SOUTH KOREA Law and Practice Contributed by: Junghwan Lee, Dong Seok Woo, Jun Woo Cho and Jee In Kim, Lee & Ko
the rent for the period between the termination of the lease and the date on which a new tenant is secured. It is common for the tenant to provide a cash security deposit to the landlord to secure performance under the lease. In some cases, a letter of credit issued by a financial institution may serve as a substitute for the cash deposit. 7. Construction 7.1 Common Structures Used to Price Construction Projects Payment terms for construction projects are set out in the construction agreement. The most common method is the lump-sum contract, under which the total construction cost for the project is determined in advance. A “relaxed” form of the lump-sum con - tract is also used, allowing for adjustments to the total construction cost in certain circumstances, such as design changes. The unit-price contract and cost-plus contract methods are rarely used. 7.2 Assigning Responsibility for the Design and Construction of a Project Build-only contracts are commonly used in small- to medium-sized public and private construction projects. Under such contracts, the owner retains responsibility for appointing an architect to perform the design, while the contractor’s obligations are lim - ited solely to construction. Design-build contracts have become increasingly uti - lised in large-scale public construction projects. Under such contracts, the contractor assumes responsibility for the design, in whole or in part, in addition to per - forming the construction work. 7.3 Management of Construction Risk The contractor is liable for damages arising from any breach of the construction agreement. Upon execu - tion of the construction agreement, the contractor must provide a performance bond equivalent to 10% of the contract price. The construction agreement may also include provisions for liquidated damages or other penalties. While these provisions are gener - ally enforceable, a court may reduce the amount of
liquidated damages or declare a penalty clause unen - forceable if deemed excessive. 7.4 Management of Schedule-Related Risk Payments for construction costs are made only upon inspection and approval of the completed work by the owner. Billing is permitted only at the times set forth in the construction agreement. Delay in achieving the agreed completion date may entitle the owner to monetary compensation, typical - ly calculated at 0.1% of the contract price for each day of delay. The construction agreement may also provide that the owner has the right to terminate the agreement in the event of a material delay in construc - tion. 7.5 Additional Forms of Security to Guarantee a Contractor’s Performance The owner commonly requires the contractor to obtain bonds or insurance from a financial institu - tion to secure the contractor’s obligations. Collecting a cash deposit or appointing a guarantor is seldom used. Examples of such bonds or insurance include bid bonds, performance bonds, contractor’s all-risk insurance, and warranty bonds. 7.6 Liens or Encumbrances in the Event of Non-Payment If the contractor is not paid, they may exercise lien rights and withhold the subject building. Note that land and buildings are treated as separate and inde - pendent real estate in Korea. An incomplete building is not considered an independent structure and can - not be subject to a lien. There are two types of liens: the liens under the Civil Code and the liens under the Commercial Code. It should be noted that their respective requirements and legal effects differ. In addition, the contractor may require the owner to grant a mortgage on the subject property (ie, both the land and the building) to secure the construction cost claim. 7.7 Requirements Before Use or Inhabitation A completed building may not be occupied or put to its intended use until a use permit has been obtained under the applicable laws. Following the completion
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