[Real Estate AtoZ] Can't Return Jeonse Deposit? "Proceed with Forced Auction!"

“The landlord says he doesn’t have money and can’t return the jeonse deposit. I’m worried about losing the money I’ve saved for years. Can I resolve this by putting the house up for auction?”

Recently, the number of tenants struggling with ‘empty-can jeonse’ houses, where the jeonse deposit exceeds the market price, has been increasing. As victims of jeonse fraud have surged across the Seoul metropolitan area including Seoul, Incheon, and Dongtan, concerns have grown that tenants may not be able to recover their long-saved jeonse funds. Especially for tenants who did not purchase jeonse deposit insurance, the damage can be relatively greater, leading to increased interest in ‘self-bidding’ through forced auctions.

What exactly is a forced auction?

A forced auction is a procedure to seize a debtor’s real estate to recover debts. For example, if a landlord who is the debtor fails to return the jeonse deposit on time, the creditor tenant can use legal means to put the property up for auction. In this case, the tenant files a lawsuit against the landlord and, upon winning the judgment, the process moves to auction proceedings.

The auction process proceeds in the following order: ▲Application for forced auction and commencement decision ▲Determination and announcement of the deadline for dividend claims ▲Preparation and execution of sale ▲Payment of sale proceeds and dividend procedures ▲Transfer of ownership registration and delivery.

This differs from voluntary auctions, another form of court auctions, in terms of the rights of the applying creditor. Voluntary auctions are procedures to enforce secured claims. If a creditor holding a security interest such as a mortgage does not receive repayment from the debtor by the due date, the creditor applies to the court for sale.

For example, if someone with low credit wants to borrow money from a bank, they may pledge specific real estate as collateral, called a mortgage registration. If the loan and interest borrowed from the bank are not repaid later, the property is put up for auction.

In fact, cases where tenants directly apply for forced auctions have significantly increased. According to Gigi Auction, a court auction specialist company, in the second half of last year, tenants in the Seoul metropolitan area including Seoul, Gyeonggi, and Incheon applied for auctions against landlords in a total of 521 cases. This is an increase of over 100 cases annually compared to 319 cases in the second half of 2020 and 410 cases in the second half of 2021.

However, an important factor here is the tenant’s dividend priority. The proceeds from the auctioned house are distributed according to priority, and for tenants to recover as much of their jeonse deposit as possible, they must meet the conditions for the highest priority repayment right, which is the third priority. These conditions include a fixed date, moving-in registration, possession, and dividend claim.

If the jeonse deposit exceeds the auction price... tenants jump into auctions for ‘self-bidding’

On the other hand, even if the house is sold at auction, there are many cases where the winning bid is less than the jeonse deposit, so tenants do not get their money back properly. Recently, as the real estate market has declined sharply and the auction market has frozen, properties with tenants attract fewer bidders and are repeatedly passed over. Each time a property is passed over, the minimum price drops by 20-30%, resulting in a lower final winning bid. Moreover, tenants can only recover their jeonse deposit after deducting auction costs and taxes such as local taxes from the winning bid, which increases their anxiety.

Recently, the number of tenants who reluctantly jump directly into auctions themselves for ‘self-bidding’ has been increasing. According to Gigi Auction, in the second half of last year, there were 102 cases in the metropolitan area where tenants directly won bids on houses they lived in. This is more than double the 48 cases in the same period the previous year. For the entire last year, there were 174 cases, an increase of more than 1.5 times compared to 112 cases the previous year and 99 cases in 2020. Especially by region, as of the second half of last year, Seoul accounted for more than 60% with 62 cases.

When tenants directly participate in auctions, the winning bid amount can be offset against the deposit. This means that when the house is won at auction, the amount of the winning bid is reduced by the amount of the deposit the tenant can recover. For example, if the winning bid is 150 million KRW and the tenant’s refundable jeonse deposit is 50 million KRW, the tenant only needs to pay the remaining 100 million KRW.

However, there are precautions when offsetting. The amount eligible for offset is based not on the total jeonse deposit not recovered but on the jeonse deposit that will be recovered after the auction. For example, even if the tenant has 50 million KRW of unrecovered jeonse deposit, if the tenant is ranked lower in the auction dividend priority and ultimately recovers only 30 million KRW, the offsettable amount is 30 million KRW. Therefore, tenants aiming for ‘self-bidding’ must carefully calculate the amount eligible for offset.