An amendment (the “Amendment”) to the Commercial Building Lease Protection Act (the “CBLPA”) was promulgated into law and took effect as of September 29, 2020 (the “Effective Date”). The Amendment includes new provisions and certain modifications to the existing provisions and has been adopted to protect commercial tenants whose businesses have been disrupted by the reduction of sales and income from the economic crisis caused by COVID-19.
1. Limitations on Penalties for Unpaid Rent (Article 10-9 – New Provision)
According to the CBLPA, if the aggregate amount of outstanding and unpaid rents by a tenant is equal to or greater than three months’ worth of rent, the landlord has the right to (i) reject the tenant’s request for renewal of the lease (Article 10 (1) 1), (ii) restrict the tenant’s right to collect premium from the tenant’s successor even if such successor was arranged by the tenant (Proviso to Article 10-4 (1)), and/or (iii) terminate the lease (Article 10-8) (collectively, the “Landlord’s Rights”).
However, the Amendment has newly introduced Article 10-9, which provides that, for a period of six months from the Effective Date (i.e., March 29, 2021) (the “Grace Period”), the aforementioned Landlord’s Rights will be limited as follows: “Even if a tenant fails to pay rent during the Grace Period, such unpaid rent arising during the Grace Period shall not be deemed to constitute ‘outstanding and unpaid’ rents for the purpose of determining whether or not the three months threshold triggering the Landlord’s Rights is satisfied.” In other words, with the introduction of the Amendment, a landlord cannot exercise the Landlord’s Rights based on such unpaid rents arising during the Grace Period. However, notwithstanding the Amendment, the landlord can still validly exercise its other rights arising due to any unpaid rent during the Grace Period under Korean law such as the right to receive damages for delayed rents and/or the right to deduct overdue rents from the tenant’s security deposit.
Among the Landlord’s Rights, items (i) and (ii) are also applicable to subleases, if any.
2. Amendment on Grounds to Request for Increase or Reduction of Rent (Article 11 – Modification)
The Amendment has newly added class 1 infectious diseases as defined under the Infectious Diseases Control and Prevention Act as one of the causes of “fluctuations in economic conditions” based on which the landlord or the tenant can request for increase or reduction of rent or security deposit. This addition now allows for the landlords or tenants to request for increase or reduction of rent or security deposit based on the change in economic conditions caused by COVID-19, which constitutes a class 1 infectious disease under the Infectious Diseases Control and Prevention Act.
At the same time, the Amendment has tried to mitigate the landlord’s burden resulting from the tenant’s request for reduction of rent or security deposit due to COVID-19 by amending the relevant provision of the CBLPA, which imposes a 5% cap on the increase rate for rents and security deposit (the “5% Increase Cap”), without imposing such cap on the decrease rate. Therefore, if any rent or security deposit is reduced as a result of the tenant’s request for reduction of the rent and security deposit due to COVID-19, the landlord would be able to increase the rent or security deposit so reduced due to COVID-19 back to the same level of rent and security deposit prior to such reduction without being subject to the 5% Increase Cap.
3. Scope of Application of the Amendment
In addition to leases executed or to be executed on or after the Effective Date, any and all leases that were effective and valid as of the Effective Date and continue to be effective and valid are subject to the Amendment.
However, the newly inserted Article 10-9 (i.e., the limitations on penalties for unpaid rent) apply to lease agreements whose converted security deposit amount (i.e., security deposit + monthly rent x 100) exceeds the converted security deposit threshold set forth under the CBLPA (the threshold varies by region; for example, the converted security deposit threshold applicable in Seoul is KRW 900 million). On the other hand, the modifications made to Article 11 (i.e., regulations regarding the grounds to request for increase or reduction of rent or security deposit) do not apply to lease agreements whose converted security deposit amount exceeds the converted security deposit threshold under the CBPLA. That said, even if certain leases are not subject to Article 11 under the Amendment, landlords and tenants can still request for increase or reduction of rent or security deposit when there is a sudden change in economic conditions pursuant to the Korean Civil Code.
Given that leases that have already been in effect as of the Effective Date are also subject to the Amendment, the Amendment will have impact not only on the landlords and tenants who will enter into new lease agreements during the Grace Period but also on the existing leases that were in effect as of the Effective Date. We therefore advise that you clearly assess and analyze the effects of the Amendment on existing and future leases.
