In real estate development practice, converting a plot of land into economic value is for the most part achieved by a single instrument: the owner leaves part of their shares in the parcel to the contractor, and the contractor in return realises the agreed project and delivers the independent units to the owner. The arrangement known as the construction contract in return for flats establishes precisely this exchange, and a significant share of building production in Türkiye takes place through this model.
What makes the relationship legally demanding is that a single instrument houses the elements of two separate contract types at once: on the one hand the creation of a work, on the other the passing of ownership of an immovable. As a result, at every stage from the formation of the contract to its termination, the zoning legislation, the Condominium Ownership Act No. 634, the Turkish Civil Code No. 4721 and the Turkish Code of Obligations No. 6098 all come into play together; and where a dispute arises, which provision is to take priority most often depends on the detail of the specific case.
Below we examine in detail the legal character of the contract, the formal rule required for it to be validly formed, the reciprocal obligations of the landowner and the contractor, how the transfer of title proceeds and the types of action brought in the event of a breach.
What Is a Construction Contract in Return for Flats?
The essence of the contract rests on two reciprocal undertakings: the landowner undertakes to transfer certain shares in their immovable to the contractor; the contractor undertakes to construct the building in conformity with the agreed project and to deliver the independent units. Since each party assumes an obligation towards the other, the relationship is bilateral from the outset.
In practice the expression construction contract in return for land share is also used for this contract. The most important reason for the model’s prevalence is that the landowner is able to open their immovable to development without laying out cash. In urban transformation schemes and large-scale investment projects the rate at which this method is preferred is markedly high.
The Definition and Legal Nature of the Contract
As a matter of Turkish law these contracts are regarded as being of a mixed nature. The reason is plain: the instrument houses both an undertaking to create a work and an undertaking relating to the transfer of ownership of an immovable.
For the contractor, the principal obligation is that the building be completed and delivered in conformity with the contract, the approved project and the technical specifications. For the landowner, the principal obligation is that the agreed land shares or independent units be transferred to the other party.
Because of this dual structure, the relationship gathers the elements of three separate legal institutions under one roof. The obligation to construct and deliver, which belongs to the contract for work; the undertaking to transfer, which belongs to the promise to sell an immovable; and finally the act of actually transferring the land share all stand side by side. It is this interlocking that requires us, where a dispute arises, to determine which rule applies according to the centre of gravity of the specific case.
The Concept of Construction in Return for Land Share
In everyday usage the expressions "in return for flats" and "in return for land share" are used interchangeably, and no practical distinction is drawn between them.
The distinguishing feature of this relationship is that no sum of money is paid to the contractor. The economic counterpart of the contractor’s obligation to build consists of certain shares in the immovable or of the independent units to be constructed. The consideration is therefore not cash but a value in kind, and in most cases that value takes concrete form as a transfer of the land share.
The Legal Basis of the Contract
There is no special statute in our legislation dealing with this contract type on its own. Even so, no shortage of provisions is felt where disputes arise; the relevant articles of several statutes are applied together.
The instruments that are decisive in practice are the Condominium Ownership Act No. 634, the Turkish Civil Code No. 4721 and, above all, the Turkish Code of Obligations No. 6098. Alongside these, the case law of the Court of Cassation serves as a source guiding practice in the interpretation of the contract and the determination of the parties’ positions.
The Formal Requirement and Validity
The contract bears a mixed character because it combines the contractor’s undertaking to build with the landowner’s undertaking to transfer in one and the same instrument. The fact that the instrument contains provisions directed at the passing of ownership of an immovable places it, under our law, among the transactions subject to an official form.
This requirement has two separate bases. Article 706 of the Turkish Civil Code No. 4721 requires that contracts whose purpose is the transfer of ownership of an immovable be formed in official form. In parallel, Article 237 of the Turkish Code of Obligations No. 6098 likewise prescribes an official form for contracts promising the sale of an immovable.
Since a construction contract in return for flats contains undertakings in the nature of a promise to sell, it is in practice concluded in the form of a deed drawn up before a notary.
On this footing, protocols, heads of agreement or informal arrangements signed by the parties between themselves are not accepted as a valid contract. Where the form is not observed, the transaction is in principle subject to the sanction of absolute nullity.
The Rights and Obligations of the Parties
The relationship is one that imposes obligations on both sides in full (synallagmatic), each party assuming obligations towards the other. On the landowner’s side the principal obligation is the transfer of the shares, while on the contractor’s side it is to produce and deliver a work in conformity with the contract.
The Obligations of the Landowner
The basic conduct expected of the landowner is twofold: to prepare a suitable ground on which the construction activity can be carried out, and to transfer the agreed shares to the other party.
The Obligation to Deliver the Land
The owner is obliged to leave the immovable to the contractor in a condition suitable for construction work. The critical point here is that there be nothing on the parcel that would prevent construction in fact or in law.
Delivery of the site is generally documented by drawing up a site delivery record. The date of this document constitutes a decisive item of evidence when arguing when the construction period began to run and which of the parties fell into default.
The Obligation to Transfer the Land Share
The second of the owner’s principal obligations is to transfer the shares specified in the contract to the contractor. The method by which the transfer is to be effected in practice is freely determined by the parties. In some contracts the shares are transferred in advance by way of an advance title deed; in others the transfer is made in stages according to the level reached by the construction; in some arrangements the shares corresponding to particular independent units are transferred separately.
Where the owner refuses to transfer, the course open to the contractor is to bring an action to compel registration (compulsory registration).
The Obligation to Grant a Power of Attorney
For the contractor to be able to carry out transactions before official authorities — principally the municipality, the Land Registry Directorate and the utility undertakings — in the great majority of projects a power of attorney must be obtained from the owner. This authority is needed in particular at the stages of having the project approved, obtaining the building permit, carrying out land registry transactions relating to the construction servitude and condominium ownership, and establishing the utility subscriptions; the scope of the power of attorney must for that reason be determined with care.
The Obligations of the Contractor
The contractor’s obligation is to bring into being and deliver, at the agreed time, a building conforming to the contract and its annexes. That obligation is not exhausted by the physical completion of the building; it also includes delivery of the building in conformity with its permit, its project and the technical rules.
The Obligation to Build in Conformity with the Contract
The criteria with which the contractor must comply are several: the approved architectural project, the technical specifications, the zoning legislation and the rules of science and craftsmanship. Within this framework, what is expected of the contractor is not to be content with finishing the shell, but to deliver an independent unit of the quality described in the contract, for which an occupancy permit can be obtained and which is ready for use.
The Duty of Care and Loyalty
Throughout the period of performance the contractor is bound to have regard to the landowner’s interests and to exercise the necessary technical diligence.
As regards the choice of materials to be used, the quality of the workmanship, structural safety and technical practice, the contractor is expected to act to the standard of a prudent merchant. There is also a duty to inform the owner as to the implementation of the project and the technical risks it carries.
The Obligation to Carry Out or Manage the Work in Person
Unless a stipulation to the contrary is included, the contractor must carry out the work through its own organisation and under its own supervision.
Employing a sub-contractor is legally possible; liability arising from the acts of the subcontractor, however, as a rule continues to rest with the contractor.
The Obligation to Deliver on Time
Completing and delivering the building within the period stipulated in the contract is one of the contractor’s heaviest obligations. Where that period is not observed the contractor falls into default and several options arise for the other party: delay damages may be claimed, a contractual penalty may be sought if one has been agreed, loss of rent may be asserted because the immovable could not be enjoyed, and finally termination of the contract may be pursued.
The Warranty Against Defects
The contractor is liable for latent or patent defects appearing in the independent units delivered; work never carried out or left half-finished falls within the same liability. Typical situations generating disputes include shortcomings observed in the common areas, defects identified in the load-bearing system, waterproofing not being carried out as it should be, materials being used sparingly and work not conforming to the project. In such cases the landowner or the owners of the independent units may demand the remedying of the defect, a reduction in the consideration, the payment of damages or the meeting of the cost of the incomplete work.
Social Security and Occupational Safety Obligations
Carrying out the insurance formalities for those working on the site and taking occupational health and safety measures are also among the responsibilities assumed by the contractor.
Where an occupational accident occurs, where premium debts to the Social Security Institution (SGK) accumulate or where third parties suffer loss, severe consequences of both a civil and a criminal nature may arise.
The Transfer of Title Under the Contract
In this relationship the transfer of title is the most critical obligation, constituting the economic counterpart of the contractor’s obligation to build. In most cases the contractor receives no money; it is treated as remunerated by having the land shares corresponding to the independent units left to it registered in its name in the land registry.
Transfers effected before the building is completed carry serious risks; that risk arises both for the owner and for those who purchase a flat from the contractor.
The Transfer of the Land Share
What is meant by transfer of the land share is the passing, in the land register, of the shares corresponding to the independent units to be left under the contract to the contractor or to persons nominated by it.
The contractor’s entitlement to that share depends in principle on its having completed the building in the manner set out in the contract, the project and the technical specifications. The transfer stands as the counter-obligation to the obligation to create the work.
While that is the principle, within the framework of freedom of contract the parties may stage the transfer by tying it to particular milestones. The contractor cannot demand a transfer unless it has completed and delivered the construction; that rule may, however, be softened by a stipulation inserted into the instrument.
The thresholds preferred in a staged transfer are generally the following: reaching damp-proof course level, completion of the shell construction, completion of the finishing work and finally the obtaining of the occupancy permit. Transferring a certain proportion of the shares at each stage is intended, on the one hand, to meet the contractor’s financing needs and, on the other, to keep the owner’s security of ownership intact.
The Advance Title Deed Practice
One of the methods most frequently encountered in the field is transfer by advance title deed. Here the contractor takes over certain shares from the owner in advance, before the construction has been completed, in order to secure financing.
The shares taken over are for the most part sold to third parties so as to generate the project’s cash flow. In large-scale investments this method is in fact widely applied.
The practice of the Court of Cassation, by contrast, does not regard the advance title deed as a definitive and unconditional conveyance of ownership. The higher court characterises such a transfer as a transaction made conditional on the contractor performing its obligation; in short, the transfer is legally in the nature of an "advance".
The natural consequence of that characterisation is this: if the contractor does not complete the construction, acts in breach of the contract, falls into default or the contract is terminated for just cause, the owner may demand the annulment of the title deeds transferred and their re-registration in the owner’s own name.
At this point the position of persons who purchase an independent unit from the contractor takes on particular importance. According to settled case law, a person who takes over a flat or a land share from the contractor in a project that is not yet complete may not in all circumstances benefit from the protection of the principle of reliance on the land register under Art. 1023 of the Turkish Civil Code No. 4721.
The likelihood of falling outside that protection is strengthened in particular in three situations: where the purchaser knows that the immovable has been made the subject of a construction contract in return for flats; where the purchaser is in a position to know that the construction has not yet been completed; and where the purchaser has the opportunity to investigate whether the contractor has performed its obligation. In such cases the purchaser may face an action for annulment of title deed and registration brought by the owner.
Accordingly, persons intending to buy an independent unit from a contractor must, before deciding to purchase, examine carefully what stage the construction has actually reached, whether the contractor has acted in conformity with the contract, the land registry records, the annotations on the record and the content of the construction contract in return for flats.
Securing the Transfer of Title
Since the economic risk between the parties is high, various legal instruments securing the transfer are resorted to in practice.
Foremost among these is the establishment of a security mortgage in favour of the landowner. Particularly where an advance title deed is granted to the contractor, the owner may have a mortgage established over the immovable in order to guarantee that the construction will be completed in conformity with the contract.
Breach of the Contract
If one of the parties fails duly to perform the obligation it has assumed, the contract is breached. In practice the breach takes different forms: the building not being completed on time, the work being incomplete or defective, construction being carried out contrary to the permit, refusal to transfer title, or other conduct by the parties in breach of the contract.
The consequences of a breach are shaped by the features of the specific case. Depending on the circumstances the other party may demand performance in kind, may allow an additional period, may claim delay damages and a contractual penalty, may demand the cost of the incomplete or defective work, may seek annulment of title deed and registration, or may terminate the contract.
The principal situations in which these consequences arise include the contractor falling into default, rendering incomplete and defective performance, carrying out work contrary to the permit, exceeding the delivery period, and the landowner failing to perform its own obligations. In such situations the following claims may be asserted within the framework of the Turkish Code of Obligations No. 6098: annulment of title deed and registration, termination of the contract, the cost of incomplete and defective work, the agreed contractual penalty, damages arising from the delay, the grant of an additional period and performance of the obligation in kind.
Types of Action Arising from the Contract
Spread over a long period, carrying a high economic value and being of a mixed nature, these contracts bring a great many disputes before the courts. The transfer of title, the failure to complete the building on time, incomplete and defective work, breaches of the permit and the consequences of termination are the matters most often made the subject of litigation.
Actions for Annulment of Title Deed and Registration
In disputes arising from this relationship, the course most frequently resorted to is an action seeking the annulment of the title deed and its re-registration.
The dispute generally arises in the following scenarios: the recovery of title deeds given to the contractor by way of advance is sought; the return of shares transferred is demanded after termination; transfers have been made even though the contractor has not performed its obligation; and the shares have been passed on to third parties. Among the factors determining the outcome of such actions, the date on which termination took place, the proportion to which the construction was completed, whether third parties can be regarded as acting in good faith, and whether the transfer bears the character of an advance come to the fore.
Actions to Compel Registration (Compulsory Registration)
If the contractor has done what falls to it but the owner refuses to transfer title, the course open to the contractor is an action to compel registration (compulsory registration).
In such an action the contractor seeks the registration in its name, by judgment of the court, of the independent units or land shares to which it is entitled under the contract.
Actions for Delay Damages
The failure to complete the building within the agreed period opens the way to actions for delay damages.
The basis of the claim consists of facts such as the delivery period being exceeded, the flats being delivered late, the occupancy permit not being obtained and the immovable not being capable of enjoyment. Relying on those facts, the owner seeks compensation for the pecuniary loss suffered. The items most often asserted in statements of claim are loss of rent, compensation for being deprived of use and the contractual penalty.
Actions for Incomplete and Defective Work
Incomplete and defective work is one of the most frequent causes of dispute in this contract type.
The two concepts are distinct from one another: where the agreed work has never been carried out or has been left half-finished it counts as incomplete work; where the work carried out is contrary to the rules of science and craftsmanship, to the technical specifications or to the approved project, it counts as defective work.
Typical defects made the subject of litigation include shortcomings in the common areas, inadequate insulation, the use of low-quality materials and work contrary to the project. In the proceedings a technical examination by a court-appointed expert is as a rule carried out, and the cost required to remedy the shortcomings and defects is calculated.
Actions for Termination of the Contract
A serious breach by one of the parties of its obligations brings into play the termination of the construction contract in return for flats.
The situations advanced in practice as grounds for termination include the construction coming to a halt for a considerable period, the contractor’s default, work being carried out contrary to the project, the contractor becoming economically incapable, construction being carried out contrary to the permit and the landowner refusing to transfer title.
The termination of construction contracts in return for flats produces wide-ranging consequences as regards the state of the land registry records, whether advance title deeds can be recovered, the fate of sales made to third parties and the parties’ reciprocal claims for damages.
Independent Legal Assessment
In these contracts the greater part of the disputes stems not from the construction stage but from the steps taken when the contract was drafted. Where how the delivery period is to be calculated, how large a share is to be transferred at which stage, which item may be claimed in the event of delay and how defective work is to be established are not clearly regulated from the outset, the parties find themselves facing proceedings lasting years. Although the drawing up of the instrument as a deed before a notary is a requirement of validity, it does not on its own provide a sufficient safeguard; what is truly decisive is the content of the provisions.
The position of third parties who purchase an independent unit from the contractor constitutes a separate layer of risk. The characterisation of the advance title deed as a conditional transfer may render contestable an investment the purchaser made in reliance on the land registry record. A legal examination carried out before the decision to purchase is therefore a far more economical solution than actions brought afterwards.
In drawing up a road map in a specific file, the following matters should be addressed as a priority:
- Documenting whether a site delivery record was drawn up and the commencement date of the construction period
- Setting out expressly in the contract the construction levels to which the transfer of the land share is tied and the timetable for transfer
- Limiting the scope of the power of attorney to be granted to the contractor and reviewing it as regards the authority to transfer
- Where an advance title deed is to be granted, structuring a security mortgage or a similar safeguard mechanism in favour of the landowner
- Defining in calculable terms the contractual penalty and loss-of-rent items to be claimed in the event of delay
- Regulating in advance in the contract the grounds for termination and the effect of termination on the land registry records
Independent Legal provides advisory services throughout the whole of the process, from the drafting of construction contracts in return for flats to the conduct of actions for annulment of title deed, for compulsory registration, for delay damages and for termination brought in the event of a breach.