1. Concepts and Differences of Deposit, Engagement Money, Earnest Money, and Forfeit Money

In judicial decisions, deposit has been defined synonymously with the concepts of engagement money and earnest money, but differently in terms of its legal nature from forfeit money and penalty clause.

Deposit / Engagement Money / Earnest Money: According to Article 177 of the Turkish Code of Obligations No. 6098 (TCO), money given when a contract is made, unless otherwise agreed, is not considered as “forfeit money” but as “engagement money” (earnest money) given as proof that the contract has been made. The primary function of this money is to prove that the contract has been established and to facilitate proof. Unless there is a contract to the contrary or local custom, this amount is deducted from the principal debt (offset).

Forfeit Money (Withdrawal Money): It is regulated in Article 178 of the TCO. If the money given has been agreed upon as “forfeit money”, the parties have the right to withdraw from the contract. In this case, if the party who gave the money withdraws, they forfeit what they gave; if the party who received the money withdraws, they return twice the amount they received. According to judicial decisions, for a payment to be considered forfeit money, this matter must be explicitly agreed upon or proven; otherwise, the money given is considered engagement money.

Penalty Clause: It is an ancillary (secondary) condition that serves to strengthen the debt. Deposit or forfeit money also has an ancillary nature like a penalty clause. However, while a penalty clause is generally a sum to be paid in case of breach of contract, a deposit is given when the contract is established.

Key Differences:

Obligation to Refund: Unless it is explicitly stipulated to be “withdrawal compensation/fee”; a deposit or earnest money can be reclaimed by the party that gave it (entitled to restitution), whether the party breaching the contract is justified or not. However, withdrawal money is a cost that the withdrawing party must bear.

Burden of Proof: The party claiming that the money given is withdrawal money (usually the seller/buyer) is obliged to prove this claim. Otherwise, the money is considered earnest money that must be refunded.

Validity: The validity of ancillary conditions such as penalty clauses and withdrawal fees depends on the validity of the main contract. If the main contract is invalid (e.g., due to lack of formal requirements), these conditions are also invalid.

2. Types of Contracts in which it is Valid and Formal Requirements

Court decisions have evaluated the legal consequences of deposits according to the type of contract and its validity conditions:

Immovable Property (Real Estate) Sales Contracts: Pursuant to Article 706 of the Turkish Civil Code, Article 237 of the Turkish Code of Obligations, Article 26 of the Land Registry Law, and Article 60 of the Notary Law, it is mandatory for them to be made in an official form (in the presence of a land registry official or a notary). Immovable property sales contracts made in ordinary written or verbal form are legally invalid (null and void). Since the contract is invalid, the provisions for deposit, withdrawal money, or penalty clauses associated with it are also considered invalid.

Vehicle Sales Contracts: According to Article 20 of the Highway Traffic Law, formal execution in the presence of a notary public is a condition for validity. Vehicle sales contracts made externally (outside a notary) are invalid and do not create rights or obligations for the parties.

Commercial Sales and Other Contracts:

Transfer of Limited Company Shares: According to Article 595 of the Turkish Commercial Code (TTK), it must be made in writing and notarized. External agreements that do not comply with this condition are invalid.

Leasing (Financial Lease): In contracts dependent on leasing approval, if the leasing is not approved, the contract is considered cancelled.

Sale of Movable Property: In cases such as the transfer of a pizza restaurant or the sale of machinery, if the transfer has not occurred and unless otherwise agreed, the down payment (earnest money) is subject to refund.

3. Cancellation and Refund Conditions

The refund of the down payment occurs under the following conditions, depending on the validity of the contract and the reasons for cancellation:

Refund in Invalid Contracts (Unjust Enrichment): In contracts that are invalid due to non-compliance with formal requirements (such as the sale of immovable property or vehicles), the parties have the right to claim back what they have given, in accordance with the provisions of “unjust enrichment”. Since the contract is invalid, the seller cannot retain the down payment by invoking “withdrawal penalty” or “contractual penalty”.

Non-Formation or Non-Performance of the Contract: The money given during the formation of the contract (earnest money/deposit for commitment) must be refunded if the contract is not performed or if the sale does not take place. According to Supreme Court decisions, unless it is explicitly agreed to be a withdrawal penalty, the party breaching the contract can request the down payment back, even if they are at fault.

Agreement of the Parties (Rescission/Mutual Termination): If the contract is terminated by mutual agreement of the parties, the earnest money received must be refunded.

Seller’s Default: If the seller fails to deliver the goods or make them ready for delivery within the agreed period, the buyer may withdraw from the contract and demand a refund of the earnest money with interest.

Exceptional Cases Where Refund is Refused:

In valid preliminary protocols of a commercial nature, if it is explicitly stated and signed that the payment “will not be refunded under any circumstances” or that it is “forfeit money,” and the buyer unfairly withdraws, the refund request may be rejected (e.g., Decision of Istanbul 7th Civil Court of Commerce). However, this situation does not cover invalid contracts that lack the official form requirement.

Additional Information from Secondary Sources

The following information contains secondary details and specific situations found in the decision texts:

Proof Issue: If a bank receipt states “cash debt,” and the recipient cannot prove that it was earnest money or commission, the payment is considered a debt and must be refunded. If the receipt states “earnest money,” it constitutes prima facie evidence that the money is a binding payment.

Warehouse Expense Offset: In commercial sales (e.g., machine import), even if the contract is not finalized, the seller may request to offset the warehouse expenses incurred for the period the goods were stored from the earnest money. However, if the proforma invoice has a note stating “warehouse expense will not be reflected,” this deduction cannot be made.

Competent Court: In disputes concerning consumer transactions (e.g., purchase of a private vehicle), down payment refund cases must be heard in Consumer Courts. In disputes between non-merchant individuals, Civil Courts of First Instance are competent.

Franchising Agreements: Franchising agreements that include a brand license must be made in writing (Industrial Property Law). Down payments made under agreements that are not in writing are considered within the scope of unjust enrichment. A suggested article.

Why is Expert Lawyer Support Necessary?

The legal differences between the concepts of down payment, earnest money, advance payment, penalty for withdrawal, and penal clause; formal requirements in real estate sales contracts, the notarization requirement for vehicle sales, transfer of limited company shares, commercial protocols, leasing agreements, and the application of unjust enrichment provisions in case of contract invalidity are all technical and specialized areas. The Court of Cassation’s decisions on issues such as the refund of down payments, whether it constitutes a penalty for withdrawal, whether the seller can retain the money in invalid contracts, and the possibility of deducting storage costs are highly detailed, and even a single error can lead to a loss of rights.

In regions such as Istanbul, Tuzla, Pendik, Kartal, Maltepe, Kadıköy, Ataşehir, Ümraniye, Gebze, Dilovası, and Çayırova, as real estate and vehicle sales are common, earnest money disputes are frequently encountered, and correctly distinguishing between “earnest money – withdrawal penalty – or liquidated damages?” is of great importance. Especially, the Supreme Court’s practice stating that the refund of earnest money is mandatory in invalid contracts such as real estate or vehicle sales, requires the process to be conducted in accordance with proper procedure.

For this reason, 2M Law Firm, provides professional legal support in complex areas such as earnest money refund, assessment of withdrawal penalties, unjust enrichment claims in invalid contracts, withdrawal clauses in commercial protocols, and the burden of proof. Expert legal support is of critical importance for correctly determining the nature of the contract, establishing the legal status of the earnest money, and asserting refund-compensation claims in the correct court with proper legal grounds.