[Housing Talk] Requirements, support measures for jeonse fraud victims

Jeonse refers to a system unique to Korea in which a lessee gives a lessor a large refundable deposit instead of paying monthly rent. Under a typical two-year jeonse contract, a lessor would return the deposit upon expiration of the contract. If the expected interest on the deposit is less than the monthly rent, as is often the case, a jeonse contract can be financially advantageous to the lessee.

However, there are many cases of jeonse fraud, where scammers usually buy houses with money from the jeonse contract deposit and refuse to return the deposits at the end of the lease. The fraudulent lessor often declares bankruptcy and puts the house up for auction without the victims’ consent, which eventually drives the victimized lessee out of the house without having their money returned. The National Assembly enacted the Special Act on Jeonse Fraud (hereinafter referred to as “the Act”) on June 1, 2023.

Requirements to be recognized as victim

The Act stipulates the following four requirements for a victim of jeonse fraud.

Firstly, a lessee who wants to be recognized as a victim of jeonse fraud (hereinafter referred to as the “Applicant”) must complete a registration of resident (usually through move-in report) and receive the fixed date on the jeonse contract, in order to gain the so-called “opposing power” under the Housing Lease Protection Act.

Secondly, the jeonse deposit of a lessee must not exceed 500 million won ($370,000). This criterion may vary from region to region.

Thirdly, a number of lessees have suffered or are expected to suffer damage due to the lessor's bankruptcy or the commencement of rehabilitation procedures, auction or public sale procedures of leased houses (including cases where leased houses are seized due to arrears in national or local taxes).

Lastly, there are reasonable grounds to suspect that the lessor intended to default on the debt, such as an investigation commenced against the lessor, the lessor’s intent to defraud, the transfer of the leased house to a person who is unable to return the lease deposit, or the purchase or lease of a house without the ability to return the lease deposit.

On the other hand, the Applicant cannot be recognized as a victim of jeonse fraud if a guarantee or insurance is purchased for a jeonse contract for the return of the entire deposit, or if the Applicant can recover the entire deposit by exercising its opposing power, the preferential repayment right or the top preferential repayment right, in the Housing Lease Protection Act.

Support measures

The act grants victims of jeonse fraud who meet all the four requirements the following rights.

Firstly, a victim of jeonse fraud may apply for a stay of the auction of the house. If the auction is stayed, the lessee can live in the house during that period, and if the jeonse market price of the house increases in the future, the possibility of receiving the corresponding deposit increases.

Secondly, the victim will be given the preferential purchase rights to protect them from losing their home. The person who bids the highest price in the auction process wins the house, and if the victim of jeonse fraud of the lease fraud applies to buy it at the winning price, the court must sell the house to the victim of jeonse fraud.

Thirdly, the victim is given the right to have the Korea Land and Housing Corporation buy the house and rent it to them.

Lastly, the victim may request the collection of the lessor’s total tax arrears by dividing them into individual houses owned by the lessor.

Therefore, in order to be recognized as a victim of jeonse fraud, it is important to meet the requirements of the Act. Therefore, a lessee who is a victim of jeonse fraud should understand the requirements of the Act and seek professional assistance if necessary.

Shim Jun-seop

This is the fourth installment in a series of columns written by attorneys at Barun Law LLC to provide legal insights in the field of construction, real estate and housing in South Korea. The writer is an attorney at the firm. -- Ed.

For further inquiries, contact junseop.shim@barunlaw.com