The world has taken its stance against the Covid-19 pandemic, which has spread rapidly around the globe and whose effects are getting stronger in Turkey in the last few weeks. The pandemic that caused by the Covid-19 has shown its deadly impacts on 194 countries so far.
The Covid-19 was declared as a pandemic by the World Health Organization ("WHO") as of March 11th, 2020, raising the alarm levels due to reasons of virus' spread speed, seriousness, and authorities' failure to take necessary precautions.
In Turkey, however, the first case was announced on March 11th, 2020. Following these developments, the "Economic Stability Shield" was publicly unveiled by President Recep Tayyip Erdoğan and citizens were urged to stay at home and to reduce social activities as much as possible to minimize the impact of the Covid-19 pandemic.
As of the date of this article, the lockdown was imposed in countries including India, Italy, Spain, France, Belgium, Serbia as well as Iraq and Tunisia. It was declared that the stay-at-home and self-isolation recommendations made by officials in some countries including Turkey may be turned into an official lockdown. Many experts and authorities around the globe state that the Covid-19 pandemic, which may be deemed as a social disaster by law, is the worst disaster ever happened to humanity since World War II.
Due to the unexpected speed of the spread of the Covid-19, some precautions are being taken by individuals as well as states and these have affected daily operations, commercial relations, and contracts in the ordinary course of life.
In the world, as in Turkey, how the Covid-19 pandemic will affect the legal relationships is a matter of debate. The approach has taken by countries in general around the globe including U.K, Australia, Singapore, China, suggests that the Covid-19 pandemic should be considered as a force majeure (the act of god) and contractual obligations should be evaluated accordingly. Moreover, the China Council for The Promotion of International Trade, accredited with China's Ministry of Commerce, announced on January 30th, 2020 that force majeure certificates have been issued for Chinese Enterprises, where if necessary, to be submitted for disputes with foreign trading partners as a result of the Covid-19 pandemic control measures.
As far as it can be seen in terms of lease contracts, heated discussions have taken place in nearly all of the developed legal systems as to whether Covid-19 pandemic constitutes a "force majeure event" and obligations under the lease contracts will continue to be performed. Similarly, among Turkish jurists' different views have been presented concerning the legal implications of the Covid-19 pandemic especially in terms of lease and employment contracts. The basis of the discussion is to determine which legal instruments to be resorted to in reinstating the balance of interest among the parties on terms such as impossibility or excessive difficulty of performance, default or defect, or termination/liquidation of the contractual relationship. Most of the contracts do not include special provisions to explain the actions that the parties may apply if the Covid-19 pandemic we are currently experiencing occurs and the legal consequences thereof are inaccurate. It seems, therefore, that not only the legislators but also those who prepared such contracts were caught unprepared by this pandemic.
In this article, the Covid-19 pandemic's possible effects on lease contracts will be evaluated. The following analyses focus on the legal instruments which may be resorted to due to an imbalance of interest among the parties caused by the Covid-19 pandemic in lease contracts either by reinstating balance or termination/liquidation of the contractual relationship. In terms of scope, however, it is essential to clarify in advance that if the lease contract concluded between the parties, contains a special provision concerning Covid-19 pandemic then firstly, due to the "freedom of contract" principle, this provision's applicability shall be evaluated.
It is left to readers' own discretion to evaluate that this pandemic, which turned into a human tragedy, will have more comprehensive and severe legal implications than those already presented in this article.
I. Shall the Covid-19 Constitute a Force Majeure Event?
Within the framework of current developments, the question of how the lease contracts, which is the subject of this article and piqued the major part of society's interest will be affected by the Covid-19 pandemic, brings our attention to the force majeure event.
Following the completion of the contract, its conditions may change due to the pandemic, and as a matter of fact, these changes may cause difficulties in a way that it cannot be expected from the obligor to perform its obligations. In this case, the strict implementation of the principle of "pacta sunt servanda" may not sit well with the concept of "contractual justice" and may necessitate an evaluation of the force majeure event.
Although the term "force majeure" is not stipulated under the general provisions of the Turkish law, the definition, and impacts on contractual relations set forth in the special laws including Public Procurement Contracts Law No. 4735 and Turkish Petroleum Law No. 6491. Natural disasters, legal labor strike, pandemics, general or partial mobilization are presented in respective laws as examples of force majeure events.
Although the concept of "force majeure" and its conditions are not stipulated under the general Turkish laws, it is recognized in the Turkish legal doctrine and case law and its scope of the implementation has been framed. As per a Turkish Court of Appeal decision, for instance, in order for an event to be deemed as force majeure, it must be (i) unpredictable (ii) inevitable and (iii) of an external origin.
In another decision, the Turkish Court of Appeal ruled that force majeure is an extraordinary event that cannot be foreseen or avoided, which results in an absolute and inevitable violation of a general behavioral norm or debt that occurred beyond the scope of obligor's or debtor's operations and enterprise. The same verdict considers force majeure events such as earthquakes, floods, fires, epidemics as natural disasters and describes them as the events that occur beyond the control of the parties and results in the impossibility of performance following the completion of the contract and cannot be foreseen. The party fails to perform its contractual duties by a force majeure event is to be relieved from those duties.
In this respect, today, it is possible for the Covid-19 pandemic which has spread and continues to spread rapidly among and within nearly all countries in the world, to be objectively concluded as a force majeure event due to the legal regulations, as well as judicial decisions, are given during the epidemic diseases occurred in previous years.
Even if the Covid-19 pandemic may be deemed as a force majeure event objectively, this detection is not enough to invoke the force majeure claim by itself. In the event that the epidemic disease does not render the performance of the obligation impossible, the excessive difficulty of performance possibility may be considered provided that the conditions have been met.
As per Article 138 of the Turkish Code of Obligations ("TCO"), the party that has been negatively affected by the unexpected event may request the adaptation of the contract in accordance with the changed circumstances before the court provided that; (i) unexpected event, which was unforeseen and not expected to be foreseen by the parties at the time of the execution has occurred beyond the control of the obligor and changed the existing facts to the detriment of an obligor to the extent that the performance had become excessively burdensome for the obligor in light of the principle of good faith at the time when the agreement was executed and (ii) the obligations have been performed by reserving the rights arising from Article 138 of TCO or the obligations have not been yet performed under the contract. If the adaptation of the contract is not possible, the party that has been negatively affected may revoke the contract.
II. The Impact of Force Majeure Event on Lease Contracts
In this respect, it may be appropriate to separately evaluate residential and roofed workplace leases.
A. With Regard to Residential Leases
It is not relatively possible to say that the pandemic constitutes an impossibility of performance or excessive difficulty of performance under the Residential Leases.
In this regard, -for instance-since the residence is the place that people rent in order to maintain their life in any case, even though the employee has been urged by the employer to use the unpaid leave or the employer has terminated the employment contract due to the negative impact of the pandemic on the economy, it is not possible from the legal perspective to abstain from fulfilling its obligations under the lease agreement regardless of whether there is a force majeure event.
B. With Regard to Workplace Leases
The situation is more complicated under workplace lease contracts. It would not be realistic to consider a sole legal remedy with respect to any kind of workplace lease contract. Therefore, the workplace lease contracts should be evaluated under three category listed as; (i) the enterprises of which operations have been temporarily suspended based on a decree of the Ministry of Interior Affairs, (ii) the workplaces which have been entirely closed upon precautions taken by the lessor or the lessee, (iii) the workplaces which are still operating their business activities.
1. With Regard to the enterprises which have been temporarily suspended based on a decree of the Ministry of Interior Affairs,
Initially, it is worth pointing out that in order to prevent the spread of the disease in the Public Recreation and Entertainment Places (where people found together in a very close distance, which may increase the risk for the spread of the disease); theatre, cinema, show center, concert hall, engagement/wedding hall, restaurant / café with music/music, casinos, pub, tavern, coffee shop, café, cafeteria, country garden, hookah lounge, hookah cafe, internet lounge, internet cafe, each activity of all kinds of game halls (arcade, PlayStation, etc.), all kinds of indoor playgrounds (including shopping malls and restaurants), tea garden, association lounges, amusement park, swimming pool, Turkish bath, sauna, spa, massage parlous, SPA and sports centers have been temporarily suspended as of 24:00 on Monday, 16.03.2020 based on a Ministry of Interior Additional Circular distributed to all Provincial Governorships and Border Administration Civil Authorities.
Apparently, many of those listed in the related Circular is the enterprises that operate business activities and it is very likely that those business activities are carried out in leased properties.
As such, first of all, it is worth pointing out the circular dated March 22nd, 2020 issued by the Ministry of Environment and Urbanization. In the Circular that has been sent by the Ministry to 81 Provincial Governorships within Turkey, it is stated that; (i) rent shall not accrue for the commercial enterprises that are leased out on properties owned by the Turkish Treasury and have limited or suspended their activities within the scope of the precautionary measures taken to prevent the spread of the new type Coronavirus [Covid-19]; (ii) rent will be discounted taken into account the number of personnel and operating period for the commercial enterprises that are not among the businesses temporarily closed. The relevant circular clearly reveals the government's approach to the rent problem of the commercial enterprises which have suspended their activities/ activities have reduced dramatically as a result of precautionary measures taken against Covid-19.
a) Evaluation with regard to Temporary Impossibility
The future of lease contracts in relation to the foregoing listed enterprises, activities of which have been suspended for an indefinite term should be evaluated within the scope of the force majeure event. In this respect, it is possible to interpret that the lessor fails to have the relevant lease property available for the use of the lessee due to temporary impossibility for the enterprises, activities of which have been mandatorily suspended based on a circular. However, considering that law does not set out a provision for the temporary impossibility, there are a lot of different views on which provision of law should be applied to this problem regarding the lease contracts.
In this case, initially, it is worth evaluating the situation pursuant to Article 136 and 137 of TCO considering that the impossibility will no longer be the case after the Covid-19 pandemic ceases its effect. Pursuant to Article 137/1 of TCO, "When the performance of the obligations under a contract is partially impossible due to reasons for which the obligor cannot be held responsible, the obligor shall be released from the obligations which became partially impossible." According to the aforesaid article, when the performance of the fundamental obligation is partially impossible, the obligation to perform ceases to exist as a matter of course regarding the law.
As there is a temporary impossibility of performance of obligations in temporary impossibility. However, it should be kept in mind that the subsequent performance of the obligation might become pointless or it may not be certain when the impossibility expires. In these cases, the existence of permanent impossibility should be accepted due to the reason that it cannot be expected from the creditor to be bound by the contract within the framework of Good Faith. The legal consequences are controversial for the cases where the parties fail temporarily to perform the obligations arising from the perpetual contracts such as lease contracts. With respect to the prevailing view in doctrine, in circumstances such as today which is not clear when the temporary impossibility expires, the existence of permanent impossibility [Article 136 of TCO] should be regarded provided that the objective of the contract is compromised. Meaning that it cannot be expected from the lessee to be bound by the contract within the framework of Good Faith [Turkish Civil Code Article 2/1].
However, if it is possible to foresee for each concrete case that the temporary impossibility will expire at a certain period of time, the performance term of obligations may be suspended until the event of impossibility expires. Although the Turkish Court of Appeals, in its decision, ruled that the parties will continue to be bound by the provisions of the contract during the "period of tolerance of the agreement" and that the binding force of that contract will be terminated upon the expiry of the respective tolerance the term, the interpretation such as "suspension of performance of the parties' obligations during impossibility" has not been directly indicated in the precedent.
It is worth pointing out, a separate analysis should be conducted over the specific circumstances of the concrete case on a case-by-case basis in order to determine the tolerance term. If the effect of Covid-19 pandemic on contractual obligations is considered within the scope of temporary impossibility, it can be stated that the contract will be terminated upon the expiry of the respective "period of tolerance" of each concrete case in case of discrepancies.
In this context, it can be evaluated that when the regulations about impossibility apply by analogy to the temporary impossibility that has been occurred due to the Covid-19 outbreak, a lessee may suspend its obligation to pay the rent during the period of tolerance. The principle issue about this interpretation about the temporary impossibility is that the consequences of this pandemic are going to result in excessive burden for the lessor. The lessor might bear the consequences only due to the field of business operations of the lessee. Besides, as the answer to the question of how long the pandemic will continue is still a mystery, we should state that we are still in an early phase to say that the temporary impossibility is convenient for the possible contractual disputes arising from the Covid-19 pandemic.
b) Evaluation of Excessive Difficulty of Performance [Turkish Code of Obligations Article 138]
According to Article 138 of TCO, entitled "Excessive Difficulty of Performance", an exception to the fundamental principle of sanctity of contracts [pacta sunt servanda], it is possible to adapt the contract regarding the change of circumstances. The applicability Article 138 of TCO is a matter of discussion in almost all the articles where the consequences of this pandemic to the lease contracts are evaluated.
In the view of English laws, the discussions mostly circulate around the doctrine of frustration, the theoretical ground of contractual force majeure and adaptation of contracts and are generally indicated that the Covid-19 pandemic does not revoke the lessee's obligations and does not constitute a reason to terminate the contract. Besides, it is also indicated that there have not been any judgments where the doctrine of frustration is applied to the lease contracts.
Some conditions must be fulfilled, in order to apply the excessive difficulty of performance, specify in Article 138 of TCO.
These required conditions, according to the article's legislative intention areas listed below:
- An unexpected event, which was unforeseen and not expected to be foreseen by the parties before signing the contract, must occur;
- This unexpected the event must not be caused by the obligor himself/herself;
- This unexpected event must change the performance of the contract into excessively burdensome for the obligor according to the principle of Good Faith;
- The obligor either must not yet perform the contract or must perform his/her obligation by reserving his/her right to excessive performance of difficulty.
As the explicit provision of the TCO Article 138, in order to demand an adaptation of contract, the obligor either must not yet perform the contractor must perform his/her obligation by reserving his/her right emerging from the excessive difficulty of performance. This means that the obligor should reserve his/her right during the performance of the contract. Otherwise, the chance of adapting the contract will not be an option further. In addition to this, it is possible to say that this situation is actually a matter of proof12. Nevertheless, if the equilibrium of the contract gets affected by the change of situations and the features of the concrete event and situations of the parties show that the contract cannot be expected to be performed even though the obligor already performed, the adaptation of the contract should be possible in the strict sense.
In Turkish Law, in order to adapt the contract to the changing situations, parties mostly take the dispute up to the court. As a matter of fact, Article 138 of TCO predicts that the parties should not rescind the contract, but they should claim adaptation of the contract in the strict sense in court. The parties of the contract can demand adaptation of the contract according to the changing situations, from the court. In that case, the court can either adapt the contract regarding the changing situations or terminate the contract. Due to the Covid-19 pandemic, clearly, the abovementioned provision of an article can be applied both for the lessee and for the lessor. However, art. 138 TCO should be applied as last resort [ultima ratio], and the parties should first give their best efforts to settle amicably. Also, we should state that as the Covid-19 pandemic's impacts continue, the obligor should perform his/her obligation by reserving his/her right emerging from the excessive difficulty of performance and so that the situation does not lead to forfeiture, the obligor should perform by reserving [caution (obsolete)].
c) Evaluation of the Lease Contract on Becoming Excessively Burdensome [TCO Article 331]
Article 331 of TCO indicates as follows, "In the event of an excessively burdensome reason, each party may terminate the contract anytime duly by observing the legal termination notice period. The court shall rule the monetary consequences of the extraordinary termination regarding the circumstances and conditions."
As the before cited regulation, if the performance of the lease contract becomes excessively burdensome for the lessee or the lessor due to the Covid-19 pandemic, the obligor may terminate the contract duly by observing the legal termination notice period. Yet, it should be stated that the application of this regulation, before 07.01.2020 is controversial for the office lease contracts where the lessee is a tradesman according to The Turkish Commercial Code or a legal entity [See also TCO provisional Article 2].
2. The Enterprises Continuing Their Business Operations But Still Got Affected By The Decrease of People in Lockdown
The enterprises of which business operations have not suspended by the Ministry of the Interior, such as markets, restaurants, hotels, it is not possible to interpret that the performance of their lease contracts became partially or totally impossible due to the Covid-19 pandemic. Still, especially the tourism and hotels sector declined visibly all around the world; also, the solidity ratio of the hotels in the UK and China decreased in major amount compared to the same season of the last year's ratio.
When considering the warnings, given by the public authorities about everyone to stay home as much as possible in order to protect public health and make sure the disease does not spread any further, Article 138 of TCO entitled "Excessive Difficulty in Performance" might be applicable, as explained above, to the enterprises of which business activities have not been shut down by the government but their income has been affected more than a prudent merchant could have foreseen, due to the pandemic. Nevertheless, as it is the first time that this kind of viral infection has this intensely affected society in the modern world, it is hard to predict what the judicial bodies will decide.
3. In Terms of The Enterprises Which Ceased Their Operations Without Any Obligation Due to Concern Arising from Covid-19 Pandemic
It is known that the enterprises whose activities are not ceased by the Ministry of Internal Affair have also applied lockdown due to decisions taken upon the initiative by the tenant or lessee. In this case, an adaptation of the contract can be requested from the court or the contract can be terminated within the framework of the explanations we made above, pursuant to Article 138 of TCO by taking into account the identity of the party [lessor or lessee] who has made such a decision to contribute to the protection of public health.
4. Does the "Obligation to Keep the Property Available" Stipulated Against the Lessees in the Lease Contracts Still, Applies?
This issue is especially important for enterprises located in Shopping Malls ["AVM"]. As it is known, although no decision with regard to the closure of the shopping malls was taken by the government, the Turkish Federation of Shopping Malls and Retailers indicated that retailers of shopping malls included within the federation will not receive a rental invoice during the period when they are closed and it will provide support to the economic stability within the combat against Covid-19 pandemic by not taking any rent from closed businesses.
Similarly, on March 19th, 2020, an advisory decision for the closure of shopping malls due to public health was taken by the Turkish Association of Shopping Malls and Investors by taking into account the demands of society and retailers. Some of the shopping malls ceased their operations by following such advisory decisions, however, there were also shopping malls that didn't comply with that advice. It is observed that the enterprises which are lessees in those active shopping centers ceased their operations against the Covid-19 pandemic with social awareness and having regard for public health. Such circumstance becomes more legally controversial due to the fact that the lease contracts of most of the lessees in shopping malls contain a provision regarding the "obligation to keep the property open during the shopping hours". In this sense, we consider that it is not possible for lessees who intend to cease their operations, to resort to the opportunity presented by "temporary impossibility of performance". However, lessors' demands for lessees to keep open their enterprises in such social situations are likely to be in contradiction with the Good Faith regulated in Article 2 of the Turkish Civil Code. Although nevertheless, it is unable to apply provisions of impossibility due to absence of decision for closure taken by the administration, it seems likely that the lessee may ask for the adaptation of the contract clause regarding keep its enterprise open and obtain a favorable outcome from this application in accordance with Article 138 of the TCO under changing conditions due to Covid-19 pandemic.
Although mentioned above it should be underlined once again: All of the legal assessments in this study are based on the assumption that there is no agreed provision requiring the pandemic to constitute a force-majeure event and stipulating which party will suffer from the damages that may emerge upon the impossibility of performance by the lessor or lessee. If there is any provision that is not deemed to be invalid as a result of observing the general transaction conditions, such provision will be applied in priority.
If there are not any contractual provisions in this respect, then secondary legislation which is summarized above will be applicable. However, it would be the best preference to evaluate the massive and unpredictable effects of the pandemic in each concrete case and to make contractual adaptation or termination/liquidation by using the appropriate legal instruments.
Furthermore, it will be crucial for solidarity that all parties reach a mutual understanding and decide on the consequence of lease contracts with the evaluation of all legal and commercial risks rather than leaving legal problems with which is faced due to Covid-19 pandemic is uncertain.
Finally, our historical experience regarding the repetition of history indicates that a legislative intervention may be in question for private law contracts, especially lease, and employment contracts, to reduce the possible effects of the pandemic.
It should be duly noted that the Turkish National Protection Law No. 3780 provides the government with the authority to intervene directly in private law contracts in order to reduce the effects of World War II on the economy. Within the scope of this Law, it is stipulated that the authority to set prices and confiscate products is given to the government; the rent prices of real estates in cities, towns, wharves, ports, and stations during the period that the law is in force will not exceed the rent prices of the previous year, the application areas of this Law will be determined by the government, the lessee will not be evicted unless personal use of lessor is needed, rent prices shall not be determined over the market value.
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.