[Exclusive] Institutionalizing Rent Reduction if Commercial Sales Drop by 30%

Government to Establish Appropriate Rent Guidelines as COVID-19 Devastates Commercial Districts

As non-face-to-face classes continue due to COVID-19, the worries of merchants in university commercial districts are deepening. On the 8th, the commercial area near Ewha Womans University in Seodaemun-gu, Seoul, showed a quiet scene due to the absence of students. Photo by Jinhyung Kang aymsdream@

Right to Request Rent Increase or Decrease, Difficult to Prove Changes in Economic Conditions

Tax Support Measures to Encourage Landlord Participation

[Asia Economy Reporter Kim Min-young] If sales drop by more than 30% due to COVID-19, commercial tenants are expected to be able to request rent reductions from building owners. Although the law was amended in 2020 to provide grounds for requesting rent reductions during the spread of infectious diseases, it was criticized for lacking specific criteria, reducing its effectiveness. In response, the government plans to establish a standard of "30% decrease in sales" to facilitate rent reduction requests more smoothly.

According to the government on the 15th, the Ministry of Justice, Ministry of Land, Infrastructure and Transport, and Ministry of SMEs and Startups will prepare and announce next month the "Guidelines for Appropriate Rent Based on Changes in Economic Conditions Due to Infectious Diseases, etc." to enable prompt resolution of disputes over rent increases or decreases. The right to request rent increase or decrease allows either landlords or tenants to request changes to the agreed rent. Originally, the Commercial Building Lease Protection Act stipulated that if there are changes in taxes, public charges, or economic conditions causing the monthly rent or deposit to become unreasonable, rent increases or decreases can be requested. However, as small business owners and self-employed individuals suffered due to quarantine measures such as social distancing and capacity limits, the Act was amended in September 2020 to include the phrase "in case of changes in economic conditions due to first-class infectious diseases, etc."

Nevertheless, the number of applications for the right to request rent changes increased by only 10 cases. According to the Korea Legal Aid Corporation, the number of applications received by the Residential Lease Dispute Mediation Committee was only 41 in 2020 and 54 in 2021. This was because tenants found it difficult to concretely prove "changes in economic conditions," making it hard for the Lease Dispute Mediation Committee to accept the cases. It is expected that once the guidelines are established, proof of changes in economic conditions will become clearer, leading to a significant increase in applications.

The government has currently commissioned the Korea Real Estate Society to conduct research for preparing the guidelines. The criteria for requesting rent reductions are likely to be when the average sales for one year before the COVID-19 outbreak and the average sales for three months before the reduction request each decrease by 30%. A government official said, "Since rent levels vary depending on economic conditions and local commercial districts, it is difficult to calculate appropriate rent," adding, "The aim is to establish criteria to determine whether a rent reduction request can be accepted when applying for lease dispute mediation."

However, since decisions by the Dispute Mediation Committee are non-binding recommendations, measures to encourage active participation by landlords are also expected to be prepared. This will involve providing tax credit benefits on the reduced amount to landlords who voluntarily reduce rent. A government official stated, "We are considering incentive measures similar to the Good Landlord system currently implemented by the National Tax Service."