Commercial real estate in South Korea: overview

A Q&A guide to corporate real estate law in South Korea.

The Q&A gives a high level overview of the corporate real estate market; real estate investment structures, including REITs; title; tenure; sale of real estate; liability; due diligence; warranties; real estate tax, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; and planning law.

To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-mjg.

Contents

The corporate real estate market

1. What have been the main trends in the real estate market in your jurisdiction over the last 12 months? What have been the most significant deals?

Despite the global economic crisis and its inevitable effect on the South Korean commercial real estate market, investments have increased in 2014 due to the continuing low interest rate. As a result of such an increase in real estate investments, overall property prices have surged since the start of 2014.

In this active investment market, real estate investors have focused their investments on the so-called "blue-chip" assets in the central business district in Seoul (commonly called the "CBD" in the real estate market) that can attract and retain major companies as their key tenants and therefore are able to collect high rental income.

In addition, sale and leaseback transactions by large retail companies have increased in 2014. As a notable example, Lotte Shopping was engaged in sale and leaseback deals for seven of its retail buildings for approximately US$617 million in 2014.

Foreign investors such as sovereign wealth funds have engaged in significant deals in the real estate market, including:

  • The Abu Dhabi Investment Authority's (ADIA) acquisition of the "State Tower Namsan", a 24-storey office building located in the CBD for approximately US$480 million.

  • The State Oil Fund of Azerbaijan's (SOFAZ) acquisition of the "Pine Avenue A", a 25-storey office building located in the CBD for approximately US$447 million.

  • The acquisition of the "K Twin Tower", a 22-storey office building located in the CBD, by Kohlberg Kravis Roberts (KKR) and Lim Advisers for more than US$450 million.

 

Real estate investment

2. What structures do investors typically use for real estate investment in your jurisdiction and what are the main advantages and disadvantages of each (for example, flexibility and tax transparency)?

It is typical for investors in the real estate market to form indirect investment vehicles such as a trust-type real estate investment fund (REF) or) a stock company-type real estate investment vehicle (REIT).

Real estate fund (REF)

The REF is a collective investment vehicle established under the Financial Investment Services and Capital Markets Act (FISCMA) which requires a registration with the Financial Services Commission of South Korea (FSC). The REF is basically a trust-type vehicle comprised of three parties:

  • Investors who are beneficiaries of a trust.

  • An asset management company (AMC) managing invested assets as a fiduciary to investors.

  • An asset custodian (usually a bank) which legally holds the title of the invested assets as a fiduciary to investors.

REFs are very popular among investors (especially institutional investors) in the real estate market due to the following advantages:

  • Because REFs are not corporations, they are free from corporate tax.

  • Investors in REFs are beneficiaries of a trust and therefore have no personal liabilities in the REF.

  • Registration of the REF is easier and faster compared to authorisation of a REIT.

Real estate investment trust (REIT)

The REIT is a real estate investment company established under the Real Estate Investment Company Act (REICA) which requires authorisation from the Ministry of Land, Infrastructure and Transport (MOLIT). The REIT can be exempt from corporate income tax if it distributes more than 90% of its distributable income as dividends. However, the following requirements and restrictions make REITs less attractive than REFs:

  • The REIT should obtain business approval from MOLIT, which takes up to six to eight weeks.

  • Within a year and a half from the date of receipt of the business approval from MOLIT, a REIT must publicly offer at least 30% of its total issuing stock. There are certain exceptions to this requirement.

  • In principle, the maximum percentage of shares that can be owned by a single REIT shareholder is 40%.

 
3. What are the main sources of finance and types of investors for real estate investment in your jurisdiction? Does your government encourage overseas investment into real estate in your jurisdiction, for example through real estate investment legislation?

Institutional investors, such as investment banks, public pension funds, mutual aid associations, securities companies and insurance companies are the main investors and sources of finance in the real estate market.

Foreign investors are also one of the main investors in the real estate market as mentioned above (see Question 1). Under the Foreign Investment Promotion Act, the South Korean government protects and promotes foreign investment in real estate by legislation, but with certain disclosure or filing requirements to the relevant government authorities. Further, there is no meaningful discrimination between foreign and local investors under the Financial Investment Services and Capital Markets Act (FISCMA) and Real Estate Investment Company Act (REICA) although certain formalities (such as permits and reports) are required for the foreign investors.

 

Restrictions on foreign ownership or occupation

4. Are there restrictions on foreign ownership or occupation of real estate (including foreign ownership of shares in companies holding real estate)? Are there restrictions on foreign guarantees or security for ownership or occupation and on lending for the purchase of real estate?

There are no restrictions on foreign ownership or occupation of real estate unless it threatens national safety or public order. However, a foreign investor must obtain authorisation from the relevant government authorities for an acquisition of land located within a military facility zone, a cultural asset protection zone, an environment preservation zone or a wildlife preservation zone. There are no restrictions on foreign guarantees or security for ownership or occupation and on lending for the purchase of real estate.

 

Title to real estate

5. What constitutes real estate in your jurisdiction? Is land and any buildings on it (owned by the same entity) registered together in the same title, or do they have separate titles set out in different registers?

Real estate consists of land and anything affixed to the land, such as buildings or trees. Land and any buildings upon it are owned separately and must be registered separately, except for condominium-type buildings which must be registered in one registry and be traded simultaneously. If a building owner does not hold title to the land, he or she must have a right to use the land, such as a leasehold interest or a surface right.

 
6. How is title to real estate evidenced? What is the name of the public register of title and the authorities responsible for managing it? Is electronic access and electronic conveyancing available?

Title to real estate is evidenced by a real estate registry managed by the Supreme Court. District courts, branches of district courts and registry offices are in charge of real estate registration under their jurisdiction. The real estate registry can be accessed electronically, and a certified copy of title can be issued online at http://www.iros.go.kr.

 
7. What are the main information and documents registered in the public register of title? Can confidential information or documents be protected from disclosure in the public register of title?

The real estate registry is divided into the following parts:

  • Division I: description of real estate.

  • Division II: register of ownership.

  • Division III: register of security interests and use rights for real estate.

Division I for land includes the location, use and area of the land. In case of a building, Division I includes the location, structural building type, area and the number of floors.

Division II consists of:

  • The name and address of the owner.

  • The date of acquisition of the real estate and registration thereof.

  • The property acquisition method such as sale, gift, entrustment or inheritance.

  • The type of title, such as co-ownership.

Division III consists of, if any:

  • The type of rights such as mortgages, leasehold rights or easements. Surface right is also included in the case of land.

  • The name and address of the holder of the rights.

  • The date of creation of the rights.

  • As applicable, basic information about the rights (that is, the maximum claim amount secured by the mortgage, the name of the mortgagor and so on).

The information set out in the title registry is public information and subject to full disclosure.

 
8. Is there a state guarantee of title? Is the authority that manages the public register liable to pay compensation for any errors it makes in relation to title registration? Is title insurance available and is it commonly used?

There is no governmental guarantee of title, and ownership of registered real estate is not guaranteed by the public register. However, the registration in the real estate registry enables a prima facie presumption for the registered rights. If a person suffers a loss due to any errors made in title registration, he or she can file a suit for indemnity against the government on the grounds of neglect of duty by the relevant officer. Although title insurance is available, it is not commonly used in South Korea.

 
9. How can real estate be held (that is, what types of tenure and other main ownership rights exist over land)?

Ownership

The most common way to hold real estate is ownership over land or buildings. Though title to land and title to buildings are separated in principle, they are generally transferred together. If land or a building is owned by a sole owner, the owner may dispose of or use the land or the building however he or she sees fit. In addition to sole ownership, there are two types of tenure in ownership:

  • Co-ownership. In co-ownership, if a co-owner wishes to dispose of, or alter, the whole real estate, other co-owners must unanimously agree to such a disposal or change. In terms of maintenance of the real estate, at least 50% of the co-owners must agree to it. However, each owner is entitled to freely dispose of his or her share.

  • Condominium- type ownership. If a building is divided into multiple units which can be used independently, each unit can be separate subjects of ownership and can be registered separately. Unit owners handle the management of a multi-unit building through an owners' association.

Leasehold

South Korean law recognises two types of leasehold interest in respect of both land and buildings. One is called "Imchakwon", and the other is called "Cheonsekwon". The former is not typically registered in the registry although it is registerable and requires payment of a monthly rent (landlords normally demand a security deposit). The latter must be registered in the registry with the security deposit and the term of the lease. Monthly rent is not required, but the security deposit is relatively high compared to Imchakwon.

Surface right

Surface right refers to the right to occupy and to use the land, to own buildings or trees attached to it. The duration of a certain surface right is fixed under the South Korean Civil Code depending on what is attached to the land.

Easements are also recognised under the South Korean Civil Code.

 

Sale of real estate

Preliminary agreements

10. What types of preliminary agreements are typically used in the sale of real estate? Are they legally binding?

Exchanging a letter of intent (LOI) or executing a memorandum of understanding (MOU) is a common practice to confirm parties' intent and to outline key economic and procedural terms. Usually a LOI or a MOU states its non-binding nature, except for provisions concerning confidentiality and exclusivity.

 

Sale contract

11. Briefly outline the typical main provisions of a corporate real estate sale contract and main real estate provisions of a typical share purchase agreement.

The main provisions of a typical real estate sale contract and main real estate provisions of a typical share purchase agreement are as follows:

  • Description of the target property.

  • Purchase price.

  • Payment method and procedure.

  • Timing of the execution, payments or closing.

  • Due diligence and price adjustment.

  • Representation and warranties.

  • Covenants.

  • Conditions precedents and closing deliverables.

  • Allocation of cost and income from the target property (pro-rations).

  • Indemnification.

  • Termination.

  • Damages and compensation.

  • Confidentiality.

  • Force majeure.

 

Due diligence

12. What real estate due diligence is typically carried out before an acquisition and what key areas does it cover? Which documents are typically reviewed? Which specialist advisers are usually involved and which reports do they typically produce?

Legal due diligence typically comprises the following:

  • Legal analysis of a transaction structure.

  • Title and encumbrances (usually through surveying real property registries).

  • Zoning restrictions.

  • Governmental permits and approvals for the real property.

  • Review of contracts relating to the target property (including lease agreements and financing documents).

  • Seller's liabilities.

  • Litigations and disputes relating to the target property.

  • Insurances required for the target property.

  • Tax applicable to the target property and proposed transaction.

  • Environment and safety.

Generally, physical due diligence and financial due diligence are conducted by a specialist and an accounting firm, who produce a due diligence report.

 

Sellers' warranties

13. What real estate warranties are typically given by a seller to a buyer in the sale of corporate real estate and what areas do they cover? What are the main limitations on warranties, for example are they typically qualified by disclosure?

Typical real estate warranties given by a seller to a buyer are as follows, and they are typically qualified by disclosure:

  • Good and valid title to the target property free and clear of encumbrances except for items disclosed by a seller or in the real estate registry.

  • Fulfilment of required governmental approvals for construction, maintenance, execution and performance of the sale agreement.

  • Full power and authority for transaction.

  • Compliance with relevant laws with respect to the construction and maintenance of the target property.

  • No violation of any environmental laws.

  • No third party claim to the target property.

  • No material litigations relating to the target property.

  • Validity of necessary agreements for the operation of the target property (including lease agreements) and no breach thereof.

Types of warranties given by a seller depend on the specifics of a transaction, such as a type of the target property, bargaining power of each party and a scope of due diligence.

 

Liability

14. Does a seller have any statutory or other liability to the buyer in a disposal of real estate?

Under the South Korean Civil Code, a seller of real estate is subject to statutory warranty liabilities, meaning a seller warrants:

  • Valid ownership.

  • No encumbrances such as mortgages, Cheonsekwon (leasehold interests, see Question 9), registered leasehold rights, superficies, easements, liens or pledges.

  • No physical or legal defect unless otherwise agreed by relevant parties.

Pursuant to these statutory warranties, a purchaser may:

  • Terminate a proposed sale agreement if a purchaser is unable to accomplish the main purpose of such an agreement.

  • Claim damages incurred as a result of a seller's breach of warranties.

However, a purchaser's right to claim under these warranties expires after a certain statutory period (six months or one year after a purchaser becomes aware of a breach of warranties) unless otherwise agreed by the relevant parties.

Further, a seller can be contractually liable to a purchaser for any seller's warranties under a sale agreement.

 
15. Briefly outline the environmental legislation and potential liability for a buyer in a purchase of real estate. Is it common to carry out environmental surveys and searches and to obtain environmental insurance? How is environmental liability typically dealt with in the sale contract?

Potential liability for a buyer, environmental surveys and environmental liability in the sale agreement. Generally, a purchaser does not inherit any pre-existing environmental liabilities of a seller. However, under the Soil Environment Preservation Act (SECA), if soil contamination is discovered on land or facilities, a current owner or operator of such land or facilities is liable for any damages arising from soil contamination and any costs associated with cleaning up the contaminated soil, even if the soil contamination pre-dates his or her ownership. To avoid such a liability, the purchase must confirm that the soil contamination is within the criteria by conducting a soil contamination survey before acquiring real estate. However, it is uncommon for a purchaser of real property in South Korea to carry out a soil environmental survey, unless the target property is likely to have been contaminated.

A purchaser often requires seller warranties on environmental issues in a sale agreement.

Environmental insurance. While insurance companies offer environmental liability coverage to commercial clients, it is uncommon for a purchaser to obtain such insurance in South Korea.

 
16. Can an owner or occupier inherit liability for other matters relating to the real estate even if they occurred before it bought or occupied it? Can a seller or occupier retain any other liability relating to the real estate after it has disposed of it?

Liability inheritance. A purchaser generally does not inherit any liability that exists prior to his or her ownership. However, a purchaser inherits its liabilities as a landlord under existing housing or commercial leases within categories protected by the Housing Lease Protection Act or by the Commercial Building Lease Protection Act. Further, liabilities pursuant to the Soil Environment Preservation Act (SECA) are inherited by a purchaser as discussed above (see Question 15).

Seller's liabilities after disposal. A seller is subject to the statutory warranty liabilities. Further, a seller who caused soil contamination is liable for damages that occurred after the sale, pursuant to SECA.

 

Completion arrangements

17. What are the typical arrangements and main documents required for completion of the sale? When does title transfer and what are the formal legal requirements to execute the sale documents, transfer the real estate and register the change of title? Is notarisation required?

Closing deliverables. At closing, a seller delivers to a purchaser certain closing documents, including documents necessary for the title transfer (including title deed) in exchange for payment of the purchase price and delivery of certain closing documents by a purchaser.

Title transfer. Under the South Korean Civil Code, title transfer of real property becomes effective once it is registered in the relevant registry. A seller and a purchaser must jointly apply for the registration at a relevant local registry office, though in many cases, a purchaser solely applies for it with seller's power of attorney.

Formalities. Notarisation or other formalities are not required for the execution of a sale agreement.

 

Real estate tax

18. Is stamp duty/transfer tax (or equivalent) payable on the purchase of real estate? Who pays, what are the rates and are there any exemptions? Does it apply to the transfer of shares in a company holding real estate and at what rate?

Stamp duty

Stamp duty is payable on the purchase of real estate, and it ranges from KRW20,000 to KRW350,000 depending on the purchase price stated in the sale and purchase agreement. Both the purchaser and the seller usually pay for the stamp duty for its original copy of a sale contract. Stamp duty does not apply to the transfer of shares in a company holding real estate. Further, no exemption applies to private entities.

Real estate acquisition tax

Acquisition tax is generally imposed at a standard rate of 4.6% on the acquisition price of the real property. However, a 9.4% acquisition tax rate is imposed on a company acquiring real estate in the Seoul Metropolitan Area, if such a company is newly established or has moved to the Seoul Metropolitan Area recently. Such a higher acquisition tax in the Seoul Metropolitan Area is not applicable to real estate investment trusts (REITs) or real estate funds (REFs).

Deemed acquisition tax

If a purchaser acquires more than 50% of the equity of a seller holding real estate, a deemed acquisition tax will be imposed with respect to the real properties in proportion to its new shareholding ratio. The deemed acquisition tax rate is 2.2% of the book value of the real property.

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios? What is the general approach of the tax authorities in your jurisdiction to such schemes?

Real estate investment trusts (REITs) or real estate funds (REFs) are commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios, since they can benefit from a 30% discount on acquisition tax. However, the 30% tax reduction will be abolished on or after 1 January 2015. Nevertheless, REITs and REFs still enjoy the lower acquisition tax rate of 4.6% in the Seoul Metropolitan Area. As these are statutory tax benefits, they are fully respected by the tax authority.

 
20. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate? Who pays? What are the rates? Are there any exemptions?

A seller is required to pay VAT equal to 10% of the purchase price of a building. A seller collects VAT from a purchaser, and the purchaser may use the VAT amount paid to the seller as a credit for its VAT return. The sale of land is not subject to VAT.

 
21. Are municipal taxes paid on the occupation of business premises? Are there any exemptions?

Inhabitant taxes are imposed on business premises by local governments. Inhabitant taxes consist of three categories:

  • A fixed amount of KRW350,000 to KRW500,000, annually.

  • KRW250 per square metre of business premises, annually.

  • 0.5% of the monthly payroll amount.

No exemptions are allowed except for foreign governmental organisations or international organisations located in South Korea.

 

Climate change issues

22. Are there targets or incentives to reduce greenhouse gas emissions from buildings in your jurisdiction? Is there a legislation requiring buildings to meet certain minimum energy efficiency criteria?

Under the relevant laws and regulations, all newly constructed buildings and old buildings falling into certain categories are subject to a greenhouse emission evaluation. If a building is certificated to meet the "Green Standards" (which include various criteria such as energy efficiency, reduction of greenhouse gas emissions, waste minimisation and water saving), it may enjoy reduced local taxes, reduced environment improvement expenses, and it is easier to obtain a building permit.

 
23. Are provisions relating to the energy efficiency of buildings commonly included in contracts for the sale of real estate or in leases (for example, green leases)?

It is not common to include provisions relating to energy efficiency in sales contracts or leases in South Korea.

 

Real estate finance

Secured lending involving real estate

24. Briefly outline the typical security package required by lenders in relation to real estate lending. How are the most common forms of security interest relating to real estate created and perfected (that is, made valid and enforceable)?

There are three main types of security that are required by lenders:

  • Mortgage. The most typical and common method of real estate security for lenders is a mortgage. A mortgage is created by an agreement between a borrower and a lender, and it is made valid and enforceable once it is registered.

  • Real estate trust. A real estate trust is another common method of real estate security, especially for development projects. A borrower entrusts its real property (often a development site) to a trustee, and a lender obtains a preferred beneficiary interest for all proceeds out of the trusted property within a maximum amount stipulated in a trust agreement. Unlike a mortgage, a lender may foreclose on a real property in a private sale or auction, while a lender must exercise its foreclosure right under a mortgage pursuant to a statutory foreclosure procedure through a court.

  • Pledge. The establishment of a pledge on various bank accounts of the borrower, and insurance proceeds, is required by the lenders.

 
25. What other real estate related measures do lenders typically take to protect themselves against default by the borrower?

Lenders use the following contractual arrangements to protect themselves against default by a borrower:

  • Conditions precedent. A loan agreement typically includes certain conditions precedent that a borrower must satisfy prior to any drawdown of proceeds, such as:

    • the delivery of certain documents including certain financial documents/certifications;

    • the provision of acceptable security and loan guarantees;

    • no event of default;

    • representations and warranties of a borrower and a guarantor being true and correct;

    • evidence of a progressive ratio of construction for development project; and

    • a legal opinion of a law firm.

  • Covenants. A loan agreement typically includes certain borrower's covenants (both affirmative and negative) such as:

    • compliance with applicable laws;

    • maintenance and continuity of business;

    • continuing government approvals;

    • maintenance of security and its priority;

    • periodical financial reports to a lender;

    • satisfaction of certain financial ratios or tests (for example, debt service coverage ratio (DSCR));

    • no encumbrances;

    • no disputes;

    • no liquidation or dissolution.

  • Guarantees. A lender may require (especially when a borrower does not have enough equity to pay off a loan) a third party guarantee including a letter of credit from a financial institution such as a bank, a personal guarantee of a major shareholder of a borrower or a guarantee insurance policy.

  • Others. A lender may require that a certain amount of loan proceeds be deposited or reserved in a designated bank account to pay off interest. In a project financing loan, a lender may ask for a cash management right and/or a step-in right.

 
26. Can lenders incur environmental liability? What measures do lenders typically take to manage potential environmental liability?

A lender is not held liable for environmental liabilities caused by a borrower's business or assets unless it acquires encumbered assets through foreclosure sale or otherwise. The lenders typically include representations and warranties related to the environmental matters in the loan agreement, inaccuracy of which constitutes a default.

 
27. Briefly outline the main remedies for lenders in relation to the secured real estate if the borrower defaults on the loan. What is the effect of the borrower's insolvency on the lender's remedies?

The main remedies for lenders are:

  • Acceleration. Upon the event of a default, a lender may accelerate any unpaid balance of the loan and exercise all of its rights available under the loan agreement.

  • Foreclosure. A lender may foreclose on a borrower's assets. However, foreclosure methods differ depending on the type of security rights of the lender. A mortgagee may apply for a public auction for a mortgaged property to a relevant court pursuant to a statutory foreclosure procedure, but a lender cannot exercise a mortgage foreclosure right outside of the court proceedings. Unlike a mortgage, foreclosure under a real estate trust is conducted through a private sale or auction.

  • Guarantees. A lender may ask a guarantor to pay the unpaid balance of the loan.

  • Bankruptcy or reorganisation. Even if a borrower becomes insolvent and files for bankruptcy, a lender may exercise its foreclosure right. If a reorganisation of a borrower commences, a lender may not immediately foreclose on the secured real estate, but a lender usually has a preferential right to receive any unpaid balance of the loan pursuant to a rehabilitation plan approved by the relevant court.

 
28. Briefly outline key additional issues for lenders in relation to construction and development projects.

To avoid any risk associated with the progress and completion of a relevant project, lenders normally allow the drawdown of the loan in instalments, which is contingent upon the satisfaction of certain construction-related covenants and the achievement of agreed milestones. In addition, lenders typically require borrowers to deliver a completion guarantee issued by a contractor and/or construction-related bonds or insurances (and a pledge thereon). Further, lenders often require step-in rights to take over the project in case of loan acceleration and a lien waiver from a contractor to exercise such step-in rights.

 

Other real estate financing techniques

29. Are other real estate finance techniques commonly used in your jurisdiction? For example, real estate securitisation and sale and leasebacks.

Real estate securitisation using asset backed security (ABS) or asset backed commercial paper (ABCP) are common financing techniques in South Korea. A sale and leaseback transaction is also a commonly used alternative financing method in South Korea since the economic recession.

 

Real estate leases

Negotiation and execution of leases

30. Are contractual lease provisions regulated or freely negotiable? Which legislation applies?

Lease provisions are generally freely negotiable. However, under the South Korean Civil Code, Housing Lease Protection Act and Commercial Building Lease Protection Act, several provisions are regulated to protect tenants, especially with respect to a lease term and a landlords' right to terminate the lease or increase rent.

 
31. What are the formal legal requirements to execute a lease? Does the lease have to be executed by certain parties or as a deed? How do the formalities differ for a company, partnership and for individuals?

No formal legal requirements exist with respect to the execution of a lease regardless of the forms of the parties.

 

Rent payments

32. How are rent levels usually reviewed and are there restrictions on this? Is stamp duty and VAT (or equivalent) payable on rent? Is a rent security deposit required and does it have to be managed in a certain way?

There is no special restriction on rent levels or a regular reviewing system on them. However, landlords cannot increase rent or a rent security deposit in excess of a certain amount under the Housing Lease Protection Act and Commercial Building Lease Protection Act. Stamp duty is not payable on rent but rents are subject to VAT. A security deposit is not mandatory, however, it is uncommon for a landlord to waive a security deposit requirement. A security deposit does not have to be managed in a certain way.

 

Length of term and security of occupation

33. Is there a typical length of lease term and are there restrictions on it? Do tenants of business premises have security of occupation or rights to renew the lease at the end of the contractual lease term?

Generally a lease term is freely negotiable. However, the term of a housing lease must be for at least two years under the Housing Lease Protection Act. If the term of a housing lease is not specified, or is less than two years, it will be deemed as two years. This rule can be waived only by a tenant.

In the case of a commercial lease which is subject to the Commercial Building Lease Protection Act, a lease term must be for at least one year. If the term of a commercial lease is not specified, or is less than one year, it will be deemed to be one year. This rule can also be waived only by a tenant. Any tenant of a commercial lease has a right to renew the lease on the same terms and conditions (including the lease term) to the extent the renewed terms and the initial term in the aggregate do not exceed five years. However, a landlord or a tenant may request adjustment to rent or rent security deposit at renewal if the amount of rent or security deposit is inadequate at the time of the renewal due to a change in tax rates, public charges or other financial burdens associated with the leased property or other economic conditions.

 

Disposal

34. What restrictions typically apply to the disposal of the lease by the tenant? Can the tenant assign or sublet the lease with the landlord's consent? Can tenants share their premises with companies in the same group? What is the effect of a legal reorganisation or transfer/sale of the tenant on the lease and on a guarantee of the lease?

A landlord's prior consent is typically required for a disposal of a lease by a tenant. If the tenant does not obtain the landlord's consent in advance, the landlord has the right to terminate the lease. Subletting or sharing the premises with a third party (including any company in the same group) also typically requires the landlord's prior consent. However, according to the Supreme Court precedents, the landlord's right of termination is limited if subletting the lease does not constitute a breach of faith.

Unless there are explicit restrictions on the legal reorganisation or a change of control of a corporate entity in a lease agreement, these events do not affect the lease. In some cases where a tenant's credit is important (such as a sale and leaseback structure), restrictions on a lease assignment tend to include restrictions on the legal reorganisation or a change of control of tenants.

 
35. Does a landlord or tenant retain any liability under the lease after the lease is assigned?

If a lease is assigned to a new tenant with a landlord's consent, the landlord or the former tenant generally does not retain any liability to each other under the lease after the lease is assigned to an assignee.

 

Repair and insurance

36. Who is usually responsible for keeping the leased premises in good repair and for insuring the leased premises? Are there provisions for the ownership of lease improvements?

In housing leases, landlords are usually responsible for maintenance and repair of leased premises unless damage occurs due to a tenant's fault. However, many commercial lease agreements specifically set forth maintenance and repair responsibilities of a landlord and a tenant. Sometimes, tenants take responsibility for performing ordinary maintenance and repair, while landlords are responsible for structural repairs, unexpected or extraordinary repairs.

Under the South Korean Civil Code, a landlord takes title to any improvements or other items affixed to a leased property which become physically a part of a leased property, and therefore very hard or very expensive to detach, uninstall or demolish. A landlord reimburses a tenant for any expenses incurred for such improvements unless a lease agreement stipulates otherwise. In addition, if a tenant installs certain personal property (which enhances the value of the leased property) on leased premises with the landlord's prior consent, upon the tenant's request, the landlord has the obligation to reimburse the tenant for such personal property upon termination of the lease.

 

Landlord's remedies and termination

37. What remedies are available to a landlord for a breach of the lease by the tenant? On what grounds can the landlord usually terminate the lease and what restrictions and procedures apply? What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

In the case of a tenant's breach of the lease, a landlord typically terminates the lease and demands a return of a leased property and compensation for damage incurred by the termination of the lease. Without any special provisions, such damage is commonly limited to rent loss until the reasonable time it takes for a landlord to find a substitute tenant. However, many lease agreements include a liquidated damage clause or a penalty clause for parties' breach. In addition, a landlord may use a security deposit to cure a tenant's breach. Requiring a sufficient security deposit is a common practice in South Korea.

The grounds on which a landlord may terminate a lease, and start termination procedures, depend on the lease agreement at issue. Typically, grounds for termination include:

  • A tenant's failure to pay rent for two or more months.

  • A tenant's failure to perform other obligations under the lease agreement.

  • A tenant's insolvency, bankruptcy or reorganisation of the tenant.

If a bankruptcy or reorganisation procedure is commenced for a tenant, the trustee of the tenant appointed by the court has the right to choose to terminate the lease or not.

 
38. Can the tenant withhold rent payments in certain circumstances, for example for serious damage to the leased premises? Can the tenant terminate the lease in certain circumstances?

Lease agreements in South Korea do not typically permit a tenant to withhold rent payments. According to Supreme Court precedent, however, a tenant may withhold rent payments if using the leased premises is impossible due to a landlord's action or inaction. Also, if a tenant is unable to accomplish its purpose of a lease because of serious damage to the leased premises, the tenant may terminate the lease under the South Korean Civil Code or a commonly included termination provision in a lease.

 

Planning and development controls

39. In what circumstances can local or state authorities purchase business premises compulsorily? Is the purchase price market value?

If it is necessary to implement public projects related to national defence, major infrastructure or other public services, local or state authorities or any project operator obtaining permission from the governmental authorities (project operator) may expropriate or use land, buildings or trees, and so on. The project operator must consult and negotiate in good faith about the amount of compensation with a landowner. The amount of compensation is usually based on the officially assessed value of the property at issue. If the project operator and the landowner fail to reach an agreement, the project operator may file an application for adjudication with the competent Land Tribunal, and the Land Tribunal subsequently determines the compensation amount based upon the officially assessed value of the taken property.

 
40. What authorities regulate planning control and which legislation applies? Is there specific protection for special categories of buildings such as historic buildings?

The Act on Planning and Use of National Land (National Land Planning Act) provides the basic framework for planning for the use, development and preservation of national land, and execution of such plans. The Ministry of Land, Infrastructure and Transport (MOLIT) devised the national land plan, pursuant to which the regional plan, urban master plan and the city management plan have been devised by governors, mayors or county governors. The city management plan contains a detailed zoning plan covering certain areas of a city. The city management plan and related local regulations restrict the grant of a development permit or a building permit in some areas where development activities and/or building works could seriously pollute or damage the surrounding environment, scenery, historic buildings and cultural heritage.

 
41. What planning consents are required for building works and the use of a building?

Most building works in urban areas need a building permit from the relevant governmental authority in advance, and the building permit must comply with the relevant city management plan as well as the restrictions under the Building Act and other regulations. The use of a building after completion requires a use permit after the completion of inspection of the building by the relevant governmental authority.

 
42. What are the main authorisation and consultation procedures in relation to planning consents?

The relevant governmental authority grants a building permit if building works comply with the relevant city management plan and the restrictions under the Building Act and other regulations. Any third party does not have a right to object to a building permit, and in principle, a public inquiry is not required to obtain a building permit.

Reform

 
43. Are there proposals to reform real estate law and are they likely to come into force and, if so, when?

Real estate funds (REFs) have been very popular indirect investment vehicles used by many investors as they impose no restrictions on investors (such as a percentage of ownership). Until 2014, only one beneficiary was permitted, however, the amendment to the Financial Investment Services and Capital Markets Act (FISCMA), which became effective on 1 January 2015, requires two or more beneficiaries.

 

Online resources

Supreme Court of Korea

W www.eng.scourt.go.kr

Description. This is an official website of the Supreme Court of Korea. There is information about the South Korean justice system and an English translation of some selected Supreme Court precedents.

Statutes of the Republic of Korea

W http://elaw.klri.re.kr/eng ( www.practicallaw.com/4-522-4804)

Description. This website is run by the South Korea Legislation Research Institute supported by the South Korean government. Some English translations of South Korean laws and regulations are available.



Contributor profiles

Gun Chul Do, Partner

Bae, Kim & Lee LLC

T +82 2 3404 0142
F +82 2 3404 0686
E gunchul.do@bkl.co.kr
W www.bkl.co.kr

Professional qualifications. Admitted to the Korean Bar

Areas of practice. Project development and project finance; mergers and acquisitions; foreign investment; corporate governance; corporate; construction.

Non-professional qualifications. Seoul National University Law School, LLB, 1988; Judicial Research and Training Institute, Supreme Court of the Republic of Korea, 1988-1990; Georgetown University Law Center, LLM, 1999

Recent transactions

  • Advised Christian Dior Couture on its acquisition of a site for the new South Korean flagship store and headquarters.
  • Advised Gale International (a US developer) on its joint venture agreement with Morgan Stanley Real Estate Funds.
  • Advised Gale International and its South Korean subsidiary on its strategic alliance agreement with CISCO.
  • Advised Merrill Lynch on financing for a US military camp relocation project.
  • Advised Morgan Stanley Real Estate Funds on its acquisition of buildings in Seoul.
  • Advised Macquarie on its acquisition and disposition of buildings in Seoul.

Languages. Korean, English

Professional associations/memberships. Korean and Seoul Bar Associations; Advisor to Saemangeum Committee under the Prime Minister's Office, 2012-2014; Investment Department, Korea Agency for Saemangeum Development and Investment, 2014 to present.

Eun Jin Jeon, Partner

Bae, Kim & Lee LLC

T +82 2 3404 0163
F +82 2 3404 0806
E eunjin.jeon@bkl.co.kr
W www.bkl.co.kr

Professional qualifications. Admitted to the Korean Bar

Areas of practice. Real estate investment vehicles (REITs and REFs); project development and project finance; construction; foreign investment.

Non-professional qualifications. Seoul National University, BA1999; Washington University in St Louis School of Law, 2007; University of Missouri, Truman School of Public affairs, Visiting Scholar 2011-2013

Recent transactions

  • NPS offshore investment project ("multi-family built-to-core strategy").
  • Mirrae Maps AMC sale of Maps Songpa Tower.
  • JR AMC establishment of REIT and purchase of a new building (office building at Dosun-dong).
  • Advised Woori Investment & Securities in its financing for an unsold apartment.

Languages. Korean, English

Professional associations/memberships. Korean and Seoul Bar Associations.

Chi Young Song, Associate

Bae, Kim & Lee LLC

T +82 2 3404 6531
F +82 2 3404 0806
E chiyoung.song@bkl.co.kr
W www.bkl.co.kr

Professional qualifications. Admitted to the Korean Bar

Areas of practice. Real estate investment vehicles (REITs and REFs); project development and project finance; mergers and acquisitions; litigation; hostile takeovers and defence; corporate; construction; China.

Non-professional qualifications. Seoul National University, BA in Economics, 2003; Seoul National University Graduate School of Law, 2004; Judicial Research and Training Institute, Supreme Court of the Republic of Korea, 2008; UCLA School of Law, LLM 2013-2014

Recent transactions

  • Provided legal advice for restructuring and private investment into the Korail Airport Railroad.
  • Provided legal advice for purchase of an office building located in Seoul by Seoul office of China Construction Bank.
  • Provided legal advice for opening Four Seasons Hotel Seoul by Mirae Asset Global Investments.

Languages. Korean, English

Professional associations/memberships. Korean and Seoul Bar Associations.

Publications. Managing Members of Partnership-Type Fund and Embezzlement–Focus on Cases of Corporate Restructuring Associations under the former Industrial Development Act (Co-authored, BFL No. 39, Jan. 2010).

Soo Min Kang, Associate

Bae, Kim & Lee LLC

T +82 2 3404 0862
F +82 2 3404 7688
E sookim.kang@bkl.co.kr
W www.bkl.co.kr

Professional qualifications. Admitted to the Korean Bar

Non-professional qualifications. Seoul National University, BS in English Language and Literature, 2011; Seoul National University School of Law, 2014

Languages. Korean, English

Professional associations/memberships. Korean and Seoul Bar Associations.

Charlene Kim, Associate

Bae, Kim & Lee LLC

T +82 2 3404 262
F +82 2 3404 7305
E charlene.kim@bkl.co.kr
W www.bkl.co.kr

Professional qualifications. Admitted to the California Bar

Non-professional qualifications. Cornell University, School of Hotel Administration, BS, 2008; Georgetown University Law Center, JD, 2011


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