Real Estate 2023 Comparisons

Real estate practice in Turkey is not governed by a separate and dedicated body of law. Instead, Turkish real estate law is integrated into the general operation of civil law, and different aspects of real estate law are governed by chapters in codes of general operation.

At the very top, property rights are secured by the Turkish Constitution and the European Convention on Human Rights (as an international treaty duly subscribed to by Turkey).

The Civil Code (Türk Medeni Kanunu) defines different property types and regulates how property interests are created, transferred, and extinguished. The Turkish Code of Obligations (Türk Borçlar Kanunu), which regulates contracts in general, also governs real estate-related contracts, including lease agreements, and specifies the procedural requirements for their formation or termination in addition to supplying certain substantive mandatory terms or default principles as necessary.

The Code on Zoning and Construction (İmar Kanunu) establishes the rules governing construction, including zoning requirements, and the various licences and permits necessary to construct and occupy buildings.

The Code on Land Registration (Tapu Kanunu) governs the registration and record-keeping of real estate.

Under the general framework established by the foregoing fundamental laws, there are more detailed codes and regulations addressing more specific areas of law. The most frequently cited of these in recent years has been the Urban Regeneration Law (Kentsel Dönüşüm Kanunu) as well as the Capital Markets Board’s respective communiqués on Real Estate Investment Companies (Gayrimenkul Yatırım Ortaklıklarına İlişkin Esaslar Tebliği) and Real Estate Investment Funds (Gayrimenkul Yatırım Fonlarına İlişkin Esaslar Tebliği).

Real Estate Sector in Last 12 Months

Both the Russia-Ukraine war that started in February 2022 and the earthquake in southeastern Turkey at the beginning of 2023 resulted in an increase in house sales and rental prices across the country. In addition to this, despite the fact that a continuous increase in the inflation rate and foreign currency has caused an increase in the price of materials used in the construction sector and has caused a decrease in production, investing in real estate is still among Turkish citizens’ top priorities to protect the value of their savings.

During the last 12 months, two large-scale real estate companies went public. Dap Gayrimenkul Geliştirme AŞ, which has carried out its activities since 1981, went public with a value of TRY555,370,000 on 24 February 2022. EYG GYO AŞ, a real estate investment company, also went public with a transaction value of TRY352,192,500 on 22–23 December 2022.

Urban Regeneration

The urban regeneration campaign has been ongoing throughout the past few years in the western region of Turkey, which sits on an active earthquake zone, with the goal of replacing weak buildings with earthquake-resistant buildings. These projects tend to be small or medium-scale works with each individual project often concerning no more than a single residential building; however, these projects have covered virtually all of Istanbul with multiple new ongoing constructions on nearly every block in the downtown area.

Moreover, a devastating earthquake that occurred in the southeastern region of Turkey caused a vast number of losses in both life and property. Therefore, the government immediately started a rebuilding campaign in these areas and urban regeneration projects have once again risen to the top of the government’s agenda. As an incidental consequence, the zoning amnesty proposal submitted to the Turkish parliament in 2022, which was expected to be promulgated towards mid-2023, is likely to be shelved. Further anticipated consequences include a shift away from Istanbul, a city that had been expecting a major earthquake for quite some time, and real estate prices increasing in cities with a lower earthquake risk.

Statistics

Shaking off the difficulties arising from the COVID-19 pandemic, Turkey has managed to maintain its sound position in the real estate market over the past 12 months. However, the rise in construction material prices and the devaluation of the Turkish lira has raised housing prices, which adversely affects sales numbers. Sales to foreigners are an important factor in the total sale of real estate thanks to Turkey’s golden citizenship programme. 

According to the official statistics published by the Turkish Statistical Institute, the number of real estate sales in 2022 decreased by approximately 0.4% compared to the previous year, amounting to 1,485,622 sales in total. However, the number of houses sold to foreigners has increased by 15.2% with 67,490 sales, although in June 2022 the threshold value for real estate purchases for citizenship applications increased from USD250,000 to USD400,000. 

Rising Inflation and Decreases in Interest Rates

The depreciation of the Turkish lira and the Central Bank of the Republic of Turkey’s unorthodox policy of interest rate decreases has resulted in a considerable rise in inflation, and consequently, real estate prices. Overall, the latest available statistics indicate that in January 2023, the Housing Price Index increased by 59.1% in Turkish liras compared to the same month of the previous year. However, banks continue to offer low deposit rates to customers, which has led consumers to purchase real properties as an investment tool, maintaining the demand for real estate at a certain level.

Residential lessees have also felt the impact of high inflation. As per the Turkish Code of Obligations, if the rental fee is denominated in Turkish liras, the rent may be increased according to the consumer price index (12 months’ average) but no higher. Therefore, the market practice is agreeing on an annual rent variation in the amount of the average change in the consumer price index for the previous year. With the consumer price index skyrocketing, rent variation rates have been scorching the average consumers’ budgets. In an attempt to curb this effect, in June 2022, the Turkish parliament promulgated a law that temporarily capped rental increase rates at 25% for residential leases. Accordingly, leases that have been or will be renewed for a new lease term between 11 June 2022 and 1 July 2023 may not be renewed at a rental fee that exceeds the previous lease term’s rent by more than 25%.

Yeni Evim Project

The main purpose of the project is to support middle-income Turkish citizens to purchase their own houses with government aid. There are several conditions for applying to this project, such as the applicant not owning a house and undertaking not to sell their own house. This project is expected to increase residential real estate sales across the country in 2023.

Impact of COVID-19

The Turkish real estate market has achieved a quick recovery from the COVID-19 pandemic. High inflation combined with low interest rates have strengthened consumer demand for both real estate and retail products. This has enabled the maintenance of a strong demand for residential real estate as well as a quick return to retail spaces such as shopping malls and high-street shops.

Removal of the restrictions put in place in response to the pandemic has also led to a boom in the tourism and hospitality sectors. According to the statistics published by the Turkish Statistical Institute, tourism income has increased by 53.4% compared to 2021, which has also helped boost the demand for tourism facilities.

Finally, the remote-working model did not become the norm as some had expected, so the demand for office space has increased as well. According to the Association of Real Estate Investors, the demand for A-Grade office spaces and central business districts saw a particular rise following the pandemic.

Although lagging behind its peers, the real estate sector in Turkey has recently begun to benefit from technological developments in a more efficient way. The number of online platforms bringing together supply and demand in the real estate market has been increasing, and existing platforms are gaining more power by adopting new features, such as API (Application Programming Interface).

In April 2021, Turkey adopted new regulations that banned crypto-assets from being used as a payment instruments. Accordingly, real estate in Turkey cannot be bought with cryptocurrency as per the currently applicable legislation.

Purchasing and Selling Real Estate via Notaries

The amendment introduced by the Law on the Amendment of the Law on Judges and Prosecutors and Certain Laws, which allows notaries to carry out real estate purchase and sale transactions, will enter into force on 1 July 2023. Previously, purchasing and selling real estate was only possible through a title deed to be executed before the relevant land registry office. With this amendment, notaries will be entitled to execute real estate sales agreements through the land registry information system upon the request of one of the parties and payment of necessary fees and expenses.

Online Auctions for Seized Real Property

As of 2 January 2023, the sale of seized goods and real property via auction through UYAP, Turkey’s online court system, in accordance with the Regulation on the Procedure of Electronic Sales Pursuant to the Enforcement and Bankruptcy Law, has been carried out in courthouses across the country.

Mandatory Mediation for Disputes Relating To the Condominium Law

Back in 2018, applying for mediation became a pre-condition for initiating litigation for the collection of commercial receivables. In the coming months, discussions in the Grand National Assembly of Turkey are expected to make applying for mediation a pre-condition of initiating litigation in disputes between lessees and landlords as well as disputes between neighbours that relate to Condominium Law.

Development of Online Platforms

As of 2019, individuals willing to carry out transactions before land registries can submit all of the required documents to an online land registry platform (webtapu) so that officials can examine such documents in advance and request missing documents, if any. Right-holders can also grant proxies through the online platform. Additionally, the General Directorate of Land Registers has announced that in the near future individuals will be able to obtain more comprehensive information regarding the land in question thanks to another platform, MAKS. Through this platform, people will be able to see information regarding the lessee, any geographical risks that the land is exposed to, and other annotations attached by government authorities, among others. However, it is still a requirement to be physically present at the relevant land registry office and to sign the relevant documents in the presence of land registry officials to consummate transactions. The sector would no doubt benefit immensely from individuals having the opportunity to consummate transactions relating to the transfer of title, the establishment and cancellation of pledges, and the attachment and cancellation of annotations through the online platform.

Specific Lease Regime

In addition to the above, it appears that a lease regime specific to offices and shops may be introduced. The current regime under the Turkish Code of Obligations mostly aims to provide protection to tenants; however, such protection does not always fit office and shop leases, which often results in outcomes beyond its purpose. Based on sector reactions, the application of some “protective” provisions under the Turkish Code of Obligations have been postponed for eight years for merchants and private and public legal entities when the Turkish Code of Obligations came into force on 1 July 2012. As the eight-year period expired on 1 July 2020, these provisions have become applicable to merchants and private and public law entities. These provisions could also become burdensome on both tenants and lessees of workplaces. Lease agreements for shops in malls in particular require a more flexible, freedom-of-contract-based approach. An amendment providing such an approach would be appreciated by the real estate sector, but for the moment, there does not appear to be any such endeavour by the government. Nevertheless, certain associations representing investors of commercial properties still keep this issue on their agenda.

Real Estate Sales to Foreigners

Finally, it would be beneficial to the Turkish real estate sector if houses sold to foreigners qualified as imports. This has been evaluated by the government on different occasions but has never been realised.

Simple Freehold Ownership

Under Turkish law, the most basic category of property right is simple freehold ownership (mülkiyet). Freehold ownership gives the property owner the right to use, benefit from, and dispose of a piece of property. These rights are conceptually separable from one another; more limited property rights can be created by carving out certain of these rights from simple freehold ownership.

Leasehold Ownership

Turkish law permits granting a third party the right to build on a piece of property (üst hakkı), and the holder of such a right becomes the owner of any structures that are built on this land in exercise of this right. If the right to build is intended to be independent and indefinite (bağımsız ve sürekli), then the holder of the right can register it in the land registry as a separate property interest, and this right is essentially treated no differently from independent real estate.

Condominium Ownership

Turkish law also recognises condominium ownership, which allows independent units in a completed structure to be owned separately from the main structure, with the common areas of the main structure remaining under joint ownership with the owners of the other independent units in the building.

Usufruct/Servitude Right

Under Turkish law, it is also possible to separate the right to use and to benefit from a piece of property from the right to disposal, and the complete right of use and benefit can be granted to a third party in what is called a usufruct/servitude right (intifa/irtifak hakkı). In a strict sense, usufruct under Turkish law is a personal right rather than a property right because this right cannot be alienated or devised and does not include the right to make fundamental changes to the established use of the property. Granting a usufruct right to a third party leaves the property owner with the sole right of disposal.

Transfer of title is governed by:

• the Civil Code, in so far as it defines the extent of the interest that is transferred;
• the Code on Land Registration, which regulates the procedures to be followed for the transfer and introduces restrictions against, and specific clearance requirements for, foreign ownership of real estate; and
• the Turkish Code of Obligations, which supplies the rules and background principles governing sales agreements.

There are no specific laws that govern transfers of real estate by type of use. Residential property and commercial property alike are transferred under the same rubric. However, specific procedures have been put in place that determine the alienation of property rights held by the government, such as by way of usufruct.

Real estate transfers become effective at the time they are registered at the Land Registry Office, which provides a definitive record of real estate ownership rooted in the Ottoman land registry system. Land records are kept in duplicate in the central database in Ankara and at the local land registry office. These records are open to the public and are reliably accurate.

Transfers of title must be recorded in order to gain effect. Similarly, all interests in real property, including mortgages, usufruct rights, rights of purchase, and repurchase, must be registered to ensure validity. Given the definitive authority carried by title records, which are open to the public for inspection, title insurance is not at all prevalent with virtually no risk to insure against.

When purchasing real estate, buyers generally engage lawyers for due diligence purposes. Lawyers inspect the land registry records and the usage restrictions included in the zoning plans for the particular locality through the relevant municipalities. As the land registry records are authoritative, a thorough inspection of these public records generally suffices to provide assurance to purchasers in terms of the property rights of the seller and any encumbrances over the target property. In addition, a review of the municipality files reveals any non-compliances with the zoning plans and the relevant construction and occupancy permits determined by the relevant municipality.

Specifically for real estate used for tourism activities, agreements and deeds establishing the relevant investor’s right to enjoy shores and forests are reviewed as well. Additionally, technical consultants are appointed for environmental and technical due diligence matters.

The types of representations and warranties given in real estate sales differ significantly depending on how the sale is structured. Asset sales typically entail very limited representations and warranties, given that comprehensive and definitive information about the encumbrances on land, including granted easements, established security, and pre-emptive rights, are all revealed in public records. On the other hand, if the deal is structured as a share sale, with the entity holding the asset changing hands rather than the underlying asset itself, extensive representations and warranties are generally demanded.

Customary buyer’s remedies include compensation or purchase price adjustment, and a letter of guarantee from the seller or retention of a part of the purchase price typically act as security for the enforcement of these remedies. It is customary for the seller’s representations and warranties to expire after two to three years, and in the case of tax obligations, after six years. There is typically a cap on the seller’s liability in the amount of 15–30% of the purchase price. However, for some important representations and warranties, eg, relating to the ownership rights of and encumbrances on the target property, this cap can increase to up to 100% of the purchase price. Environmental representations and warranties are occasionally demanded but are seldom granted.

Real estate law sits at the crossroads of constitutional law, private law, and administrative law. As noted above, property rights are guaranteed by the constitution and international treaties. At a more local level, the most important area of law for a purchaser to keep in mind is property law, given that it determines the rights and obligations conferred to owners of real property. The law of obligations is also important in that it defines the rules and principles governing contracts related to real property (sale agreements, lease agreements, etc). Next, zoning law should be kept in mind as this determines the uses to which real estate can be put. A purchaser should also be mindful of secondary rules governing the issuance of construction and usage permits. Finally, land registration laws are also fairly important, given that they determine what information about real property can be gleaned from land registry records.

The obligation to comply with environmental regulations is generally imposed on owners of real property rather than the property itself. As such, a buyer of real property is in principle not responsible for any contamination that has taken place prior to their taking ownership. However, contamination may carry with it the presumption that the current occupant has caused contamination, and in such an event, the occupant may need to defeat that presumption by proving that it was an earlier owner who caused the pollution. This is one area where due diligence findings may prove useful.

A buyer can ascertain the permitted uses of a parcel of real estate by consulting the zoning plans, plan notes for the concerned plot, and zoning legislation. The zoning plans concerning each locality contain specific instructions on how each parcel may be developed or used; these instructions reveal both the general plan for the use of land in the locality and indicate how each parcel fits into the whole.

It is generally not possible to alter zoning restrictions for particular parcels on a project basis through agreements with local zoning authorities, especially after an amendment introduced to the Zoning Law in 2020 which specifically prohibits zoning plan amendments for particular parcels that increase the population, building density, number of storeys, and building height.       

Turkish law permits the government to take land in cases of public need. The transfer can either take place voluntarily or the government can file suit to condemn a piece of private property and, in due course, assume ownership. Voluntary transfers can be in exchange for cash or for another piece of government-held property.

If the parties cannot come to an agreement on the consideration for a voluntary exchange, the government can file suit to establish the value of the land to be condemned. In a condemnation suit, the court appoints an expert to establish the value of the land to be condemned, and the parties can contest the expert’s valuation in open court. The court then establishes the value of the land and, upon payment of this sum, orders the registration of the land in the name of the condemning agency. The condemnation compensation may be split into instalments, and, if this is ordered, registration may begin after the payment of the first instalment.

In practice, developed land is rarely condemned.

Transfers of real estate through asset deals are subject to title deed registration fees, VAT, and income/corporate income tax. Share sales are subject to VAT and capital gains taxes. However, VAT, income tax and capital gains tax are subject to exemptions that are relatively easy to satisfy.

Title Registration Fees

Title registration fees of 4% of the value of the asset are assessed on sales of real estate by asset sale. These fees are generally split equally between the parties.

VAT

If the seller is a legal entity, VAT is assessed on the transferred property at 18% for office space and commercial property and at 1%, 8% or 18% for residential property, depending on the total square metres and/or the value per square metre.

Capital Gains Tax

Finally, income tax is assessed on the selling asset-holder. For individuals, the applicable rate is between 15% and 40% but capital gains tax is not assessed for individuals who are not professionally engaged in the trade of real estate and who have held the sold property for five years or longer. For corporations, the capital gains tax rate is 20%, but corporations that do not engage professionally in the trade of real estate can shield 50% of the income from such a sale as long as the proceeds are retained in the company coffers.

Exemptions

In share sale transactions, VAT, and capital gains, tax exemptions apply as long as the transferred shares have been held by the selling entity for two years or more. Share purchase agreements are exempt from stamp tax with a recent change in the law.

Foreign legal entities may not acquire real property in Turkey unless they are allowed to do so under special laws, such as the Petroleum Law, Tourism Law, or the Industrial Zones Law. To overcome this legal barrier, investors often choose to establish Turkish SPVs. Turkish-incorporated companies with 50% or more foreign share ownership and/or management control are subject to approval by the governorship before they can acquire real property in Turkey. Turkish-incorporated companies in which foreign ownership is under 50% and where management is not under foreign control can acquire real property just like domestic concerns where all shareholders are Turkish nationals.

The governorship approval procedure involves an investigation of whether the real property is in a military forbidden zone, military security zone, strategic zone, or a private security zone. If it is, then the acquisition is subject to clearance from the military or the provincial police directorate, depending on which of these exercises jurisdiction over the relevant sensitive area. If not, approval for the acquisition is routinely granted. The process is completed within approximately one month. The establishment of mortgages in favour of foreign capital companies, leases of real property by foreign capital companies, and the acquisition of real property in organised industrial zones, technology development zones, and free zones are not subject to the foregoing approval process.

Acquisitions of commercial real estate are generally financed by loans and sales revenue generated from the project. Real estate investment funds, lease certificates, and real estate investment companies are capital market instruments used for financing options for acquisitions of large real estate portfolios or companies holding real estate.

There is no security specifically used by commercial real estate investors. Generally, securities such as a mortgage, share pledge, personal guarantee, assignment of receivables, etc are used for real estate-related funding.

Mortgages

Two types of mortgage are recognised under Turkish law: the principal amount mortgage and the maximum amount mortgage.

Principal amount mortgages

Principal amount mortgages are established to secure amounts that have already been lent to borrowers and contain the unconditional and absolute debt acknowledgement of the borrower. Although the amount of the mortgage only shows the principal amount of the loan lent, the lender may request:

• the principal amount;
• foreclosure expenses and default interest;
• accrued contractual interest; and
• expenses incurred by the mortgagee(s) that were mandatory to preserve the value of the mortgaged property (including disbursement of insurance premiums that were the mortgagor’s responsibility).

Maximum amount mortgages

Maximum amount mortgages secure an amount that is higher than the principal amount, incorporating in advance various expenses that may be incurred by the mortgagee, and do not permit the collection of any amounts above the ceiling amount.

Other Structures Available

Sale-and-leaseback structures can also be used for acquisitions of commercial real estate. Finally, Islamic finance-designed instruments such as sukuk may also be utilised.

Securities are granted over real estate to foreign financial institutions without any restrictions. Repayments to foreign lenders under a security document or loan agreement are made without any restriction unless repayment constitutes a criminal act (eg, money laundering).

Stamp tax (0.948% of the amount subject to mortgage) and a mortgage fee (0.455% of the amount subject to mortgage) are paid for the establishment of a mortgage. Foreign financial institutions are exempt from taxes and fees arising out of securities granted over real estate. The fee for enforcement proceedings is approximately 0.5% of the amount subject to mortgage. In accordance with a recent change in the legislation, there is now an exemption for half of the mortgage fee (0.227%) for mortgages established between traders.

Under Turkish law, target companies are prohibited from providing funds, loans, securities or guarantees to a third party to facilitate the acquisition of its own shares, and such financial assistance transactions will be deemed null and void. This provision does not apply to (i) transactions conducted for the purpose of the activity of financial institutions and (ii) securities, advance payments and loans granted to employees of the target company or its parent company in order to acquire the shares of the company.

When granting upstream security or guarantees for a parent company, it may be difficult for board members to specify a convincing reasonable cause for the subsidiary to enter into such an arrangement to the benefit of its holding company or group companies.

Under Turkish law, the creditor beneficiary of a mortgage must initiate an execution proceeding to liquidate the mortgage. Depending on the workload of the execution offices and courts, and whether the borrower challenges the proceedings, these proceedings can take from six months to two to three years. Priority between claimants is listed as an obligatory rule of the applicable law. By law, a creditor beneficiary of a mortgage has priority over other creditors with respect to mortgaged property.

An accelerated foreclosure procedure exists for principal amount mortgages and mortgages granted in favour of banks and financial institutions.

In principle, the order of priority between creditors is regulated under the applicable law and contractual subordination is not expressly regulated under the law. According to Court of Appeals precedents, execution and bankruptcy rules relate to public policy and cannot be changed contractually. Accordingly, a subordination agreement is not enforceable against an execution office. However, parties may freely undertake to pay the respective amounts to other recipients upon collecting receivables. In summary, a subordination arrangement may create a contractual obligation on the part of the parties but will not have a preventative effect during any enforcement proceedings to be initiated before execution offices.

Under the applicable law, polluters must bear all expenses for the prevention, removal and cleaning of pollution. The applicable law requires that – where environmental pollution is a possibility – the parties must take the necessary measures in order to prevent pollution, and, if pollution occurs, they must take the required actions in order to stop the pollution or decrease the effects of the pollution. The same law explicitly states that polluters have strict liability with respect to environmental pollution. Therefore, lenders holding or enforcing security over real estate should not be liable under environmental laws, as any pollution to the real estate is regarded as being caused by the borrower.       

In principle, securities established in favour of a lender do not become void by a borrower’s insolvency. However, securities guarantee the creditors’ position in such cases.

Declaration of Bankruptcy

In the event of a borrower’s insolvency, creditors can ask a court to declare the bankruptcy of the borrower. Bankruptcy results in the total liquidation of a bankrupt entity’s assets and the satisfaction, pro rata, of its creditors. An important exception to this rule is mortgagees as their receivables are guaranteed by specific security, so the bankruptcy rules require that they be repaid first, in full, before other unsecured creditors.

Composition of Debts

On the other hand, when borrowers become insolvent, they can seek bankruptcy protection in the form of composition of debts. Under this device, debtors reach an agreement with their creditors regarding the extent of the deduction to be made in outstanding debts and the deferment of payments. Mortgagees are given exceptional rights under the composition of debts mechanism as well. Even under the composition regime, mortgagees may initiate proceedings for the sale of mortgaged assets to have their debts repaid but may not realise the eventual sale of the secured asset while the protection is in place.

Another device of bankruptcy protection that used to be available but is no longer permitted was the deferral of bankruptcy, which was imposed by a court upon the application of the debtor. The shift to a composition regime from a deferral of bankruptcy regime is a positive development in that it promotes agreement between debtors and creditors rather than a court imposing a solution in its own judgment.

The market may adapt to the expiry of the LIBOR index by setting forth a new benchmark rate, such as EURIBOR, in credit arrangements. A fall-back clause referring to another alternative benchmark rate may be used as well. At present, parties may revise their agreements to adapt to the new situation by mutual agreement. The bottom line would be that the courts would determine and refer to a new interest rate benchmark upon the appeal of the parties in the event of any dispute.

Zoning plans must comply with the applicable legislation, and, more specifically, with planning principles, urbanisation principles and public interest, such as regional requirements, transportation opportunities, etc. This implies legislative control over zoning plans.

Moreover, smaller-scale zoning plans must comply with larger-scale zoning plans (hierarchy of zoning plans). Ministries enact larger-scale zoning plans (spatial strategic plans, environmental plans) whereas local municipalities enact smaller-scale zoning plans (implementation zoning plans). This implies the central administration’s control over local authority.

Construction permits from the municipality are required for any new construction, refurbishment, or major modifications. The construction permit and design documents should be in accordance with the legislation and zoning plans. The legislation defines the detailed technical requirements for design documents. Additionally, various requirements and restrictions (eg, setback distances, ratio of footprint to parcel area, construction coefficient) are also regulated under zoning plans. Oversight is conducted by the authority issuing the construction permit (eg, the municipality).

Zoning plans regulate the permitted use and development of individual parcels of real estate. The Ministry of Environment, Urbanism and Climate Change, which also enacts zoning plans in environmental protection sites, enacts environmental zoning plans with a scale of 1/100,000. General functions (business, residential, etc) of regions are regulated under environmental zoning plans.

Municipalities enact zoning plans with a scale of 1/5,000 and 1/1,000 and detailed zoning conditions including function restrictions (residential, industrial, etc), setback distances, construction coefficient and maximum height are specified thereunder. Moreover, there are restrictions connected to the special status of respective lands (forest, cultural heritage, natural heritage, etc).

The Housing Development Administration also exercises planning authority in certain specific government-subsidised housing development zones that are placed under its jurisdiction.

Finally, the Ministry of Tourism and Cultural Heritage also exercises its approval authority in tourism and cultural heritage zones.

The procedure for obtaining entitlements to develop a new project or complete a major refurbishment is as follows:

• an initial application is made to the municipality to obtain a zoning status certificate;
• official designs (projects) are prepared by architects and engineers according to the conditions stated in the zoning status certificate;
• these official designs (projects) are submitted to the municipality along with other documents required for a construction permit application; and
• the municipality approves the official designs (projects) and issues the construction permit.

The application procedure generally takes one to three months, depending on the time spent drafting the official designs (projects). Municipalities generally issue construction permits within one to three months. 

Third parties do not directly participate in the construction permit procedure. However, affected third parties may submit an official letter to the municipality for revocation of a construction permit within the scope of the general right of petition. This application does not affect the validity of the construction permit.

Under Turkish law, as a constitutional principle, all administrative decisions are subject to judicial review. Thus, an affected party may file an administrative lawsuit to declare the administrative act null and void or to claim damages. Property rights-holders may challenge the denial of construction permits, unfavourable revisions to zoning plans and parcellation plans, or any other administrative act. In addition, affected third parties (neighbours, etc) may initiate a lawsuit for cancellation of a construction permit.

It is not necessary to enter into agreements with local or government authorities to develop a project. Zoning plans grant the right to undertake construction under the conditions specified in the zoning plan and no further agreement with the municipality is necessary to exercise that right. Construction requires the obtainment of a construction licence, which is not an agreement per se but rather an administrative approval process.

Agreements may be necessary in an ancillary fashion, such as contractors needing to subscribe to utilities for consumption during the construction phase. Additionally, developers need to apply to the municipalities for the appointment of a licensed construction audit company.

If the planned construction does not comply with zoning conditions and designated use, the municipality will not issue a construction permit. Moreover, if the planned activities do not comply with designated use, it is not possible to obtain a workplace opening and operation permit.

Special purpose vehicles (SPVs), real estate investment companies (REICs), and real estate investment funds (REIFs) are the types of entities available to investors to hold real estate assets. REICs and REIFs are preferred by real estate investors due to tax exemptions granted to such entities. REICs and REIFs are also preferable because these entities may create large-scale funds generated from the capital contributions of different investors. SPVs may also be advantageous as they are not subject to the restrictions and specific conditions stipulated under the capital markets legislation, such as valuation conducted under said legislation, etc. For this reason, SPVs are commonly used in practice.

SPVs may be incorporated as a limited liability company or a joint stock company in the form of a publicly or privately held company. REICs may be incorporated as a joint stock company in the form of a publicly held company. REIFs do not have any legal personality and may only be held by qualified investors.

The minimum capital requirements are as follows.

• The minimum capital amount for a REIC is TRY30 million and TRY100 million for REICs incorporated for infrastructure purposes.
• The minimum asset pool for a REIF should be TRY10 million within one year of initiating the sale of participation shares to qualified investors.
• Joint stock companies should be incorporated with a minimum capital amount of TRY50,000, one quarter of which should be paid at the time of incorporation and the rest paid within 24 months of incorporation of the company.
• Limited liability companies should be incorporated with a minimum capital amount of TRY10,000. There is no minimum payment requirement at the time of incorporation and the total capital amount should be paid within 24 months of the company’s incorporation.

Corporate law provisions are applied to SPVs as they are subject to the Turkish Commercial Code, including the capital maintenance rule, corporate benefit, etc. REICs are also subject to the corporate law requirements stated under the Turkish Commercial Code. REICs and REIFs are also subject to capital markets regulations as they make use of funds provided by investors.

The amount depends on the type and size of the investment.

Lease

A lease is the basic type of arrangement that allows a person, company, or other organisation to occupy and use real estate for a limited period of time without buying it outright.

Right of Construction

A right of construction may also be established as a type of right in rem in order to protect the owner’s right against third parties. In practice, a right of construction is preferable to other types of real estate use because it gives property rights to the holder of the right of construction for a period. A mortgage may also be established over a right of construction as it is independently registered in the title deed registry with separate ownership rights.

Usufruct

Another type of right in rem is the usufruct right, which entitles the rights-holder to use and benefit from real property fully. The usufruct right is a right granted to a specific person and may not be transferred. It is a right that is limited in time; usufruct rights granted to legal persons are limited to 100 years, and usufruct rights granted to natural persons are limited to the grantee’s lifetime.

There are no different types of commercial leases. All lease agreements are governed by the same regulation. However, leases may be classified as a ground lease or a building lease according to the rental conditions. Currently, there are also ongoing discussions to amend the legislation regulating home leases and commercial leases, though there are no drafts available yet.

Rentals are freely negotiable under lease agreements. However, certain lease terms, such as eviction, rent increase, etc, are specifically regulated under the Turkish Code of Obligations as mandatory terms.

Turkish Code of Obligations

The application of some of these mandatory terms was postponed for eight years when the Turkish Code of Obligations came into force on 1 July 2012 for merchants and private and public legal entities. As the eight-year period expired on 1 July 2020, these provisions became applicable to merchants and private and public legal entities as well. Such provisions are mostly considered to protect tenants against landlords, which provides certain limitations with regards to the lease agreement. For instance, the most prominent ones stipulate that obligations regarding additional payments other than rent and ancillary costs cannot be imposed on tenants and penalty clauses for failure to pay and acceleration clauses will be deemed invalid. 

A piece of legislation enacted in 2018 prohibits denominating rental fees in foreign currency under certain conditions. This legislation applies to lease agreements where the lessor is a foreign capital company, but it is still possible to denominate rents in foreign currency in lease agreements where the tenant is a foreign real person, foreign company, or a company owned by foreign investors.

Counteracting COVID-19

In order to curb the adverse impact the COVID-19 pandemic may have had on tenants, government authorities put a series of measures into effect including suspending the enforcement procedures that remained in force between 22 March 2020 and 15 June 2020 and prohibiting landlords from terminating lease agreements for offices or evicting tenants in offices for failure to pay rent during the period between 1 March 2020 and 30 June 2020. However, currently there are no material ongoing regulations concerning rent or lease terms that resulted from the COVID-19 pandemic.

There is no minimum or maximum limit for lease terms. In practice, the terms of leases for residential property are generally agreed to as one year compared to five years or more for commercial assets. The owner of the real estate should carry out the structural maintenance while the lessee is responsible for daily maintenance. Parties may contractually agree otherwise.

The parties generally agree to the frequency of rental payments as a monthly payment, but the parties may also determine the term of rent as quarterly or annually. In commercial leases, rent may be expressed as a fixed amount or as a fixed percentage of revenues derived from the use of the property. Market practice tends to combine the two, with payable rent being set at whichever of the two is higher.

It is also customary to introduce force majeure clauses in lease agreements. Before the COVID-19 pandemic, most force majeure provisions addressed the risk of leased property being damaged by an act of God, in which case the lessor is relieved from its duties to keep the property in operable condition. Now that the market has suffered the effects of the pandemic, lease agreements entered into recently include pandemics as a force majeure event to the extent that they preclude the tenant from using the leased property.

As per the Turkish Code of Obligations, if the rent is agreed to in Turkish liras, the rent may be increased according to the consumer price index (12 months’ average), but not higher. Rent may not be increased within the first five-year period if the rent is agreed to in foreign currency. Please see 1.2 Main Market Trends and Deals for the rent variation cap applicable for residential leases until 1 July 2023.

If the parties fail to mutually agree on a new rental amount, either of the parties can apply to the court to render a new rental amount according to the market price at the end of each five-year lease term.

If the lease property is part of a commercial enterprise or is owned by a limited liability company/corporation, VAT is applicable at 18% of the rent. Withholding tax is applicable to commercial entities for leases of natural person-owned real estate.

A commission to the real estate agency and a deposit to the real estate owner are generally paid by the tenant at the start of a lease as per current market practice.

The areas used by several tenants, such as car parks, gardens or swimming pools, are classified as common areas, and expenses arising out of the use of these areas are divided among tenants according to certain criteria (eg, land share, square metre-size of property).

If the building housing the premises has been converted to condominium use, then each tenant is able to obtain an individual utilities account for their own use. Expenses incurred for common areas are generally allocated among tenants on the basis of the square metres of the property. Managers of such properties usually reserve for themselves, by contract, the authority to take into account other factors such as the tenant’s location within the premises, the extent to which the presence of the tenant generates business for the facility as a whole, the tenant’s business volume, etc.

The allocation of common expenses among tenants in shopping centres is governed by the Regulation on Shopping Centres (Alışveriş Merkezleri Hakkında Yönetmelik). The regulation specifies mandatory rules to be used when allocating common expense contribution amounts to tenants in shopping centres. The common expenses are, in principle, allocated according to the square metres of the respective stores, restaurants, etc.

Generally speaking, landlords insure the property against structural risks, and tenants insure the property against operational risks. Landlords also insure the common areas of shared-use properties and can increase the cost of this insurance depending on the parties’ bargaining positions. The law imposes the cost of mandatory insurance on landlords by default but permits reassignment of these costs.

Landlords typically insure properties against fire, hurricanes, explosion, water damage, flooding, landslides, snow damage, aircraft impact, and earthquakes. Terrorism insurance is also sometimes taken out. A lessee typically takes out a renter’s all-risk insurance as well as third-party liability insurance.

The use of land is regulated under the zoning plan for the locality. These restrictions operate in the background and supersede any conflicting provisions of any lease agreement that is signed between a landlord and a tenant. Furthermore, under the Code on Condominiums, the operation of businesses is prohibited in residential buildings. Restrictions on a tenant’s use of real property are typically found in lease agreements, and these are binding on lessees under contract law.

Tenants may alter leased premises if this is permitted under their lease agreement. Structural improvements may require a licence from the local municipality, and these licences are only issued to landowners. As such, a tenant would have to obtain the landlord’s consent to structural improvements. Landlords typically give their consent to such improvements by issuing a power of attorney to their lessees for improvement purposes, under which lessees obtain the requisite licence and commence construction of improvements.

If the landlord has consented to alterations to be made by a lessee, they may not demand the return of the property to its previous condition. Similarly, a lessee may not demand compensation for any increase in the value of the property that may be caused by the lessee’s alterations. Both of these default positions may be changed by agreement.

There are very few regulations that govern the lease of property by type of use. One such specific set of rules, the Regulation on Shopping Centres, has had little restrictive impact in practice.

A lessee’s bankruptcy during the term of a lease gives the landlord the right to demand assurances for the payment of future rental amounts. If the lessee or the bankruptcy administrator is not able to provide such assurances, the landlord is then entitled to terminate the lease.

Landlords typically demand that tenants guarantee their obligations by posting a cash deposit or a bank letter of guarantee. The Turkish Code of Obligations has introduced a quantitative limitation in this respect, limiting the amount of such guarantees to be posted to a maximum of three months’ rent – this entered into force as of 1 July 2020. In any event, landlords tend to demand an annual or quarterly payment of rent to obtain further security.

A tenant has the right to occupy a leased premises for another 11 years once the leased period has ended. The landlord may terminate the lease by giving notice no less than three months before the end of the eleventh year after the expiration of the lease or each year thereafter. This is a mandatory provision of the law; therefore, landlords do not have a free hand in circumventing this entitlement given to lessees.

Assignment is subject to the lessor’s prior written consent, which cannot be withheld unreasonably in respect of workplace leases. Subleases are also subject to the original lessor’s prior written consent.

Landlord’s Rights to Terminate

The landlord may terminate a lease if the lessor has served written notice on the lessee twice in one lease term for failure to pay rent. The landlord may terminate a lease if the lessee has undertaken to vacate the leased premises on a certain date but has failed to keep their promise.

The landlord may also terminate a lease on the basis of need; if the landlord or the landlord’s family must use the leased premises themselves, then the landlord may terminate the lease. Similarly, the landlord may terminate the lease if material repairs need to be made to the premises and the lessee’s continued occupation of the premises under such circumstances is not possible.

Finally, the landlord may terminate a lease if the lessee fails to use the premises in accordance with the terms of the lease agreement. If the lessee’s breach is non-material, the landlord must give at least a 30-day cure period. If the breach is material and the breach is unlikely to be remedied in the cure period, the agreement may be terminated with immediate effect.

Tenant’s Right to Terminate

The lessee may terminate the agreement in the event that the premises are materially unfit for use. Furthermore, tenants may terminate a lease early by way of paying the lease amount until the leased property has been rented to another lessee under similar conditions.

Both Parties’ Right to Terminate

Both parties may terminate the lease if generally applicable contract termination grounds arise.

Lease agreements are not subject to any form requirement, but written lease agreements are market practice. Turkish law enables the annotation of lease agreements in the land registry records of the leased property. Annotation gives full protection against eviction if the relevant property is transferred to a third party. Deed registry fees amounting to 0.683% of the total lease amount would accrue together with a fixed contribution amount (approximately TRY519).

A tenant may be evicted prior to the originally agreed date if the grounds for termination discussed in 6.19 Right to Terminate a Lease arise. In such an event, eviction proceedings typically take one to one-and-a-half years.

In the event of eviction for failure to pay rent, a landlord may also seek to have the tenant evicted by way of execution proceedings. The execution office would serve a payment order on the tenant in such a case, and, upon failure to pay within 30 days, begin the process to evict. This procedure is notably faster than eviction by court order.

Both eviction processes may be subject to appeal and the eviction order can be suspended while the appeal is pending.

A government agency may be able to terminate a lease only in exceptional circumstances. One such instance may be when the leased real estate is subject to condemnation. In the event of condemnation, the lessee does not receive compensation from the government. Another such instance is if the leased property is going to be subject to demolition under the scope of the Urban Regeneration Law. In such an event, the lessee would be given a total of 90 days to vacate the premises and would be evicted by the government upon failure to voluntarily surrender the property.

Structures used in the global market (turnkey and cost-plus-profit) are also used in the Turkish market. Turnkey structures are commonly used in public tenders. For private deals, turnkey or cost-plus-profit structures may be used depending on the commercial agreement of the parties.

Moreover, a unique method that is commonly used that was created for construction to be made over private party land is known as “construction in return for flat”. Under this structure, the contractor constructs the building without receiving any cash payment. The owner makes the payment to the contractor in the form of a flat or flats; accordingly, the owner and contractor share the flats in the constructed building in line with a ratio determined under the agreement (eg, 55% for the owner and 45% for the contractor). The owner does not make any other payment for the construction.

Revenue sharing, which is a structure that resembles ordinary partnership, has been gaining traction in the market recently. Revenue sharing involves the contractor taking on the construction and sale activities, and the landowner and the contractor sharing the collected revenues in previously agreed ratios.

Contractors assume the responsibility and construction of a project through construction agreements. However, as per the Turkish Code of Obligations, owners are responsible vis-à-vis third parties. In the event that owners are required to pay compensation to third parties, they are entitled to have recourse to their contractor. At the contractor level, design and construction work is outsourced through subcontractors that are hired by contractors.

Contractors generally assume the construction risk of a project; thus, limitation of the contractors’ liability is not very common. Moreover, clauses containing waivers, indemnifications, and limitations of liability in favour of contractors are not generally accepted by courts.

Provisions on schedule-related risks are subject to freedom of contract; therefore, parties may agree on certain milestones and penalties. This is commonly used in practice. As per the law, an owner is entitled to compensation if the contractor does not comply with the milestones and deadlines specified under the agreement.

Parent guarantees, performance bonds (bank letters of guarantee), and retentions are common securities given by contractors. Requesting guarantees from contractors is common for valuable lands where the owners have negotiating power.

Another method that is often used in tranches but not necessarily in high-profile construction projects is the exchange of negotiable instruments (eg, bonds or cheques). While negotiable instruments are ordinarily used to settle outstanding debts, they are sometimes used as security in construction agreements.

Contractors are entitled to request the registration of a mortgage over the land to guarantee their receivables. Owners may request removal of the mortgage upon fulfilling their obligations under the construction agreement.

An occupancy permit certifying that the construction has been completed in accordance with the official designs (projects) should be obtained before a project is inhabited or used for its intended purpose.

Sale of lands within the scope of a commercial enterprise and land owned by limited liability companies and corporations are subject to VAT. The generally applicable VAT rate for land sales is 8%.

However, the VAT rate applicable for flats generated from urban regeneration that are up to a net area of 150 square metres is 1% and from 150 square metres and higher is 18%.

The VAT rate applied to sales of flats can be 8% or 18%, depending on the tax value of the flat concerned. VAT is paid by the purchaser.

The sale of lands held by limited liability companies and corporations for more than two years is exempt from VAT. However, this exemption does not apply to limited liability companies and corporations that conduct real estate business.

Methods such as division, mergers, share transfers, etc, are used to benefit from mutual tax agreements and exemptions. Moreover, REIFs and REICs are exempt from corporate income tax. These structures can also be used to mitigate tax liability.

There is no periodic tax applicable for the occupation of business premises. However, a fee determined by municipalities is paid to obtain and renew operation permits. There is no specific exemption for operation permit fees. 

Moreover, real property tax is paid to municipalities. The municipalities determine this tax according to the value of the respective lands. There are no significant exemptions for businesses with respect to real property tax.

Income generated by foreign investors who are not resident in Turkey is subject to withholding tax (eg, 20% for rental income). Rental income is subject to income tax for real persons and corporate tax for companies. The income tax applicable for real persons varies between 15% and 40% depending on the rental amount and TRY21,000 (applicable for year 2023) of the rental income from residences is exempt from income tax. Corporate tax is paid on the rental income generated by limited liability companies and corporations. General corporate income tax is currently 23%.

There is no general tax exemption for income tax and corporate tax accrued on rental income. However, if rental income is generated by a REIF or REIC, the relevant income is exempt from corporate tax.

Depreciation deductions may be made over buildings, facilities, etc, as per the method and rates determined under the legislation (eg, 2% of the building’s annual value). Moreover, expenses incurred for the respective real estate may also be deducted from the income subject to tax. Additionally, real persons can deduct a flat 15% of the income generated from the lease of real property.