Urban Transformation Projects in Risky Areas

1. Introduction

Turkey's urbanization, which gained momentum in the late 20th century and continues today, has raised concerns regarding unstructured urban planning, construction in unsuitable regions, and technically deficient buildings. These challenges, exacerbated by Turkey's location in an earthquake-prone zone, have resulted in severe tragedies during catastrophic earthquakes and floods. The devastating earthquake of 2023 brought these issues to the fore, causing numerous fatalities, immense material damage, and large-scale migrations from affected cities.

This unfortunate event emphasized the pressing need for livable spaces in Turkey that meet modern environmental requirements and urbanization models. As a result, urban transformation measures have been implemented with the goal of swiftly and effectively transitioning living areas in the country towards safety and structured planning.

Urban transformation in Turkey is mainly divided into three models: (i) direct transformation of identified risky buildings, (ii) comprehensive transformation of risky areas, and (iii) creation of reserved building areas for future construction. The term "risky area" denotes regions that require total transformation, while "reserved building area" refers to the development of new urban spaces that meet modern living requirements.

Urban transformation projects in risky areas are conducted under the auspices of Law No. 6306 on the Transformation of Areas Under Disaster Risk ("Urban Transformation Law") and the Implementing Regulation of Law No. 6306 ("Regulation"). These legal instruments were designed to involve owners of risky properties in the transformation process, allowing them to decide the timeline, model, and specifications of the projects managed by contractors. However, disputes between property owners and contractors stalled progress, leading to an amendment in the Urban Transformation Law in 2019.

With the amendment, the Republic of Turkey's Ministry of Environment, Urbanization, and Climate Change (“Ministry”) has been empowered to ex officio undertake and perform urban transformation projects, along with the authority to assign independent contractors for actual construction projects.

The government's ex officio authority was already in place before the amendment, provided through the expropriation/urgent expropriation authorities of the government. However, the use of this right created further disputes and prolonged the transformation processes. The amendment rectifies this by granting the government direct authority to intervene in the transformation process.

The Ministry's ex officio authority now extends beyond transformation projects or properties in risky areas, reserved building areas, or projects on independent risky buildings. A new definition in the Urban Transformation Law broadens the Ministry's authority, allowing it to exercise its ex officio right in areas where buildings are at risk of demolition, where buildings have collapsed or are severely damaged, or where there is a risk of severe damage due to ground shifts, landslides, floods, rock falls, fires, explosions, etc.

2. Urban Transformation Process in Areas Designated As Risky

The process of urban transformation in risky areas generally comprises the following stages:

The term "risky area" is defined by the Urban Transformation Law as an area declared by the President of the Republic of Turkey ("President") that: (i) poses a risk of life and property loss due to its ground conditions or the nature of its settlement or construction, (ii) experiences disruptions to public order or safety that interrupt or disturb everyday life, (iii) suffers from inadequate planning or infrastructure services, (iv) contains buildings that violate zoning legislation or are structurally or infrastructurally impaired, or (v) has at least 65% of its total buildings in violation of zoning legislation or constructed without a building license (even if licenses may have been obtained after construction completion).

2.1 Identification of the Risky Area

The power to designate an area as a "risky area" lies solely with the President. However, the Ministry is responsible for identifying and examining potential areas, compiling a report on the identified area, and presenting this report to the President for approval. Furthermore, property owners of buildings within a potential area also have the right to petition the Ministry to designate their area as a "risky area."

According to announcements made by a Minister in April 2023, more than 3.3 million residences have undergone a transformation as of that date, with the transformation process for an additional 250,000 residences still in progress.

2.2 Property Owners' Decision: The 2/3 Rule

Although urban transformation legislation allows public authority to directly engage in urban transformation processes and execute these projects independently or via contracted contractors, the primary rule outlined in the legislation advocates for project execution based on the mutual agreement of property owners.

Both Article 6 of the Urban Transformation Law and the corresponding Regulations stipulate that a minimum of a 2/3 majority of shareholders of parcels or lots within risky areas must agree to reconstruct a new building on the parcels or lots. They must also decide to enter into a contract with the contractors using a flat-for-land method or a different type of construction agreement. Therefore, for independent contractors intending to conduct urban transformation projects in risky areas and even on risky buildings not located within these areas, it is crucial to negotiate with at least a 2/3 majority of shareholders to initiate construction projects.

A policy aimed at the timely completion of transformation projects is in place, allowing the government to intervene when minority shareholders (representing at least 1/3 of the shares) do not participate in or oppose the transformation decisions made by others. The Urban Transformation Law regulates a unique system for the shares of the minority shareholder, prioritizing majority shareholders to acquire the shares of the minority shareholders.

If the majority shareholders fail to acquire these shares, the Ministry will acquire them on behalf of the Treasury. The acquisition process under Article 6/1 of the Urban Transformation Law includes the following steps:

a. The Ministry evaluates the fair market value of the minority shareholders' shares.

b. The evaluated shares of the minority shareholders are auctioned off to shareholders who have entered into an agreement for the transformation project. The sale price cannot be less than the fair market value.

c. For transformation projects taking place in risky areas, if the shares cannot be sold to the shareholders who entered into an agreement, the Ministry will purchase and hold the shares on behalf of the Treasury.

The government's commitment to completing transformation projects promptly and avoiding a state of uncertainty in risky areas is evident through its willingness to intervene by acquiring the shares of minority shareholders if the majority shareholders cannot. By acquiring the minority shareholders' shares, the transformation projects can proceed more efficiently.

2.3 Agreement Between Property Owners and Contractors: Prerequisites For Contractors To Conduct Urban Transformation Projects In Risky Areas

Once a minimum quorum of 2/3 of shareholders or property owners has been reached, transformation projects can be undertaken by independent contractors (or public enterprises). An agreement, typically titled "Promise of Sale of Immovable Property and Construction Agreement in Return of Flat" ("Agreement"), is entered into between the property owners and contractors for the transformation project. In this Agreement, the contractor pledges to complete the construction in line with the requirements of the Urban Transformation Law and the technical specifications mutually determined by the parties, in exchange for the transfer of ownership of specified parts of the building from the property owners to the contractor. The Agreement must also specify the rules of partition.

Contractors undertaking urban transformation projects in risky areas must meet certain requirements outlined in the relevant legislation as part of the general intent of the Urban Transformation Law and related legislation. The practices that contractors may encounter under the Urban Transformation Law and Regulation during the initiation and continuation of construction projects are as follows:

2.3.1 Possession of a Contractor's License

Article 5 of the Classification and Registration Building Contractors Regulation stipulates that the construction of all buildings requiring a construction permit in Turkey must be carried out by and under the responsibility of a contractor or a joint venture of contractors, who possess legal or real personality and must have a license number. As buildings in risky areas are subject to a construction permit, all contractors wishing to undertake an urban transformation project must possess or apply for a contractor's license that enables them to perform the work and conduct the construction activities for these types of projects.

Article 8 of the Urban Transformation Law similarly mandates contractors to have a contractor's license by enumerating the requirements for obtaining one, which include:

a. Financial Sufficiency

b. Technical Sufficiency

c. Minimum Work Experience

Accordingly, contractors should apply for a contractor's license from the 15 different groups of licenses (A, B, B1, C, C1, D, D1, E, E1, F, F1, G, G1, H, Temporary Group) considering the specifics of the transformation project they are undertaking. The required license group depends on the size and square meters of the building planned to be constructed in the risky area.

2.3.2 Insurance and Warranty Obligations

As part of the policy to complete the transformation efficiently and minimize the risk of infringing the rights of property owners, Article 8 of the Urban Transformation Law mandates that, besides the license obligation, contractors conducting transformation projects in risky areas must have one of the following insurance policies or warranties:

a. A building completion insurance policy covering the risk of the contractor's failure to complete

the construction project.

b. A warranty provided by the contractor to the Ministry, calculated based on the building construction area according to the existing zoning plan or the proposed zoning plan;

i. 10% of the approximate cost of the building in areas with a construction area of up to 50 thousand square meters.

ii. For projects with a construction area over 50 thousand square meters;

10% of the approximate cost of the building for the first 50 thousand square meters of the construction area.

• 8% of the approximate cost of the building for the construction areas between 50 – 75 thousand square meters.
• 6% of the approximate cost of the building for the construction areas between 75 - 100 thousand square meters.
• 4% of the approximate cost of the building for the construction areas over 100 thousand square meters.

There are two options for contracting companies to carry out projects in risky areas: they can either provide the guarantee detailed above, or they can procure building completion insurance, the scope, conditions, and application principles of which are determined by the Ministry of Treasury and Finance. Contracting companies can commence construction by choosing one of these two options.

2.3.3 Contractor Sales Limitations

The 10% Rule and Municipal Approval Requirement.

Upon obtaining relevant insurance policies or providing warranties to the necessary authorities, contractors must evacuate buildings located in risky areas and initiate the transformation process by commencing construction. Typically, these contractors plan to pre-sell properties, which will eventually be theirs upon project completion, as a financial strategy to fund current and future projects.

Nonetheless, for projects in risky zones, contractors' rights to sell properties to third parties prior to project completion are restricted. As stipulated in Article 13 of the Urban Transformation Law, contractors may sell their properties based on the progress level of construction, and only with municipal permission. Therefore, contractors desiring to pre-sell must first apply to the municipality for approval. On receiving the contractor's application, the municipality must carry out the following actions upon receiving an application from the contractor to sell properties:

a. Gauge the construction progress and calculate the completion percentage, using credible and verifiable measures.

b. Permit the contractor to sell properties up to but not exceeding 10% of the project's completion ratio. This limit helps protect the property owners' interests and ensure the completion of the project.

c. Require full approval from all property owners for sales exceeding the 10% ratio. This ensures that all owners agree with the pace of construction and the plan to sell properties before the completion of the project.

Without unanimous approval from all property owners, contractors cannot sell properties beyond the 10% completion ratio. This rule helps ensure that all property owners have a say in the project and protects their rights and interests.

3. The Ministry's Ex Officio Authority to Complete Transformation Projects

While it is crucial to consider property owners' perspectives in urban transformation policies, the completion of urban transformation, particularly in large cities, is critical for Turkey's societal welfare and national safety, considering the nation's geological structure and fault line map. Thus, despite property owners' evaluations being important, the Urban Transformation Law's Article 6/A amendment dated July 4, 2019, allows the Ministry to undertake urban transformation projects in areas posing a risk of building collapse or where buildings have been significantly damaged due to natural disasters. The Ministry can exercise this power on a wide array of areas defined in the Urban Transformation Law, not specifically restricted to risky buildings or areas.

The ways in which the Ministry's power is exercised are:

a. The Ministry can perform the transformation projects by itself or through a contractor, without seeking the consent of the owners or related parties.

b. The Ministry can facilitate all land registry and cadastral transactions, including sales, transfers, and liens. Additionally, all kinds of demolition and construction permits and procedures can be executed at the Ministry's request without needing property owners' consent.

c. Any existing agreements on transformation projects within the execution area can be terminated without seeking the consent of the involved parties.

d. The Ministry determines the quality and size of the housing and workplaces to be built in the areas. Entitlement studies take into account the existing property's value and the value of the new structure to be given to the property owner.

4. Case Study: Urban Transformation in The Fikirtepe District

Fikirtepe, a neighborhood in Istanbul's Kadköy district, is currently hosting one of Turkey's most expansive urban transformation projects. The district's central location and an above-average number of unlicensed, derelict buildings spurred the need for urban transformation, initiated in 1999 after the devastating Marmara earthquake. However, despite several starts, projects in the area have never been fully completed due to disputes among property owners and contractors, and financial issues arising from prolonged dispute resolution processes. As a result, the Ministry has decided to use its ex officio authority to expedite the transformation processes, dividing the area into three separate lots. Lot 1, known as the "New Fikirtepe Project," covers areas where independent contractors have failed to complete transformation projects. The Ministry is now managing these transformations, though it currently only uses its ex officio authority in lot 1, with no restrictions on using it in the remaining lots.

5. Conclusion

The catastrophic earthquake in 2023 that affected at least ten cities in Turkey and resulted in over 50,000 deaths has underscored the urgent need for urban transformation. As many of Turkey's major cities lie on active fault lines, urban transformation is of crucial importance, especially considering experts' predictions of an impending major earthquake in Istanbul.

The Urban Transformation Law and its associated regulations provide a framework to ensure that these transformations are carried out in a way that protects the rights of property owners, provides for societal welfare, and upholds the principles of safe and sustainable urban development.

Individual risky building transformations are often conducted through agreements between property owners and independent contractors. However, the role of the Ministry in managing transformations in risky and reserved areas has become increasingly significant. In situations where projects are delayed due to disputes or other complications, the Ministry's ex officio authority under Article 6/A of the Urban Transformation Law allows it to intervene and ensure the project's completion.

A prime example of this authority's use is the New Fikirtepe Project in Istanbul's Kadköy district, where the Ministry is now managing transformations due to failures by independent contractors. Given the devastating earthquake in 2023 and the predicted future seismic events, it is foreseeable that the Ministry will become more proactive in exercising its authority.

Urban transformation in Turkey is not only a matter of urban renewal and development but also a matter of national safety and resilience in the face of natural disasters. By striking a balance between the rights and interests of property owners and societal needs, the Turkish government aims to create a safer and more sustainable urban environment for its citizens.

In conclusion, as Turkey continues to deal with the aftermath of the 2023 earthquake and prepares for future seismic events, the Urban Transformation Law and its regulations provide an essential framework for managing the necessary transformations. With a focus on ensuring the completion of transformation projects and protecting the rights of property owners, the government has demonstrated a strong commitment to ensuring the safety and welfare of its citizens.

@Ömer Kesikli\ @Onur Durak