ROYALTY AGREEMENTS UNDER TURKISH LAW
i. General Information
Royalty agreement is a type of contract describing the allocation of the operating rights on a part or all of a licensed mining area to real or legal third parties by the right (license) holder (“License Holder”). Also, royalty agreement is a private law contract that imposes obligations on both parties. The parties to such contract are the mining license holder and the third person, who will take over the operating rights of the mining area (“Royalty Owner”). With such contract, the license holder undertakes to make the mining area physically available for a third party for operation purposes, and in return is entitled to a fee for each ton of mined mineral.
ii. Royalty Agreements Under Turkish Law
Administration of mining activities is carried out by the Ministry of Energy and Natural Resources ("MENR") in Turkiye. Under MENR, General Directorate of Mining and Petroleum Affairs (Maden ve Petrol İşleri Genel Müdürlüğü) ("MAPEG") is the authorized administrative body primarily responsible for the administration of mining activities and issuance of mining licenses.
The Mining Law No. 3213 published on June 15, 1985 (“Mining Law”), and the Mining Regulation published on September 21, 2017 (“Mining Regulation”) constitute the main pieces of mining legislation in Turkiye. Turkish Constitution dictates that “natural wealth and resources are under the sole authority and disposal of the State”. As a reflection of this principle, Mining Law stipulates that minerals are fully owned by the State and are not subject to the ownership of the terrain they are located. This forms the basis of licensing regime under Turkish law.
The basis of royalty agreements, however, stems from the “principle of indivisibility of mineral rights”. This is reflected under the Mining Law as “none of the rights related to first application (precedence), exploration license, discovery and operation license established over the minerals can be divided into shares”. As a result of such principle, it is not possible to divide the exploration license and operating license. However, having these rights belong to a single person led to a decrease in the productivity of the mining site, given the fact that not every license holder of a mine may have the technical know-how nor the financial capability to operate such. This prohibition has led to the emergence of royalty agreements as a new type of contract.
Royalty agreements have emerged as a unique type of contract within the mining industry, with the fact that the principle of indivisibility has been effectively overcome for the efficient, safe and stable operation of mining sites.
The concept of royalty agreement is defined under the Mining Regulation as “The contracts signed by and between the license holders and the third parties or organizations for the whole or part of the license area in order to provide the right of disposition to these persons to operate and make value of the mines in the license areas”. Having said that, the mining legislation does not provide any insight on the general characteristics/requirements of royalty agreements. However, Supreme Court decisions and doctrine envisage that the framework under the Turkish Code of Obligations, with no: 6098 (“TCO”) regarding the usufructuary lease provisions will be used by analogy.
The parties of a royalty agreement are the owner of the operating license, referred to as the License Holder, and a natural/legal person that will operate the mine in the area in line with the rights under the royalty agreement and is referred to as the Royalty Owner.
Royalty Owner is required to fulfill certain requirements in order to execute a valid royalty agreement under the Mining Law. Accordingly, it is legally required to be a Turkish citizen, or a Turkish entity authorized to engage in mining activities and to have adequate financial capability. As per the Mining Regulation, financial adequacy means that the legal entities have sufficient funds to meet the financial criteria defined under the Mining Regulation. The existence of 30% of such funds must be proven/documented by share their capital and %70 with a bank reference letter for Turkish entities. Real persons, also, are required to demonstrate the entirety of the financial adequacy amount through a bank reference letter. In summary, (i) foreign legal entities and (ii) Turkish entities (with either domestic or international shareholding structures), which do not meet the financial adequacy requirements, are not allowed to be parties to a royalty contract.
iii. Form and Legal Nature of Royalty Contracts
Article 12 of the TCO, which regulates the form requirements of legal transactions, states that unless otherwise stated by law, the validity of contracts is not subject to any particular form. The form prescribed by law for contracts is, as a rule, a validity requirement. Contracts concluded without complying with the prescribed form are not legal effective. Accordingly, the “requirement to obtain the Ministry’s approval” for the royalty agreements stipulated under Provisional Article 7 of the Mining Law constitutes a validity requirement within the meaning of Article 12 of the TCO.
As described herein above, legal nature of royalty agreements can be defined as a type of usufructuary lease agreements regulated under the TCO. The Supreme Court also renders decisions in line with such approach. Therefore, the provisions of the TCO regarding the usufructuary lease will be applied to the royalty agreements along with the provisions under the Mining Law and Mining Regulation. The following elements form the nature of royalty agreements:
Royalty agreement is a voluntary agreement; allocation of operating rights under the license area by a License Holder to a Royalty Owner through a contract is subject to the approval of MAPEG.
Royalty agreement is a synallagmatic agreement, where both parties assume certain obligations: One of the parties agrees to allocate their rights that they have under the Mining Law, and other party agrees to pay the agreed consideration in return.
Royalty agreement is a contract in continuous character; and the License Holder is required to bear with the use of the operation rights, which originally belong to the License Holder under the Mining Law, by the Royalty Owner.
iv. Practical Legal Remarks with respect to Royalty Agreements under Mining Regulations
A royalty agreement to be executed between a License Holder and a Royalty Owner is subject to the approval of the MAPEG. Firstly, it is a voluntary agreement, i.e. if the declarations of the parties are mutual and consentaneous with respect to the essential parts of the agreement, the agreement is formed, and yet it is legally ineffective. It becomes effective, upon the approval of the MAPEG. Approving or not approving a royalty agreement is under MAPEG’s sole discretion. However, in our experience, such applications are “often” approved unless there is inadequacy on technical know-how or financial capability of the Royalty Owner.
Also, under the Mining Regulation, it is obligatory that the royalty agreements made by and between the mining operation license holders and the third parties for part or all of the license areas, and the amendments made therein, must be submitted to the MAPEG for information purposes and must be annotated in the mining register for informational purposes. Further, such disclosure obligation does not require MAPEG to become a party to the agreement. In addition, the end date of the royalty agreements must also be specified as day/month/year, including possible time extension terms.
In accordance with the Mining Regulation, during the transfer requests of the operating licenses to third parties that have a royalty agreement annotated with the Mining Register, a letter of commitment is requested from the transferee that the terms of the registered royalty agreement are accepted, and if it is not, the transfer of such operating license cannot be realized. With this provision, a registered royalty agreement and the rights of the Royalty Owner under the contract are protected.
In addition, any direct or indirect change in connection with the shareholding structure or the address of the Royalty Owner shall be notified to MAPEG within one (1) month following such change. In cases where the new shareholder owning more than 10% of the shares is a legal entity, such legal entity’s shareholding structure must also be notified to MAPEG. Once MAPEG notices that a Royalty Owner fails to notify such change, it grants two months’ notice to remedy such irregularity and if not remedied, the Royalty Owner will be charged a monetary fine and its activities will be suspended until such change is duly reported to MAPEG.