Экзамен зачет учебный год 2023 / 18 Korea

Editor’s Preface

I wish to express my deep and sincere thanks to all my distinguished colleagues who have contributed to this first edition of The Real Estate Law Review. I would also like to thank Gideon Roberton and his publishing team for their tireless work in coordinating the contributions from the various countries around the world.

David Waterfield

Slaughter and May

London

February 2012

viii

Chapter 18

Korea

Yon Kyun Oh, Ann Seung-Eun Lee and Heung Suk Oh 1

IINTRODUCTION TO THE LEGAL FRAMEWORK

iOwnership of real estate

With respect to ownership of real estate, Korean law only recognises complete ownership, which is similar to the Anglo-American law concept of a fee simple absolute. Korean law does not recognise partial estates such as life estates (ownership lasting only during a certain person’s lifetime), conditional estates (ownership lasting only as long as certain conditions remain satisfied) and future interests (ownership arising only upon the occurrence of a future contingency). Leasehold interests, rights of superficies (the right to use land without ownership) and certain easements are also recognised under Korean law.

In Korea, real estate may be held by sole ownership or by tenancy in common, where two or more persons own an undivided interest (which may or may not be equal) in real estate with no right of survivorship. Joint tenancy (where two or more persons own an undivided and equal right to enjoy the property during their lives, with the right of survivorship) and tenancy in the entirety (where the joint tenancy is between a husband and a wife) are not recognised under Korean law. Depending on the relationship among the joint owners, tenancies in common can be divided into: (1) gongyu, where the joint owners are not related and each owner has full right to dispose of its ownership interest independently from the other owners; (2) hapyu, where joint owners own the real property as a partnership such that until the partnership is dissolved, the real property, as well as interests in the partnership, can only be transferred with the consent of all of the owners; and (iii) chongyu, where real property is owned by an association such as a religious organisation and disposition requires the consent of the requisite proportion of the members of such organisation).

1Yon Kyun Oh is a partner, Ann Seung-Eun Lee is a foreign attorney and Heung Suk Oh is an attorney at Kim & Chang.

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ii System of registration

In Korea, a separate title registry exists for land and buildings, which constitute separate real estate. Title registries are maintained by the local court registrar. In addition, the local government maintains a separate ledger (containing detailed descriptions of the real property) for land and buildings.

Registration in the title registry is generally required to perfect real estate title transfers (except for transfers arising by operation of law). Registration of title constitutes prima facie evidence of valid title. The order of priority among different interests in real estate (including security interests) is generally determined by the order of registration in the title registry.

The Korean title registry involves ‘registration’ of interests, rather than ‘recording’ of interests. Thus, while the information shown in the title registry is public information, the underlying documents creating such interests, which are required to be submitted to the court registry in connection with the registration, are generally not publicly available (except for trust agreements).

There is no state guaranty of title. Title insurance is available but has not been widely used due to the fact that title registration generally constitutes prima facie evidence of valid title.

iii Choice of law

Real estate transactions are mainly governed by the Civil Code, the Commercial Code, the Real Estate Registration Act (creation and maintenance of title registries), the National Land Planning and Use Act (zoning and land use) and the Building Code (construction and building use).

Depending on the particular transaction, certain additional laws may apply, such as the Industrial Complex Act (development and use of industrial complexes and establishment of factories), the Act on Free Economic Zones (tax benefits to qualified investors in real estate located in free economic zones) and the Act on Foreigners’ Land Ownership (procedures for foreigners to acquire Korean land).

IIOVERVIEW OF REAL ESTATE ACTIVITY

iReal estate investment trusts

2011 saw the creation of 26 new real estate investment trusts (‘REITs’) (with 7.4 trillion won in assets under management), which represents the largest number of new REIT creations in a single year to date, and an increase from the 17 new REITs (with 7.9 trillion won in assets under management) in 2010. The increase is due in part to recent difficulties in raising funds through the project financing structure. The investment target of REITs have also been diversified to include not only office buildings but also officetels,2 retail properties, hotels, warehouses and mixed-use properties.

2 A multi-purpose building with residential and commercial units.

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ii Real estate funds

The total amount of investments in Korean real estate funds (‘REFs’) was about 7 trillion won in September 2008, just before the start of the global credit crisis. That amount steadily grew to 11 trillion won by December 2010 and to 12 trillion won by July 2011. As of early January 2012, the total amount of investments in Korean REFs was just over 13 trillion won, more than 97 per cent of which were invested in private real estate funds (funds offered privately to a limited number of institutional investors such as pension plans, associations and financial institutions). The total amount of investment in REFs is expected to grow even further this year.

IIIDEVELOPMENTS IN PRACTICE

iAmendments to the Trust Act

On 25 July 2011, certain amendments to the Trust Act were promulgated into law, effective as of 25 July 2012. The amendments, which are quite comprehensive in scope, represent the first time that the Trust Act has been amended since its adoption in 1961 and are intended to facilitate the use of trusts. The most significant changes are that:

aa trust may now designate itself as a trustee of a trust, provided that the trustor cannot cancel such trust;

bunless otherwise prohibited by the trust agreement, a trustee may, with the consent of the beneficiaries, further entrust trust property to another trust;

ca trustor may assign all of its rights, title and interest in, to and under a trust to a third party if permitted by the trust agreement or otherwise consented to by the trustee and the beneficiaries of such trust;

dthe liability of a trustee for the debts of a trust may be expressly limited to the assets of such trust through the use of a limited liability trust; and

ethe trustee of a limited liability trust may issue bonds on behalf of, and secured by, the assets of such trust.

In addition, the amendments to the Trust Act clarified that creditors of a trust (e.g., mortgagees and lessees) have priority over the beneficiaries of such trust, provided that the trust’s creditors may not cancel a trust where a bona fide trustee has been entrusted with trust property for consideration or a bona fide beneficiary has acquired beneficial interests in such trust for consideration. Given the increased structuring flexibility provided by the amended Trust Act, the trust is expected to be utilised more widely in various transactions.

ii Amendments to Enforcement Decrees related to the REIT Act

The new ‘parent-subsidiary real estate investment trust’ (‘parent-sub REIT’) structure is now permitted under the amendments to the Enforcement Decrees related to the Real Estate Investment Trust Act, which became effective on 31 December 2011. In order to qualify as a parent-sub REIT, national pension plans and mutual savings associations must own more than 50 per cent of the equity interests in the parent REIT, which in turn owns more than 50 per cent of the equity interests in the subsidiary REIT, which in turn owns real property. Unlike other normal REITs, parent-sub REITs are exempt from

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the public offering requirement, as well as the 30 per cent limitation on the maximum equity ownership by a single investor. The amendments are designed to encourage investment by national pension plans and mutual savings associations in REITs and to promote the advancement of the real estate market by offering a new source of capital to a market that has traditionally depended on bank loans. As a result of the amendments, increased investment in REITs by the National Pension Service of Korea – the largest single institutional investor in Korea – is anticipated. According to certain industry reports, the National Pension Service of Korea is reviewing the potential investment of between 400 and 800 billion won in parent-sub REITs.

iiiAmendments to Enforcement Decrees related to the Act on National Land Planning and Use

Certain amendments to the Enforcement Decrees related to the National Land Planning and Use Act (‘the NLPUA’) were promulgated into law, effective on the 9 March 2011, lifting certain restrictions on contiguous development. Prior to the amendments, the issuance of development permits was uniformly restricted where the size of a contiguous area permitted for a specified purpose exceeded a certain threshold (e.g., 5,000 square metres in the case of green preservation areas and 30,000 square metres in the case of industrial areas), the amendments allow the issuance of development permits even in the case of contiguous development if systematic development is determined to be possible upon review by the city planning committee.

The amendments also provide that within certain designated areas within which real property transactions are subject to local governmental authority approval (‘transaction approval area’), where a person has obtained the requisite approval for a factory, residence or certain other uses for a building and is actually using such building for the originally permitted purpose, such person may lease a portion of such building that would otherwise remain idle to a third party also for the originally permitted purpose. This is a departure from the previous rule, which permitted a factory or other building located within a transaction approval area to be used only for the originally permitted purpose by the original user, even if excess space remained idle.

iv Amendments to Housing Site Development Promotion Act

Certain amendments to the Housing Site Development Promotion Act expanding the scope of private participation in the housing site development business became effective on 31 August 2011. Prior to the amendments, only public agencies (national and local governments, local public corporations and the Korea Land and Housing Corporation) were permitted to carry out the housing site development business. Under the previous regime, exceptions from this restriction existed for persons registered under the Housing Act (‘registered housing developers’), which (1) own more than a certain portion of the land in a specified housing site development zone and (2) have either registered as a general contractor pursuant to the Framework Act on the Construction Industry or have executed a contract with a party who is permitted to participate in housing site development projects with public agencies. The amendments now permit registered housing developers to participate in housing site development by entering into a co development agreement or establishing a co investment vehicle with a public

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agency without satisfying any other requirements. The participation of private entities is expected to lower the cost of housing site development, which in turn will result in lower sales prices for developed land. In addition, the new influx of private capital is expected to stimulate development in areas where projects have been suffering from delays due to recent liquidity problems of the Korea Land and Housing Corporation and other public agencies.

v Amendments to the Act on Private Participation in Infrastructure Projects

On 4 August 2011, certain amendments to the Act on Private Participation in Infrastructure Projects were promulgated into law, effective as of 5 November 2011. The amendments are intended to promote private participation in government projects by increasing profitability and facilitating financing, most notably, by:

aincreasing potential returns to private participants by increasing the scope of permitted ancillary businesses that may be conducted in conjunction with the main public project;

bnow allowing trust-type infrastructure funds incorporated as closed-end funds and governed by the Financial Investment Services and Capital Markets Act to invest in public projects; and

cpermitting asset-backed securitisation vehicles to issue bonds in connection with the financing of public infrastructure projects (previously, only the developer and banks were permitted to issue such bonds) and permitting such bonds to be guaranteed by the Korea Infrastructure Guarantee Fund.

The amendments are expected to increase attractiveness of investments in public infrastructure projects at a time when returns to private participants have been fairly low as a result of the overall economic downturn following the global credit crisis and the discontinuance of the minimum revenue guarantees, which were previously available in certain public projects.

viAmendments to the Act on Development and Management of Logistics Facilities

On 4 August 2011, certain amendments to the Act on Development and Management of Logistics Facilities were promulgated into law, effective as of 5 February 2012. The most significant change under the amendments is the introduction of the registration requirement for entities engaged in the logistics facilities business. Previously, the logistics facilities business went from a permit-based business to a registration-based business in 1991. When registration became no longer required in 2000, the industry experienced a proliferation of tiny logistics facilities businesses. Under the amendments, entities engaged in the ownership or leasing of a logistics warehouse facility with a total floor area of 1,000 square metres or more, or a logistics storage area that has a total area of 4,500 square metres or more, are required to be registered. In addition, the amendments introduced a new subsidiary system for certain logistics facilities business activities, as well as a mechanism to provide official recognition to superior logistics facilities service providers who have contributed to the improvement of service quality.

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vii Amendments to and restructuring of Local Tax Law

Effective as of 1 January 2011, the previous Local Tax Law (‘the old LTL’) was amended into (1) the Local Tax Basic Law (‘the LTBL’), (2) the Local Tax Law (‘the new LTL’) and

(3) the Local Tax Incentives Limitations Law (‘LTILL’), collectively, ‘the new tax laws’. The new tax laws include several departures from the old LTL with implications for real estate transactions, including the following.

First, the new tax laws consolidate 16 local tax items into 11, although the effective tax burden remains the same. For example, under the old tax laws, in connection with the acquisition of real property, acquisition tax was payable within 30 days of the acquisition and registration tax was payable at the time of the registration of the title transfer. Under the new LTL, acquisition tax and registration tax related to acquisition have been combined into a single combined acquisition tax payable by the time of the registration of transfer of title to real property. Similarly, under the new LTL, (1) registration tax (not related to acquisition) and licence tax have been combined into a single registration licence tax, (2) property tax and city planning tax have been combined into a single property tax and (3) common facility tax and regional development tax have been combined into a single regional recourse and facility tax.

Second, under the old LTL, amended tax returns were required to be filed within 60 days of the event triggering the obligation to file such amended tax return in order to avoid penalties. Under the new LTBL, amended tax returns may be filed at any time prior to the assessment of the underpaid taxes (if ever) by the applicable tax authorities. Penalty taxes, however, which start accruing from the due date of the filing of the original tax return (at increasingly higher rates with the passage of time), must be paid at the time of the filing of the amended tax return.

Third, under the old LTL, tax refund claims were required to be filed within 60 days of the event triggering the right to a refund. Under the new LTBL, a refund claim may be filed up to three years after the due date of the filing of the local tax return.

Fourth, under the old LTL, there was no prescribed time period for a tax audit. Under the new LTBL, tax audits are required to be completed within 20 days.

viii Amendments to Presidential Decrees related to the Public Health Control Act

Effective as of 10 January 2012, certain amendments to the Presidential Decrees related to the Public Health Control Act were promulgated into law. The amendments are designed to provide a legal basis for serviced residences in response to the 15 April 2010 Supreme Court ruling that operating a serviced residence constitutes accommodation business rather than real estate leasing business and, therefore, that operating a serviced residence without reporting it as an accommodation business was illegal. This ruling left many serviced residences equipped with cooking equipment in a difficult position as there was no legal ground under the Public Health Control Act to report accommodation businesses with cooking equipment.

The amendments introduced a new category of ‘living accommodation business’, which includes accommodation facilities equipped with cooking equipment, thus providing a legal ground for reporting serviced residences equipped with cooking equipment. Any accommodation facilities with cooking equipment already in existence as of the effective date of the amendments are required to either remove the cooking

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equipment within one year or report itself as a living accommodation business under the Public Health Control Act.

IV FOREIGN INVESTMENT

Governmental approval is generally not required for foreign persons to acquire real estate in Korea. Under the Foreigners Land Act, however, acquisition by a foreign person of land located in Korea, either directly or indirectly through a company the majority interests of which are owned by a foreign person, must be reported to the local government. In lieu of filing a report under the Foreigners Land Act, a foreign purchaser may file a report pursuant to the Act on Certified Broker’s Business and Real Estate Transaction Act, which is required to be filed in connection with all real estate acquisitions in any event. Certain tax incentives may also be available in connection with foreign investments made in certain designated foreign investment zones. In addition, foreign-invested entities that acquire real property are exempt from the obligation to purchase national housing bonds in connection with the acquisition of real property in proportion to the amount of direct foreign investment in such entity (see Section VI, infra, for additional details on the requirement to purchase national housing bonds).

While direct acquisition is also possible, foreign companies generally acquire real estate in Korea through special purpose vehicles, whether it be ordinary companies or structures with tax benefits such as REFs or REITs companies (see Section V, infra, for additional details).

V STRUCTURING THE INVESTMENT

The recent trend has been for the Korean government to provide increasing flexibility to various investment structures. The following are investment structures commonly used in real estate investments in Korea.

i Real estate investment trusts

REITs are becoming an increasingly popular vehicle for real estate investment in Korea. While the REIT Act recognises a few different types of REIT, the corporate restructuring REIT (‘CR-REIT’) is most commonly used by private investors, despite the fact that CR-REITs are only permitted to invest in real estate assets sold by companies undergoing corporate debt restructuring (i.e., the seller should use the proceeds from the sale to repay its debt). This is because unlike other types of REITs, CR-REITs are (1) exempt from the public offering requirement, (2) not subject to the cap on the maximum ownership by a single investor and (3) not subject to the minimum hold period during which disposition of assets is prohibited, thus eliminating what are commonly viewed as the disadvantages of a REIT.

Recent amendments to the REITs Act announced in 2010 aimed at boosting the recovery of the real estate market and promoting the use of REITs have made REITs even more attractive to investors. These amendments include:

aa reduction in a REIT’s minimum required paid-in capital at establishment and during operation;

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bshortening the mandatory hold period for non-residential property (from three years to one year after the acquisition);

ca reduction from 30 per cent to 20 per cent in the minimum percentage of shares required to be publicly offered by a REIT until the end of 2012 (other than CRREITs, which are not subject to any public offering requirement); and

dan increase from 30 per cent to 35 per cent in the maximum percentage of shares owned by any single REIT shareholder until the end of 2012 (other than CR REITs, which are not subject to any maximum ownership caps).

ii Real estate funds

REFs are also frequently used in real estate investments. Among the various types of REFs recognised by the Financial Investment Services and Capital Markets Act (‘the FSCMA’), the trust-type REF has been most commonly used due to the relative ease with which a trust-type REF can be established because the structure does not involve the incorporation of an entity. Recently, the limited liability company (yuhan hoesa in Korean)-type REF has been gaining interest, especially among foreign investors. Currently, REFs are not subject to any cap on the maximum ownership by a single investor. One significant disadvantage of the REF structure is that because the FSCMA’s intent was to provide tax benefits to passive investors in an REF, investors by statute have only a very limited amount of control over the day-to-day management and operation of the REF assets, which is instead required to be undertaken by a licensed asset management company. REFs are also subject to a three-year mandatory hold period before it can dispose of its assets, with certain limited exceptions.

iii Project finance vehicles

In the project finance vehicle (‘PFV’) structure, one or more financial institutions must hold at least 5 per cent of the equity interest in the PFV. In addition to various tax benefits, the key advantages of the PFV structure are that formation of a PFV is relatively quick because governmental approval is not required (only filing with the local tax authority is required) and investors in the PFV can exercise a great degree of control over the operation and management of the PFV assets. Key disadvantages are that the PFV structure may be used only for large scale development projects, a PFV has a limited life span and there are some uncertainties regarding requirements for PFV qualifications.

iv Asset-backed securitisation

Despite stringent legal and ‘internal’ regulatory requirements such as ‘originator’ qualifications governing the establishment and operation of asset-backed securitisation vehicles, this structure continues to be used to acquire commercial buildings due to its various tax benefits.

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VI REAL ESTATE OWNERSHIP

i Planning

The Ministry of Land, Transportation, and Maritime Affairs devises a basic land use plan at national level. Local governments are responsible for establishing more detailed land use plans at the local level.

The main laws governing land use include the NLPUA, which regulates zoning and land use and the Building Code, which regulates construction and building use. Under the NLPUA, every parcel of land receives one or more zoning (e.g., residential, commercial, industrial, green, etc.) and if applicable, sub-zoning designations (e.g., commercial areas may be subdivided into hub-commercial, general commercial, residential commercial, distribution commercial, etc.). A parcel of land may also receive other area-specific designations such as air-defence cooperation area, overcrowding restriction area, fire prevention area, etc. In addition, each parcel of land also has a specific land usage designation, such as building site, factory site, farmland site and forest site. Furthermore, under the Building Code, every building has a registered purpose of use, which should be complied with by user of such building. The above designations determine the permitted use of a particular parcel of real estate.

Other specific laws may apply for certain types of development, such as development of industrial and residential complexes and redevelopment of destroyed city areas.

ii Environment

Under the Framework Act on Environmental Policy (‘the FAEP’), the polluter is generally responsible for remediation of and compensation for damages arising from environmental pollution caused by it. The FAEP is a strict liability statute; accordingly, if one is shown to have caused pollution, which in turn is shown to have caused damages, the polluter will be liable whether or not it was negligent or otherwise at fault.

Furthermore, with respect to soil contamination liability, certain persons, including owners, occupants and operators of certain facilities likely to cause soil contamination and acquirers of such facilities (or even just the land under such facilities), are deemed to be polluters and may be held strictly liable for such contamination.

A lessee of real property (who is not operating the facilities) may also be liable under general tort theories for damages caused by contamination of land, even if such contamination existed prior to its occupation of the land.

iii Tax

In connection with the acquisition of real property, the purchaser is required to pay an acquisition tax (including surtax) at the rate of 4.6 per cent of the purchase price (or 9.4 per cent, if the real estate is in the Seoul Metropolitan Area and acquired by the head office or a branch office) and purchase national housing bonds issued by the government in an amount equal to around 5 per cent of the government-posted standard value in the case of land, and in the case of non-residential building, around 2 per cent of the government-posted standard value (foreign-invested entities are exempt from this national bond purchase requirement)(see Section IV, supra, for additional details).

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