In construction contracts made in return for independent units (kat karşılığı inşaat sözleşmesi), the landowner’s greatest fear is that the contractor establishes a mortgage in favour of third parties, and of banks in particular, over the independent units that belong to the landowner. So, even where there is no annotation in the land register, can banks protect that mortgage by claiming that they acted in good faith?
A critical decision given recently by the Court of Cassation (Yargıtay) answers this question clearly in favour of landowners: “A bank that carries out a simple investigation could have known that the construction was in return for independent units; its claim of good faith therefore cannot be heard.”
In practice, after taking over the land shares, contractors obtain loans from banks in order to finance the project and, in return for that loan, establish a mortgage over the independent units that should belong to the landowner. When the construction is completed, the landowner is faced with a bank mortgage over the very flat to which they are entitled.
In a case examined by the 6th Civil Chamber of the Court of Cassation, banks generally raise the defence that “there was no annotation in the land register; as a bona fide third party we must be able to keep our mortgage.” The Court of Cassation, however, no longer accepts this defence.
The essential reasoning of the Court is as follows:
- Banks cannot content themselves with looking at the land register as an ordinary citizen would. As professional credit institutions, they are under a duty to examine the situation of the property, the nature of the construction and any reference to “construction in return for independent units” in the land registry records.
- Even where there is no annotation in the land register, the ongoing state of the construction and the contractual relationship can be revealed by a simple investigation.
- A failure by the bank to carry out that investigation is assessed as “gross negligence” or “bad faith”, and the mortgages established may be removed together with the landowner’s action for registration.
This decision provides landowners with the following legal safeguards:
- The unlawful mortgages of the contractor do not prevent your ownership of your flat. With a sound legal strategy, these mortgages may be released (fek, that is, discharged).
- The defence of the bank that it did not know may be invalidated within the framework of the duty of professional care (in the context of article 1023 of the Turkish Civil Code and the following provisions).
- By bringing an action for the cancellation of the title deed and re-registration in respect of your mortgaged flats, you may have your right of ownership prevail over the claim of the bank.
In disputes arising from construction contracts made in return for independent units, and particularly where bank mortgages are involved, timing is of vital importance. Starting the legal process before the financial position of the contractor deteriorates and before the mortgages are converted into money through enforcement proceedings is the only way to protect your right of ownership.
If you are unable to take delivery of your flat because of a mortgage established by the contractor, or if your title deed is at risk, you may contact our office for professional legal support.
