[Ryu Taemin's Real Estate A to Z] If Monthly Rent and Deposit Are High, Can the Commercial Lease Protection Act Not Apply?

[Asia Economy Reporter Ryu Tae-min] Tenant A, whose commercial lease contract expired three weeks ago, assumed the contract was automatically renewed through "tacit renewal" since neither the landlord nor A mentioned anything about renewal before the expiration. However, recently, A was asked by the building owner to vacate the commercial property. Although A protested, the response was that the contract exceeded the converted deposit amount, so the Commercial Building Lease Protection Act could not be fully applied, leaving no other options.

The Housing Lease Protection Act and the Commercial Building Lease Protection Act have different application criteria, causing ongoing confusion in the field. It is important to be cautious because whether the lease contract is subject to the Lease Protection Act depends on the contract details.

For commercial lease contracts, the Commercial Building Lease Protection Act is fully applied only if the converted deposit amount meets the legal standard. If it exceeds this amount, only part of the Lease Protection Act applies, and the rest is governed by civil law. The converted deposit amount is calculated by adding the deposit to the monthly rent multiplied by 100.

For example, under current law in Seoul, leases with a converted deposit exceeding 900 million KRW are only partially covered by the Commercial Building Lease Protection Act. If the deposit is 200 million KRW and the monthly rent is 6 million KRW, the converted deposit is 800 million KRW, so the Lease Protection Act fully applies. However, if the deposit is 300 million KRW and the monthly rent is 6.5 million KRW, some provisions of the Lease Protection Act will not apply.

No Protection for ‘Tacit Renewal and Rent Increase Restrictions’ When Converted Deposit Exceeds Threshold

A key issue when the converted deposit exceeds the legal limit and the Lease Protection Act does not fully apply is the tacit renewal provision. Tacit renewal means that if the landlord does not express any intention to refuse renewal or change terms between 6 months and 1 month before the contract expires, the contract is automatically extended under the same conditions. Under the Commercial Building Lease Protection Act, a tacitly renewed lease allows the tenant to terminate the contract at any time. Also, regardless of the previous lease term, the extended contract period is fixed at one year.

However, if the converted deposit exceeds the legal limit and the Lease Protection Act does not apply, civil law governs, resulting in tacit renewal without a fixed period. Therefore, after tacit renewal, either party?the landlord or tenant?can terminate the lease at any time.

Rent increases can also become problematic. For contracts not fully covered by the Commercial Building Lease Protection Act, the 5% cap on rent increases is removed. This means there is potential for significant rent hikes upon renewal. Especially in the current environment of consecutive interest rate hikes, landlords facing increased interest burdens are likely to raise monthly rents significantly at renewal to offset these costs. Real estate attorney Eom Jeong-sook (Beopdo Comprehensive Law Office) advises, “For contracts exceeding the converted deposit limit, since the Lease Protection Act’s rent increase cap does not apply, it is necessary to set an appropriate amount at the time of contract signing.”

Core Rights Such as Contract Renewal Requests Are Guaranteed... Converted Deposit Standards Vary by Region

On the other hand, tenants’ core rights such as the right to request contract renewal and opposability are guaranteed. In commercial leases, the right to request contract renewal allows tenants to demand renewal for up to 10 years from the initial contract date. Opposability means that even if the leased property changes ownership, the tenant’s lease rights remain valid. Other provisions, such as protection of the opportunity to recover key money, are also exceptions.

Meanwhile, the converted deposit amount standards vary by region. In Seoul, the full application of the Commercial Building Lease Protection Act applies if the converted deposit is 900 million KRW or less. In the Seoul metropolitan area’s overconcentration control zones, the threshold is 690 million KRW; in five metropolitan cities?Daegu, Gwangju, Ulsan, Incheon, and Daejeon?the threshold is 540 million KRW. However, if an area within Incheon falls under the metropolitan overconcentration control zone, the threshold rises to 690 million KRW. In other regions, the standard is mostly 370 million KRW, but it varies depending on local characteristics, so caution is advised.