Under the current legal framework in Korea, if a lessee exercises their right to extend the current two-year jeonse housing lease contract under the Housing Lease Protection Act (hereinafter referred to as “the Act”), which grants them an additional two years of residency, and later wishes to terminate the lease solely because they have found a more affordable jeonse rental house, should the lessor be obliged to return the deposit to the lessee? The answer to this question, despite possible counter-arguments, can be considered to be “yes” in the current legal context.

On July 30, 2020, a revision bill sponsored by lawmakers of the then-ruling Democratic Party of Korea to add Article 6-3, entitled, “Request for Contract Renewal, etc.,” passed in the National Assembly and took effect the following day. According to the new clause, if a lessee requests the renewal of a contract within a certain period, a lessor cannot refuse the request unless there is a valid reason as prescribed by the law.

The lessee has the right to give notice of termination to the lessor at any time, once the contract is renewed at the lessee's request, and the termination will take effect three months after the lessor has received the notice. It should also be noted that Article 10 of the act states that any agreement contrary to this act and unfavorable to the lessee shall be null and void.

The key question is whether the lessee can terminate the extended contract at any time by simple notice, even if the extended contract has a fixed term of two years. If so, the lessee has a significant right or option to terminate the contract at any time, regardless of the period agreed upon between the lessee and the lessor.

On the other hand, despite having set a fixed term, the lessor has to assume the risk of finding a new lessee within three months of receiving a notice of termination, even if this requires a significant reduction in the rental price and substantial losses. This has led to a heated debate about the limitations on the exercise of a lessor's property rights. Furthermore, it also leads to an escalation of conflicts between lessors and lessees during periods such as the current downturn in the housing rental market.

The lessee’s right of unilateral termination originally applied to situations of so-called “implied renewal,” or the automatic renewal of the lease by operation of law under the same conditions as the previous lease. It occurs when the lessor and the lessee extends the lease contract without taking any action with regard to demands or refusals to renew the lease at the end of the lease term, as stipulated in Article 6 of the act. However, with the revision of the act, the same unilateral right of termination in the case of implied renewal was also extended to the renewed lease upon the lessee's request, which resulted in the aforementioned controversy.

A few years ago, many lessors faced significant difficulties due to the housing shortage, as they were unable to either find new homes to move into on time or afford the renewed contract to rent the same house due to the sharp increase in housing rental prices. Now that the situation has reversed, there has been a significant increase in the number of lessors who are unable to return deposits on time, causing major problems in Korea.

When the rental market prices fall sharply, as is currently the case, lessees benefit significantly. However, if the market conditions change and prices rise rapidly again, lessors will consider the risk of unilateral termination at lease renewal. They may have no choice but to set the initial lease deposit at a significantly higher level to reflect this potential termination. This is particularly true for lessors who have received termination notices from lessees, as they may factor this risk into their pricing when market conditions fluctuate.

In light of this controversy, lower courts have recently ruled in favor of the lessor, stating that the lessee's right to terminate the lease at any time can only be recognized when the lease is renewed without specifying a period.

But there is still a growing demand for policymakers to review and clarify the regulations concerning lease renewals and unilateral termination rights. This review should aim to strike a delicate balance between protecting the rights of both lessors and lessees and ensuring a fair and stable rental market. This may include clarifying, along the lines of the abovementioned court ruling, that the lessee's right to terminate the lease at any time will only be recognized when the lease is renewed with no period specified.

Kim Yong-woo

This column is the third installment in a series written by attorneys at Barun Law LLC to provide legal insights in the field of construction, real estate and housing in South Korea. The writer is a partner attorney at the firm. -- Ed.

For further inquiries, contact yongwoo.kim@barunlaw.com.