In urban transformation projects the construction relationship established between the condominium owners and the contractor forms the backbone of the process. In practice, however, a rather different picture is frequently encountered: plots on which not even the foundations have been laid, sites lying idle for months, or works falling outside the undertakings given in the contract. Developments of this kind cause loss to the owners and raise the need to bring the contractual relationship to an end.
Transformation is not merely an exchange between two subjects of private law. Since the safety of buildings carries a public interest, the contracts signed and the construction activities conducted within this framework are circumscribed by legislation and are further made subject to the supervision of the relevant administration. Nor may the contract be brought to an end otherwise than within that framework.
In this briefing note we examine, in the light of the provisions of the legislation, the circumstances in which and the procedure by which construction contracts signed with a contractor in transformation projects may be terminated.
Construction Contracts Concluded Within the Scope of Transformation
Contracts of this kind are concluded between the parties for the purpose of the renewal or reconstruction of risky structures, within the limits drawn by Act No. 6306 on the Transformation of Areas at Disaster Risk and by the Implementing Regulation to that Act.
The Legal Nature of These Contracts
The texts signed by the condominium owners and the contractor are private law contracts determining the reciprocal rights and obligations of the two parties with the aim of renewing a risky structure. They present a structure imposing a performance on each party and containing mutual and interdependent obligations.
Even so, the transformation process cannot be regarded as consisting solely of an obligational relationship confined to the parties. Since it has an aspect touching public order, these contracts, while preserving their private law character, fall within the scope of administrative supervision both at the stage of their performance and at that of their termination; for that reason they are assessed as contracts of a mixed nature.
The result is that two sources apply to such contracts at the same time: the provisions of the Turkish Code of Obligations No. 6098 on the one hand, and Act No. 6306 and the legislation made under it on the other. The conduct of a termination or of a bringing to an end likewise takes place under the oversight and supervision of the administration.
Contract Types Encountered in Practice
In transformation practice, different construction contracts whose legal natures differ from one another may be concluded between the owners and the contractor. Which type is chosen is determined by how the construction is to be financed, by the obligations the parties assume and by how the independent units emerging at the end of the project are to be apportioned. The two models most often encountered in the field are the following:
- Construction contract in return for a fee (services)
- Construction contract in return for a land share — also referred to in practice as a construction contract in return for flats
These two models differ from one another as regards which party bears the financial burden, the responsibilities assumed during the construction process and the method by which the independent units are apportioned.
The Conditions Required for Termination of the Contract
The process is subject not only to the general provisions of the Turkish Code of Obligations No. 6098 but also to the special rules of Act No. 6306. For that reason the termination of a construction contract signed with a contractor is, unlike the bringing to an end of an ordinary contractual relationship, confined by conditions and procedures particular to transformation.
The owners’ greatest reservation is that, should the contractor fail to render its performance, the matter will turn into proceedings lasting years. In order to meet that reservation, the Act has provided an administrative route to termination, subject to the fulfilment of certain conditions; that route allows a result to be obtained more quickly than by way of the classical litigation process.
Termination of the contract on the ground of the contractor’s default is governed in the legislation in respect of two separate situations.
Failure to Begin the Construction Work Within One Year
The first situation arises as follows: although all the owners have reached agreement, or the shares of those who did not join the decision taken by an absolute majority of the land shares have been sold, the construction work on the new building has not been embarked upon even though a year has elapsed, for reasons attributable to the contractor.
For this ground to be relied upon, two further matters must be satisfied. If, under the contract, there are performances the rightholders must render before the construction work begins, those must without exception have been rendered. In addition, there must be no judicial decision, administrative act, administrative practice or other similar valid excuse preventing the construction from beginning.
In short, the opening of the route to termination depends on the failure to begin the work being attributable to reasons originating with the contractor.
No Construction Activity Carried On for Six Months
In the second situation the construction has actually begun but has been left at a certain stage. For termination on this ground, no work must have been carried on for at least six months with a team and equipment capable of bringing the project to completion. In establishing that state of affairs, use is made of documents such as the findings, minutes and records of the relevant administration, the data in the building inspection system, photographs and satellite images.
Where either of the two situations mentioned takes concrete form, the condominium owners constituting an absolute majority as regards the land shares may take a decision in favour of termination.
For detailed information on the general principles of the debtor’s default, our study entitled “Default of the Debtor and the Rights of the Creditor” may be consulted.
The Owners Taking a Decision in Favour of Termination
The owners’ power to bring the contract to an end is not unconditional. For a valid intention to terminate to be formed, an absolute majority (50%+) of the land shares of the condominium owners must take a decision to that effect.
Application to the Administration Following the Decision to Terminate
Once a decision to terminate has been taken by the rightholders within the framework of the conditions set out above, an application for termination must be made to the Presidency of Urban Transformation, together with the information and documents showing that the failure to begin the construction work is attributable to the contractor.
Examination of the Application by the Administration
When the application is received, it is first examined whether the decision to terminate satisfies the conditions required by the Act.
Where the application is found to conform to the legislation, written notification is given to the contractor on the basis of the ground of termination and a period of 15 days is allowed to it. Within that period the contractor is required to set out, with its reasons and supporting documents, why it has not continued with the construction work. After the period has expired, an examination is carried out at the site of the building as to whether the conditions for termination have arisen. In the course of that examination, correspondence is entered into with the municipality, the social security institutions and other bodies and organisations concerned with the matter, and the necessary information and documents are collected.
If, as a result of the examination and investigation conducted, the view is reached that the conditions for termination have not arisen, that fact is notified to the owners who made the application.
Finding That the Conditions for Termination Have Arisen
If the assessment concludes that the conditions for termination have arisen, a warning is given to the contractor allowing it a period of 30 days. The subject matter of the warning falls under two headings:
- That the construction work be begun
- That the works be carried on with a team and equipment capable of bringing the project to completion
Where the contractor fails to meet its obligations within those 30 days, the contract between the rightholders and the contractor is deemed to have been terminated as at the date on which the period expired, without the further consent of those concerned being required. The fact that termination has taken place is notified both to the owners and to the contractor.
Under the scheme established by the legislation, although the intention to terminate emanates from the rightholders, the transaction becomes final only through the official procedure conducted by the Presidency. The measure ultimately produced is an administrative act and is open to judicial review.
Should the Presidency perform that act unlawfully, or fail to conduct the procedure as it should, an action for annulment may be brought before the administrative courts by the rightholders or by the parties concerned.
The Contractor’s Opportunity to Object and to Bring an Action
The period of fifteen days allowed to the contractor by the Directorate, after the condominium owners have applied to the Urban Transformation Directorate seeking termination, is at the same time the contractor’s opportunity to present its defence. At this stage the contractor may object to the termination by arguing that the grounds of termination put forward do not reflect the true position, that the delay in delivery stems from obstacles on the construction site or from the owners of the property, or that the majority required in the decision taken by the rightholders was not achieved.
If, notwithstanding those objections, the Directorate regards the grounds relied upon by the rightholders as valid and terminates the contract, the resulting decision is in the nature of an administrative act and the contractor may accordingly bring an action against it before the Administrative Courts.
The Legal Consequences of Termination
The termination of the transformation contract between the owners and the contractor produces various legal and financial consequences for the parties. Once termination is complete, the rights and obligations of both parties are reassessed within the framework of the relevant legislation.
Financial and Legal Liabilities Following Termination
The owners may take a decision in favour of termination where, for reasons attributable to the contractor, no construction has been embarked upon at all for a year despite the contract, or where, even though the construction has begun, activity on the site has been at a standstill for a period exceeding six months.
Termination does, however, produce various legal and financial consequences for the parties. Pursuant to Article 13/11(g) of the Implementing Regulation to Act No. 6306, the works completed up to the date of termination, the shares transferred, the payments made and the other financial obligations that have arisen are wound up on the basis of the general provisions of the Turkish Code of Obligations No. 6098.
The same provision also lays down that the rent assistance paid by the contractor to the rightholders up to the date of termination may not be reclaimed from them. The owners, for their part, may seek to be made good for the losses they have suffered under the general provisions. The items capable of being advanced in this connection include the following:
- The difference arising where the contract to be concluded with a new contractor carries a higher cost
- The rental income forgone by reason of the delay to the construction
- The other losses directly suffered
By contrast, where the contract has been terminated because the construction was at a standstill for a period exceeding six months, the works completed by the contractor up to that moment must be brought into account.
Where the contract has been brought to an end on other unlawful grounds falling outside those listed in Act No. 6306 — for example, the contractor’s use of deficient materials or materials contrary to the contract — the owners’ right to obtain compensation for their losses on the basis of the general provisions of the Turkish Code of Obligations No. 6098 is reserved.
Once termination has taken place, construction contracts annotated on the register of the properties are deleted by the land registry directorate if the owners or the administration so request.
The Owners’ Claims Where the Construction Is Left Unfinished
Where the contract has been terminated by reason of the contractor’s failure to meet its obligations and the construction has been left unfinished, the condominium owners may bring an action for damages based on the general provisions of the Turkish Code of Obligations No. 6098 in respect of the losses arising from deficient and defective performance. The matters the owners may claim within the scope of that action may be listed as follows:
- The making good of the financial losses suffered by reason of the incomplete building
- The remedying of the losses arising from deficient or defective works
- Compensation for the losses caused by the contractor’s culpable conduct
The Conclusion of a New Contract and the Continuation of the Process
Once a decision to terminate has been given, the condominium owners may take a decision with a view to appointing a new contractor. A new construction contract is signed with the contractor so chosen and the transformation process is carried on from where it left off.
The terms of the new contract should be drafted in greater detail, with the lessons drawn from the difficulties encountered in the previous project, and should be arranged so as to secure the owners’ rights. Obtaining legal advice at this stage is decisive in preventing possible loss.
In summary, the termination of a transformation contract is a transaction producing serious legal and financial consequences for the parties. In order not to suffer a loss of rights, the owners must carry out a comprehensive assessment before reaching agreement with a new contractor, must follow the process meticulously, and must take into account that the provisions of the Turkish Code of Obligations No. 6098 will apply to the arrangement of the financial obligations.
Related Topics
The following subjects may be consulted for other headings of the urban transformation legislation:
- The Urban Transformation Process in Risky Structures
- Objection to and Annulment of a Risky Structure Decision
- What Is a Risky Structure? How Is a Risky Structure Determined?
- The Rights of Owners Who Do Not Comply with an Urban Transformation Decision
- The Urban Transformation Process in Risky Areas
- Strengthening Decisions in Risky Structures
Independent Legal Assessment
What is decisive in the termination of transformation contracts is most often not the strength of the legal argument but the documentary quality of the file. It is not enough simply to assert that the year or the six months has elapsed; it must be shown to the administration in concrete terms that those periods passed for a reason attributable to the contractor. Building inspection records, the administration’s minutes, dated photographs and data on the state of personnel and equipment on the site are the elements that determine the fate of the application.
The second critical dimension of the process is the character of termination as an administrative act. For the rightholders this means that the route to the administrative courts remains open should the Presidency’s decision go against them; for the contractor it means that review by the Administrative Court comes into play should the termination become final. The file must therefore be constructed from the very outset in a form ready for judicial review.
In a specific dispute, the headings to which priority should be given are the following:
- Documenting by minutes and share schedules that the decision to terminate was taken by an absolute majority of the land shares
- Proving that the performances the rightholders were required to render under the contract have been completed
- Confirming that there is no judicial decision or administrative act preventing the construction from beginning
- Diarising and meticulously monitoring the fifteen-day and thirty-day warning periods
- Preparing in advance the account for bringing into account the works completed up to the date of termination
- Not omitting the application required for the deletion of the annotation of the construction contract on the land register
Independent Legal provides advisory services and conducts litigation throughout the whole of the process in urban transformation projects, from the conclusion of the contract to the administrative and judicial stages of termination.