SCOPE OF THE EXPRESSION "DISPOSITION" UNDER SECTION 31/III OF THE FINANCIAL LEASING, FACTORING AND FINANCING COMPANIES LAW NR. 6361

I- Financial Leasing Contract

A financial leasing contract is an agreement under which an investment property is purchased by the lessor and leased to the lessee and made use of within the term of the agreement. If mutually agreed under the contract (Section 23 / I of the Financial Leasing, Factoring and Financing Companies Law Nr. 6361, referred briefly as the “Law Nr. 6361”), the lessor transfers the ownership of the property to the lessee at the end of the term of the agreement.

The contract must be in writing, and if the subject under the contract is an immovable property, the contract must be registered with the land registry office, and if it is a movable property subject to registration, it must be registered with the respective registry. In practice, this procedure is called “financial leasing annotation”. Movable properties not subject to registration are registered with the exclusive registry held by the Union of Financial Leasing, Factoring and Financing Companies (Section 22 of the Law nr. 6361)

Under the contract, the lessor is obliged to deliver the property subject to the contract to the lessee within minimum two years (Section 22 of the Law Nr. 6361). The lessee has to use and maintain the property in accordance with the terms set out under the contract. On the other hand, the lessee is also responsible for the maintenance and repair of the property subject to the contract. The property subject to the contract has to be insured, and insurance premiums are covered by the lessee. Moreover; damages, loss and decrease in value of the property subject to the contract caused by contractual use and are not covered by the insurance will be at the lessee’s risk (Section 24 of the Law nr. 6361).

By this means, particularly small- and medium-sized companies are able to acquire any and all equipment, tools, immovable properties, and similar goods, as necessary for their activities, without having to pay large amounts of money at once. Another important reason for choosing the financial leasing method is that companies find the opportunity to acquire property without using their own resources.

II- Termination of the Financial Leasing Contract, and Termination by the Lessor

It is stated clearly, under the Law nr. 6361, that the financial leasing contract will be terminated automatically if the contract expires, the lessor dies or loses her/his capacity to act (Section 30 of the Law Nr. 6361). Similarly, it is regulated under the same section that unless otherwise agreed, the lessee may terminate the contract before it expires if the s/he enters into liquidation process or liquidates her/his business where the property subject to the contract is assigned for, even if s/he does not enter into a full liquidation process.

Breach of contract is regulated under the Section 31 of the Law Nr. 31. It reads as follows:

“The lessor may terminate the contract if the lease amount is not paid within the thirty-day period granted to the lessee who is in default in paying the lease amount. However, if it is agreed under the contract that the ownership will be transferred to the lessee at the end of the term of the agreement, this period may not be less than sixty days. Contracts entered into with lessees, who have been warned due to the failure to pay three or two consecutive lease amounts in a year, may be terminated by the lessor."

Under this section, two alternatives on termination are provided to the lessor depending on the breach of the contract by the lessee. One of them is the case where three or two consecutive lease amounts are not paid on time in a year. When one of these conditions is met, the lessor can directly terminate the contract by sending a notice to the lessee. In this case, the lessor is not required to grant time to the lessee, and it is not sought for the lessee to go into default.

The second alternative takes place in the first sentence of the section, and accordingly, the lessor has to put the lessee into default in accordance with Section 117 of the Law of Obligations by sending her/him a notice. However, the lessee being in default is not sufficient for termination of the contract. The lessor also has to cause the lessee to fall into default in thirty days for her/him to pay her/his debt. If the lessee fails to pay her/his debt within this period, the lessor may terminate the contract. It is also highlighted, under the section, that if the parties have agreed upon the transfer of the ownership of the property subject to the contract to the lessee at the end of the term of the agreement, the time to be granted by the lessor may not be shorter than sixty days.

It is set out, under section 31/II of the Law Nr. 6361, that if either of the parties acts in breach of the contract and in cases where the other party may not be expected to sustain the contract, the contract may be terminated.

Since financial leasing contracts are considered to be contracts with continuous obligations, the lessor’s claims under the scope of the termination will be determined in accordance with the Section 126 of the Law of Obligations. Accordingly, the contract may be terminated and compensation for damages suffered due to the termination of the contract before its term may be requested. The aforementioned damages are accepted to be positive damages according to the legislative intent.

Positive damages are explained in the doctrine as follows (1):

“Positive damages refer to the damages suffered by the creditor due to failure of the occurrence of her/his interest in fulfillment of the obligation. In other words, the difference between the status of the creditor's assets in the event that the debt is fulfilled and the condition that the debt has not been fulfilled is a positive damage."

In this case, for instance, if the lessor terminates the contract before its term due to insolvency of the lessee and may not lease the property subject to the contract in the remaining term of the agreement or lease it in consideration of a lower fee, the lessor may claim the loss from the lessee. 

III- Assessment of Section 31/III of the Financial Leasing, Factoring and Financing Companies Law Nr. 6361

Financial leasing contracts are synallagmatic contracts with continuous obligations. Therefore, disputes often arise and may be subject to civil law cases due to the failure to perform the bilateral obligations. Since financial leasing contracts aim to provide merchandisers with tools, equipment, and immovable properties, as necessary for their commercial activities, properties subject to the contract are usually very expensive and valuable.

In this regard, for instance, if there is a case arising from the insolvency of the lessee, financial leasing companies face the risk of decrease in the value of the property subject to the contract, establishment of limited real rights on the property subject to the contract such as lien and have difficulty in debt collection, since it takes a very long time for lawsuits to be finalized in our country. For this reason, Section 31/III of the Law Nr. 6361 sets an exceptional way for financial leasing companies:

“If a court renders a decision of preliminary injunction in a dispute regarding a financial leasing contract between the lessor and the lessee and the property subject to the contract is given to the lessor or a third party, the lessor may dispose of the property subject to the contract by depositing money in the amount of the market value of the said property. However, if the termination of the contract is ruled to be unjust, the lessor is obliged to compensate for the damages of the lessee.”

As it is seen, if the court gives the property, subject to the contract, to the lessor or a third party, the lessor may dispose of the property by depositing money in the amount of the market value of the property. There is no consensus upon the scope of the expression “disposition”, as set out under the section.

Turkish Language Association defines the expression “disposition” as follows: The authority to use something at its own will.

In the doctrine, it is explained as:

“Dispositional transactions are legal transactions that directly affect a right in the assets of the disposer, transfer or restrict that right to another person, impose burden, change or terminate that right. Transfer of property, assignment of receivables, transferring the right; Establishing an easement right on an immovable property can be shown as examples of a disposition process that limits the property right." (2)

As it can be interpreted from both definitions, disposition authority is the widest authority provided to a person upon a property. The person who is authorized to dispose of a property may establish a limited real right on the property and even transfer the ownership of the property to another person.

In this scope, it has to be acknowledged that the expression “disposition” has been deliberatively chosen by the legislator. Therefore, once the lessor pays the deposit as stipulated by the law, the lessor may carry out any transaction upon the property subject to the contract and transfer its property to a third party.

Thus, it has been underlined, under the recent decisions by the Regional Court of Justice, that the financial leasing company who has roughly proved its claim and paid the necessary deposit has to be provided with the authority to dispose, as set forth under Section 31/III of the Law Nr. 6361, and this authority may be used to sell the property:

“In summary, the attorney to the plaintiff claimed, under his appeal petition, that the property belongs to the client, the request for an interim injunction is obligatory for protection of the client's rights, that the immovable property remains in the responsibility of the lessee will cause its wear, Section 31/3 of the Law Nr. 6361 gives the right to dispose of the property, the client company will take back the leased real estate with a cautionary decision, with a letter of guarantee or guarantee under which he stated that the real estate will be sold to a third party in accordance with the power of disposal, and that the property right is secured by the constitution, and demanded that an order be issued to annul the decision…

The lawsuit is about full restitution of the property subject to the financial leasing contract. The present dispute is regarding the decision of rejection of the preliminary injunction claim… Under the notice sent to the counter party on 24.04.2019 by the party who requested a preliminary injunction, it was stated that the contract had been terminated and payment of the receivables had been requested to be made within 60 days, the return of the goods had been requested 3 days after expiry of this period. The notice had been delivered to the counter party on 26.04.2019. It was set forth, under Section 31/III of the Financial Leasing, Factoring and Financing Companies Law Nr. 6361, that the lessee is obliged to return the property when the contract is terminated by the lessor. The lessee did not argue that the notices were unlawful or that the payment had been made in accordance with the contract. According to Section 389 of the Code of Civil Procedure, the claimant is expected to roughly prove her/his claims. When the present case is investigated in the light of the explanations above, considering that the contract was terminated by the lessor and considering the Law Nr. 6361 and the provisions of the contract between the parties, it is against the procedure and law to decide in writing as a result of an erroneous evaluation instead of ruling for a preliminary injunction.” (The decision, dated 17.01.2020, numbered 2020/61 and bearing the file number 2019/2959, by the 16th Civil Chamber of the Regional Court of Justice of Istanbul)

As clearly set forth in the decision, the expression “disposition” provides the lessor, who has paid the deposit and roughly proved her/his claim according to Section 389 of the Code of Civil Procedure, with the greatest authority upon a property, and the lessor may sell the property subject to the contract within this scope.

Att. Ezgi Ozdemir

 

References:

1) Oguzman/Oz, “Borclar Hukuku Genel Hukumler”, Volume I, 13th Edition, Istanbul, 2015, p. 383

2) Oguzman/Barlas, “Medeni Hukuk”, 20th Edition, Istanbul, 2014, p. 177