The main sources of real estate law are as follows:
Over the past 12 months, investments in the Korean real estate market slowed down due to high inflation rates and sudden interest rate hikes, causing increased uncertainty in the financial market.
Commercial real estate transactions remained at around 70% of the previous year’s level, with an overall decrease in the office and logistics markets and a decrease of almost 60% in the retail market. As the US Federal Reserve raised its benchmark interest rates, the Bank of Korea also raised its benchmark interest rates seven times in a row, leading to greater uncertainty and liquidity tightening in the financial market. As a result, many real estate sales plans scheduled for the second half of 2022 were either withdrawn or delayed. For example, the IFC sale in the Yeouido Business District (YBD) was unsuccessful, and the sale of Tower 8 in the Central Business District (CBD) was delayed. Although the pace of interest rate hikes in 2023 is expected to slow down, interest rates are expected to remain high, resulting in a decrease in the transaction volume.
In the first half of 2022, a REIT managed by ARA Korea sold the Alpharium Tower in the Bundang Business District (BBD) for approximately KRW1 trillion to a fund managed by Mastern Investment, setting a new record for the highest price per square metre in the BBD. Additionally, a REIT managed by KORAMCO Asset Management purchased the A Plus Asset Tower in the Gangnam Business District (GBD) previously owned by another REIT managed by KORAMCO Asset Management for approximately KRW430 billion, setting a new record for the highest price per square metre in the Seoul office market at KRW47.52 million per square metre.
The IFC sale in YBD, which was expected to be the largest transaction of 2022, fell through in the third quarter. Mirae Asset Management was selected as the primary negotiation partner by the seller, Brookfield, but the REIT operating licence necessary for the acquisition of IFC was not issued, and the parties ultimately failed to reach an agreement. This matter is now undergoing international arbitration proceedings.
Despite the economic slowdown, the prime office market, which had no new supply, continued to experience a steady increase in corporate lease demand, resulting in a decrease in vacancy rates and an increase in rental prices across all areas. In particular, the office vacancy rate in the GBD was in the single digits at the end of 2022, showing a significant increase in rental prices compared to other areas.
In the logistics market, there have been concerns about leasing demand for logistics centres due to recent delays in the initial public offerings of Market Kurly and Oasis Market. The retail market is expected to stabilise to some extent following the industry restructuring in the aftermath of COVID-19. Convenience stores, which can operate both online and offline, and department stores and mixed-use shopping facilities that handle luxury goods are expected to grow based on their respective strengths. In the case of hotels, there has been an increase in the number of foreign visitors, but the number is still far below that of pre-COVID-19 levels. However, demand for five-star hotels continues to increase due to the rise in domestic travellers and an increase in Japanese and American tourists, and the average daily rate for hotel rooms has also increased compared to pre-COVID-19 levels.
There have been new business models that leverage blockchain and other disruptive technologies, such as digital asset-backed securities (DABS) offered with real estate as the underlying asset. The Korean government has been supportive of new technologies and has exempted the application of current regulations to business models designated as innovative financial service, through the “regulatory sandbox‟ regime.
Since 2019, several real estate investment platforms have been admitted to the regulatory sandbox, allowing them to offer DABS, non-fungible tokens (NFTs) or fund interests, and enabling investors to trade on the platform while recording the transactions on a blockchain, without being subject to securities regulations. The regulatory sandbox provides a transitional exemption for new business models for a period of up to four years.
Moreover, the government has been gradually accommodating new business models within the regulatory framework. The Ministry of Land, Infrastructure and Transport (MOLIT) has announced its plan to establish a “real estate transaction platform based on blockchain” by 2024, which is expected to enhance the accessibility and transparency of the public records of real estate transactions.
The Financial Services Commission (FSC) announced its plan to permit security token offerings (STO) in February 2023. According to the relevant guidelines, eligible security tokens will be considered investment contract securities, and may benefit from electronic registration of securities (as with stock and bonds) and listing on the Korea Exchange. The related legislative work is expected to take place in 2023.
Although the impact of disruptive technologies on real estate markets remains limited, the recent progress suggests that digital assets and blockchain can be utilised to securitise real estate and raise funds. The development and regulation of new technologies and products will likely become a significant topic within Korean real estate capital markets in the future.
REITs are indirect investment vehicles in the form of a corporation that invests in and manages real estate, receiving investment funds from multiple investors and distributing over 90% of the profits to investors. Under current law, there are three types of REITs: self-managed REITs that directly perform investment and management of assets with employees, including asset management professionals; entrusted management REITs (general REITs) that entrust the investment and management of assets to asset management companies; and corporate restructuring REITs that invest in and manage assets at least 70% of which consist of real estate sold for debt repayment.
However, self-managed REITs must pay corporate taxes even if they distribute over 90% of their distributable earnings, unlike entrusted management REITs, and while their authorised capital is over KRW7 billion, which is higher than KRW5 billion for other types of REITs, they cannot receive work from other REITs. The reduction of dividend income for self-managed REITs in turn reduces investment in self-managed REITs, which leads to dissatisfaction among existing investors. As a result, there are only four self-managed REITs out of over 300 REITs, and no new self-managed REITs have been registered since 2015. To address this, an amendment bill is pending in the National Assembly to allow self-managed REITs to convert to entrusted management REITs upon the resolution of the general meeting of shareholders and the approval or registration of the Ministry of Land, Infrastructure and Transport.
Despite the fact that the investment targets of REITs have diversified from existing office and retail properties to logistics and data centres, and the asset size of REITs has grown rapidly, REIT markets in Korea are still developing in terms of scale and maturity compared to advanced REIT markets such as the United States. There are also problems such as rigid regulatory operations and long authorisation periods compared to similar funds, and there is low accessibility of public REITs for ordinary investors. To address this, an amendment bill is pending in the National Assembly to improve the REIT licensing and registration system and to expand policy support for diversifying investment types, such as improving the public offering system to enhance accessibility for the general public and allowing investment in social infrastructure to further promote listed REITs. It is expected that the proposed amendments will be passed through the National Assembly within 2023.
Property rights that may be acquired include:
The RERA applies to the transfer of title of all real estate.
To be lawful and proper, transfers of real estate must be registered in the real property registry. Title insurance is not common in Korea. The COVID-19 pandemic has not particularly disrupted or added to these procedures.
Buyers carry out legal due diligence based on information provided by sellers and on public information such as that acquired through the real estate registry, the real estate ledger and the certificate of land use plan issued by the municipal government. Legal due diligence typically covers the transaction structure, title, encumbrances, zoning, government permits and approvals, and taxes.
The COVID-19 pandemic has had almost no impact on legal due diligence.
Representations and warranties provided in a commercial real estate transaction typically include:
No specific warranties are statutorily required to be provided by a seller in the sale of real estate. However, the Civil Code provides that in the event that a property has defects and unless a buyer was aware of, or could have been made aware of, these defects at the time of the sale, such buyer may cancel the contract if the objective of the contract cannot be achieved as a result of such defects. Otherwise, a buyer may only claim damages for the defects. A buyer’s remedies are termination of the contract, indemnification and/or claim for damages. In many cases, security deposits are kept for a certain period of time as security for damages claims. The survival period for the seller’s representations and warranties varies by case, with a maximum limit of ten years under the Civil Code and five years under tax law. In particular, for investment vehicles that must be liquidated after the sale, the period is often not set at all or is set at a short period of six months. The scope of the seller's liability for a breach of its representations and warranties is also diverse, making it difficult to speak universally, and in many cases different limits are set on liability depending on the specific representations and warranties. There have been cases where representation and warranty insurance was used.
COVID-19 related representations and warranties are not usually included in real estate transaction documents.
As several government approvals may be required for real estate transactions, parties should ascertain which approvals are required for their deals and incorporate sufficient time into the deal timeline to obtain any such approvals.
Even if a buyer did not cause the pollution or contamination of a property, such buyer is responsible for the pollution or contamination unless such buyer was not aware of, or could not have been made aware of, the state of pollution or contamination of the property.
A buyer may ascertain the permitted uses of a parcel of real estate by obtaining a certificate of land use plan issued by the relevant municipal government. It is possible to enter into specific development agreements with the relevant public authorities. A typical example would be the development of non-governmental rental housing in accordance with the Special Act on Non-Governmental Rental Housing.
The government’s taking of land (including by an industrial site development project enterprise) is permitted for public interest projects as stipulated in the Act on Expropriation of Land, etc, for Public Works and Compensation (AELPWC). To expropriate property, the government must make a public announcement of the properties to be expropriated, notify the property owners and implement a compensation plan. The government must assess the compensation amount and negotiate with the property owners.
If an owner agrees to transfer their property at the price offered by the government based on the government’s assessment, an agreement for the property transfer may be executed at such a price. However, if an owner does not accept the government’s proposal, the government may file, or must file at the request of the owner, a motion to determine the appropriate purchase price for the relevant property with the Central Land Expropriation Committee, which will examine the value of the property, assign a certified appraiser to assess the property, and consider briefs from the government and the property owner.
In approximately three to four months, the Committee renders a decision on the purchase price for the property subject to the expropriation. The government must then pay the purchase price as determined by the Committee. Ownership of the expropriated property is then transferred to the government on the expropriation date indicated in the Committee’s decision, even if the owner files an objection or a lawsuit regarding the decision.
Acquisition and Recordation Tax
When a company or an individual acquires real property in Korea, it must pay acquisition tax of 4.6% (inclusive of surtax) of the purchase price (ie, actual acquisition cost) reported at the time of the acquisition. The acquisition tax is inclusive of a recordation tax. Acquisition tax is exempt if a property is purchased on condition that it will be donated to the state or a local government.
Stamp duty of up to KRW350,000 is payable on the contract for the acquisition of real estate and generally paid by the buyer. The buyer must also purchase national housing bonds at a rate of approximately 5% of the purchase price of the real estate. In practice, these bonds are immediately resold at a 10% to 15% discount on the purchase price of the bonds.
Additional taxes apply to share deals and partial ownership transfers, to the extent that the buyer (and its related parties) becomes a majority shareholder of a target company holding real estate. A deemed acquisition tax is imposed when an entity (along with its related parties) becomes a majority shareholder of a target company by acquiring more than 50% of its shares, and the majority shareholder is required to pay deemed acquisition tax of 2.2% (inclusive of surtax) of the book value of the real estate held by the target company in proportion to the majority shareholder’s ownership percentage, as if it has directly acquired such real estate. In addition, the seller of shares in a share deal must pay a securities transaction tax, which is equal to 0.35% of the sale price.
Foreign investors acquiring land are required to file a report with the local government in Korea within 60 days of the execution of the sale and purchase agreement, or to obtain approval in cases where the land is located in:
Foreign investors acquiring 50% or more of shares in a land-owning company are required to file a report to that effect. However, the filing of this report may not be required if the foreign investors elect to file a general real estate transaction report with the local government in accordance with RRETA.
Acquisitions of commercial real estate are financed through both debt and equity financing. In particular, institutional investors such as investment banks, public pension funds, mutual aid associations, securities companies and insurance companies are a significant source of financing for such acquisitions, as well as foreign investors.
In addition to conventional debt and equity financing by various investment vehicles (as described in 5. Investment Vehicles), there are some financing options more customised for acquisitions involving large real estate assets. For example, real estate securitisation using asset-backed securities (ABS) or asset-backed commercial paper (ABCP) is common in Korea. Sale-and-leaseback transactions have also been a commonly used alternative financing method in Korea.
Investors borrowing funds to acquire or develop real estate typically use a mortgage on the real estate as security, created by a mortgage agreement between the parties. Another type of security typically used is a security trust under which the real estate investor entrusts the real estate to a trustee and the lender becomes a beneficiary.
Any foreign lender who intends to acquire a security interest over real estate located in Korea is required to file in advance a report with a foreign exchange bank in Korea under the Foreign Exchange Transaction Regulations. Furthermore, if the land in question is located within a district subject to prior approval by the MOLIT under the NLPUA, and if the foreign lender intends to acquire a security interest that would grant them the right to use the land for the purpose of owning buildings and structures on such land, additional approval must be obtained from the local government with jurisdiction over the land.
A foreign lender is generally not subject to any restrictions on transferring the proceeds of a loan repayment to its offshore account as long as the government authorisation required under the Foreign Exchange Transaction Regulations was duly obtained in respect of the security agreement and the loan agreement at the time of signing or closing the financing transaction.
Security over real estate (ie, mortgages) must be registered with the competent court registry office. In the case of mortgages, registration tax (0.2% of the maximum secured debt amount) and local education tax (20% of the registration tax), as well as certain other fees and duties such as charges for the purchase of national housing bonds and stamp duty, must be paid prior to filing the application for registration of the mortgage.
Under Korean law, if an entity (the security provider) grants security over its assets to secure the debt of another person/entity (the debtor) without adequate consideration from the debtor, this may constitute criminal and civil breach of fiduciary duty by the directors of the security provider. In other words, if the security provider’s directors fail to procure adequate consideration when they approve the provision of collateral, the directors will be deemed to have caused economic harm to the security provider in breach of their fiduciary duty. In order to be deemed “adequate‟ in this context, the consideration must be equivalent to the risk exposure of the security provider (ie, forfeiture of its assets should the debtor default on the loans).
In addition, if the debtor is a specially related person/entity of the security provider (ie, its major shareholder), the provision of security by the security provider may be subject to certain additional restrictions or requirements under Korean law, including the following:
Furthermore, there is a requirement to file a public notice of acquisition of security interest if the security provider and the debtor belong to the category of “companies subject to restriction on mutual contribution” under the MRFTA, and the value of the security to be granted exceeds a certain threshold.
The enforcement of security over real estate against a defaulting borrower may be made in accordance with the terms of the security document, and there is no other legal formality that must be complied with or legal impediment to enforcing the security if the requisite foreign exchange report was made in respect of the security document and the loan agreement. However, if a rehabilitation proceeding under Korean insolvency law is commenced in respect of a security provider, enforcement of security will generally be prohibited, and the lender will be required to report its claim and security and will have to be repaid in accordance with the terms of the rehabilitation plan approved by the court.
Korea is a race jurisdiction, and therefore, priority of any competing lender’s security interest over the real estate is determined in the order of registration of security. If the foreign lender is a secured lender, no additional step needs to be taken to secure priority over any lower-ranked security holder or unsecured lender.
It usually takes approximately six to 12 months to enforce and realise real property security, although the actual time may vary for each case.
The government has not introduced any restrictions on the enforcement on collateral in real estate lending due to the COVID-19 situation, but it has required lenders to take steps to extend the maturity of loans made to small- and medium-sized enterprises and small business owners.
Existing secured debt may become subordinated to newly created debt only if all existing lenders agree to subordinate their debt. In such cases, the existing security must also be subordinated to the new loan, and the security must be newly registered in the order of priority. Registration of security is required to have a perfected right to the security (as in the case of mortgages).
According to the Debtor Rehabilitation and Bankruptcy Act (DRBA), if a new loan is advanced to a debtor subject to rehabilitation proceedings that have already commenced, such new loan is granted a preferential right of repayment in priority to pre-rehabilitation claims and secured rehabilitation claims.
A lender may not be held liable for environmental liabilities caused by encumbered real estate unless it acquires the property through a foreclosure sale (or by otherwise enforcing its security). In such cases, the lender’s environmental liabilities will be as described in 2.7 Soil Pollution or Environmental Contamination. Thus, a lender holding security over real estate will not be liable under environmental laws.
Under the Civil Code, security interests knowingly created by a borrower against the proprietary interest of existing lenders may be made void by the courts upon the request of such existing lenders, if:
Additionally, granting security interests in favour of only some of the existing lenders without receiving any new financing (or new lending arrangements) may constitute fraudulent transfer.
Under the DRBA, a security interest created by a borrower in rehabilitation or bankruptcy may be voided by the rehabilitation receiver or the bankruptcy administrator if created by a “preferential‟ act by the borrower that favours certain lenders over others.
Many finance documents that are negotiated in the Korean market are governed by English or New York law or follow English or New York law precedent language. As such, market participants will need to follow regulatory developments in the US and Europe more closely as a result of the LIBOR phase-out. Currently, transaction documentation utilises triggers that refer to fallbacks when LIBOR and relevant rates are temporarily or permanently unavailable. If these fallbacks are triggered, the rates may be determined based on alternative reference bank quotations or other benchmark replacement rates.
In entering into transaction documents, parties should take into consideration whether the governing law and jurisdiction provisions are appropriate in light of the projected LIBOR phase-out as well as the status of the Korean financial market.
The principal laws applicable to strategic planning and zoning are NLPUA (regulating zoning and land use) and the Building Act (regulating construction and building use). For certain types of development such as the redevelopment of urban areas, other specific laws may apply, such as the Act on Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents (AMIUADCR) and the Special Act on Promotion of Urban Renovation.
In addition, at a national level, the MOLIT regulates the development and use of land by setting out a basic land-use plan. At a local level, municipal governments regulate the development and use of land by promulgating local ordinances.
The principal laws applicable to design, appearance and method of construction are the NLPUA and the Building Act. In particular, the Building Act regulates the standards and usage of land, structure, and facilities of buildings, as well as safety, functionality, environment, and aesthetics of buildings, and its application is overseen by municipal governments.
As explained in 4.1 Legislative and Governmental Controls Applicable to Strategic Planning and Zoning, at a national level, the MOLIT regulates the development and use of land by setting out a basic land use plan. At a local level, municipal governments regulate the development and use of land by promulgating local ordinances.
The NLPUA provides a basic framework for planning regarding the use, development and preservation of national land and the implementation of such plans. Under this framework, the MOLIT devises the national land plan, in accordance with which the regional plan, urban master plan and city management plan are devised by governors, mayors and other heads of local governments.
The city management plan contains a detailed zoning plan covering certain areas of the city. In addition, the city management plan and related local regulations restrict granting development permits or building permits in certain areas where development activities and/or building works could seriously pollute or damage the surrounding environment, scenery, historic buildings, cultural heritage, etc.
To develop a new project or a reconstruction/redevelopment project, certain permits, approvals and licences must be obtained in accordance with the relevant laws (ie, the Urban Development Act, the Housing Act, the Building Act, the Act on the Ownership and Management of Aggregate Buildings, the AMIUADCR, etc).
The specific processes for obtaining such entitlements vary depending on the relevant law. Generally, an application for entitlements will be submitted to the relevant government authority, in accordance with the requirements and processes set forth in the relevant laws, and the relevant government authority will then grant such entitlements if the application complies with the relevant city management plan and the restrictions under the Building Act and other regulations.
In general, a third party does not have the right to object to such developments, unless such third party’s rights have been infringed by such development. Under Supreme Court precedent, rights are infringed only if there is a “legally protected interest‟, which means individual, direct and specific interest protected by the law underlying the applicable government decision and other relevant laws.
In addition, a third party who has suffered losses or injury (ie, noise, infringement of the right to light, ground subsidence, etc) due to the construction work for such development may seek suspension of such construction work or claim damages for losses suffered.
An applicant for permits, approvals or licences may appeal the authority’s decision regarding the application (ie, a decision rejecting an application or a decision not fully granting permission) by bringing an administrative suit.
Furthermore, a third party whose legal rights are infringed by the decision may also appeal the decision.
However, an appeal seeking the cancellation of a decision by an administrative agency must be brought within 90 days of the appellant becoming aware of the decision or within one year of the decision, whichever is earlier.
A government authority must consult other government authorities or agencies that will be affected by the permits/approvals being sought, before such permits/approvals are issued. That said, whether it is possible or necessary to enter into separate agreements with government entities or utility suppliers and what kinds of agreements are typical may vary depending on the specific law applicable to each development project. For an example of an agreement that may be entered into, please refer to 2.8 Permitted Uses of Real Estate under Zoning or Planning Law.
If a developer who has obtained permits/approvals does not carry out the development in accordance with such permits/approvals, or does not adhere to the prescribed conditions, the relevant government authority may cancel such permits/approvals.
In addition, if a developer engages in any conduct in connection with a development project without obtaining the permits/approvals required under the relevant laws or does not satisfy a prescribed condition under the relevant laws, such developer may be subject to criminal sanctions (ie, imprisonment, penalty payment) or administrative sanctions (ie, fine payment, business suspension).
There are two general forms of companies:
Five special forms of investment vehicles, CR-REIT, general REIT, RETF, RECF and PFV, are also available (see 5.2 Main Features of the Constitution of Each Type of Entity).
A stock corporation has the familiar corporate structure of shareholders, a board of directors and one or more executives, and is organised under the articles of incorporation. Shareholders of a stock corporation are liable only up to an amount equal to their capital contribution, and shares may be transferred freely.
Limited Liability Company
A limited liability company is comprised of “members‟ instead of shareholders. As in the case of a stock corporation, the liability of members is limited to the amount of their capital contribution to the entity. However, a board of directors is not required for a limited liability company, although one may optionally be created by the members. Unlike in some other jurisdictions, in Korea there is no material difference in tax treatment between a stock corporation and a limited liability company, as both are subject to two-tier taxation from the investor’s perspective (on corporate income and on dividends).
Real Estate Trust Fund
A real estate trust fund (RETF) may be classified as a trust; it is required to manage its assets through an asset management company with equity of KRW2 billion or more and with five or more professionals.
Corporate Restructuring Real Estate Investment Trust
A corporate restructuring real estate investment trust (CR-REIT) may be classified as a stock corporation; it is required to invest 70% or more of its assets in “CR-REITable‟ assets, as defined in the relevant regulations, and to manage its assets through an asset management company with equity of KRW7 billion or more and with five or more professionals.
Real Estate Investment Trust
A general real estate investment trust (general REIT) may be classified as a stock corporation, and it is required to invest 70% or more of its assets in real estate and manage its assets through an asset management company with equity of KRW7 billion or more and with five or more professionals.
Real Estate Corporate Fund
A real estate corporate fund (RECF) may be classified as a stock corporation; it is required to manage its assets through an asset management company with equity of KRW2 billion or more and with five or more professionals.
Project Financing Vehicle
A project financing vehicle (PFV) may be classified as a stock corporation, and it is required to manage its assets through an asset management company that is a shareholder of the PFV, or a company set up by a shareholder of the PFV.
The minimum capital requirement for each type of entity is as below:
The ownership limitation for each type of entity is as below:
There are no public offering related requirements that apply to the various types of entity except for:
Restrictions on external financing for each type of entity are as below:
Qualifications for assets invested in by each type of entity are as below:
Requirements for real estate development projects invested in by each type of entity are as below:
The applicability of corporate income tax to each type of entity is as below:
The governing law of each type of entity is as below:
The main items in annual maintenance costs for special investment vehicles are the fees paid to the asset management companies, custodians and business trustees. As an example, for REITs, annual fees paid to asset management companies are typically within 0.2% to 0.4% of the total property purchase price, while annual fees paid to custodians and business trustees typically add up to 0.04% of the total property purchase price. Fees paid by other special investment vehicles do not vary significantly. The annual accounting compliance cost for special investment vehicles is typically around KRW10 million or lower, although this may vary slightly depending on the asset size and the accounting period.
Arrangements for the occupancy and use of real estate include a lease on real estate, an easement on land, and a superficies on land.
There are two main types of commercial leases:
Under the Civil Code
Rents and lease terms are basically freely negotiable. However, under the Civil Code, certain terms may not be contractually agreed upon to the extent that they are unfavourable to a tenant. For example, in the event that the agreed rent becomes inadequate due to an increase in taxes, public charges or other claims, the landlord is entitled by law to request an increase in future rent. However, the tenant’s right to request a reduction in rent in case of a change in economic circumstances may not be waived or excluded by contractual agreement. As another example, in the event that a tenant installs a fixture in or on the leased building for its benefit with the landlord’s consent, the tenant is entitled by law to request the landlord to purchase the fixture upon termination of the lease and such right of the tenant may not be waived or excluded by contractual agreement.
Under the CBLPA
Furthermore, for commercial building leases regulated under the CBLPA, the lease term may not be less than one year (unless the tenant, on its own, elects for a period of less than one year), and the tenant is entitled to request renewal of the lease for a cumulative term of up to ten years. In addition, for such leases, with respect to the right to request an increase or reduction of rent based on changes in economic circumstances, rent may not be increased within one year from the execution date of the lease or of a prior rent increase, or by the maximum limit for a rent increase as prescribed by law.
In September 2020, the CBLPA was amended, following the spread of the COVID-19 pandemic, to explicitly stipulate the outbreak of “Level 1 Infectious Disease” as an event qualifying as a change in economic circumstances based on which the tenant may request a rent reduction, although COVID-19 has since then been declared a Level 2 Infectious Disease and this provision is not currently applicable. In January 2022, where commercial tenants are going to close their business due to the impact of COVID-19, the CBLPA was amended to allow the tenant to terminate the lease contract immediately on account of a significant change in the economic situation caused by any collective restrictions or prohibitions imposed by the government for more than three months.
A lease for business premises typically include the following terms:
The COVID-19 pandemic did not cause any apparent change in the typical terms.
The amount of rent depends on the terms agreed between the parties but will usually increase for retail shop leases in accordance with an increase in the consumer price index (CPI). The CBLPA provides that if the rent or security deposit becomes insufficient due to taxes, import duties or any other increase or decrease in the burden on the leasehold building, or fluctuations in economic conditions, each party to a lease may claim an increase or decrease in the future rent or security deposit. However, the landlord may not increase the rent or security deposit by more than 5% at a time, and a rent increase is not allowed within one year of commencing the lease contract, or within one year of an agreed increase in the rent or security deposit.
New rent will be determined by an agreement between the parties after negotiations but, as stated in 6.5 Rent Variation, an increase in rent for certain leases will be regulated under the CBLPA, as applicable.
VAT is payable on rent, unless the leased property is:
Costs payable at the start of a lease include a security deposit and a maintenance fee, the amounts of which are negotiated with the landlord.
Under the Civil Code, the landlord is basically responsible for maintaining and repairing areas used by tenants, but the costs for maintenance and repair incurred by the landlord may be charged to tenants in accordance with the lease contract. In such cases, the tenants must pay for the maintenance and repair in proportion to the size of their leased property.
Utilities and telecommunications charges are paid by tenants, in proportion to the size of their leased property.
A landlord purchases a package insurance policy and, in many cases, pays the premium for insurance, which includes coverage for:
In some double-net or triple-net leases for retail stores, the tenant pays the cost of insuring the real estate.
There are very few insurance policies that cover reduced profits from the suspension of operations, and there is no insurance policy that compensates for any damage caused by COVID-19.
There are no regulations or laws generally restricting a tenant’s use of real estate, but restrictions may be imposed by landlord and relevant clauses may be incorporated into a lease agreement, and regulations relating to specific areas may impose specific restrictions on a tenant’s use of real estate. For example, the Outdoor Advertisement Control Act (OACA) stipulates that any person who intends to display advertisements or change authorised advertisements must obtain permission from, or report to, the local government depending on the type of advertisements, thereby directly restricting a tenant’s use of real estate in connection with advertisements.
Under the Civil Code, a tenant is basically permitted to implement improvement measures that objectively increase the value of the leased real estate. However, the tenant is not allowed to alter or improve the real estate against the landlord’s objection.
Special laws (as opposed to the general provisions of the Civil Code) do exist, such as:
Parties cannot contract around clauses contained in these special laws to the detriment of tenants (ie, lease agreements cannot contain provisions that are less favourable to tenants than as set forth in the relevant special law).
As described in 6.3 Regulation of Rents or Lease Terms, legislative amendments were made to the CBLPA in 2020 to mitigate the impact of the COVID-19 pandemic.
A lease term that stipulates tenant’s insolvency as a cause of termination is invalid because it is inconsistent with the DRBA, which provides that the insolvent company has the right to elect either to terminate or keep the contract effective.
In most cases, a security deposit is provided as security to a landlord should a tenant default under a lease. A letter of guarantee issued by a financial institution may replace the security deposit in rare cases.
A tenant has the right to continue to occupy the leased real estate until the security deposit is returned by the landlord, even after the expiration of the lease. Therefore, the landlord needs to be prepared to return the security deposit to the tenant on the date originally agreed.
Tenants and sub-tenants may assign their leasehold interest with the consent of the landlord; however, it is extremely rare in practice for such consent to be granted by the lessors.
A common reason for a landlord to terminate a lease is a tenant’s failure to make timely rent payments, or the tenant’s alteration of the real estate without approval from the landlord. On the other hand, a common reason for a tenant to terminate a lease is the landlord’s transfer of the real estate to a third party. In such cases, the landlord may negotiate with the tenant to insert a clause in the lease agreement permitting the landlord to freely transfer the real estate as long as the transferee (ie, the third party) agrees to accept all the terms and conditions of the lease agreement.
There are no registration requirements or particular execution formalities for leases. However, in order for the tenants to protect their leasehold interest from third parties, tenants are advised to record their leasehold interest in the registry (in practice, and in many cases, leases are recorded in the real estate registry). In addition, the tenant must pay a recording tax of 0.24% (inclusive of surtax) of the monthly rent payable to the landlord and a recording fee of KRW15,000 for the real property.
A tenant may be forced to leave if they are late paying rent, but the CBLPA stipulates that the tenant cannot be forced to leave until the delayed rent payments amount to, or exceed, triple the periodic rent payments (eg, three months’ rent in the case of monthly payments).
If the tenant refuses to surrender the real estate voluntarily, the landlord may file an eviction lawsuit against the tenant. It usually takes about six to ten months for a district court to render a judgment, which may then be appealed to a higher court. In order for the landlord to avoid such a long adjudication procedure, at the time the lease contract is made, they may opt for a pre-trial settlement procedure. With respect to the enforcement of the court judgment or the pre-trial settlement protocol, the eviction is executed by a court-appointed enforcement officer, and it usually takes two to three weeks from the landlord’s filing of a petition for the commencement to the completion of the eviction process.
A lease may be terminated in accordance with the relevant law, including the AELPWC, and the tenant’s leasehold interest may be extinguished upon expropriation of the leased premises (whether land or building) by the government. Specifically, a lease is automatically terminated at the time the expropriation process is commenced, in which case the landlord must return the lease deposit to the tenant. The landlord is not obliged to pay separate damages for termination due to expropriation. However, under the relevant law, the expropriating entity must pay the following as compensation to the tenant of an expropriated building:
Since there are no statutory or other legal procedures for paying contractors, the payment structures for construction projects are typically set out in contractual agreements. The most common payment method for construction contracts is the fixed fee method, while the cost of the work method (or cost plus fee) is rarely used. However, in public construction contracts, unlike private construction contracts, escalation clauses are generally allowed.
In fixed fee contracts, contractors bear the risks relating to, among others:
For small to medium-sized projects, build-only contracts are common in both public and private construction projects. In such contracts, the owner is responsible for appointing an architect to carry out the design, and the contractor is responsible for the construction only.
For large-scale public construction projects, design-build contracts have become more frequently used of late. In such contracts, the contractor is responsible for the design (in whole or in part) as well as the construction of the project.
Commonly used contractual devices for managing construction risks are as follows.
Although these provisions are enforceable in principle, a contract that has been prepared by one party for execution with multiple counterparties will be treated as a standardised contract, and any retention provision in a standardised contract that is unjustifiably unfavourable to the other party may be unenforceable.
Indemnity Provisions, including Liquidated Damages and Penalty Provisions
Although these provisions are enforceable in principle, a court may reduce the amount of liquidated damages at its discretion if it finds the amount to be excessive (ie, in circumstances involving concurrent delay), and a penalty provision may be unenforceable if the amount is found to be excessive.
Contract Provisions Regarding Damages for Delay
Delay damages are generally calculated by multiplying the contract price by the rate of delay, and the amount is payable unless the delay was due to force majeure, or it was the owner/employer’s fault. Although delay damages are enforceable in principle, they are treated as liquidated damages by Korean courts, and if a court finds the amount of delay damages to be excessive, it may exercise its discretion to reduce the amount. Please see 7.4 Management of Schedule-Related Risk.
Consequential Damages Provisions
Consequential damages are only recognised if they are expected or reasonably foreseeable by the party liable for such damages. Therefore, in order for consequential damages to be recoverable, they should be expressly contemplated in the contract to the extent possible. A contractual agreement to exclude consequential damages or compensation for loss of profit is enforceable in principle.
Schedule-related risk on construction projects may be managed by including provisions regarding damages for delay in the construction contract. Parties are allowed to agree that an owner is entitled to monetary compensation for delays in achieving certain milestones and completion dates. However, if a court finds the amount of delay damages to be excessive, it may exercise its discretion to reduce the amount. The typical percentage for delay damages is 0.1% of the contract price per day of delay.
Furthermore, parties may include a provision allowing the owner to terminate the contract if there is a material delay in the construction.
Owners often seek additional forms of security to guarantee the performance of contractors under construction contracts, such as:
In the event of non-payment, a contractor may exercise lien rights and refuse to hand over the project until the contract price is paid, provided that an incomplete building that is not deemed an independent building is classified as an improvement on the land, and thus may not be subject to a lien. Therefore, the subject property must be objectively considered to be an independent building in order for a lien to be exercised. According to relevant court precedents, an incomplete building will be considered an independent building if it has more than a minimum number of pillars, a roof and main walls.
Civil and Commercial Liens
There are two types of liens available, and a contractor may selectively assert a lien under the Civil Code (a civil lien) or under the KCC (a commercial lien).
For a civil lien, a contractor must be in possession (including indirect possession) of the subject property, and the claims for the contract price must be correlated to the property in possession (meaning that the property in possession must be the property in relation to which the claim for the contract price has arisen). The subject property is not required to be owned by the debtor.
For a commercial lien, this correlation is not required, but the subject property must be owned by the debtor (ie, the project owner), and the contractor must be in possession of the subject property as a result of the relevant commercial transaction.
In addition, a contractor may demand that the owner establish a mortgage on the subject real property to secure the contract price.
Similarly, a designer may assert a commercial lien or demand that the owner establish a mortgage on the subject real property, but the civil lien would not be available as the designer’s claim for the contract price would not be correlated to the property in possession. To assert a commercial lien, the designer must be in possession of the subject property as a result of a commercial transaction.
The right to a lien and the right to a mortgage may both be waived by agreement of the parties. Since the parties may execute lien waivers at any time by mutual agreement, a comprehensive lien waiver is often executed in advance for convenience. If a comprehensive lien waiver is executed, a monthly/periodic lien waiver is not required.
While there is no statutorily prescribed form for a lien waiver, the waiver will typically contain the location and other details of the subject property, and an expression of intent to waive a lien.
Under the relevant laws, a use permit must be obtained before a completed project may be inhabited or used for its intended purpose. A use permit (or temporary use permit) may be obtained from the competent authority after the completion of construction, and non-compliance is punishable by a fine of up to KRW50 million.
For the transfer of a building, a VAT is levied at the rate of 10% of the transfer price, and the transferor must collect the amount of VAT from the transferee. However, no VAT is imposed on a transfer of land, which is exempt from taxation. In the case of a comprehensive transfer of a business, including all rights and obligations therein, no VAT is imposed even if the transferred assets include a building.
If an investment vehicle such as a REIT or a PFV distributes 90% or more of its distributable income as dividends, the disbursed dividend amount may be deducted from the income calculated for the relevant business year. For PFVs, this tax benefit is applicable through the fiscal year ending on or before 31 December 2025. An REF is a pass-through entity and thus not a taxable entity and is also exempt from the tripling of the acquisition tax or the corporate registration tax in an overpopulated control area such as the Seoul Metropolitan City.
If a corporate entity occupies premises where it continuously conducts business, with its employees working there and its facilities installed at the location, the business owner registered in the tax ledger must pay the property tax portion of the resident tax, in the amount of KRW250 per square metre of gross floor area of the business premises. If the business owner is not the owner of the building where the business premises are located, then the owner of the building may become secondarily liable for unpaid tax. However, any business premises with an area under 330 square metres is tax exempt.
In addition, the corporate entity must pay a per capita resident tax at the rate of 0.5% of the aggregate monthly salaries paid to employees, to the municipal government of the location of the business premises. The per capita resident tax may be increased or decreased by up to 50% in accordance with the rules set by the municipal government.
Regarding a foreign corporate entity’s income generated from Korean domestic sources, depending on the category of income, either the person/entity providing the income must withhold and pay income tax to the government, or the foreign corporate entity itself must report and pay the income tax. Rental income from real estate constitutes income generated from domestic sources, and a foreign corporate entity itself must report and pay the income tax. The applicable tax rate is 9.9% to 26.4% of the income, depending on the amount of taxable income. On the other hand, a foreign corporate entity's income from the transfer of real estate constitutes income from domestic sources, and the person/entity providing the income must withhold as income tax the lower of either 11% of the amount paid to the foreign corporate entity for the transfer, or 22% of the capital gain from the transfer, and report and pay the same to the government.
The foreign corporate entity receiving income from the transfer of real estate must also complete an income tax filing, but the amount withheld as income tax by the transferee is creditable. The applicable tax rate is the same as it is for real estate rental income (9.9% to 26.4%). There are no special exemptions for real estate transfer taxes, and tax treaties joined by Korea generally prescribe that real estate rental income and real estate transfer income are taxable in Korea, the location of the income source.
A domestic corporate entity owning real estate (as opposed to leasing real estate) may recognise depreciation of the building as an economic loss of such corporate entity, within the limits prescribed in the Corporate Tax Act. There appear to be no other tax benefits that can be gained from owning real estate.
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