Retail industry lease agreements: a two-dimensional view

Dunya Executive - - BUSINESS BY LAW - VEFA RESAT MORAL, MANAGING PARTNER, MORAL LAW FIRM resatmoral@moral.av.tr

The retail industry has led the Turkish economy in recent years and shopping malls are the most essential part of the industry. Shopping malls have recently undergone a challenging period by virtue of social and economic developments throughout the country. Tending to grow together, they have faced substantial declines as to decreases in footfalls due to recent adverse events as well as a reduction of the consumption appetite due to economic constriction. In this trend, shopping malls have been adversely affected regarding leases, since retailer profitability has declined and foreign exchange rates have increased significantly.

The fact that shopping mall rents are determined by foreign currencies creates an independent concern on account of the retail industry. Thus, retailers have been demanding incentives from shopping mall managements such as a fixed exchange rate, rent reduction or payment possibilities in the domestic currency. Alternatively, since retailers’ revenue feasibilities are figured out by an expectation of foreign exchange income, shopping mall investors who mostly paid back their loans in foreign currency for at least five to nine years were forced to be cautious regarding the aforementioned demands.

Today, 118 of 371 shopping malls in Turkey are collecting their rents in domestic currency, namely Turkish lira, meanwhile the remaining 253 are collecting in foreign currencies. Six of these foreign currency-collecting shopping malls have converted their lease agreements and started to collect in Turkish lira, as a consequence of President Recep Tayyip Erdogan’s call that those who had drafted their lease agreements in foreign currencies should amend the payment clauses by means of determining Turkish lira as the new payment instrument.

This article evaluates the cases and possibilities of adaptation of rents in the retail industry in the light of essential adverse developments from the two perspectives of shopping malls and retailers. Conditions to allow demand of lease rate adaptation for deduction purposes In view of the aforementioned precedents, the existence of all four conditions is required for the adaptation of rent amounts. These are:

1) An unexpected development that cannot be foreseen by the parties should arise during a long contractual term

2) Such an extraordinary development should arise under a reason not originated from the lessee

3) Conditions determined at the commencement date of the relationship should have essentially changed against the Lessee due to such an unexpected development

4) The lessee, at the time of adaptation request, should either not perform its obligations or should perform such obligations with the reservations of the adaptation request.

Contractual status of retailers Regarding lease agreements between the merchant parties, the Supreme Court strictly interprets the condition of predictability where courts expect a prudent merchant to envisage a crisis and locate the risk of fluctuation on foreign exchange rates in advance. For instance, despite the fact that Turkey’s inflation rate does not change regularly, an adaptation claim regarding the contract concluded after the February 2000 crisis, the period from when adaptation demands are accepted, has been rejected on the ground that “a prudent merchant should have foreseen the economic changes during a crisis period.” From the view of shopping mall investors In light of legislation and legal practice, the position of the shopping mall investor seems crystal clear. However, even the legal protection shield protects lessors until the Supreme Court change its approach; the reality is that a shopping mall may only protect its value with a strong and sustainable shopping mix and brands. Therefore, even if the shopping mall investor seems to be protected by the law against retailers’ adaptation requests, it is clear that they should not remain unresponsive to retailers’ expectations. The big picture demonstrates the fact that industry players can only win together.

Conclusion When we review the current conjuncture of Turkey – aside from the uncertainty of the inflation rate, devaluations of the past, or current exchange rate fluctuations – the fact that Turkey has faced with difficult socio-economic developments, consecutive terror attacks, the coup attempt on July 15, 2016 sequent negative events, and after recent events affecting the economy such as the US presidential elections; it is foreseeable that industries will be negatively affected. However, in recent history, there is no court ruling that formulates the solution as the inflation increase as double or such will not be deemed as an unforeseeable extraordinary occasion. When past court rulings and the Supreme Court’s general attitude have been taken into consideration, it is a moral certainty that courts would evaluate and rule the Turkish market conditions as foreseeable.

Despite the aforementioned reality in Turkey, shopping mall investors do evaluate, and also should, under a sustainable win-win principle that the parties need each other for life for the creation of an environment that provides a long-term profitable market.

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