In construction relationships established in return for land shares, the change of hands of the title deed constitutes both the most critical and the most fragile link in the process. Early transfers made to the contractor before the construction is finished may give rise to grave consequences, such as the work being left half-finished, the independent units being sold on to third parties, and the transferred title deeds never being recovered.
To this picture must be added the unlimited powers of representation conferred upon the contractor, the presence or absence of annotations entered on the land register, and whether or not the transfer has been divided into stages. Each of the elements listed is a choice that has a direct bearing on the legal security of the parties.
In this briefing note we assess the operation of the transfer of title in construction contracts in return for flats, the risks created by the advance title deed, the problems arising from powers of attorney, the practice of entering an annotation on the land registry, and the types of action arising from the transfer.
How Does the Title Transfer System Work?
In construction contracts in return for flats, the transfer of title is among the fundamental performances constituting the consideration for the building obligation assumed by the contractor. In this relationship no cash price is as a rule paid to the contractor; instead, specified land shares or independent units are transferred to it.
The stage at which the transfer is to take place, what it is to cover and how it is to be characterised in law are decisive in practice. Transfers made before the construction is completed, for their part, carry appreciable risks for the parties.
Transfer of Land Shares
The transfer of land shares is the operation by which specified shares are passed, in the land registry, to the contractor or to third parties nominated by it in accordance with the contract.
As a rule, the contractor becomes entitled to the land share only when it has completed the building in conformity with the contract, the approved project and the technical specifications. Seen in that light, the transfer constitutes the counter-performance for the contractor’s obligation to produce the work.
In practice the transfer is for the most part made conditional upon the completion of specified works, is based on the level the construction has reached, and is carried out in stages.
The Advance Title Deed Practice
One of the methods frequently resorted to in the field is the transfer of title to the contractor before the construction is finished. This method is referred to in practice as the advance title deed.
The true function of the advance title deed is to enable the contractor to finance the project. The contractor generally meets the cost of construction by selling on to third parties the title deeds thus passed to it. However, where the contract is terminated, the independent units are sold to third parties, the contractor falls into financial difficulty or fails to complete the project, this method may turn into grave disputes.
The Legal Nature of the Transfer
How the transfer of title effected in relationships in return for flats is to be characterised in law is a question that determines the outcome of the dispute.
In the practice of the Court of Cassation, transfers of an advance nature are for the most part accepted as transactions made conditional upon the contractor performing its obligation. Accordingly, if the contractor fails to discharge the obligations arising from the contract, the landowner may seek the restitution of the transferred title deeds. In cases of termination in particular, claims for annulment of title deed and registration, the fate of sales made to third parties and the recovery of the transferred shares are among the most frequently debated headings.
The Risk Created by the Advance Title Deed Transfer
One of the gravest legal risks in a construction relationship in return for flats is the passing of title to the contractor before the construction is completed. Where the project ends in failure, these early transfers, made on the ground of a need for finance, may lead to serious losses of rights as regards the landowner.
Where the shares transferred at an early stage are sold on to third parties, the construction is abandoned midway or the contract is terminated, wide-ranging title deed disputes arise.
Transfers Made Before Construction Begins
In some projects the title deed may be passed to the contractor while the construction has not yet begun at all, or is at a very low level.
Although a transfer of that kind makes it easier for the contractor to find resources, it produces grave consequences for the landowner. If the contractor never sets about the work, or is unable to continue the construction because of a financial bottleneck, the landowner’s control of ownership over the property is largely weakened.
For that reason, making the transfer in incremental fashion by tying it to the level the construction has reached is accepted in practice as the safer method.
Failure of the Contractor to Complete the Project
The greatest danger of the advance title deed practice is the contractor’s failure to complete the work. Where the construction is halted for a long period, the site is abandoned, or there is bankruptcy, financial inadequacy or an economic crisis, the landowner is faced with the problem of how it is to recover the title deeds already transferred.
The principal routes that come onto the agenda in such situations are termination of the contract, actions for annulment of title deed and registration, and claims for damages.
Sale of Independent Units to Third Parties
It is quite common in practice for the contractor to sell on to third parties the land shares or independent units it has taken over by way of advance.
Where the contract is terminated or the project cannot be completed, the legal position of those persons gives rise to serious debate.
Indeed, it is an approach adopted in the decisions of the Court of Cassation that persons who purchase an independent unit from a project that has not yet been completed may not in every case benefit from the principle of reliance on the land register under Art. 1023 of the Turkish Civil Code No. 4721.
The Problem of Recovering the Transferred Title Deed
Where the contractor fails to perform the obligations arising from the contract, the landowner may claim the restitution of the title deeds it has transferred. That said, the fact that construction servitude or condominium ownership has been established over the property, that a mortgage has been created, or that the shares have been passed on to third parties makes the process markedly more difficult.
For that reason, in contracts providing for an advance title deed, the timing and scope of the transfer and the security mechanisms that are to accompany it must be regulated in detail in the text.
The Staged Title Transfer System
With a view to balancing the distribution of risk between the parties, an incremental or staged transfer model is frequently adopted in practice. Under this model the title deed is transferred in portions, depending on the construction reaching specified levels.
While the model has regard on the one hand to the contractor’s need for finance, on the other it seeks to keep alive the security of ownership that the landowner retains over the property.
Transfer Tied to the Level of Construction
Under this system the transfer is carried out according to the degree of physical progress of the building. In practice, specified proportions of the land share are passed over depending on thresholds such as the obtaining of the occupancy permit, the completion of the finishing works, the completion of the shell construction and the reaching of the plinth level.
In this way the contractor becomes entitled to the title deed in proportion to the works it has carried out, while the landowner does not wholly lose its control over the property.
The Incremental Security Mechanism
The staged transfer establishes a scheme of security that operates in practical terms between the parties.
Where the contractor acts contrary to the contract or fails to complete the project, the shares not yet transferred continue to remain vested in the landowner. This allows the loss the landowner may suffer to be limited to a certain extent. That security may be further reinforced by annotations on the land registry, contractual penalty provisions and a security mortgage.
The Advantages It Offers the Landowner
The incremental transfer model is markedly safer for the landowner than the advance title deed. In cases such as termination of the contract, the contractor making sales to third parties without any supervision, falling into financial inadequacy or abandoning the work midway, the landowner’s risk of losing ownership is considerably reduced.
For that reason, in projects of high economic value, tying the transfer to the level of construction and conducting it under supervision assumes particular importance.
The Risk of the Powers of Attorney Granted to the Contractor
It is a widespread practice in construction relationships in return for flats to grant the contractor a comprehensive power of attorney. Various powers of representation are conferred on the contractor so that permit procedures may be conducted, applications to the municipality made, land registry transactions carried out and sales of independent units managed.
However, broad powers whose limits have not been drawn may produce grave consequences for landowners. Where the contractor abuses that authority, the passing of the property to third parties or ownership disputes that are difficult to make good may come onto the agenda.
The Problem of Unlimited Authority
In practice, powers of attorney may be drawn up covering extremely broad powers, such as granting a power of attorney to third parties, creating a mortgage, effecting a transfer in the land registry and making sales. Authorisation as broad as that markedly weakens the landowner’s control over the property throughout the project.
Authority to Sell to Third Parties
Some contracts also confer on the contractor the authority to sell the independent units to purchasers of its choosing. In that event the contractor may transfer the independent units, or draw up promises to sell, while the project has not yet been completed.
Where the contractor has acted contrary to the contract or the project has been left half-finished, such sales become the source of serious title deed disputes.
Abuse of the Authority
The exercise of the authority under a power of attorney contrary to the contract is among the disputes frequently seen in the field. Operating the authority for a purpose other than that for which it was given, placing a mortgage on the property, making a sale without the landowner’s knowledge and transferring independent units not agreed upon in the contract are assessed within this scope.
Acts of that kind lay the ground for allegations of abuse of the duties under the power of attorney; in the end, actions for annulment of title deed and registration and claims for damages come onto the agenda.
Limiting the Power of Attorney
So that the landowner does not suffer a loss of rights, it is of great importance that the power of attorney be drawn up in narrow and supervised terms. The protective methods resorted to in practice are as follows:
- Making specified transactions additionally subject to written approval
- Providing for a requirement of joint signature
- Removing from the text the authority to create a mortgage
- Limiting the authority to specified independent units only
- Placing a numerical or subject-matter limit on the authority to sell
Accordingly, when a power of attorney is prepared in projects in return for flats, the scope of the powers conferred on the contractor must be determined with care.
The Importance of Entering an Annotation on the Land Registry
The annotation of the contract on the land registry is a decisive step for the protection of the parties’ rights. The annotation affords significant legal security against transfers that may subsequently be made over the property, sales to third parties and ownership disputes.
The rights arising from this contract are as a rule not rights in rem but bear the character of personal rights. Where the contract is annotated on the land registry, however, those rights become capable of being asserted against third parties, albeit to a limited extent.
The Effect of the Annotation as Regards Third Parties
If the contract has been annotated on the land registry, it produces legal consequences as regards those who subsequently take over the property as well. Persons who later acquire rights over the property are expected to have regard to the annotation on the register. Accordingly, in the case of a property carrying an annotation, third parties’ defence of good faith may be construed more narrowly in practice.
The annotation serves a function in particular as regards the protection of the rights arising for the contractor under the contract.
Protection of the Landowner
The annotation affords protection not only to the contractor but to the landowner as well. Linking the scheme of allocation, the scope of the contract and the rights over the independent units to the land registry record contributes to preventing disputes that may arise later. Thanks to the annotation, title transfer processes become more amenable to supervision, third parties become aware of the existence of the contract, and unsupervised sales may be forestalled.
Its Function in Practice
The disputes most frequently encountered in projects in return for flats are gathered around the sales the contractor makes to outsiders and the title transfer transactions. The entering of an annotation on the land registry plays a decisive role in the protection of the contractor’s rights, in processes for the termination of the contract, in debates concerning the good faith of third parties, and in actions for annulment of title deed and registration.
For that reason, the annotation of the contract on the land registry assumes particular importance in projects of high economic value.
Actions Arising from the Transfer of Title
Title transfer processes are the area that generates the most disputes in a construction relationship in return for flats. Different types of action may come onto the agenda by reason of the avoidance of the transfer, sales made to outsiders, conduct of the contractor contrary to the contract and the advance title deed method.
In these disputes the good faith of third parties, the parties’ position as to fault, the level the construction has reached, the land registry records and the provisions of the contract are assessed together.
Actions for Annulment of Title Deed and Registration
One of the types of action most frequently brought in this relationship is the action for annulment of title deed and registration. Abuse of the power of attorney, transfers made to third parties, the restitution of the title deeds after termination and the recovery of the shares passed to the contractor by way of advance are, in practice, the source of these actions.
In the proceedings, whether the contractor has performed its obligation and whether third parties can be regarded as acting in good faith are of particular prominence.
Actions to Compel Registration
Where the contractor has discharged the obligations arising from the contract but the landowner is avoiding the transfer of title, an action to compel registration (compulsory registration) may be brought by the contractor. In such an action the contractor seeks the registration in its own name, by court judgment, of the land shares or independent units to which it is entitled.
In these proceedings the court examines the validity of the contract, the degree of completion of the construction and whether the contractor has duly performed its obligation.
Actions for Termination of the Contract
Disputes concerning the transfer of title are for the most part brought before the court together with a claim for termination of the contract. Abuse of the transfer of title, the carrying out of works contrary to the building permit, the abandonment of the construction midway and the contractor’s failure to complete the project are the principal grounds of termination actions.
In termination proceedings the relationships of claim between the parties, the fate of the sales made to outsiders and the restitution of the transferred title deeds are dealt with together.
Claims for Damages
Damages may also be sought in respect of the losses suffered by reason of the transfer of title. In practice, losses in value, the inability to recover the title deeds, the project being left half-finished, sales being made to third parties and the property being transferred unlawfully are the subject of claims for pecuniary loss.
In addition, where a contractual penalty has been agreed in the contract, the parties may also claim their contractual penalty entitlements separately.
Independent Legal’s Assessment
The greater part of the disputes in construction relationships in return for flats stems from insufficient attention being paid to the timing of the transfer when the contract is signed. Title deeds passed to the contractor at the outset leave the landowner deprived of bargaining power when the project does not progress; moreover, the fact that the shares have been passed on to third parties may turn a claim for restitution into proceedings lasting years.
For that reason the transfer timetable, the security mechanisms and the limits of the power of representation must be devised as a single whole. A single sentence of flexibility in the text of the contract may in practice turn into a loss of ownership that is difficult to make good.
In a concrete project, the following headings should be given priority when the contract is being concluded or when a dispute arises:
- Tying the land shares to be transferred to a timetable by matching them with levels of construction
- Expressly limiting the powers of mortgage and sale in the power of attorney to be given to the contractor
- Entering an annotation on the land registry simultaneously with the conclusion of the contract
- Including provisions governing the obligation of restitution in the event of termination and supported by a contractual penalty
- Where sales to third parties are envisaged, setting out in the text the procedure for informing purchasers
- Investigating the contractor’s financial position and previous projects before the contract is concluded
Independent Legal provides advisory services throughout the entire process, from the preparation of construction contracts in return for flats to the management of the title transfer process and the conduct of actions arising from the transfer.