The amended Commercial Building Lease Protection Act (the "Amended Act") took effect as of January 4, 2022, which allows the lessee to terminate the lease agreement early in the event that the lessee closes down its business due to reasons of material economic hardship caused by social distancing as well as other pandemic restrictions. 

Background

Despite the growing number of commercial lessees shutting down their businesses as a result of the prolonged COVID-19 restrictions, no adequate measures have been put in place to address the burden borne by such lessees who are compelled to continue paying rent under existing lease agreements.  For the purpose of mitigating this burden, the Amended Act newly introduces an exception to the principle of contractual compliance and newly grants lessee(s) the right to terminate a commercial lease early in case of material changes in economic circumstances. 

The Amended Act 

The key terms and conditions of the lessee’s right to terminate the lease agreement under Article 11-2 of the Amended Act are as follows:

1.   Requirements for Exercise of Right of Early Termination

The pre-requisite requirements for a lessee to be able to exercise such a right to terminate the lease agreement early are as follows:  

• The lessee must have been subject to the gathering restrictions pursuant to Article 49 (1) 2 of the Infectious Disease Control and Prevention Act (including operating hour restrictions, and collectively hereinafter, the "Gathering Restrictions") for a total of three months or longer; and
• The lessee must have closed its business due to a material change in economic circumstances caused by the Gathering Restrictions for a total period of three months or longer.
   

2.   Effective Date of Termination

If the lessee notifies the lessor of its intention to terminate the lease agreement early, pursuant to the lessee’s termination right granted under the Amended Act, such termination will go into effect three months following the lessor’s receipt of the said termination notice.

3.   Commercial Leases subject to Lessee’s Early Termination Right 

The lessee’s termination right also applies to (i) leases that exceed the conversion deposit threshold set forth in the Enforcement Decree of the Amended Act (KRW 900 million for Seoul) and (ii) leases existing and in effect as of the date on which the Amended Act took effect. 

Potential Impact

The significance of the Amended Act lies in expanding the scope of COVID-19 relief for commercial lessees, which now ranges from providing the right to claim reduction in rent and security deposits (Article 11 (1)) to granting the right to terminate the lease agreement early. 

As mentioned above, to exercise its early termination right granted under the Amended Act, the lessee must prove that its business closure was caused by a material change in economic circumstances resulting from the Gathering Restrictions.  However, in light of the legislative intent to alleviate the burden of lessees experiencing financial distress, it is unlikely that a strict burden of proof will be imposed upon the lessees.  That said, it is necessary to keep an eye on the court's decisions going forward. 

Even when the lease agreement is terminated by the lessee's exercise of its early termination right granted under Article 11-2 of the Amended Act, matters such as the return of security deposits and the restoration obligation of the leased premises are still subject to the terms and conditions under the relevant lease agreement and the Korean Civil Code.