[Real Asset Strategies] Changes to Transfer Criteria for Co-owned Reconstruction Association Membership in Speculative Zones Cause Transaction Confusion

Only Shares Meeting Exception Requirements Eligible for Succession
Higher Risk of Disputes... Verification Needed Before Signing Contracts
No Remedies for Transactions Made Before Legal Interpretation Change

Confusion has arisen in the field regarding whether it is possible to transfer reconstruction association member status within speculative zones, as the Ministry of Land, Infrastructure and Transport recently issued a new legal interpretation that differs from its previous stance.

Apartment complexes in downtown Seoul. Photo by Yonhap News

According to the maintenance industry on January 13, the Ministry of Land, Infrastructure and Transport notified local governments in November last year about changes in its legal interpretation regarding restrictions on the transfer of association member status in speculative zones.

Under current law, for reconstruction projects in speculative zones where association establishment approval has been granted, the transfer of association member status is prohibited. However, an exception is made if the owner is a single-household, single-homeowner who has held the property for at least 10 years and resided in it for at least 5 years.

However, regarding the transfer of association member status for co-owned properties with multiple stakeholders, the Ministry issued a new guideline. It interpreted that the share of a co-owner who meets the exception requirements may be transferred, while the share of a co-owner who does not meet the requirements is restricted from transfer.

This interpretation is based on a Supreme Court ruling from August last year, which stated that when trading co-owned properties in a reconstruction zone, the transferee can only obtain association member status if all co-owners, not just the representative member, meet the succession requirements. Previously, when transferring a co-owned home in a speculative zone, it was sufficient for only the representative member to meet the exception, and the transfer of the entire share was permitted.

Following the Ministry's notice, Gangnam District Office sent an official letter to reconstruction associations stating that sales contracts signed before the Ministry changed its interpretation would be subject to the previous interpretation. An official at a real estate agency in Seocho District explained, "Previously, we only had to check the requirements for the representative member, but now we must verify whether all co-owners qualify for the exception, which increases the likelihood of confusion or disputes in contracts. We are advising clients to confirm with the association or local government before signing contracts."

A reconstruction association in Banpo-dong, Seocho District, also informed its members that even if the district office approves a change in association membership, there is a risk that the Korea Real Estate Board may not recognize the new member status during the feasibility review of the management and disposal plan, so caution is necessary.

The Ministry explained that under the revised interpretation, based on the Supreme Court ruling, "If some shares meet the exception requirements, succession of status is possible, but if not, the shares will need to be valued at the time of the future management and disposal approval for cash settlement." Regarding the timing of the new interpretation's application, the Ministry stated, "In principle, the Supreme Court’s legal reasoning should apply after the ruling." The Ministry also noted that the court did not make a determination on whether the ruling should be applied retroactively.

Additionally, the market has pointed out that when a buyer fails to acquire association member status and becomes subject to cash settlement, the reference date for the cash settlement is unclear. There is also no clear mention of remedies for transactions that took place before the change in legal interpretation.

In this regard, the Supreme Court ruled in August last year that "if a person who cannot acquire association member status is to be compensated for losses, the timing of the compensation and the valuation standard should be based on the date the property was acquired." Assuming a compulsory sale claim is made two years later, if the valuation is based on the acquisition date, the difference in compensation could amount to several hundred million to several billion won in reconstruction complexes in the Gangnam area.

Lee Jungwoo, managing attorney at Centro Law Firm, pointed out, "The Ministry has not provided clear standards on how to handle those who transacted based on the previous interpretation, but it is highly likely they will be subject to cash settlement, and there is no clear legal basis for relief. The timing of the cash settlement-whether it is the transaction date or after management and disposal approval-can significantly affect the amount, so establishing clear criteria is very important."