Construction Agreements In Return For Land Share

A flat-for-land construction agreement is a contract made between landowners and a contractor (developer), where the subject of the agreement is a construction project. In this agreement, landowners allocate their land to the contractor for the purpose of constructing a building. In return, the contractor assumes the obligation to construct the building on the allocated land. The landowners, in turn, are obliged to transfer ownership of certain independent sections (units) in the constructed building to the contractor.

Commonly referred to in practice as flat-for-land construction contracts, these agreements are considered contracts for work in terms of their legal nature. According to the Turkish Code of Obligations, a contract for work is one in which the contractor undertakes to create a work (such as a building), and the employer agrees to pay a fee in return. However, in flat-for-land construction agreements, the fee is not paid in cash, but through the transfer of ownership rights over certain parts of the land.

In this respect, the contract is considered a hybrid agreement, encompassing elements of both contracts for work and preliminary real estate sales contracts.

This bulletin addresses the characteristics of flat-for-land construction contracts, the obligations of the parties, and the validity conditions of such agreements.

1. Subject and Legal Classification of Flat-for-Land Construction Agreements

The main element of flat-for-land construction agreements is the construction activity. In this contract, the contractor undertakes to construct a structure (residence, workplace, hotel, etc.) on the land, while the landowner agrees to transfer ownership of some independent units within the building to the contractor.

This type of agreement is considered hybrid in nature as it incorporates elements from two different legal contracts:

• From the contractor’s perspective: Contract for work (Articles 470 and following of the Turkish Code of Obligations)
• From the landowner’s perspective: Preliminary contract for the sale of immovable property (Article 29 of the Turkish Code of Obligations and Article 26 of the Land Registry Law)
• The contractor is obligated to construct the building.
• The landowner is obligated to transfer the independent units in exchange for the construction.

This mutual obligation relationship is important in terms of default and impediments to performance. For example, if the contractor delivers a defective work, the landowner may withhold the obligation to transfer ownership.

Therefore, these contracts include elements of both construction and transfer of property rights. In practice, such agreements are referred to as hybrid contracts (mixed contracts).

Important Note: In case of a dispute, the legal nature of the breached part determines which legal provisions shall apply. For instance, if the contractor fails to deliver the building on time, the provisions of the contract for work regarding delay shall be applied.

2. Formal Requirements in Flat-for-Land Construction Agreements

Under Turkish law, contracts concerning the transfer of immovable property are subject to official form requirements. Since flat-for-land construction contracts include the transfer of immovable property, they must be executed in official form either before a notary or at the land registry. The presence of the parties before the notary during the drafting and signing of the contract is a condition for its validity.

Conditions for a valid agreement:

• Both parties must be present in person before the notary.
• The contract must be executed in the form of an official deed and signed accordingly.
• Notarization of signatures alone is insufficient.
• A written and signed contract without official form is also invalid.

Exceptions Recognized in the Practice of the Court of Cassation

In practice, contracts may still be considered valid even if not executed in official form under certain conditions, such as:

• If the transfer of shares has actually occurred at the land registry,
• If the construction has been partially or fully completed,
• If the parties have fulfilled their obligations in practice.

In such cases, according to the established precedents of the Court of Cassation, asserting the invalidity of the contract due to the lack of form may be contrary to the principle of good faith (Article 2 of the Turkish Civil Code) and considered an abuse of rights. Therefore, even if the contract is formally invalid, it may still produce legal consequences.

Examples from Court of Cassation decisions: “Since flat-for-land construction agreements involve a commitment to transfer shares at the land registry, they are valid only if executed in official form. For contracts signed without observing the form, either the transfer of shares must have taken place at the land registry, or the performance must have been completed to gain subsequent validity.” [1]

“The flat-for-land construction contract between the parties was executed informally. Although this contract was initially considered invalid due to its form, the contractor started construction on the land delivered to them and completed the rough construction phase by the date of the lawsuit. During this period, some of the units that should belong to the contractor were transferred at the land registry either to the contractor or to third parties who purchased them. By partially and mutually fulfilling their obligations, the parties considered the informally executed contract as valid. Claiming that a partially or fully performed contract is invalid due to lack of form constitutes an abuse of rights.” [2]

“The contract relied upon by the plaintiff in the main case is, in essence, a flat-for-land construction contract. Such contracts must be executed in official form before a notary and must bear the signatures of all landowners. However, as per the Supreme Court Joint General Assembly Decision dated 25.01.1984 No. 1983/2-1, 1984/1, the contract can become valid if the landowners subsequently give their consent. In this specific case, it appears that the party who did not sign the contract later approved it. Therefore, the contract relied upon by the plaintiff was validly formed. The court should have ruled on the merits of the dispute based on a validly formed contract instead of dismissing the case based on erroneous reasoning.” [3]

“Flat-for-land construction agreements and contracts amending them must be executed in official form. However, even if the contract is made in a simple written form, if the transfer of title has been executed or if the construction subject to the contract has been completed to an irreversible degree, raising an objection based on the lack of form contradicts the principle of good faith stated in Article 2 of the Civil Code.” [4]

“Even if a contract is invalid due to the lack of form and the obligations have not been performed, if one party: a) hindered the completion of the required form for their own benefit or through misleading actions, b) attempts to escape from the contract merely because it no longer serves their interest and not due to any moral or protective reason, c) confirmed the contract after its execution and unjustifiably reinforced the other party’s trust, then invoking the lack of form to avoid their obligations constitutes an abuse of rights. In such cases, the other party shall have the right to request specific performance or claim damages as if the contract were valid.” [5]

3. Different Forms of Flat-for-Land Construction Agreements in Practice

Flat-for-land construction contracts may appear in various forms in practice. Since the contractor does not receive any payment for the construction in advance, the financial burden of the construction lies entirely on them. This may lead to financial difficulties for contractors. According to the law (Article 479 of the Turkish Code of Obligations), the landowners’ obligation to transfer independent units as compensation arises only upon the completion of construction. To address such issues in practice, various solutions have been developed. In order to secure the financing required by the contractor at the outset, flat-for-land construction contracts can be executed under the following conditions:

• By stipulating phased transfers depending on the progress of construction,
• By transferring all or part of the land share to the contractor at the beginning and establishing a mortgage in favor of the landowner (such mortgages are then lifted in stages as construction progresses),
• By promising the transfer of the property upon completion and delivering it upon completion,
• By establishing a construction easement in advance to allow the contractor to sell,
• By making an advance payment to the contractor (thus enabling the contractor to create economic resources by transferring their future entitlements to third parties).

Since the principle of contractual freedom is adopted in our Code of Obligations, the parties have the liberty to arrange the content of the contract according to their will and needs. Therefore, the parties may make various changes and provisions in flat-for-land construction contracts as listed above.

4. Rights and Obligations of the Parties in Flat-for-Land Construction Contracts

Both parties in flat-for-land construction contracts have rights and obligations arising from the contract. Therefore, it is necessary to examine the rights and obligations of the contractor and the landowner separately.

Obligations of the Contractor:

• Obligation to construct and deliver the building,
• Obligation to carry out or supervise the construction personally,
• Obligation to deliver the building on time and free of defects (complete and flawless),
• Duty of care and loyalty,
• Obligation to procure necessary construction equipment and materials.

Obligations of the Landowner:

• Transfer of shares corresponding to the independent units as construction cost,
• Delivery of the land without legal or actual impediments,
• Obligation to cooperate with the contractor.

“In flat-for-land construction agreements, the contractor undertakes to construct a building, while the landowner agrees to provide compensation in the form of flat-for-land transfer. The payment in these contracts is made in-kind. The subject of the agreement is the construction of a building on land owned by the landowner. Construction refers to a tangible work. The first element in such contracts is the contractor’s obligation to construct a building. The contractor is obliged to create a building using their own financing, and often their own skill and labor. Generally, in contracts for work, the contractor undertakes to deliver a certain result to the employer. The contractor’s primary obligation to create the work is based on Article 470 of the Turkish Code of Obligations. The contractor must deliver the work in accordance with the contract. Otherwise, the balance of benefits expected from the contract would be disturbed to the detriment of one party. In this case, the party failing to fulfill their obligation cannot demand performance from the other party. The obligation to commence and continue the work as agreed results from the contractor’s duty of loyalty and diligence. Since the creation of the work may take varying amounts of time depending on its scope, the parties specify the start and completion dates in the contract. If not otherwise agreed, the contractor must start work immediately, continue without interruption, and complete the construction within the specified time.” [6]

Validity and Formal Requirements of Flat-for-Land Construction Agreements

Flat-for-land construction agreements are among the most common contracts in construction law practice. By nature, they feature elements of both preliminary real estate sales contracts and contracts for work, and they must be executed in official form to be valid. If not executed in official form, they are invalid and have no legal effect. However, in exceptional cases, flat-for-land construction contracts that were not executed in accordance with form requirements may still be deemed valid. Claims of invalidity that constitute abuse of rights are not accepted by the courts, and such contracts are considered valid and produce legal consequences.

 

 

References

İlker Hasan DUMAN, İnşaat Hukuku, (2021), Seçkin Yayıncılık, Ankara (Access to some of the judicial decisions was provided from this work.)

Erhan GÜNAY, Arsa Payı Karşılığı İnşaat Yapım Sözleşmesinden Kaynaklana Uyuşmazlıklar, (2021), Seçkin Yayıncılık, Ankara.

İbrahim KAPLAN, (2013), İnşaat Sözleşmeleri Hukuku ve Endüstri Yatırım Sözleşmeleri, Yetkin Yayıncılık, Ankara.

23rd CIVIL CHAMBER OF THE SUPREME COURT, 15.11.2013, 3270/7118.

23rd CIVIL CHAMBER OF THE SUPREME COURT, 30.01.2014, 5641/557.

23rdCIVIL CHAMBER OF THE SUPREME COURT, 2016/4766 E., 2019/2317 K.

23rdCIVIL CHAMBER OF THE SUPREME COURT, E. 2016/4803, 2019/1958 K.

13th CIVIL CHAMBER OF THE SUPREME COURT, 22.11.1996, 8841/10366.

GENERAL ASSEMBLY OF THE SUPREME COURT OF LAW, 21.03.2012, 162/217.

[1] 23rd CIVIL CHAMBER OF THE SUPREME COURT, 15.11.2013, 3270/7118.

[2] 23rd CIVIL CHAMBER OF THE SUPREME COURT, 30.01.2014, 5641/557.

[3]23rdCIVIL CHAMBER OF THE SUPREME COURT, 2016/4766 E., 2019/2317 K.

[4]23rdCIVIL CHAMBER OF THE SUPREME COURT, 2016/4803 E., 2019/1958 K.

[5] 13th CIVIL CHAMBER OF THE SUPREME COURT, 22.11.1996, 8841/10366.

[6] GENERAL ASSEMBLY OF THE SUPREME COURT OF LAW, 21.03.2012, 162/217.