South Korea

1. Reasons for amending the Commercial Building Lease Protection Act (Amended on May 13, 2015)
Under the previous version of the Commercial Building Lease Protection Act (the Act), a commercial tenant could lose the value of its ‘leasehold premium’ (kwon-ri-gum in Korean), which is the monetary value of goodwill, etc. that resulted from the tenant’s investment and business activities at the property, if its landlord terminated it or refused to renew its lease. The existing tenant might bear a business loss for a substantial period of time to reinvest in facilities and establish goodwill. Then their landlord could receive the benefit of the existing tenant’s goodwill by terminating that tenant and executing a lease with a new tenant who would enjoy the business value created by the prior tenant, for which the new tenant pays the landlord.

To resolve the foregoing problem, an amendment to the Act was enacted to protect existing tenants by enabling them to recover their leasehold premium when leaving the premises. It also imposes an obligation on landlords not to unreasonably interfere with the existing tenant in that tenant’s efforts to sell its leasehold premium to a new tenant found by the existing tenant (not by the landlord). The amendment to the Act also is intended to strengthen protection for existing commercial tenants by allowing new potential tenants to obtain necessary lease information to facilitate such sales and recommending the use of a standard commercial lease agreement and a standard leasehold premium agreement.

2. Major amendments
The amendment to the Act expands a tenant’s ability to assert a priority right in the leased premises over rights of third parties, such as mortgage holders, in all commercial lease agreements (Article 2, Paragraph 3).

The superintendent of the applicable tax office is required to draft a certificate of a fixed date that sets forth the location of the commercial building concerned, the fixed date of the tenancy, the amount of rent and the security deposit. This enables a tenant to prove its lease interest in the property to new potential tenants. The superintendent is prohibited from unreasonably refusing to provide that information to new potential tenants who request it (Article 4).

The concept of a ‘leasehold premium’ is now recognised under the law in the amendment to the Act. It is identified as a price paid by a person who is doing or contemplating doing business at a leased commercial building, to a landlord or a tenant (other than a security deposit and a rent), to compensate for obtaining or using the goodwill in the property – tangible or intangible value including business facilities, equipment, customers, credit, business know-how, operational advantages resulting from the location of the building, etc. (Article 10-3)

From three months prior to the end of the lease term to the termination of the lease, a landlord cannot prevent the existing tenant from receiving a leasehold premium payment from a new tenant identified by the existing tenant. The landlord is required to compensate the existing tenant for any loss or damage suffered in case of a breach. The existing tenant is required to provide information about the new tenant to the landlord. (Article 10-4)

If a commercial building subject to a lease is part of a ‘superstore’ or ‘quasi-superstore’, as defined in Article 2 of the Distribution Industry Development Act, a “State Property”, as defined under the State Property Act, or a “common property”, as defined under the Common Property and Goods Management Act, then it is excluded from being subject to these leasehold premium protections. (Article 10-5)

Any sublease, where an existing tenant sublets the leased property to a third-party sub-lessee, also is not subject to these new protections.

3. Implications for future legal disputes
Under Article 10-4, Paragraph 1 of the amendment to the Act, the owner of a commercial building (a landlord) shall not prevent an existing tenant from receiving payment for its leasehold premium from a new tenant found by the existing tenant. Accordingly, an existing tenant may argue that the owner/landlord is required to execute, against its will, a new lease agreement with a new tenant that is willing to purchase the leasehold premium from the existing tenant.

While such an argument appears to be a strained interpretation of the law, there is a potential remedy to protect against such a claim. The amendment to the Act requires the Minister of Land, Infrastructure and Transport to announce standard procedures and methods of appraisal of leasehold premiums and he may designate a standard leasehold premium agreement and recommend use of that standard agreement. Accordingly, while it is not required to draft a leasehold premium agreement, drafting and confirming the terms of such an agreement and thereby clarifying the rights and obligations related to such an agreement in advance may help parties avoid future disputes.

Lee International IP & Law Group
Poongsan Bldg. 23 Chungjeongro
Seodaemun-gu, Seoul 120-013, Korea
Tel: 82 2 2262 6059 / Fax: 82 2 2273 4605
Email: ksnoh@leeinternational.com
www.leeinternational.com

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