1. Established Practice of Premiums in Korea
In Korea, it is customary that a tenant of a commercial building receives an amount of money from a new tenant in the form of a "premium" at the time of transferring his or her leasehold right to the new tenant. The reason for this practice is that the tenant of a commercial building makes an investment in the building for his or her business, including the installation of facilities in the building, and by engaging in its business thereby attracting customers to the building. Any person who intends to engage in the same type of business as that of an existing tenant in the commercial building will receive the benefits of utilizing the facilities installed by the outgoing tenant in the building and the patronage of the existing customers of the outgoing tenant. In consideration for such benefits, the new tenant who assumes the leasehold right from the existing tenant pays to such outgoing tenant a certain amount of money, the "premium". The outgoing tenant may recover his or her investment in the leased premises by receiving such premium. However, existing applicable laws and case precedents in Korea did not acknowledge the right to receive a premium from the new tenant as being a legal right of the outgoing tenant.
To protect the legal status of tenants with respect to premiums, the Commercial Building Lease Protection Act (the "CBLPA") was amended effective May 13, 2015.
2. Major Provisions on Premiums under the Amended CBLPA
As a method to protect the right of tenants to the premium, a landlord is prohibited from disturbing a tenant's recovery of the premium during the three (3) months prior to the expiration of the lease term under the amended CBLPA. More specifically, the landlord is prohibited from:
- Demanding and receiving a premium from a new tenant introduced by the outgoing tenant;
- Preventing a new tenant introduced by the outgoing tenant from paying the premium to the outgoing tenant;
- Requesting a new tenant introduced by the outgoing tenant to pay a significantly high rent and security deposit; and
- Refusing to enter into a lease agreement with a new tenant introduced by the outgoing tenant without justifiable cause.
In other words, when the lease term is about to expire, a landlord may not select a new tenant by himself or herself and must enter into a new lease agreement with an incoming tenant introduced by the outgoing tenant. The outgoing tenant will be given an opportunity to receive the premium from a new tenant by using his or her position to arrange the execution of a new lease agreement between the new tenant and the landlord.
However, if a lease agreement is terminated due to the existing tenant’s breach of his or her obligations under the lease agreement, the landlord may enter into a new lease agreement with a potential tenant of his or her own choice. In addition, in cases where the landlord uses the leased premises for a non-profit purpose for at least one and a half years after the expiration of the existing lease term, he or she need not enter into a lease agreement with a person recommended by the outgoing tenant.
If the landlord does not enter into a new lease agreement with a person introduced by the outgoing tenant, he or she is obliged to compensate the outgoing tenant for damages incurred. Under the amended CBLPA, the maximum amount of such compensation shall be the lower of (i) the premium that a new tenant agreed to pay to the outgoing tenant, or (ii) the market price of the premium upon expiration of the lease term.
3. Implications of Amendment to the CBLPA regarding Premiums
It is expected that the amended CBLPA will be effective in protecting the rights of tenants to receive a premium. However, the amended CBLPA is open to the criticism that the rights of landlords to enter into lease agreements have been excessively infringed upon. In the future, the landlord will have more difficulty in changing the arrangement and placement of the types of businesses within a commercial building.
We expect that there will be an increase in legal disputes in connection with such provisions. Attention needs to be paid to how the provisions of the amended CBLPA and resultant legal disputes will affect commercial practices regarding lease agreements in commercial buildings.