On December 10, 2024, the Korea Financial Investment Association issued the proposed draft of the “Best Practice Standards for Completion-Guaranteed Land Trusts” (the “Best Practice Standards”), following the “Proposed Plan for Improvement of Real Estate Project Financing (“PF”) Policy (Link)” that was jointly announced by the competent authorities, including the Ministry of Land, Infrastructure and Transport, in November 2024. The Best Practice Standards will take effect on January 2, 2025 and will become applicable to all trust agreements to be executed thereafter.

The newly established Best Practice Standards set forth detailed operating procedures and risk allocation criteria for completion guarantees, with an aim to address the numerous legal disputes that have recently emerged in connection with trust companies’ completion guarantees.

Below, we will introduce the current trends in trust companies’ completion guarantees and the key details of the Best Practice Standards.
 

• Securing the essential project costs to ensure completion of construction: When a trust company enters into a land trust agreement with a completion guarantee, for the purpose of ensuring completion of construction, the trust company must verify during its internal feasibility review process whether the essential project costs have been secured through the trustor’s equity, loans, or other means. The essential project costs refer to the project costs required to complete the construction without any unit being pre-sold.
   

• Limiting the scope of damages: The scope of liability for damages for a trust company’s failure to fulfill its completion obligation will be limited to actual damages directly incurred by the lending financial institution due to delays in recovering the principal and interests as a result of such failure. The Best Practice Standards prohibit trust companies from (i) agreeing to repay the principal and interests upon expiration of the completion guarantee period, and (ii) compensating lending financial institutions for their opportunity costs attributable to delayed recovery or damages incurred under agreements other than the relevant trust agreement.
   

• Establishing a reasonable completion guarantee period: (i) A trust company’s completion guarantee period must be calculated by adding to the construction company’s completion guarantee a period longer than (a) six months or (b) 20% of the construction company’s planned construction. (ii) A trust company shall be able to adjust its completion guarantee period through mutual agreement with the lending financial institution if the construction is delayed due to reasons not attributable to the trust company or the construction company. (iii) In the event of an extension of the construction company’s completion guarantee period, the trust company’s completion guarantee period must also be extended accordingly.
   

• Authority to replace the construction company: A trust agreement must include provisions to facilitate the trust company’s smooth replacement of the construction company in order to fulfill the completion obligation, such as provisions regarding obtaining of a waiver of construction rights and liens from the construction company.
   

• Management of construction costs payment: A trust company must only disburse construction costs after verifying completion and ensure that construction costs are used solely for construction-related expenses. Any insurance payouts and performance bond proceeds related to construction must be first used to reimburse the trust company for the trust company’s funds that have been invested in the construction costs.
   

• Adjustment of the sales price: A trust agreement must stipulate that the lending financial institution and the trust company may, through mutual agreement, decide to adjust the sales price, if necessary during the course of the trust company’s performance of its completion obligation.
   

• Feasibility assessment procedures: A trust company shall establish and operate an internal feasibility review criteria specifically for completion-guaranteed land trusts, separately from those for typical land trusts.
   

There have been predictions that, while the implementation of the Best Practice Standards will lessen trust companies’ burden related to completion guarantees, it will heighten the loan recovery risks from the lenders’ perspective, thereby resulting in a significant decline in the use of completion guarantees. On the other hand, some anticipate that the demand for completion guarantees will be maintained, at least to a certain degree, because completion guarantees are crucial in projects involving small and medium-sized construction companies, provided that there will be increases in loan interest rates and fees.

Furthermore, although the Best Practice Standards are not retroactively applicable to existing trust agreements, they may impact the interpretation of such agreements potentially affecting ongoing disputes related to trust companies’ completion guarantees.

[Korean Version]