiff tenant and all of the conditions and the evidence submitted by the parties, an interim measure can be decided upon for the payment of the rent at a reduced amount to be determined by the Court, provided that the interim measure is evaluated by the Court at certain intervals, or upon the application of the parties. If the situation and conditions change, it should be abolished or another amount should be established.

The Court ruled that the interim measure should be reviewed by the Court every 6 months, and a decision as to whether to abolish or increase or decrease it in accordance with the new conditions should be made considering that the effects of pandemic change over the course of months, and it is not clear how long these effects will continue.

[1] Baysal, Başak: Sözleşmenin Uyarlanması, , On İki Levha, 3rd ed., 2019.

[2] Baysal, p. 256.

[3] Decision of the 6th CC of the Court of Cassation, No. 2015/4013 E. 2015/6417 K. 25.06.2015, “… the Plaintiff who requests adaptation should not cause the emergence of the exceptional circumstances and conditions due to his own fault…”

[4] Turkish Civil Code No. 4721, OG, No. 24607, 8.12.2011.

[5] Baysal, p. 286.

[6] Decision of the 13th CC of the Court of Cassation, No. 1995/145 E. 1995/3339 K. 06.04.1995; Decision of the 13th CC of the Court of Cassation No. 2005/1874 E. 2005/9749 K. 09.06.2005.

[7] Baysal, p. 291.

[8] Gümüş, Prof. Dr. Mustafa Alper: Kira Sözleşmesi, Vedat Kitapçılık, 2nd ed., İstanbul, 2012.