Where an agent uses the power of representation conferred on him for his own gain or for the gain of another rather than in the interest of the principal, the remedy available to the true right holder is an action for annulment of title deed and registration founded on abuse of the duties of an agent.
The action is built on the assertion that the transfer of immovable property effected by the agent in breach of his duties of loyalty and care is devoid of legal validity; in consequence, deletion of the entry in the register and re-registration of the property in the name of the true right holder are sought. The underlying premise is this: the fact that a transaction appears sound in point of form is not enough to keep it standing in law. Whether the transaction is compatible with the interest of the principal is examined separately.
In this briefing note we examine in detail the content of the concept of abuse, the patterns of fact that point to that conclusion, and the types of dispute most frequently encountered in practice.
The Concept of Abuse of the Duties of an Agent
For abuse to be spoken of, the agent must have used the authority entrusted to him in a manner that does not accord with the interest of the principal and must have carried out a transaction breaching his duty of loyalty. However broad the authority conferred on the agent may be, it must be exercised within the framework of the rule of good faith and with regard to the interest of the person granting the power of attorney.
The existence of a power of attorney does not, therefore, confer validity on every transaction the agent signs. Transactions concluded through an abuse of authority may, where certain conditions are satisfied, be treated as legally invalid, and annulment of the land registry entry may be sought accordingly.
The Essence of the Agency Relationship
The agency relationship arises where a person undertakes the authority to conclude legal transactions in the name and on the account of another. As the agent acts in the capacity of representative, the legal consequences of the transactions he concludes arise directly in the assets of the principal.
The agent’s task does not, however, consist merely in exercising the authority. The agent is at the same time bound to have regard to the interest of the principal and to act in accordance with the instructions given to him. Doctrine and practice describe this obligation as the agent’s duty of loyalty and care.
The Distinction Between the Limits of Authority and the Duty of Loyalty
Authority is the framework drawn in the power of attorney which determines what legal transactions may be carried out. The duty of loyalty, by contrast, requires that, while acting within that framework, the interest of the principal be protected and the rule of good faith adhered to.
The conclusion that follows is this: even an agent expressly authorised in the power of attorney may not use that authority in a manner harmful to the principal. Disposing of the property well below its true value, or transferring the proceeds of the sale to the agent’s own account, are typical forms of conduct capable of being characterised as a breach of the duty of loyalty.
In What Cases Is the Sale Treated as Invalid?
Where the sale concluded by the agent has been effected in a manner plainly at odds with the interest of the principal, and a breach of the duty of loyalty can be established, the conclusion of invalidity may be reached.
The principal situations leading to an assessment of invalidity in practice may be listed as follows: the agent concluding a transaction going beyond the instructions given to him by the principal; the property passing to the agent personally or to those close to him; the price received for the sale not being passed on to the principal; and the property being transferred at a price falling well short of its market value.
Where facts of this kind are encountered, annulment of the land registry entry and registration of the property in the name of the true right holder may be claimed.
The Existence of a Power of Attorney Is Not Sufficient in Itself
One of the most frequent misapprehensions encountered in the field is the belief that the existence of a power of attorney renders the transaction lawful of its own accord. In truth, the existence of the power of attorney does not of itself establish the lawfulness of the transaction carried out.
Even where the agent concluded the transaction on the basis of the power of attorney, the sale may be treated as invalid once it is proved that the transaction ran counter to the interest of the principal and that the duty of loyalty was breached.
Indeed, the courts do not confine their examination to the existence of the power of attorney; they consider as a whole the circumstances in which the transaction was concluded and whether the agent’s conduct is compatible with the rule of good faith.
When Does Abuse Arise and How Is It Established?
Abuse is most often established not from a single act but from the coming together of several suspicious facts in the same file. For that reason the courts do not make their assessment solely by reference to the sale transaction; they weigh together where the sale price went, the connection between the parties, the instructions given by the principal and the factual situation arising after the transaction.
The most important indicators pointing to abuse in practice are examined below.
Transfer of the Property to the Agent or a Person Close to Him
The agent transferring the property into his own ownership or that of a person close to him, instead of acting on behalf of the principal, is one of the strongest indications of abuse. In transactions of this type there is generally a close connection between the agent and the buyer, and the transfer is not structured so as to have regard to the interest of the principal.
In such files the courts examine together the relationship of kinship or closeness between the parties, the price agreed and the circumstances in which the transaction took place.
A Price Far Below the Market Value
The transfer of the property at a price considerably lower than its market value is an important presumption suggesting that the agent has acted in breach of his duty of loyalty. A visible and unexplained gulf between value and price may show that the transaction was not carried out for the benefit of the principal.
A low price does not, however, of itself produce the conclusion of abuse. That fact is assessed together with the other evidence in the file.
Transactions Contrary to Instructions
The agent may not carry out a transaction going beyond the express instructions of the principal. Where the power of sale has been made subject to particular conditions and the agent has not complied with them, the conclusion may be reached that there has been an abuse.
Thus, for example, where instructions were given that the property should not be sold below a specified price but the transfer was made at a lower price, that indicates a breach of the duty of loyalty.
The Sale Price Not Reaching the Principal
The price not being passed on to the principal at all, or being passed on only in part, is among the clearest indicators of abuse. In such cases, even if the sale appears unproblematic in point of form, it may be accepted that the agent did not act in accordance with the interest of the principal.
At this point the courts turn to bank records, payment documents and movements of funds, and investigate through those records whether the price was in fact paid.
The Agent Obtaining a Personal Benefit from the Transaction
The arising of an unjust gain in favour of the agent himself or a person close to him as a result of the sale is an important fact establishing abuse. That gain may appear in the form of the property being transferred cheaply, the price being spent by the agent, or the property passing indirectly under the agent’s control.
In files of this type the court assesses together the economic benefit the agent derived from the transaction and whether the transaction caused loss so far as the principal is concerned.
The Principal Being Unaware of the Transaction
The principal not knowing that his property has been sold, or learning of the transfer only much later, is a notable indicator of abuse. In particular, the sale price not having reached him over a long period, or his remaining unaware of the transfer, lays the ground for an assessment to that effect.
The Property Continuing to Be Used by the Agent After the Transfer
The property continuing in fact to be used by the agent or a person close to him after the sale suggests that the transaction was not in reality concluded for the benefit of the principal. Combined with facts such as the new owner not using the property or the property not having been let, this situation becomes a strong presumption.
The Legal Bases of the Action
The legal foundation of this type of action is constituted by the rules governing the agent’s duty of loyalty and care — above all the provisions of the Turkish Civil Code No. 4721 and the Turkish Code of Obligations No. 6098 — together with the fundamental principles of reliance on the land registry and the protection of ownership.
In exercising his authority the agent is under an obligation to protect the interest of the principal and to act in accordance with the rules of good faith. Where that obligation is breached, the transactions concluded may, where the conditions are present, be treated as invalid, and annulment of the land registry entry arises.
The Duty of Loyalty and Care Under Turkish Code of Obligations No. 6098, Art. 506
Article 506 of the Turkish Code of Obligations No. 6098 imposes on the agent the obligation to act in accordance with the interest of the principal and to carry out the work undertaken with loyalty and care. The provision establishes that the agent’s responsibility is not limited to exercising the authority; it also extends to refraining from conduct that would cause loss to the principal.
In that framework, being expressly authorised in the power of attorney does not legitimise a use of that authority contrary to the rule of good faith. Transactions concluded in breach of the duty of loyalty may be treated as legally invalid.
Abuse of the Power of Representation
Abuse of authority describes the situation in which the power of representation formally exists but is used to the detriment of the principal. In such a case the transaction may be unable to benefit from the protection of the legal order even though it appears valid from the outside.
The sale of the property well below its market value, non-payment of the price to the principal, or the transfer of the property to the agent himself or to a person close to him are the principal examples showing that the authority has been abused.
The Principle of Reliance on the Land Registry and Its Limits
The principle of reliance on the land registry aims to protect persons who acquire a registered right in good faith. That principle is not, however, absolute; it does not operate without limit, particularly where the agent has abused his authority.
A person who acquires the property is not regarded as acting in good faith if he knows, or is in a position to know, that the agent has abused his duties, and the land registry entry may be annulled. Where, by contrast, the property has subsequently passed to a good-faith third party, that person’s right of ownership may be protected.
The Principle of Protection of Ownership
The right of property is a fundamental right guaranteed both by the Constitution and by statute. The true owner may therefore seek, by way of an action, the return of property lost to him through the agent’s conduct in breach of the duty of loyalty.
By virtue of that principle, the correction of register entries created as a result of abuse and the protection of the true right holder’s ownership are among the fundamental aims of the legal order.
The Parties to the Action
In actions of this kind the accurate identification of the parties is decisive for the sound conduct of the proceedings. As a rule the capacity of claimant belongs to the person granting the power of attorney or to his heirs, while the capacity of respondent belongs to the person who acquired the property or to the agent.
In files in which the property has been transferred to several persons or has changed hands, directing the action against the correct persons may affect the outcome directly.
Who May Be the Claimant
The action may be brought by persons whose right of ownership has been impaired by the transaction concluded by the agent. Among those holding that capacity is, first and foremost, the person who granted the power of attorney. If that person is no longer alive, his heirs occupy the position of claimant. Where there is a restriction of capacity, a guardian or trustee, as legal representative, may also bring the action. In addition, other persons having a legal interest in bringing the action may likewise acquire the capacity of claimant.
In practice, in files in which the person granting the power of attorney has died, the action is most often seen to be brought by the heirs.
Who Is to Be Named as Respondent
The action is, as a rule, directed against the person who acquired the property. Depending on the structure of the particular case, however, it may be necessary to name several persons as respondents.
In that scope the capacity of respondent may belong to the person who acquired the property, to the agent who concluded the transaction, to the owner or third parties who subsequently acquired the property, and to those holding rights in rem over the property.
Cases Giving Rise to Mandatory Joinder of Parties
In some situations the action must be directed against several persons jointly. Where a right in rem has been created over the property, where the property is held in shared ownership, or where it has been transferred to several persons, the action must be brought against all those concerned. Failure to comply with that requirement may lead to the action being dismissed on procedural grounds.
The Position as Regards the Statute of Limitations
The limitation period applicable in these actions is determined by the legal ground on which the claim rests. As the dispute most often rests on a breach of the duties of loyalty and care arising from the agency contract, the provisions on contractual claims and liability come into play.
For that reason, in practice the general limitation period for actions founded on abuse of the duties of an agent is taken to be 10 years under the Turkish Code of Obligations No. 6098.
The particular features of the case may nevertheless alter the assessment of the period. The property having been transferred to third parties, the date on which the transaction was discovered, or the death of the person who granted the power of attorney, are matters that must also be taken into account in calculating the period.
The Course of the Proceedings
These actions rest on rights in rem relating to the ownership of immovable property and are conducted within a particular procedural discipline. Bringing the action before the court with subject-matter and territorial jurisdiction, establishing by concrete evidence that the agent acted in breach of his duty of loyalty, and preventing the property from passing to third parties are the critical headings of the process.
Throughout the proceedings the true value of the property, the fate of the sale price and the lawfulness of the agent’s conduct are in most cases elucidated by technical examination and expert reports. Assembling the evidence before the action is brought, and applying in good time for the necessary protective measures, is therefore preparatory work capable of determining the outcome.
The Court with Subject-Matter and Territorial Jurisdiction
In actions for annulment of title deed and registration founded on abuse of the duties of an agent, subject-matter jurisdiction belongs as a rule to the Civil Court of First Instance.
As to territorial jurisdiction, the action is brought before the court of the place where the property is situated, and the jurisdiction of that court is mandatory.
Application for an Interim Injunction
One of the most important procedural steps in this type of action is preventing the property in dispute from being transferred to third parties. It is therefore of great importance that an interim injunction be sought from the court when the action is brought or while the proceedings are pending.
Where the claimant establishes his case to the standard of prima facie proof, the court may order the entry of an annotation prohibiting transfer and sale on the land registry record. That measure is an effective instrument of protection preventing the judgment to be given from being rendered nugatory.
How Is Abuse Proved?
In these actions the burden of proof lies on the claimant; it falls to the claimant to establish that the agent acted in breach of his duties of loyalty and care. As direct documentary evidence is often unobtainable, proof proceeds through indirect evidence and the particular features of the case.
Among the evidence most frequently relied on in practice, the scope of the power of attorney together with the land registry transaction file and official documents come first. To these are added bank records relating to the sale price, correspondence between the parties and similar documents. Witness statements and examination by a court-appointed expert are likewise principal instruments for elucidating the file.
The court determines whether the agent acted in breach of his duty of loyalty by assessing this evidence together.
Court Fees and Litigation Costs
These actions fall as a rule among the actions subject to a proportional court fee. When the action is brought, the fee calculated on the basis of the value of the property must therefore be paid.
While the proceedings are pending, various items such as the fees of court-appointed experts, the cost of the on-site examination, service costs and witness expenses also arise. These costs are as a rule borne, at the end of the action, by the party who loses the case.
Attorney’s Fees
At the end of the proceedings, attorney’s fees are awarded against the opposing party in favour of the successful party under the Minimum Attorney Fee Tariff.
In these actions attorney’s fees are calculated on a proportional basis by reference to the value of the property in dispute.
Apart from that, attorney’s fees arising from the agreement concluded between the party and the attorney may also be in issue; those fees may be claimed separately depending on the outcome of the action.
Appellate Remedies
It is possible to have recourse to appellate remedies against the decisions given in these actions. An appeal may be lodged within 2 weeks of the date of service against the decision of the court of first instance.
Decisions given following the appeal review may be taken to appeal on points of law where the monetary thresholds laid down by law are exceeded.
The Consequences of the Action
If the court concludes that the agent acted in breach of his duties of loyalty and care and that the transaction concluded is incompatible with the interest of the principal, it may order the annulment of the land registry entry created unlawfully.
The outcome of the action is not, however, always confined to annulment of the entry. Where the property has passed to third parties, in cases in which good-faith third parties must be protected, or where restitution of the property in kind has become factually impossible, it is also possible for damages to be awarded in place of annulment.
Annulment of the Land Registry Entry
Once it is established that the agent abused his authority and that the sale ran counter to the interest of the principal, the court may order the annulment of the register entry created on the basis of that transaction.
With the order of annulment, the transfer of ownership effected unlawfully is set aside.
Registration of the Property in the Name of the Principal
Where annulment of the entry is ordered, the court orders the re-registration of the property in the name of the person who granted the power of attorney. The property lost as a result of the abuse thus returns to its true right holder.
If the person who granted the power of attorney is no longer alive, the property is entered in the register in the names of his heirs in proportion to their inheritance shares.
Registration in Proportion to Shares
Where there are several right holders in the property, or where the action has been brought by the heirs, the court may order registration having regard to the proportions of the shares.
In that case the property is recorded in the land registry in proportion to the heirs’ inheritance shares or the co-owners’ shares.
Claim for Damages
In some files it is not possible for annulment of the entry to be ordered. In particular, where the property has passed to a third party acting in good faith in reliance on the land registry, a claim for damages arises in place of annulment.
In such a situation the true right holder may claim, by way of damages, the value of the property, the loss he has suffered and the loss of use.
Related Topics
Our other work in the same field is as follows: Action for Annulment of Title Deed and Registration on the Ground of Wrongful Registration; Action for Annulment of Title Deed and Registration Based on a Fiduciary Transaction; What Is an Action for Annulment of Title Deed and Registration and When May It Be Brought; The Offence of Misconduct in Public Office; Action for Annulment of Title Deed and Registration on the Ground of a Forged Document.
The Independent Legal View
In this type of action the real difficulty facing the claimant is not the legal characterisation but proof. A document directly establishing the agent’s intention is rarely to be found; the outcome generally emerges from the picture formed by facts such as the fate of the price, the closeness between the parties and the actual use of the property after the transfer, each supporting the others. Constructing the file so as to build that picture is work that must be completed before the statement of claim.
The most frequent loss of rights in practice arises from the property changing hands while the proceedings are pending. That risk can be largely averted by an application for an injunction made at the same time as the action is filed; otherwise the practical value of a successful action may be confined to damages.
The matters to be addressed as a priority in a particular dispute are as follows:
- Establishing by documentary evidence the scope of the power of attorney and any limiting instructions
- Tracing the sale price through bank records to determine whether it reached the principal
- Determining, through a court-appointed expert, the difference between the market value at the date of transfer and the price stated in the land registry
- Making an application for an injunction, together with the action, for the entry of an annotation prohibiting transfer on the land registry record
- Assessing from the outset whether subsequent acquirers of the property can be regarded as acting in good faith
- Documenting the moment at which the ten-year period began to run, taking the date of discovery as the basis
Independent Legal provides advisory services and litigation representation throughout the whole of the process, from the preparation of evidence to the completion of the registration, in disputes over immovable property arising from abuse of the power of representation.