Contractual Right of Pre-emption

What Is the Contractual Right of Pre-emption?

The contractual right of pre-emption is a formative right which, where the owner of an immovable sells it to a third party or carries out a transaction economically equivalent to a sale, entitles the holder of the right of pre-emption to become its purchaser by a unilateral declaration.

In practice, a pre-emption agreement aims to prevent the immovable from passing to an unwanted person where the owner does not wish to sell the property at present but is likely to sell it in the future. We may say that it serves a purpose similar to that of the statutory right of pre-emption.

Unlike the statutory right of pre-emption, the contractual right of pre-emption creates a voluntary restriction for the owner. By it, the owner confers the power to establish, by a unilateral declaration of intent, a contract of sale between himself or herself and the counterparty. Since this right arises from a contract, it is by its nature a personal (contractual) claim.

The circumstances in which the contractual right of pre-emption cannot be exercised are the same as those in which the statutory right of pre-emption cannot be exercised.

Form of the Contractual Right of Pre-emption

Under Article 237/3 TCO, the contractual right of pre-emption is subject to written form. This formal requirement is a condition of validity. No notarised (official) form is additionally required for the pre-emption agreement to be annotated in the land registry; written form is sufficient. The content of the agreement must identify the parties and the immovable concerned, and it must bear the parties’ signatures. The legislature’s reason for requiring written form stems from the fact that this transaction is mostly seen as a clause included in lease agreements. In this way, the parties’ task is in a sense made easier.

The contractual right of pre-emption may be established by an inter vivos transaction or by a disposition mortis causa. If it is to be established by a disposition mortis causa, it may be established by a will or an inheritance contract, provided that the formal requirements of these two forms of disposition are complied with.

Annotation of the Right in the Land Registry

The contractual right of pre-emption creates a contractual claim. For this reason, the right is relative. To enable the right to be asserted against third parties as well, the legislature has provided for the annotation of the right of pre-emption in the land registry. If it is not annotated, the pre-emption agreement continues to exist; however, where the party bound by the pre-emption sells the immovable to another person or transfers it by a transaction similar to a sale, the right holder can in that case only claim compensation for the resulting loss from the party bound by the pre-emption (the seller). If it is annotated, the holder may assert the right against anyone who holds ownership of the immovable within the ten-year annotation period. The annotation period cannot exceed ten years; this is the maximum period (Article 735/2 TCC). Owing to the annotation, where rights acquired by third parties in the immovable would make it more difficult to exercise the annotated right, the additional effect of the annotation ensures that those rights cannot be exercised.

This annotation entered in respect of the contractual right of pre-emption resembles the annotation entered as an interim measure in an action brought to exercise the statutory right of pre-emption. However, as can be seen here, no separate annotation is required when bringing an action to exercise the right, since the annotation already exists beforehand.

The benefit of the annotation for the holder of the right of pre-emption in terms of protection against problems that may arise in the future is evident.

Simple and Qualified Pre-emption Agreements

A distinction is drawn between simple and qualified pre-emption agreements according to whether the pre-emption agreement sets the terms of the contract of sale for the right holder.

Conditions for Exercising the Contractual Right of Pre-emption

The conditions discussed in the article for the right to be exercised are as follows:

1. A sale contract or a transaction equivalent to a sale must have been concluded
2. The transaction must have been notified to the holder of the right of pre-emption
3. The right of pre-emption must have been exercised in time
4. The right of pre-emption must not have been waived
5. Exercise of the right of pre-emption by way of legal action

a) A Contract of Sale or a Transaction Equivalent to a Sale Must Have Been Concluded

For the right to be exercised, a sale or a transaction equivalent to a sale must first have been concluded between the owner of the immovable over which the right has been established and a third party. An example of such a transaction is the transfer of all the shares in a real estate investment trust owning the immovable.

b) Notification to the Holder of the Right of Pre-emption That the Sale or an Economically Equivalent Transaction Has Taken Place

In this respect, the provisions on the notification obligation in the exercise of the statutory right of pre-emption apply. In addition, if the holder of the right of pre-emption learns of the sale long after it took place and, exercising that right, brings a pre-emption action against the third party, the defendant third party may request that payment be made on the basis of the actual value of the immovable on the date of the action.

c) The Right of Pre-emption Must Have Been Exercised in Time

The right of pre-emption will remain valid within the period specified in the agreement. After the period has expired, the right holder cannot make any claim. Apart from this period specified in the agreement, following the transfer of the immovable by sale or an equivalent transaction, which is the first condition for the right to arise, the right must be exercised within the notification periods applicable to the statutory right of pre-emption. In addition, as mentioned above regarding time limits, where an annotation is entered, there will be a maximum annotation period of ten years. Within this annotation period, the person must exercise the right within the minimum period of three months from notification and the maximum period of two years from the sale, as laid down in the law. All the periods mentioned are periods of forfeiture.

d) The Right of Pre-emption Must Not Have Been Waived

Owing to the cross-reference in the TCC, the rules applicable to the statutory right of pre-emption also apply to contractual rights of pre-emption.

e) Exercise of the Right of Pre-emption by Way of an Action

Just as with the statutory right of pre-emption, this right may be exercised by way of an action. The sale relationship between the right holder and the purchaser resulting from the action is established at the moment the statement of claim containing the declaration exercising the right of pre-emption reaches the defendant purchaser. The effects of the annotation mentioned above must not be overlooked here. This is important in determining who has standing to be sued.

Simulation as to the Price in Pre-emption

Where the right of pre-emption over an immovable that has been sold is exercised by way of an action, situations may emerge in which the sale price has been simulated. Two possibilities may arise here:

Sale price shown higher in the land registry

-The person injured by the simulation arising from the sale price being shown in the land registry as higher than the actual sale price is the holder of the right of pre-emption, because the purpose of showing it higher is to prevent the holder of the right of pre-emption from filing a pre-emption action. If the value is high, the price that must be paid to the third party as a result of exercising the right will be the amount shown. For this reason, the holder of the right of pre-emption may file a pre-emption action that includes the claim of simulation. Here, since they are not a party to the simulation, they may rely on all kinds of evidence, call witnesses and request an expert report. However, the Court of Cassation does not consider the price determined solely by an on-site inspection sufficient to establish simulation. In terms of proof, it scrutinises the matter, so to speak, with a fine-tooth comb. In the reasoning for the reversal in the decision of the 14th Civil Chamber of the Court of Cassation dated 14.03.2016, numbered 2015/15015 E., 2016/3195, on the subject, “…. The claimant sought a declaration that the sale price in the official deed dated 28.05.2010 relating to the immovable registered as block 297, parcel 17 had been shown in the land registry as far too high, the determination of the actual sale price, and the cancellation of the share registered in the defendant’s name and its registration in the claimant’s name. The claimant, who is not a party to the sale transaction in the land registry, may prove the claim of simulation as to price by any evidence. The expert report drawn up following the on-site inspection conducted by the court is not by itself sufficient to prove the claim of simulation. However, it serves to complement the other evidence…” the Court thus set out the position in these terms.

“…. The claimant sought a declaration that the sale price in the official deed dated 28.05.2010 relating to the immovable registered as block 297, parcel 17 had been shown in the land registry as far too high, the determination of the actual sale price, and the cancellation of the share registered in the defendant’s name and its registration in the claimant’s name. The claimant, who is not a party to the sale transaction in the land registry, may prove the claim of simulation as to price by any evidence. The expert report drawn up following the on-site inspection conducted by the court is not by itself sufficient to prove the claim of simulation. However, it serves to complement the other evidence…”

Court of Cassation 14th Civil Chamber, decision dated 14.03.2016, 2015/15015 E., 2016/3195

Of course, since any evidence may be relied on, the aim has in a sense been to protect the right holder. If simulation cannot be proven, the court is obliged to ask the claimant during the proceedings whether he or she insists on exercising the right of pre-emption. If still willing, the claimant may ensure the continuation of the action by depositing the price shown in the land registry and the related fees within the period to be set by the court.

Sale price shown lower in the land registry

A purchaser who wishes to pay less in respect of the related fees resorts to showing the sale price in the land registry as lower. In such a case, by bringing an action and exercising the right, the holder of the right of pre-emption will be able to acquire ownership of the immovable by paying the price declared in the land registry and covering the fees. There is again a case of simulation here. However, the party harmed here is now the purchaser, who is the defendant. Under the settled case law of the Court of Cassation, no one may make a claim based on his or her own simulation. Moreover, under the general principles of law, no one may derive a benefit from a situation arising from his or her own fault. For these reasons, the defendant cannot claim that there was simulation. In some of its judgments on this matter, the Court of Cassation has allowed the purchaser to prove the situation by a document equivalent to the land registry record. Where the sale took place between relatives, there are Court of Cassation judgments that have also accepted an ordinary written document.

This matter is also controversial in the doctrine, and there is a view that it will lead to unjust enrichment on the part of the person exercising the right of pre-emption. The underpayment of taxes and fees payable at the land registry in respect of the immovable sold also causes loss to the State. Since less than the amount due has been paid because of the understated value, a tax loss penalty will arise. There are differing views as to who should bear this penalty and the difference in the fee amount arising from the actual price.

Court of Cassation Decisions on the Subject

On the Statutory Right of Pre-emption, the Court of Cassation;

“Pursuant to the decision on the unification of case law of the Assembly of Civil Chambers of the Court of Cassation dated 11.06.1947, numbered 1947/5 E., 1947/18 K., co-owners exercising the right of pre-emption benefit equally from the share subject to pre-emption, whatever their shares. Where other co-owners join the action by way of principal intervention under Article 65 of the Code of Civil Procedure No. 6100, or by way of consolidation under Article 166 of the Code of Civil Procedure of a pre-emption action filed by other co-owners, those co-owners also benefit equally from the share subject to pre-emption, provided that the principal intervention request or the consolidated action was filed in time.”

(Court of Cassation 14th Civil Chamber, 07.01.2020, 2019/4628 E., 2020/137 K.)

On the Conditions for Exercising the Right of Pre-emption, the Court of Cassation;

“The right of pre-emption does not apply to transfers that are not in the nature of a sale. Since the claimant is not a party to the transaction in the land registry, he or she may allege that the transaction was simulated and was shown as an exchange in order to prevent the exercise of the right of pre-emption, and may prove this allegation by any evidence, including witnesses.”

(Court of Cassation 6th Civil Chamber, 16.03.2004, 2004/1094 E., 2004/1756 K.)

On De Facto Partition, the Court of Cassation;

“…Where the immovable to which the share subject to the pre-emption action relates has been privately partitioned among the co-owners and each co-owner uses a specific part, and one of them sells the part he or she uses and the share corresponding to that part to a third party, the exercise of the right of pre-emption on account of the sale in the land registry by a claimant who did not claim any right over that part at the time of the sale is incompatible with the rule of good faith set out in Article 2 of the TCC. Pursuant to the Court of Cassation’s Judgment on the Unification of Case Law dated 14.2.1951, No. 17/1, the plea of bad faith may be raised at any stage of the proceedings and must also be taken into account by the court of its own motion. In such a case, there is no question of an expansion of the defence. Where there is a de facto partition, the action must be dismissed.”

(Court of Cassation 14th Civil Chamber, 05.11.2018, 2016/8170 E., 2018/7395 K.)

Sources Used

• OĞUZMAN, SELİÇİ, OKTAY ÖZDEMİR, Eşya Hukuku, Filiz, Istanbul 2015
• EREN, Borçlar Hukuku Özel Hükümler, Yetkin, Ankara, 2015
• ARAL, AYRANCI, Borçlar Hukuku Özel Borç İlişkileri, Yetkin, Ankara, 2019
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• ÖZÇELİK, Ş.B. An Assessment of the Court of Cassation’s Practice that the Statutory Right of Pre-emption Cannot Be Exercised in the Case of De Facto Partition, TBB Journal 2019(141), (253-264)