South Korea

Author: | Published: 3 Apr 2003
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Commercial leasing

1. What legislation and/or regulatory bodies are responsible for regulating the relationship between landlord and tenant in South Korea?
Relevant legislation includes the Civil Code, the Act on the Protection of Housing Leases (APHL), the Act on the Protection of Commercial Building Leases (APCBL), the Rental Housing Act (RHA), and the Act on the Regulation of Standardized Contracts (ARSC). Lease agreements prepared by landlords are considered standardized contracts under the ARSC. Lease provisions in such standardized contracts that unfairly prejudice lessees will be deemed null and void. Korean courts have jurisdiction in all landlord-tenant disputes unless there is an arbitration clause in the lease agreement.

2. What is the effect of a tenant's insolvency, and what remedies are available to landlords?
There are three bankruptcy proceedings in Korea: bankruptcy proceedings under the Bankruptcy Act; corporate reorganization proceedings under the Corporate Reorganization Act; and composition proceedings under the Composition Act.

Rent claims arising prior to the commencement of corporate reorganization or composition proceedings will be repaid pursuant to the reorganization plan or the composition plan approved by the creditors' meeting and relevant court, in which case the repaid amounts are usually much less than rent amounts due. Rent claims arising prior to the commencement of bankruptcy proceedings will be repaid from the proceeds of the debtor's assets on a pro rata basis after the preferential repayment of secured debts and other claims arising after the commencement of the bankruptcy proceeding. If the tenant paid a refundable key money deposit at the beginning of the lease term, the landlord can deduct the unpaid rent for the period up to the commencement of the bankruptcy, corporate reorganization or composition proceedings from the key money deposit. Rent claims arising after the commencement of bankruptcy, corporate reorganization or composition proceedings are not subject to such proceedings. Therefore, such rent claims can be collected from the assets of the debtor in preference to unsecured claims arising prior to the commencement of such proceedings and can be deducted from the key money deposits if the relevant lease agreement contains provisions permitting such deduction.

Further, if a bankruptcy proceeding commences for a tenant: (i) the landlord may terminate the lease agreement by giving six months notice; or (ii) the landlord may request the administrator to determine whether he will terminate the lease agreement. If the administrator fails to make such determination within a reasonable time, the administrator will be deemed to have terminated the lease agreement. In a corporate reorganization proceeding, however, the landlord may request the administrator to determine whether he will terminate the lease agreement and if the administrator fails to do so within 30 days, the administrator is deemed to not have terminated the lease agreement.

3. How has recent statutory reform affected (or, how will proposed future statutory reform affect) the lease renewal process?
The APCBL, which came into effect in November 2002, is applicable to leases of commercial buildings for which the amount of the key money deposit plus 100 times the monthly rent is less than a certain amount. Under APCBL leases, the lessee may request the lessor to renew the lease one to six months before the lease expires, and the lessor may not refuse such a request without a justifiable reason. However, lessees who have failed to make three or more rent payments cannot make such a request. Nor is the renewal right available to lessees who sublease the leased property without the prior consent of the lessor, or who materially breach the lease agreement. Also, the renewed lease term including the original lease term cannot exceed five years. The terms and conditions of the renewed lease are the same as the original lease except for rent and key money deposit, which the lessor may increase up to 12%.

4. How does human rights legislation affect the landlord/tenant relationship?
There are no human rights laws that directly affect the landlord/tenant relationship in Korea. However, there are laws designed to protect tenants from abusive landlords.

Securitization of real estate assets

1. How significant is the real estate securitization market in South Korea?
The real estate securitization market in Korea consists of asset-backed securities (ABS) and real estate investment trusts (REIT). The total amount of ABS issued in 2002 was W 40 trillion ($32 billion), but the amount of ABS for real estate transactions was only W 613 billion, and the amount of mortgage-backed securities (MBS) for claims secured by mortgages was W 950 billion. Four REITs for Corporate Restructuring (CR-REIT) were established in 2002, but general REITs were not established due to limited tax benefits under existing legislation.

2. What have been the key real estate securitization deals over the last 12 months?
In late 2002, Macquarie Bank and Schroder Asian Properties acquired three major commercial buildings in Seoul through an ABS special purpose company (SPC) from another ABS SPC. The total purchase price was W 237 billion.

3. To what degree of detail (if at all) are the parties obliged to disclose the lease terms on a formal registry (eg the land registry)?
Under the Value Added Tax Act, any company that operates a real estate leasing business must report certain terms of lease agreements, such as the area of the leased property, key money deposit amount, monthly rent amount, the name of the lessee etc with the relevant tax authorities every three months.

Pursuant to the VAT Act and the APCBL, if a company leases its business premises and registers its business, it must report to relevant authorities the following terms of the lease agreement: (i) names of the lessor and lessee; (ii) lease term; (iii) the location and area of the leased property; and (iv) rent. In the case of a registered lease, the lease term, rent, key money deposit and the lessor's consent to a transfer of the lease or the sublease must be registered in the relevant real property registry.

4. How important a role do the rating agencies play in securitization transactions?
Rating agencies do not play a major role in real property securitization transactions in Korea. For the issuance of ABS based on real property or the establishment of a CR-REIT company, securities such as the ABS are issued based on the targeted property itself (not on the credit rating of the ex-owner of the property).

Property outsourcing

1. How prevalent is property outsourcing in South Korea?
Historically, commercial property in Korea has been owned by a handful of the largest Korean conglomerates that had real estate subsidiaries to service their property needs. This changed with the 1997 Asian economic crisis, which forced conglomerates to rationalize their real estate holdings. There was, therefore, no property outsourcing market in Korea until the implementation of the Act on Asset-Backed Securitization (ABS Act) in July 1998. During the last five years, some companies sold real estate to ABS SPCs and there have been several sale-lease back transactions. However, property outsourcing in Korea is still in its infancy, and very few properties have been outsourced to date.

2. What are the relative benefits of private finance initiatives (PFIs) and public-private partnerships (PPPs)?
PFIs and PPPs are not used in Korea.

3. What lessons have been learnt from both private sector and public sector property outsourcing schemes in terms of performance, service provision, financial benefits, problems?
Because outsourcing in Korea is undeveloped, it is premature to comment.

4. To what extent should the service provider extend services to cover back offices systems such as IT and human resources (HR)?
IT and HR services are not covered by service providers. In all building acquisitions to date by ABS SPCs and REITs, the service providers who have entered into management agreements with such SPCs provide the following services: (i) repair, maintenance and management of the building facilities; (ii) management of energy (electricity, heat etc) used in the building; (iii) building security; (iv) parking lot maintenance; (v) concierge services; and (vi) other miscellaneous services.

5. What has been the effect of Enron and the accounting scandals on corporate considering off-balance sheet property outsourcing?
The Enron scandal has had an effect on general accounting practices in Korea, but it is too soon to say whether such scandals have had any effect on property outsourcing.

6. What is the future of property outsourcing for the private sector?
The Korean real estate market has changed dramatically in the past several years, going from one of the most closed to one of the most open markets in the world. As noted, however, property outsourcing is just beginning in Korea. As more companies begin to recognize its benefits, the outsourcing market is expected to enjoy significant growth.

Financing of real estate transactions

1. What are the most recent methods by which purchasers finance high value real estate transactions in South Korea?
Most recent high value properties were acquired through ABS SPCs. In such transactions, the ABS SPC issues a bond secured by a mortgage established on the real property to investors and/or borrows operating funds from financial institutions.

In addition, after the REIT Act was enacted in 2001 (which contained the CR-REIT structure), the acquisition of property by CR-REITs became a useful temporary alternative. CR-REITs will be phased out as they were designed to assist companies in restructuring following the economic crisis.

2. To what extent does stamp duty (or the equivalent in your jurisdiction) affect the cost and method of financing real estate transactions?
Under the Stamp Tax Act, a stamp tax is levied on a person who prepares a document certifying the establishment, transfer or change of rights to property including loan agreements. However, the maximum amount of the Stamp Tax is only W 350,000.

However, other major taxes are imposed upon the acquisition and holding of real property in Korea, including: (i) acquisition tax generally of 2.2% of the tax base of the property (which can go up to 6.6 % depending on the use and location of the property); (ii) registration tax of 3.6% of the tax base of the property (which can go up to 10.8 % depending on the use and location of the property); (iii) property tax (for the owner of a building) of 0.5% to 7% of the tax base of the property; (iv) aggregate land tax (for the owner of the land) of 0.3 to 2% of the tax base of the property; and (v) urban planning tax of 0.2% of the tax base of the property.

3. To what degree of detail are the parties obliged to disclose the terms of financing on a formal registry (eg the land registry)?
Parties are generally not required to disclose financing terms on land or other formal registries in Korea. There are, however, reporting requirements with respect to mortgages, ABS Plans and REITs.

4. Is there any debate as to who holds the legal title to a mortgaged property?
No. Mortgagors hold legal title to mortgaged property.

Conveyancing issues

1. What are the various forms of property ownership in South Korea?
Under Korean law, buildings and land are owned separately. Thus, real estate registries for buildings are maintained separately from those for land. The only ownership right recognized in Korea is complete ownership, similar to what is known as "fee simple absolute" under Anglo-American law. There is no concept of a "future interest" in Korea.

Joint ownership of real property is expressed in the real estate registry as a percentage of ownership of the entire property. Each joint owner may freely transfer its ownership share to a third party without the other joint owners' consent. Each joint owner is entitled to use the real property in proportion to its share, and each joint owner may take actions to preserve the entire real property regardless of its share.

2. Other than the general principles of contract law governing agreement between vendor and purchaser, what other statutory governance, regulations or guidelines exist to protect the parties to a property transaction?
First, acquisition of real property is effected by the registration of such acquisition in the real estate registry. Also, under the Act on Special Measures for the Registration of Real Estate, anyone who applies for ownership transfer registration must submit a contract with the approval seal of the relevant local government to the registry office.

Second, there are some restrictions on land transactions. If the land is located in an area requiring a permit, the underlying transaction agreement is effective only after the required permit is obtained pursuant to the Act on the Planning and Utilization of National Land. Under the Alien Land Acquisition Act, a foreigner (including a foreign-invested company with foreign equity of 50% or more, or in which foreigners control the board of directors) who purchases real property is required to report the acquisition with the relevant local government within 60 days after the execution of the relevant agreement. However, if the land is located in a "military facilities protection area" or "cultural relics protection area", prior approval is required.

3. Is the practice of the vendor wanting to take advantage of development uplift prevalent in your jurisdiction? How do lawyers usually achieve this?
Vendors in Korea sometimes takes advantage of development uplift. In some cases, the vendor of the targeted land enters into a development agreement with the developer or the purchaser, pursuant to which the purchaser pays the vendor a certain percentage of development uplift as part of the purchase price.

4. How significant is e-conveyancing in your jurisdiction? What rules and regulations govern the e-conveyancing process?
E-conveyancing of real property is not used in Korea.

5. How has the legislation and recent case law in your jurisdiction addressed the issue of adverse possession?
In Korea, there is a concept similar to "adverse possession" in Anglo-American law. If a person has for 20 years peaceably and openly possessed real property with the intent to own it, he can acquire legal ownership of the real property upon registration thereof.

In determining whether the possessor had the intent to own the real property, recent case law has clarified that the possessor could not acquire ownership if he possessed the property without reasonable grounds to do so.

Bae, Kim & Lee
Hankook Tire Bldg. 647-15,
Seoul, 135-723,
Tel: +82 2 3404 0000
Fax: +82 2 3404 0001