Will the Amendment to the Commercial Lease Act Activate the 'Right to Request Rent Reduction'... Many Cases Likely Referred to 'Mediation' in Actual Trials

On the 28th, merchants of Doosan Tower held a press conference in front of Seoul City Hall to exercise their right to request a rent reduction.

[Asia Economy Reporter Choi Seok-jin] With the enforcement of the revised Commercial Building Lease Protection Act (hereinafter referred to as the Commercial Lease Act), amended to protect commercial tenants facing difficulties due to the novel coronavirus infection (COVID-19), the long-dormant “right to request rent increase or decrease” is showing signs of revitalization.

In particular, the revised law imposes certain restrictions when landlords request an increase in rent or deposit, but places no restrictions on tenants’ requests for reductions, which is expected to impose a significant burden on landlords.

If landlords do not comply with tenants’ requests for rent reductions, tenants will ultimately have to seek relief through litigation. Experts anticipate that in actual lawsuits, disputes will often be resolved through mediation, where both parties agree on a certain amount.

Enforcement of Revised Commercial Lease Act... Retroactive Application of Rent Increase/Decrease Request Provisions

According to the legal community on the 3rd, the revised Commercial Lease Act, passed by the National Assembly plenary session on the 24th of last month, was promulgated after passing the Cabinet meeting on the 29th of last month, and has now come into effect.

The revised Commercial Lease Act stipulates in Supplementary Provision Article 1 (Effective Date) that “this law shall come into effect on the date of promulgation,” thereby taking effect immediately upon promulgation. Furthermore, Article 2 (Application of Temporary Special Provisions such as Contract Renewal Requests) states that for Paragraphs 1 and 3 of Article 11 concerning the right to request rent increase or decrease, “the revised provisions shall also apply to leases existing at the time of enforcement of this law,” thus applying retroactively to commercial lease contracts concluded before the law’s enforcement.

Article 11 of the revised law adds “Class 1 infectious diseases as defined in Article 2, Paragraph 2 of the Infectious Disease Prevention and Control Act” as a reason for requesting an increase or decrease in rent or deposit due to changes in economic circumstances in Paragraph 1.

This explicitly codifies tenants’ rights to request rent or deposit reductions due to COVID-19.

Regarding landlords’ requests for increases, even before the amendment, Article 11, Paragraph 1, proviso stipulated that “in the case of increases, the rate shall not exceed the standard prescribed by Presidential Decree,” thereby limiting the increase rate.

Enforcement Decree of the Commercial Building Lease Protection Act Article 4 (Standards for Requesting Rent Increase, etc.) stipulates that “requests for rent or deposit increases under Article 11, Paragraph 1 of the Act shall not exceed 5% of the rent or deposit at the time of the request,” thus originally limiting the increase range to 5% of the rent or deposit.

The revised law newly establishes Paragraph 3 of Article 11, providing an exception that if a landlord reduced rent due to economic changes caused by Class 1 infectious diseases such as COVID-19 and later raises the rent again due to the end of the COVID-19 situation or other reasons, the 5% limit does not apply until the rent reaches the previous amount.

Rent Reduction Request Right as a ‘Formative Right’... High Likelihood of Referral to Mediation in Actual Trials

The right to request rent increase or decrease due to changes in economic circumstances is stipulated not only in the Commercial Lease Protection Act (Article 11) but also in the Civil Act (Article 628) and the Residential Lease Protection Act (Article 7).

In particular, the Supreme Court views the legal nature of the right to request rent increase or decrease not as a ‘claim right’ to demand rent adjustment but as a ‘formative right’.

In other words, under certain conditions, when one party requests an increase or decrease in rent, the rent is immediately adjusted upon the communication of such intention to the other party, even without the other party’s consent.

Professor Jang Wan-gyu of the Law and Police Department at Yongin Songdam University said, “Because the right to request rent increase or decrease is a formative right, a unilateral declaration of intention causes a change in rights. In court, the judge examines whether the conditions for rent reduction requests are met and retrospectively confirms whether the exercise of the formative right was appropriate. The actual effect of rent reduction occurs retroactively from the time the rent reduction request is notified in writing or by certified mail.”

The problem is that this right has rarely been exercised in practice, and cases litigated in court are also hard to find.

This is because tenants, who must maintain a good relationship with landlords and continue the lease unless they are prepared to move elsewhere, found it practically difficult to unilaterally claim rent reduction due to economic changes or file lawsuits.

However, since this amendment was promoted with a clear purpose by the government to reduce the burden on tenants affected by the COVID-19 crisis, courts are likely to interpret the law actively in favor of tenants if cases proceed to litigation.

A sitting presiding judge A said, “Although the provision exists, I do not think I have handled any rent reduction request cases during my judicial career. After the amendment, if lawsuits are filed, courts are likely to apply the provisions actively from the standpoint of prioritizing tenant protection over landlords.”

Judge A also predicted, “In actual trials, rather than deciding rent amounts by judgment, judges are more likely to resolve cases through mediation, where landlords and tenants make mutual concessions and agree on a settlement amount. This is because going to judgment would likely worsen relations between the parties, who need to maintain their lease relationship.”

Rent Reduction Request Lawsuits Expected to Follow... Calls for Detailed Standards in Presidential Decree

Movements to exercise tenants’ rights to request rent reductions under the revised law have already begun.

Merchants at Doosan Tower in Dongdaemun, Seoul, held a press conference in front of Seoul City Hall on the 28th of last month, announcing, “We will exercise the right to request rent reductions at the merchants’ association level.”

Article 2 (Scope of Application) of the law, which defines the scope of application of the Commercial Lease Act, exempts leases exceeding the deposit amount prescribed by Presidential Decree from the Act’s application in the proviso of Paragraph 1.

The Enforcement Decree of the Commercial Lease Act sets the deposit amount standard for application of the Act at 900 million KRW for Seoul in Article 2, Paragraph 1, Subparagraph 1.

However, Paragraph 3 of the same Article 2 stipulates that “notwithstanding the proviso of Paragraph 1, Articles 3, 10 Paragraphs 1, 2, and the main text of 3, Articles 10-2 through 10-9, and Article 19 shall apply even to leases exceeding the deposit amount under the proviso of Paragraph 1.”

In other words, the newly established special provision for six months of rent arrears in Article 10-9 (Temporary Special Provisions on Contract Renewal Requests, etc.) applies even to leases with deposits exceeding 900 million KRW, but Article 11, which regulates the right to request rent increase or decrease, does not apply to leases exceeding 900 million KRW in deposit.

Especially in places like Doosan Tower, where many so-called “tenant B” type commission stores exist, whether commissions paid monthly based on sales can be considered monthly rent and used as the basis for calculating the converted deposit will be a prerequisite for applying the revised Commercial Lease Act and is expected to be contested in future trials.

There is currently no Supreme Court ruling on this, and lower court rulings are divided.

Jang Cheol-hee, a lawyer at the BIEL Law Office advising large shopping malls, said, “While the policy goal of protecting small business owners is understandable, the scope and standards for applying the right to request rent reduction are not concretely defined in the law. Until application standards are established through subordinate legislation or precedents, there will inevitably be some confusion regarding the scope of reduction and the timing of judgment on the resolution of reduction reasons.”

Certified real estate agent Kim Sun-hee said, “Since the revised law came into effect, many tenants have inquired about rent reduction requests. No matter how good a law is, if the procedures are complicated and time-consuming, its effectiveness diminishes. Follow-up measures to concretize the system so that rent reductions can be realized immediately for tenants seem necessary.”

Meanwhile, the Ministry of Justice plans to expand the installation of dispute mediation committees for housing and commercial building leases by adding LH and the Korea Real Estate Board as operating institutions to the six existing committees currently installed and operated at the Seoul Central, Suwon, Daejeon, Daegu, Busan, and Gwangju branches of the Korea Legal Aid Corporation.

From November this year, dispute mediation committees will be additionally installed in six locations including Incheon, Cheongju, and Changwon (LH), and Seoul Northern, Jeonju, and Chuncheon (Korea Real Estate Board). Next year, six more committees will be added in Jeju, Seongnam, and Ulsan (LH), Goyang, Sejong (Daejeon), and Pohang (Korea Real Estate Board).

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