Strengthening Tenant Rights... A Special Remedy for Jeonwolse or a Misstep in the Jeonse Crisis?

'Lease 3 Acts' Submitted to Legislation Committee

'Contract Renewal Right 2+2 Years · Rent Increase Cap 5%' Amendment Likely
Renewal Refusal Possible if Landlord Resides or Demolishes/Rebuilds

Retroactive Application to Existing Contracts · One Renewal Guaranteed Regardless of Period
Concerns Over 'Jeonse Turning into Monthly Rent' Amid 55-Week Soaring Jeonse Prices in Seoul

[Asia Economy Reporters Yoo In-ho and Lee Chun-hee] The legislation of the so-called 'Lease 3 Acts' including the rent ceiling system, contract renewal request right, and lease reporting system is entering its final stage, signaling a major change in the rental market. The Housing Lease Protection Acts proposed by the ruling Democratic Party of Korea and other parties vary in intensity, but their core is to significantly strengthen the rights of tenants, who have been the 'weaker party' in the rental market. However, concerns remain that landlords may resort to loopholes to avoid regulations imposed by the law, potentially worsening the shortage of supply and increasing disputes in the market.

On the 27th, a total of 19 Housing Lease Protection Acts were submitted to the National Assembly's Legislation and Judiciary Committee. All were proposed by the ruling coalition including the Democratic Party of Korea, the Justice Party, and the Open Democratic Party, containing provisions on the rent ceiling system and contract renewal request rights among the Lease 3 Acts.

The contents of each bill vary. While the intent is the same?to extend the guaranteed lease period currently limited to the initial 2-year contract term to protect tenants' residential stability and to set a cap to prevent excessive rent increases?the strength of each bill differs.

'2+2 years' with a 5% rent increase cap likely... Retroactive application expected to guarantee one renewal even for existing contracts

The government's legislative push for the right to request contract renewal, the rent ceiling system, and the rent reporting system is intensifying the shortage of listings across Seoul due to concerns over a lack of available properties. On the 26th, the listings board at a real estate agency within an apartment complex in Songpa-gu, Seoul, was completely empty. [Image source=Yonhap News]

Regarding contract periods, proposals include guaranteeing one renewal (2+2 years) or two renewals (2+2+2 years) after the initial 2-year contract ends. Democratic Party lawmaker Kim Sang-hee and others have proposed extending each contract term to 3 years. Another lawmaker from the same party, Park Joo-min, suggested removing the fixed term altogether.

The rent increase cap is generally proposed at 5% compared to the previous contract. However, Open Democratic Party lawmaker Kim Jin-ae argued that a flat 5% cap could entrench a 5% rent increase at every contract renewal, proposing instead to set the cap at the lower rate between the average household income growth rate and 5%. Justice Party lawmaker Shim Sang-jung included the previous year's inflation rate, and Democratic Party lawmaker Lee Won-wook proposed a cap of the base interest rate plus 3 percentage points in their bills.

The most likely plan currently is the 2+2 renewal term and a 5% rent increase cap included in most amendment bills. However, considering that elementary school education lasts 6 years under the current school system, the 2+2+2 renewal plan is also under review.

To address concerns about infringement on landlords' rights, the reasons for landlords to refuse contract renewal will be clearly defined. It is expected that landlords will be allowed to refuse renewal for reasons such as the landlord's actual residence or demolition/reconstruction.

The issue is that there may be controversy over the retroactive application of the Lease 3 Acts. The ruling party and government plan to apply the Lease 3 Acts retroactively to existing contracts. This aims to minimize side effects such as landlords raising rents in advance before the law's introduction, causing a surge in rent prices. It is also reported that existing contracts will guarantee tenants one contract renewal regardless of the contract period.

However, even if the new regulations are applied retroactively, landlords can avoid the Lease 3 Acts by notifying tenants of contract renewal refusal between 6 to 2 months before the contract expires and before the law takes effect. According to the current Housing Lease Protection Act, landlords can notify tenants of contract renewal refusal between 6 and 2 months before the contract ends. The contract termination becomes the landlord's 'confirmed right.' In other words, even if tenants demand to stay for another 2 years based on the Lease 3 Acts, landlords are not obliged to comply. Landlords who evict existing tenants are likely to raise rents significantly in advance, which they will not be able to increase later.

Growing concerns over a Jeonse crisis... Experts call for supplementary measures

In the market, concerns are rising that the introduction of the Lease 3 Acts promoted by the government and ruling party could trigger an 'unprecedented Jeonse crisis.' Especially if the Lease 3 Acts are implemented at the end of this month, tenants whose lease contracts expire between October this year and January next year are likely to face disputes with landlords. According to the Seoul Real Estate Information Plaza, the number of apartment Jeonse and monthly rent transactions between October 2018 and January 2019 was 43,766. A significant portion of these tenants may not benefit from the Lease 3 Acts and could even be forced out of their current homes.

Already, Seoul's Jeonse prices have been rising for 55 consecutive weeks since July last year. According to the Ministry of Land, Infrastructure and Transport's real transaction price disclosure system on the 27th, a Jeonse contract for an 84㎡ (exclusive area) unit at Raemian Sinbanpo Palace in Jamwon-dong, Seocho-gu, Seoul, was traded for 1.6 billion KRW on the 16th of this month. This is 250 million KRW higher than the 1.35 billion KRW transaction price for the same area in May. A 60㎡ unit at e-Pyeonhansesang Mapo River Park in Yonggang-dong, Mapo-gu, Seoul, was traded for 665 million KRW on the 13th of last month but rose to 750 million KRW on the 2nd of this month, an increase of nearly 100 million KRW in two weeks.

Park Won-gap, Senior Real Estate Specialist at KB Kookmin Bank, predicted, "There is a possibility that landlords will raise deposits significantly before the law takes effect or that Jeonse prices will surge every 4 years instead of every 2 years. The shift from Jeonse to monthly rent will accelerate, and the end of Jeonse could come sooner."

Therefore, there are calls for supplementary measures even if the Lease 3 Acts are introduced. Professor Kwon Dae-jung of Myongji University's Department of Real Estate said, "The government needs to respond flexibly to areas with rapid rent increases or unstable markets. Policies should be devised to prevent a decrease in supply."

This content was produced with the assistance of AI translation services.