The Supreme Court recently issued a new judgment on the “legal principle regarding the violation of good faith of an original owner’s claim of title in respect of a strata building which has not qualified for strata ownership.”  The case dealt with a third party that won a bid for and purchased a strata building (commercial building), which had not met the requirements necessary to qualify as a strata building under the Act on Ownership and Management of Condominium Buildings (“AOMCB”).

Background:

The plaintiff (developer) constructed a commercial building and created a building ledger for it as a strata building (“Strata Commercial Building”).  Title preservation registration (“Strata Registration”) was also completed.  A kun-mortgage was created and registration of trust was issued in reliance of the Strata Registration.  Thereafter, the Strata Commercial Building was sold to a third party by foreclosure on the kun-mortgage and in a public auction process under the trust deed.  The defendant ultimately purchased the Strata Commercial Building, completed the title transfer registration and commenced its business. 

However, the plaintiff demanded the deregistration and delivery of the Strata Commercial Building, claiming that since the Strata Commercial Building did not satisfy the requirements to qualify as a strata building under the AOMCB at the time of the Strata Registration, the Strata Registration was not in effect and therefore, both the kun-mortgage and registration of trust were invalid. 

In the past, the Supreme Court had ruled that in the event the Strata Registration did not satisfy the requirements necessary to qualify for strata ownership under the AOMCB, it was not effective, and thus, the kun-mortgage was invalid.  The winner was required to deregister and deliver the building to the original owner. 

The Supreme Court dismissed the purchaser’s arguments and accepted the plaintiff’s claim.^*

Our Representation:

Kim & Chang represented the defendant from the final appeal, making various arguments identifying the unlawfulness of the lower court’s decision, including its violation of the principle of good faith.  The Supreme Court accepted our grounds for final appeal regarding the violation of the principle of good faith, and ruled that:

• The Strata Registration for the Strata Commercial Building, which did not satisfy the requirements for strata ownership, does not have any effect.  Thus, in principle, the purchaser cannot acquire the title to the Strata Commercial Building.
• Other material issues on which the Court rested its decision include: (i) plaintiff cannot claim the strata ownership was invalid when in fact, plaintiff had made the Strata Registration based on the Strata Ownership and even created a kun-mortgage; (ii) the requirements for strata ownership will be potentially satisfied by the defendant; and (iii) an extended period of time has lapsed after the plaintiff’s Strata Registration.  Given this, it would be in violation of the principle of good faith for the plaintiff to argue that the Strata Registration was invalid, and claim deregistration and delivery against the defendant. 

Significance:

Although there is no doubt whether registration is invalid with respect to a building for which a building ledger as a strata ownership was created and the Strata Registration was completed, previous Supreme Court decisions showed that for the Strata Commercial Building which had not satisfied the requirements for strata ownership, not only was its registration invalid, but also other registrations based thereon were also invalid.  As such, the claim regarding the principle of good faith was not accepted.  The concern was that legal security based on such registrations was being impaired. 

In summary, a person who purchases a unit of Strata Commercial Building from a developer will not be able to acquire the title, and the contractors who executed their claim for the construction price through its beneficial interests (by way of in-kind payment, kun-mortgage, trust registration, etc.) for the construction price, and the financial institutions which executed loan claims in the same manner had a potential of returning the paid amounts without recovering such claims. 

According to the recently issued Supreme Court decision, however, as the plaintiff’s claim in this case may be deemed to be in violation of the principle of good faith, we believe that it will be a basis to claim that the previous creation of the kun-mortgage and trust registration, and payment based thereon are valid.