Recently, in a lawsuit for Confirmation of the Absence of Obligation filed by a business entity that operates a duty-free shop at the Incheon International Airport Passenger Terminal (the “Plaintiff”) against the Incheon International Airport Corporation (the “Defendant”), the Incheon District Court (the “Court”) affirmed the Plaintiff’s claim for rent reduction pursuant to Article 628 of the Civil Code, finding it reasonable to reduce the originally agreed-upon rent by 50%.  The Court also confirmed that the Plaintiff does not have any obligation to pay for rent or other damages other than the reduced rent amount (Incheon District Court Decision 2022Gahap65769, July 22, 2022).  In this case, Kim & Chang’s Litigation Practice successfully represented the Plaintiff.

Regarding this case, 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 outbreak did not provide sufficient grounds for the reduction of rent prescribed in Article 628 of the Civil Code as the pandemic constitutes 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 Court explained that, for the right to claim an increase or reduction in rent under Article 628 of the Civil Code, which legislates the principle of circumstantial change, to be recognized, 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 Court found that in this case, a 50% reduction in rent would be reasonable for the following reasons:

• 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 a social crisis to some degree, it is difficult to find an infectious disease that impacted the world for as long as COVID-19.

• Since the lease agreement for the duty-free shop between the Plaintiff and the Defendant provides for a minimum guarantee amount for rent, the Plaintiff should theoretically continue to pay a rent amount equivalent to the minimum guarantee amount to the Defendant despite the decrease in its sales.  However, considering the severe impact of the COVID-19 pandemic, this is too harsh for the Plaintiff.
   

The Defendant, on the other hand, claimed that the lease agreement should be terminated as a result of rent delinquency, asserting that the Plaintiff had failed to pay the agreed amount of rent in full by exercising the right to claim rent reduction.  The 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 is not fixed, and thus, it is unreasonable to mechanically decide whether to acknowledge the reason for termination by simply comparing the overdue rent with the rent decided by the Court later on.”

The Court’s decision holds significance in that it focused on the global impact of COVID-19 on the duty-free and tourism industries since 2020 and prevented the lessee from bearing the harsh consequences of this unprecedented infectious disease.  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 from the perspective of justice and equity.

Another important aspect of this decision is that even if the lessee fails to pay the full amount of the agreed rent in the course of the dispute, which would constitute partial rent delinquency, the lessor may not terminate the lease agreement based solely on the lessee’s rent delinquency.  In addition, by deciding to reduce the rent by 50%, the Court made a more forward-looking judgment compared to previous decisions concerning claims for rent reduction, where only reduction ratios of 20-30% were recognized.