SOUTH KOREA Law and Practice Contributed by: Junghwan Lee, Dong Seok Woo, Jun Woo Cho and Jee In Kim, Lee & Ko
6. Commercial Leases 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period of Time Im-cha-gwon and jeonse-gwon are the two types of leases used in Korea. Under an im-cha-gwon , parties contractually agree that one party may use the leased property in exchange for rent. Because an im-cha- gwon is a contractual right, it does not itself guarantee enforceability against third parties. The Commercial Building Lease Protection Act provides protection for commercial leases, including in the event of a trans - fer of the property by the landlord. Jeonse-gwon is a type of lease unique to Korea, under which the tenant provides a lump-sum deposit in exchange for the right to use the leased property. Registration is required to make a jeonse-gwon effective. 6.2 Types of Commercial Leases While there are two types of leases used in Korea, im-cha-gwon is more commonly used in commercial lease practice. In addition, it is common (though not legally required) for the tenant to provide a security deposit to secure the payment of rent. Regarding the method of rent payment, (i) fixed rent, (ii) percentage rent, and (iii) minimum guaranteed rent structures are used. Under a fixed rent structure, rent is calculated based on a predetermined rate per unit area, and this approach is commonly adopted in office leases. Under a percentage rent structure, rent is determined as a percentage of gross sales gener - ated from the leased property, which is typically used in retail leases. A minimum guaranteed rent structure is often used in conjunction with a percentage rent structure to hedge against the risk of declining sales. 6.3 Regulation of Rents or Lease Terms There are no statutory restrictions on rents as such, and the parties may freely agree on the terms of the lease. However, certain mandatory provisions aimed at protecting tenants are in force. Under the Civil Code, either the landlord or the tenant may request a rent adjustment if existing rent levels become inappro - priate due to changes in public charges or other eco - nomic circumstances. Under the Commercial Building Lease Protection Act, certain protected commercial leases are subject to a 5% cap on annual rent increas -
(a) financial institutions must hold ≥5% of shares; (b) used for specified projects (eg, infrastructure, development); (c) no statutory leverage cap; and (d) typically distribute ≥90% of income for tax benefits. In addition, foreign investors may be subject to disclo - sure and transparency requirements under their home jurisdiction, which may affect the structuring of real estate investments in Korea. For example, US inves - tors may be required to identify and report beneficial ownership information, which may lead to increased due diligence and information-sharing requirements. In practice, this may require Korean sponsors, asset managers or other stakeholders to provide ownership and control information, and may influence structuring decisions and transaction timelines. 5.6 Annual Entity Maintenance and Accounting Compliance REFs typically incur annual fees payable to the asset management company, trustee, placement agent and fund administrator. Management fees payable to the asset management company generally range from approximately 0.2% to 0.4% of assets under manage - ment, while other service fees combined are typically around 0.04%. In addition, performance-based fees may be payable to the asset management company, often calculated based on capital gains or internal rate of return. REITs have a broadly similar cost structure to REFs but may incur higher compliance costs due to addi - tional regulatory oversight by the Ministry of Land, Infrastructure and Transport. Publicly listed REITs are subject to additional listing-related compliance and disclosure costs. PFVs typically incur management fees structured as a combination of fixed annual fees and performance- based fees, particularly for development projects. Depending on the applicable legal thresholds, enti - ties may be subject to mandatory external audits. Audit fees typically range from approximately KRW10 million to KRW30 million for a standard single-asset structure.
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