This paper intended to analyze and to give some information and evaluations regarding the issue of arbitrability of lease agreements for immovable property under Turkish Law. First of all, we will give brief information about the idea of arbitration followed by arbitration in Turkish Law and relevant legislation. Secondly, this paper will proceed with the issue of arbitrability and its reflections under Turkish Law. Then we will delve into the characteristics of lease agreements and the types of disputes arisen from them and the application of arbitrability. Further, this paper will give the discussions under Turkish doctrine and jurisprudence followed by our evaluations and will conclude.

Introduction to Arbitration

Arbitration is an alternative dispute resolution method in which parties agree that the dispute will be resolved before an arbitral tribunal. The arbitration process, which aimed at saving time and money, is designated as an alternative to state courts. In order for parties to have their dispute resolved before an arbitral tribunal, their intentions must be precise and clear. This arbitration “agreement” can be one of the provisions in the master agreement or can occur as a separate agreement.

Arbitration in Turkish Law

In Turkish Law, arbitration is regulated under Civil Procedural Law numbered 6100, International Private Law and Procedural Law numbered 5718 and International Arbitration Law numbered 4686. Civil Procedural Law regulates the internal arbitration process in which the foreign element does not exist. Since the scope of this paper will be limited to the arbitration where foreign element persists, therefore, we will not proceed with the Civil Procedural Law. Further International Arbitration Law is a more special law regarding this paper’s topic we will deal with mainly International Arbitration Law and International Private Law and Procedural Law where applicable.

The scope of application of International Arbitration Law is regulated under Article 2: “This Law will apply to the disputes where the seat of arbitration is Turkey and foreign element occurs or the applicable law will be specified as this Law by parties or arbitral tribunal”. Putting aside the second scenario which almost never happens practically where the applicable law will be specified as International Arbitration Law, in order to comprehend the first scenario, the definition of foreign element plays a crucial role.

According to Article 2 of International Arbitration Law the following disputes are deemed as containing foreign element: “(i) where the parties to the arbitration agreement have their domiciles or habitual residences or places of business in different States; (ii) where one of the following is situated outside the State in which the parties have their domiciles or habitual residences or places of business; (1) the place of arbitration, which is determined in, or pursuant to, the arbitration agreement; [or] (2) a place where a substantial part of the obligations arising from the underlying contract is performed or a place where the dispute has the closest connection; (iii) where a shareholder of the company which is a party to the underlying contract that constitutes the basis for the arbitration agreement has brought foreign capital [into Turkey] in accordance with the laws concerning the encouragement of foreign capital or where a loan and/or guarantee agreement needs to be signed for the execution of the underlying contract; (iv) where, in accordance with the underlying contract or with the underlying legal relationship, the movement of capital or of goods shall be made from one country to another.“

Once the foreign element arises then the applicable law will be the International Arbitration Law under Turkish Law. We would like to draw your attention to that this applicable law will not be the law on the merits of the dispute. International Arbitration Law provides procedural rules to the arbitration process.

Arbitrability

As stated above, arbitration is a process where parties chose to have their disputes resolved not by state courts rather by the arbitral tribunal. However, not all types of disputes may be brought into the arbitral tribunal. Since arbitration is an alternative dispute resolution method where the Sovereign States decline their power to adjudicate in favor of private arbitrators, they set limits to the disputes to be resolved by arbitration.  In areas where State Sovereignty and relatedly public order may be felt more vigorously such as criminal law and family law, the parties in many cases can not choose arbitration as a dispute resolution method. This limit to arbitration set by the Sovereign States is called arbitrability.

Under Turkish Law, the question of arbitrability is regulated under Article 1 of International Arbitration Law. The provision states that “This Law will not be applicable to the matters related with rights in rem regarding immovable property in Turkey and to the disputes where parties can not determine freely.” Pursuant to this provision the disputes related to the rights such as ownership, usufruct, right of easement and mortgage, etc. in immovable property in Turkey may not be resolved by arbitration. Further in matters where parties can not enjoy their rights freely and decide the conclusion of the dispute such as criminal cases may not be brought before an arbitral tribunal. Since we established the arbitrability it is important for us to define the characteristics of the lease agreement for immovable property whether they fall under the scope of application of Article 1 or not.

Lease Agreements

Lease agreement is regulated under the Articles of 299 – 378 of the Turkish Code of Obligations numbered 6098. Lease agreement is a type of agreement where the lessor is under an obligation to make the property available for the lessee’s use during the term whereas the lessee is obliged to make periodic payment in exchange for that use. Considering the provisions regarding the lease agreement it can be stated that party autonomy is highly respected which means that parties can choose the modalities of obligations. In other words, save for the certain exceptions regarding residence and roofed workplaces, parties can choose the other party, price, conditions, term, and object of the lease agreement to which they will be a party.

Further, parties have rights in personam arisen from lease agreement which means these rights can not be put forward against the 3rd parties. Lessor will have a right to claim money from the only lessee whereas lessee will have a right to claim the property for its use from the lessor. For example, if the lessor, assuming the proprietor at the same time, transfers the ownership of the object to a 3rd person, the lessee can not put forward his / her rights arisen from the lease agreement to that 3rd person. Since it is clear that the lease agreement grants parties rights in personam we can draw the conclusion that it does not fall under the category of “the disputes related with the rights in rem for immovable property”. However, the question of whether the disputes related to lease agreement for immovable property fall under the category of “issues where parties can freely determine” is not a piece of cake.

In spite of the fact that in the lease agreement party autonomy is highly respected, however, Turkish Legislator put some limitations to it due to some socio-economic considerations. These limitations are mainly foreseen in the lease for residence and roofed workplace in the Articles of 339-356 of the Turkish Code of Obligations. For example, the lessor can not increase the price more than the annual consumer price index[1]. Further, the lessor may not terminate the contract for convenience before the 12th year from the beginning of the agreement[2]. For the reasons abovementioned, it is not crystal clear that party autonomy reigns in the lease law especially in the lease for residence and roofed workplace. Also, in some disputes of a lease agreement for immovable property, State Sovereignty may become more apparent. For example, eviction is a claim where the lessor enjoys this claim through execution offices which can resort to the right to use force if the lessee did not comply with the eviction order. Therefore, one may argue that eviction-related disputes may not be arbitrable since parties can not freely determine the consequences of the disputes. Since disputes arisen from lease agreements for immovable property may vary it will be necessary to have them analyzed in respect of arbitrability.

Therefore, in this paper disputes related with the lease agreement for immovable property will be divided into three as: (i) eviction, (ii) price determination and (iii) collection of payment.

i)Eviction

According to Turkish Law, the lessor will be entitled to file a lawsuit for eviction when the term expired or by extraordinary termination. Plus, if the object of lease agreement is a residence or roofed workplace the lessor will be entitled to file a lawsuit for eviction (i) when the lessee did not pay the monthly payment on time for two times within a year, (ii) need for housing or workplace of the lessor or its spouse/kinship, (iii) need for reconstruction and (iv) need for a new landlord. However, we would like to draw your attention to this situation lessor will only be entitled to file a lawsuit for termination of the agreement. After having a decision of termination, the lessor will need to apply for the eviction process. In another word having a court decision stating that the agreement is terminated does not trigger automatically the eviction process which will be conducted through execution offices.

Moreover, the lessor may directly apply to execution offices for eviction if the lessee did not pay the lease payment or if the lessor obtain an eviction commitment from the lessee.[3] This is called a direct eviction request before execution offices. In this scenario, the lessor does not have to obtain a court decision for eviction.

We may draw the conclusion that even if the lease agreement is terminated by a court decision the lessor still needs to apply for eviction to execution offices. Therefore, considering the eviction process may only proceed through execution offices that are entitled to use of force, the eviction-related disputes may not be resolved by arbitration. Due to the use of force by execution offices these disputes fall under the category of “the disputes where parties can not freely choose”. Therefore, we are of the opinion that eviction-related disputes are not arbitrable.

The preponderant view of Turkish doctrine states that eviction-related disputes may not be resolved by arbitration as well. Although the Turkish Court of Cassation which states in many of its decisions that disputes related to lease agreements are not arbitrable, the Court decided in one of its decisions that the eviction claim between two merchants is arbitrable. Therefore we can conclude that the Court of Cassation takes the parties’ identity into consideration when evaluating whether the dispute arising from the lease agreement is arbitrable. However, this Court of Cassation’s approach is not well-established case law. Therefore, we are of the opinion that the Court of Cassation in a prospective dispute would be most likely to reject the idea of arbitrability of eviction-related disputes.

ii)Price Determination

Price determination is regulated in Article 344 – 345 of the Turkish Code of Obligations. Pursuant to Article 344, the lessor is not able to increase the price more than the annual consumer price index. Further, after 5 years lessor may apply to a court for the increase of prices more than the annual consumer price index. The Turkish legislator set forth these limits in order to protect the lessee which is deemed socio-economically disadvantaged.

The Court of Cassation states that disputes related to the price determination may not be resolved by arbitration. The Court based its arguments that even if parties can freely determine the price for the lease they can do so within certain limits set by law.[4]  This approach of Court of Cassation is severely criticized by Turkish authors on the ground that this approach is beyond the ratio legis.[5][6] They oppose the approach of Court of Cassation stating that every other areas where party autonomy is highly respected have also limits set by laws such as mandatory provisions of law.

Further, we would like to draw your attention to that these limits on the increase of lease prices are only foreseen for the lease of residence and roofed workplace. Should you have a lease agreement of real estate (land etc.) without a residence or roofed workplace, then this limit does not apply. Therefore we are of the opinion that the disputes related to the price determination regarding the lease of land or real estate may be resolved by arbitration. Otherwise, there would be a risk that the Turkish Courts may deem the lease agreement for residence or roofed workplace is non-arbitrable.

Moreover, workplaces in shopping malls need to be taken into consideration. Because in their lease agreement, the lease price is determined as a fixed price plus some percentage of their turnover. Some Turkish authors claim that these lease agreements should be governed not by provisions of a lease for residences and roofed workplaces but by a usufructuary lease. If we deem these agreements as a usufructuary lease, then the protective provisions of residences and roofed workplaces do not apply. Therefore, we may draw the conclusion that since in these agreements socio-economic concerns do not exist, the Courts may approach them as arbitrable. However, this depends on the qualifications of the agreement by courts. Nevertheless, we are of the opinion that lease agreement for workplaces in shopping malls there is a slight chance of qualified as arbitrable.

iii)Collection of Payment

Another issue is that whether the lawsuit for the collection of unpaid claims arising from the lease agreement may be resolved before an arbitral tribunal. Almost all of the Turkish authors defend that these disputes are arbitrable. We can state that the Turkish Court of Cassation is on the same page with its one of the decision.[7]

However, we are of the opinion that even these purely claim-based disputes may be deemed as related to the public order by the courts and not arbitrable. Because if the lessee does not pay even one single periodic payment, the lessor will be entitled to apply for the eviction process before execution offices. Further, pursuant to Article 352 of the Turkish Code of Obligations, if the lessee does not pay the monthly payment within a lease term two times and be notified by the lessor with the justified ground, then this could trigger the termination and relatedly eviction process. Given the fact that the lessor may not terminate the lease agreement thus may not evict the house, this two times nonpayment may have serious consequences.  Therefore, considering the Court of Cassation’s approach which is highly concerned with the public order, there would be a risk for the dispute to be deemed as non-arbitrable. Therefore, it is clear that disputes related to the collection of periodic payments relate to the eviction process. We would like to draw your attention to that there would be a risk of the non-arbitrability approach by Courts.

Discussions under Turkish Doctrine and Jurisprudence

Under Turkish Law, as stated above, the disputes related to rights in rem of immovable property in Turkey may not be resolved by arbitration. Some authors in Turkish Law doctrine states that from the contrary of the wording of this provision lease agreements which does not relate with the rights in rem for immovable property can be arbitrable.[8] Further, the same author puts forward that even in disputes in which the laws of the country where the enforcement of arbitration is sought allow the issue to be resolved by arbitration then this dispute must be deemed arbitrable under Turkish Law.[9] The same author proceeds with the idea that disputes related to the immovable property that is outside of Turkey are arbitrable under Turkish Law.[10]

Other authors step further as stating that since the criterion for the arbitrability is the party autonomy the disputes related to rights in rem for immovable property may be resolved before the arbitral tribunal.[11] Because the parties can freely determine the consequences of the disputes related to rights in rem for immovable property such as they can settle or exonerate themselves.

After establishing the doctrine’s point of view regarding the issue we need to look at how the Courts approach the arbitrability of a lease agreement for immovable property. We can state that the general approach of the Court of Cassation is that the disputes arising from the lease agreement for immovable property may not be resolved by arbitration due to the public order concerns. The rationale behind this jurisprudence is to protect the socio-economically disadvantaged party which is the lessee. Although there is one decision in which the Court of Cassation states that eviction suit between two merchants is arbitrable. Further in one of its decisions Court of Cassation stated that the dispute at hand which requires the revision of land registry by restitution of share of immovable property is arbitrable.[12] However, we would like to draw your attention is that even though there are decisions given by the Court of Cassation in favor of arbitrability the general approach of the Court of Cassation is that the disputes related to lease agreement of immovable property are not arbitrable.

Conclusion

As per the explanations above, under Turkish Law matters related to rights in rem for immovable property and matters where parties can not freely determine are not arbitrable. Although lease agreements, where party autonomy is highly respected, grants rights in personam to parties may be deemed as non-arbitrable by Turkish Courts due to socio-economic considerations especially for the residence and roofed workplaces. Since disputes arisen from lease agreements vary, the nature of the dispute needs to be taken into consideration.

Eviction-related disputes are deemed non-arbitrable due to the fact that in the process the use of force may be resorted by execution offices. Even though in one of its decisions Court of Cassation stated that the eviction claim between two merchants may deem arbitrable there is not a well-established approach accepted by jurisprudence. Further, price determination issues are accepted as non-arbitrable by the Court of Cassation which is severely criticized by Turkish authors stating that this is beyond the purpose of the law. Another issue is that almost all of the Turkish authors claim that a lawsuit for the collection of lease payment must be deemed arbitrable, however, there is no well-established case law in favor of that opinion.

Therefore we are of the opinion that disputes arising from lease agreement for immovable property may not be deemed as arbitrable by Turkish Courts. In conclusion, if you have any arbitration agreement regarding the disputes arising from the lease agreement of immovable property in Turkey would be most likely to be deemed null and void except for the collection of unpaid lease payments. You must file a lawsuit before Turkish State Courts. Otherwise, your arbitral award would be most likely to face a setting award process according to Article 15 of International Arbitration Law. Therefore we advise you not to have an arbitration agreement for the disputes to be arisen from the lease agreement of immovable property in Turkey due to the abovementioned concerns.

To this point, this paper analyzed the arbitrability of a lease agreement for immovable property from the perspective of rights in personam v rights in rem. However under Turkish Law rights in personam may be enforced through 3rd parties by annotation to the land registry. This will be another paper’s subject. For further inquiries, we would be delighted to assist you.

Kind regards,

Att. Burak BAYRAM

REFERENCES

AKINCI, Ziya. “International Arbitration”, İstanbul 2020

ÖMEROĞLU, Ekin. “Immovable Tenancy Contracts In Terms Of Applicable Law, International Jurisdiction And International Arbitration Under The Turkish Law.”, Journal of Turkish Bar Association 2016

ŞANLI, Cemal/ESEN, Emre/ATAMAN FİGANMEŞE, İnci. “Private International Law, İstanbul 2021.

PÜRSELİN, Hatice Selin. “Arbitrability of Tenancy Contracts within the Scope of the International Arbitration Act” Marmara University Law Faculty Journal, June 2021

YILMAZ, Süleyman / ÇAVUŞOĞLU, Gökçe Filiz. “The Concept Of Arbitrability In Turkish Law And Arbitration For The Disputes Arising Out Of Immovable Properties.” İnönü University Law Faculty Journal (10/2), 2019.

[1] TCO ARTICLE 344:The agreements of the parties regarding the rental price to be applied in the renewed rental periods are valid, provided that they do not exceed the rate of change compared to the twelve-month averages in the consumer price index in the previous rental year. This rule also applies to rental agreements with a term longer than one year.

[2] TCO ARTICLE 347: Unless the tenant notifies at least fifteen days before the expiration of fixed-term contracts, the contract is deemed to be extended for one year under the same conditions, unless the tenant is leased for housing and roofed workplace. The lessor cannot terminate the contract based on the expiry of the contract period. However, at the end of the ten-year extension period, the lessor may terminate the contract without giving any reason, provided that he notifies at least three months before the end of each extension year following this period.

[3] Yargıtay 19. Hukuk Dairesi, T. 16.12.2004, E.2004 / 5413, K. 2004/ 12656

[4] Yargıtay 3. Hukuk Dairesi, T. 2.12.2004, E. 2004 / 13018, K.2004 / 13409

[5] ÖMEROĞLU page 394.

[6] YILMAZ / ÇAVUŞOĞLU page 602

[7] Yargıtay 6. HD. T. 30.01.2013, E. 2012/9581, K. 2013/1334

[8] Akıncı page 356

[9] ibid. page 353

[10] ibid. page 353

[11] Şanlı/Esen/Ataman Figanmeşe, page. 771

[12] Yargıtay 15. HD. T. 31.5.1979, E. 1979/1195, K. 1979/1330