Korean real estate law – protecting the tenant or punishing the landlord?August 31, 2015 / By
One of the more popular Korean political themes of recent years has been ‘economic democratisation’ – correcting the imbalance of economic power that exists between major conglomerates and the much less developed small and medium business sector.
The impact of this paradigm on the real estate market was first witnessed in 2013 when the government forced major hypermarket chains to close two Sundays a month to protect small retailers at traditional markets. The law instigated a slide in hypermarket sales from which the industry is yet to recover.
More recently, a revision to the Commercial Building Lease Protection Act has raised concerns that the government’s efforts to protect small tenants may have gone too far. The Act was originally introduced in 2001 and provided a guaranteed minimum five year lease term for retail tenants. In May 2015, the Act was revised to include all tenancies where a business is registered, thereby broadening the Act’s coverage to all sectors of the economy including the office market.
This has raised a number of issues for office market landlords:
Lease extensions – existing tenants with lease terms of less than five years must be guaranteed extensions to reach the minimum five year term.
Renovation – If lease contracts are already in place then landlords will be restricted to renovating a property until all tenants have occupied for a minimum of five years. In many instances, this is expected to make value-add / opportunistic style repositioning strategies much less attractive and may expedite the redundancy of older buildings as opportunities for upgrading are passed over. The legislation is already having a negative impact on the transaction market with at least one deal known to have stalled due to concerns over the viability of a post-acquisition refurbishment scheme.
Short term leases – Landlords looking to lease space for terms of less than five years, such as areas reserved for future tenant or owner expansion, are likely to find it tough going. With no legal right to enforce a shorter lease term, landlords may have to weigh up the probability of a tenant voluntarily departing and being stuck with dead space producing no income.
While some small tenants dealing with unscrupulous landlords will undoubtedly benefit from the extra protection provided by the revised Act, many landlords may be left wondering why the ‘economic democratisation’ of real estate needs to punish them.
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