Prohibition of Payment in Foreign Currency in Lease Agreements
The Decree No. 32 on the Protection of the Value of Turkish Currency (“Decree No. 32”) and the Communiqué No. 2008-32/34 on the Decree No. 32 on the Protection of the Value of Turkish Currency (“Communiqué”) prohibit the determination of the contract prices of certain contracts and other payment obligations arising from these contracts in a foreign currency or indexed to a foreign currency.
Article 8 of the Communiqué, titled “Foreign Currency and Foreign Currency Indexed Contracts”, sets out in detail the contracts in which the contract price cannot be determined in a foreign currency or indexed to a foreign currency (and exceptions to these prohibitions). This article also includes provisions regarding whether contract prices and other payment obligations in lease agreements may be concluded in foreign currency or indexed to a foreign currency.
Pursuant to Article 8/2 of the Communiqué, residents of Turkiye may not determine the contract price and other payment obligations arising from such agreements in a foreign currency or indexed to a foreign currency in real estate lease agreements for residential and workplaces located in Turkiye.
Pursuant to Article 8/27 of the Communiqué, if foreign currency-indexed payment obligations were previously determined under these contracts, the parties are obliged to convert the contract price and other payment obligations arising from these contracts into the Turkish currency in accordance with Provisional Article 8 of the Decree No. 32.
Article 8/28 of the Communiqué states that the amounts determined in a foreign currency or indexed to a foreign currency in residential and workplace lease agreements concluded before the effective date of the provisional Article 8 of the Decree No. 32 shall be determined in the Turkish currency for a period of two years as per the first paragraph of Article 8/28 of the Communiqué.
Pursuant to the relevant provisions, if parties fail to agree on the redetermination of the contract price and other payment obligations arising from these contracts, which cannot be determined in a foreign currency or indexed to a foreign currency; the prices determined in foreign currency or indexed to foreign currency in the contracts shall be determined by increasing the equivalent of such prices in Turkish currency calculated using the effective selling rate of the Central Bank of the Republic of Turkey, which is an indicator determined on 2/1/2018, based on the monthly rates of change in the consumer price index (CPI) determined by the Turkish Statistical Institute for each month from 2/1/2018 to the date of the redetermination of the prices.
An exception is regulated in the relevant article for receivables that are already collected or overdue, deposits given within the scope of real estate lease agreements and commercial papers that have entered into circulation within the scope of the performance of the agreements, and Article 8/28 of the Communiqué does not apply to these exceptions.
Pursuant to Law No. 1567 on the Protection of the Value of the Turkish Currency, any person who violates the obligations stipulated under the general and regulatory procedures of this Law is subject to an administrative fine. Pursuant to Article 17/7 of the Misdemeanor Law No. 5326, the amount of the administrative fine is increased annually according to the revaluation rate.
This Newsletter article analyzes a decision of the Court of Cassation regarding a dispute arising from a lease agreement in which the rent is determined in a foreign currency.
Decision of the Court of Cassation
The Court of Cassation, in its decision dated 6.10.2022 and numbered E. 2022/6469, K. 2022/9954, has found a “violation of public order” with respect to a lease agreement where the rent was agreed to be paid in a foreign currency.
The dispute arises from the enforcement proceedings initiated by the lessor against the lessee for unpaid rents in foreign currency. The lease agreement subject to the dispute was for a fixed term between 30/12/2010 and 30/12/2020 and the contract price was determined as 50.000 Euro for each year.
According to the decision, upon the extension of the contract term by the parties, the lessor demanded the payment of the rent of EUR 15.687,12 for the lease period 31/12/2020-30/12/2021, but the parties failed to reach an agreement on the payment of the rent.
Following the objection to the debt by the lessee, the enforcement court decided with its decision dated 22.02.2022 and numbered 2021/167 E. 2022/77 K. that since the rent was finalized pursuant to Article 63 of the Execution and Bankruptcy Law No. 2004 (“EBL”), the debtor’s objection regarding the foreign currency rent was not to be considered; accordingly, the objection was revoked and the debtor was decided to be evicted from the leased real property. Thereafter, the debtor appealed the decision. The 12th Civil Chamber of the Regional Court of Appeal, through its decision dated 13.04.2022 dated 2022/830 E. 2022/1089 K., dismissed the appeal on merits.
The decision of the Court of Cassation points out there is a fixed-term lease agreement between the parties, which does not constitute a commercial paper, with a rent determined in a foreign currency. The Court of Cassation found that as the lease agreement does not fall within the scope of any exception, the rent which was determined in a foreign currency ought to be converted into Turkish currency pursuant to Provisional Article 8 of the Decree No. 32.
The Court of Cassation makes reference to the provision of Article 63 of the EBL which stipulates that objections which are not submitted while objecting to a debt at the enforcement office cannot be considered in subsequent proceedings initiated for the revocation of the objection. The Court of Cassation further states that such provision does not apply in cases where there is a rule related to public order and courts must ex officio take into consideration issues related to public order.
The Court of Cassation considered the legislation on the protection of the Turkish currency falls within the scope of the rules of public order, and concluded that the failure of the court of first instance to consider the objections within the framework of Decision No. 32 just because they were not submitted together with the objection to the debt is a ground for reversal. The Court of Cassation decided to reverse the decision of the Court of Appeal and the decision of the Court of First Instance on the ground of failure to ex officio take into consideration the regulations on the protection of the Turkish currency concerning public order.
The decision of the Court of Cassation is noteworthy as the court found a breach of public order with respect to a contract where the contract price was prohibited to be determined in a foreign currency or indexed to a foreign currency. This determination is quite significant as the consequences of such a breach may result in partial invalidity or invalidity of contracts which have been concluded in breach of the Communiqué.
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