Assessment of the effects of Covid-19 on commercial lease agreements

Banu Sönmez, Tansı Kutluk

The Coronavirus epidemic disease identified as Covid – 19, experienced in our country and throughout the world, was declared a Pandemic by the World Health Organization on 11 March 2020.

In the decisions of the Court of Cassation (Yargıtay), force majeure events such as earthquakes, fires and epidemic diseases are defined as events which occur outside the parties’ sphere of control, which are unforeseeable by the parties in advance, which cannot be resisted, and which inevitably and absolutely prevent the performance of the obligation and render it impossible.

Although there is no previously established case law capable of constituting a precedent in the face of an epidemic disease with effects of this magnitude, our opinion concerning the legal provisions to be applied in remedying the disrupted balance of interests between the parties, or in terminating the contractual relationship, is set out below.

Pursuant to the Turkish Code of Obligations (TCO), the effect of the coronavirus, as a force majeure event, on lease agreements must be examined under two headings:

1. IMPOSSIBILITY OF PERFORMANCE

The concept of impossibility of performance is regulated under Article 136 of the Code of Obligations as follows:

“If the performance of the obligation becomes impossible for reasons for which the obligor cannot be held responsible, the obligation is extinguished. In contracts imposing reciprocal obligations, the obligor who is released from the obligation by reason of impossibility is obliged to return the performance received from the other party pursuant to the provisions on unjust enrichment, and loses the right to claim the performance which has not yet been rendered to him. Cases in which the risk arising before the performance of the obligation has been allocated to the obligee by law or by contract fall outside the scope of this provision. If the obligor fails to notify the obligee without delay that performance has become impossible, and fails to take the necessary measures to prevent the increase of the damage, he is obliged to compensate the damages arising therefrom.”

Where the impossibility of performance is, moreover, partial; pursuant to Article 137 of the Code of Obligations;

“If the performance of the obligation becomes partially impossible for reasons for which the obligor cannot be held responsible, the obligor is released only from that part of his obligation which has become impossible. However, if it is clearly understood that the parties would not have concluded such a contract had this partial impossibility of performance been foreseen in advance, the obligation is extinguished in its entirety.

In contracts imposing reciprocal obligations, if the obligation of one party becomes partially impossible and the obligee consents to partial performance, the counter-performance is likewise rendered in that proportion. In the event that the obligee does not consent to such performance, or that the counter-performance is of an indivisible nature, the provisions on total impossibility apply.”

2. EXCESSIVE DIFFICULTY OF PERFORMANCE (HARDSHIP)

The concept of excessive difficulty of performance, on the other hand, is regulated under Article 138 of the Code of Obligations as follows:

“Where an extraordinary circumstance which was not foreseen by the parties at the time the contract was concluded, and which was not expected to be foreseen, arises for a reason not originating from the obligor, and alters the facts existing at the time the contract was concluded to the detriment of the obligor to such a degree that demanding performance from him would be contrary to the rules of good faith, and where the obligor has not yet performed his obligation or has performed it while reserving the rights arising from the excessive difficulty of performance, the obligor has the right to request the judge to adapt the contract to the new conditions, and, where this is not possible, to withdraw from the contract. In contracts involving continuous performance, the obligor shall, as a rule, exercise the right of termination instead of the right of withdrawal.

The provision of this article also applies to obligations denominated in foreign currency.”

In examining the effect of the coronavirus outbreak on commercial lease agreements within the framework of the legal provisions set out above, we are of the opinion that the mandatory closure decisions taken by the Ministry of Interior and the decisions of a recommendatory nature published by the administration must be examined separately.

i. LEASE AGREEMENTS RELATING TO BUSINESS PREMISES CLOSED PURSUANT TO THE DECISIONS TAKEN BY THE MINISTRY OF INTERIOR:

By the circulars of the Ministry of Interior of the Republic of Turkey on Coronavirus Measures, the activities of the following have been temporarily suspended throughout the country: night clubs, bars, pavilions, discotheques, theatres, cinemas, performance centres, concert halls, engagement/wedding halls, restaurants/cafés with live or recorded music, gazinos, beer houses, taverns, coffee houses, reading houses (kıraathane), cafeterias, countryside gardens, hookah lounges, hookah cafés, internet halls, internet cafés, all types of gaming arcades, all types of indoor children’s play areas (including those within shopping centres and restaurants), tea gardens, association premises, amusement parks, swimming pools, Turkish baths (hamam), saunas, thermal springs, massage parlours, SPAs, sports centres, beauty salons, barbers and hairdressers.

Owing to the temporary suspension of activities by the supplementary circular of the Ministry of Interior of the Republic of Turkey entitled Coronavirus Measures, differing views exist in legal doctrine, and these views are formed as follows:

  • Views to the effect that there is a temporary impossibility of performance:

It is uncertain for how long the measure taken by the Ministry will continue. At this stage, having regard to the terms of the lease agreements, it cannot be said that the obligation has become permanently impossible in respect of the leases of business premises such as offices or stores. In such a case, where there is a definite obstacle to the performance of an obligation but performance may become possible at a later time, this situation may be considered to be “temporary impossibility”. In this case, it may be argued that the obligations to pay the rent are suspended until the state of temporary impossibility of performance comes to an end.

Indeed, in the Decision of the Assembly of Civil Chambers of the Court of Cassation, docket no. 2011/13-528 E., decision no. 2011/571 K., dated 28.9.2011, the explanations set out below were given with regard to Temporary Impossibility and the scope within which the period of remaining bound by the contract must be assessed in the event of Temporary Impossibility:

“Undoubtedly, the existence of temporary impossibility brings with it the question of how long the parties will remain bound by that contract. The rule on this matter is that the parties remain bound by the contract pursuant to the principle of “pacta sunt servanda, fidelity to one’s word”. However, there are certain special situations in which deeming the parties bound by that contract both impedes their economic freedom and eliminates the opportunity to conclude a contract with another party. In practice, the period during which the parties remain bound by that contract in the event of temporary impossibility is called the “period of tolerance of the contract” (akde tahammül süresi). Whether this period has elapsed must likewise be assessed according to each concrete case and within the framework thereof (judgment of the Assembly of Civil Chambers of the Court of Cassation dated 28.04.2010, no. 2010/15-193-235).”

As regards the exceeding of the “period of tolerance of the contract”, being the period during which the parties must remain bound by the contract on account of temporary impossibility, as stated in the decision of the 15th Civil Chamber of the Court of Cassation, docket no. 2018/828 E., decision no. 2018/2740 K., dated 27.6.2018; if the Temporary Impossibility does not cease notwithstanding that the period of tolerance has elapsed, and there is no fault attributable to the parties, then, since the period of tolerance during which performance of the contract must be awaited will have been exceeded, it will be necessary for the court to rule that the invalidity of the contract be established.

  • Views to the effect that there is a partial impossibility of performance:

It may also be possible to assess the coronavirus within the scope of partial impossibility of performance. Indeed, although the tenants whose business premises have been closed by the Ministry have been compelled to suspend their commercial activities, they do not vacate their business premises.

Having regard to this situation, it may be argued that, as regards the tenants who are unable to use the leased immovable properties for their commercial activities as a result of the mandatory closure decision, they cannot be held liable for the entirety of the rent; but that the rent may be performed partially.

  • Views to the effect that there is a permanent impossibility of performance:

Some jurists, relying on the provision on “impossibility of performance” regulated under Article 136 of the Code of Obligations, are of the view that the tenants whose business premises have been closed by the Ministry on account of the coronavirus will be released from the rental obligation by reason of “impossibility of performance”.

The opinion of our Law Office concerning the lease agreements relating to the business premises closed by the decision of the Ministry is that the tenant’s obligation is a “monetary obligation” and that, having regard to the terms of the lease agreements of business premises such as offices and stores, it would be a narrow interpretation to speak of impossibility of performance; that it is, however, possible to speak of “temporary impossibility of performance”, and that during this process the obligations to pay the rent are suspended until the state of temporary impossibility of performance comes to an end. We are of the view that the tenant may refrain from paying the rent during this period of suspension, but that, once the temporary impossibility of performance has ceased, he will be required to pay the rents which accrued during the period of suspension without interest. Furthermore, we are of the opinion that the tenant may at the same time, by availing himself of the excessive difficulty of performance under Article 138 of the Code of Obligations, also bring an action for adaptation of the contract, if the conditions therefor exist.

ii. LEASE AGREEMENTS RELATING TO BUSINESS PREMISES CLOSED BY THE TENANT ON ITS OWN INITIATIVE:

As also explained in paragraph 2 above, pursuant to Article 138 of the Code of Obligations, where an extraordinary circumstance which was not foreseen by the parties at the time the contract was concluded, and which was not expected to be foreseen, arises for a reason not originating from the obligor, and alters the facts existing at the time the contract was concluded to the detriment of the obligor to such a degree that demanding performance from him would be contrary to the rules of good faith, and where the obligor has not yet performed his obligation or has performed it while reserving the rights arising from the excessive difficulty of performance, the obligor has the right to request the judge to adapt the contract to the new conditions, and, where this is not possible, to withdraw from the contract. In contracts involving continuous performance, the obligor shall, as a rule, exercise the right of termination instead of the right of withdrawal.

With regard to the lease agreements of the business premises closed by the tenant on its own initiative but within the scope of the recommendatory decisions and warnings of the public authorities arising from the coronavirus outbreak, we are of the opinion that an “excessive difficulty of performance” has arisen in the obligation to pay the rent. This situation grants the tenant the right to bring an action for adaptation of the contract in accordance with the statutory conditions set out in Article 138 of the TCO; it does not grant the right not to pay the rent. For this reason, we are of the view that, in the event that an amicable settlement cannot be reached between the Lessor and the tenant, an action for adaptation must be brought by the tenants without delay. We would like to emphasise that, in our opinion, the rents which are not paid during this process will have to be paid in the future together with interest.

In the decision of the 13th Civil Chamber of the Court of Cassation, docket no. 2012/8250 E., decision no. 2013/2623 K., dated 7.2.2013, it is explained that the “excessive difficulty of performance” under Article 138 of the TCO will be assessed by the judge, in a possible legal dispute, within the framework of the following conditions:

“According to the provision of Article 138 of the TCO, in order for a decision to be rendered in line with the request upon an application to be made by one of the parties to the contract to the judge, the following conditions must be present: 1) After the contract has been concluded, the balance between the performances of the parties must have been disrupted to such a great extent that the obligor cannot be expected to bear the consequences thereof. 2) The change in the balance of the performances must arise from an extraordinary circumstance which was unforeseen and not expected to be foreseen at the time the contract was concluded (such as war, economic crisis, devaluation, natural disasters, prohibitions and restrictions imposed on imports and exports). 3) The fact creating the excessive difficulty of performance must not originate from the obligor. 4) The performances must not yet have been rendered. As a rule, once performance has been rendered, recourse may not be had to adaptation or to withdrawal from the contract by invoking excessive difficulty of performance. However, if the obligor has performed while reserving the rights which have arisen, he will be able to exercise those rights even after performance.”

In conclusion;

Different views may always emerge in line with the statements of our Honourable President, new decisions or new practices, according to the course of the coronavirus in our country. However, within the scope of the current statements and the legislation in force;

  • With a view to preventing losses of rights in the judicial field on account of the coronavirus outbreak, by provisional Article 1 of Law no. 7226, all periods relating to the creation, exercise or extinction of a right, including the periods for bringing an action, initiating enforcement proceedings, application, complaint, objection, notice, notification, submission and the periods of prescription, the forfeiture periods and the mandatory administrative application periods; the periods determined for the parties under the Code of Criminal Procedure and the Code of Civil Procedure and under other laws containing procedural provisions, the periods fixed by the judge within this scope, and the periods before the mediation and conciliation institutions, were suspended as from 13/3/2020 (including this date) until 30/4/2020 (including this date); and, further, since by provisional Article 2 of Law no. 7226 concerning commercial leases the provision that “the failure to pay the commercial lease rent accruing from 1/3/2020 until 30/6/2020 shall not constitute grounds for the termination of the lease agreement or for eviction” has been introduced, enforcement proceedings in respect of the rent receivable may be initiated against the tenant on account of the non-payment of the rents in this interim period only as of 04.05.2020 (or, in the event that the periods are extended, as of the newly determined date), but the lessor may not make any request for termination or eviction arising from the rents unpaid for the period 1/3/2020-30/6/2020;

  • In the lease agreements relating to the business premises closed by the decision of the Ministry, the tenant’s obligation is a “monetary obligation” and, having regard to the terms of the lease agreements of business premises such as offices and stores, it would be a narrow interpretation to speak of impossibility of performance; it is, however, possible to speak of “temporary impossibility of performance”; during this process the obligations to pay the rent are suspended until the state of temporary impossibility of performance comes to an end; in other words, the tenant’s obligation to pay the rent is deferred during this period of suspension, but, once the temporary impossibility of performance has ceased, the tenant may be held liable to pay the rents which accrued during the period of suspension without interest; furthermore, the tenant may at the same time, by availing himself of the excessive difficulty of performance under Article 138 of the Code of Obligations, also bring an action for adaptation of the contract, if the conditions therefor exist;

  • In the lease agreements of the business premises closed by the tenant on its own initiative but within the scope of the recommendatory decisions and warnings of the public authorities arising from the coronavirus outbreak; an “excessive difficulty of performance” has arisen in the obligation to pay the rent; this situation grants the tenant the right to bring an action for adaptation of the contract in accordance with the statutory conditions set out in Article 138 of the TCO; it does not grant the right not to pay the rent; we are of the view that, in the event that an agreement cannot be reached between the Lessor and the tenant, an action for adaptation must be brought by the tenants. On the other hand, we are of the opinion that the tenants may be held liable to pay, in the future together with interest, the rents which are not paid during this process.

However, it must also be emphasised that, in each individual case, the views may differ having regard also to the nature of the lease agreement and to the other conditions of the contract, and depending on the duration of the pandemic and its effects on the concrete case; and we would like to state that we are of the opinion that, in a possible dispute, the judge may render a decision apportioning the liabilities/risks between both parties within the framework of compensatory justice.

Yours sincerely,

Banu Sönmez – Tansı Kutluk SOMS LEGAL LAW OFFICE

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