Supreme Court: "Commercial Tenants Cannot Be Evicted for Rent Arrears During COVID-19 Special Period"

Legal Special Provisions Interpreted in Favor of Tenants
During Repayment Allocation, Monthly Rent for the Special Period Cannot Be Allocated First

Supreme Court, Seocho-dong, Seoul.

The Supreme Court has ruled that the special provisions under the Commercial Building Lease Protection Act, established to protect merchants suffering difficulties due to COVID-19, must always be interpreted in favor of the tenant when determining the order of repayment allocation.

When a tenant pays the landlord an amount insufficient to cover all overdue rent, it is more advantageous for the tenant to allocate repayment first to the overdue rent during the special period exempted from contract termination reasons. Therefore, repayment should be prioritized for the overdue rent from the remaining period.

According to the legal community on the 9th, the Supreme Court's Second Division (Presiding Justice Cheon Dae-yeop) dismissed the landlord B's appeal in a lawsuit filed by tenant A against B and upheld the lower court's ruling in favor of the plaintiff.

In July 2018, A entered into a lease contract with B for part of a building located in Seocho-gu, Seoul, with a deposit of 15.75 million KRW, monthly rent of 2.625 million KRW, and maintenance fees of 1 million KRW.

However, when A fell behind on rent payments, B claimed contract termination and filed a lawsuit for building eviction in October 2018. During the trial, a settlement was reached with the condition that "if the total amount of future overdue rent and maintenance fees reaches three months' worth, the lease contract will be automatically terminated."

In July 2020, upon renewing the lease contract, the two parties changed the terms to a deposit of 17 million KRW, monthly rent of 2.8 million KRW, and maintenance fees of 1 million KRW.

However, A again fell behind on rent and other payments totaling 36.71 million KRW by September 29, 2021. B claimed that since the overdue rent reached three months' worth, the lease contract was automatically terminated according to the settlement terms, and proceeded with eviction enforcement based on the settlement record, which has the same enforceability as a final judgment.

In response, A filed an objection lawsuit, arguing that under the special provisions of the Commercial Building Lease Protection Act, overdue rent during the six-month special period from the law's enforcement date cannot be grounds for contract termination, so the overdue rent has not yet reached three months' worth.

Article 10-9 of the Commercial Building Lease Protection Act, newly established and enforced from September 29, 2020, to protect commercial tenants who suffered business losses due to COVID-19, stipulates that overdue rent during the six months from the enforcement date shall not be counted in refusals of contract renewal, contract termination, or key money recovery.

The lower courts accepted A's argument and ruled against B's forced execution based on the settlement record.

The first trial court stated, "This law reflects the situation where domestic consumer spending has contracted due to the impact of COVID-19, and commercial tenants' sales and income have sharply declined, making rent a significant burden on their business activities. It provides a temporary exception that rent arrears during the six months after the law's enforcement are not grounds for contract termination, thereby restricting landlords' contract termination during the economic crisis." It further stated, "Considering the legislative intent, the overdue rent during the six-month period should not be grounds for contract termination or eviction claims."

In particular, the dispute centered on which debt repayment should be allocated first when the repayment amount is insufficient to cover the total debt.

Under the Civil Act, if there is an agreed order of repayment allocation between creditor and debtor, that order is followed. If there is no agreement, the debtor's designated order is followed. If the debtor does not designate an order, the creditor may designate the order, but the debtor can immediately object.

If neither party designates the order, Article 477 of the Civil Act prescribes the statutory order of repayment allocation: debts due first are allocated first; if all debts are due or none are due, debts that benefit the debtor most are allocated first.

All these provisions are designed to protect the debtor.

A had overdue rent of 9.17 million KRW until September 28, 2020, the day before the special provisions took effect, and incurred 25.52 million KRW in overdue rent during the six-month special period after the law's enforcement. However, A repaid 10.14 million KRW during this period.

The key issue was which debt the 10.14 million KRW repayment, insufficient to cover the total overdue rent, should be allocated to first.

If the repayment is first allocated to the 9.17 million KRW overdue rent before the special period, 970,000 KRW remains. If this remainder is then allocated to the overdue rent during the special period, the overdue rent after the special period exceeds three months' worth, meeting the condition for contract termination. Conversely, if repayment allocation to the overdue rent during the special period is postponed and repayment is first allocated to the overdue rent after the special period, the overdue amount is 12.15 million KRW, 390,000 KRW short of the 12.54 million KRW three-month overdue rent required for contract termination.

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

In the appeal, B argued that including delayed damages in the overdue rent would exceed three months' worth, but the court rejected this interpretation, stating it violated the mandatory provisions of Article 10-8 of the Commercial Building Lease Protection Act.

The Supreme Court also ruled, "There is no error in the lower courts' application of the law regarding Article 10-9 of the Commercial Building Lease Protection Act and statutory repayment allocation, nor omission in applying Article 10-9, which would affect the judgment," affirming the lower courts' decisions.

The court stated, "According to Article 15 of the Commercial Building Lease Protection Act, any agreement unfavorable to the tenant that violates the Act is invalid. Therefore, even if the landlord and tenant made an agreement on repayment allocation different from the Civil Act regarding overdue rent, it cannot be recognized if unfavorable to the tenant. In such cases, the Civil Act's repayment allocation provisions apply only within the scope not violating Article 10-9 of the Commercial Building Lease Protection Act."

A Supreme Court official said, "This ruling clearly states the legislative intent and purpose of the special provisions in Article 10-9 of the Commercial Building Lease Protection Act and is the first to confirm that repayment allocation for calculating total overdue rent must follow the tenant protection principle."

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