Amendment of Shopping Center Regulation
Contrary to the expectations, the new provisions with regard to common expenses at Shopping Centers will rise to a great deal of confusion and legal uncertainty in the future
Some changes have just been made to the Shopping Centers Regulation (“Regulation”) which had entered force upon publication of Official Gazette on February 26, 2016, with a text of amendment published on the Official Gazette dated December 30, 2016. The amendments are mainly concerning to how the common expenses (service charges) would to be distributed and also the obligations imposed in respect to security measures that the shopping centers shall install a license plate recognition system and an undercarriage imaging system.
In the first publication of the Regulation, it had foreseen that in the first paragraph of Article 11, the common expenses shall be distributed according to the coefficients stated in the table of distribution of the Regulation, with this amendment, the table of distribution and the coefficient system are abandoned and it has now foreseen to set an expense sharing procedure with consensus between all lessees unanimously and the Shopping Centers Management, and in the event that consensus not achieved between the parties then expenses shall be distributed according to the ratio found by dividing each lessee's sales area to the total sales area at Shopping Centers. In Amendment, it has been stated that the expense sharing procedure to be agreed on jointly and unanimously will be applied for a maximum of five years. Furthermore "Marketing and administration expenses", has been made subject to a separate arrangement that they shall be claimed from the lessee if it is included in the lease agreement. In case of there are no provisions in the lease agreement, it has been stated that each lessee’s sales area will be divided according to the ratio of the total sales area.
In the nineteenth article titled "Security Services" of the Regulation, there were an obligation that the public areas shall be recorded by cameras and these records of cameras shall be preserved at least for thirty days. With new amendment two additional obligations have been introduced and the Shopping Center owners have been obliged to establish a license plate recognition system and an underground imaging system for the entrance and exit of controlled areas such as open and closed car parks and share the data obtained through the plate recognition system with the police units instantly.
With the nineteenth article of the Regulation, an unanticipated additional cost was also charged from the Shopping Center Owners and this cost will be a onetime cost and since it has been stated that the technical specifications for the additional security systems envisaged and the guidelines for data sharing are regulated by the Ministry of Interior, exact state of this cost will emerge in the coming days. However, there is a constant influence as the regulation on common expenses is continuous and according to this regulation it will come to the agenda repeatedly in periods of five years. In this respect, there is a necessary to analyzing the regulation made about the common expenses more closely. The following matters are became important.
Can the Shopping Center Management provide a unanimity with Retail Businesses?
There is an impossibility to, provide consensus between “the big ones” which has a renting area between 5,000 and 20,000 m2 and expressed as "box" or "anchor" according to circumstance and which claims that the influx of visitors to the shopping center is due to them in position of world brand and “the small ones” which has a renting area between 5 m² and 100 m² and usually established by local brands in each Shopping Center. Although the "expense sharing procedure" was mentioned in paragraph 1 of Article 11 of the Regulation, abovementioned parties will question that which expenses consist the “common expenses” and, this situation will have made a more incomprehensible level than the new sharing rule.
In the same manner, there would be a dispute for one by one at expenditure items; between the Shopping Center Managements which prepares the budget for the Shopping Center Owner and different lessee groups at one side the Shopping Center owner which considers the general performance and service quality of the Shopping Center and at other side the lessees which are unsure about contribution this overall performance to them, would have an intense discussion.
The main discussion topic regarding to sharing of common expenses would be the fact which has become a necessity of the sector that participation of big ones in the expenses with lesser amount in m2 basis.
Especially in terms of the marketing budget, it is highly possible that there would be a conflict between the big ones and the small ones. Due to fact that the big shops would utter, they have done their own advertising, and most of the visitors of the Shopping Center came to shopping center due to their own campaigns so would not want to participate in the marketing budget created by the Shopping Center Management. Whereas the small shops who cannot afford such big budgets alone probably may not accept to withdraw the participation of the big shops on this budget. Due to this conflict the parties will be able to discuss different distribution ratios for different items of the common expense budget, as well. Due to the fact that "common expense calculations for each type of expenditure" has been set forth in the new paragraph 7 of Article 11. Accordingly to this Article, although a single distribution rule can be determined for all expenses, different principles can also be determined on the basis of each expenditure type.
What happens when unanimity is not provided?
According to the first paragraph of the new Article 1 of the Regulation, it has been stated that in the event unanimity is not provided, the common expenses "will be allocated to the selling space of the retail business in proportion to the selling space of the shopping center". With a simpler explanation, the total selling space of the Shopping Center will be calculated and written to the denominator; the share of this ratio will be the " selling space " used by each lessee.
Such regulation may cause a dispute especially in terms of units operating especially in the food court area. Because the manufacturing (kitchen) part of these units is much bigger than the active selling space, which is usually a counter and the areas where these units serve customers are not just this counter. It will also be a separate discussion about whether seating areas, which are common areas, will be taken into consideration, or not.
What will be the status of common expense agreements in the existing lease agreements?
The new form of Article 11 of the Regulation enacts a compulsory regulation which nullifies almost any agreement made regarding the common expenses in the lease agreements. The lessees which are subject to limitation based on common expenses (cap implementation) will no longer benefit from this limitation cause of this regulation and furthermore they will also participate discussions as a controversial party, which all lessees will almost constitute a "general assembly". In the event that parties do not unanimously agree at discussions these "big lessees" will have to participate in common expenses on the basis of m2.
By which basis will the final account of the common expenses for the year 2016 be made?
With the subjunction made to the first provisional clause, "(5) The deduction of the charges which has been taken by the shopping center management as advance for common expenses for year 2016 shall be done according to the principles and procedures stated in Article 11". Meaning of this subjunctions is: All the amounts collected from the lessees in year 2016 would be considered as an "advance payment" and the final account would be distributed to the lessees based on the unanimous sharing rule in the event unanimity received. However in the event unanimity is not achieved the charges would be distributed to the lessees , on the basis of (m2) (sales area / total sales area). The final calculation shall be finalized at the latest date of 31 March 2017 and the lessees must be notified until this date. There are no restraint for making and reporting the final account before this date.
Which method would be followed if there is no agreement between the parties in year 2017 and later?
With the new Article numbered 1 of Regulation it has stated that, in the event unanimity is not provided between the parties, common expenses shall be distributed on the basis without any distinction (brand, activity area, etc.) on the basis of (m2). On condition of unanimity provided between parties, each Shopping Center will have its own distribution chart and this distribution chart shall be treated as an addendum of lease agreements for five year term.
How will the Sales Area concept and the ratio to Total Sales Area be calculated?
The definition of "Sales Area" was made at the third article (ğ) of the Regulation: “the total work place areas except work places used as only as business offices, but also residences, storing areas, production facilities/areas and common use areas”.
Accordingly this article, for instance, the sales area between the safe and the kitchen shall be formed as a "sales area" at fast food units in Food Court. However in practice there would be a constant debate for the kitchen and the common areas where the guests consume their food may be evaluated within the "sales area".
Nevertheless at the units operated as clothing store, the outside area which is the front of the showcase and the outer border of the front storage areas separated by the back of the store may be described as "sales area".
The Sales Area defined by the Regulation is not equal to the GLA (Gross Leasable Area). In practice, warehouse areas would not be taken into consideration in the account of the sales area unless these areas are used as sales areas.
With the rearrangement stipulated in First subclause of Article 11 of the Regulation; the participation fee to common expenses for each lessee shall be determined by rate which shall be calculated with writing the sales area under the responsibility of lessee to “dividend” and total sales area to “denominator”.
Has any transition period been envisaged?
No. The Ministry did not envisage any transitional process and arranged a distribution basis on a square meter basis, as a mandatory rule without providing an insufficient time for unanimity by removing the whole year-to-year rule on the distribution basis, one day from the end of the year.
What will happen in coming years?
According to the new execution of the Regulation as long as an agreement with unanimity does not occurred between the parties the Distribution rule based on square meters shall be acted and even if there is an agreement with unanimity, this agreement shall be reviewed every 5 years.
What will happen now?
Shopping Center Owners would have to implement Regulations in item 11 since these new regulations are mandatory rule. However, when applying this new situation, they would not make a distinction between the lessees and the lessees they have previously 'capped' any more and would invite the unanimous agreement, and when the parties does not agreed unanimously, the common expenses shall be renegotiated as mentioned above.
Action For Annulment
Since the relevant provisions of the Regulation are regulatory transactions and regulatory procedures become definite and binding with the publication of the Official Gazette, it may be possible to file an annulment suit at the administrative judiciary within 60 days starting from 30.12.2016. Due to the fact that the regulatory process of the case is a regulation, the Ministry of Customs and Trade may be brought before the Council of State by 28.02.2017 at the latest by showing the adversary. Any legal or real person who is affected can file this case to the benefit of such regulatory action.
At current time there are cases in which has been requested for the cancellation of the provision of Regulation (11.8), which requires that revenue from common areas be offset in common expenses. The results of these cases would also need to be followed carefully.
Including Common Expenses to the Rent
Since the case that what made the common expenses and in which principles this common expenses be shared is like a “necrosis” between the Shopping Center Owners, Shopping Center Managements and Retail Shops, Shopping Center Owners may negotiate with tenants and with this negotiation they may include common expenses to lease and not resort to collect common expenses except the lease payment.
Benefits of this method for the investor are keeping good relationships with the lessees which are their customers and recording the common area income as an income. However the uncertain situation caused by the variability of common area costs at over time would be a disadvantage for this method.
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