Article 10-9 of the Commercial Building Lease Protection Act (the “Special Provision”) was introduced on September 29, 2020 to safeguard commercial tenants from losing their business foundations due to reduced sales or income caused by COVID-19 by way of addressing situations where commercial lease agreements are at risk of termination due to overdue rent. The Special Provision stipulates that overdue rents accrued during a period spanning six months starting from September 29, 2020 (the “Special Period”) will not be considered as grounds for the termination of a contract, refusal to renew a contract, or the imposition of limitations on the ability to collect premiums with respect to the lease agreement.
Following the introduction of the Special Provision, concerns have been raised regarding the order of priority in payment application between (i) overdue rent accrued during the Special Period (the “Special Period Overdue Rent”) and (ii) overdue rent accrued during the periods that fall outside of the Special Period (the “Non-Special Period Overdue Rent”). These concerns particularly arose in cases where a commercial tenant had failed to make timely rent payments during the Special Period as well as during the periods falling outside of the Special Period (the “Non-Special Period”), and the overdue rents had not been fully repaid by the tenant. In light of the above, a recent case before the Supreme Court has provided a ruling on this matter (Supreme Court Decision 2022Da309337, April 13, 2023, the “Decision”).
In the Decision, a commercial tenant had delayed paying both the Special Period Overdue Rent and Non-Special Period Overdue Rent. While the tenant later repaid a portion of the overdue rents, the repayment fell short of the total overdue rent amount, resulting in an accumulated unpaid and overdue rent exceeding three months’ worth of monthly rent.
Under these circumstances, the Supreme Court held that the unpaid and overdue rent cannot be recognized as a justifiable ground for the landlord to terminate the lease agreement given that, according to Article 477, Item 2 of the Civil Code of Korea, tenant payments should first go towards fulfilling their obligation to pay Non-Special Period Overdue Rent before addressing their obligation to pay Special Period Overdue Rent. This is because paying the Special Period Overdue Rent offers the tenant a smaller benefit compared to paying the Non-Special Period Overdue Rent, as the exercise of the landlord’s rights to refuse the renewal of the contract and to terminate the lease are restricted pursuant to the Special Provision even if the tenant fails to pay the Special Period Overdue Rent. Additionally, any outstanding Special Period Overdue Rent owed is not factored into the calculation of overdue rent that would grant the landlord the right to terminate the lease.
The Decision is particularly meaningful in determining the order of payment application for the Special Period Overdue Rent and Non-Special Period Overdue Rent. As the benefit the tenant obtains by paying the Special Period Overdue Rent is smaller than that of paying the Non-Special Period Overdue Rent, the rents paid by the tenant will be applied to fulfilling the tenant’s obligation to pay the Non-Special Period Overdue Rent first before they are applied to pay the Special Period Overdue Rent, regardless of the due date for the payments. Consequently, the possibility of the Special Period Overdue Rent remaining unpaid is high, as pursuant to the Special Provision, the Special Period Overdue Rent is excluded from the calculation of the aggregate amount of unpaid rent based on which a landlord can exercise his/her lease termination right and, as a result, landlords are likely to be restricted from exercising their rights to terminate commercial lease agreements based on the Special Period Overdue Rent.
