Supreme Court: Commercial Landlords Without Fault in Termination Have No Obligation to Return Key Money

Second Instance Judgment Recognizing Key Money Refund Overturned

Supreme Court, Seocho-dong, Seoul.

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that if a commercial tenant unilaterally cancels a contract due to their own circumstances, they cannot recover the key money paid to the landlord, even if the contract was terminated before the store even opened.

The Supreme Court's Second Division (Presiding Justice Min Yoo-sook) overturned the lower court's ruling that had favored tenant A in a lawsuit demanding the return of 20 million KRW in key money from landlord B, and remanded the case to the Seoul Northern District Court on the 29th.

The court first cited previous Supreme Court rulings on key money, stating, "The payment of key money associated with the lease of commercial buildings does not constitute part of the lease contract itself. Key money is considered compensation for the transfer or use over a certain period of intangible property values such as business facilities, equipment, clientele, credit, business know-how, or the commercial advantages of the store location. As long as the transfer or use of these tangible or intangible property values is validly conducted, the landlord is not obligated to return the key money."

It continued, "Therefore, only in special circumstances where the landlord re-acquires the property value at the end of the lease, or despite agreeing to maintain the lease for a certain period after receiving the key money to allow the tenant to utilize that value, the lease is prematurely terminated due to the landlord's circumstances, preventing the tenant from using the property value during the agreed period, does the landlord bear the obligation to return all or part of the key money received."

Regarding this case, the court stated, "The plaintiff (tenant A) voluntarily refused to enter the commercial space and, notably, despite having been guaranteed the right to sublease to a third party if unable to enter directly, did not exercise this right. There is no claim or evidence that the defendant (landlord B) was unable to transfer or allow the use of the commercial property's value due to their circumstances. Therefore, the defendant is, in principle, not obligated to return the key money to the plaintiff," explaining the reason for remanding the case.

It added, "Contrarily, the lower court ruled that the plaintiff could not exercise the right to rescind the contract by forfeiting the deposit, yet held that the lease contract was implicitly terminated, and thus the key money contract was also terminated, obligating the defendant to return the key money. This judgment contradicts the Supreme Court's prior rulings and constitutes an error under Article 3, Clause 2 of the Small Claims Procedure Act, which prohibits judgments contrary to Supreme Court precedents," the court said.

Article 3, Clause 2 of the Small Claims Procedure Act (Appeals and Reconsiderations) allows appeals to the Supreme Court against second-instance judgments by district court panels in small claims cases when the judgment contradicts Supreme Court precedents.

In April 2016, A entered into a lease contract to rent B's commercial space in a newly built apartment complex in Dasan-dong, Namyangju-si, Gyeonggi-do, intending to use it as a real estate brokerage office.

A signed a lease contract with a deposit of 35 million KRW and a monthly rent of 1.7 million KRW, paying B 3.5 million KRW as a contract deposit and 20 million KRW as key money. The remaining 31.5 million KRW was to be paid within the designated move-in period, which was later officially set from December 29, 2017, to March 1, 2018, after A filed the key money return lawsuit.

The contract included special provisions such as: ▲ the lease contract must be succeeded by any new landlord under the same conditions even if ownership of the commercial property changes ▲ the contract cannot be terminated due to reasons such as double damages ▲ if the tenant cannot move in due to their own circumstances, they may sublease to a third party with the landlord's approval.

However, on December 11, 2017, A sent B a certified letter stating that they had rescinded the lease contract by forfeiting the deposit and demanded the return of the key money. Despite the approaching designated move-in period, A did not move in.

A argued that the clause stating the contract cannot be terminated due to double damages only restricts the landlord B's right to rescind, and that as the tenant, A could rescind the contract by forfeiting the deposit.

After receiving the certified letter, B sent a document refusing to return the key money, arguing that the special provision excluding the right to rescind the contract by forfeiting the deposit or paying double damages applied, and thus A could not rescind the lease contract, prompting A to file a lawsuit.

During the first trial, on May 16, 2018, B also expressed the intention to rescind the lease contract due to A's non-payment of the remaining deposit and failure to move in.

Both A and B agreed to rescind the lease contract, and since A had already forfeited the 3.5 million KRW deposit, the trial focused on whether A could recover the 20 million KRW key money already paid.

Typically, key money is paid as compensation for intangible property values such as store facilities or commercial advantages of the location. A claimed that since the contract was terminated before opening, without enjoying any commercial benefits, the key money should naturally be returned.

The first and second trial courts ruled in favor of A.

The first trial court rejected A's claim that the clause excluding termination due to double damages only restricted the landlord's right to rescind. However, since A had expressed the intention to rescind during the trial, the court found mutual agreement to rescind the contract.

Regarding key money, the court stated, "Key money is compensation for tangible assets such as store facilities and equipment, as well as intangible property values like commercial advantages of the store location or the right to use the premises for a certain period. Tenants usually pay key money to landlords to secure a long-term lease period to recover their investment, especially for prime locations. The issue of return arises only if there is an assumption of a normal recovery period or business operation."

It added, "Therefore, in cases like this where the store did not even open, the contract is considered void, and the obligation to restore the original state arises," ordering B to pay A 20 million KRW in key money plus interest.

The second trial court also found that A's right to rescind was invalid due to the contract clause excluding the right to rescind. However, since B also expressed the intention to rescind, the court found the contract was implicitly rescinded by mutual agreement.

Unlike the first trial court, the second trial court reasoned that the lease contract and the key money contract are inseparable.

The second trial court cited a Supreme Court ruling stating, "Although the key money contract accompanying the leasehold transfer contract is a separate contract, considering the circumstances and contents of both contracts, if the key money contract is economically and factually inseparable from the leasehold transfer contract, and the parties would not have intended one without the other, the contracts should be regarded as indivisible."

It concluded, "Since the key money contract in this case is economically and factually inseparable from the lease contract, it is reasonable to consider the key money contract rescinded along with the lease contract."

And it ruled, "The first trial court's decision aligns with this conclusion and is therefore upheld; the defendant's appeal is dismissed."

Although the reasoning differed, the second trial court's conclusion that B must return the key money and interest to A was consistent with the first trial court, meaning B's appeal was rejected.

However, the Supreme Court overturned this conclusion by the second trial court.

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