Blog, Real Estate

Let’s suppose a case. You had been living as Jeonse for a long time, and the contract period was about to end. You found another house, and now you should move out, and ask the leaseholder to return the deposit as you need to pay for the new deposit. Then your leaseholder may say “I don’t have the money for it right now. If the next lessee comes in, they will pay me their deposit, then I’ll return your deposit with that money.” And now, you are in big trouble. 

In this article, we are going to overview what Jeonse is, why this problem happens, and what to do to not get slipped into this trap. 

What is Jeonse? – The Loophole in The System

First, we need to understand the unique characteristics of Jeonse. Jeonse is a very distinctive form of contract frequently found in South Korea. It does not even have any proper English name, so it is officially translated as “Jeonse (전세)” as it is. It is also often translated as “jeonse,” or “lump sum lease,” which is not an accurate translation. 

This is how it works. You pay a lot of money in a lump sum as a deposit to the lessor. Then you do not pay any rent while living there, and the lessor returns the deposit to you at the end of the contract period, but no interest is added. As a result of the contract, the lessor gets to borrow a huge amount of money from you (the lessee) for no interest, and the money corresponds to the interest for the lump sum deposit works as the monthly rental payment. 

One of the biggest ironies of this form of contract is that most of the Jeonse named contracts do not fall under Chapter VI of the Civil Act, Article 303 and under, which stipulates the true sense of Jeonse. Rather, most Jeonse contracts are just a modified form of “Lease,” which is stipulated in Section 7 of Civil Act, Article 618 and under. If you are not certain about your contract’s form, it must be “lease.” In that case, your contract shall be in effect only between the lessee and the lessor. Moreover, registration is not required. Your right for your residence shall not be treated as a “real right,” but just as a “claim.”

This causes two big problems. First, you cannot claim your right to the house against a third party. Second, you do not have any security if you already have moved out from the house (it is called “delivery” legally while it may sound strange), you do not have any measures to hold your ground against the lessor. 

Two Possible Ways To Contest – Not To Move Out, Or To Register

What can we do when the lessor does not pay the deposit back to you? There are two legitimate ways to consider other than just filing a lawsuit. 

1. The first way to contest against the lessor is not to move out of the house at all. At the end of the lease contract, the lessee must move out from the leased object, and the lessor must return the deposit. These duties on each party must be concurrently performed. If the lessor does not pay the deposit to you, then you do not have to move out. (we call that “Exceptio non-adimpleti contractus,” or “동시 이행 항변권” in Korean).

The problem is this way of the contest is, in most cases, you already have contracted another place to live. You need to move out of the previous residence and move into the new one. It won’t be easy to cancel the new lease contract, and moreover, when the previous lessor gives the money back to you, then you need to move out. You will be in an insecure status, stuck in the middle, not canceling the new contract, yet not moving out from the previous house, waiting until the lessor gives the money back. 

2. The second and recommended way to contest is registration. 

Housing Lease Protection Act Article 3-3 (Leasehold Registration Orders)

(1) If no deposit is refunded after the termination of a lease, the lessee may file an application for a leasehold registration order with the district court, the branch of the district court, or the Si/Gun court having jurisdiction over the location of the leased house.

(2) The following matters shall be stated in the application form for a leasehold registration order, and the reasons for filing the application, and the facts constituting the grounds for the lease registration shall be clearly explained:

1. 1. 1. Purport of and reasons for the application;
      2. The house which is an object of the lease (where the object of the lease is a part of the house, the drawing plot shall be attached thereto);
      3. The facts constituting the grounds for the lease registration (the fact that the lessee has obtained the opposing power provided for in Article 3 (1), (2) or (3), or the preferential repayment right provided for in Article 3-2 (2));
      4. Other matters determined by the Supreme Court Regulations.

(5) Where the lessee completes the registration of leasehold following the execution of the leasehold registration order, he/she shall obtain the opposing power provided for in Article 3 (1), (2), or (3) and the preferential repayment right provided for in Article 3-2 (2): Provided, That where the lessee has already obtained the opposing power or the preferential repayment right before the registration of leasehold, the opposing power or the preferential repayment right shall be maintained as it is, and even if he has lost the requirements for opposing power provided for in Article 3 (1), (2), or (3) after the registration of leasehold, the opposing power or the preferential repayment right which he has already obtained shall not be lost. <Amended on Aug. 13, 2013>

We already have mentioned that registration is not required, but this does not mean that registration is impossible. This system is stipulated in Housing Lease Protection Act (주택임대차보호법) Article 3-3. As you can see from the title of the Act, this is to protect the house lessee. The requirements are simple.

1. The lessee has obtained the “opposing power (대항력).” Opposing power is a right to contest against a third party. We will discuss this concept in the next article.
2. The lease contract is terminated, due to the expiration or any other reasons.
3. The deposit is not returned.

If you meet these requirements, you can file an application for a leasehold registration order to the district court. As it is just an application, not a lawsuit, so it (mostly) only takes two or three weeks for the order to be issued. 

Once a leasehold registration order is issued, there are a few benefits to the lessee. First, your opposing power does not vanish if you had moved out. Second, you get to obtain a “preferential repayment right” for the house, therefore once the object is auctioned, then you get to be paid from the proceeds from the sale. 

Last and the most important effect of the leasehold registration order is that the record remains. There is no lessee who wants to lease from an unreliable lessor. Once the registration is done, the record regarding the registration shall be permanently on the record even if the deposit is returned (another registration that the order was canceled shall be recorded upon the previous record). This shall be an indicator for the possible future lessee to check the credibility of the lessor and can decide to avoid the lessor with a registration record. And there is no lessor who wants to be avoided by the lessee. 

Conclusion

In general, the lessee has a high possibility of being endangered or stuck in the middle. By House Lease Protection Act, it is possible to have your leasehold registered and have your deposit refunded. For that, three elements are required; 1) the lessee has obtained the opposing power 2) the lease contract must be terminated 3) the deposit is not refunded. In this article, we have not discussed the notion of the “opposing power,” but we are going to discuss it later, so please wait for the next article. 

Seoul Law Group has various experiences regarding house lease contracts including Jeonse. Especially, the leasehold registration is a relatively quick procedure, so we can help your deposit to be returned soon. Please do not hesitate to contact us.