How Commercial Lease Conversion Differs From Housing in Korea — A 12 Percent Ceiling and a Threshold

The legal ceiling on commercial lease conversion in Korea is 12 percent a year. For housing it is 5 percent, so the commercial ceiling is 2.4 times higher. Converting a 200 million won deposit into rent, a home tops out at 833,333 won a month, while a shop can go up to 2,000,000 won.

The ceiling is not the only difference. Commercial leases have a cut-off called the converted deposit. Above it, neither the conversion ceiling nor the 5 percent increase limit applies. In Seoul the cut-off is 900 million won. The amount the 5 percent is measured against also differs: for housing it is "the agreed" amount, for commercial leases it is the amount "at the time of the claim."

Below I set the Commercial Building Lease Protection Act and its Enforcement Decree next to the Housing Lease Protection Act and go through the differences. It should help tenants and landlords of commercial property decide which figures to work from before a conversion or renewal.

The ceiling on commercial lease conversion is 12 percent

The two articles are worded differently

Both housing and commercial law cap the conversion rate, but the wording differs. Article 7-2 of the Housing Lease Protection Act says to use the lower of two rates, and Article 9 of its Decree sets the first at 10 percent a year and the second as the base rate "plus 2 percent a year."

Article 12 of the Commercial Building Lease Protection Act reads:

Where all or part of a deposit is converted into monthly rent, the amount converted shall not exceed the monthly rent calculated by multiplying it by the lower of the following rates:

1. a rate prescribed by Presidential Decree, taking into account bank lending rates under the Banking Act and regional economic conditions;
2. the rate obtained by multiplying the base rate published by the Bank of Korea by a multiple prescribed by Presidential Decree.

Article 5 of the Decree sets the first rate at 12 percent a year and the multiple at 4.5. With the base rate at 3.0 percent, 4.5 times gives 13.5 percent. The lower of the two, 12 percent, is the ceiling.

Adding versus multiplying

Both use the lower of two rates, so the 2.4-times gap comes from how the second rate is worked out. Housing adds 2 percentage points to the base rate. Commercial multiplies it by 4.5.

At a 3.0 percent base rate, housing comes out at 5 percent and commercial at 13.5 percent. For housing the second rate is lower, so 5 percent is the ceiling. For commercial the first rate is lower, so it stops at 12 percent. Once the base rate is above 2.67 percent (12 ÷ 4.5), the multiplied figure is always higher than 12 percent, so at most realistic rates the commercial ceiling stays at 12 percent. For housing, the base rate would have to go above 8 percent before the 10 percent rate became the lower one. In short, the housing ceiling moves with the base rate, while the commercial ceiling sits at 12 percent.

Here is how it works out for a 200 million won deposit.

	Housing	Commercial
Ceiling formula	lower of 10%/yr and base rate + 2pp	lower of 12%/yr and base rate × 4.5
Ceiling now	5%	12%
Monthly rent ceiling on a 200m won conversion	833,333 won	2,000,000 won
Amount the 5% increase is measured against	the agreed rent, etc.	the rent or deposit at the time of the claim
Total period covered by the renewal right	4 years (2+2)	10 years
Term on implied renewal	2 years	1 year
Arrears that justify refusing renewal	2 months' rent	3 months' rent

That is a difference of 1,166,667 won a month, or 14 million won a year.

Above the converted-deposit cut-off, the ceilings disappear

First, check that the Act covers your lease

Before working out the converted deposit, check whether the Act applies at all. Article 2(1) sets its scope:

This Act shall apply to leases of commercial buildings (meaning buildings subject to business registration under Article 3(1)) (including cases where the principal part of the leased property is used for business purposes).

The building has to be one that is subject to business registration, and the main part has to be used for business. The Supreme Court decides whether a building is commercial by how it is actually used, not by what the register or building ledger says (Supreme Court decision of 28 July 2011, 2009Da40967). In the same decision, the court said a factory or warehouse used only to store or make goods is not in business use, but it is covered if profit-making activity such as taking orders and selling also happens there. Where a property mixes living space and a shop, what matters is which use is the main one.

Whether the tenant has actually registered the business is a separate question. Under Article 3(1), the lease becomes enforceable against third parties from the day after the tenant takes possession and applies for business registration. Whether the Act covers the lease and whether the tenant has that protection need to be checked separately. Since the Act that applies decides whether the conversion ceiling is 12 percent or 5 percent, look at the lease, the business registration certificate and how the space is actually used first.

The converted deposit is the deposit plus 100 times the rent

Article 2(1) has a proviso: the Act does not apply "to leases exceeding the deposit amount prescribed by Presidential Decree." Article 2(2) says that where there is rent as well as a deposit, the rent is multiplied by a rate set by Presidential Decree and added in, and Article 2 of the Decree sets that rate at 100 and the rent as the monthly figure.

So the converted deposit is the deposit plus 100 times the monthly rent. The regional cut-offs are in Article 2(1) of the Decree.

Region	Cut-off
Seoul Special Metropolitan City	900 million won
Overconcentration control region (excluding Seoul) and Busan	690 million won
Metropolitan cities (excluding areas in the overconcentration control region, county areas, and Busan), Sejong, Paju, Hwaseong, Ansan, Yongin, Gimpo, Gwangju (Gyeonggi)	540 million won
Elsewhere	370 million won

In Seoul, a 100 million won deposit with 5,000,000 won monthly rent gives 100 million + 500 million = 600 million won, which is under the cut-off. At 8,100,000 won a month it becomes 100 million + 810 million = 910 million won, over the 900 million line. A 3,100,000 won difference in monthly rent changes whether these limits apply.

Above the cut-off, Articles 11 and 12 drop out

Going over the cut-off does not switch off the whole Act. Article 2(3) lists the provisions that still apply: Article 3 (enforceability against third parties), Article 10(1), (2) and the main text of (3) (the right to request renewal), Article 10-2, Articles 10-3 to 10-9 (key money), Article 11-2, and Article 19.

Article 11 (claims to raise or lower rent) and Article 12 (the conversion rate limit) are not on the list. Neither the 5 percent increase limit nor the 12 percent conversion ceiling applies. Article 10-2 applies instead:

In the case of renewal of a lease exceeding the deposit amount under the proviso to Article 2(1), the parties may claim an increase or decrease of rent and deposit, taking into account taxes and public charges on the commercial building, the rent and deposits of neighboring commercial buildings, other burdens, changes in economic circumstances, and the like.

It lists things to take into account but gives no ceiling. The right to request renewal still runs for up to ten years, but the rent can follow the local market. That is why "surely it's illegal to raise it by more than 5 percent" does not hold for high-value commercial leases. The Housing Lease Protection Act has no cut-off like this, so Articles 7 and 7-2 apply to every residential lease.

The 5 percent is measured against a different amount

The sentence setting the 5 percent cap also differs. For housing, Article 8(1) of the Decree says "one-twentieth of the agreed rent, etc." For commercial leases, Article 4 of the Decree says:

A claim to increase rent or the deposit under Article 11(1) of the Act shall not exceed 5/100 of the rent or deposit at the time of the claim.

Commercial leases use the amount at the time of the claim. Since both Acts bar an increase within a year of signing or of the last increase (housing Article 7(1), commercial Article 11(2)), the result is usually the same. But if the amount was changed by agreement partway through the lease, the figure the 5 percent is applied to can differ. For a commercial lease, check the amount as of the date of the claim.

There is also a provision that only commercial leases have: Article 11(3). If rent was reduced because of a Class 1 infectious disease and the landlord later raises it again, the 5 percent cap does not apply until the rent is back to its pre-reduction level. It was added on 29 September 2020 so that landlords who cut rent would not be blocked from returning to the original amount. If your rent was lowered during the pandemic, this still applies.

The case law is worth knowing too. Supreme Court decision 2013Da35115 held that if a tenant exercised the right to renew and then signed a new contract document, it is still treated as a renewal if that is what it was. An agreement to pay more than the statutory rate is void for the excess, and the overpayment can be recovered as unjust enrichment. On the other hand, Supreme Court decision 2013Da80481 held that the increase limit applies to claims made while the lease is running, not to a new contract after it ends or a figure the parties simply agree on. What counts is not whether a new document was signed but whether it is a renewal or a new contract.

What to check for a commercial lease conversion

1. Work out the converted deposit first. Whether deposit + (monthly rent × 100) is over your region's cut-off decides everything else. Above it, neither the conversion ceiling nor the 5 percent limit applies.
2. Under the cut-off, the conversion ceiling is 12 percent. Multiply the deposit being converted by 12 percent and divide by 12 to get the monthly rent ceiling. If the base rate falls below 2.67 percent, the 4.5-times figure becomes lower and you need to recalculate.
3. Keep conversion and increase apart. Moving money from deposit to rent is a conversion (Article 12); raising the total is an increase (Article 11). If a proposal includes both, calculate each and then look at the combined result.
4. Check whether a year has passed. No increase can be claimed within a year of signing or of the last increase.
5. Count how much of the renewal right is left. It covers ten years in total, including the original term. After ten years there is no right to renewal, which weakens the tenant's position in any negotiation over rent.
6. If the rent was ever reduced, check Article 11(3). An increase that only restores a reduction made because of an infectious disease is not capped at 5 percent.

If your lease is residential, see the per-item 5 percent cap when raising deposit and rent together. Housing also differs in that no provision combines deposit and rent into one converted figure. Registered rental operators should also read what happens to capital gains tax after rental registration cancellation.

Closing

Commercial lease conversion differs from housing in three ways. The conversion ceiling is 12 percent rather than 5 percent, both that ceiling and the 5 percent increase limit fall away once the converted deposit is over the regional cut-off, and the 5 percent is measured against the amount at the time of the claim. The ten-year renewal right and the one-year term on implied renewal also shape any discussion about rent.

If you bring housing figures to a commercial lease conversion, the monthly rent can be off by more than double. Start by checking whether the Act covers your lease, then work out the converted deposit and see which side of the cut-off you are on.