Can an arbitration clause be included in lease agreements?

Abstract

This study examines whether an arbitration clause can be included in lease agreements within the framework of the principle of “arbitrability.” Arbitrability is assessed based on the subject matter and the parties involved in the dispute. Under Turkish law, disputes concerning in rem rights over immovable property and matters not subject to the parties’ free will are not considered suitable for arbitration. Lease agreements, as they do not typically establish in rem rights, are generally deemed arbitrable; however, this may vary depending on the content of the agreement and the nature of the dispute. In particular, in residential and commercial lease agreements, rent determination and eviction lawsuits are closely related to public order and are therefore considered non-arbitrable, whereas claims for the collection of unpaid rent are deemed suitable for arbitration. The Court of Cassation has also adopted this distinction, although a consistent body of case law has not yet been fully established with regard to eviction lawsuits.

Arbitrability

Arbitrability refers to whether a dispute is eligible to be resolved through arbitration in terms of its subject matter and the parties involved. The arbitrability of a dispute must be assessed separately in each case. Pursuant to Article 408 of the Code of Civil Procedure (“CCP”) and Article 1 of the International Arbitration Law (“IAL”), disputes concerning rights in rem over immovable property located in Turkey and matters not subject to the parties’ will not be considered arbitrable.

Arbitrability of Lease Agreements

Lease agreements are governed by Articles 299 et seq. of the Turkish Code of Obligations (“TCO”). By nature, a lease agreement is a contract whereby the lessor undertakes to grant the lessee the use, or use and benefit, of an object, and the lessee undertakes to pay the agreed rental fee in return.

Lease agreements do not establish rights in rem in favor of the lessee and therefore are generally not deemed to arise from rights in rem over immovable property. Accordingly, they may be considered arbitrable from this perspective.

Another key factor in assessing arbitrability is whether the dispute is subject to the parties’ will. Lease agreements are contracts subject to public policy considerations due to the prevalence of mandatory provisions, the principle of protecting the weaker party (the lessee), prohibitions on clauses against the lessee, and limitations on rent increases.

In practice, three types of disputes most commonly arise from lease agreements: (i) rent determination, (ii) eviction of the leased property, and (iii) collection of unpaid rent. Whether lease agreements are arbitrable depends on whether these disputes satisfy the conditions for arbitrability.

Arbitrability of Rent Determination Disputes

The arbitrability of rent determination disputes must be assessed specifically in light of whether the matter is subject to the parties’ will. Although rent can be determined by agreement, this is subject to legal limitations and is an exception to the principle of contractual freedom.

In doctrine, it is argued that although the determination of rent is subject to statutory limitations, the arbitration of such disputes should be allowed as long as the arbitral tribunal determines a fair market rent, and that such a process does not violate public policy. However, arbitrability should not be evaluated based on the outcome of the decision, but on the nature of the dispute subject to adjudication. Rent determination is closely linked to public policy and the principle of lessee protection.

The Court of Cassation holds that rent determination disputes are not arbitrable. According to its jurisprudence, rent may be determined by the parties only within statutory limits, and rent determination falls within the realm of public policy.

Earlier decisions of the Court of Cassation stated that the lessee is the weaker party in lease agreements, and that only state courts can ensure the protection of the lessee. Accordingly, it concluded that arbitration clauses in lease agreements are invalid as they may impose harsher conditions on the lessee.

In more recent decisions, the Court distinguishes between types of lease agreements. In a 2024 decision, the Court held that arbitration clauses are invalid in rent determination disputes arising from residential and roofed workplace leases, but valid for other types of leases.

In conclusion, under current jurisprudence, arbitration cannot be resorted to in rent determination disputes involving residential and roofed workplace leases, as the determination of rent is closely tied to public policy and must be conducted within strict legal limits.

Arbitrability of Eviction Disputes

There is no uniform case law on the arbitrability of eviction disputes. In one decision, the Court of Cassation allowed arbitration in an eviction dispute where both parties were merchants. In another, the Court emphasized that arbitration proceedings must be followed if the lease agreement contains an arbitration clause.

However, in an older decision, the Court ruled that hearing eviction cases in civil courts of peace is a matter of public policy, and that such disputes are not arbitrable. In recent jurisprudence, the Court has held that eviction and termination in residential and roofed workplace leases are subject to limited and mandatory legal grounds and therefore not arbitrable.

In light of these developments, it may be concluded that the Court of Cassation currently tends to regard eviction disputes as non-arbitrable in residential and roofed workplace leases, although a firm consensus has not yet been reached.

Arbitrability of Rent Collection Disputes

Rent collection disputes generally satisfy the requirements of arbitrability. Established case law confirms the validity of arbitration clauses in actions for the collection of rent.

Conclusion

The arbitrability of disputes arising from lease agreements is governed by Article 408 of the CCP and Article 1 of the IAL. Accordingly, disputes concerning rights in rem over immovable property located in Turkey and matters not subject to the parties’ will are not arbitrable. Lease agreements, governed by Articles 299 et seq. of the TCO, are subject to public policy considerations, including protection of the weaker party, prohibition of lessee-unfavorable clauses, and statutory limitations on rent increases. The arbitrability of such agreements must be assessed in relation to the type of dispute.

Current jurisprudence holds that arbitration clauses are invalid in rent determination disputes concerning residential and roofed workplace leases, while they are valid in rent collection disputes. In eviction cases, there is no settled precedent, but recent judgments suggest that arbitration clauses may also be invalid in residential and roofed workplace leases.

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