In a recent lawsuit for Confirmation of Non-Obligation filed by a business entity that operates a duty-free shop (the “Plaintiff”) at the Incheon International Airport Passenger Terminal against the Incheon International Airport Corporation (the “Defendant”), the Seoul High Court (the “High Court”) upheld the lower court’s decision acknowledging the Plaintiff’s claim for rent reduction of 50% from the originally agreed-upon rent pursuant to Article 628 of the Civil Code on the grounds of material financial changes resulting from the COVID-19 pandemic (Seoul High Court (Incheon) Decision 2022Na14538, October 2, 2024). In this case, Kim & Chang successfully represented the Plaintiff.

The Plaintiff has been operating a duty-free shop at the Incheon International Airport Passenger Terminal since 2015. However, after the onset of the COVID-19 pandemic in early 2020, the number of customers that visited the airport plummeted by approximately 90%. As a result, the Plaintiff suffered significant losses in operating the duty-free shop and requested the Defendant to reduce the rent under the lease agreement.

The Defendant argued that the COVID-19 pandemic did not provide sufficient grounds for the reduction of rent prescribed in Article 628 of the Civil Code, considering that the pandemic constituted a risk that the lessee should bear, and that the Plaintiff could have foreseen the outbreak of another infectious disease after experiencing SARS and MERS.

In this regard, the district court (Incheon District Court, hereinafter the “District Court”) explained that in order to recognize the right to claim for an increase or reduction in rent under Article 628 of the Civil Code, which governs the principle of change in circumstances, the following conditions must be fulfilled: (i) there must be a change in the economic circumstances after the parties agreed on the rent amount, and (ii) such a change must render the previous rent amount unreasonable. Specifically, the District Court held that a 50% reduction in rent would be reasonable for the reasons outlined below:
 

• The spread of COVID-19 worldwide led to a steep drop in the number of passengers using the Plaintiff’s duty-free shop (approximately 90%), resulting in a significant decrease in the Plaintiff’s sales with accompanying operating losses.
   

• While epidemics like the SARS and MERS also caused social disruption to some degree, it is difficult to find an epidemic that impacted the world for as long as the COVID-19 pandemic did.
   

• Although the lease agreement between the Plaintiff and the Defendant includes a minimum rent provision, considering the severe and unprecedented impact of the pandemic, the minimum rent provision is too harsh on the Plaintiff.
   

• The High Court also upheld the District Court’s decision.
   

The Defendant claimed that the lease agreement should be terminated because of the Plaintiff’s rent delinquency, arguing that the Plaintiff failed to pay the full agreed rent by claiming its right to rent reduction. At the appellate trial, the Defendant filed a counterclaim against the Plaintiff and sought damages worth approximately KRW 53 billion. The District Court denied the effect of the Defendant’s termination notice by finding that “if the lessee exercises the right to claim rent reduction, the amount of rent to be paid by the lessee has not been determined. Thus, it is unreasonable to mechanically acknowledge rent delinquency by simply comparing the rent and the overdue amount determined by the court after the matter of fact.” The High Court also upheld the District Court’s decision and dismissed the Defendant’s counterclaims entirely.

The High Court’s decision is notable because it focused on the prolonged global impact of the COVID-19 pandemic on the duty-free and tourism industries since late 2019 and protected the lessee from shouldering the full financial burden of this unprecedented pandemic. The decision affirmed that the COVID-19 pandemic constitutes a change in economic circumstances that had not been expected by both parties and that it is unreasonable for the lessee to bear all losses arising therefrom, when examined from the perspective of justice and equity.

Another significant takeaway is that even if the lessee fails to pay the full amount of the agreed-upon rent, leading to partial rent delinquency, in the course of the dispute, the lessor may not terminate the lease agreement grounded solely on the lessee’s rent delinquency. In addition, this decision, which decided to reduce the rent by 50%, was more proactive compared to previous decisions concerning claims for rent reduction, where only reduction ratios of 20-30% were recognized.