Legal Framework and Procedural Requirements

The Civil Code serves as the fundamental legal framework governing real estate in South Korea, specifically addressing property rights, ownership transfers and security interests. Specific property rights must be registered in the real estate register managed by courts under the Registration of Real Estate Act, while the Act on the Reporting of Real Estate Transactions, etc, mandates procedural compliance for real estate transactions. In addition, the Housing Lease Protection Act and the Commercial Building Lease Protection Act provide essential statutory safeguards for tenants that complement the general civil framework.

Public Law and Development Controls

The National Land Planning and Utilization Act is the primary statute governing zoning, land use classifications and development permits. The Building Act establishes construction and safety standards for buildings. For urban areas, the Act on the Improvement of Urban Areas and Residential Environments provides the legal basis for redevelopment and reconstruction projects.

Judicial Precedents and Regulatory Guidance

Although Korea is a civil law jurisdiction, Supreme Court decisions provide important guidance on the interpretation of statutes in complex disputes. In addition, administrative guidelines and local ordinances provide detailed rules for the implementation of development projects and local tax matters.

Main Market Trends and Deals

Over the past 12 months, the South Korean commercial real estate market has shown a recovery in transaction activity, led by prime office assets in Seoul. Total transaction volume rebounded in 2025 to approximately KRW33–34 trillion, with capital concentrated in high-quality, income-generating assets in core business districts where vacancy rates remained low (generally below 5%).

Notable deals included the acquisition of Pangyo Tech 1 by Korea Investment Real Asset Management for approximately KRW1.98 trillion, representing the largest single-asset office transaction in 2025. As the second-largest deal, Signature Tower in Seoul’s CBD was acquired for approximately KRW1.03 trillion by KB AMC through a share deal. In addition, a notable feature of the market this year was that approximately one-third of office transactions were driven by strategic investors, reflecting an increase in owner-occupier acquisitions. For example, LX Group acquired the LG Gwanghwamun Building to use as its corporate headquarters.

In the logistics sector, a notable transaction included the sale of the Cheongna Logistics Center in Incheon for approximately KRW1.03 trillion, representing the largest logistics transaction in Korea to date. The logistics market also showed signs of stabilisation, as new supply declined significantly following several years of rapid development.

Impact of Inflation and Interest Rates

While inflation has moderated toward the 2% target as of early 2026, elevated interest rates continue to shape market dynamics. The Bank of Korea maintained its base rate at around 2.5%, and financing conditions remain relatively tight compared to prior years.

Higher financing costs have led to greater asset-level differentiation and wider pricing gaps. Capital has concentrated in prime, income-generating assets, while development projects and weaker assets have faced more conservative underwriting. The higher-rate environment has also contributed to ongoing restructuring activity, with distressed asset transactions and non-performing loan (NPL) sales remaining active.

Adaptation to Emerging Trends and Structural Changes

Market participants have continued to adapt to evolving structural and technological trends.

First, the market for tokenised securities and fractional real estate investment has transitioned from regulatory sandbox experimentation toward a formal regulatory regime. Legislative amendments passed in January 2026 established a legal framework for the issuance and circulation of security tokens, with implementation expected in 2027. Preliminary licences for over-the-counter trading platforms were also granted in February 2026. However, the market remains at an early stage of development, with infrastructure and secondary trading systems still being established, although tokenisation may improve accessibility and liquidity in real estate investment.

Secondly, PropTech adoption has gradually increased, particularly in the operation of prime office assets. Smart building technologies are beginning to emerge, as illustrated by Factorial Seongsu in Seoul, which in 2026 became one of the first buildings in Korea to obtain a SmartScore certification. This reflects the adoption of AI- and IoT-based building management systems aimed at improving energy efficiency and operational performance. However, such technologies remain concentrated in newly developed, high-quality assets.

Thirdly, large-scale conversion of office assets into residential use has not yet become a mainstream trend in Korea. Although policy discussions have intensified around repurposing certain commercial or non-residential assets to address housing supply, practical implementation remains limited. More immediate adaptive reuse activity has been observed in the hospitality sector, where certain assets are being repositioned in response to increased tourism demand.

Finally, financing structures have evolved in response to tighter liquidity conditions. Alternative lenders, including securities firms and private credit providers, have become more active, while traditional bank lending has become more selective. At the same time, restructuring and workout activity in the project finance sector has remained a key feature of the market.

Several regulatory and policy developments are expected to have a meaningful impact on real estate investment and development in Korea.

First, a legal framework for tokenised securities was established through legislative amendments passed in 2026, with implementation expected in 2027. This is expected to enable the issuance and trading of real estate-backed interests in tokenised form, although the extent of market adoption remains uncertain.

Secondly, regulatory reforms in the real estate project finance (PF) sector are being actively implemented in response to recent market stress. Authorities have introduced a framework under which PF projects are classified (eg, normal, at-risk and distressed), with differentiated measures applied, including restructuring or asset disposals for distressed projects and liquidity support for viable projects. Financial institutions with significant PF exposure, such as securities firms and savings banks, are subject to enhanced supervisory scrutiny, including tighter risk management requirements, increased provisioning and more conservative underwriting standards. There is also a policy emphasis on strengthening equity capital in development projects to reduce reliance on high-leverage structures, and higher-equity Project-REIT structures are being introduced as an alternative to traditional PFV-based development. These measures are already being implemented and are expected to continue shaping the development financing market.

Ownership and Co-Ownership

The principal real property right in Korea is ownership (so-yu-gwon), equivalent to fee simple, granting rights to use, profit from and dispose of property. Land and buildings are treated as separate assets and may be owned and registered independently. Co-ownership (gong-yu) is also recognised, where multiple parties hold undivided fractional interests.

Other Property Rights

Common additional rights include:

• superficies (ji-sang-gwon): a real right allowing the holder to use another’s land for the purpose of owning buildings or other structures;
• jeonse-gwon: a real right under which the holder provides a lump-sum deposit in exchange for the right to use a property for a fixed term;
• mortgage (jeo-dang-gwon): a security interest that allows a creditor to be repaid from the proceeds of the secured property in the event of default; and
• leasehold (im-cha-gwon): a contractual (personal) right that allows a person to use another’s property in exchange for rent, often protected under special statutes.

Sectional Ownership and Condominiums

For multi-unit structures, the Act on Ownership and Management of Condominium Buildings governs sectional ownership. This framework allows individuals to hold exclusive title to specific units while sharing ownership of common areas and the underlying land. These rights are recorded in the registry, and their administration is typically handled by a management body comprising all unit owners.

Trust Arrangements and Beneficial Interests

Real estate trusts are a prevalent investment vehicle in Korea, particularly for development and financing. Under these arrangements, legal title is transferred to a licensed trust company (the trustee), while the investor acquires a trust beneficial interest. This structure allows the beneficiary to enjoy the economic benefits of the property, while the trustee holds and manages legal title in accordance with the trust agreement.

The Civil Code governs real estate transfers in Korea, with ownership taking effect upon registration. The Registration of Real Estate Act sets out registration procedures, while the Act on the Reporting of Real Estate Transactions requires transactions to be reported (generally within 30 days of agreement).

Certain assets are subject to additional regulations:

• Residential: The Housing Act and Urban Improvement Act may apply to housing supply and transfers.
• Agricultural: The Farmland Act imposes purchaser qualification requirements to prevent speculation.
• Industrial: The Industrial Cluster Development Act regulates transfers within industrial complexes.
• Foreign Investment: Additional reporting or approvals may be required under real estate reporting and foreign exchange laws, particularly in restricted areas.

A transfer of title to real estate becomes effective upon registration in the real estate registry. To complete the registration, documents such as the sale agreement, title documents (including the registration certificate) and the seller’s seal certificate must be submitted to the relevant registry office. Although the Korean system does not recognise the “public faith” of the registry (ie, a good faith purchaser may not be protected against prior defects in title), such cases are relatively rare in practice. As a result, title insurance is not commonly used in Korea.

Buyers typically conduct legal due diligence by reviewing publicly available records, including the real estate registry, the building ledger and the land use plan confirmation. The primary focus is to verify ownership records, identify any encumbrances such as mortgages or provisional attachments, and confirm compliance with zoning and building regulations, as well as potential environmental issues.

In commercial transactions, due diligence typically includes a review of key lease agreements, ongoing or potential litigation, tax liabilities and existing property management arrangements.

In Korean commercial real estate transactions, sellers typically provide the following representations and warranties:

• authority and capacity;
• title and encumbrances;
• leases and possession;
• compliance and permits; and
• litigation and insolvency.

Under the Civil Code, sellers bear statutory warranty liability for defects in title or property. If the buyer was unaware of a defect at the time of sale, they may rescind the contract or claim damages, provided this is exercised within six months of discovering the defect.

In practice, commercial real estate transactions are primarily governed by contract. Buyers typically rely on termination rights for material breach and claims for breaches of representations and warranties. Where sellers are SPVs intended for post-closing liquidation, claim survival periods are often short (around one to three months), and liability is usually capped at 5–10% of the purchase price. W&I insurance is uncommon but may be used in certain cases.

Investors should confirm whether a property is subject to prior approvals or permits (eg, land transaction permit zones or cultural heritage areas). Commercial deals may also require transfer or reissuance of administrative permits, and early verification of timelines is important to avoid closing delays.

Foreign investors must generally comply with the Foreign Exchange Transactions Act (FETA), including reporting through a designated foreign exchange bank. Depending on the structure, registration under the Foreign Investment Promotion Act (FIPA) may also be made to qualify as foreign direct investment and facilitate remittance of proceeds.

Under the Soil Environment Conservation Act, a current owner may be held liable for the remediation of soil contamination, even if they did not cause the pollution. However, an owner may be exempt from liability if it can demonstrate that it acquired the property without knowledge of the contamination and without negligence. To mitigate this risk, investors typically conduct environmental site assessments during due diligence and include specific indemnity provisions in sale agreements.

A buyer can verify permitted uses and development restrictions through a Land Use Planning Certificate, which sets out zoning classifications (eg, residential, commercial, industrial) under the National Land Planning and Utilization Act. For more detailed controls, particularly in urban areas, District Unit Plans provide parameters such as floor area ratio, building coverage and height limits. The building ledger may also be reviewed for information on existing structures.

In addition to statutory zoning, certain developments may be enabled through public contribution arrangements, where developers negotiate with authorities for relaxed planning parameters in exchange for providing public infrastructure or facilities. These arrangements, though administrative in nature, can be significant in large-scale projects.

The government or designated entities may expropriate real estate for public projects under the relevant statute. The process starts with public notice and negotiations for voluntary purchase; if unsuccessful, the Land Expropriation Committee determines compensation, and title transfers upon payment or deposit. Owners may challenge the decision through objection procedures or administrative litigation to increase compensation. In practice, adjudication takes about three to four months, while litigation may take six months to over a year at first instance.

Acquisition Tax

For asset deals involving commercial real estate, the buyer is generally liable for acquisition tax at a rate of 4.6% (inclusive of local education tax), which includes the former registration tax component. In certain cases, including properties located in designated over-concentration control zones, higher rates may apply, which can be approximately 9.4%.

Value Added Tax (VAT)

The seller is required to charge 10% VAT on the building portion of the purchase price, which is payable by the buyer. However, the buyer may claim a refund if it is registered as a general taxable person. In certain cases, VAT may be exempt if the transaction qualifies as a comprehensive transfer of business.

Stamp Tax and Other Costs

Stamp tax of up to KRW350,000 applies to the sale agreement and is typically borne by the buyer. Buyers are also required to purchase national housing bonds upon registration, based on a prescribed percentage of the property’s government-assessed value. In practice, such bonds are typically resold immediately at a discount. Other costs, such as brokerage fees, are generally allocated in accordance with market practice.

Share Deals

In a share deal, deemed acquisition tax of approximately 2.2% (inclusive of surtax) may be imposed if the buyer becomes a majority shareholder (ie, acquires more than 50% of the shares). This tax is calculated based on the proportional value of the underlying real estate assets. In addition, the seller is subject to securities transaction tax at a rate of 0.35% for transfers of unlisted shares.

Foreign investors generally have the same acquisition rights as domestic entities, subject to reporting and permit requirements:

• Transaction Reporting: Acquisition must be reported to the local authority within 30 days of signing.
• Permits: Prior approval is required for properties in protected zones or land transaction permit zones (including certain Seoul areas). This also applies where foreign investors hold ≥50% of the acquiring entity, so ownership structure should be reviewed.
• Foreign Exchange/FDI: Non-residents must report through a designated foreign exchange bank. If qualifying as foreign direct investment (eg, KRW100 million minimum and 10% stake), an additional FDI report may be filed.

Commercial real estate acquisitions in Korea are typically financed with a mix of equity and debt. Debt is mainly structured as mortgage loans secured by the property, often divided into senior, mezzanine and sometimes junior tranches. Unlike some jurisdictions, mezzanine financing is usually secured by a subordinated mortgage rather than share pledges.

On the equity side, investments are commonly made through real estate funds (REFs) or REITs, with different classes to reflect risk-return profiles. Large transactions may also involve securitisation structures such as ABS or ABCP, or blind-pool funds managed by asset managers.

Commercial real estate financing in Korea is typically secured by mortgages or security trusts. In a security trust, title is transferred to a trustee and the lender is the priority beneficiary, enabling tighter control and streamlined enforcement through public sale without court foreclosure. Lenders also take security over key receivables such as insurance proceeds and bank accounts.

In development projects, additional protections are common. These include share pledges over the project company, completion guarantees and arrangements to subordinate or waive contractors’ claims.

There are no specific restrictions on granting security over domestic real estate to foreign lenders, but such arrangements must generally be reported under the Foreign Exchange Transactions Act. If a foreign lender acquires the property through enforcement, it must comply with applicable acquisition procedures, including reporting and permit requirements. Repayment of principal and interest is generally permitted, subject to foreign exchange regulations.

Mortgage registration (required for effectiveness) triggers taxes of about 0.24% of the secured amount (typically 120% of the loan principal). Security trusts also involve trustee fees, and stamp tax of up to KRW350,000 applies to loan and security documents.

In enforcement, creditors must initially advance auction costs, which are later reimbursed with priority from sale proceeds. For security trusts, enforcement via public sale involves disposal fees and related administrative expenses under the trust agreement.

To grant valid real estate security, a company must follow internal approval procedures (typically board approval), with heightened scrutiny for related-party transactions (eg, ≥10% shareholding). For REFs or REITs, decisions must comply with fiduciary duties, and investor consent may be required under applicable rules. Historically, third-party security without sufficient corporate benefit could trigger liability, though recent reforms aim to mitigate this risk.

Enforcement of real estate security in Korea is largely governed by security documents, with limited statutory formalities. Mortgages are enforced through judicial auction, while security trusts enable more streamlined public sale; in insolvency, individual enforcement is restricted. Priority is based on registration order, subject to certain statutory claims. Court foreclosure typically takes six to 12 months, while trust enforcement is faster. There are no pandemic-related restrictions, and enforcement and NPL activity remain active, though more selective.

Under Korean law, creditors may rearrange repayment priority by intercreditor agreement. To adjust priority of security against third parties, additional steps are required – mortgages are typically cancelled and re-registered (or assigned to a new lender to retain priority), and receivables security is reset through release and re-establishment of pledges. In insolvency, priority may change, as post-commencement financing can be granted priority over existing claims.

Under Korean law, a lender holding or enforcing real estate security is generally not liable for environmental contamination solely on that basis; liability typically rests with the polluter or current owner/operator. However, if the lender acquires ownership (eg, through foreclosure), it may become liable, subject to statutory defences.

Under Korean law, security interests created before insolvency are generally valid but may be avoided as preferential or fraudulent transactions. Once rehabilitation or bankruptcy proceedings commence, individual enforcement may be restricted, and creditors must exercise their rights within the insolvency process, with recovery subject to distribution rules or a rehabilitation plan.

No material taxes are imposed on loans themselves, but taxes may arise from creating and registering real estate security. Mortgage registration triggers taxes of about 0.24% of the secured amount, and stamp tax of up to KRW350,000 may apply to loan agreements.

The National Land Planning and Utilization Act establishes the framework for land use planning and zoning, while the Building Act regulates building standards, design and construction.

At the national level, the Ministry of Land, Infrastructure and Transport formulates overarching land use policies and planning guidelines. At the local level, municipal governments are responsible for implementing zoning plans, granting development and building permits, and enforcing applicable regulations.

Land use is regulated through zoning classifications and land use plans, which designate permitted uses and development intensity. In addition, various sector-specific laws and local ordinances may impose further restrictions depending on the nature and location of the project.

Compliance with these regulatory frameworks is required in order to obtain the relevant permits and approvals for development and construction, and non-compliance may result in administrative sanctions or restrictions on use.

Development rights in South Korea are obtained through administrative approvals, primarily including development permits and building permits. The applicable process depends on the type and scale of the project, and is governed by zoning regulations and land use plans under the National Land Planning and Utilization Act.

For certain projects, particularly large-scale developments or those requiring more detailed planning control, a district unit plan may be established or amended. Such plans provide more specific parameters for land use, building density and design within a designated area, and form the basis for subsequent permitting.

Depending on the nature of the project, approvals may be subject to review by relevant municipal committees, such as urban planning or architectural committees. In certain cases, public inspection or consultation procedures may also be required. In general, third parties do not have a broad right to object to development approvals unless their legally protected interests are directly affected. In such cases, affected parties may challenge the relevant administrative decision through administrative litigation. Appeals must be filed within the statutory time limits under applicable administrative law.

Planning and zoning restrictions are enforced by the relevant government authorities. Non-compliance with permits or applicable regulations may result in administrative sanctions, including suspension or revocation of permits, corrective orders or fines, and, in certain cases, criminal penalties.

Investors in Korea typically use three vehicles to hold real estate: REITs (under the Real Estate Investment Company Act), real estate funds (REFs) under the Capital Markets Act, and project financing vehicles (PFVs) under the Restriction of Special Taxation Act.

REFs are widely used due to their flexibility and ease of formation, with trust-type structures most common – particularly for domestic investors to avoid affiliate designation issues – while foreign investors often prefer corporate-type REFs.

REITs and PFVs must be joint-stock companies. REITs are generally used for long-term holdings or listed structures, whereas PFVs are temporary vehicles for development projects with tax benefits. However, PFVs have been criticised for low equity levels, and recent reforms promoting higher-equity Project-REITs are expected to increase REIT usage in development.

REFs

REFs are managed by a licensed asset manager, with a trustee responsible for custody. Public REFs must invest at least 50% in real estate, while private REFs are more flexible. Trust-type REFs (most common) lack legal personality, with title held by the trustee and investors as beneficiaries; corporate-type REFs are incorporated entities with shareholders.

REITs

REITs are joint-stock companies subject to regulatory approval or filing. Most operate as SPCs outsourcing asset management to an AMC and must generally hold at least 70% of assets in real estate. Variants include CR-REITs (for restructuring assets) and Project-REITs (for development-stage investment).

PFVs

PFVs are also joint stock SPCs used for specific development projects, with outsourced management and a minimum two-year life. They are widely used due to tax efficiency, structural flexibility and high leverage capacity.

Tax and Costs

Trust-type REFs are tax-transparent, with taxation at the investor level. Corporate-type REFs, REITs and PFVs are subject to corporate tax but can reduce it through dividend deduction mechanisms. In terms of costs, REITs tend to be more expensive due to regulatory requirements, while trust-type REFs are relatively cost-efficient.

REITs are a commonly used real estate investment vehicle in South Korea, and both public and private forms are available. Public REITs are subject to additional regulatory requirements, including public offering obligations, while private REITs operate under a more flexible regime. REITs are also available to foreign investors, subject to general foreign investment regulations.

REITs are primarily used for long-term holding income-generating assets and for structures intended for public listing. Compared to other investment vehicles, REITs provide a more standardised and regulated framework, which may enhance investor confidence and facilitate access to a broader investor base.

As of February 2026, there are approximately 449 REITs under management in Korea, with total assets under management of around KRW118.2 trillion, and 25 REITs listed on the domestic stock exchange.

• REFs: There is no specific statutory minimum capital requirement for the fund itself under the applicable laws. The initial capital is typically determined by the investment scale of the project and the requirements of participating institutional investors.
• REITs: A general REIT managed by a licensed asset management company must have an initial capital of at least KRW300 million at the time of incorporation. Subsequently, it is required to reach a statutory minimum capital of KRW50 billion within six months of obtaining a business licence or registration.
• PFVs: To qualify for the dividend-paid deduction and other tax benefits under the applicable laws, a PFV must have a minimum capital of KRW5 billion. Additionally, at least 5% of the total shares must be held by a financial institution as a procedural requirement.

Governance requirements vary depending on the type of investment vehicle used:

• REFs:
1. supervised by the FSC/FSS;
2. managed by a licensed asset manager; typically require at least two investors;
3. public REFs: ≥50% real estate investment; leverage generally up to 2x NAV; and
4. private REFs: more flexible, with leverage typically up to 400% of NAV.
• REITs:

1. supervised by MOLIT;
2. ≥70% of assets in real estate;
3. public reits: public offering and shareholder dispersion (eg, ~30% float);
4. generally required to distribute ≥90% of income;
5. borrowing up to 2x equity (up to 10x with shareholder approval); and
6. subject to periodic disclosures.
• PFVs:

1. financial institutions must hold ≥5% of shares;
2. used for specified projects (eg, infrastructure, development);
3. no statutory leverage cap; and
4. typically distribute ≥90% of income for tax benefits.

In addition, foreign investors may be subject to disclosure and transparency requirements under their home jurisdiction, which may affect the structuring of real estate investments in Korea. For example, US investors may be required to identify and report beneficial ownership information, which may lead to increased due diligence and information-sharing requirements. In practice, this may require Korean sponsors, asset managers or other stakeholders to provide ownership and control information, and may influence structuring decisions and transaction timelines.

REFs typically incur annual fees payable to the asset management company, trustee, placement agent and fund administrator. Management fees payable to the asset management company generally range from approximately 0.2% to 0.4% of assets under management, while other service fees combined are typically around 0.04%. In addition, performance-based fees may be payable to the asset management company, often calculated based on capital gains or internal rate of return.

REITs have a broadly similar cost structure to REFs but may incur higher compliance costs due to additional regulatory oversight by the Ministry of Land, Infrastructure and Transport. Publicly listed REITs are subject to additional listing-related compliance and disclosure costs.

PFVs typically incur management fees structured as a combination of fixed annual fees and performance-based fees, particularly for development projects.

Depending on the applicable legal thresholds, entities may be subject to mandatory external audits. Audit fees typically range from approximately KRW10 million to KRW30 million for a standard single-asset structure.

Im-cha-gwon and jeonse-gwon are the two types of leases used in Korea. Under an im-cha-gwon, parties contractually agree that one party may use the leased property in exchange for rent. Because an im-cha-gwon is a contractual right, it does not itself guarantee enforceability against third parties. The Commercial Building Lease Protection Act provides protection for commercial leases, including in the event of a transfer of the property by the landlord. Jeonse-gwon is a type of lease unique to Korea, under which the tenant provides a lump-sum deposit in exchange for the right to use the leased property. Registration is required to make a jeonse-gwon effective.

While there are two types of leases used in Korea, im-cha-gwon is more commonly used in commercial lease practice. In addition, it is common (though not legally required) for the tenant to provide a security deposit to secure the payment of rent.

Regarding the method of rent payment, (i) fixed rent, (ii) percentage rent, and (iii) minimum guaranteed rent structures are used. Under a fixed rent structure, rent is calculated based on a predetermined rate per unit area, and this approach is commonly adopted in office leases. Under a percentage rent structure, rent is determined as a percentage of gross sales generated from the leased property, which is typically used in retail leases. A minimum guaranteed rent structure is often used in conjunction with a percentage rent structure to hedge against the risk of declining sales.

There are no statutory restrictions on rents as such, and the parties may freely agree on the terms of the lease. However, certain mandatory provisions aimed at protecting tenants are in force. Under the Civil Code, either the landlord or the tenant may request a rent adjustment if existing rent levels become inappropriate due to changes in public charges or other economic circumstances. Under the Commercial Building Lease Protection Act, certain protected commercial leases are subject to a 5% cap on annual rent increases where a landlord seeks a rent adjustment based on economic changes. A tenant under the Commercial Building Lease Protection Act has the right to request renewal of the lease for a total period of up to ten years, and the landlord may not refuse such a request unless it has a justifiable reason.

• Length of Lease Term: The lease term varies depending on the agreement between the parties. In the case of commercial leases, the initial term is often around five years.
• Maintenance and Repair: In principle, the landlord is obligated to maintain and repair the leased property in a condition suitable for the tenant’s use. The landlord is responsible for repairs to the walls, ceilings, common areas, HVAC systems, and other facilities installed by the landlord. The tenant is responsible for repairs where damage is attributable to the tenant’s wilful misconduct or negligence, as well as for facilities installed by the tenant.
• Rent Payments: Rent is typically paid monthly in advance.

Parties typically agree on a mechanism for annual rent adjustments, either at a fixed rate or by reference to an index such as the consumer price index.

Parties determine the new rent by mutual agreement after negotiation. In addition, as described in 6.3 Regulation of Rents or Lease Terms, changes in economic circumstances may result in an increase or decrease in rent, subject to certain limitations.

A 10% VAT is payable on rent under a commercial lease, and such VAT is borne by the tenant. Where a security deposit is provided, the interest income that could be earned on such deposit is deemed to constitute rent and is subject to 10% VAT. In such cases, it is customary for the landlord to bear such VAT.

It is common for the tenant to pay the agreed security deposit upon commencement of the lease term. The security deposit is provided to secure all obligations of the tenant under the lease, including the payment of rent. Upon expiration or termination of the lease term, the security deposit is returned to the tenant.       

The tenant typically pays the agreed maintenance fee, which includes the costs incurred for the maintenance and repair of common areas. Accordingly, while the landlord carries out the maintenance and repair of common areas, the associated costs are borne by the tenant in proportion to the size of the leased area.

The tenant pays utilities and telecommunications costs in proportion to the size of the leased area.

The landlord, as the owner of the leased property, is legally responsible for property taxes. It is typical for the parties to agree that such taxes are borne by the landlord.

The landlord, as the owner of the leased property, typically maintains insurance policies covering property all risk, machinery risk, gas accident liability, and general liability. The party responsible for bearing the insurance premiums is determined by agreement between the landlord and the tenant. In many cases, such premiums are borne by the landlord.

No tenant is known to have recovered losses related to COVID-19 under business interruption insurance policies.

In general, a tenant’s use of the lease property is not restricted by law or regulation. However, such use may be limited by provisions of the lease, or by regulations applicable to certain areas. Typical limitations included in a lease agreement include the following: installing signage outside the permitted areas; storing hazardous materials such as explosives; and using the leased property for residential purposes or for any purpose other than the agreed use under the lease.

The tenant is permitted to alter or improve the leased property as stipulated in the lease agreement, typically only with the landlord’s prior consent. Such consent is usually subject to the condition that, upon expiration or termination of the lease term, the tenant restores the property to its original condition at its own expense.

The Housing Lease Protection Act, applicable to residential leases, and the Commercial Building Lease Protection Act, applicable to commercial leases, are in force to protect the rights of tenants. The key features include: the right to assert the lease against third parties through simplified means other than registration; the right to request an extension of the lease term; and limitations on rental increases.

A lease agreement may stipulate the tenant’s insolvency as a cause of termination by the landlord. However, such a provision would likely be deemed invalid under the Debtor Rehabilitation and Bankruptcy Act, which grants the bankruptcy trustee the discretion to choose whether to terminate or perform the lease.

The tenant has the right to occupy the leased property until the landlord refunds the security deposit. However, a lease agreement may provide that, upon expiration or termination of the lease, the tenant must first return the leased premises, and the landlord shall refund the security deposit only thereafter.

The tenant may not assign the lease or sublet the leased property without the landlord’s consent.       

Typical grounds for the landlord to terminate the lease are the tenant’s failure to pay rent for three months or more, or the tenant’s transfer of the right to claim the security deposit.

A typical ground for lease termination by the tenant is the landlord’s transfer of the leased property to a third party. Accordingly, landlords often seek to include a clause in the lease agreement providing that the landlord may freely transfer the property, provided that the transferee assumes all obligations under the lease.

Im-cha-gwon (ie, a contractual leasehold right) is not subject to any registration requirements or specific formalities for execution. However, to protect right to use the leased property for the full term, a tenant may, with the landlord’s consent, register its Im-cha-gwon in the land registry.

In practice, it is more common for a tenant, with the landlord’s consent, to register a mortgage, which secures the return of the security deposit upon expiration or termination of the lease. See 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security for information on fees and taxes applicable to such a mortgage.

Evicting a defaulting tenant requires compliance with legal procedures. The landlord must file a lawsuit in court to obtain an eviction order. Once the court grants the eviction order, the landlord must then seek the court’s assistance to enforce the order. Depending on the circumstances and the court’s schedule, the eviction process may take several months. To avoid a lengthy litigation process, landlords often seek to include a clause in the lease agreement providing for a pre-trial settlement procedure at the time the lease agreement is signed.

A tenant’s leasehold interest may be terminated if the leased property is expropriated by the government. Under the applicable law, the expropriating authority is required to compensate the tenant of a commercial lease for loss of profits resulting from business interruption for up to four months.

If a tenant breaches a lease, the landlord is entitled to claim liquidated damages. However, if the lease agreement does not specify the amount of such damages, the landlord may only recover damages equivalent to the rent for the period between the termination of the lease and the date on which a new tenant is secured.

It is common for the tenant to provide a cash security deposit to the landlord to secure performance under the lease. In some cases, a letter of credit issued by a financial institution may serve as a substitute for the cash deposit.

Payment terms for construction projects are set out in the construction agreement. The most common method is the lump-sum contract, under which the total construction cost for the project is determined in advance. A “relaxed” form of the lump-sum contract is also used, allowing for adjustments to the total construction cost in certain circumstances, such as design changes. The unit-price contract and cost-plus contract methods are rarely used.

Build-only contracts are commonly used in small- to medium-sized public and private construction projects. Under such contracts, the owner retains responsibility for appointing an architect to perform the design, while the contractor’s obligations are limited solely to construction.

Design-build contracts have become increasingly utilised in large-scale public construction projects. Under such contracts, the contractor assumes responsibility for the design, in whole or in part, in addition to performing the construction work.

The contractor is liable for damages arising from any breach of the construction agreement. Upon execution of the construction agreement, the contractor must provide a performance bond equivalent to 10% of the contract price. The construction agreement may also include provisions for liquidated damages or other penalties. While these provisions are generally enforceable, a court may reduce the amount of liquidated damages or declare a penalty clause unenforceable if deemed excessive.

Payments for construction costs are made only upon inspection and approval of the completed work by the owner. Billing is permitted only at the times set forth in the construction agreement.

Delay in achieving the agreed completion date may entitle the owner to monetary compensation, typically calculated at 0.1% of the contract price for each day of delay. The construction agreement may also provide that the owner has the right to terminate the agreement in the event of a material delay in construction.

The owner commonly requires the contractor to obtain bonds or insurance from a financial institution to secure the contractor’s obligations. Collecting a cash deposit or appointing a guarantor is seldom used. Examples of such bonds or insurance include bid bonds, performance bonds, contractor’s all-risk insurance, and warranty bonds.

If the contractor is not paid, they may exercise lien rights and withhold the subject building. Note that land and buildings are treated as separate and independent real estate in Korea. An incomplete building is not considered an independent structure and cannot be subject to a lien. There are two types of liens: the liens under the Civil Code and the liens under the Commercial Code. It should be noted that their respective requirements and legal effects differ.

In addition, the contractor may require the owner to grant a mortgage on the subject property (ie, both the land and the building) to secure the construction cost claim.

A completed building may not be occupied or put to its intended use until a use permit has been obtained under the applicable laws. Following the completion of construction, the competent authority may issue either a use permit or a temporary use permit.

As described in 2.10 Taxes Applicable to a Transaction for information, VAT is payable on the sale or purchase of a building.

There are no particular tax mitigation structures commonly used in the acquisition of large-scale real estate portfolios. However, share deal transactions have been increasingly used in recent years, as they offer the advantages of reducing acquisition tax and simplifying the transaction process.

A corporate entity that continuously operates its business at particular premises, where its employees work and business facilities are installed, is subject to the business premises component of the resident tax. This tax is calculated at KRW250 per square metre of the gross floor area. Where the corporate entity does not own the building, the building owner may be held secondarily liable for any unpaid amount. Premises with a floor area of less than 330 square metres are exempt from this tax. In addition, such corporate entity is also subject to the employee component of the resident tax, which is levied at 0.5% of the aggregate monthly salaries paid to employees.

The resident tax above may be increased or decreased by up to 50% in accordance with the rules set by the municipal government.

Non-resident corporations deriving Korean-source income may be subject to Korean tax either through withholding, where the withholding agent withholds and remits the relevant tax to the Korean tax authority, through direct tax filing and payment obligations in Korea, or through both, depending on the type of income.

Specifically, foreign corporations receiving rental income from Korean real estate derived by foreign corporations must report and pay corporate income tax ranging from 11% to 27.5% (inclusive of local income tax), whereas capital gains arising from transfer or sale of Korean real estate are subject to withholding where the withholding agent (ie, transferee) must withhold either (i) 11% (inclusive of local income tax) of total sales proceeds or (ii) 22% (inclusive of local income tax) of capital gains, whichever is lower. Foreign corporations deriving capital gains from transfer or sale of Korean real estate must also report and pay corporate income tax ranging from 11% to 27.5% (inclusive of local income tax) – however, any amounts previously withheld (ie, by the transferee) would be creditable.

The Korean domestic tax law does not grant any exemptions on taxes imposed on income arising from Korean real estate.

Depreciation of a building may be recognised as an economic loss by a domestic corporate entity that owns real estate, subject to the limitations under the Corporate Tax Act.