The ruling Democratic Party of Korea and the government revised the Housing Lease Protection Act to restrict jeonse (rent-free lease) deposit increases to 5 percent, but in practice landlords will find it effectively impossible to raise deposits without tenants’ consent.
In revising the law last month, they added a new article banning landlords from raising deposits by 5 percent or more, but did not specify that tenants must accept increases within that amount. Recently, the Ministry of Land, Infrastructure and Transport interpreted the provision to mean that tenants have “no obligation to accept a deposit increase.”
Before the revision, homeowners could terminate contracts if tenants declined an increase in the deposit. Under the revised law, however, they must renew contracts once after the first two years if tenants want to renew, without condition. Landlords can raise deposits only if tenants agree. Of course, lessors can sue, but that option involves considerable costs and success is not guaranteed. The revised law effectively discriminates against homeowners.
It is likely that the party and the government did not foresee this problem. They should have examined the bill more meticulously beforehand, but the law was revised with haste.
Drawing on its majority in the parliament, the party rushed the amendment through the legislation and judiciary committee, skipping a debate or detailed review, and the following day it voted on the bill at the plenary session. The main opposition party boycotted the session to protest its unilateral processing.
If this loophole is not fixed, landlords will likely raise deposits sharply when they sign contracts with new tenants, in anticipation of a four-year deposit freeze.
The party and the government say the law was revised to protect tenants, but in the long run deposits will likely surge.
The revised Housing Lease Protection Act is not the only case where legislation may ultimately damage the economically disadvantaged people it’s supposed to protect.
A revision to the severance pay guarantee law, proposed by the ruling party, would oblige employers to provide retirement allowance if an employee resigns after working for one month or more. The bill would also extend coverage to include those working fewer than 15 hours a week. Currently, severance pay is given to employees who leave their jobs after working for at least a year. If the bill is enacted, 2.8 million more people will receive severance pay on a yearly basis and companies will need 7.6 trillion won ($6.4 billion) to pay it out, according to estimates by the Korea Enterprises Federation.
This bill, if it passes, would likely strike a fatal blow to small enterprises that are barely surviving amid the economic impact of the coronavirus. They would avoid hiring. To save on labor costs, businesses would most likely eliminate short-term jobs first. When it drew up the bill, the party meant for the changes to benefit low-wage employees working short hours for short periods, but their jobs would probably be in the most danger.
The party also proposed a bill to lower the maximum legal interest rate on a loan to 10 percent per year from the current 24 percent. Its argument -- that people in the low-income bracket need to be protected in difficult times like this -- appears at first glance to be convincing.
But the market is not so simple. If interest rates are forced below 10 percent, private subprime lenders will have no choice but to strengthen the qualifications for borrowers and turn away applicants with low credit scores. Those unable to borrow will be driven toward illegal loan sharks. Like the house rent cap and minimum wage hikes, this bill will likely produce outcomes opposite from what was intended.
The ruling party has an invincible majority (176 seats) in the 300-seat Assembly. If it uses its majority to rush through populist bills while disregarding market mechanisms, confusion and unintended effects are inevitable.