The Korean Property Rental System 

 

 

 

 

 

 

 

 

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 - The Korean Property Rental System -
Search, rent and furnish an office and commercial space in Korea.

 

Before the first concrete steps to establish a branch in Korea are made, consideration should be given to the selection of a suitable location, and especially to the Korean rental system.

 

The Korean rental system differs in several ways from rental systems that are common in Europe. Specifically, a higher demand for liquidity in the financial plan needs to be considered. Furthermore, a current lease agreement is required to establish a branch in Korea, without which the registration in the commercial register and tax office log is not possible. Even though this may seem illogical, from the European business perspective, this system helps the authorities to prevent the establishment of shell companies, or at least impede their establishment.

 

The Korean rental system is generally divided into two groups, Jeonse (전세) and Wolse (월세). The monthly rental system that is well-known in Europe is typically only used in Korea for a special property types such as single rooms and student accommodation, and is not given further consideration in this report.

 

Jeonse
In its present form, Jeonse is a rental system that is only found in Korea. In the Jeonse system, the tenancy begins with the initial security deposit of a single amount which is usually about 40% to 60% of the market value of the property. Due to the particular market situation within the private sector in early 2013, this Jeonse security deposit can even be as much as 80% of the current market value of a property. This is mostly due to falling interest rates on savings and the currently sluggish market situation, in which many market participants expect declining real estate prices.

 

Unlike in most of Europe, the interest yield on the deposit will not be paid to the tenant, but the landlord can keep this as income. No additional monthly rent is paid. On expiry of the contract period, the original deposit will be refunded in full.

 

For Europeans it may be easier to understand this private sector rental system if you know that, for a long time in Korea, it was impossible for individuals to purchase real estate with a bank mortgage. Only within the last two decades or so, did the Korean government begin to allow this. In the past, acceptable housing was scarce, therefore the landlords needed to use the tenants’ Jeonse deposits to finance their property purchases.

 

Wolse is a split system in which usually one to three "annual rents" are deposited as security and additional monthly rent is paid. The interest income from the Wolse deposit is also kept by the landlord. The Wolse system is commonly used in the commercial sector.
 

The Pyeong (평)
In Korea, by law, the metric system is used. However, Koreans still like to use the old Korean unit area Pyeong (평). One Pyeong is 3.3058m². Many properties are often referred to by the gross area, known as Gong-geub Myeon-joek (공급 면적) in Korean, which can differ considerably from the useable space (net area), known as Joen-yong Myeon-jeok (전용 면적) in Korean, due to the different calculation methods of construction law. This net area is often known colloquially as Sil-Pyeong (실평). Both attributes are equally important, because the maintenance service costs are calculated based on the gross area. In the ensuing rental contract, only the metric system is used because by law, the use of the old Pyeong unit in the contract or relevant correspondence can now even be subject to a financial penalty or a fine.

 

The location search and selection should be made primarily from an economic point of view, where the rental cost is only one aspect among many. Consideration should be given to a good connection to the transportation infrastructure (subway, bus, highway and possibly an airport), as well as proximity to customers and access to qualified personnel.

 

In many, but not in all industries, a representative office (and a representative address) is important. Sometimes potential employees consider the prestige of the office location when deciding whether to accept an employment offer, and the company’s area code can be one factor. An area code outside of Seoul (02) can be a reason not to apply. For companies which employ staff from Europe countries, especially if they come to Korea with their children, it may be advisable to select a location with proximity to suitable educational facilities and expatriate-style housing.

 

For the search of a non-commercial property, there are several Korean websites, which may be used in order to get an initial orientation. English websites are largely useless as the offers are usually overpriced and disconnected from the Korean reality. Commercial real estate is difficult to find over the internet, as offers are commonly outdated and without pictures. In this case, it is advisable to restrict the search area and to cooperate with local estate agents, as well as the physical inspection of the prospective properties in order to make an appropriate selection.

 

Industrial and manufacturing companies may also like to consider one of the many free economic zones FEZ). To be clear, most foreign investors, regardless of location, are eligible for tax credits, so the main arguments for settling in an FEZ should not be based on tax incentives, but on the availability of developable land and possibly also access to suitable personnel. Due to the lack of available land, FEZs can be a good option for the construction of new manufacturing facilities and warehouses.

 

Renting is typically done via brokers, known in Korean as a Boodongsan (부동산). This is not mandatory, but a common practice and advisable. These agents are specially trained, have a broker's license and are registered at the district administration, known in Korean as the GooCheong (구청). A broker can only be registered for a single district and cannot act outside of this district. It is highly recommended to check the registration of a broker and to cross-check it with the district administration on the basis of registration number and name. Furthermore, every broker should have an insurance policy to the value of at least 100 million Korean won (approx. € 70,000), which should later be attached to the contract. The commission rates are determined by the district administration and vary between commercial and residential properties.
 

Comprehensive tenant protection systems apply for individuals. However, if there is a mortgage on the property, then it may be important to consider the proportional value of the mortgage and that the tenant’s security deposit is not at risk by a potential claim on the collateral by the original lender. Nonetheless, if it is so, then careful consideration should be given to the economic risks. When renting commercial space, varying protections apply, depending on the region, which can be requested from the district administration. Currently, if, in Seoul, the deposit + monthly rent x 100 ≤ 300,000,000 Korean won, a statutory protection applies to the value of 30,000,000 Korean won (currently about EUR 21,000) on the deposit. Since the limit of 300,000,000 Korean won is often exceeded, the advice of a lawyer (not a tax adviser) about collateral is generally advisable and useful. Furthermore, the lawyer can assist in the registration of a mortgage.


If expatriate housing is rented in the name of the company (which is advisable for tax reasons, as the company can book the rent and charges as expenses), the security deposit should be registered in the Land Registry, as no special protections applies to private residential space, which has been rented by a company.

 

Lastly, when lease contract expires or is terminated, the lessee is obliged to recover the premises to the original conditions of when the lease contract started. In this regard, we have seen many cases where the lease contract ends, the landlord and lessee have differences on the original condition, and thus it turns into a legal dispute. In order to reduce such risk, it is advisable to make detailed phots or videos of the overall premises and keep it as records. Such material can be effectively used in a legal dispute, but moreover it can be used to avoid such legal dispute.

 

Furniture and setup
In Korea, there is often no proper handover of the office or home. It can even happen that you just receive the PIN code for the entrance door and are then left to your own devices. A clean office cannot always be reckoned with and it is not uncommon that you have to dispose of old office furniture or the old carpet from the previous tenant. In many cases, it may also be that previous tenants have improperly modified the electrical systems and that you have to repair these along with your network cabling and air conditioning. Often, the offices have been fitted with a custom interior, which can show considerable wear after a few years, especially if low quality materials were used. Therefore, an appropriate budget should be provided for the cleaning and restoration. The quality of Korean craftsmen can be described as moderate, although price and quality don’t often go hand in hand. In order to achieve ‘western’ quality standards, it is advisable to pay close attention while the work is being done, so that corrections can be addressed and any misunderstandings can be resolved immediately. The payment terms for the artisans should be setup so that the majority of the money is paid after the work is completed. The daily rates of artisans are about 150,000 to 300,000 Korean won per day, plus materials. The general rule is that even if artisans require less than a full day to do the work, a full day is nevertheless billed.

 

For the subsequent furnishing and decoration, there are various Korean online stores and designated places in Seoul (known as furniture streets) where there are numerous furniture stores, although the actual selection is rather limited (as most vendors have about the same product range). However the price-performance ratio is usually good.

 

The availability of the usual furniture and IT equipment is generally very good and delivery times of 1 to 2 days are not unusual. However, the availability of specific components, such as a custom server or workstation PC, often requires a lead time of 2 to 4 weeks from the supplier. For telephone and internet there are various providers available, all of which usually activate the line within 24 hours. For some time now, telecommunications such as VoIP (Voice over Internet Protocol) with the SIP protocol (Session Initiation Protocol) have been popular in Europe. Korean vendors are also mainly using the SIP protocol, although they often don’t allow appropriate access to freely custom configure the system, which can make the linking of the Korean branch office to the system at HQ somewhat difficult. Small internet service providers are often more flexible than the big vendors and allow integration into their own corporate network.

 

Extending or terminating the contract
A rental contract extension is typically done between one and six months prior to the expiry of the contract period, and should be discussed with the landlord at least one month before the end of the current contract, or earlier. If the landlord misses the deadline, then the contract is extended by one year, whereby a three month notice period applies for the tenant. In Korea, there is practically no fixed rental price, as the leases are set up again at the end of each period and it rarely happens that an existing contract is extended without changes; particularly in the rent.

 

If a termination by the tenant is required within the contract period, then this is almost always associated with increased costs for the tenant. Generally the tenant pays the cost of the estate agent and possibly the loss of rent. Early consultation with the owner and broker is advisable in order to minimize these costs.

 

From our experience we consider it important that when a company moves, all company documents (e.g. the commercial register and the tax certificate) must be updated to the new address within 14 days. Of course, customers and business partners should also be informed of the news details.

 

Registering changes appropriately
If a foreign manager has a change of private address in Korea, then it is mandatory to inform the commercial register and the tax authorities within 14 days, update the identity card (Alien Registration Card) in the local district administration and at the immigration office, and to update the Korean driver's license with the relevant driving license authority or at the principal police office. Since many of these changes are automatic for Koreans, thanks to the digital networking of the authorities, it is therefore thought (and claimed) that this also works automatically with foreigners. However, this is an unfortunate misconception, as incorrectly registered foreigners can be subject to fines about which they only become aware when the bailiff knocks at the door.

 

 

Author:
Elias Peterle, Nowak & Partner peterle@nowak-partner.com

 

Co-Author:
Jin Hyuk Chung, Korean Attorney at Law at HMP Law jhchung@hmplaw.com

 

Please note that for topics relevant to the currently effective Korean law; we are not liable for the accuracy, completeness or timeliness of any information.


 

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