Construction Agreement in Exchange for Flats (Build-and-Sell Agreement)

A construction agreement in exchange for flats ("kat karşılığı inşaat sözleşmesi") is a contract under which a landowner transfers certain shares of the land to a contractor, and the contractor in return undertakes to build on the land and deliver the agreed independent units to the landowner. It is the most common type of contract in urban transformation and the renewal of old buildings.

This contract carries the characteristics of a contract for work on the one hand, and a promise to sell immovable property on the other. This hybrid structure directly determines the formal requirements, the parties' obligations and the rules that apply when a dispute arises. In a project that can last for years, the first document signed is the key to resolving almost every disagreement that may arise later.

Form of the contract: why must it be made before a notary?

Because the contract includes the obligation to transfer land shares to the contractor, it qualifies as a promise to sell immovable property. For it to be valid, it must therefore be made in the form of a notarial deed (düzenleme şekli) (Turkish Civil Code art. 706, Turkish Code of Obligations art. 237, Notary Law art. 60 and art. 89). Contracts made in ordinary written form or with only a notarized signature are, as a rule, considered invalid.

In Court of Cassation (Yargıtay) practice, it is accepted that where the parties have largely performed their obligations, invoking the invalidity of a contract that fails to meet the formal requirements may violate the principle of good faith (Turkish Civil Code art. 2). However, relying on this exception to enter into a contract without the proper form carries serious risk; the right course is to comply with the official form from the outset.

Before the contract is signed, it is advisable for the landowner to research the contractor's financial standing, the projects it has previously completed, and the zoning status and plan notes of the property. For parcels with more than one landowner, it should also be checked separately whether all owners are joining the contract on the same terms; otherwise the project may stall before it even begins.

Provisions that must be included in the contract

• Clear identification of the independent units that will go to the landowner and to the contractor, by floor, facade, square meters and unit number
• The dates for obtaining the permit, starting construction and delivery, and who will obtain the occupancy permit and when
• Gradual transfer of the land shares to the contractor in line with the stage of construction
• A technical specification describing the quality of materials and workmanship
• Compensation or a penalty clause payable in case of delay (Turkish Code of Obligations art. 179 et seq.)
• Security such as a bank letter of guarantee, and the allocation of insurance and tax obligations
• Rent assistance for landowners and the eviction schedule

Completing the entire title transfer before construction begins leaves the landowner exposed to the contractor's financial problems. Gradual transfer and adequate security are the foundation of a balanced contract.

What happens if the contractor delays the work?

Once the delivery date has passed, the contractor is in default. Under Turkish Code of Obligations art. 123 et seq., the landowner may grant the contractor a reasonable additional period; if performance is still not rendered within that period, the landowner may either demand performance together with delay damages or withdraw from the contract. In addition, if work is not started on time, or if it becomes clear from the progress of the work that it cannot be finished by the delivery date, the landowner may withdraw from the contract without waiting for the delivery date (Turkish Code of Obligations art. 473).

The rental income the landowner has lost because of the delay is, in practice, the most frequently claimed item of damage. If a significant part of the construction has been completed, termination with effect for the future, rather than retroactive cancellation of the contract, may come into question; this distinction is critical because it determines which shares will be left to the contractor.

Defective work and limitation periods

If the delivered units do not comply with the project, the specification or technical standards, the client must inspect the work and notify the contractor of the defects within a reasonable time (Turkish Code of Obligations art. 474). Once a defect is established, the client may exercise one of the following rights: withdrawal from the contract, a price reduction, or free repair if it does not require excessive cost (Turkish Code of Obligations art. 475). Hidden defects that emerge later must be notified as soon as they are discovered (Turkish Code of Obligations art. 477).

For immovable structures, liability for defects is time-barred five years from the delivery date, or twenty years if the contractor is grossly at fault (Turkish Code of Obligations art. 478). To prevent evidence from being lost, requesting that the court record the evidence (delil tespiti) when a defect is noticed is often a sensible step.

The position of those who buy flats from the contractor

Contractors often sell the units that will fall to them to third parties before construction is complete, or assign their rights in those units. The assignment of a receivable must be made in written form (Turkish Code of Obligations art. 184). The assignee cannot acquire more than the contractor's own right; the landowner may raise against the assignee the defenses it has against the contractor (Turkish Code of Obligations art. 188). Anyone who is going to buy a flat from the contractor must therefore examine the contract with the landowner and the stage of construction. In cases involving title transfer problems, a title deed cancellation and registration action may come into play.

Checks made before purchase generally include: whether the contract between the landowner and the contractor was made in the form of a notarial deed, which shares have been transferred to the contractor in the land registry, the validity of the building permit, and the actual progress of the construction. This information determines what rights the assignee holds in the event of a dispute.

Competent and authorized court

Disputes arising from a construction agreement in exchange for flats are, as a rule, heard by the civil court of first instance (asliye hukuk mahkemesi); if the dispute is a commercial matter for both parties, the commercial court of first instance (asliye ticaret mahkemesi) may have jurisdiction. In actions concerning a real right over immovable property, such as title cancellation and registration, the court of the place where the property is located has exclusive jurisdiction (Code of Civil Procedure art. 12). Disputes arising from a construction agreement in exchange for flats are not among the matters, such as rent, partition of co-ownership and condominium ownership, that fall under mandatory mediation as a prerequisite for filing suit. However, if the dispute is a commercial case and concerns a claim for the payment of a sum of money or compensation, applying to a mediator before filing suit is a prerequisite to the action (Turkish Commercial Code art. 5/A); the type of action should therefore be clarified in advance.

Support from our firm

Every case is unique; the way the contract was made, the percentage of construction completed and the parties' degree of fault produce different legal outcomes, so the specific circumstances must be assessed separately. Our firm provides support in drafting and reviewing contracts, the notice (ihtarname) process, evidence recording, and the pursuit of lawsuits between landowners and contractors. For other matters in the real estate field, you can review our real estate law page, and you can reach us for a consultation through our contact page.