Due to the fact that lease agreements are of interest to the general public and the high inflation rate in our country, the determination of the increase rates of rental fees in residential and roofed workplace leases is a controversial issue that is always on the agenda of the public. Turkish Code of Obligations numbered 6098 ("TCO") regulates provisions regarding the determination of the rental fee in residential and roofed workplace leases under Article 343 and following articles. Article 343 of the TCO regulates that the lease agreements cannot be amended against the lessee, except for the determination of the rental fee.
Article 344/1 of the TCO introduces a regulation on the increase of the rental fee. According to the relevant provision, provided that the increase rate does not exceed the twelve-month averages of the consumer price index of previous lease year, the agreements of the parties regarding the rental fee to be applied to the renewed lease periods are valid. This rule also applies to lease agreements with a term longer than one year. According to the relevant provision, the upper limit of the increase rate on the rental fee is determined and this rate is determined as the twelve-month average of the consumer price index. If the lessee and the lessor determine a higher rate for the rent increase in the lease agreement, this rate will be invalid. In other words, if the parties have agreed to increase the rental fee by a certain rate or amount each year and this increase rate is higher than the twelve-month average of the consumer price index, the rental fee increase will be realised at the rate of the twelve-month average of the consumer price index.
In the event that the lease agreement between the parties is an agreement for a period longer than one year and the rental fee is determined separately for each year at the time of signing the agreement and the determined fees are above the twelve-month average of the consumer price index, then the determined rental fees will also be invalid and the twelve-month average of the consumer price index will be determined as the average increase rate.
A temporary article was added to the TCO on June 8, 2022 and it was regulated that the agreements regarding the rental fee to be applied in the renewed lease periods until July 1, 2023 in terms of residential leases shall be valid, provided that the increase do not exceed 25% of the rental fee of the previous lease year. It is also regulated that if the rate of change in the twelve-month averages of consumer price index of the previous lease year remains below 25%, the rate of 25% will be valid. This period has been extended until July 1, 2024. Within the specified periods, the rental fee cannot be increased by more than 25%. However, it should be mentioned that this regulation is only valid for residential rents.
Article 344/2 of the TCO regulates the situation where the parties have not reached any agreement in the lease agreement regarding the increase of the rental fee. In the event that the parties have not reached an agreement on the increase rate of the rental fee, the rental fee shall be determined by the judge according to equity, taking into account the condition of the leased property, provided that it does not exceed the twelve-month average of the consumer price index of the previous lease year. In the event that the increase rate of the rental fee is not determined in the lease agreement and the lessor has not increased the rental fee for a certain period of time and requests an increase after years, it is a controversial issue how to evaluate the increases not made in the past years. In this case, according to the opinions in the doctrine, an increase should be made over the rental fee in the year in which the increase is requested, and the fact that no increase has been made for a certain period of time will not affect the increase to be made later.
The TCO limits the increase on the rental fee for the first 5 years with the twelve-month average of the consumer price index. However, the TCO contains a separate regulation regarding the increases to be made at the end of the 5th year. According to the Article 344/3 of the TCO, regardless of whether an agreement has been made by the parties on this matter or not, in lease agreements with a term longer than five years or renewed after five years and at the end of each subsequent five years, the rental fee to be applied in the new lease year shall be determined by the judge in an equitable manner, taking into account the rate of change in the consumer price index according to the twelve-month averages, the condition of the leased property and the comparable rental fees. It should be noted that it is not obligatory to request the judge to determine the fair market value at the end of the 5th year. Even if such request is not asserted, the increase will be made according to the twelve-month average of the consumer price index. However, not requesting the determination of the fair value at the end of the 5th year does not prevent this request to be asserted in the following years. The parties may also request this determination in the 6th or 7th years.
Another problem encountered in practice is the commencement date of this 5-year period if the parties execute a new lease agreement. According to an opinion in the doctrine, if the new lease agreement is a continuation of the previous lease agreement, the 5-year period will commence from the moment that the first lease agreement is executed. In cases where the lessor or the lessee has changed, it should be accepted that a new lease agreement has been executed, and in this case, the 5-year period should be started as of the execution of the new lease agreement.
It is also important how the rental fee will be determined by the judge at the end of 5 years. The TCO sets the rate of change according to the twelve-month averages in the consumer price index, the condition of the leased property and precedent rental fees as criteria for the determination of the rental fee by the judge. Among these criteria, the first criterion to be considered by the judge is the arm's length rent. It is stated that the precedent rental fee is the amount reached by the stabilised rental fees accepted in the lease agreements executed regularly in a certain environment. Precedent rental fee is determined by experts.
In the event that the rental fee is determined in foreign currency, Article 344/5 of the TCO regulates the manner of the increase in the rental fee. However, it should be mentioned that the Communiqué on Decree No. 32 on the Protection of the Value of the Turkish Currency ("Communiqué") contains restrictions on the determination of the rental fee with the foreign currency lease agreements. The Communiqué prohibits residents of Türkiye from determining the agreement fee and other payment obligations arising from the real estate lease agreements, including residential and roofed workplaces, which is located in Türkiye in foreign currency or indexed to foreign currency.
However, in real estate lease agreements to which (i) Turkish residents who Not being a citizen of the Republic of Türkiye or (ii) non-residents located in Türkiye which have branches, representative offices, offices, liaison offices, companies that directly or indirectly have fifty percent or more shareholding or control, it is possible to agree on the agreement fee and other payment obligations arising from these agreements in foreign currency or indexed to foreign currency. In this context, in cases where the rental fee will be determined in foreign currency, it will be necessary to pay attention to the restrictions within the scope of the Communiqué.
In cases where the lease agreement can be determined in foreign currency in accordance with the Communiqué, it is important to determine the increase rate in the rental fee. The TCO regulates that if the rental fee is agreed in foreign currency, the rental fee cannot be changed until five years have passed. When determining the rental fee after five years, the increase rate is determined in accordance with equity, taking into account the changes in the value of the foreign currency and the condition of the leased property and the precedent rental prices.
One of the problems encountered in practice is the question of whether this increase will be applied when the parties determine the rental fee in foreign currency and determine an increase rate in the rental fee for each year. The relevant provision of the TCO is clear and this provision is in the nature of a relative mandatory provision, and it is not possible to agree otherwise against the lessee under the agreement. In other words, even if an increase rate is agreed under the lease agreements determined in foreign currency, an increase cannot be made for five years. However, it is possible to request the determination of the fair value with the passing of the 5th year.
Another problem to be addressed is whether it is possible for the parties to foresee an increase after the 5th year. According to the doctrine, it should not be possible to determine an increase after the 5th year. According to this view in the doctrine, the reason for limiting the prohibition of increase to 5 years is that the determination of the fair value can be requested after the 5th year.
In cases where the rental fee is determined in foreign currency, the TCO has made it possible to file an adaptation lawsuit within 5 years in case of sudden and significant changes in the foreign currency exchange rate. Thus, in cases where the rental fee is determined in foreign currency and the rental fee changes significantly due to the sudden increase in the foreign exchange rate, the lessee has the right to file a lawsuit without waiting for the 5-year adaptation lawsuit period regulated under the TCO. However, in practice, in order to prevent the lessee from filing a lawsuit based on the provisions on hardship and requesting the adaptation of the rental fee, lessors introduce provisions in the agreement, which prohibits to file a adaptation lawsuit. In this case, it is important to evaluate whether Article 138 of the TCO regulating the hardship is mandatory or not. There are quite different opinions in the doctrine on this subject. However, according to an opinion in the doctrine, it is necessary to accept that Article 138 of the TCO is mandatory, even though it is clearly stated in the agreement that adaptation cannot be requested, and the addition of such provisions to the agreement should be characterised as a violation of the rule of honesty according to Article 2 of the Turkish Civil Code.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
