South Korea - Real Property Issues
|Law fixes broker commission rates. Depending on the monetary amount of the transaction, this commission rates changes. For example, if the transaction amount is 5,000,000 Korean Won, then the commission rate is 5%, which is paid equally by the seller and the buyer. As the transaction amount increases the rate of commission decreases. Although law fixes commission rates, due to competition among brokers, they usually charge less. However, brokers cannot charge more than what the law allows.
Property and ownership information
|South Korea has a unitary as distinguished from a federal system of government. The national government is organized into territorial subdivisions, or provinces as "Do"s. These provincial units are not to be confused with states in America, which have current legal and governmental status with the federal government. By contrast, in R.O.K., the national government delegates the enforcement of laws (i.e. administrative roles) to provinces and cities but these provincial and local governments merely implement and administer the national laws and regulations. They have no authority to originate policy.
Property laws in Korea had important influences from foreign countries. From 1910 through 1945 Korea was under Japanese occupation. Korea was heavily influenced by Japanese legal systems and adopted many Japanese laws. European Civil Codes heavily influenced Japanese law, especially with respect to property laws. When Korea was freed from Japanese occupation in 1945, the U.S. government had a major role in assisting Korean government's transition. American property law was used as a model for some areas of property law in Korea. It is therefore important to remember that real property law in Korea follows both American and European law, especially the German.
Korean are very pragmatic people. This pragmatism and cultural context is apparent in the legal system. For example, both purchase contract and lease agreement document in Korea typically encompass only a single page. Long complex documents are loathed by Koreans, who dislike the very concept of written contracts, and prefer to consummate deals only through handshakes. They like simplicity not complication. In the Orient common sense and traditional still dominates the contractual relationship. Written contracts are not looked upon as legally binding as in America.
The country is going through one of the fastest economic growth rates in the world and aggressively modernizing and revising its systems. Therefore it is important to keep in mind that materials presented in this section can change quickly. Also at present time, Korean government does not allow foreign investors to invest for the sake of investment. In other worlds, only those who will be using the real estate to conduct its normal businesses and expatriates can own real property in Korea.
Similar to the U.S. Korea also have recording offices -called "Tunkiso"- in each local districts. Most of the property and ownership information are on the certificate (Torrens System) and they are indexed by the address of the property.
|Information pertaining to selling prices and terms of the transaction are not required to be recorded in Korea. So the only way to get this information is to ask the seller or the buyer directly.
Real estate trade association
|Name: National Association of Real Estate Brokerage
Address: 234-2 Kong Deok - Dong, Mapo-Gu, Seoul
Korea Real Estate Association (KREA)
Songkyung Bldg, 10fl.
Korea, Republic Of
Phone : +82 2 3452 0605
Fax : +82 2 34520666
e-mail : firstname.lastname@example.org
Web : www.fiabci.or.kr
The Korea Real Estate Federation was founded in 1970, under the auspices of the Ministry of Construction. It represents the real estate profession in Korea and offers its members services such as publications and events including special reciprocal links and activities with Japan.
|Until late 1980's, anybody could hang a sign on the door and engage in real estate brokerage business. But now it has become more sophisticated and the public administrative agency decided to regulate the field. Now licensing is required in order to engage in real estate brokerage business. Similar to the U.S., all the licenses are required to apply for the license and pass the official examination and properly register with the government agency.
Land description meters and bounds survey system
|Accurate description of the property is one of the most important aspects of the deed. Korea has a system of legal description similar to that employed in the U.S. It must be clear and accurately distinguish the property from other parcels of real property. If the property is improved, then the size and the year it was built need to be on the deed along with the land description.
Rights and interests in land
|A. Fee Simple or Fee Simple Absolute
Fee simple is the only freehold interest acknowledge in Korea. Similar to European Civil Law, the fee simple state is the only possessory real property interest recognized in Korea. This is the most encompassing estate in real property a person can have. This interest is the most basic "property" right in Korea, and it is used as a foundation by which all other property rights are measured. Within the limits of public law, e.g., public zoning, building code, the fee simple owner is free to do whatever with the land. This includes: exclusive right to possess, to use, to encumber, to transfer (dispose of), to exclude and to destroy.
B. Life State
Life states do not exist in Korea law! The concept of life states runs counter to Korean culture where, once a property is acquired, people want to keep it forever, pass it on to their children and grandchildren. Multi-generational succession to property within the family is a very important tradition in Korea.
This is an estate that is limited in duration to the life of its owner, or to the life or lives of one or more other designated persons. The grantee of a life estate can use the real property just as though he or she is the fee simple owner. Life estate ends when the person whose life is the measuring rod dies.
Again, it would not be illegal in Korea for parties to contractually agree to terms comprising the essence of a life estate, but such an agreement could not be registered or recorded!
C. Fee Tail
Fee tail, a type of estate in which the right of inheritance is limited to the direct descendants of the grantee, is also not found in Korea because only fee simple estate is recognized. However, it can be created contractually between two private parties, although again it would not be recorded or registered! Because Koreans have a cultural aversion toward unnecessary restrictions, especially private restrictions, it is doubtful that fee tail clauses would appear in real property contracts. The purpose of this estate is to keep the property in the family. Should the grantee's line cease no matter how many generations later, the estate reverts back to the grantor's heirs. This estate has now completely disappeared or been modified in most of the states in America.
D. Defeasible Fee, Special Limitations, and Condition Subsequent
In contrast to the fee simple, the fee simple defeasible has restrictions. Although one who holds a fee simple defeasible may use and hold the property forever, or convey it, or have it inherited by his heirs, he must use it subject to a restriction. Fee simple defeasible falls into three categories: (1) the fee simple determinable, which lapses automatically if the impermissible event occurs; (2) the fee simple subject to a condition subsequent, which gives the grantor a right to reenter the property and terminate the estate if the impermissible event occurs; and (3) the fee simple subject to a special limitation, which provides for transfer of the property to a third person (one other than the grantor) if the impermissible event occurs.
As mentioned above, Korea only has fee simple estate. In Korea, a grantor cannot insert any restrictions in the deed except in the case of donation or inheritance. Again, it can be created between two individuals but there is no property law governing this estate. Private restrictions are extremely disfavored in Korea, and if a given property contained such restrictions it would likely render the property unmarketable because of the strong cultural bias against such arrangements.
II. Non-freehold estates
Non-freehold estate or commonly known as "leasehold interest" is a estate that gives the tenant the right to exclusive possession and use of real property for a fixed period of time. The landlord (lessor) has a reversionary interest during the lease term.
In Korea, a residential lease cannot be for a term less than a year or longer than ten years. The beginning and termination dates must be in the lease agreement. Commercial leases generally do not have term limitations.
A. Tenancy for a Period
This estate is a leasehold that is for a fixed period of time. The key feature distinguishing this tenancy from other tenancies is that both the beginning date and the ending date are pre-determined. This tenancy is the most dominant leasehold interest in Korea. A lease in Korea must have beginning date and the ending date clearly written on the document. In order to register the document, it is imperative that beginning date and termination date be specific. For residential leases the minimum term is one year and the maximum term is ten years. For example, if a lease term is agreed to be for six months, then it will automatically becomes a one-year lease, and if a lease term is for 11 years, then it will automatically be considered as ten-year lease.
B. Tenancy at Sufferance
Korean law as to tenancy at sufferance is the same as in the United States. This tenancy exists only in the limited situation in which a tenant holds at the end of a valid lease. This tenancy is very short lived and insubstantial; it will end as soon as the landlord exercises his option either to evict the tenant or to hold him to another term.
C. Tenancy from Period to Period
In America, this is a tenancy that continues from one period to the next automatically, unless either party determines it at the end of a period by notice. As mentioned above, in Korea the beginning and termination dates must be in the lease agreement. Once the original lease terminates, a new document must be expected for the tenancy to continue. Therefore, this tenancy is not found in Korea.
D. Tenancy at Will
Tenancy at will is one that is terminable at the will or unilateral decision of either party, with no designated period of duration. Again, lease agreements in Korea must have the beginning and the termination dates in the lease document. Therefore this leasehold estate is not found in Korea.
Unique leasing practice in Korea
Korea probably is the only country in the world that practices front end payment of rental arrangements. A landlord can ask the would be tenant for an upfront rent, i.e. entire amount. Generally, the landlord asks 50%, sometimes as high as 60%, of the market value of the property. For example, if the market value of the house is $250,000 the landlord can ask $125,000 up front from the would be tenant. Of course the normal utility bills and phone bills are the responsibility of the tenant. At the termination of the lease, the landlord returns the whole principal amount back to the tenant. One may wonder, then how the landlord makes a profit from leasing his or her rental property? Remember, the landlord had $125,000 upfront, he probably used it to make more money. Of course, if landlords has no need of money, or cannot find any profitable opportunity, then he usually opts for the monthly rent route, in which the monthly rent is not returned at the conclusion of the lease. But more than 90 per cent of renters pay one time upfront rent. Generally speaking, Koreans do not like installments payments. Only those who are extremely poor ask for installment payments.
Forms of ownership
In Korea only 3 forms of multiple-party ownership are recognized: tenancy in common, partnerships and corporate ownership. Characteristics of all three forms are the same as in the U.S. The most common form of multiple party ownership is tenancy in Common.
Tenancy in Common
Tenancy in common is an estate where two or more persons are owners of undivided interests (it does not have to be equal) in real property with no right of survivorship. This form of concurrent ownership must have a unity of possession, which means that each tenants is entitled to possession of the whole property and cannot exclude other tenants and cannot claim any specific portion for himself alone. Each co-tenant holds an estate in land by separate and distinct titles but with unity of possession.
Each co-tenant is responsible for paying property taxes and any other expenses incidental to the operation of the property in proportion to his share of ownership. Likewise, if the property is rented out or producing income, each tenant has the right to share in the income in proportion to his share of ownership.
A tenant in common can transfer or otherwise dispose of his interest in the property freely without the consent of the other co-tenants. Since there is no right of survivorship, should a tenant dies, his interest goes to his heirs and not to the other surviving tenant. If one of the tenants in common wants to sell the entire property or wants to divide up the property but the other tenants do not consent to this, then the co-tenant can petition a court for partition of the property. If this is not practical then the court will order the property to be sold at auction and divide the proceeds. In all respect to the above Korean law mirrors the U.S. model.
This form of joint ownership does not exist in Korea. In America, it is a form of concurrent ownership where each tenant owns an undivided interests in real or personal property (each joint tenant equally owns the property as a whole). It is, as between joint tenants, a concurrent ownership of the whole, as distinguished from tenancy in common which is an undivided ownership of the part. There are several distinguishing characteristics of this form of ownership: Joint tenancy encompasses a fourfold unity and right of survivorship. Traditionally, a joint tenancy can be created when "four unities" exist: time, title, interest, and possession. When one of the joint tenants dies, his or her share lapses automatically vesting to the surviving joint tenants. When only one tenant survives, he or she becomes the sole owner.
Unities Under Joint Tenancy
To form a joint tenancy in America, per common law, as mentioned above, normally requires that the four unities must exist: time, title, interest and possession.
Time - All parties must enter into ownership at same time
Title - All parties' name must be on the same document.
Interest - Each joint tenants must have equal interest.
Possession - Each joint tenants must have equal right of possession.
Type of multi-party ownership form with above features are not found in Korea.
Other Types of Co-Tenancy Interests
In Korea, the only other forms of multiple ownership are partnership and corporate ownership. The characteristics of partnership and corporate ownership.
Transfer of title
Similar to America, the most common method of transferring interests in land is by deed from the record owner. In America, recital of consideration in the deed is not a necessary element, but in Korea a recital of actual, total consideration must be in the deed. If the consideration is not included in the deed then transaction will be considered donation.
Required Elements of a Deed
For a deed to be valid it must include, besides consideration, a description of the property, both land and improvements; delivery date; identification of grantor; and, the seal of both grantor and grantee.
Accurate description of the property is one of the most important aspects of the deed. Korea has a system of legal description similar to that employed in the U.S. It must be clear and accurately distinguish the property from other parcels of real property. If the property is improved, then the size and the year it was built need to be on the deed along with the land description.
In Korea, a deed to be valid, it must be physically delivered, whereas in America, delivery does not necessarily have to be actual handling of the deed. Purchaser makes initial down payment (usually 30% of the purchase price) when a contract is signed by both parties. Thereafter he makes two more installments and makes the final payment to the seller. All this generally takes about 60 days. Deed is physically delivered to the purchaser when he makes the final installment. Date for the delivery of the deed is usually the date the purchaser makes the final installment.
Because Korea has no title companies, there could be a potential problem from the grantee's side. Since there is no escrow, and since the grantor keeps the deed until the closing day, delivery of the deed depends on the integrity of grantor. Of course the grantee can sue the grantor should have decide not to deliver the deed. At this time, real estate professionals as well as academicians are urging the legislators to seriously consider authorizing escrow services.
For the deed to be valid, the grantor must be names and identified in the body of the deed. (Same as America)
Signature of Grantor
The deed is valid unless grantor places his or her "tojang" (seal) nest to the name. This is the same as in the U.S.
Other Elements Usually in the Deed
In America, a seal is an embossed impression on paper caused by a metal die used to authenticate a document or attest to a signature, as with a corporate or notary seal. At one time, in the U.S., a deed had to have a private seal affixed to be valid. But today, nearly all states have abolished the seal requirement.
In Korea without a seal a deed is invalid. Here a brief description of seal used in Korea is in order. It is called "Tojang". It is about half an inch in diameter and about two and a half inches in length. One end is embossed with the person's name. It is affixed utilizing a red inkpad. In America persons sign their name, but in Korea people do not sign their name, instead they write out their name and place a seal (tojang) next to their name. So in essence Korean "tojang" is a counterpart to American signature.
An acknowledgement, i.e. notorial attestation, is a formal declaration before a duly authorized officer, such as a Notary Public, by a person executing an instrument that such execution is his act and deed. In America, the majority of states do not require acknowledgement for the deed to be valid. But many states require that the deed be acknowledge in order to be recorded.
Since Korea follows the Torrens system, acknowledgement is not a necessary requirement to make the deed valid. Acknowledgement plays an important role in Korea, however, regarding other legal documents. If a legal document, i.e. promissory note, is properly acknowledged, the note holder need not go through the normal court procedures to obtain a judgment.
Registering a title makes recording system unnecessary, and since titles are registered in Korea (Torrens system), this section will cover briefly about the recording system practiced in America.
Under the recording system a person can enter into the book of public records the written instruments affecting the title to real property, such as deeds, mortgages, options, judgments, liens, etc. Recordation gives constructive notice to the world of the existence of the recorded document and its contents. Although recording is not required to make documents valid, it is a prudent act, since it gives legal priority to those interests that are recorded firsts. Title companies normally will not insure the title if it is not recorded properly.
Despite wide use of the recording system, it has shortcomings. Recording documents do not insure their validity. Also recording merely furnishes evidence, not proof of title. A full title search requires tracing the chain of title instruments back to a grant from a sovereign (searchers usually go back only 40 to 60 years) which is time consuming and very difficult. Therefore, there is a risk that earlier, unexamined documents could adversely affect the title. (The Law of Property, p. 774)
Recordation and transfer of title
|A. Title Insurance
In America title insurance is the leading means by which a buyer of property can assure himself of a good title. The insured will be able to recover from a title insurer if the title is bad for any reasons except those exclusions and other limitations contained in the insurance policy. Unlike other types of insurance, which protect a policyholder against loss from some future occurrences, title insurance, protects a policyholder against loss from some occurrence that has already occurred, such as a forged deed somewhere in the chain of title.
Title insurance is not used in Korea. Usually, title inspection is done by an attorney or a paralegal. Their inspection of title is cursory and not detailed. Unlike America, they are not liable for any negligence on their part. The Korean legislature is considering adopting enabling legislation for title insurance. The true Torrens system makes title insurance unnecessary, but the Torrens system in Korea, which will be discussed below, deviates in one serious way that can de detrimental to the buyer of property.
Especially now that the Korean real estate market is opening up to foreign investors, title insurance should be available to the property owners in the near future.
B. Torrens system
Also known as the title registration system, Torrens system is used in Korea exclusively, whereas in the U.S., both recording and Torrens systems are used.
Under this system, a person who owns a land in fee simple applies with the registration clerk to have it registered. Unless the purchaser registers the title he does not acquire title to the property. In America where the recording system is used, execution and delivery of a deed conveys the title, but under the Torrens system transfer of title occurs when the grantor and grantee register with the clerk (Tunki-so); the grantor surrenders the original certificate and the grantee receives a new certificate from the clerk. All liens and encumbrances against the title are noted in the certificate. Any encumbrances on the old certificate, if they are still effective, carries over to the new certificate. The distinctive feature of this system is that title does not pass, and encumbrances are not effective against the property until such encumbrances or conveyances are noted on the registeres certificate of title.
Typically, under a true Torrens system the registration clerk inspects the records and sends notices to anybody who has any interest in the property. Then, a court will order a judicial hearing to ascertain who the true owner is and the applicant, if he is the rightful owner, will be issued a certificate of title. However, under the Korean form of Torrens, the registration clerk merely inspects the application form, as to completeness. There is no mechanism for a judicial hearing by which the court quiet title or otherwise judicially cure defects and ambiguities. Due to this lack of judicial proceedings there have been many problems for property owners. Lawmakers are being urged by real estate practitioners and academicians to enact title insurance system.
Under the American Torrens system a registered property cannot be lost by adverse possession, but this is not the case in Korea. An adverse possessor can claim the property even though the title is registered.
|Unlike the U.S., in Korea, long and complicated legal documents are not used and not preferred by the people. For example, a typical real estate contract is a single page document. On this page only the necessary information can be found: Names, dates, price, and legal description. When writing a contract details are not stressed. If the seller defaults, seller pays to the buyer two times the down payment. There is no specific performance. If a buyer defaults then only the earnest money will be forfeited. Real estate contracts are prepared by a broker.
|In Korea, only a mortgage is available to secure a loan collateralized by real estate. In America, deeds of trust are the most commonly used borrowing money on real estate. Mortgage practice is similar to America except the deficiency judgment. If the property was sold for less than the debt amount, then the creditor cannot obtain a deficiency judgment (A deficiency judgment is a personal judgment against the debtor for the difference between the amount owing on the debt and the net proceeds from the foreclosure sale).
Financing and lending practices
|Korea is a cash society not a credit society. So real estate finance especially, is not well developed. About 90% of real estate transactions are straight cash transactions. Lenders do not like to lend their money for house purchase. One of the reasons is that lenders are averse to residential market fluctuations. Even if they decide to lend, it is usually 30% LTVR and mo more than 50% LTVR. It is also hard to get a loan from the bank. Korean bankers are very conservative, and do not like the risk of housing market. Some American banks in Korea, City Bank, Chemical Bank, have success in mortgage market in Korea. It is interesting that in America, residential property is considered one of the safest collateral for lending money. Some lenders are willing to loan the whole purchase price. Whereas in Korea, bankers are very cautious about residential market. They do not like the unpredictability of housing market. In the past, there were many unethical price fixing and land speculations, over inflated selling price to get more money from bank.
|South Korea has one of the world's most highly computerized real estate taxation systems. Of the 30 million parcels of land in South Korea, some 25 million are subject to property taxes. As in most countries, certain types of real estate are exempt from assessments. In South Korea, exempt real estate includes land and building used for religious purposes, hospitals, government-owned land, museums, and real estate used for education.
Six years ago, South Korea combined land valuation methods for property taxation, transfer taxation and eminent domain awards into one system, calles the Official Land Value System, supervised by the Ministry of Construction. To establish benchmarks for real estate values, a sample of 300,000 parcels was selected and appraised. This sampling was designed to insure that the range between the highest and the lowest values not exceed 20 percent. The values of the sample parcels are monitored by private appraisers under contract with the government. The real estate taxes for individual parcels are then derived from the values established by samples, with adjustments for a parcel size, location, layout, use and other characteristics. Each year more than 32 physical and location characteristics for every parcel in South Korea are surveyed. To establish fair market value for individual parcels, the benchmark from the sampling of 300,000 parcels are compared to actual sale prices using computer assisted modeling techniques. The value from this techniques sometimes differs sharply from traditional assessments based on visual inspection of a property.
Disparities in real estate assessments caused considerable public opposition to elements of the new tax law in the past several years, and consequently the government has not been able to put the system into full operation. Because of citizen resistance, the government developed a longer-range plan several years ago. As a percentage of government revenues in 14 countries, the yield from real estate property taxes is the lowest in South Korea at 1.8 percent. The United States is the highest at 14.2 percent.
South Korea, with a population of 42 million, has experienced an average 7.0 percent economic growth rate for the past 25 years. The gross domestic product grew by more than 11 percent annually in the late 1980s, with unemployment below 3.0 percent. Like the economic growth in other Pacific Rim countries, the tremendous business climate in South Korea led to sharp increases in land values. To reduce land speculation, a land value increment tax was imposed.
This tax is applied to unimproved property, business property not being used for business purposes, and unoccupied farm and forest lands. This measure was designed to be imposed every three years, but has been applied annually in cities where property values were increasingly rapidly. The anti-speculative property tax measures that followed provide dramatic examples of government efforts to dampen land price inflation. This tax is 50 percent of the increase in the land value above what is considered the natural economic increase throughout the country for the taxable period. This implied increase in real estate value is taxed whether or not there has been a profit through a sale. Before this anti-speculation tax law was passed, it was expected to face severe political opposition. However, the legislation received support from both the ruling and the opposition parties and there has since been no widespread criticism of the law. South Korean government officials credit this law with a reduction in land speculation.
Because assessed valuation is generally about 15 percent to 20 percent of full market value, the effective tax rate is only one fifth of the potential tax rate. There are substantial variations in this assessment ratio with different types of real estate and in different parts of the country. Generally, rapid increases in land prices in metropolitan areas has meant that urban property is assessed at lower ratios of fair market value than rural property. The anti-speculative measures, along with other government efforts, have brought urban and rural real estate taxes closer to a market value balance.
Closing and escrows
|Because there is no title company in Korea, and once the contract is signed, the broker is no longer involved with the transaction, closing is done by the seller and the purchaser. This sounds alarming at first, but real estate transaction in Korea is very simple (one page contract!). For example, when a contract is signed, the purchaser typically put down 10% earnest money deposit (amount of earnest deposit is negotiable). Depending on the size of the transaction the purchaser makes additional payment to the seller. And when the seller vacates the property the purchaser moves in and pays the balance to the seller and receives the certificate (remember Korea is a Torrens system country). The new owner then registers the title at "Tunkiso". All this usually takes anywhere from a month to two months.
|Similar to the U.S., Korea employs the normal methodology of cost, income, and market approaches. Generally, appraisals do not influence the transaction. Again, Koreans are very pragmatic people so they do not like complicated transaction processes. A seller determines the purchase price and if a potential purchaser thinks it is over-priced and appraisal shows that to be true, even then the potential purchaser is powerless because seller can always sell it to another at the asking price.
|There are many kinds of insurance available to cover property or liability against various risks in Korea. Depending on the types and usages, for some real estates certain coverages are required by law.
Land use control
|A. Protective or restrictive covenants- in general
Within certain limitations, owners of real estate in the U.S. can create private and enforceable agreements that restrict the use of real property. It is sometimes called private zoning. A covenant is basically a promise to do or not to do a certain thing.
In Korea, a restrictive covenant can e inserted in the deed, only if the covenant is through a donation or an inheritance. However, unlike America, covenants do not "run with the land". The covenant is only between the parties who agreed to it. The successor is not privy to the covenant. As long as grantee's usage is legal and conforms to the zoning and building codes, the grantee can do whatever with the property, except as mentioned above where donation or inheritance is involved.
B. Protective or restrictive covenants- running with the land at law
American law - A covenant running with the land is simply a contract between two parties which, because it meets certain technical requirements, has the additional quality that it is binding against one who later buys the subject land.
For the covenant to run with the land several technical requirements must be met:
1.- Original parties must agree that the covenant will run with the land.
2.- The covenant must "touch and concern" the land.
3.- There must be a privity of the estate.
4.- It must be enforceable between the original parties.
In Korea a restrictive covenant is binding only between original parties and it does not run with the land. If a donee or devisee breaches the covenant, the only remedy is money damages. Injunction or specific performance remedies are not available in Korea.