Constitutional Court Rules "Excluding Protection of Key Money for Commercial Tenants Who Are 3 Months Behind on Rent" Constitutional

Unanimous Constitutional Ruling on Provisions Related to the Commercial Lease Protection Act

The Constitutional Court has ruled that the provision in the Commercial Lease Protection Act excluding commercial tenants who have overdue rent for three months from the protection of key money rights does not violate the Constitution.

Forcing a landlord to enter into a lease contract with a person introduced by a tenant whose trust relationship with the landlord has already been broken is harsh. Considering that there are provisions in the Commercial Lease Protection Act to protect tenants, such as the right to request a rent reduction, the legislator's choice cannot be seen as excessive even from the perspective of balancing the interests between landlords and tenants, according to the ruling.

Constitutional Court, Jongno-gu, Seoul.

According to the legal community on the 5th, the Constitutional Court unanimously upheld the constitutionality of Article 10-4, Paragraph 1 of the Commercial Lease Protection Act in a constitutional complaint case.

Mr. A signed a commercial lease contract with Mr. B in April 2017 to lease a tiled-roof restaurant building and surrounding land in Gyeongju City for two years from May 1, 2017, to April 30, 2019, with a deposit of 50 million won and a monthly rent of 3 million won.

The contract also included a provision that Mr. B would pay 30 million won as facility costs for equipment used in the cafe operated by Mr. B in the building and bedding for the lodging facilities.

After paying the deposit and facility costs and operating the restaurant, Mr. A agreed with Mr. B in January 2018 to reduce the rent to 2.6 million won, and the lease contract was tacitly renewed until April 30, 2021.

However, starting from February 2019, Mr. A began to delay part of the rent payments and had not paid a total of 9.64 million won in rent by the end of March 2020.

As the lease contract was nearing its end, Mr. A introduced a new tenant to Mr. B, but Mr. B did not enter into a lease contract with the person introduced by Mr. A.

Mr. A then filed a lawsuit in March 2021 claiming damages, arguing that Mr. B obstructed the tenant's opportunity to recover key money under the Commercial Lease Protection Act. In court, Mr. B argued that Mr. A could not claim the right to recover key money because he had overdue rent for three or more terms under the Act.

During the trial, Mr. A requested the court to refer the constitutionality of the proviso of Article 10-4, Paragraph 1, and Article 10, Paragraph 1, Subparagraph 1 of the Commercial Lease Protection Act, which excludes tenants who have overdue rent for three or more terms from the protection of key money recovery rights, but the request was dismissed. Subsequently, Mr. A filed a constitutional complaint with the Constitutional Court.

Article 10-4, Paragraph 1 of the Commercial Lease Protection Act, which guarantees tenants the opportunity to recover key money, states: "The landlord shall not obstruct the tenant from receiving key money from a new tenant introduced by the tenant under a key money contract by engaging in any of the following acts from six months before the end of the lease period until the lease termination. However, this shall not apply if any of the reasons listed in Article 10, Paragraph 1 apply."

In other words, the Act prohibits landlords from obstructing tenants' recovery of deposits while setting exceptions in Article 10, Paragraph 1, which enumerates cases where landlords can refuse tenants' requests for contract renewal.

Specifically, these cases include: ▲ the tenant has overdue rent amounting to three terms (Subparagraph 1), ▲ the tenant leased by falsehood or other fraudulent means (Subparagraph 2), ▲ the landlord and tenant mutually agree with the landlord providing substantial compensation to the tenant (Subparagraph 3), ▲ the tenant subleased all or part of the leased building without the landlord's consent (Subparagraph 4), ▲ the tenant intentionally or through gross negligence damages all or part of the leased building (Subparagraph 5), and ▲ other serious reasons making it difficult to continue the lease due to significant breach of tenant obligations (Subparagraph 8).

The Constitutional Court limited the scope of review to the part of Article 10-4, Paragraph 1 of the Commercial Lease Protection Act directly applicable to this case, namely Article 10, Paragraph 1, Subparagraph 1, concerning overdue rent for three terms.

Unlike cases where a constitutional complaint is filed under Article 68, Paragraph 1 of the Constitutional Court Act on the grounds that a law directly infringes fundamental rights, constitutional complaints under Article 68, Paragraph 2, which are recognized when a request for a constitutional review is dismissed by a court, require the "premise of the trial" as a condition. Therefore, the subject of review is limited to cases where the law in question is directly applied in ongoing litigation and where the constitutionality of the law affects the orders or main reasons of the ongoing trial.

Mr. A argued in his constitutional complaint that "deciding whether to protect the opportunity to recover key money solely based on overdue rent without considering the existence of the deposit or whether the overdue rent is paid later is very harsh on tenants."

He also emphasized that "the standard for overdue rent could be relaxed from three terms to six or nine terms, or an objective fixed period rather than the rent payment period agreed upon by the parties could be set as the criterion. Considering that tenants are unfairly deprived of key money recovery opportunities, resulting in the landlord unjustly acquiring the equivalent benefit of the key money, this violates the principle of proportionality and infringes property rights."

However, the Constitutional Court ruled, "Forcing landlords to enter into contracts with new tenants introduced by tenants who have overdue rent amounting to three terms even after the lease has ended is unilaterally harsh," and "the provision under review does not infringe the tenant's property rights."

The Court explained, "The provision under review excludes tenants from the protection of key money recovery opportunities when they have breached the trust relationship with the landlord by failing to fulfill their most basic and primary obligation of paying rent, thereby balancing the interests between the two parties. If landlords were required to enter into lease contracts with new tenants introduced by tenants who have overdue rent amounting to three terms, it would be practically equivalent to renewing contracts with tenants who have lost trust due to non-payment of rent, which is unreasonable from the landlord's perspective."

Mr. A also argued that it was excessive to uniformly deprive tenants of key money recovery opportunities even when the tenant is not at fault.

However, the Constitutional Court stated, "While it may be somewhat harsh for tenants not to have the opportunity to recover key money due to the provision under review when they have overdue rent without fault due to sudden economic changes, fundamentally, economic fluctuations are risks that tenants must bear primarily themselves."

Furthermore, "The Commercial Lease Protection Act allows tenants to request a rent reduction when the existing rent or deposit becomes unreasonable due to economic changes, thereby providing tenants with an opportunity not to be excluded from key money recovery protection due to overdue rent in the first place," the Court added.

Finally, the Court noted, "Considering that the provision under review applies only when the tenant has overdue rent amounting to three terms, not merely three instances of overdue rent, it cannot be said to be unilaterally harsh on tenants," and did not recognize any infringement of property rights.

The key money recovery protection provision for tenants in question (Article 10-4) was newly established along with the definition provisions of key money and key money contracts (Article 10-3), which had been recognized by precedent, during the May 2015 amendment of the Commercial Lease Protection Act.

Earlier this year, the Supreme Court ruled on the purpose of the provision, stating, "The purpose of Article 10-4 of the Commercial Lease Protection Act is not to protect the key money paid by the tenant itself but to institutionally guarantee the tenant's opportunity to recover the tangible and intangible economic value created through business operations in the leased commercial building from a new tenant as of the lease termination."

An official from the Constitutional Court said, "This decision is the first time the Constitutional Court has ruled on the constitutionality of the provision in the Commercial Lease Protection Act that excludes tenants who have overdue rent amounting to three terms from the protection of key money recovery opportunities."

He added, "Considering the purpose of the key money recovery protection system for commercial tenants and the necessity of balancing interests between landlords and tenants, the Court found reasonable grounds for the provision under review and that it does not exceed the limits of legislative discretion, resulting in a unanimous decision to uphold its constitutionality."

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