In a decision that could serve as important case law regarding the impact of the pandemic on contractual relationships, the Bursa Regional Court of Appeal recently accepted a restaurant owner's interim injunction application for a 50% rent reduction in an action brought for a rent adjustment claim based on the hardship principle.
The decision is seen as an important precedent regarding the impact of COVID-19 on contractual obligations, particularly leases. As the economic impact of COVID-19 measures continues to grow, this interpretation by the court is seen as welcome and necessary.
The TCO does not contain any specific provision on the adjustment of leases in cases of force majeure, nor does it contain a specific definition of force majeure.
Instead, the TCO provides general provisions for hardship (Article 138) and impossibility (Article 136), and in accordance with the ”genus never perishes” (genus nunquam perit) principle, Article 138 on hardship gains importance when it comes to financial obligations of a contracting party; which also applies generally to tenants' obligations as to paying rent under leases.
According to the principle of pacta sunt servanda (i.e. "agreements must be honoured"), the parties are obliged to fulfill their obligations even if circumstances have changed to the disadvantage of one party. Consequently, in principle, the tenant cannot unilaterally reduce the rent. However, Article 138 of the TCO allows a party to ask the court to adjust the contract if an exceptional and unforeseeable circumstance has made the contract unacceptable under the principle of good faith, and to terminate the contract if it is not possible to adjust the contract.
In this case, the tenant is not entitled to reduce the rent unilaterally, but to ask the court to adapt the contract to the fundamentally changed circumstances. Thus, in order for the tenant to initiate an action on the basis of Article 138 of the TCO, he must prove that there is an exceptional situation that could not have been foreseen when the contract was concluded and that a situation has arisen for which the tenant is not responsible. Furthermore, there are no established precedents for a pandemic. Therefore, each claim must be assessed on its own merits.
The court's decision
A restaurant owner went to court seeking a rent reduction, claiming that there had been a significant decrease in business and sales due to the pandemic and government restrictions on restaurants. Specifically, the owner sought an injunction for a 50% rent reduction. The court denied the application for an injunction, whereupon the plaintiff appealed.
The Bursa Regional Court of Appeal reviewed the decision and granted the restaurant owner's application for an injunction. In its reasoning, the court stated the following:
- Regarding hardship:
- The pandemic should be considered an unforeseeable and exceptional circumstance under Article 138 of the TCO, as the pandemic resulted in events never before experienced in Turkey or the world; and
- Each case should be assessed on a case-by-case basis, as the impact of the pandemic varies by sector and region. Therefore, the courts should determine the impact of the pandemic on each tenant affected.
- Regarding interim injunction:
- An interim injunction may be granted if changes in the as-is situation occur that may make it significantly more difficult or entirely impossible for the applicant to acquire the right or cause him inconvenience or serious harm; and
- Since the landlord can terminate and evict the tenant (i.e. the applicant) if he is unable to collect the rent within a specified period of time, the abatement of rent to be made after a judgment on the rent adjustment claim has been given would not serve the purpose of the Act. In this respect, the application for an interim injunction should be granted, as the plaintiff's eviction could cause irreparable damage.
The court also ruled that the injunction should be reviewed and revised (if deemed necessary) by the trial court after six months, as the effects of the pandemic may vary depending on the time of year and the end of the pandemic is difficult to predict.
The court's decision will be considered final as long as the value of the three-month rent does not exceed the appeal threshold of the Turkish Court of Appeal (i.e. 72,070 TRY for 2020).
Although the pandemic case is still ongoing and it is too early to interpret Turkish case law on the matter, the court's decision sets a landmark precedent for interpreting the pandemic as an "extraordinary event" under Article 138 of the TCO, where claimants may be granted an injunction to reduce rent.
However, each case is unique. An obligation in one dispute may be interpreted one way, while a similar obligation in another dispute will be assessed differently. Therefore, every contract, including leases, must be subject to a review that specifically considers all relevant circumstances and conditions of the case.
For more information on hardship cases and the impact of the current crisis on leases in Turkey, please contact your regular CMS advisor or CMS local experts Dr. Döne Yalçın and Arcan Kemahlı.