The future of an owner in a building entering transformation is most often determined not at the construction stage but at the stage of signature. Which independent unit in the new building will fall to whom, the extent to which the existing rights over the property will be preserved and the undertakings the parties assume towards one another all take shape in the text of the contract. It is therefore decisive for the process as a whole that the provisions be drafted in a balanced, intelligible manner consistent with equity.
In practice, however, a rather different picture frequently prevails. Some texts restrict the rights of owners to an immoderate degree, while others contain arrangements creating a clear advantage in the contractor’s favour. In such cases it may be argued that the contract contains an unfair term or that it was concluded under conditions of unfair exploitation (lesion), and the annulment of the text in its entirety or of certain of its clauses may be sought.
In this briefing note we examine, from a practical standpoint, the criteria by which a transformation contract is regarded as contrary to equity, the difference between the concepts of the unfair term and of unfair exploitation, the conditions required for an action for annulment and the legal consequences to which it gives rise.
The Definition and Function of an Urban Transformation Contract
An urban transformation contract is a contract concluded between the condominium owners and the contractor for the purpose of demolishing and rebuilding a building identified as a risky structure and of determining how the independent units arising from that construction are to be apportioned. The text is the fundamental document governing the owners’ existing rights, the character of the units that will fall to them in the new building and the mutual obligations of the parties.
It would be misleading to treat this contract as a mere document of construction organisation. The text simultaneously establishes a broad legal relationship touching upon the scope of the right to property, the proportions of apportionment and the powers of use. For that reason it is of considerable importance that the provisions contain no uncertainty and that they observe a proportionate balance between the parties.
The Legal Nature of the Contract
As to its nature, an urban transformation contract is a mixed structure bringing together several elements, which cannot be reduced to a single contractual type, and in practice it most often presents an appearance approaching that of a construction contract in return for a land share. At the heart of the relationship lie the contractor’s undertaking to create a new building on the property and the owners’ undertaking to transfer a determined portion of their land shares to the contractor.
Another feature distinguishing the contract from an ordinary immovable property transaction lies in the number of parties. The text is most often concluded not with a single owner but with all the condominium owners in the same building together. In this respect the resulting transaction is not an individual contract but a collective legal relationship concerning the common interest of the co-owners and affecting all of them in its consequences.
In summary, the contract occupies a position of its own in that it is a collective transaction to which the condominium owners are jointly party, that it carries a construction resembling that of the construction contract in return for a land share, and that it displays a mixed structure combining the elements of more than one contractual type.
The Purpose and Scope of the Contract
The reason for the contract’s existence is the removal of the existing building, the construction of a new one in its place and the setting out of how the parties’ shares in that new building are to be determined. The scope of the arrangement is not confined to the construction activity alone; the allocation of the independent units, the regime governing the use of the common areas and the financial obligations assumed by the parties are also resolved within the same text.
The Concept of an Unfair Term
An unfair term denotes a provision in a contract which restricts the right of one of the parties to an immoderate degree or which gives rise to a marked imbalance in favour of the other party. Although freedom of contract is a constitutive principle in Turkish law, that freedom is not unlimited; provisions may not be drafted in a manner extending beyond the rule of good faith and beyond equity.
While Art. 26 and Art. 27 of the Turkish Code of Obligations No. 6098 allow the parties to determine the content of the contract freely, they limit that freedom by mandatory rules, morality, public order and personality rights. In addition, Art. 2 of the Turkish Code of Obligations requires adherence to the rule of good faith in the exercise of rights and the performance of obligations.
In transformation contracts drawn up in standard form and placed before a large number of condominium owners for signature, the likelihood that certain provisions have been constructed to the owners’ detriment is particularly high. Such texts are reviewed by reference to Art. 25 of the Turkish Code of Obligations (general terms and conditions) and to the rule of good faith; provisions incompatible with equity may be treated as unfair terms and held invalid.
The Statutory Provisions Applied in the Review
The debate over unfair terms in transformation contracts is conducted principally along the axis of four provisions.
Art. 2 of the Turkish Code of Obligations — The Rule of Good Faith. Everyone is obliged to observe the rule of good faith in exercising a right and in performing an obligation; the legal order affords no protection to the manifest abuse of a right.
Art. 25 of the Turkish Code of Obligations — General Terms and Conditions. Contractual provisions which are incompatible with the interests of the other party and drafted contrary to the rule of good faith may attract the sanction of invalidity.
Art. 26 of the Turkish Code of Obligations — Freedom of Contract. The parties may determine the content of the contract as they wish, provided they remain within the limits drawn by the law.
Art. 27 of the Turkish Code of Obligations — Absolute Invalidity. Provisions conflicting with mandatory rules of law, with morality or with public order are absolutely invalid.
When these provisions are read together, the following conclusion emerges: for a provision in a transformation contract to survive, it is not enough that it has been signed by the parties; the provision must at the same time carry a content that is consistent with the rule of good faith, balanced and not injurious to equity.
Provisions Capable of Being Treated as Unfair Terms in Practice
Freedom of contract affords no justification for the economically stronger party — which is generally the contractor — to use its superiority in order to bind the other party to onerous conditions. The principal groups of provisions in transformation contracts capable of being made the subject of judicial review are addressed below.
Inequity in the apportionment and the distribution of floor area. The reason for the existence of transformation is the conversion of a risky structure into a safe one; that purpose does not, however, legitimise interference with the essence of the owner’s right to property.
- Manifest disproportion: Leaving the owner an exorbitantly low floor area when measured against the value of the land share and comparable projects in the district, or imposing a model of apportionment leaving the contractor an extraordinary share of profit, gives rise to a debate over unfair terms.
- Disregard of premium value: Where the advantages of the owner’s existing flat, such as its aspect, its floor level and its view, could technically have been preserved, allocating to that owner a unit of low economic value such as a ground-floor or rear-facing unit without any reason being given is incompatible with equity.
Unilateral powers strengthening the contractor alone. In a balanced text rights and obligations are reciprocal; provisions protecting only the stronger party fall foul of the review of general terms and conditions.
- The power to make alterations to the project unilaterally: Clauses conferring on the contractor the power to alter the architectural design, the project or the quality of materials without obtaining the owners’ approval may be held invalid.
- Inequality in the termination regime: Provisions which render the owner’s right of termination effectively unusable or make it subject to very onerous penalty clauses, while leaving the contractor the opportunity to escape the contract with ease, are in the nature of unfair terms.
Restriction of liability and uncertainty as to the delivery period. The contractor’s principal performance is to deliver the building within the agreed period and in a manner conforming to sound technique.
- Leaving the delivery timetable open-ended: Clauses in which the period is constructed as running “from the obtaining of the building permit” and the permit application is left entirely to the contractor’s initiative, or in which the definition of force majeure is widened so as to cover economic fluctuations as well, are regarded as unfair, since they drive the owner into indefinite uncertainty.
- Leaving delay without sanction: Provisions stipulating that no rental support or damages for delay will be paid in the event of late delivery, or reducing those damages to a symbolic figure, are contrary to the rule of good faith.
Penalty clauses operating in one direction only. Penalty clauses attached to withdrawal from the contract and to cases of breach are expected to be reasonable and symmetrical for both parties. Clauses which cause the owner to lose their flat or to pay heavy sums upon a minor breach, while providing for no sanction at all in respect of comparable conduct by the contractor, are regarded as unfair terms within the scope of Art. 25 of the Turkish Code of Obligations.
The Concept of Unfair Exploitation (Lesion)
Unfair exploitation denotes the creation of a manifest disproportion between the performances by taking advantage of the difficult position, the inexperience or the thoughtlessness in which one of the parties finds itself at the moment the contract is concluded. Although from the outside the contract appears to have been concluded by free wills, in reality there is a serious difference of power, of knowledge or of economic balance between the parties.
Art. 28 of the Turkish Code of Obligations No. 6098 allows contracts arising in such conditions, and exhibiting a manifest disproportion between their performances, to be annulled. The survival of a contract therefore depends not only on the signatures beneath it but also on the honesty and fairness of the conditions in which it was concluded.
In transformation practice an allegation of lesion most often arises where the owner’s lack of technical or legal knowledge has been exploited, where no reasonable period has been allowed for a decision, or where the owner has been steered towards signature under pressure. In such cases annulment may be sought in respect of the whole or of part of the contract.
The Basis and Elements of Unfair Exploitation
The concept is governed by Art. 28 of the Turkish Code of Obligations No. 6098. Under that provision, where there is a manifest disproportion between the performances in a contract and that disproportion has arisen through the exploitation of the difficult position, the inexperience or the thoughtlessness of one of the parties, the annulment of the contract may be sought.
The elements required in practice fall under three headings: the existence of a manifest and measurable disproportion between the reciprocal performances; the fact that one of the owners is in a state of hardship, inexperience or thoughtlessness; and the fact that the other party has acted with the intention of knowingly turning that weakness to its own advantage. Where these three elements are present together, a claim for annulment based on unfair exploitation becomes available.
Forms in Which Unfair Exploitation Appears in the Transformation Process
For the provisions on lesion to be relied upon, the manifest disproportion in the contract must have been created by taking advantage of a moment of weakness on the owner’s part. The principal forms encountered in practice are as follows.
Exploitation of a state of hardship. This heading covers cases in which, at moments when the building must urgently be demolished, when an eviction notice has arrived from the municipality or when the need for shelter has become impossible to postpone, the contractor uses that pressure to impose on the owner a share so low that they would never accept it in ordinary conditions. A typical example is that of an elderly owner, anxious that their share will be put up for sale because the majority has been achieved, being steered towards signature by an offer of a flat falling far below the market rate.
Exploitation of a lack of knowledge. Transformation is a complex process in which technical and legal aspects are interwoven. This heading covers cases in which the contractor misleads the owner by taking advantage of their lack of knowledge as to construction costs, the increase in the permitted floor area ratio or premium values in the district. An example assessed in this way is that of an owner who ought to receive 100 m2 in return for their land share being persuaded to accept 60 m2 through costs being deliberately presented as exorbitant.
Manifest disproportion between the performances. The most concrete indication of lesion is the unacceptable difference between the gains obtained by the parties.
- Apportionment departing from comparables: Where a share in the band of 50%–60% is set aside for landowners in similar projects in the same district, keeping the owner’s share at a level of 25% without any technical justification such as ground difficulty or additional cost creates a presumption of manifest disproportion.
- Concentration of the valuable units in a single pair of hands: The contractor reserving the shops and the luxury flats for itself and leaving the owner only the basement floor or units receiving no daylight raises the question of lesion when the economic values are compared.
The presence of an intention to exploit. The final element is that the contractor knows of the hardship or inexperience in which the owner finds itself and aims consciously to derive an advantage from it. A contractor who draws up the contract on such terms despite foreseeing that the owner will suffer a loss of rights is regarded as having the intention to exploit.
The Conditions Required for an Action for Annulment
The Existence of a Marked Imbalance Between the Performances
The first condition for an order of annulment is the existence of a plainly visible imbalance between the performances of the parties. That imbalance is most often given concrete form in the immoderate difference between the true value of the property and the rights conferred on the owner by the contract. Where extraordinary advantages are secured for some owners while others suffer serious harm, that too is a strong indication that the text is incompatible with equity.
The Emergence of a Serious and Concrete Loss of Rights for the Owner
A theoretical imbalance existing only on paper is not sufficient for annulment; the imbalance must translate into a tangible loss from the owner’s perspective. A marked reduction in the value of the independent unit to be left to the owner, a lowering of the land share or a narrowing of the power of use are examples of losses of this kind. Such consequences are assessed as disproportion capable of warranting annulment.
The Contract Being Contrary to the Rule of Good Faith
In Turkish law the validity of a contract depends on its conformity with the rule of good faith and the principle of equity. If a transformation contract carries provisions which manifestly injure the interests of the owners or which produce the result of an abuse of right, it may be regarded as contrary to the rule of good faith. Such a finding constitutes the basis of the claim for annulment.
The Claimant Having a Legal Interest
For a claim for annulment to be examined on the merits, the claimant must have a legal interest in that claim. Put another way, the application of the contract must have given rise to a concrete loss for the claimant, or there must be a likelihood of such a loss arising. Where there is no legal interest, the court may dismiss the action without entering into the merits of the matter.
The Parties to the Action and Standing
The capacity of claimant belongs to the condominium owner or co-owner who is party to the contract and directly affected by its provisions. Each of the owners may bring an action alone, for the sole purpose of protecting their own right.
Standing is as a rule directed against the contractor. Depending on the nature of the dispute, however, it may also be necessary for the other condominium owners who are party to the contract to be named as respondents.
It is not as a rule mandatory for all the owners to bring the action together. Where the annulment of the contract in its entirety is sought, however, and the decision to be given is of such a nature as to affect the rights of all the owners directly, the participation of the other owners in the proceedings as parties may be required.
Preclusive Periods
The period for bringing an action varies according to the legal ground relied upon. In claims founded on an allegation of unfair exploitation in particular, compliance with the preclusive periods laid down in the Turkish Code of Obligations is mandatory.
Under Art. 28 of the Turkish Code of Obligations, a claim for annulment on the ground of unfair exploitation must be raised within a period of 1 year running from the moment the situation became known; in any event, recourse to that remedy must be had before 5 years have elapsed from the date on which the contract was concluded.
The periods in question are preclusive in nature and are taken into account by the court of its own motion. Where the period is missed, the opportunity to make a claim for annulment falls away.
By contrast, where the contract is contrary to mandatory provisions or where absolute invalidity (nullity) is in issue, no time limit runs as a rule; invalidity may be raised at any time.
The Position as Regards Mandatory Mediation
In actions for the annulment of a transformation contract, mandatory mediation as a procedural requirement is as a rule not required. Since such actions are directed at the validity of the contract or at the annulment of its provisions, they may be taken directly to court.
Where a claim for damages or for a monetary debt is also raised within the action, however, mandatory mediation may arise as a procedural requirement according to the nature of the dispute.
The Course of the Proceedings
The Court with Subject-Matter and Territorial Jurisdiction
Subject-matter jurisdiction is determined according to the nature of the dispute. Since such actions most often concern rights in rem over the property or the validity of the contract, the Civil Court of First Instance is the court with subject-matter jurisdiction as a rule.
As regards territorial jurisdiction, the general rule is the court of the place where the property is located. In disputes concerning rights in rem over the property, the court of the place where the property is located has exclusive territorial jurisdiction.
Application for an Interim Injunction
The bringing of an action does not by itself bring the construction or the land registry formalities to a halt. If the continued application of the contract is capable of giving rise to harm that is difficult to make good, an interim injunction may be sought from the court.
Where the court reaches the view that the right forming the subject of the action is seriously imperilled or that harm difficult to remedy afterwards may arise, it may make an order of provisional protection. Within that framework, the suspension of the provisions of the contract and of the implementation of the project, the withholding of the allocation of the independent units, the halting of the formalities relating to the alteration of the land share and the transfer of title, and the non-commencement or non-continuation of the construction activities may be sought.
The application for an injunction may be submitted together with the statement of claim, or it may equally be put to the court while the proceedings are under way. If the court sees fit, it may make the grant of the injunction conditional upon the lodging of security.
Evidence and the Burden of Proof
It falls to the claimant to establish by concrete evidence that the contract is contrary to equity or that it was signed in conditions of unfair exploitation. The critical point in such actions is that the connection between the provisions of the contract and the loss suffered by the owner can be clearly demonstrated.
Among the types of evidence most frequently relied upon in practice are the contract itself and its annexes, the architectural project and the plan for the allocation of the independent units, the land registry records and the land share data, court-appointed expert reports on the determination of value, the minutes of on-site examinations and technical inspections, and the correspondence between the parties, the minutes of meetings and the information documents.
The assessment of technical headings such as the area of an independent unit, the proportion of the land share or the difference in premium value is most often carried out by way of examination by a court-appointed expert, and that examination has a decisive effect on the decision.
Court Fees, Costs of the Proceedings and Counsel’s Fees
The fees and costs payable are connected to the nature of the action and the scope of the claim. A claim for annulment is generally subject to a proportional fee, that fee being calculated on the basis of the value of the right forming the subject of the action. Where the claim is in the nature of one for a declaration or for invalidity, a fixed fee may be applied.
Among the costs arising in the course of the proceedings are the application fee and the advance fee, service costs, court-appointed expert and on-site examination fees, witness costs, and file and postal costs.
Costs and counsel’s fees are as a rule imposed on the party losing the action. Where the action is partly allowed, the court may apportion these items between the parties on a proportionate basis.
In addition, counsel’s fees are awarded in favour of the party represented by a lawyer, to be recovered from the other party in accordance with the Minimum Attorney Fee Tariff. That sum is independent of the fee agreed between the party and their counsel and is in the nature of a cost of the proceedings.
Appeals
The parties have the opportunity to have recourse to appellate remedies against the decision given. An appeal lies in the first place against the first-instance decision and, where the statutory conditions are satisfied, an appeal on points of law may be pursued.
An appeal is lodged with the relevant Regional Court of Appeal within 2 weeks of service of the decision. On appeal the decision is reviewed not only as to its conformity with the law but also as to the facts.
Decisions of the regional court of appeal may be made the subject of an appeal on points of law before the Court of Cassation where the monetary threshold laid down in the law is exceeded. An appeal on points of law must also as a rule be lodged within 2 weeks of service of the decision.
The judgment given in an action for annulment therefore becomes final only upon the completion of the appeal and appeal on points of law stages.
Independent Legal Assessment
What is decisive in disputes arising out of transformation contracts is not how the contract is interpreted after signature, but which points went unexamined before it. In practice, claims for annulment most often stem from the imbalance created by the clauses on the proportion of apportionment, the delivery timetable and the penalty clause taken together; approaches focused on a single clause fall short of grasping the text as a whole.
The examination must therefore be conducted so as to cover the whole of the contract together with its annexes and the architectural project. In building a strategy in a specific file, it is appropriate to give priority to the following headings:
- Determining at the outset whether the claim is to be founded on the review of unfair terms or on unfair exploitation; the burden of proof and the regime of time limits differ between the two routes
- Fixing by documents the moments at which the one-year and five-year preclusive periods begin to run
- Establishing by a technical study, before the action is brought, the proportions of apportionment and the differences in premium value in comparable projects
- Raising the application for an interim injunction expressly in the statement of claim, against the possibility that the construction advances or that the transfers of title take place
- Assessing in advance the procedural requirement of mediation, where a monetary debt or an item of damages is also to be claimed
- Determining the choice between partial and complete annulment by reference to the outcome the owner expects from the transformation
Independent Legal provides advisory services and conducts litigation at every stage of the process, from the pre-signature review of urban transformation contracts to the conduct of an action for annulment.