[Jeonse Living ABC] "Move First, Deposit Later"... Essentially Giving Up 'Collateral'

Editor's NoteAs so-called ‘Villa Kings’ cause a surge in jeonse fraud victims, tenants' anxiety is growing. However, the jeonse system remains one of the main lease contracts in Korea. Asia Economy delivers practical legal knowledge and information that tenants need to know while living under jeonse through a series called ‘Jeonse Living ABC’ with attorney Koo Min-su (NH Investment & Securities Real Estate Asset Management).

#Tenant Mr. A heard from the landlord before the jeonse contract expired that "I don't have money right now, so if the tenant moves out first, I will find a new tenant and return the jeonse deposit." Since Mr. A has maintained a good relationship with the landlord, he is unsure whether to trust the landlord's words and move out. What choice should Mr. A make in this case?

Jeonse Contracts Are Also ‘Credit Contracts’... Rights Must Be Protected Through ‘Collateral’

Attorney Koo Min-su advised that tenant Mr. A should coldly refuse the landlord’s request in this case. If the tenant trusts the landlord’s words and moves out (gives up possession) or changes their resident registration, the tenant effectively forfeits one of the strongest collaterals: the right to assert against third parties (daehangryeok) and the fixed date registration (hwakjeong ilja). Giving up such collateral is like making it difficult to recover the loaned money. Therefore, tenants must maintain daehangryeok and priority repayment rights until the deposit is returned at the end of the lease.

Jeonse contracts are ultimately ‘usage contracts’ where one uses a house and pays for it, and simultaneously ‘credit contracts’ where the tenant entrusts a deposit and expects its return at maturity. From the perspective of a credit contract, tenants are at a disadvantage because there is no way to know the landlord’s credit status at the time of contract, and incidents of not getting the loaned money back occur two or four years after the contract. Therefore, tenants must secure ample ‘collateral’ to prevent non-return situations. Representative collaterals include daehangryeok, priority repayment rights, Housing & Urban Guarantee Corporation (HUG) return guarantees, and jeonse right registration.

Understanding Jeonse Contract Characteristics Can Prevent Fraud

The method of inflating jeonse prices in the ‘Villa King’ cases can also be explained from the credit contract perspective. Tenants who pay jeonse prices higher than the market price of the house receive less ‘collateral’ for the deposit they should get back. This is easy to understand by comparing it to banks that lend money. Banks usually set senior collateral rights at 110% or 120% of the loan amount and carefully monitor whether loan interest is unpaid, managing loan claims and collateral conservatively. Similarly, tenants should request additional collateral or lower the jeonse amount if the jeonse deposit ratio relative to the house price is high. Keeping the jeonse rate below 80% can largely prevent non-return incidents even if the house price falls.

Also, tenants should be cautious that the strong collateral rights of daehangryeok and fixed date registration take effect from 0:00 the day after the registration date. There have been cases where landlords maliciously took out bank loans on the same day after the tenant moved in and registered the fixed date. In such cases, if a mortgage is set (loan secured by the house), the tenant’s daehangryeok becomes subordinate, making it difficult to recover the money. Tenants must ensure that the lease contract states that the tenant’s rights have priority and report immediately if such incidents occur.

Since jeonse contracts include the characteristic of ‘credit,’ establishing and maintaining daehangryeok and priority repayment rights is most important. Remember also to secure ample collateral to protect the jeonse deposit.