Highly-charged discussions on commercial lease agreements have been ongoing. In particular, disagreements and arguments are on the verge of turning into a battle for shopping malls.
For the past three months, the lease amounts at the shopping malls could not be collected, but rather they were subject to invoices with very low rates and for symbolic prices. But a more interesting situation has emerged in the new normal period. The shopping malls were opened by taking many precautions. This led to a significant increase in operating expenses. However, there was a huge drop in the number of visitors. It has become a major disadvantage because of the fact that the shopping malls are closed areas.
This is unknown as to how long this will last. Commercial leases think that the lease amounts should not be collected for shopping malls unless conditions are back to normal as in the pre-pandemic times (old normal). On the contrary, the shopping malls do not lean towards this since they were unable to collect rent for the last three months and their expenses were increased due to hygiene measures.
The events that occurred reveal that shopping mall leases have different natures than the other commercial leases. Even though shopping mall commercial agreements contain verbiage stating that these agreements cannot be considered as usufruct lease, the fact that the lease price is often determined based on the revenue shows that these agreements are more like a category of usufruct lease.
It can be said that the lease amount is not only determined on the basis of revenue, but also the fixed minimum amount. Yes, but many agreements specify an alternative lease amount as well. Accordingly, the fixed figure determined as rental price comes into effect only when the rate of rental price determined as turnover falls below this figure. In other words, the fixed lease amount and the turnover rate lease amount are compared, whichever is higher in that month, that figure is paid as the lease amount. Beyond any doubt, it is a way of making decisions that the legislator doesn't even think about. Because according to the regulations on lease agreement, the lease amount shall be either specified or determinable. Both a specified and determinable lease amount is considered to be agreed herein. It may not pose a legal problem, but it is a good example in terms of showing the difficulty in applying the categories, set forth while drafting the law, in practice.
II. The Inadequacy of the Concept of Force Majeure in the Face of the Pandemic
Another famous classification, as it is known, is the distinction of “force majeure – unexpected state”. This distinction is made according to the criteria of whether the reason that hinders the performance of the debt stems only from the subjective state of the person, or objectively from the point of view of everyone.
Like any classification, this distinction is made based on notional principles. In fact, there is no force majeure or unexpected state in the outside world. It is just that we take certain situations as a justification to avoid performing the debt. In other words, these concepts belong to the mental world, they are not physical, but factual realities. As an example, the Roman jurists classified the subject of legal science as individuals, objects and cases. But to them, a man who was a slave was also a commodity. As we can see, this classification is a result of an acceptance, not of physical functioning in the outside world.
It is also possible to give similar examples from recent history: For example, a plastic surgery, when performed in a private clinic was considered to be an agreement for work for a period of time and the legal regulations of the agreement for work were applied to disputes in this matter. Unquestionably, the jurists -who wanted to distinguish between concluding a contract for something manufactured and concluding a contract for something not manufactured- were not aware that they referred to the provisions to be applied to the disputes arising from aesthetic surgeries in the future. Nor would they have expected to be aware, because at the time it was unimaginable that the words aesthetic and surgery would juxtapose. Just like the fact that, a year ago, we couldn't have imagined the whole world would have to be cooped up in houses.
The point to be noted is this: the jurists, who made the first classification, made such classification by considering the nature of the relationships and events in question and finding a reason for a distinction. In other words, they set forth a concept that depends on the cause and that is causal. However, the events that were later considered appropriate to the classification do not fit these causes. For example, considering an aesthetic surgery as an agreement for a work is completely as a matter of an assignment. In fact, the acceptance that the legal regulations of the representation agreement will be applied to the relationship between the physician and the patient is a matter that has been completely assigned and preached. If not, there is no resemblance between appointing a representative and going to a doctor. It is said that the patient grants a power of attorney to the doctor to intervene in his or her own body. The relationship between the patient and the physician is nothing like the relationship between the representative and the principle. It is not possible, at least in the near future, for the patient-physician relationship to attain a legal qualification compatible with its specific characteristics, as it is left in the period of Roman law to follow the life relations and make legal classifications.
I will, of course, connect these long narratives to our subject matter. As I explained above, the distinction of “force majeure-unexpected state” is also a causal distinction, but the Coronavirus (Covid-19) outbreak, which we live in, does not fit both concepts in terms of its nature. For this reason, it has to be accepted as being within the scope of one of these concepts as imposed.
However, for the development of solutions in accordance with equitable principles and for the full implementation of the objective good faith rule, it is necessary to put forward the aspects of the pandemic that do not conform to the concept of force majeure.
First of all, the examples of force majeure that we read in the books are examples that take place in one region, none of which are global events or which occur all over the world. Let us consider the most famous examples: Earthquake, flood, war. None of these are events affecting the whole world, like the pandemic today.
Secondly, in the context of a pandemic, personal protection and safety measures carry far more weight than it is in the other force majeure cases. Cleaning, wearing a mask, social distancing measures only the person can be exercised by the individuals themselves. In other force majeure cases, individual measures do not have such significance. Therefore, it looks like as if the measures have been put in place to prevent the ability to rely on force majeure.
Thirdly, force majeure is seen as an impossibility since it is a state beyond a person's capacity. However, there is currently no obstacle beyond a person's capacity in terms of shopping center commercial leases. But it still does not seem reasonable to expect lessees to open their businesses and pay the full rent. Since its existence reason is a commercial attraction, it is pointless to expect commercial activity in a place that has lost all its charm.
Fourthly, unlike other cases of force majeure, the Coronavirus pandemic is divided into periods: the first outbreak, spreading, control and normalization periods, the second wave period. This is not just a medical classification, but a classification with legal consequences. The laws entered into force and administrative measures adopted are determined accordingly -so much so that the concept we call the ”new normal" describes a purely social and legal phenomenon.
Fifthly, perhaps applicable for some well-known force majeure, but it is worth mentioning herein again. Not every industry and every workplace was affected by the Coronavirus outbreak on the same level. In fact, some industries and businesses have more than doubled or tripled their earnings. It is surely not reasonable for a pharmacy to ask for a discount on the lease amount.
While it is possible to count other differences, ignoring these fundamental differences and describing them as a classic force majeure even more unable the matters to be settled.
At the top of these problems, the force majeure clauses take place. There are force majeure clauses in almost all shopping mall commercial lease agreements. As you know, these agreements are famous for being long and detailed. Penalty clauses, guarantees, bonds, a hundred and one possibilities, whatever was heard, added to the agreement… Moreover, the common sense that these agreements are just and only procedures while executing them. We all know that in these agreements, no matter other than the lease amount is seriously discussed. Therefore, the following questions should not be important in the provisions to be applied due to the pandemic: Is the epidemics that are listed under the force majeure clause are also stated in the agreement? Is it stated that the lessee's obligation to pay continues also in case of force majeure?
To pursue these questions and to establish a judgment according to their answers will be considered as a legal technician, not a legal practitioner. We have to understand the matter in a holistic way and accept that positive law is not a legal concept that fully fits the pandemic. This acceptance will save us from being a prisoner of fragmentary provisions in narrow patterns. How will it save? By giving a rise to the comparable implementation of other provisions.
III. Implementation of Article 363 of the Turkish Code of Obligations ("TCO") by Comparison
Is there a provision that can be applied comparatively and can help our problems? Yes, there is: Article 363 of the TCO.
Reduction of the Lease Amount in Extraordinary Circumstances
ARTICLE 363- If the usual yield of an agricultural real estate is significantly reduced due to extraordinary disasters or natural events, the lessee may request a proportionate amount of the lease amount to be reduced.This right can be waived in advance, but only if the possibility of such circumstances has been taken into account during the determination of the lease amount, or if the loss incurred has been covered by an insurance policy.
There might be concerns regarding the application of this provision, as the shopping mall commercial lease is not considered as usufruct lease. However, as I tried to express above, shopping mall commercial lease is extremely close to the usufruct lease in terms of its nature. The fact that such provision is regulated for agricultural immovable properties should not be an obstacle to its application by comparison. I'm of the opinion that article 363 of the TCO is perfectly applicable to the circumstances we live in.
We can see more clearly in Herman Becker's statements that the legal nature of the “deduction” in this provision is very appropriate to the circumstances we live in: “The right of deduction claim is not a compensation: Because the usufruct lessor is not responsible for the fruits or benefits of the leased property to the usufruct lessee. The request distortion (defect) is not based on the warranties: Because the event of a disaster or the occurrence of natural events cannot be interpreted as a distortion in the immovable property subject to the usufruct lease. It is more of a question of equalization due to equity principles, of remedy for a very large disparity between performance and counter performance that cannot be predicted by the parties. In the meantime, the idea that the usufruct lessor would have been compromised in the same way if he or she had operated the property subject to the usufruct lease also plays a role. Bearing a portion of the damage by the usufruct lessee especially, –and not by other creditors - is justified and appropriate only in this regard” (Herman BECKER, Commentary on the Swiss Code of Obligations, VI. Volume, Translation Suat DURA, Court of Cassation Publications, Bern 1934, p. 341, n. 2).
An examination of whether article 363 of the TCO can be applied comparatively will necessarily raise the question of whether special provisions should be applied comparatively or whether general provisions should be applied directly. However, the provision that is applied comparatively herein is also applicable for lease agreements. The fact that the lease type is different does not alter this reality. If it was discussed to apply an article regarding an agreement for work, it could be suggested that when there was a clause in the general provisions regarding the subject matter it would not have been appropriate to apply an article on a different subject matter.
IV. Why Adaptation Rather Than Article. 363 of the TCO
The most prominent concept in the legal discussions so far is the concept of adaptation. Therefore, there has already been an expectation for adaptation cases in practice. In addition, the adaptation facility provides a much wider range of possibilities, not just discounts, but suspensions, shortening of time. It even gives the possibility of termination if adaptation is not possible. In this case, what's the point of looking for an applicable substance other than Article 138 of the TCO regulating the adaptation?
That question kept me from writing this article for a long time. However, it is important not to be too sure that adaptation cases can fully solve the problem. That's because a second wave is expected in September. What if such a possibility becomes reality, and while we are expecting to return to the old normal in September, we have to go back to the old normal and close schools again, and declare a curfew and take a series of strict measures? Will we be able to solve the problem by getting an expert witness report again in the adaptation cases already filed? Even the thought of this possibility is problematic.
There are also many questions to be answered regarding adaptation cases: what happens if the lessee cannot afford payments with a dissenting note while adaptation cases are ongoing? What will be the effect of the terminations on the case while the adaptation case is ongoing, will the case be left without subject matter? Can the request for adaptation be made as a reduction only or suspension, or can requests such as a reduction or even a time cut for after suspension of certain months be compounded, and more importantly, will the court have the opportunity to rule on others when one of them is requested? Moreover, if the compound claim is partially rejected and court costs to be decided make it pointless to win the case, will the desired result be obtained from these cases? What will happen if there is finally bankruptcy while the case is ongoing?
These are the problems that will be experienced while the case is ongoing. However, there will also be a huge competition of injunctions at the beginning of the case. Because keep paying the lease amount, even with a dissenting note, leads the adaptation case to have no purpose. On the other hand, penalty clause claims and guarantees will be troublesome unless an injunction is taken. On the other hand, it does not seem possible ordinary practices to be carried out either by banks or shopping malls without questioning. It seems likely that every ordinary practice will be re-debated in all disputes arising during the pandemic.
We need to remember again that no legal regulation exists. I wish there was an opportunity to make a law that, despite this uncertainty, could eliminate uncertainty fairly. However, there is currently no expectation of such work. In such uncertainty, and in the chaos of the epidemic, a legal regulation with theoretical principles does not seem possible. For this reason, despite all these unanswered questions, the adaptation case still seems to be the most popular option.
V. Model Practices of the Court of Cassation
Perhaps the Court of Cassation most introduces its original solutions in areas where legal regulations are not sufficient such as in the construction agreement in return for land share.
For example, it is one of the first examples -on whether the agreement shall be terminated retroactively or proactively while the construction work in ongoing- that comes to mind where the Court of Cassation rules that if the construction is completed by ninety percent, it is no longer possible to terminate the agreement retroactively.
We are not the only ones to have case law that sets criteria like the law. Examples given in decision of the Swiss Federal Court during the First World War are also extremely valuable in regards to our topic: “Regarding the difficulties which occur in the delivery of the first World War, only if the contract price increase hits 100%, legal impossibility -more precisely the existence of such impossibility that cannot be overcame by the debtor- used to be accepted. There is no way to insist on this opinion, which is partly adopted by Swiss case law. In that case, If the creditor suffers losses while the debtor is able to provide an income by taking advantage of the new conjecture, this point of view does not work. Moreover, while a loss can be devastating to one debtor, it may not make any sense to the other. In fact, the remedy in accordance with the principles regulated by our law is this: Article 21 regulating the abuse of one party dues to his/her economic difficulty while concluding an agreement can be directly applied to the economic difficulties incurred subsequently. If the interest of the debtor, in terms of moral principles, needs to be reviewed more than the interest that should be protected by the agreement, then a relative impossibility may have occurred due to the interest of the debtor which is contrary to this. For example, if there is a health risk due to the necessity of using Ersatz substances, or if, under changing circumstances, the business reputation is impaired by the known consequences of blacklists etc.” (Herman BECKER, Commentary on the Swiss Civil Code , Volume VI, Translation Osman TOLUN, Ankara 1967, p. 526, n. 20).
Also, the decision of the Court of Cassation on the law of construction agreement in return for a land share which rules that ordinary written sales will be considered an assignment and the decision that these agreements can only be terminated (in a constitutive way) by a court decision is also solutions that fall outside the legal patterns we know.
Therefore, it would not be surprising that the Supreme Court here, too, has come up with a unique solution that is outside the usual legal patterns but within the system. For this reason, it is possible that even the adaptation establishment will have a new look in a very different way.
As a result, I find it beneficial to share my opinion that Article 363 of the TCO can be applied by comparison since force majeure clauses are open to be reviewed. The fact that the pandemic is considered as a force majeure only by an imposed method, the possibility of a second wave in the pandemic and the understanding that the pandemic will last longer, the likely occurrence of events that will make adaptation pointless while adaptation cases are ongoing, the possibility of having a legal basis for solving the problem with a unique case law over legal stereotypes as the Court of Cassation ruled on construction agreements in return for a landscape and it is the most appropriate legal regulation can be applied to shopping mall commercial agreements.
This document is translated from Turkish to English by Att. Gözde Gürünlü (Founder and Legal Translator at Legis Translate). For more information please visit www.legistransalate.com.