On October 16, 2018, the amendment to the Commercial Building Lease Protection Act (the “Commercial Lease Protection Act”) became effective.  Among others, the amendment includes the extension of the period (up to a total of ten years, including the initial lease term) during which a commercial building tenant can exercise its right to demand lease renewal.

In light of the increasing number of disputes arising between tenants and landlords, the newly enforced amendment seeks to ensure stable operation of the tenants’ businesses. 

Key Aspects:

1. Exercise period for tenants’ right to demand renewal of lease term extended

Prior to the amendment, the Commercial Lease Protection Act limited the exercise period for tenants’ right to demand lease renewal to five years.  Under the amendment, the exercise period has been increased to ten years (including the initial lease term).  

However, the new lease protection period will only apply to newly executed or renewed lease agreements, and the previous protection period of five years will continue to apply to the lease agreements that were already in existence prior to the effective date of the amendment (i.e., October 16, 2018).

2. Exercise period of tenants’ right to demand compensation for business goodwill (kwon-li-geum) extended

Prior to the amendment, a tenant could seek compensation for any premium or goodwill (known as “kwon-li-geum” in Korean) created on its leased premises against subsequent tenants of the leased premises, and the tenant had the choice to exercise such a right three months before the end of the lease term.  If, during the three-month exercisable period, the tenant finds and introduces a prospective tenant to the landlord, but the landlord rejects such prospective tenant (thereby interfering with the tenant’s actions to collect goodwill against subsequent tenants), the landlord was obligated to compensate the tenant the reasonable goodwill assessed on the lease premises. 

Under the amendment, the tenant’s exercisable period for collection of goodwill has been increased to six months prior to the end of the lease term. 

This amendment applies to existing leases regardless of their execution dates.

Significance:

As the tenants’ right to demand lease renewal has been significantly strengthened, we expect an active discussion in the real estate industry about what would constitute justifiable grounds for landlords’ refusal of lease renewal requests from a tenant under the newly amended Commercial Lease Protection Act.