This article is a contribution by Attorney Sanghoon Kim of Choi & Lee Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editor team at editor@venturesquare.net.
“I couldn’t do business because of COVID-19. Do I still have to pay rent?” Many people will agree with this question. In fact, when duty-free shops and stores were unable to operate due to the government’s quarantine guidelines in the early stages of COVID-19, disputes over rent between tenants and landlords arose nationwide. The Supreme Court recently made an important ruling on this matter. In the so-called Hotel Lotte Duty Free case, the Supreme Court presented new standards for whether and to what extent rent could be reduced.
1. You don't have to pay rent for unused space.
Hotel Lotte was operating duty-free shops at Gimpo and Gimhae airports, but when the Ministry of Land, Infrastructure and Transport implemented a quarantine policy to centralize international flights to Incheon Airport, the duty-free shop operations were suspended, and accordingly, the company filed a lawsuit against the lessor, Korea Airports Corporation, demanding a full refund of rent. The courts of the first and second trials ruled that “COVID-19 is a temporary situation, and since business was only temporarily impossible, it does not mean that the entire contract became impossible,” and approved a rent reduction for only a certain period.
However, the Supreme Court was different. The Supreme Court looked at the case from a much broader perspective than the previous position and reorganized important legal principles. First, it reinterpreted the landlord's duty to 'provide space' as not simply giving up space, but 'making sure that the space can actually be used for the purpose of the business.' Second, if the space cannot be used at all for a certain period of time, it was considered that the contract itself became impossible during that period, and it could be evaluated as a complete breach of the landlord's duty.
Based on this judgment, the Supreme Court ruled that rent could be exempted for a certain period of time, not just a partial reduction. In other words, from the tenant’s perspective, if it was a period of “no business at all,” then rent could be exempted from payment at all during that period.
2. Who will be responsible for public interest measures and contracts?
This Supreme Court ruling cannot simply be seen as a special case during the COVID-19 period. It is because it presents a new legal standard for who should bear what responsibility in situations where a contract cannot be normally performed due to social disasters, the spread of infectious diseases, government emergency orders or guidelines, or other administrative measures for the public good. In particular, regarding the question of whether rent must be paid for unusable space, the judgment that full reduction is possible if certain requirements are met is a very different turning point from previous precedents.
This case is about a 'lease contract', but the scope of its legal principles is endless. For example, if the lease of a hotel or convention space cannot achieve the purpose of the contract for a certain period of time, the same logical structure can be applied. Therefore, rather than simply thinking about the COVID-19 situation, it is recommended to prepare for various restrictions for public interest purposes such as the resurgence of infectious diseases, climate disasters, wartime and security situations that may occur in the future.
3. What should I pay attention to when writing a rental agreement?
In addition to simply specifying a “force majeure” clause in the contract, we recommend that you specifically state how you will adjust the contractual responsibilities in the event of a business interruption due to government measures or administrative orders. You should determine in advance whether alternative methods of performance are possible, what the criteria are for rent reduction, and who has the right to suspend or terminate the contract during that period to prevent unnecessary disputes. In particular, since this ruling clearly shows that continuous contracts such as space provision have a meaning beyond “simply renting a place,” it has become increasingly necessary to specify the criteria for sharing responsibilities in the contract, focusing on the purpose of use, operability, and realization of substantial benefits.
If the contract has already been concluded, it is advisable to review it now and prepare a response plan for a crisis situation through a revised contract or a supplementary agreement. If a dispute arises between the contracting parties regarding responsibility after the fact, it can lead to a long lawsuit not only over the scope of damages but also over the scope of contract termination or rent reduction, so preemptive preparation is ultimately the most effective strategy for reducing costs and risks.
4. In an age of uncertainty, proper contract writing is necessary.
In conclusion, this Supreme Court ruling goes beyond the individual dispute between Hotel Lotte and the airport corporation, and has profound implications for the contracting culture of our society as a whole. This is because a contract is not simply a formal document, but a plan for how to share risks in preparation for an uncertain future.
Therefore, when signing a contract in the future, be sure to check whether it includes a liability sharing clause for unpredictable situations such as the spread of infectious diseases or government measures for public interest, and even if a contract has already been signed, it is advisable to proceed with the process of reorganizing it through a change contract or supplementary agreement if necessary. Ultimately, it is important to take legal action when a dispute arises, but I would like to emphasize that prior preparation is the most effective way to reduce risk.
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