Because they involve the transfer of ownership, promise-to-sell contracts in exchange for land shares and flat-for-land construction contracts (kat karşılığı inşaat sözleşmesi) cannot be terminated automatically simply by one party’s unilateral declaration of intent reaching the other party. These contracts can only be brought to an end by the mutual agreement of the parties (ikale – termination by mutual consent) or by a court’s termination judgment becoming final.
Construction and promise-to-sell contracts in exchange for land shares are among the most complex contract types in Turkish law of obligations. By their nature, these contracts have a dual-type (mixed) legal character. On the one hand, they contain the contractor’s obligation to construct a building on the landowner’s property in accordance with zoning legislation (the contract-for-work element); on the other hand, they contain the landowner’s obligation to transfer ownership of certain land shares to the contractor in return for that construction (the real estate promise-to-sell element). The combination of these two different performances subjects the validity and termination of the contract to far stricter conditions than ordinary contracts. For contracts of this kind involving the transfer of ownership of real estate, the legislator has made a formal requirement mandatory for validity: the contract must be drawn up by a notary in official form.
The fact that the contract is subject to such strict formal requirements and aims directly at the transfer of ownership is also reflected in the process of ending it (termination or rescission). The frequently asked question “Can a promise-to-sell contract in exchange for land shares and a flat-for-land construction contract be terminated unilaterally?” is answered firmly, under the settled case law of the Court of Cassation (Yargıtay) and the provisions of the Turkish Code of Obligations (TBK), as “No, it cannot be terminated by a unilateral declaration of intent”. Such contracts can only be validly dissolved either where the parties reach full agreement on termination (ikale / termination by mutual consent), or where, if there are just grounds, a lawsuit is filed and the court’s judgment of termination/rescission becomes final. A unilateral notice of termination or declaration, even if it reaches the other party, does not by itself end the contract and produces no legal effect.
1. Why the Contract Cannot Be Terminated Unilaterally and Its Legal Basis
The reason why construction contracts in exchange for land shares cannot be terminated by a unilateral declaration lies in the undertaking to “transfer shares at the land registry (tapu)” contained in the contract and in the principle of protecting the right of ownership. Although, as a rule, the employer in a contract for work has the power to terminate the contract by a unilateral declaration, this general rule loses its validity once the transfer of land shares and of ownership comes into play. As consistently emphasised in the decisions of the Assembly of Civil Chambers of the Court of Cassation and in the settled case law of the 15th Civil Chamber of the Court of Cassation and of the 23rd Civil Chamber, which for a period was responsible for these disputes, in construction and promise-to-sell contracts in exchange for land shares, the mere arrival of a unilateral declaration of termination/rescission at the other party is not sufficient to produce legal consequences.
Such contracts can only end through one of the following two legal routes:
- Agreement of the Parties on Termination (Mutual Consent/Ikale): The landowner and the contractor, as the parties to the contract, may mutually agree to end the contract between them. In that case, the contract is deemed to have ended as of the date on which the parties’ matching declarations of intent on termination/rescission coincide, and the liquidation process begins.
- The Court Judgment Becoming Final: Where there are just grounds, such as one of the parties breaching the contract, falling into default or abandoning the work, the party seeking termination must apply to the court and file a lawsuit. The contract formally ends on the date on which the judgment of termination or rescission given by the court as a result of that lawsuit becomes final.
If there is no agreement between the parties on termination, and one party wishes to continue the contract while the other seeks termination on just grounds, the matter must be decided by a court and that judgment must become final. Until the court judgment becomes final, the parties’ contractual obligations legally continue.
2. Legal Consequences of Retroactive Termination (Rescission) and the Liquidation Process
Since flat-for-land construction contracts are, by their structure, as a rule classified as contracts with instantaneous performance, the legal effect of termination is “retroactive” (rescission of the contract). The statutory basis for retroactive termination is Article 125/III of the Turkish Code of Obligations (TBK). In the event of rescission, the contractual relationship is dissolved with retroactive effect and the parties are mutually released from their obligation to perform. The most fundamental practical consequence is that the parties are obliged to return to the legal and factual position they were in before the contract, as if the contract had never been concluded.
Once retroactive termination is accepted, the liquidation process begins. The basic principle of liquidation is that the parties mutually return the performances they have rendered to each other under the rules on unjust enrichment. In this context:
- For the Landowner: The landowner becomes entitled to reclaim ownership of the land shares transferred to the contractor for the construction. If shares have been transferred at the land registry or a condominium servitude (kat irtifakı) has been established, the landowner may file an action for cancellation of title and registration, seeking cancellation of the title deeds registered in the contractor’s name and their registration in the landowner’s own name.
- For the Contractor: In return for the title deeds it will have to transfer back to the landowner because of the retroactive termination, the contractor becomes entitled to claim the value of the actual works it has carried out on the construction site. Since the contractor cannot dismantle and remove the physical structures built on the landowner’s property, these works remain in the landowner’s assets. As this would constitute unjust enrichment of the landowner, the contractor may demand payment of the monetary value of the lawful and useful works that have entered the landowner’s assets. This amount must be paid to the contractor regardless of whether the termination was justified, because no one may retain enrichment that has accrued to their assets without just cause.
3. The Rights of Third Parties and the Limits of the Principle of Reliance on the Land Registry
Another situation frequently encountered in flat-for-land construction projects is that the contractor, in order to finance the construction, sells to third parties the land shares or the independent units under condominium servitude transferred to it by the landowner. Where the landowner terminates the contract retroactively on just grounds, the legal position of these third parties who bought independent units from the contractor is a matter of considerable debate.
According to the settled practice of the Court of Cassation, title transfers made to the contractor under construction contracts in exchange for land shares are not final transfers of ownership but are in the nature of an “advance payment” conditional on completion of the construction. When the contract is terminated retroactively, since the contract becomes void from the outset, all transfers made to the contractor lose their basis and constitute unjust enrichment. For this reason, the title transfers made by the contractor to third parties also become invalid.
At this stage, third parties cannot demand protection of their title deeds by invoking the principle of reliance on the land registry (good faith) under the Turkish Civil Code (TMK). This is because third parties acquiring title on the basis of a flat-for-land construction contract are expected to know, or ought to know, that there is a construction contract behind the title and that these titles may be cancelled if the contractor fails to perform. Therefore, in a retroactive termination, the good-faith defences of third parties who bought shares from the contractor are not heard, and at the landowner’s request the land registry entries of these third parties are cancelled and registered in the landowner’s name. In such cases, the courts must issue clear, enforceable judgments that leave no room for doubt regarding the cancellation of third parties’ title deeds and the removal of condominium servitudes, in accordance with Article 297 of the Code of Civil Procedure (HMK).
4. Determining the Value of the Works, Expert Examination and Calculation Method
Once the judgment of retroactive termination becomes final, or the parties’ intentions to terminate coincide, the correct calculation of the value of the lawful and useful works to which the contractor is entitled is the most important technical stage of the case. The following basic steps and rules must be observed in this calculation:
- Determining the Valuation Date: The reference date for calculating the value of the works is the moment of termination. If termination occurred by court judgment, the date on which the judgment became final; if it occurred by agreement of the parties, the date on which their intentions coincided (agreement was reached) is taken as the valuation date.
- The Local Market Price Principle: The value of the works must be calculated according to the local market prices on that valuation date. The local market price expresses the construction value of the works under free market conditions in that area. The most important legal rule in this calculation is that contractor’s profit and VAT (KDV) are already naturally included in local market prices. Therefore, it is legally not possible to add contractor’s profit or VAT on top of the value determined by the expert panel according to local market prices.
- Forming the Expert Panel and On-Site Inspection: To determine the value of the works, the court should appoint a three-member expert panel consisting of an architect, a civil engineer and a specialist in tax and SGK legislation. An on-site inspection should be carried out at the construction site together with this panel to establish the actual state of the works on the spot, and the works that comply with the project and zoning legislation (lawful works) should be identified. Since works that violate zoning legislation, are unlicensed or must be demolished cannot be regarded as “useful works”, their value cannot be claimed from the landowner.
- Apportioning General Expenses: General expenses incurred by the contractor at the beginning of construction (for example, project fees, excavation costs, site set-up, etc.) cannot be added directly to the value of the works. The portion of these expenses corresponding to the proportion of actual works carried out should be determined and included in the value of the works. The portion of expenses attributable to the remaining, unbuilt part of the construction may be claimed by the contractor from the landowner as of the termination date. The amount of the necessary expenses, apportioned to the performed part of the work, must either be paid or be accepted as included in the work price already paid.
5. Claims for Negative Damages and the Role of Fault
While the contractor’s right to the value of the works in a retroactive termination does not depend on fault, the “negative damages” (reliance losses) that the parties may claim from each other are based entirely on fault. Under Articles 106/II and 108 of the repealed Code of Obligations No. 818 and the final paragraph of Article 125 of the Turkish Code of Obligations No. 6098, the party rescinding (terminating) the contract may claim compensation for the negative damages it has suffered if the other party was at fault in falling into default. The party claiming negative damages must itself be free of fault and bear no responsibility for the default.
In legal doctrine and in Court of Cassation decisions, negative damage is defined as “the loss suffered because reliance on the validity or completion of a contract proved to be in vain when the contract had no effect or was not completed, a loss that would not have been suffered had the contract not been concluded”. In other words, negative damage covers expenditure made in reliance on the contract which is wasted when the contract is terminated. The main items falling within the scope of negative damages are:
- Expenses incurred to conclude the contract (notary fees, contract duties and taxes),
- Expenses incurred to perform the contract and to accept the counter-performance (the share of project, permit and site expenses attributable to the unbuilt part of the construction),
- Losses resulting from missing the opportunity to conclude a more advantageous contract with someone else because of reliance on the validity of the contract (loss of opportunity),
- Litigation costs and attorney’s fees incurred in bringing and pursuing the lawsuit.
If the landowner is not at fault in the termination of the contract, or if the contractor has fallen into default through its own fault (for example, by failing to complete the construction on time or by abandoning it), the contractor has absolutely no right to claim negative damages from the landowner. In order to claim negative damages, the contractor must prove that the landowner was at fault in falling into default.
6. Liquidation of SGK Premiums, Taxes and Building Inspection Costs
Another matter frequently disputed in the liquidation of flat-for-land construction contracts concerns SGK (Social Security Institution) premiums, property taxes and building inspection service fees paid during construction. Who is responsible for these items and how they are to be settled after termination are governed by specific rules:
- Building Inspection and Property Tax Costs: Under the Building Inspection Law, the legal party to and addressee of the building inspection service contract is the landowner. Likewise, under the property tax legislation, the landowner is the taxpayer liable for property tax on the real estate. Even if the contract provides that these costs will be paid by the contractor, since the landowner is the legally liable party, these payments are initially assessed in the landowner’s name. If the landowner has made these payments personally and seeks to recover them from the contractor, it may claim them from the contractor under the rules on unjust enrichment, provided it proves the amounts paid on the contractor’s behalf. However, where the contractor has collected or will collect from the landowner the SGK premiums and taxes of the workers employed on the works it carried out as part of the work and construction price, it must be borne in mind that the payment obligation lies with the contractor.
- SGK Premiums for Workers: The contractor is directly responsible for paying the SGK premiums and taxes of the workers employed on the construction. In the liquidation case, it should be investigated whether the contractor has paid these premiums and whether there is any debt to SGK, and the amount of SGK premiums for which the contractor is responsible should be clarified.
7. Specific Court Decisions and Examples from Practice
The Court of Cassation decisions and specific cases in the file clearly show how the legal principles explained above are applied to disputes:
A) Retroactive Termination Due to Abandonment of Construction (Bilecik Example): A construction contract in exchange for land shares, dated 04.04.2016 and numbered 4056 in the journal of the Bilecik 1st Notary, was concluded between the landowner and the contractor G. Yapı İnş. San. ve Tic. Ltd. Şti. Under the contract, the contractor would construct a building on the landowner’s plot and deliver 2 independent units of the building, to be built as permitted by the zoning status, to the landowner. The contract provided that the building permit would be obtained within 90 days and delivery made within 18 months of the permit date. However, during the proceedings, it was established by expert report that, although only 5 months remained until the delivery date, the physical completion rate stood at only 10.7% and the contractor had abandoned the construction site. Since it was clearly understood that the contractor could not complete the construction within this period, the court found the landowner’s request for retroactive termination of the contract entirely justified, and ruled for a declaration of termination and the cancellation of the condominium servitudes.
B) Mutual Termination and Liquidation by Agreement of Intentions (Ankara Example): In the file of the Ankara 2nd Commercial Court of First Instance numbered 2012/447 E. (later Ankara 19th Civil Court of First Instance 2013/19 E. and, after reversal, Ankara 19th Civil Court of First Instance 2018/521 E.), the landowner cooperative sought termination of the contract by a statement of claim dated 31.08.2012. The defendant contractor, by a petition dated 09.11.2012, declared that it accepted the landowner’s request for termination and sought payment of the value of the works it was entitled to and of its negative damages. In this specific case, the date on which both parties’ intentions to terminate coincided was 09.11.2012. The Court of Cassation stated that this date, on which the parties’ intentions coincided, must be accepted as the termination date and that the value of the works must be calculated according to local market prices on that date.
The Court of Cassation also emphasised that in this dispute the court should have carried out an on-site inspection with a 3-member expert panel consisting of an architect, a civil engineer and a specialist in tax and SGK legislation, and that, since contractor’s profit and VAT are already included in the value of the works, they should not be awarded separately. As regards interest, since there was no proper notice of default before the lawsuit, it held that statutory interest should run from the date of the lawsuit for the portion claimed in the original statement of claim, and from 04.04.2017, the date on which the amendment fee was paid, for the portion increased by amendment of the claim (ıslah); the local court’s judgment to the contrary was reversed on the merits.
Because they involve the transfer of ownership and are subject to official form, promise-to-sell contracts in exchange for land shares and flat-for-land construction contracts cannot be terminated by the unilateral declaration of one of the parties (for example, by sending a notice). These contracts can legally be ended only by the parties’ mutual intention to terminate (ikale) or, where there are just grounds, by a court judgment of termination/rescission becoming final following a lawsuit.
In the event of retroactive termination of the contract (rescission), the parties are obliged to return their performances to each other in kind with retroactive effect, as if the contract had never been concluded. In this liquidation process, while the title deeds transferred to the contractor for financing purposes revert to the landowner, the good-faith defences of third parties who bought independent units from the contractor are not protected under the principle of reliance on the land registry, and their title deeds are cancelled. While the landowner recovers its title deeds, the contractor may in turn claim from the landowner the value of the lawful and useful works it has carried out, based on local market prices applicable on the termination date. In calculations based on local market prices, contractor’s profit and VAT cannot be added separately since they are already included in the price. While the value of the works may be claimed regardless of fault, negative damages that the parties claim from each other can be awarded only if it is proven that the other party was at fault in falling into default. For a fair liquidation, it is essential that the courts, through expert panels, carry out calculations in line with these statutory methods and render clear, enforceable judgments.
Source: Hüseyin Kovan, Flat-for-Land Construction Contracts in 100 Questions (100 Soruda Kat Karşılığı İnşaat Sözleşmeleri)
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