Construction agreements executed in return for land shares, while offering significant commercial opportunities for contractor (developer) companies, simultaneously entail substantial legal risks. Upon completing and delivering the construction project undertaken, the contractor acquires ownership of the independent units allocated to it under the agreement. Throughout this process, issues such as project financing, timely completion, and pre-sales to third parties directly affect both the contractor’s commercial reputation and its legal position.
Particularly in cases where the project does not proceed as planned and the agreement reaches the stage of termination, safeguarding the works and investments already carried out by the contractor, while balancing liabilities toward third-party purchasers, becomes critically important.
In this article, the rights and obligations arising from the contractor’s standpoint in cases of termination due to default will be examined. The legal fate of partially completed works, the contractor’s rights where the landowner is at fault, the role of good faith in housing sales to third parties, the risks arising from the absence of annotations in land registry records, and the preventive measures contractor companies may adopt in light of Turkish Supreme Court (Court of Cassation) precedents will be discussed.
Protection of the Contractor’s Performance (Value of Partial Construction Works)
One of the most critical concerns for contractor companies is ensuring that the construction works carried out do not remain uncompensated even if the agreement is terminated. A construction agreement in return for land shares is a bilaterally binding contract; that is, once the contractor fulfills its obligation to construct and deliver the building, the landowner is obliged to transfer the agreed land shares to the contractor.
However, if the agreement is terminated before the contractor fully performs its obligations, the contractor loses the right to demand the transfer of land shares. As emphasized in a decision of the General Assembly of Civil Chambers of the Court of Cassation, “unless the contractor completes and delivers the building, the right to demand transfer of land shares does not arise; therefore, upon termination of the agreement due to non-performance, land registry entries created in favor of the contractor or third parties acquiring rights from the contractor become invalid.” This principle clearly delineates the limits of the contractor’s proprietary rights.
Nevertheless, termination does not necessarily result in a total loss of rights for the contractor. Where the contract is terminated with retroactive effect—meaning liquidation is conducted as if the contract had never existed—the partial construction performed by the contractor leads to an enrichment of the landowner’s assets. In such cases, the contractor may claim compensation corresponding to the value of the works performed, based on the provisions governing unjust enrichment.
As consistently held by the Court of Cassation, where partial construction confers a tangible benefit upon the landowner, the contractor may claim compensation at least to the extent of that benefit. For example, if a contractor undertakes to construct ten apartments but completes five units before the landowner terminates the agreement, the landowner may be required to compensate the contractor for the value of the partially completed construction.
Where termination is effected prospectively—generally in cases where construction is more than 90% complete—the situation does not amount to a classical termination but rather to the conclusion of the contractual relationship through reciprocal performance. In such cases, courts may determine the level of completion and identify the independent units rightfully earned by the contractor, ordering the transfer of the corresponding land shares.
The Court of Cassation, 15th Civil Chamber, has repeatedly ruled that where construction exceeds 90% completion, termination should take effect prospectively, allowing the contractor to retain title to the units it is entitled to. The underlying rationale is to protect the contractor’s labor and material contribution and to prevent unjust loss of performance already rendered.
In summary, even where a construction agreement is terminated, the contractor does not necessarily forfeit all entitlements. Depending on the circumstances, the contractor may either claim compensation based on unjust enrichment or, where the project is substantially completed, acquire title to the independent units it has earned. Proper management of the termination process and effective legal advocacy are essential in securing these rights.
Sales to Third Parties and the Balance Between Good Faith and Bad Faith
Contractor companies frequently enter into pre-sale agreements for independent units during the construction phase to secure financing or respond to market demand. These pre-sale agreements, typically executed before a notary public as real estate sale promises, constitute valid personal rights transferred by the contractor to third-party purchasers.
However, when the underlying construction agreement is terminated, the legal position of both the contractor and the landowner vis-à-vis these third-party purchasers becomes a matter of concern.
In scenarios where the landowner validly terminates the agreement, third-party purchasers may be unable to demand delivery of their units despite having paid the purchase price. From the contractor’s perspective, termination does not automatically extinguish obligations toward purchasers. On the contrary, purchasers may seek reimbursement or damages directly from the contractor. Where the contractor cannot assert claims against the landowner—particularly where it is at fault—it may be required to refund payments from its own resources.
For this reason, contractor companies must adopt a cautious and strategic approach when selling units to third parties and ensure that preventive legal mechanisms are embedded in their contractual arrangements.
The principle of good faith becomes particularly relevant regarding whether the construction agreement or sale promise agreements are annotated in the land registry:
- Where the agreement or sale promises are annotated in the land registry, subsequent acquirers of rights over the land cannot claim good faith, as they are deemed to have constructive notice. Even if the landowner later terminates the agreement, purchasers—acting as successors of the contractor—may, subject to certain conditions, claim registration of title.
- Where no annotation exists, a third party acquiring ownership in reliance upon the land registry is generally deemed to be acting in good faith. In such cases, neither the contractor nor purchasers can assert real rights against the new owner; the contractor’s remedy is limited to a claim for contractual damages against the landowner. Court of Cassation jurisprudence unequivocally confirms that unannotated sale promise agreements cannot be asserted against good-faith third parties.
From a reputational standpoint, protecting third-party purchasers is of vital importance for contractor companies. In practice, disappointed purchasers often initiate legal proceedings against both the landowner and the contractor. Accordingly, contractor companies should:
- Execute sale promise agreements before a notary and, where possible, ensure annotation in the land registry pursuant to Article 1009 of the Turkish Civil Code.
- Transparently regulate third-party sales within the primary agreement with the landowner.
- Maintain open communication with purchasers upon any indication of delay or termination, offering alternative remedies such as refunds or interest payments where appropriate.
Recent Court of Cassation decisions also reflect an increasingly purchaser-protective approach. In certain cases, purchasers have been permitted to complete outstanding works at their own expense and obtain title registration upon depositing the relevant costs. These rulings demonstrate that good-faith purchasers are not left entirely unprotected, even where the contractor defaults.
Land Registry Records, Absence of Annotation, and the Limits of the Contractor’s Rights
As emphasized above, the absence of a land registry annotation significantly weakens the contractor’s legal position. Without annotation, the contractor’s rights remain purely personal and cannot be asserted against subsequent good-faith acquirers. This principle stems from the protection afforded to reliance on land registry records under Article 1023 of the Turkish Civil Code.
Court of Cassation unification decisions consistently uphold that construction agreements lacking land registry annotation cannot be asserted against later good-faith purchasers.
The scope of the contractor’s rights ultimately depends on contractual compliance. Where the contractor has materially breached its obligations—such as failing to commence construction or causing excessive delay—it may forfeit certain rights. In cases of contractor fault, the landowner may validly terminate the agreement, nullify unearned entitlements, and enforce contractual penalties. Claims for lost profits are generally excluded; at best, the contractor may claim compensation limited to the value of works performed.
Conversely, where delay results from the landowner’s failure to perform contractual obligations—such as not transferring land shares or delaying permit processes—the contractor may not be deemed in default. The Court of Cassation, 15th Civil Chamber, has explicitly ruled that “a contractor who does not commence construction due to the landowner’s failure to transfer land shares cannot be considered at fault.” Consequently, monitoring the landowner’s performance and formally placing the landowner in default where necessary is crucial for contractors.
Preventive Measures for Contractor Companies and Conclusion
Corporate contractor companies can safeguard their rights against termination and default risks by adopting proactive legal strategies:
- Careful Contract Drafting: Contractual provisions should be clear, balanced, and consistent with Court of Cassation precedents, particularly regarding timelines, penalties, force majeure, and reciprocal default mechanisms.
- Land Registry Annotation: Contractors should assess the feasibility of annotating their contractual rights pursuant to Article 1009 of the Turkish Civil Code, as this provides critical protection against third-party transfers.
- Phased Transfers and Securities: Progressive transfer of land shares and contractual guarantees can significantly enhance the contractor’s legal security.
- Third-Party Purchaser Agreements: Sale contracts should explicitly regulate termination scenarios, refund mechanisms, and interest provisions to mitigate future disputes.
- Performance Documentation: Contractors should meticulously document construction progress and landowner-related delays to establish evidentiary support in potential disputes.
- Legal Advisory and Dispute Resolution: Engaging experienced legal counsel from the outset and considering alternative dispute resolution mechanisms can prevent costly litigation.
In conclusion, the protection of contractors’ rights in construction agreements in return for land shares requires a proactive and foresighted legal approach. Given that both parties simultaneously occupy the positions of creditor and debtor, contractors must monitor not only their own obligations but also those of landowners. Proper use of legal instruments such as land registry annotations, balanced contractual arrangements, and effective risk management is as critical as technical and commercial success.
Should your company require legal assistance regarding construction agreements in return for land shares, our experienced legal team stands ready to provide comprehensive support to safeguard your project and minimize potential disputes.
