Default by the Contractor in Construction Contracts in Return for Land Share

Construction contracts in return for land share are complex agreements that form the basic dynamic of urban transformation processes and the real estate sector in Türkiye. Under these contracts the landowner undertakes to transfer a specified share of the land to the contractor, while the contractor undertakes, in return for that share, to construct independent units on the land and to deliver a portion of them to the landowner. The dispute most frequently encountered in practice, however, is default arising where the contractor fails to complete the construction on time or in a proper manner.

The contractor falls into default where the works are not delivered despite the expiry of the period stipulated for delivery. Where the date has been fixed definitively, default arises without the need for notice, whereas in certain circumstances the landowner may need to grant the contractor a reasonable additional period. In the event of default, the landowner has elective rights under the Code of Obligations: it may demand performance of the contract together with damages for delay; it may abandon performance and claim compensation for its positive damage; or it may rescind the contract and claim compensation for its negative damage.

According to the case law of the Court of Cassation, the level of completion of the construction is a critical criterion in the exercise of the right to rescind. Where the construction has been completed to the extent of 90 per cent or more (95 per cent in some decisions), rescission by the landowner (termination with retroactive effect) may be regarded as contrary to the rule of good faith in Article 2 of the Civil Code. In such cases the Court of Cassation holds that the rules on termination with prospective effect should be applied.

Where the contract is terminated with prospective effect, the contractor becomes entitled to a land share or independent unit in proportion to the work completed; on retroactive termination (rescission), title transfers made to the contractor are annulled and the parties recover what they have given under the rules on unjust enrichment. In order to prevent such complex disputes, which carry serious financial risks, technical specifications, delivery periods and penalty clauses must be regulated in detail with expert legal support at the contract formation stage.