Supreme Court: Owners Increased by 'Jibun Jjokkaegi' Must Be Excluded from Redevelopment Association Formation Vote

The Supreme Court has ruled that in cases where so-called 'share splitting'?transferring ownership of extremely small shares through formal gifts or sales?is carried out to increase the number of landowners agreeing to establish a redevelopment association, those landowners who acquired ownership through share splitting must be excluded from the total number of landowners or consenting parties when calculating the quorum for association establishment.

This is because, apart from the consent requirement based on land area, the Urban Renewal Act requires meeting conditions based on the number of consenting land or building owners, and specifies the method of calculation in detail. The court held that such share splitting constitutes an illegal act to evade or exclude the application of these provisions, and thus its effect cannot be recognized.

Supreme Court, Seocho-dong, Seoul.

According to the legal community on the 11th, the Supreme Court's Second Division (Presiding Justice Cheon Dae-yeop) upheld the lower court's ruling in favor of plaintiffs A and others in a lawsuit against the Mayor of Seongbuk-gu, Seoul, seeking cancellation of the approval for the establishment of a housing redevelopment maintenance project association.

The court stated, "Although some parts of the lower court's judgment were somewhat inappropriate, there was no error affecting the judgment such as misapplying the law regarding the degree of illegality of the association establishment approval, the calculation method for the quorum and number of consenting landowners for association establishment, or failing to conduct necessary hearings on the acquisition process of small shares, thereby violating the rules of logic and experience and exceeding the limits of free evaluation of evidence," and dismissed the appeal.

A and others are residents of a planned housing redevelopment project area in Seongbuk-gu, Seoul.

B Construction Company, which owns land and buildings in this area, sold or gifted shares of land or buildings to 209 people closely related to the company, including its employees, from 2008 to 2018. Among them, 194 people's land shares ranged from 0.0005% to 0.002%, and building shares ranged from 0.003% to 0.04%.

Subsequently, in May 2019, Seongbuk-gu Office approved the establishment of the redevelopment association, stating that 391 out of 512 land or building owners consented, meeting the Urban Renewal Act's quorum requirement (at least three-fourths). A significant number of these consenting parties were those who received so-called 'fragmented shares' from B Company through share splitting.

A and others filed a lawsuit requesting cancellation of the redevelopment association establishment approval, arguing that B Company artificially increased the number of owners to obtain consent for the association establishment.

The first trial court ruled against the plaintiffs, stating there was no evidence to recognize that B Company engaged in share splitting. However, the second trial court accepted the plaintiffs' claims, stating, "B Company nominally entrusted or colluded to sell or gift small shares of land or buildings to employees, acquaintances, etc., thereby artificially increasing the number of owners."

The Supreme Court also agreed with the second trial court's judgment.

The court first examined the requirements for association establishment approval under the pre-amendment (former) Urban Renewal Act and its enforcement decree applied in this case.

The court explained, "Article 35, Paragraph 2 of the former Urban Renewal Act stipulates that 'to establish an association, the redevelopment project promotion committee must obtain consent from at least three-fourths of the landowners and owners of land area of at least half, and submit the articles of association for approval by the mayor or county governor.' Also, Article 33, Paragraph 1, Item 1 of the enforcement decree of the Urban Renewal Act provides that for redevelopment projects, when multiple people share one parcel of land or one building, one representative among them is counted as one landowner, and when one person owns multiple parcels or buildings, that person is counted as one landowner regardless of the number of parcels or buildings." The term 'landowners' under the Urban Renewal Act includes owners or surface rights holders of land or buildings located in the redevelopment area.

The court stated, "Thus, the Urban Renewal Act requires meeting consent conditions based on the number of land or building owners separately from those based on land area, and specifically regulates the method of calculating the number of consenting landowners to prevent distortion of the overall intention of landowners related to association establishment."

Furthermore, the court said, "Considering the content, purpose, and system of the Urban Renewal Act, artificially increasing the number of landowners by transferring ownership of small shares to closely related persons through formal gifts or sales solely to meet the quorum for association establishment or to gain a leading position in the redevelopment project process, and having them express consent for association establishment, constitutes an illegal act to evade or exclude the application of the strict regulations on quorum and number of consenting landowners under the Urban Renewal Act. Therefore, such artificially increased landowners must be excluded from the total number of landowners and consenting parties when calculating the quorum."

The court also presented criteria to determine whether share splitting constitutes an illegal act subject to nullification.

The court explained, "To determine whether an act constitutes an illegal act to evade or exclude the application of the Urban Renewal Act, factors such as the proportion and area of the small shares in the land or buildings, the actual price paid by the acquirers of the small shares, the acquisition process, purpose, and timing, whether there is a reasonable cause for acquiring the small shares, the impact of including the acquirers in the count of landowners on the total number of landowners, the degree to which the acquirers expressed consent for association establishment and its effect on the quorum, and the relationship between the acquirers and major shareholders must be comprehensively considered and specifically judged on a case-by-case basis."

The court concluded that there was no problem with the second trial court's judgment that B Company's actions constituted such share splitting and ordered cancellation of the establishment approval.

A Supreme Court official stated, "Although transfer of some shares of land or buildings after designation and announcement of a maintenance area is not legally impossible, this ruling is significant in that it is the first to clarify that in exceptional cases where the number of landowners is artificially increased through 'share splitting' to obtain consent for redevelopment association establishment, such acts constitute illegal evasion, and the artificially increased landowners must be excluded from the total number of landowners and consenting parties when calculating the quorum."

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