SOUTH KOREA Law and Practice Contributed by: Junghwan Lee, Dong Seok Woo, Jun Woo Cho and Jee In Kim, Lee & Ko
In development projects, additional protections are common. These include share pledges over the pro - ject company, completion guarantees and arrange - ments to subordinate or waive contractors’ claims. 3.3 Restrictions on Granting Security Over Real Estate to Foreign Lenders There are no specific restrictions on granting secu - rity over domestic real estate to foreign lenders, but such arrangements must generally be reported under the Foreign Exchange Transactions Act. If a foreign lender acquires the property through enforcement, it must comply with applicable acquisition procedures, including reporting and permit requirements. Repay - ment of principal and interest is generally permitted, subject to foreign exchange regulations. 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security Mortgage registration (required for effectiveness) trig - gers taxes of about 0.24% of the secured amount (typically 120% of the loan principal). Security trusts also involve trustee fees, and stamp tax of up to KRW350,000 applies to loan and security documents. In enforcement, creditors must initially advance auc - tion costs, which are later reimbursed with priority from sale proceeds. For security trusts, enforcement via public sale involves disposal fees and related administrative expenses under the trust agreement. 3.5 Legal Requirements Before an Entity Can Give Valid Security To grant valid real estate security, a company must follow internal approval procedures (typically board approval), with heightened scrutiny for related-party transactions (eg, ≥10% shareholding). For REFs or REITs, decisions must comply with fiduciary duties, and investor consent may be required under applica - ble rules. Historically, third-party security without suf - ficient corporate benefit could trigger liability, though recent reforms aim to mitigate this risk. 3.6 Formalities When a Borrower Is in Default Enforcement of real estate security in Korea is largely governed by security documents, with limited statuto - ry formalities. Mortgages are enforced through judicial auction, while security trusts enable more streamlined
public sale; in insolvency, individual enforcement is restricted. Priority is based on registration order, sub - ject to certain statutory claims. Court foreclosure typi - cally takes six to 12 months, while trust enforcement is faster. There are no pandemic-related restrictions, and enforcement and NPL activity remain active, though more selective. 3.7 Subordinating Existing Debt to Newly Created Debt Under Korean law, creditors may rearrange repayment priority by intercreditor agreement. To adjust priority of security against third parties, additional steps are required – mortgages are typically cancelled and re- registered (or assigned to a new lender to retain prior - ity), and receivables security is reset through release and re-establishment of pledges. In insolvency, pri - ority may change, as post-commencement financing can be granted priority over existing claims. 3.8 Lenders’ Liability Under Environmental Laws Under Korean law, a lender holding or enforcing real estate security is generally not liable for environmen - tal contamination solely on that basis; liability typi - cally rests with the polluter or current owner/operator. However, if the lender acquires ownership (eg, through foreclosure), it may become liable, subject to statutory defences. 3.9 Effects of a Borrower Becoming Insolvent Under Korean law, security interests created before insolvency are generally valid but may be avoided as preferential or fraudulent transactions. Once rehabili - tation or bankruptcy proceedings commence, indi - vidual enforcement may be restricted, and creditors must exercise their rights within the insolvency pro - cess, with recovery subject to distribution rules or a rehabilitation plan. 3.10 Taxes on Loans No material taxes are imposed on loans themselves, but taxes may arise from creating and registering real estate security. Mortgage registration triggers taxes of about 0.24% of the secured amount, and stamp tax of up to KRW350,000 may apply to loan agreements.
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