Construction Contract in Exchange for Flats — Requirements and Disputes

The construction contract in exchange for flats is one of the most common methods of real estate development in Turkish legal practice. Under this contract, the landowner undertakes to transfer certain shares of the land to the contractor, while the contractor undertakes to construct a building of the qualities agreed upon in the contract on the land and deliver certain independent units to the landowner. This type of contract, which is subject to the provisions on contracts for work and services regulated in Articles 470 et seq. of the Turkish Code of Obligations (TCO), is a mixed-nature contract that also incorporates provisions relating to the sale of immovable property. Also known as the "construction contract in return for land share," this contract produces significant legal consequences for both landowners and contractors and gives rise to numerous disputes.

Legal Nature of the Construction Contract in Exchange for Flats

The construction contract in exchange for flats is an unnamed (innominate) contract type not specifically regulated under Turkish law. According to the established case law of the Court of Cassation, this contract is a mixed-nature contract combining elements of a contract for work and services and a preliminary real estate sales contract. The contractor's obligation to construct a building falls under Articles 470 et seq. of the TCO regarding contracts for work, while the landowner's obligation to transfer land shares is subject to provisions relating to the sale of immovable property.

The mixed nature of the contract is significant in determining which provisions will apply in case of disputes. The Court of Cassation determines whether the provisions of the contract for work or the sales contract will apply depending on the nature of the dispute. The provisions on contracts for work apply to disputes regarding the contractor's obligation to construct, while the provisions on the sale of immovable property apply to disputes regarding the transfer of land shares.

The parties to the contract are the landowner and the contractor. The landowner may be a natural or legal person. Where there are multiple landowners, all landowners must be parties to the contract or must have authorized the landowner signing the contract. The contractor is the natural or legal person undertaking the construction work. In practice, contractors generally operate as construction companies.

Formal Requirements and Validity of the Contract

For a valid construction contract in exchange for flats to be established, it must be drawn up in official form. Pursuant to Article 706 of the Turkish Civil Code (TCC), Article 237 of the TCO, and Article 26 of the Land Registry Law, contracts aimed at the transfer of immovable property ownership must be made in official form. Since the construction contract in exchange for flats involves the transfer of land shares, it must be drawn up before a notary public in the form of an official deed.

Construction contracts in exchange for flats made without complying with the official form requirement are, as a rule, invalid. However, according to the established case law of the Court of Cassation, where a contract made in violation of the form requirement has been fully or substantially performed by the parties, invoking the formal deficiency may constitute an abuse of right (TCC Article 2). In such cases, the court may rule on the validity of the contract by evaluating the circumstances of the specific case.

The validity conditions of the contract also include the legal capacity of the parties, the soundness of their intentions, and the fact that the subject of the contract is not contrary to law and morality. In particular, contract provisions foreseeing the construction of buildings contrary to zoning legislation may be deemed invalid due to illegality. A contract provision foreseeing the construction of an industrial facility on land designated as a residential area in the zoning plan may be cited as an example.

The mandatory elements that must be included in the contract are: the identity information of the parties, the title deed information of the land, the characteristics of the building to be constructed (number of floors, number of independent units, material standards to be used), the determination of the independent units to be allocated to the landowner and the contractor, and the start and completion dates of construction and delivery conditions. The absence of any of these elements may cause serious problems in the interpretation and implementation of the contract.

Transfer of Land Shares and Title Deed Procedures

The transfer of land shares constitutes one of the most critical elements of the construction contract in exchange for flats. The timing and method of transferring land shares to the contractor is among the most disputed issues between the parties. Three different transfer methods are used in practice.

The first method is the transfer of all land shares to the contractor upon the establishment of the contract. While this method is advantageous for the contractor, it carries serious risks for the landowner. If the contractor fails to complete the construction or sells the land shares to third parties, the landowner may be adversely affected. Therefore, if this method is preferred, it is recommended that a mortgage or annotation be registered on the title deed in favor of the landowner.

The second method is the gradual transfer of land shares depending on the progress of construction. For example, thirty percent upon the completion of the rough construction, thirty percent upon the completion of the roof, and the remaining forty percent upon the completion of finishing works. This method is the most common application that balances the interests of the parties.

The third method is the transfer of land shares after the construction is fully completed and the occupancy permit (building use permit) is obtained. This method provides the most protection for the landowner. However, contractors are generally reluctant to accept this method, as they need land shares to secure financing during the construction period.

In the event that the title deed transfer is not made on time, the entitled party may file a compulsory registration action pursuant to Article 237 of the TCO and Article 716 of the TCC. In this action, the court may order the title deed transfer to be made, provided that the contractual conditions have been fulfilled. The compulsory registration decision is communicated to the Land Registry Office and the registration is carried out.

Contractor's Obligations and Liabilities

The contractor's primary obligation arising from the construction contract in exchange for flats is to construct the building with the qualities agreed upon in the contract and to deliver the independent units belonging to the landowner on time. Pursuant to Article 471 of the TCO, the contractor is obliged to perform the work with loyalty and care, taking into account the interests of the employer. The construction must be carried out in accordance with the contract, technical specifications, zoning legislation, and building standards.

The contractor also has a duty of care in the selection of materials. Pursuant to Article 472 of the TCO, if the contractor supplies the materials, they are obliged to ensure that these materials are of good quality. The use of materials below the quality specified in the contract gives rise to the contractor's liability. The Court of Cassation considers the use of a different brand or lower quality materials than those specified in the contract as a material defect.

Another important obligation of the contractor is to complete the construction within the period agreed upon in the contract. In case of delay, the contractor is liable to pay delay compensation to the landowner. If a delay penalty has been agreed upon in the contract, the provisions on penalty clauses apply pursuant to Article 179 of the TCO. The delay penalty is generally determined on a monthly or daily basis, and a specific amount is agreed to be paid for each passing day or month.

The contractor is also responsible for taking occupational safety measures during construction, obtaining necessary permits and licenses, taking out insurance, and fulfilling tax obligations. In the event of a workplace accident, the contractor's criminal and civil liability arises. The conclusion of a contract with a building inspection organization within the scope of building inspection legislation is also among the contractor's obligations.

Landowner's Obligations and Rights

The landowner's primary obligation arising from the construction contract in exchange for flats is to transfer the land shares agreed upon in the contract to the contractor. The landowner is obliged to carry out the title deed transfer procedures in a timely manner in accordance with the transfer schedule determined in the contract. In case of delay in transfer, the contractor may make a claim against the landowner under the default provisions.

Another obligation of the landowner is to refrain from obstructing the contractor's construction activities. Obligations such as delivering the land to the contractor in a condition suitable for construction, avoiding unnecessary interference during construction, and obtaining permission from neighboring landowners when necessary belong to the landowner.

Among the landowner's rights, the most important is the right to supervise whether the construction is being carried out in accordance with the contract. The landowner may inspect the construction personally or through a technical consultant during the construction period, identify deficiencies and defects, and notify the contractor. At the delivery stage, the landowner has the right to check whether the independent units comply with the contract and to report defects.

Pursuant to Article 474 of the TCO, the landowner is obliged to inspect the delivered independent units within a reasonable time and to notify the contractor of defects. For hidden defects, there is an obligation to report within a reasonable time from the date the defect becomes apparent. Pursuant to Article 478 of the TCO, the limitations on the defect notification period do not apply in cases of gross negligence on the part of the contractor.

Delay Compensation and Penalty Clauses

In construction contracts in exchange for flats, if the contractor fails to complete the construction on time, the landowner may claim delay compensation. Delay compensation may be claimed under general provisions pursuant to Article 125 of the TCO, even if there is no separate provision in the contract. However, in practice, the parties generally include a delay penalty (penalty clause) in the contract.

Penalty clauses are regulated in Articles 179-182 of the TCO. If a delay penalty has been agreed upon in the contract, the landowner may claim the agreed penalty amount without having to prove that they suffered any loss. However, where the penalty clause is excessive, the judge may reduce the penalty clause pursuant to Article 182/last paragraph of the TCO. The Court of Cassation takes into account criteria such as the economic status of the parties, the portion of the obligation that has been performed, and the nature of the contract when reducing the penalty clause.

In calculating delay compensation, the rental income lost by the landowner due to the delay is taken as the basis. According to the established case law of the Court of Cassation, the equivalent rental value of the independent units belonging to the landowner is determined by an expert report and multiplied by the delay period to determine the compensation amount. The date on which the contractor falls into default is the delivery date specified in the contract.

Force majeure events (such as earthquakes, floods, epidemics, and wars) may eliminate or reduce the contractor's liability for delay compensation. However, the contractor must prove the force majeure event and how it affected the construction. Mere economic crises or increases in material prices are generally not accepted as force majeure by the Court of Cassation.

Termination of the Contract and Its Consequences

Termination of the construction contract in exchange for flats is one of the most frequently used legal remedies by the parties. Termination means the prospective ending of the contract and is possible when certain conditions are met. In the event of termination, the return of performances rendered by the parties and compensation claims arise.

Pursuant to Article 473 of the TCO, if the contractor does not start work on time or delays the work contrary to the contract, the landowner may terminate the contract without waiting for the delivery deadline. Before termination, the landowner must give the contractor a reasonable additional period and invite performance (send a formal notice). If the contractor still fails to perform within the additional period, the landowner may terminate the contract.

In the event the landowner terminates the contract, the return of land shares transferred to the contractor arises. The contractor is obliged to return the land shares transferred to them back to the landowner. If the contractor has transferred the land shares to third parties, the landowner may file a title deed cancellation and registration action against the third parties. However, in this case, the principle of protection of bona fide third parties under Article 1023 of the TCC may come into play.

The cost of the work completed by the contractor in the event of termination is also a controversial issue. According to the established case law of the Court of Cassation, even if the contract is terminated due to the contractor's fault, the contractor may claim the cost of the work performed under the provisions on unjust enrichment. This cost is calculated based on the construction value determined by an expert report. However, the damages suffered by the landowner (delay compensation, cost of remedying defective work, etc.) are deducted from this amount.

Pursuant to Article 484 of the TCO, the landowner may terminate the contract at any time by compensating the contractor's loss. This right is referred to as "termination against payment" and allows the landowner to withdraw from the contract at any stage of the construction. However, in this case, the landowner is obliged to pay the contractor the cost of the work performed to date and the expected profit (positive interest).

Defective Construction and Incomplete Work Disputes

One of the most common areas of dispute in construction contracts in exchange for flats is the presence of defects or incomplete work in the independent units delivered by the contractor. A defect means that the delivered work does not possess the qualities agreed upon in the contract or is not suitable for its intended use. Incomplete work refers to construction work agreed upon in the contract but never performed.

Pursuant to Article 474 of the TCO, the landowner is obliged to inspect the delivered independent units as soon as possible in the ordinary course of business and to notify the contractor of defects. For apparent defects (defects visible to the eye), notification must be made at the time of delivery or within a reasonable time. Hidden defects must be reported immediately upon their discovery.

The landowner's elective rights in the case of defects are regulated in Article 475 of the TCO. Accordingly, the landowner may exercise one of the following rights: requesting the remedy of the defect, claiming a price reduction, or refusing to accept the work and withdrawing from the contract. However, the right to withdraw from the contract may only be exercised if the work is defective to such an extent that it is unusable for the landowner. The Court of Cassation applies the principle of proportionality in the exercise of the right of withdrawal.

The statute of limitations differs for incomplete work. According to the established case law of the Court of Cassation, incomplete work is subject to general statute of limitations provisions rather than defect provisions. Pursuant to Article 147 of the TCO, a five-year statute of limitations applies to contractors' claims relating to the work. For defective construction, pursuant to Article 478 of the TCO, a five-year statute of limitations applies to immovable structures. In cases of gross negligence by the contractor, the statute of limitations extends to twenty years.

Zoning and Permit Issues in Construction Contracts

Zoning legislation is one of the most important regulations directly affecting construction contracts in exchange for flats. Construction carried out without a building permit constitutes an unauthorized structure under the Zoning Law No. 3194 and may be subject to a demolition order. Therefore, it is of great importance that the contract clearly specifies who will obtain the building permit and when.

If the number of floors or the construction area agreed upon in the contract decreases due to a zoning plan amendment, the adaptation of the contract arises. Pursuant to Article 138 of the TCO, if the conditions existing at the time the contract was made change due to an unforeseeable reason that cannot be attributed to the parties, the parties may request the adaptation of the contract to the new conditions. A zoning plan amendment may be considered as such a situation.

Obtaining an occupancy permit is also of critical importance for the performance of the contract. If the contractor completes the construction but fails to obtain an occupancy permit, the transition of the independent units to condominium ownership is not possible. This situation may cause serious grievances for the landowner. The Court of Cassation accepts that obtaining the occupancy permit is the contractor's obligation and that delivery without the occupancy permit does not constitute full performance.

Dispute Resolution Methods and Competent Court

Disputes arising from construction contracts in exchange for flats may be resolved through negotiation between the parties, mediation, and litigation. With Law No. 7036 and subsequent regulations, mediation has been introduced as a procedural prerequisite in commercial disputes. However, for disputes arising from construction contracts in exchange for flats, whether mediation is mandatory must be determined based on whether the parties are merchants.

In actions arising from construction contracts in exchange for flats, the competent court is determined according to the nature of the case. The civil court of first instance has jurisdiction in claims relating to the substance of the immovable property (such as title deed cancellation and registration). For compensation and receivables actions, the competent court is determined within the framework of the Code of Civil Procedure provisions. If the contract contains an arbitration clause, the dispute may also be resolved through arbitration.

The court with jurisdiction is, as a rule, the court of the defendant's place of residence. However, in actions relating to the substance of the immovable property, the court of the place where the immovable property is located has exclusive jurisdiction pursuant to Article 12 of the Code of Civil Procedure. In compensation and receivables actions, the court of the place of performance of the contract (Article 10 of the Code of Civil Procedure) or the court of the place where the tort occurred (Article 16 of the Code of Civil Procedure) may also have jurisdiction.

Points to Consider When Drafting a Construction Contract in Exchange for Flats

When drafting a construction contract in exchange for flats, it is of great importance to prepare a clear and understandable text that best protects the rights of the parties. The presence of vague or ambiguous expressions in the contract may lead to serious disputes in the future. Therefore, it is recommended that the contract be prepared or reviewed by an expert lawyer.

The following matters, in particular, must be regulated in detail in the contract: the architectural project and technical specifications of the building to be constructed, the brand and quality standards of the materials to be used, the land share distribution table, the start and completion dates of construction, the amount of delay penalty, delivery conditions and acceptance procedures, the obligation to obtain the occupancy permit, insurance obligations, and the conditions for termination of the contract.

Securities that may be included in the contract to protect the landowner include: the establishment of a mortgage in favor of the landowner on the land shares to be transferred to the contractor, independent technical inspections at certain stages of construction, regular monitoring of the contractor's financial status, and the inclusion of a letter of guarantee or surety condition in the contract.

In conclusion, the construction contract in exchange for flats is a contract of complex legal nature that produces significant financial consequences for both landowners and contractors. Obtaining legal support from an expert real estate lawyer in the preparation, negotiation, implementation of the contract and in the dispute resolution process is of great importance for the protection of the parties' rights.

This article has been prepared for general informational purposes and does not constitute legal advice. Professional legal support from an expert lawyer must be obtained in specific disputes.