Building Completion Insurance in Urban Transformation Projects

Building completion insurance in urban transformation; comprehensive legal guide covering contractor's bankruptcy, death, failure to complete construction, guarantee bonds, landowners' rights, in-kind and cash compensation, rent payments, and Law No. 6306.

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What is Building Completion Insurance in Urban Transformation?

In urban transformation projects, building completion insurance is a special safeguard mechanism aimed at protecting landowners in the event that a contractor fails to complete construction work during the renovation of risky buildings. It is commonly BTS (Building Completion Insurance). This insurance should not be considered simply as a type of damage insurance. Building completion insurance is a surety insurance product that can come into play in cases such as the contractor's bankruptcy, death, rejection of the inheritance by their heirs, or failure to complete and deliver the property within the maximum period specified in the contract or legislation.

In urban transformation projects, the biggest concern for property owners is the inability to complete the new building after the old one is demolished. When a risky structure is demolished, the owner can no longer effectively use their old independent unit. The property often becomes a vacant plot or a half-finished construction. At this stage, if the contractor goes bankrupt, abandons the project, exceeds the deadline, or loses the financial means to complete the project, the owner faces a very serious legal and economic risk. The fundamental function of building completion insurance is to mitigate this risk.

According to the Insurance and Private Pension Regulation and Supervision Authority's information guide, BTS (Border Guarantee Insurance) is described as a surety insurance product that provides protection in construction projects, primarily urban transformation and pre-paid housing sales projects, through surety bonds issued on behalf of landowners or consumers within the scope of insurance contracts between contractors/sellers and insurance companies. According to the guide, in projects to be carried out in areas and parcels covered by Law No. 6306, the contractor undertaking the construction work must obtain BTS or fulfill other guarantees and conditions specified in the legislation before obtaining a building permit.

Why is Building Completion Insurance Important?

In urban transformation projects, building completion insurance aims to fill the biggest gap created by the demolition of old buildings: "What happens if the contractor cannot complete the building?" This is the most critical question in urban transformation contracts. Because the contractor may make very good promises in the contract; they may offer large square footage, high rental assistance, short delivery times, luxurious technical specifications, or attractive independent unit sharing. However, if the contractor cannot complete the project, these promises have no practical value.

Building completion insurance is a tool designed to prevent property owners from being left completely unprotected in the event of a contractor's failure to fulfill their obligations. Through this insurance, if the conditions are met, the insurer can pay monetary compensation or choose to complete and deliver the project. Therefore, building completion insurance can function not only as a form of monetary payment but also, in some cases, as the completion of the construction.

In this respect, BTS should be considered together with other security instruments such as bank guarantee letters, guarantees given to the administration, phased title transfer, and penalty clauses. Although it does not eliminate all risks on its own, it provides a significant security for the owner, especially in case of the contractor's bankruptcy, death, or failure to fulfill delivery obligations.

Relationship between BTS and Collateral under Law No. 6306

In urban transformation projects under Law No. 6306, contractors are required to provide certain guarantees. According to the current implementation regulation, in private law projects to be carried out in risky areas and reserve building areas, guarantee rates are determined in stages according to the building construction area. In parcels containing risky buildings, if the project is undertaken by real persons or private legal entities, the contractor undertaking the construction 6% to the administration before obtaining the building permit. However, in certain small-scale projects, this guarantee requirement may be waived under conditions such as the parcel owner constructing their own building and not selling it to third parties.

The same regulation stipulates that if building completion insurance is obtained, the requirement for providing this guarantee will not be sought. In other words, building completion insurance can function as an alternative to the guarantee to be given to the administration under certain conditions. Therefore, in urban transformation contracts, along with the question "Did the contractor provide a guarantee?", the questions "Was building completion insurance obtained, in whose name was the guarantee bond issued, and what is the scope of the policy?" must also be asked.

There is an important distinction to note here: a guarantee given to the administration and building completion insurance are not the same thing. While a guarantee given to the administration is more of an administrative assurance that can be used for the completion of the project, in BTS (Building Completion Insurance), guarantee bonds are issued on behalf of the landowners, and in the event of a risk occurring, the rights holders may have the right to directly apply to the insurer. The SEDDK (Insurance and Construction Insurance Authority) guide also states, when comparing BTS with surety insurance, that in BTS, the right to claim compensation belongs to the rights holders when the risk specified in the guarantee bond occurs, and the insurer can fulfill the compensation either in cash or in the form of project completion.

When should building completion insurance be purchased?

In urban transformation projects, building completion insurance should be considered before obtaining a building permit. In projects covered by Law No. 6306, the contractor must either obtain a building completion insurance policy or provide other guarantees specified in the legislation before applying for a building permit. Therefore, the building completion insurance policy is not a secondary document to be remembered after construction has begun; it is a fundamental element of the permit and guarantee phase of the project.

According to the SEDDK guidelines, in urban transformation projects, the contractor obtains a BTS (Building Treasury Bond) with a maximum coverage limit for all the interests of the landowners before obtaining the building permit; the policy is submitted to the relevant authority; and the authority is obliged to verify the validity of the policy. Furthermore, the insurer issues a separate guarantee bond for each landowner based on the value of the independent unit and sends it to the landowners' addresses. It is particularly emphasized that landowners must ensure that a BTS guarantee bond has been issued in their name.

Therefore, property owners should not simply rely on the contractor's statement that "we had a building contract installed." They should review the policy sample, check if the promissory note is issued in the owner's name, investigate whether the insurance company is authorized, and examine the validity period, coverage limit, project type, unit price, and compensation terms of the promissory note.

What is a Promissory Note?

In building completion insurance, the most important document for landowners is the bond of guarantee. The policy is arranged between the contractor and the insurance company; however, the direct protection of the landowner is concretized by the bond of guarantee issued in their name. Therefore, for the owner, the question of "Has a bond of guarantee been issued in my name?" is as important as the question of "Is there a policy?".

According to the SEDDK guidelines, in urban transformation projects where a Building Construction Contract (BTS) is commissioned, the insurer issues a guarantee bond for each landowner based on the value of the independent unit subject to the construction contract and delivers it to the landowners. It is necessary to ensure that the guarantee bond is issued in your name, specifies the project type, includes the maximum coverage limit allocated for your interests, contains the insurer's statement regarding the compensation, and has a validity date of at least the project duration + 12 months.

This is very important in practice. In some projects, the contractor may claim to have a general insurance policy; however, a separate guarantee bond may not have been issued in the name of the landowners. In such a case, the owner may not be able to actually benefit from the insurance protection or may experience serious problems in the application process. Therefore, for BTS purposes, landowners must have a guarantee bond issued in their own name.

Under what circumstances does BTS provide security?

The circumstances under which building completion insurance becomes active are determined according to the policy, general terms and conditions, and special conditions. However, the SEDDK (Urban Transformation Projects Insurance Authority) guide clearly outlines the minimum coverage conditions for urban transformation projects. Accordingly, BTS (Building Completion Insurance) can provide coverage to rights holders in cases where the contractor goes bankrupt, dies, and their heirs reject the inheritance, or if the insured fails to complete and deliver the property within 12 months following the maximum period specified in the relevant contract or legislation, or the delivery date promised in the project, including actions contrary to legislation and the project.

This regulation shows that BTS is not simply a penalty for delay that automatically kicks in with every delay. For example, if a contractor is several months late on delivery, this alone may not necessarily mean that the BTS risk has occurred. Events such as exceeding the 12-month period after the promised delivery date, bankruptcy, or death can be decisive in terms of insurance coverage.

However, it is possible to expand the scope of coverage with the policy's specific conditions. Therefore, when entering into an urban transformation contract, property owners should examine not only the existence of the Urban Transformation Insurance Policy (UTIP) but also its scope and specific conditions. For example, it is essential to carefully examine how issues such as delivery delays, technical discrepancies, contractor default, project stoppage, rent payments, and incomplete workmanship are regulated in the policy.

Will the insurer pay cash or in kind?

One of the most important features of BTS (Building Insurance System) is that when a risk occurs, the insurer can fulfill its compensation obligation in two ways: cash compensation or in-kind compensation. Cash compensation is when the insurer pays the amount calculated under the coverage to the rightful claimant. In-kind compensation is when the insurer completes and delivers the promised real estate.

According to the SEDDK guidelines, when a risk materializes, landowners must apply to the insurer with a promissory note issued in their name. The insurer can conduct research and assessment; inspect the sites where the risk has occurred; and fulfill the compensation obligation either by paying in cash or by completing and delivering the property. If the insurer chooses the method of completing the construction, it may be necessary for the landowner to transfer the right of ownership of the building, which is entitled to be transferred to the contractor according to the construction contract, to the insurer, or to draw up a notarized sales promise agreement to that effect.

This point is extremely important for the owner. The owner should not assume that they will receive immediate cash payment if the risk materializes. The insurer may choose to complete the project. In this case, the handover of the project site, the level of remaining construction, the selection of a new contractor, the transfer of title, the establishment of condominium ownership, and the technical completion process come into play. Therefore, the BTS (Building Insurance System) should be considered not only as a "guarantee of payment" but also as a mechanism for the completion of the project.

How is monetary compensation calculated?

In the cash compensation method, the insurer may pay the amount stated in the guarantee bond according to specific indexation rules. According to the SEDDK guidelines, the insurer pays the beneficiaries an amount calculated not to exceed the amount stated in the guarantee bond, adjusted according to the New Housing Price Index from the project start date. The total of these compensation payments is limited to the adjusted amount of the maximum coverage limit allocated in the policy.

Therefore, property owners need to carefully examine the limits in the security deposit. If the security deposit limit is set too low, the monetary compensation received if the project cannot be completed may not cover the actual damage. Especially considering high inflation, rising construction costs, and changes in market values, it is crucial that the security deposit limit is set to cover the actual construction cost of the independent unit and the property owner's interests.

It should also be noted that monetary compensation may not automatically cover all damages suffered by property owners. For example, loss of rent, late payment penalties, moral damages, depreciation in value, loss of business income, or other claims arising from the contract against the contractor may be assessed separately, independently of the scope of the Urban Transformation Contract (BTS). Therefore, BTS should not replace the penalty clauses, rent assistance, phased title transfer, and security provisions in the urban transformation contract; it should be designed as a complementary guarantee.

How does the timeline work if the insurer completes the construction?

If the insurer chooses the same method of compensation, that is, if they decide to complete and deliver the construction, the duration of the process becomes critical for the property owner. Because the property owner has already suffered due to the contractor's failure to complete the project; it is unacceptable for the insurer to further prolong the process indefinitely.

According to the SEDDK guidelines, if the insurer decides on the completion and delivery of the project, after the contractor is determined and the project site is handed over to them, they shall deliver the property to the rightful owners within a reasonable time and in any case within 24 months following the promised project completion date in case of non-completion due to bankruptcy or death; and within a reasonable time and in any case within 24 months following the handover of the project site in case of non-completion within 12 months following the project completion date.

This provision aims to prevent the BTS (Building Construction Contract) from creating a second period of uncertainty for the property owner. However, in practice, processes such as handing over the project site to the insurer, determining the current construction level, terminating the legal relationship with the previous contractor, transferring the title deed, and selecting a new contractor must be carried out carefully. It is important for property owners to receive legal and technical support at this stage.

Does the insurance company pay for rent assistance?

One of the key aspects of building completion insurance is the insurer's ability to make rental payments under certain conditions if they choose the in-kind compensation method. According to the SEDDK guidelines, if the insurer chooses to complete and deliver the construction, after receiving the project site; in case of non-completion due to bankruptcy or death, they will pay the beneficiaries a rental amount equal to 0.5% of the inflation-adjusted construction cost of the independent unit every month after the promised project completion date, or every month after the 12th month if the project is not completed within 12 months of the completion date, until the housing unit is delivered. These payments cannot be linked to the maximum coverage amount specified in the separate guarantee bonds.

This provision provides significant protection for the property owner. One of the biggest hardships in urban transformation projects is having to live in rented accommodation for years after the old building is demolished. However, it's important to note that the insurer's rent payment only comes into play when the in-kind compensation method is chosen, not in every case.

Therefore, the contractor's obligation to provide rental assistance should be specifically regulated in the urban transformation contract. The existence of a Building Contribution System (BTS) should not leave the contractor's rental assistance obligation ambiguous. The contract should clearly state the commencement date, duration, amount, continuation of rental assistance in case of delivery delays, and its relationship to rental payments arising from the BTS.

What happens if BTS's contract ends?

One of the most sensitive issues regarding BTS (Building and Construction Contracts) is the termination of the insurance contract or the main construction contract. According to the SEDDK (Insurance and Construction Contracts Authority) guidelines, even if the BTS contract terminates, the liability arising from promissory notes issued in the name of the landowners before the termination date continues. Therefore, if a promissory note was issued in the name of the landowners before the termination of the BTS contract, the insurance protection may continue.

In contrast, the termination of the main construction contract may have different consequences. According to the guidelines, if the construction contract underlying the BTS (Building Insurance Policy) terminates, the insurer's liability also ends; if the landowner withdraws from or terminates the contract, the insurer cancels the promissory notes issued on behalf of the beneficiaries, and the coverage ends.

Therefore, property owners must carefully assess the impact on their BTS (Building Insurance Policy) in the event of contractor default before immediately resorting to termination. Incorrect or hasty termination may lead to the termination of insurance coverage. If the contractor has left the work unfinished, the following should be considered together: whether the BTS risk has materialized, the possibility of applying to the insurer, the administrative termination process, the status of the promissory note, and the property transfer relationship.

The Difference Between BTS and Surety Insurance

In practice, building completion insurance and surety insurance can be confused. While both are security instruments, there are significant differences in terms of the beneficiary, claim authority, and compensation method. According to the comparison in the SEDDK guide, in building completion insurance, the right to claim compensation when the risk occurs belongs to the beneficiaries; the insurer can provide compensation in cash or upon completion of the project. In surety insurance, however, the beneficiary is indicated as the relevant administration in both the policy and the surety bond, and the right to claim compensation belongs to that administration.

This difference is very important from the landowner's perspective. If the contractor has only provided surety insurance or a guarantee in favor of the administration, the landowner may not be able to claim compensation directly from the insurer. In contrast, with BTS, each landowner is in the position of beneficiary, so a guarantee bond is issued in their name, and the rights holders can apply when the risk materializes.

Therefore, the mere statement "there is a guarantee" is insufficient when preparing an urban transformation contract. The type of guarantee, the beneficiary, the right to claim, the guarantee limit, and the payment method must be clearly examined. The legal consequences of a property-related guarantee, which provides a direct right of application, and a surety bond issued in favor of the administration are not the same.

What should be considered in a BTS policy?

Obtaining building completion insurance alone is not sufficient. The policy and guarantee bonds must be correctly prepared. According to the SEDDK (Insurance and Construction Insurance Authority) guidelines, the relevant authority must ensure that the policy is issued under the name "Building Completion Insurance Policy," that a copy of the policy has been submitted to the authority, that the policy or guarantee bond is not issued in the name of the relevant authority, that the insured/policyholder is identified as the contractor and the beneficiary as the landowners, that a maximum coverage limit has been allocated for the benefit of the landowners, and that a guarantee bond is issued in the name of each landowner after the establishment of the condominium ownership following the building permit.

Property owners should also conduct a similar check. The authorization of the insurance company issuing the policy should be verified through the Insurance Information and Supervision Center (SEDDK). The SEDDK guidelines state that it is necessary to check whether the insurance company issuing the surety insurance contract or BTS contract is among the companies licensed in the surety insurance branch on the SEDDK website, and that the validity of surety bonds and policies can be checked through the SBM system.

Therefore, in practice, property owners need to request the following documents: BTS policy, promissory note issued in their name, important information form for the promissory note, coverage limit, validity date, insurance company authorization information, project information, the relationship between the construction contract and the promissory note, and the specific terms and conditions of the policy.

Can BTS Completely Eliminate Contractor Default?

No. While building completion insurance is a very important safeguard, it does not completely eliminate contractor default or all risks in the urban transformation contract. The contractor may start work late, fail to provide rental assistance, deviate from the technical specifications, delay delivery, or prolong the project process. Not all of these situations may automatically trigger payments under the Building Completion Insurance Scheme.

Therefore, the BTS (Building Transformation System) should be used in conjunction with other protection mechanisms in the urban transformation contract. The contract should also regulate phased title transfer, delay penalties, rental assistance, technical specifications, building occupancy permit requirements, guarantee letters, restrictions on the sale of contractor shares, and termination procedures. The regulation also links the sale of independent units belonging to the contractor to the progress level of the construction and the permission of the administration; the sale of independent units belonging to the contractor cannot be made without written permission from the administration.

This system, together with BTS (Building Property System), creates multi-layered protection in favor of the property owner. The contractor cannot obtain early title transfer, cannot sell their shares without limit, insurance coverage is provided with BTS, a penalty clause applies if delivery is delayed, rental assistance continues, and if the work is left unfinished, termination and selection of a new contractor can be considered.

What happens to BTS if the contractor goes bankrupt?

Contractor bankruptcy is one of the most significant risk scenarios for BTS (Building Transformation Project). When a contractor goes bankrupt, the urban transformation project often effectively comes to a standstill. Instead of becoming creditors in the bankruptcy estate, property owners can evaluate the possibility of protection by applying to an insurer under the BTS framework.

In this situation, the property owners must first locate the promissory note issued in their name, submit a written application to the insurer, provide documents demonstrating that the construction was not completed, attach records proving the contractor's bankruptcy, and complete any information and documents requested by the insurer. After reviewing the matter, the insurer may choose to pay either monetary compensation or compensation in kind.

If the insurer chooses to complete the project, liquidation issues arising from the previous contractor, site transfer, the technical condition of the existing construction, and title and condominium ownership procedures must be carefully handled. If the insurer chooses to pay monetary compensation, payment will be made within the framework of the coverage limit and indexation provisions.

How should the BTS (Building Technology and Safety) clause be written into an Urban Transformation Agreement?

The building completion insurance clause in the urban transformation contract must be clear, enforceable, and verifiable in favor of the property owner. Simply stating "the contractor will obtain building completion insurance" is not sufficient. The following points must be included in the contract:

The contractor will obtain building completion insurance in accordance with Law No. 6306 and related general conditions before applying for a building permit.

The policy will list the contractor as the policyholder/insured, and the landowners as the beneficiaries.

A separate security bond will be issued for each landowner, covering the price of the independent unit to be given to them in accordance with the contract.

No additional title deed transfers will be made in favor of the contractor during the construction permit process until the security bond is delivered to the owners and its validity is checked by the administration.

The validity period of the guarantee bond will be at least the project duration + 12 months.

The policy's special terms and conditions cannot be reduced without the written consent of the owners.

The contractor will be responsible for paying the policy premiums and keeping the policy in effect.

The existence of BTS (Building Transportation System) does not relieve the contractor of obligations regarding rental assistance, delay penalties, defective workmanship, technical specifications, and delivery.

Owners retain the right to claim compensation from the insurer in the event of a risk occurring.

These types of provisions ensure that BTS becomes a truly enforceable safeguard.

The Most Common Mistakes Made by Property Owners

In urban transformation projects, the most common mistake property owners make regarding building completion insurance is relying solely on the contractor's verbal statement. Simply saying "we have insurance" is not enough. The policy, guarantee bond, validity period, coverage limit, and the insurance company's authorization must be checked.

The second mistake is failing to check whether the promissory note is issued in the name of the owner. In BTS (Building Security System), protection for the owner is embodied in a promissory note issued in their own name.

The third mistake is weakening the provisions regarding phased title transfer, letters of guarantee, rental assistance, and late payment penalties simply because BTS (Building Treasury Bonds) exist. BTS should be placed alongside, not in place of, other guarantees.

The fourth mistake is to immediately terminate the contract when the contractor defaults. Since termination of the main construction contract can affect BTS protection, insurance coverage and application strategy should be evaluated first.

The fifth mistake is failing to verify the insurance company's authorization and the authenticity of the policy. Fake, invalid, or unauthorized insurance documents can lead to serious loss of rights in practice.

Conclusion

In urban transformation projects, building completion insurance is a crucial safeguard aimed at protecting landowners against serious risks such as the contractor's bankruptcy, death, or failure to complete the project within the promised timeframe during the renovation of risky buildings. The possibility of construction being left unfinished after the demolition of an old building is one of the biggest economic and legal risks property owners may face. While building completion insurance doesn't completely eliminate this risk, when properly structured, it provides significant protection that strengthens the property owners' position.

According to Law No. 6306, contractors are required to provide certain guarantees before obtaining a building permit. If building completion insurance is obtained, the guarantee requirement stipulated in the regulation may not be sought. However, for this to be the case, the policy must genuinely qualify as a building completion insurance policy, the landowners must be designated as beneficiaries, a separate guarantee bond must be issued for each owner, the guarantee limit must be sufficient, and the policy's validity period must be appropriate.

The most important document in terms of BTS (Building Insurance Transactions) is the promissory note issued in the name of the owner. The owner must verify that the promissory note is issued in their name, specifying the project type, the coverage limit, the compensation statement, the validity date, and the insurance company's authorization. In the event of a risk occurring, the insurer is presented with this promissory note; the insurer may choose to pay monetary compensation or compensation in kind, such as the completion of the construction.

In conclusion, building completion insurance in urban transformation projects is not merely a formality added to the contract, but a strategic safeguard ensuring the completion of the project and the protection of property rights for the owners. Property owners should consider building completion insurance in conjunction with provisions for phased title transfer, rental assistance, penalties for delays, technical specifications, occupancy permit requirements, restrictions on the sale of contractor shares, and termination clauses. A properly established building completion insurance system reduces the risk of collapse due to contractor issues; an incomplete or unsupervised insurance policy may not provide the expected protection to property owners.