Contractor Default and the Landowner’s Claim for Specific Performance in Land-Share-for-Construction Contracts

What Is a Land Share-Based Construction Contract?

Land share-based construction contracts, which have become a cornerstone of the real estate and construction sectors, are dual-purpose and hybrid contracts that encompass both a promise to sell real property and an obligation to create a work of construction within a single legal relationship. 

The multi-layered structure of these contracts gives rise to complex legal disputes—beyond the scope of traditional contract law principles—particularly during the performance phase and especially when the contractor defaults. 

In this article, we will examine the conditions for the contractor’s default in land-share-for-construction contracts, as well as the right to specific performance—one of the remedies available to the landowner in the event of the contractor’s default—and related claims, in light of current theoretical approaches in legal doctrine and Supreme Court precedents.

Under What Conditions Does the Contractor’s Default Occur?

The contractor’s default occurs when the contractor fails to fulfill the obligation to complete the construction—the primary performance under the contract—and deliver it to the landowner within the timeframe and with the specifications agreed upon in the contract, despite the performance still being possible, by acting in violation of the law.

According to the general provisions of the Turkish Code of Obligations No. 6098 (“TCO”) and the principles of the contract for work, a series of legal conditions must be cumulatively met for the contractor to be deemed to be in default:

A. Maturity of the Debt and Feasibility of Performance

First and foremost, the due date of the contractor’s primary obligation—to deliver the completed structure to the landowner—must have arrived, and the performance of said obligation must not have become objectively impossible for the parties. 

B. Non-Performance of the Debt and the Notice Requirement

In addition to the contractor’s failure to fulfill this delivery obligation—which has become due and is still possible to perform—it is generally required that the landowner has issued a formal notice of default. This is because, pursuant to Article 117 of TCO, the debtor of a due debt falls into default only upon the creditor’s notice; however, if the contract provides for a specific delivery deadline agreed upon by the parties, default is deemed to have occurred automatically without requiring such a notice. 

C. The Illegality of the Delay

In addition to all these fundamental elements, it is a legal requirement that the delay in performance—unlike the creditor’s default—not be based on a just and lawful cause attributable to the contractor arising from the landowner, meaning that the failure to perform the obligation must objectively constitute a breach of the contract.

Once all these conditions are cumulatively met, the contractor’s default will be legally established, and from this point onward, the landowner will have the right to demand specific performance of the obligation and related ancillary claims, as detailed below.

What Are Specific Performance and Related Claims?

A. What Are the Claims for Specific Performance and Substitute Performance?

In construction contracts based on land shares, the contractor’s default by failing to perform the principal obligation within the stipulated timeframe does not, in and of itself, constitute a legal event that automatically terminates the debt relationship between the parties or the obligation to specific performance. 

In the event of the contractor’s default, the landowner has the right to demand the completion of the construction with the intention of preserving the contract. In this context, the institution of specific performance—established by the legislature in anticipation of the failure to perform construction obligations and regulated in the first paragraph of Article 113 of the Turkish Civil Code—comes into effect. Pursuant to this provision, the landowner, as the creditor, may request that the performance of the obligation not fulfilled by the debtor be carried out either by the landowner themselves or by a third party authorized by the court, with all costs and risks borne entirely by the contractor. 

Conditions for a Request for Performance in the Name of the Creditor:

For the institution of specific performance to be applied, the performance of the debt must not have become objectively impossible, and the landowner must apply to the court to request explicit permission in this regard. The amount allocated and approximately determined by the court’s decision in specific performance constitutes an advance payment intended solely for the purpose of completing the construction. 

There is a discrepancy between judicial precedents and legal doctrine regarding the admissibility of a claim for specific performance. According to the Supreme Court’s established precedents, for the court to grant permission for specific performance, the construction must be physically substantially completed. For example, in a project where the physical completion level was still around 10%, a request for specific performance was rejected by the Supreme Court under the principle of good faith, and it was ruled that the dispute should be resolved in accordance with the provisions regarding the termination of the contract. Indeed, pursuant to the decision of the 15th Civil Chamber of the Supreme Court dated October 16, 2003, Case No. 2003/1771 E., 2003/4842 K.;

“If the payment is to be made upon completion, this may apply only if the work (construction) is to be completed as a whole. More specifically, since neither the completion of the deficient and defective work nor the claim that the work is to be completed as a whole was raised in a construction project at the 10.28% stage, there is no basis for discussing payment upon completion. Specifically regarding the facts of this case, the plaintiff, as the landowner, may request the termination of the existing relationship (the termination of the construction contract) in accordance with the principles of good faith. The plaintiff’s claim for the recovery of the cost of defective and incomplete work (even if this claim were to be evaluated as a claim for payment upon completion) must be dismissed, and the decision must be reversed in favor of the defendant.”

It has been ruled that in cases where the physical completion rate of the construction is very low, a claim for specific performance is inconsistent with the principle of good faith. This ruling by the Court of Cassation has been criticized by various scholars in the doctrine on the grounds that there is no such proportional limitation in the text of the law and that the right cannot be restricted through interpretation.

The landowner may not only request permission for specific performance to ensure that incomplete or defective work is completed, but may also claim in the same lawsuit that the contractor advance the reasonable costs required for this process. In practice, one of the most effective legal protections granted to the landowner to enhance the collectability of specific performance expenses and secure their financing is the ability to request that the proceeds from the sale of independent units or land shares—which, under normal circumstances, would be transferred to the contractor pursuant to the contract—be directly allocated to cover specific performance expenses through a court order. This matter is addressed in the decision of the 23rd Civil Chamber of the Supreme Court dated October 25, 2018, Case No. 2015/7558 E., Decision No. 2018/4957:

“Based on the allegations, defenses, the expert report adopted by the court, and the entire case file, and taking into account the dates regarding the construction ban in the region, the construction was required to be delivered by no later than April 8, 2011, with the building occupancy permit obtained; however, the occupancy permit was issued on ….March 2012, and the total cost of the incomplete and defective work amounts to 41,700.00 TRY; under these circumstances, the legal and contractual conditions for permitting specific performance to enable the completion of the incomplete and defective work—which the defendant has failed to remedy—have been met; Although there is no document regarding the delivery of the real property to the plaintiff, inspections were conducted between the parties to identify deficiencies in the property from time to time, and it was noted that the plaintiff reserved the right to claim liquidated damages due to the construction being completed late; since the construction was not delivered within the timeframe specified in the contract (even when construction prohibition periods are included) , the court partially granted the claim, permitting specific performance in favor of the plaintiff; authorizing the sale of the subject independent unit for no less than 110,901.79 TRY; ordering the return to the defendant of any remaining amount from the expenses incurred due to specific performance; and ordering the defendant to pay the penalty clause amount of 34,800.00 TRY,03.2012, along with legal interest accruing from that date, be collected from the defendant.”

It has been ruled that the landowner’s request to permit the sale of the contractor’s independent units for the purpose of completing the incomplete work is in accordance with legal and contractual conditions.

It should also be noted that the landowner’s decision to uphold the contract and seek specific performance does not preclude the collection of delay damages from the defaulting contractor or the claim for penalty amounts reserved with a reservation of rights at the time of acceptance of performance.

B. How Is Delay Compensation Claimed?

In construction contracts based on land shares, one of the primary legal remedies available to the landowner when the contractor defaults by failing to perform its primary obligation within the agreed timeframe is the claim for delay damages. This compensation is solely contingent upon the occurrence of default and may be sued for and claimed at any time—whether before or after the performance phase—regardless of whether the contractor has actually made the delivery.

Unlike the application of penal clauses, the legislature has not required the landowner to raise a reservation of rights at the time of acceptance of performance regarding claims for compensation for delay; it has established a legal basis allowing even a landowner who accepts the structure unconditionally to subsequently claim damages resulting from the delay. 

Conditions for Awarding Damages:

• The landowner must have suffered actual damage 
• There must be a proper causal link between this damage and the contractor’s default 
• The contractor must be at fault for the default

In such cases, while the landowner must prove the existence of the damage and the causal link, the burden of proving lack of fault rests with the contractor.

Items of Damages That May Be Claimed:

It is emphasized in legal doctrine and judicial decisions that the difference theory should primarily be applied in calculating liquidated damages. According to this theory, the basis is the negative difference between the property value the landowner would have attained had the debt been performed on time and properly, and the current property value resulting from the default.

In this context, alleged abstract losses of value cannot be claimed under delay damages; however, actual damages—such as the penalties paid to third parties due to the landowner’s inability to fulfill the commitment to transfer the independent units to third parties within the agreed timeframe, or the rental income lost due to the failure to deliver the independent units on time—may be claimed. It should be noted that there is no requirement for a specific rental amount to be explicitly stated in the contract for rental loss to be claimed. In accordance with the decision of the 15th Civil Chamber of the Supreme Court dated October 30, 2006, Case No. 2005/6438 E., 2006/6030 K.:

“In a construction contract for the transfer of a land share, if the parties have agreed on a fixed amount for rental compensation in the event of a delay in the delivery of the work, the amount of compensation the landowner may claim is limited to the agreed-upon amount. If no such amount is specified in the contract, the amount of compensation that may be claimed must be determined by an expert based on local market rates.”

It has been established through judicial precedent that, in cases where the contract contains no provision, the amount of compensation may be determined by an expert based on comparable values and local market rates.

In determining the amount of compensation, the parties’ contributory negligence is also taken into account. Pursuant to Article 54 of the Turkish Code of Obligations (TBK), as referenced in Article 114 of the TBK, if the landowner’s own actions or inactions have caused the default to occur or the damage to increase, it is a legal requirement to apply a reduction in the compensation amount determined by the court, proportional to the degree of fault and in accordance with equity. 

Pursuant to the decision of the 23rd Civil Chamber of the Court of Cassation dated May 12, 2014, Case No. 2013/8809 E., Decision No. 2014/3654 K.; 

“The case concerns a claim for compensation arising from a construction contract in exchange for a land share. The plaintiff alleged that the work was not performed within the agreed timeframe or in accordance with the contract. The court found that the work was non-compliant with the contract, defective, and incomplete, and further determined that the defendant contractor was late in delivery and that the plaintiff landowners also contributed to the delay. Consequently, the court partially granted the claim after applying a 50% reduction to the delay damages. However, an error was made in the method of calculating the plaintiff’s claim.

First, the specific defective and incomplete works must be identified individually; the cost of rectifying the incomplete works as of the date of the lawsuit must be calculated based on current market rates; and for the defective works, the difference in cost between the work performed and what was required under the contract must be determined based on current market rates as of the date of the lawsuit, and the plaintiffs’ claim must be ruled upon accordingly. Furthermore, the court awarded liquidated damages on the grounds that the defendant failed to deliver the work on time and in the manner agreed upon in the contract; however, a deduction was made from the calculated damages on the basis that the plaintiffs were also at fault for the delay. However, the judgment was rendered without determining the specific causes attributable to the plaintiffs that contributed to the delay or the duration of the delay caused thereby. In fact, the plaintiff’s entitlement to delay damages—if any—should be calculated and ruled upon only after determining the specific reasons why the landowners caused the delay and the extent to which the delivery of the work was delayed as a result of those reasons.”

Although it is stated that a reduction should be made if the landowner is at fault, the court’s abstract acceptance that the landowner is at fault or the application of an estimated reduction is deemed insufficient; rather, it is required that the specific causes of the delay stemming directly from the landowner and the duration by which these technical violations disrupted the construction delivery process be calculated in a concrete, verifiable, and unambiguous manner.

Pursuant to the principle of contractual freedom, the parties may also agree in advance to include a fixed lump-sum amount in the contract as liquidated damages to facilitate the proof of damages in the event of a breach. However, this lump-sum amount differs from a penalty clause. While a penalty clause may be claimed without the actual occurrence of damage, the agreed-upon fixed delay compensation may only be claimed if damage has actually occurred.

In examining the statute of limitations defense and the duration of the indemnity, it must be noted that, by its legal nature, the delay indemnity covers periodic damages occurring during the period between the moment the contractor defaults and the date the default legally ceases. 

The statute of limitations periods applicable to all such claims, being ancillary to the claim for performance, are subject to the same time limits as the principal claim. In this context, a five-year statute of limitations applies pursuant to Article 147(6) of the Turkish Civil Code in cases where the contractor’s breach of the delivery obligation involves slight negligence, while a ten-year statute of limitations applies pursuant to Article 146 of the Turkish Civil Code in cases where the contractor’s refusal to perform is found to involve gross negligence.

C. How Is a Penalty Clause Enforced?

In construction contracts for land shares, it is legally permissible to agree on a penalty clause under the second paragraph of Article 179 of the Turkish Civil Code, based on the possibility that the contractor may fail to perform the primary obligation of delivery at all or as required. As a penalty clause serves to reinforce the principal obligation, it constitutes an ancillary right; consequently, its validity is generally subject to the existence of the principal obligation and the formal requirements applicable to the contract. 

As a natural consequence of this accessory nature, the enforceability of the penalty clause ceases if the contract is rescinded with retroactive effect due to default. However, if a valid penalty clause exists, the landowner has the right to demand payment of the agreed-upon amount solely based on the fact of default, without bearing the burden of proving that any specific damage has occurred, in addition to the claim for specific performance.

In practice, such penalties included in contracts generally constitute liquidated damages attached to performance. Liquidated damages come into play in scenarios where the landowner demands strict performance of the obligation or terminates the contract with future effect; in such cases, the contractor remains obligated to pay this penalty even if the delivery obligation has been fulfilled. However, the enforceability of the penalty clause attached to performance is contingent upon the landowner’s failure to accept performance without raising a reservation at the time of delivery of the structure.

Pursuant to the principle of contractual freedom, the parties may agree on an optional penalty clause, and the landowner may waive the right to specific performance and instead demand the penalty amount specified in the contract as compensation for actual damages.

The enforceability of the penalty clause has been the subject of doctrine and judicial decisions regarding the contractor’s fault and the scope of damages. According to the prevailing view in doctrine, unless the parties have made a contrary provision in the contract, the penalty clause cannot be claimed in cases where the contractor bears no fault for the default. Conversely, in cases where the contractor is at fault, the landowner may claim the penalty amount pursuant to the first paragraph of Article 180 of the Turkish Civil Code, even if the landowner has suffered no actual damage; and if the actual damage exceeds the contractual penalty agreed upon in the contract, the landowner may only seek recovery of the excess amount, provided that the contractor’s fault and the extent of the damage are proven. 

There are also examples in Supreme Court case law where penalty clauses deemed exorbitant may be subject to partial or total invalidity. Indeed, the decision of the 15th Civil Chamber of the Supreme Court dated May 11, 2000, Case No. 2000/4655 E., Decision No. 2000/2324 K.:

“According to the contract, the price of the work is 380,000.00 TRY, and if the contractor fails to perform or delays performance, they shall pay a penalty equal to twice the price of the work. The contractor shall pay a penalty consisting of both the amount already received and the amount to be received, plus twice that amount; the client, on the other hand, shall not only obtain the completed work for free but also receive an amount equal to the contract price. Although damages may arise due to delayed performance, this penalty clause in the contract goes far beyond the potential damages, exceeds them, is ethically objectionable to society, and effectively legitimizes forced labor. “Although it may not lead to the contractor’s economic ruin, due to the inherent flaws it carries, it is absolutely void pursuant to Article 18 of the Constitution and Articles 26 and 27 of the Turkish Civil Code”

It has been established in case law that penalty clauses which exceed potential damages by an exorbitant margin and are incompatible with fairness will be subject to the penalty of absolute nullity.

Claims arising from a penalty clause are generally subject to a five-year statute of limitations period from the date of maturity; however, if the contractor’s failure to deliver the structure is found to be due to gross negligence, a ten-year statute of limitations period applies pursuant to Article 146 of the Turkish Civil Code.

Differences Between Lump-Sum Compensation and Penalty Clauses:

Lump-sum compensation, which we examined in the previous section and is not specifically regulated in the Turkish Civil Code, involves pre-determining a fixed amount for potential damages to relieve the landowner of the burden of proving the damage. The fundamental differences between these two institutions are as follows:

Due to the consequences arising from these differences between lump-sum indemnity and a penal clause, it is essential to determine whether the financial penalty added to the construction contract in exchange for the land share was drafted with the intent of a penal clause or for the purpose of lump-sum indemnity.

Conclusion: What Steps Should the Landowner Take?

In construction contracts for a share of the land, which are frequently encountered and often the subject of legal disputes, the legislature provides the landowner with legal means to enforce performance while maintaining the contract in the event of the contractor’s default. In the event the contractor fails to perform the principal obligation within the stipulated timeframe, the landowner may seek specific performance or, particularly, specific performance in kind; these remedies are subject to legal and procedural rules shaped by Supreme Court precedents, taking into account the project’s current stage of completion and the principle of good faith.

However, the differing legal natures of ancillary claims—such as delay damages sought to fully compensate for financial losses arising from the delay, penal clauses added to the performance, and lump-sum damages— along with details such as the burden of proof, the court’s discretionary reduction, and the raising of a reservation of rights at the time of acceptance of performance, highlight the importance of the contractual framework in resolving the dispute.

To prevent irreparable losses of rights and exorbitant commercial damages in these projects, it is essential to clearly define the legal purpose of financial penalties during the drafting of contracts, to ensure that notice procedures are carried out at the appropriate time, and to meticulously manage the actions required during the handover of the structure through a sound legal strategy.

Frequently Asked Questions (FAQ)

Is a notice of default required for the contractor’s breach of contract?

Generally, yes; however, if a specific delivery date is specified in the contract, a notice is not required, and default occurs automatically.

Can specific performance be demanded if the construction is 10% complete?

According to Supreme Court precedents, no. The Supreme Court rejects claims for specific performance in cases where the physical completion rate is very low, deeming such claims inconsistent with the principle of good faith. However, this approach has been criticized in legal doctrine.

Can the landowner claim liquidated damages after accepting the building?

Yes. A claim for delay damages does not require a reservation of rights to be made at the time of acceptance; it may be claimed later even if the structure was accepted unconditionally.

What is the most significant practical difference between a penalty clause and lump-sum damages?

A penalty clause requires a reservation of rights to be raised at the time of delivery; this is not a requirement for lump-sum damages. Additionally, while the occurrence of actual damage is not a prerequisite for a penalty clause, actual damage is required for lump-sum damages.

What is the statute of limitations for delay damages?

It is 5 years in cases of slight negligence by the contractor and 10 years in cases of gross negligence.

If the rent amount is not specified in the contract, can lost rent be claimed?

Yes. According to Supreme Court precedent, even if a fixed rent amount is not specified in the contract, compensation may be determined through an expert assessment based on local market rates.

Is the contractor required to pay a penalty clause if they are not at fault?

According to the prevailing view in legal doctrine, unless the contract provides otherwise, a penalty clause cannot be claimed if the contractor is not at fault.