Bringing a construction contract in return for flats to an end is not a matter that is completed simply by the parties declaring that “the contract is over”. Once termination has occurred, questions arise as to what will become of the title deeds already transferred to the contractor, whether the shares transferred by way of advance can be recovered, what will happen to sales made to third parties, claims for annulment of title deed and registration, and reciprocal claims for damages.
Termination is not confined to severing the obligational relationship between the parties. It produces far-reaching consequences for the position of the land registry, the legal status of the independent units already built, transfers made earlier and claims for loss.
Below we examine the circumstances in which the contract may be terminated, the distinction between the types of termination, the legal position of the title deeds, the claims and rights to damages arising for the parties, and the course of the proceedings, in the light of the disputes encountered in practice and the approach of the Court of Cassation.
What Is Termination of a Construction Contract in Return for Flats?
Contracts of this kind differ from relationships in which performance is rendered on a single occasion; they are contracts that extend over years, rest on trust between the parties and have a mixed character. Because of that structure, termination does not merely extinguish the mutual obligations; it also has a direct effect on claims for damages, sales made to outsiders, the position of the units already built and the transfer of title.
The factors that determine the course of these disputes are well established: what becomes of the title deeds transferred to the contractor by way of advance, the level the construction has reached, which party is at fault, and whether third parties who have purchased flats can be regarded as acting in good faith.
Termination Procedure
In determining how the contract is to be brought to an end, the first point of reference is the text itself. Most contracts contain specific clauses governing the service of a formal notice, the granting of additional time, the conditions under which default arises, and the operation of the contractual penalty.
Under the system of the Turkish Code of Obligations No. 6098, the rule is that where the debtor falls into default, an appropriate period is granted and performance is demanded. If that period elapses in vain and the obligation is not performed, the way is open to termination.
In practice, the process is generally conducted through the following steps: service of a notice on the other party through a notary public, the granting of a reasonable period for performance in that notice, and recording the level the construction has reached at that moment by way of a court-ordered preservation of evidence.
That said, where the gravity of the breach exceeds a certain threshold, it may be accepted that the right of termination arises directly without any need to grant additional time. The actual abandonment of the site, the manifest incapacity of the contractor to complete the work, or the complete disappearance of the purpose pursued by the contract are situations of that nature.
Legal Consequences of Termination
Termination produces consequences of many kinds for the parties. While the mutual obligations arising from the contract come to an end, a winding-up relationship arises in particular in respect of the transfers of title already made and the works already carried out.
At this point the decisive question is whether termination will take effect retroactively or only for the future. In the decisions of the Court of Cassation this assessment is made by reference to the level the construction has reached and the labour and cost the contractor has invested in the work, and different outcomes may be reached from one file to another.
On What Grounds May the Contract Be Terminated?
The right of termination arises where one of the parties gravely breaches the obligations it has assumed. The situations most frequently encountered in the field are the contractor’s failure to complete the building, the carrying out of works that do not comply with the project, and conduct by the landowner that obstructs performance.
Failure to Complete the Construction on Time
Failure to complete the building despite the passing of the agreed delivery date may afford the landowner the possibility of termination. A serious overrun of the period, coupled with the realisation that the work cannot be completed within a reasonable time, is among the strongest grounds for termination in practice.
Abandonment of the Work by the Contractor
Where the contractor halts its activities, withdraws from the site or becomes unable to continue the project because of a lack of financial capacity, this too may call for the contract to be brought to an end.
Incomplete and Defective Works
Works carried out contrary to the rules of science and craft, to the technical specifications or to the approved project may constitute a ground for termination. Under this heading, defects that cannot be remedied and grave faults in the building are of particular prominence.
Building Permit and Occupancy Permit Problems
The construction of the building contrary to the building permit, resort to unauthorised construction, or the failure to obtain the occupancy permit are also among the situations that trigger a dispute over termination.
Breach of Contract by the Landowner
The right of termination does not belong to the owner alone. Where the landowner fails to effect the transfer of title, fails to issue the powers of attorney required for the transactions, or adopts an attitude that obstructs the construction, the contractor may likewise proceed to terminate the contract.
Zoning and Legal Impediments
In some cases neither party is at fault. A change in the zoning plan, the impossibility of obtaining a building permit, the expropriation of the property or a change in its legal status may render performance of the contract impossible, and termination comes onto the agenda.
Types of Termination
The consequences that termination will produce vary according to the particular features of the case and the stage the contract has reached. In determining the nature of the termination, the rate of completion of the construction, which party is at fault and the contribution the contractor has made to the work are taken as the measure.
In practice these contracts may come to an end in four different ways: termination with retroactive effect, termination with prospective effect, termination for just cause, and termination by agreement between the parties.
Termination with Retroactive Effect
In this form, the contract is treated as never having come into existence from the moment it was concluded. As a result, the performances rendered by the parties to one another fall to be mutually restored.
Such an outcome is generally reached in files where the contractor has made no appreciable contribution to the project or where the construction has remained at a very low level.
In that event, the recovery of the advance title deeds given to the contractor and claims for annulment of title deed and registration take centre stage in the dispute.
Termination with Prospective Effect
In this second possibility the contract is not undone retroactively; it merely ceases to produce effects for the period after termination.
In the practice of the Court of Cassation this assessment arises in files where the construction has largely been completed and the contractor has undertaken considerable labour and cost.
In such a case, how the winding up between the parties is to be carried out and whether the contractor has acquired any entitlement are examined separately.
Termination for Just Cause
Where one of the parties gravely breaches the obligations arising from the contract, a right of termination for just cause arises for the other party. In practice this ground is accepted in four typical situations: refusal to effect the transfer of title, abandonment of the work by the contractor, the carrying out of works that do not comply with the project, and the stoppage of the construction for a considerable period.
Where termination is based on just cause, the party in breach may also incur liability to pay damages.
Termination by Agreement of the Parties
The contract may also be brought to an end by the mutual declarations of will of the parties. In practice this route is implemented by drawing up a rescission agreement or a termination protocol.
Where termination is effected by agreement, the matters that must be recorded in the protocol are well established: with which party the title deeds are to remain, how the completed works are to be wound up, how the mutual claims for damages and other claims are to be settled, and how sales made to third parties are to be resolved. So that no fresh dispute arises later, it is of great importance that this text be drafted clearly and in detail.
The Position of the Title Deeds in the Termination Process
When the contract comes to an end, the matter that gives rise to the greatest contention is where, in law, the title deeds transferred to the contractor will stand. Annotations entered on the register, sales made to outsiders and advance title deed practices become decisive at this stage.
In establishing the fate of the title deeds, three criteria are applied together: whether the termination takes effect retroactively or prospectively, the extent to which the construction has been carried out, and how fault is distributed between the parties.
Title Deeds Transferred to the Contractor
Transfers made to the contractor are as a rule the consideration for its obligation to build. Where the contractor fails to perform the obligations it has assumed, the legal position of those title deeds becomes contentious.
In files where the construction has been abandoned midway or the contract has been terminated for just cause in particular, a claim for the recovery of the transferred title deeds comes onto the agenda.
Recovery of Advance Title Deeds
Transfers made to the contractor before the construction is completed, for the purpose of enabling it to obtain finance, are referred to in practice as advance title deeds.
The Court of Cassation for the most part does not treat these transfers as a definitive conveyance of ownership; it regards them as transactions conditional upon the contractor performing its obligation. As a consequence of that approach, where the contractor acts in breach of the contract or fails to complete the building, the landowner may bring an action for annulment of title deed and registration and reclaim the shares it has transferred.
The Effect of Sales to Third Parties
It is a frequent occurrence for the contractor to sell on to others the land shares or independent units transferred to it.
Where the contract is terminated, the legal position of those purchasers is considered separately. In that examination, whether the purchaser can be regarded as acting in good faith, whether it was aware that the property was the subject of a construction contract in return for flats, and the level of the construction at the date of sale are decisive.
According to settled case law, persons who purchase an independent unit from a project that has not yet been completed may not in every case benefit from the protection of Art. 1023 of the Turkish Civil Code No. 4721.
Claims for Annulment of Title Deed and Registration
After termination, the usual course taken by the landowner is to bring an action for annulment of title deed and registration. In that action the owner seeks the annulment of the transfers made to the contractor, the deletion of the entries created in the names of third parties, and the re-registration of the property in its own name.
In deciding upon these claims, the court assesses together the legal nature of the contract, whether the termination was justified, the level the construction has reached and the position of third parties.
The Parties’ Rights and Claims After Termination
Matters do not end with the termination of the contract; mutual rights, claims and demands for damages arise between the parties. At the winding-up stage, the rate of completion of the construction, the distribution of fault, the monetary value of the works carried out and the clauses inserted in the contract become decisive.
The headings that give rise to the most frequent contention at this stage are incomplete and defective works, loss arising from delay, claims under contractual penalty clauses, the restitution of title deeds and allegations of unjust enrichment.
Cost of Incomplete Works
Where the contractor leaves the works provided for in the contract incomplete, the owner may claim their cost. Here, works never carried out, works left half-finished and shortcomings that do not comply with the contract are established through a court-appointed expert; the cost required to remedy those shortcomings is then calculated.
Damages for Delay
The failure to complete the building within the agreed period raises the question of compensating the loss suffered by the landowner. The claim is most often founded on the late delivery of the property, the deprivation of its use throughout that period and the rental income that could not be obtained.
If the contract contains a contractual penalty or a damages clause specific to delay, that provision is additionally taken into account.
Contractual Penalty Claims
In these contracts it is common for a contractual penalty clause to be included for cases of breach of contract, defective performance or delay. Where the delivery period is exceeded, the occupancy permit cannot be obtained or works are carried out contrary to the contract, payment of the agreed contractual penalty may be sought.
Having regard to the circumstances of the particular case, the court may also examine whether the contractual penalty is excessive.
Positive and Negative Damage Claims
Upon termination, compensation may be sought for the parties’ positive or negative damage.
Positive damage denotes the deprivation of the benefit that would have been obtained had the contract been duly performed. Negative damage, on the other hand, covers the losses suffered by reason of reliance on the contract remaining validly in force. The items made the subject of a claim for damages include expenses incurred for the project, financing costs, alternative projects that could not be pursued and economic opportunities that were missed.
Unjust Enrichment Claims
Where, after termination, one of the parties has obtained an increase in assets without consideration at the expense of the other, the provisions on unjust enrichment come into play. This debate typically turns on the monetary value of the works carried out by the contractor, the increase in the value of the property brought about by those works, and performances for which no consideration has been given.
In examining such an allegation, the court weighs together the mutual performances of the parties, their respective fault and the contribution made to the property.
Court Proceedings in Termination Actions
These actions are disputes that call for technical examination and involve high economic value. The proceedings are not confined to whether the contract has come to an end; the position of the persons in the capacity of purchaser, the items of damages advanced, defective and incomplete works, the level the building has reached and the entries on the register are all considered together.
Technical expert reports, records of on-site examinations and land registry records carry decisive evidential weight in these files.
The Court with Subject-Matter and Territorial Jurisdiction
In disputes arising from termination, subject-matter jurisdiction lies as a rule with the Civil Court of First Instance.
As to territorial jurisdiction, in most cases the court of the place where the property is situated has jurisdiction. Where the file also contains a claim for annulment of title deed and registration, the court of the place where the property is situated may be regarded as having exclusive territorial jurisdiction.
Interim Injunction Applications
While the proceedings are pending, an interim injunction may be sought in order to prevent the loss of rights. The measures most frequently sought in these files are the entry of an annotation on the land register so as to prevent the transfer of the property to third parties, the suspension of sales of independent units, and the temporary suspension of construction activity.
Evidence and Proof
The parties are under a duty to make out their allegations by lawful evidence. The principal items of evidence submitted to such files include the contract itself, the technical specifications and architectural projects, land registry records, the building permit files obtained from the municipality, the formal notices exchanged between the parties, photographic and video records relating to the site, and witness testimony.
Court-Appointed Expert and On-Site Examination
Since the dispute calls for technical expertise, an examination by a court-appointed expert becomes obligatory in most files. Through the on-site examination and expert examination conducted by the court, the level the construction has reached, which works are incomplete or defective, whether there is any departure from the project, the cost of the works and the current factual condition of the property are established.
In termination actions, the correct determination of the level of the construction is of critical importance, since it determines whether the termination will take effect retroactively or prospectively.
Court Fees and Litigation Costs
Fees and costs take shape according to the nature of the claim advanced. Different fee regimes may apply to claims for annulment of title deed and registration, claims for damages and monetary claims.
Expert fees, the costs of the on-site examination and service costs are also among the significant items of litigation costs.
Attorney’s Fees
The party that fails in the proceedings must in principle meet the other party’s attorney’s fees.
That fee is determined within the framework of the Minimum Attorney’s Fee Tariff, on the basis of the type of action and the proportion in which it is upheld or dismissed.
Where several claims are advanced together in the same file, the calculation of the attorney’s fees calls for a separate assessment.
Appellate Remedies (Appeal and Appeal on Points of Law)
Decisions handed down may be challenged by way of appeal and, where the conditions are met, by way of appeal on points of law.
Appellate review is conducted by the Regional Courts of Appeal, and review on points of law by the Court of Cassation.
Actions That May Be Brought Alongside Termination
Terminating the contract on its own often does not produce a sufficient outcome. Additional claims must be advanced in order to correct the land registry records, make good the loss sustained and wind up the mutual claims.
The position of the transfers made to the contractor, incomplete and defective works, loss arising from delay and sales made to third parties lead to several claims being combined in the same case file.
Actions for Annulment of Title Deed and Registration
The type of action most frequently resorted to after termination is the action for annulment of title deed and registration.
By this route the landowner seeks the annulment of the entry relating to the shares it transferred to the contractor by way of advance and the re-registration of the property in its own name. The factors that determine the outcome are whether the termination was justified, the level of completion of the construction, whether the transfer bears the character of an advance, and the good faith of the third parties in the capacity of purchaser.
Actions to Compel Registration
Where the contractor has performed the obligations incumbent upon it but the owner refuses to effect the transfer of title, the contractor may bring an action to compel registration.
In such an action the contractor seeks to have the land shares or independent units that should belong to it under the contract registered in its name on the strength of a court judgment.
Damages Actions
An action for damages may be brought in order to make good the loss sustained by reason of termination. The items claimed are generally the pecuniary loss sustained, rental income that could not be obtained, expenses incurred for the project, the loss in value arising in the property and claims under contractual penalty clauses.
Actions for Incomplete and Defective Works
The carrying out by the contractor of works contrary to the contract, the project or the technical specifications forms the subject matter of actions for incomplete and defective works. In such actions the cost of completing the incomplete works, the cost required to repair the defects and the loss in value arising in the property may be claimed. Examination by a technical court-appointed expert plays a decisive role in resolving the dispute.
Independent Legal’s Assessment
What determines the outcome in termination files is often not the strength of the legal argument but how well the factual position at the moment of termination has been documented. Where the level at which the construction was left cannot subsequently be established beyond dispute, the distinction between a claim for termination with retroactive effect and one with prospective effect may resolve itself against the parties. For that reason, obtaining a preservation of evidence before serving a formal notice has a direct bearing on the course of proceedings that will run for years afterwards.
The second critical heading is the state of the land registry. The onward transfer of advance title deeds to third parties may render the consequences of termination practically unenforceable from the landowner’s point of view. Placing an interim injunction on the register before the action is brought is the step that enables a case won on paper to produce results in practice as well.
In a concrete dispute, the headings to which priority should be given are as follows:
- Documenting the level of the construction by way of a preservation of evidence before serving the formal notice
- Reviewing the clauses of the contract on time limits, formal notice and contractual penalties in order to establish whether they give rise to a right of termination
- Deciding, according to the rate of completion of the construction, whether termination with retroactive or prospective effect is to be claimed
- Placing an interim injunction on the land registry records and identifying the transfers made to third parties
- Structuring the claims for the cost of incomplete works, damages for delay, contractual penalties and unjust enrichment together from the outset
- Where termination by agreement is preferred, regulating the title deed, works and damages relationships in full within the termination protocol
Independent Legal provides comprehensive advice in the termination of construction contracts in return for flats, from the formal notice stage through to the conduct of actions for annulment of title deed, compulsory registration and damages.