The extent to which the rent may be raised while a lease relationship continues is subject to a framework laid down by Article 344 of the Turkish Code of Obligations No. 6098. Even where the parties have inserted a clause on increases into their contract, the rate to be applied cannot exceed the ceiling prescribed by the law.
A view frequently encountered in practice is that the increase is to be made solely according to the rate written in the contract; that approach, however, does not yield the correct result in every case. The legislature has narrowed contractual freedom in respect of increases and has regulated the matter in detail by reference to criteria such as the change in the consumer price index, the five-year lease term and comparable rents.
In this briefing note we examine the criteria by which the rent increase rate is determined, the legal limits of the increase clauses inserted into contracts and the manner in which the increase is to be calculated, together with examples drawn from practice.
Definition and Legal Framework of the Rent Increase Rate
The rent increase rate is the legal upper limit indicating the extent to which the rent may be raised while the lease relationship continues. The provisions of the Turkish Code of Obligations on the subject contain mandatory rules limiting the will of the parties, particularly in leases of residential property and of business premises with a roof. The determination of the rate is therefore not a matter left solely to the agreement of the parties; the outcome is reached within the framework of the criteria laid down in the law.
The Basic Rule on Increases
Under Article 344 of the Turkish Code of Obligations No. 6098, even where the contract contains a clause on increases, the rate to be applied may not exceed the rate of change according to the twelve-month averages of the consumer price index in the preceding lease year. Even where the parties have agreed upon a higher rate, that agreement produces no effect to the extent that it goes beyond the statutory ceiling.
Turkish Code of Obligations No. 6098, Art. 344(1)
“Agreements of the parties concerning the rent to be applied in renewed lease periods are valid provided that they do not exceed the rate of change according to the twelve-month averages of the consumer price index in the preceding lease year. This rule also applies to lease agreements of more than one year’s duration.”
By this provision the legislature has narrowed contractual freedom in the matter of increases and has tied any raising of the rent to an objective economic indicator. Whether the increase clause in the contract can take effect depends upon its remaining within the field determined by the law; as regards the parts exceeding the ceiling, the clause is not applied.
Uniform Application to Residential and Business Premises Leases
The regime set out in Article 344 of the Turkish Code of Obligations operates, as a rule, in the same manner for leases of residential property and for leases of business premises with a roof. In both types of lease, therefore, the increase rate must be determined within the limits drawn by the law.
The Increase Rate in Leases of Residential Property and Business Premises with a Roof
The raising of the rent in leases of residential property and of business premises with a roof is subject to Article 344 of the Turkish Code of Obligations. Under that provision the increase may not go beyond the statutory limit, even where it has been agreed in the contract. In other words, it is not only the text of the contract but also the statutory restrictions that come into play in determining the rate.
The purpose of the restriction is to preserve the balance between the parties to the lease relationship. For that reason neither the provision written into the contract nor the expectation of the parties is regarded as decisive in itself; the increase may be effected only within the framework of the criteria laid down in the law.
How Is the Statutory Increase Rate Determined?
The law fixes the upper limit of the increase as the rate of change in the twelve-month averages of the consumer price index for the preceding lease year. The fact that a separate rate has been stipulated in the contract does not alter that ceiling.
This is the datum to be taken as the basis for the calculation in practice, and that rate is binding in computing the increase. Whatever the rate written in the contract may be, the increase actually applied cannot exceed this criterion.
Is the Rate Written in the Contract Applied in All Circumstances?
The fact that an increase rate has been agreed in the contract does not mean that the rate will be implemented unconditionally. The clause in the contract is valid only in so far as it remains within the limit drawn by the law.
Even where the parties have agreed upon a particular rate, if that rate exceeds the statutory ceiling the increase is made according to the statutory limit. That result does not mean that the contract is regarded as wholly invalid; only the part which is contrary to the law is left out of application.
Is an Increase Above the Consumer Price Index Possible?
Raising the rent beyond the consumer price index rate is, as a rule, not accepted in leases of residential property and of business premises with a roof. The legislature has determined the ceiling in express terms and has not permitted the parties to exceed that threshold.
Accordingly, even if a higher rate is written into the contract or the landlord demands more, the increase may be applied only within the statutory limit. That result flows from the mandatory character of the provision.
The Fate of an Increase Clause Exceeding the Statutory Ceiling
Where the increase clause in the contract is above the statutory limit, the invalidity covers only that portion which exceeds the ceiling. The rate agreed does not become wholly ineffective; the part contrary to the law is simply not applied.
In such a case the increase is calculated by reference to the upper limit prescribed by the law. Where the tenant has paid more than the statutory limit, the recovery of the sums overpaid may also arise, provided the conditions are met.
What Happens if the Contract Contains No Increase Clause at All?
The absence of any provision on increases in the contract does not lead to the conclusion that the rent may be raised without limit. In that event too, the increase is determined within the framework of the criteria laid down in the law.
If the parties cannot reach agreement on the new rent, it is open to them to bring an action for the determination of the rent. In that case the court determines the increase having regard to the statutory criteria.
Increases Under Contracts Denominated in Foreign Currency
In contracts where the rent has been agreed in a foreign currency, the determination and the alteration of the rent are subject to special rules. In such contracts the rent may, as a rule, not be altered until five years have elapsed.
In any determination made after the five-year period has expired, the movement in the exchange rate is not the only consideration; the condition of the leased property, comparable rents and the principle of equity are assessed together. In that respect lease relationships established in a foreign currency are subject to a narrower regime of alteration as regards increases.
Determining the Rent in Lease Relationships That Have Completed Five Years (Rent Determination Action)
In leases of residential property and of business premises with a roof the increase is in principle limited to the consumer price index rate. Once the lease relationship has completed five years, however, a different system comes into play for the determination of the rent. At that stage the determination is not made by reference to the index alone; comparable rents, the characteristics of the immovable property and the principle of equity enter the picture.
The expiry of five years is therefore regarded as a technical threshold in lease law. Where the rent has departed markedly from market realities, the parties most often have recourse to a rent determination action. For the details of the subject, reference may also be made to our study entitled rent determination action.
The Criteria Applied After Five Years
Once five years have elapsed from the commencement of the contract, the increase is no longer calculated either by reference to the rate in the contract or by reference to the consumer price index alone.
At that stage the court weighs the following elements together in determining the rent:
- The reflection of the principle of equity and fairness in the particular case
- Comparable rents in the locality
- The location of the immovable property and its surroundings
- The physical characteristics of the immovable property
- Whether the leased property is used as a residence or as business premises
- Current market conditions
In practice the assessment is most often conducted by way of an examination by a court-appointed expert, and the rental value of the immovable property under current market conditions is established.
The point to be underlined is this: the expiry of five years does not mean that the rent will rise of its own accord. The determination of the new rent requires, in most cases, a decision of the court.
Does the Consumer Price Index Limit Cease to Apply After Five Years?
With the expiry of five years the consumer price index does not fall out of the picture altogether; it merely loses its character as the decisive criterion. Whereas the index limit is taken as the basis during the first five-year period, after that period the index becomes only one of the elements taken into the assessment.
The court also has regard to the increases in the index in reaching its decision; the final outcome, however, is shaped in accordance with comparable rents and the principle of equity.
What Does Equity and Fairness Mean?
Equity and fairness is a criterion of assessment resting upon the ideas of justice and balance in the determination of the rent. That principle means that the rent is to be determined at a reasonable level having regard to the features of the particular case, and not as the product of a purely mathematical calculation.
Among the principal matters the court takes into account in making that assessment are how long the tenant has been using the immovable property, the physical condition of the property, the level of rents in the locality in which it is situated and the gap between the existing rent and the market rent.
Where the same tenant has remained in the property for a long period, a reduction of a certain proportion from the comparable rent is accepted as a requirement of equity. In practice that reduction is most often encountered in the range of 5% – 20%.
May a Determination Action Be Brought Once Five Years Have Elapsed?
Once the lease relationship has completed five years, it is open both to the landlord and to the tenant to bring an action for the redetermination of the rent.
The typical situations in which this course is taken are that the existing rent has fallen considerably below the market level, that the parties have been unable to agree on a new rent, and that the rent has ceased to be current because of the long duration of the lease relationship.
A critical rule of timing applies here: in order for the determination action to be capable of affecting the rent applicable in the new lease period, it must be brought at least 30 days before the commencement of the new period, or written notice must be given to the other party within the same period. If that condition is not satisfied, the rent determined is applied only from the following lease period.
From What Date Does the New Rent Take Effect?
The date from which the rent determined by a determination action is to be applied is one of the matters giving rise to the greatest doubt in practice. The relationship between the moment the action is brought and the commencement of the new lease period directly determines the date on which the increase takes effect.
For that reason, in a determination action it is not only the figure that matters but also the period from which that figure will be applicable. Where a mistake of timing is made, the new rent may be applied a year late even though the action is won.
Bringing the Action in Time
Where the determination action has been brought before the new lease period begins, the rent determined by the court takes effect from the first day of that period.
An example makes the point clear: if the new lease period begins on 1 July and the action has been brought before that date, the rent determined by the court is applied as from 1 July. In that event the landlord may also, once the proceedings have concluded, claim the accumulated rent differences retrospectively.
The Consequence of a Late Action
Where the action has been brought after the new lease period has begun, the rent determined takes effect, as a rule, from the following period. That situation is capable of causing serious losses of rights in practice.
If the new lease period began on 1 January and the determination action was brought on 15 February, the rent determined by the court will most often take effect from 1 January of the following year. In other words, even if the rent has risen, the actual implementation of the increase may be delayed by approximately one year.
Serving Written Notice Before the Action
The law affords a second possibility besides the bringing of an action. Where the landlord has given the tenant written notice at least 30 days before the commencement of the new lease period announcing that the rent is to be increased, the new rent may be applied from that same lease period even if the action is brought later.
The Contractual Increase Clause Standing in for Notice
Where the contract contains an express provision concerning increases, it may in many cases be unnecessary to give separate written notice. Where, for example, there is a provision stipulating that the rent is to be increased in each new period, or that the rent for the new period is to be determined by reference to comparable rents, it is in most cases accepted in the practice of the courts that such a clause performs the function of the notice requirement.
Even so, in order to avoid doubt and any loss of rights, giving written notice before a determination action is brought is always the safer course.
The Independent Legal Assessment
In disputes concerning rent increases, the element determining the outcome is most often not the legal argument itself but the correct management of the calendar. During the first five-year period the room for manoeuvre of the parties is narrow because of the index ceiling; once five years have elapsed, comparable rents and the assessment of equity come into play, and preparation must therefore be made at the level of evidence.
For the landlord, it is decisive that the survey of comparable rents be prepared in a form capable of founding the examination by the court-appointed expert; for the tenant, that long-standing use be established for the purposes of an equitable reduction. In a particular file the following matters in particular should be addressed as a priority:
- Correct calculation of the commencement date of the lease relationship and of the five-year period
- Determination of the valid part of the contractual increase clause by comparison with the statutory ceiling
- Fixing in the calendar the first day of the new lease period and the 30-day notice period
- Giving written notice in a form capable of being served, and preserving the means of proof
- Documenting comparable rent data and the characteristics of the immovable property in claims made after five years
- Separate assessment of the conditions for a claim for restitution where overpayment has been made
Independent Legal provides advisory services and conducts litigation in matters concerning the determination of rent, the review of increase provisions and the conduct of rent determination actions.