CAN A LEASE AGREEMENT BE STRUCTURED AS A SERVICE AGREEMENT?
In practice, particularly in serviced residences, residence projects, short- and medium-term accommodation models, and certain mixed-use relationships, it is observed that parties structure their contractual relationships under titles such as “service agreement,” “accommodation agreement,” or similar designations instead of using a traditional lease agreement. Such agreements often create hybrid legal structures incorporating both the transfer of the right to use an immovable property and ancillary elements such as cleaning, management, concierge, and reception services within the same legal relationship.
Pursuant to Article 299 of the Turkish Code of Obligations No. 6098 (“TCO”), “a lease agreement is an agreement whereby the lessor undertakes to leave the use of a thing, or both its use and enjoyment, to the lessee, and the lessee undertakes to pay the agreed rent in return.” In light of this statutory definition, whether the parties’ structuring of the agreement under a different title alone changes the legal nature of the agreement constitutes an issue that must be separately assessed, particularly in view of the mandatory provisions governing residential and covered workplace leases under Articles 339 et seq. of the TCO.
The hybrid nature of such agreements gives rise to significant legal discussions regarding whether these relationships should be characterized as lease agreements, service agreements, or unnamed mixed contracts; whether party intent or the objective nature of the agreement should prevail in such characterization; and whether it is possible, through such contractual structures, to depart from the mandatory provisions of lease law.
Within the scope of this article, the legal characterization and validity of structuring a lease agreement as a service agreement will be examined in light of the provisions of the TCO, the dominant element theory recognized in legal doctrine, the prohibition of linked transactions, and current judicial precedents on the subject.
WHAT IS A LEASE AGREEMENT?
Pursuant to Article 299 of the TCO, a lease agreement is a bilateral agreement whereby the lessor undertakes to leave the use of a thing, or both its use and enjoyment, to the lessee, and the lessee undertakes to pay rent in return. The constitutive elements of a lease relationship consist of the transfer of the use of the leased property, payment in return for such use, and the mutual intent of the parties regarding these matters.
The determining element in terms of the legal nature of a lease agreement is the transfer of the right to use and benefit from a particular property or right to the other party. In this respect, the principal feature distinguishing a lease agreement from service, work, or mandate agreements is that the core of the agreement is not a personal labor or activity obligation, but rather the transfer of a right of use.
As a matter of fact, in its decision dated 24.04.2024 and numbered E.2023/235, K.2024/195, the General Assembly of the Court of Cassation emphasized that, for a lease agreement to come into existence, the parties must agree on the essential terms of the agreement. This approach supports the view that legal characterization should be based not merely on the title of the agreement, but on its essential elements.
As a rule, lease agreements are not subject to any formal requirement and may even be established through written, verbal, or implied declarations of intent. Nevertheless, the fact that the agreement has been designated under different titles by the parties does not necessarily mean that the relationship will be characterized accordingly; rather, the nature of the relationship and its essential elements are determinative in identifying its legal character. This issue constitutes the starting point for discussions concerning the legal consequences of establishing a lease agreement under the title of a “service agreement.”
WHAT IS THE DIFFERENCE BETWEEN A LEASE AGREEMENT AND A SERVICE AGREEMENT?
Whether an agreement is characterized as a lease agreement or a service agreement is determined not by the title given to the agreement by the parties, but by identifying the principal element of the contractual relationship. If the dominant element of the agreement consists of the transfer of the right to use an immovable property or an asset, the agreement will be regarded as a lease agreement. Conversely, if the principal element consists of a specific personal labor, activity, or service performance, the characterization as a service agreement may come into question.
This distinction becomes particularly important in hybrid structures where the right of use and the service element coexist within the same agreement. The debates observed in practice in serviced residences, residence projects, and similar models are generally concentrated around this distinction.
| Criterion | Lease Agreement | Service Agreement |
| Principal element | Transfer of right of use | Personal labor or service performance |
| Economic purpose | Providing use and enjoyment | Performance of services |
| Role of service elements | May be ancillary | Constitutes the principal obligation |
| Consideration | Rent | Service fee |
| Dominant element test | Right of use is dominant | Service performance is dominant |
A. Where the Transfer of the Right of Use Constitutes the Principal Element, a Lease Agreement Exists
If the principal purpose of the agreement is the transfer of possession or the right to use a specific immovable property in return for consideration, the relationship will, as a rule, be regarded as a lease agreement even if accompanied by certain service obligations. In such cases, cleaning, management, security, concierge, or similar services constitute ancillary obligations rather than principal performances and do not, by themselves, alter the legal nature of the agreement.
As a matter of fact, in its decision dated 15.06.2022 and numbered E.2022/949, K.2022/1009, the 23rd Civil Chamber of the Ankara Regional Court of Appeal stated that “…in cases where the operator element does not constitute the principal subject matter of the agreement but remains an ancillary obligation connected to the use of the leased property, the relationship must be regarded as a lease agreement…”; thus clearly establishing that where auxiliary service elements remain secondary in comparison with the transfer of the right of use, the agreement preserves its character as a lease agreement.
B. Where the Service Performance Constitutes the Principal Element, the Relationship May Be Characterized as a Service Agreement
Conversely, where the core of the contractual relationship consists not in the transfer of the use of the leased property but rather in a specific personal labor, expertise, or organizational service, the relationship may be characterized as a service agreement or an atypical mixed contract. In such cases, the determining factor is whether the dominant aspect of the agreement is the right of use or the personal service performance.
As a matter of fact, in its decision dated 15.11.2023 and numbered E.2023/1753, K.2023/1857, the 23rd Civil Chamber of the Ankara Regional Court of Appeal concluded that, “in a dispute concerning the use of construction machinery with an operatör, the operator’s personal knowledge and experience constituted the principal element of the agreement, and therefore the relationship should be regarded not as a lease agreement but as a service-oriented contractual relationship.”
When this approach is evaluated together with the aforementioned decision of the same Chamber dated 15.06.2022 and numbered E.2022/949, K.2022/1009, it becomes evident that, in disputes of a similar nature, the outcome is determined not by the title of the agreement, but by identifying the principal element in the specific case. In one case, the service element was regarded as secondary and a lease relationship was recognized; whereas in the other, the service performance was accepted as the dominant element, leading to the conclusion that the relationship possessed a different legal nature.
C. Do Ancillary Service Obligations Change the Type of the Agreement?
The inclusion of service elements accompanying a lease relationship does not, by itself, transform the agreement into a service agreement. The determining issue is whether such services constitute an inseparable and ancillary complement to the right of use, or whether they represent the principal element determining the economic purpose of the agreement.
In legal doctrine, this issue is predominantly explained within the framework of the dominant element theory, according to which, in mixed contracts, the provisions relating to the performance constituting the dominant character of the agreement shall apply. Within this framework, where cleaning, management, security, concierge, or similar services remain ancillary obligations connected to the use of the leased property, the existence of such services alone does not alter the legal nature of the lease agreement.
This approach is particularly important in serviced residence models and similar structures where the right to use immovable property and various service packages are incorporated into the same contractual structure, and demonstrates that legal characterization must be based not on the title of the agreement, but on the identification of the dominant element.
TO WHAT EXTENT IS THE TITLE OF THE AGREEMENT TAKEN INTO CONSIDERATION IN LEGAL CHARACTERIZATION?
As explained above, the legal characterization of an agreement is determined, as a rule, not by the title assigned by the parties, but by the content and essential elements of the agreement. Nevertheless, the fact that the parties have structured the agreement under a particular contractual type is not entirely irrelevant and constitutes merely one of the factors to be considered in interpretation. The principal determining factor is the objective nature of the legal relationship between the parties.
As a matter of fact, in its decision dated 22.11.2022 and numbered E.2022/3392, K.2022/2496, the 36th Civil Chamber of the Istanbul Regional Court of Appeal stated that:
“…the subject matter of the agreement underlying the dispute consisted of leaving a specific and fixed place to the other party for use in return for consideration; therefore, the contractual relationship between the parties constituted a lease relationship, and it could not be argued that the agreement was a service procurement relationship; the parties’ designation of the agreement under a different title does not alter the nature of the agreement…”
Thus, it was clearly established that the title assigned to the agreement is not solely determinative and that essential elements such as the transfer of the right of use constitute the basis for legal characterization.
This approach demonstrates that, in cases where there appears to be a divergence between party intent and the objective legal nature of the relationship, the courts may assess the agreement according to its true legal character. Particularly in models where lease relationships are accompanied by various service packages or ancillary agreements, the mere use of the title “service agreement” does not automatically eliminate the application of the mandatory provisions specific to lease law.
This discussion becomes even more significant, particularly in models involving ancillary service obligations or mandatory supplementary agreements connected to the lease relationship; at this point, issues of validity may additionally arise within the scope of the prohibition of linked transactions.
WHY ARE LEASE AGREEMENTS STRUCTURED AS SERVICE AGREEMENTS IN PRACTICE?
In practice, there are various commercial and legal reasons why relationships concerning the use of immovable property are sometimes structured under the guise of service agreements, accommodation agreements, or mixed contractual structures rather than traditional lease agreements.
A. Purpose of Ensuring Operational Flexibility
Particularly in serviced residences, residence projects, and short-term usage models, operators may prefer to consolidate various service elements together with the right of use under a single structure in order to manage operational organization, pricing policies, and usage conditions more flexibly.
B. Intention to Depart from the Mandatory Regime Specific to Lease Law
In certain structures, it is observed that this contractual model is preferred with the intention of distancing the relationship from the scope of application of the mandatory provisions governing residential and covered workplace leases. In particular, attempts to create alternative contractual structures merely through designation, with the aim of circumventing eviction regimes, limitations on rent increases, renewal protections, and mandatory provisions protecting tenants, constitute a subject of debate in legal doctrine
C. What Legal Risks May Arise From Such Structures?
Although such contractual structures may appear to provide flexibility at first glance, they may also give rise to significant legal risks. The principal risks include:
- Re-characterization of the agreement by the courts,
- Invalidity of provisions contrary to mandatory rules,
- Invalidity of certain ancillary obligations within the scope of the prohibition of linked transactions,
- Objections based on circumvention of mandatory provisions or abuse of rights where an intention to evade the lease regime is established.
For this reason, rather than merely considering whether the agreement has been designated as a “service agreement,” it is important to assess whether the material and legal structure of the relationship genuinely reflects such a nature.
ARE LINKED SERVICE AGREEMENTS VALID?
In certain structures where lease agreements are designed under the appearance of service agreements, the issue is not limited solely to the legal characterization of the agreement; the validity of additional obligations attached to such agreements may also become subject to dispute. In particular, in models where the use of the immovable property is conditioned upon the acceptance of specific service packages, the prohibition of linked transactions may come into question.
The prohibition of linked transactions is a protective mechanism prohibiting the imposition upon the tenant of additional obligations that are not in the tenant’s interest and are not directly connected to the lease relationship as a condition for the establishment or continuation of the lease agreement. As a matter of fact, Article 340 of the TCO explicitly provides that:
“In residential and covered workplace leases, where the establishment or continuation of the agreement is made conditional upon the tenant undertaking an obligation that is not in the tenant’s interest and is not directly related to the use of the leased property, the agreement connected to the lease shall be invalid.”
The purpose of this provision is to prevent the lessor from imposing additional commercial obligations on the tenant by exploiting the lease relationship.
A. What Types of Arrangements May Fall Within the Scope of the Prohibition of Linked Transactions?
Arrangements requiring the separate and mandatory purchase of specific cleaning, management, consultancy, membership, or similar services independent of the use of the leased property may, depending on the circumstances of the concrete case, fall within the scope of the prohibition of linked transactions. In particular, such provisions, which are not in the tenant’s interest and impose additional commercial obligations ancillary to the lease relationship, may give rise to discussions within the framework of Article 340 of the TCO.
Within this scope, making the lease of an immovable property conditional upon obtaining services from a particular service provider, imposing de facto mandatory additional payment obligations apart from rent, or regulating elements that are essentially part of the rent under the appearance of a separate service agreement may all become subject to review under the prohibition of linked transactions.
B. What Is the Legal Risk of Such Provisions?
Provisions imposing additional service obligations that are not in the tenant’s interest and conditioning the establishment of the lease relationship upon the acceptance of such obligations may face the sanction of invalidity pursuant to Article 340 of the TCO. Therefore, structuring a lease agreement as a “service agreement” may, in certain circumstances, give rise not only to issues of legal characterization but also to issues of validity that may result in the invalidity of certain contractual provisions.
Nevertheless, it is not possible to conclude that common expenses, management services, or genuine service elements naturally connected to the use of the leased property fall within this scope in every case. The legal issue essentially lies in determining whether such services genuinely constitute a natural extension of the usage relationship or independent additional obligations imposed through the lease relationship.
Within this framework, the structuring of a relationship as a service agreement should be carefully evaluated not only in terms of whether lease provisions will apply, but also in terms of the validity of certain additional obligations incorporated into the agreement.
Conclusion: Does The Title “Service Agreement” Eliminate The Application Of Lease Provisions?
Although, in practice, lease relationships are at times structured under service agreements, accommodation agreements, or similar mixed contractual models, such designation alone does not eliminate the character of the relationship as a lease agreement. In legal characterization, the determining factors are not the title assigned by the parties to the agreement, but rather the transfer of the right of use, the weight of the service elements, and the dominant economic and legal character of the agreement.
Within this framework, in structures where the transfer of the right of use constitutes the principal element and the services remain ancillary obligations, the fact that the agreement has been established under different titles shall not preclude the application of lease provisions. Conversely, in exceptional structures where the personal service performance or organizational service element becomes dominant, the relationship may be characterized as a service agreement or a mixed contract.
Nevertheless, merely designating an agreement as a “service agreement” with the purpose of circumventing the mandatory provisions specific to lease law does not automatically produce such a consequence. As a matter of fact, both the dominant element approach recognized in legal doctrine and judicial precedents take into consideration the true legal nature of the agreement rather than its designation.
On the other hand, such contractual structures may, in certain cases, give rise not only to issues of characterization, but also to issues of validity within the scope of the prohibition of linked transactions with respect to certain mandatory service obligations incorporated into the lease relationship. In this respect, the issue constitutes not merely a theoretical discussion concerning contractual types, but also a matter of validity giving rise to significant practical consequences.
For this reason, in structures where relationships concerning the use of immovable property are designed under the appearance of service agreements, it is important that the contractual structure be evaluated holistically in light of the mandatory provisions of lease law, the dominant element theory, and the prohibition of linked transactions, in order to prevent disputes that may be difficult to remedy.
Frequently Asked Questions (FAQ)
Does a lease agreement cease to be a lease agreement merely because it is titled as a “service agreement”?
No. The title assigned to the agreement is not solely determinative. If the transfer of the right of use constitutes the principal element of the agreement, lease provisions may still apply even if the agreement is established under a different title.
Does the inclusion of service elements automatically transform the agreement into a service agreement?
No. Where cleaning, management, concierge, or similar services remain ancillary obligations, their existence alone does not alter the legal nature of the agreement. The determining factor is the dominant element.
In what circumstances may an agreement be characterized as a service agreement or a mixed contract?
Where the dominant aspect of the agreement consists not of the transfer of the right of use, but rather of personal labor, expertise, or organizational service elements, the agreement may be characterized as a service agreement or an atypical mixed contract. This assessment must be made on a case-by-case basis.
May courts make a legal characterization different from the title assigned by the parties?
Yes. Courts may determine the legal nature of the agreement according to its content and essential elements, irrespective of the title used by the parties.
What is the prohibition of linked transactions?
The prohibition of linked transactions regulated under Article 340 of the TCO is a protective mechanism restricting the imposition of additional obligations on the tenant that are not in the tenant’s interest and are not directly connected to the lease relationship.
Are mandatory service or package obligations invalid in all circumstances?
No. Genuine common expenses or service elements naturally connected to the use of the leased property may be assessed differently. However, independent additional obligations imposed through the lease relationship may give rise to issues of validity.
Can the mandatory provisions of lease law be circumvented merely by changing the title of the agreement?
As a rule, no. The fact that the agreement is established under titles such as “service agreement” or similar designations does not, by itself, eliminate the application of the mandatory provisions of lease law.
