[Housing Talk] Contractual considerations for 'rebarless' apartment units

On Aug. 2, the ruling People Power Party and the government jointly issued a decision to grant aspiring homeowners who intend to occupy apartment units constructed without sufficient reinforcing bars, commonly referred to as “rebarless” apartment units, to cancel their contracts.

From a legal point of view, it is crucial to clarify that this decision has a specific scope, which applies only to contracts for the purchase of dwellings built by state-run entities such as Korea Land and Housing Corp. (LH), and it does not cover private-sector projects.

As a result, a separate issue arises concerning individuals who have contracts with private entities and their ability to terminate contracts for "rebarless apartments."

Termination of contract refers to the right to withdraw from housing contracts with the contracting party. According to the Fair Trade Commission's standardized contract for the supply of apartment units, this right to rescind the contract is recognized in cases where the defects in the supplied housing are so severe and the repairs are so difficult that the objective of the contract is unachievable. Therefore, the key question is whether the defect caused by insufficient rebar is so serious and the repair so difficult that the purpose of the contract cannot be achieved.

According to a 2010 precedent of the Supreme Court of Korea, a defect in a building is defined as a structural or functional flaw that deviates from the specifications outlined in the construction contract or fails to meet the quality standards typically expected of a completed building. The determination of whether a defect exists should be based on a comprehensive consideration of various factors, including the contractual terms between the parties, whether the construction was carried out in accordance with the design plans, and whether it complies with the standards prescribed by building regulations.

The lower courts tend to be more conservative. The majority of cases involve discrepancies between the contractual terms of the contract as presented in marketing materials, such as pre-sale advertisements, and the actual building constructed. In such cases, even if expected facilities are absent or inadequate, courts are generally reluctant to grant the purchaser a right of rescission.

When examining the issue of rebarless apartments, it is imperative to divide it into two distinct aspects: first, determining whether “the defect is of a serious nature,” and second, evaluating whether “the repairs are so complex as to impede the attainment of the objectives of the contract.”

First, the insufficiency of reinforcing bars seems to be serious, unless the extent of the insufficiency is extremely minor, given its connection with public safety, including that of the many inhabitants.

Secondly, whether the difficulty of repairs is to the extent that the objective of the contract cannot be achieved depends on the situation in each case. It is likely to differ depending on whether the necessary repairs can be accomplished to an adequate degree through maintenance, or whether it requires a degree of reconstruction to the extent of complete redevelopment.

In addition, if the property is purchased from a previous owner who has already entered a supply contract with the developer, there could be the troublesome issue of having to terminate the purchase contract based on the relationship with the previous owner.

On the other hand, it is important to emphasize that claims for damages can be pursued independently of the termination of the contract, such as, the severity of the defect or the feasibility of repairs is not the main factor in winning the claim.

Parties potentially liable for damages include the developer (or trustee), who is the counterparty to the purchase contract, as well as the construction company (including subcontractors), supervisors, and any other entities involved. Typically, the claim is directed to the financially sound builder, as provided for in Article 44 of the Framework Act on the Construction Industry, which establishes a legal basis for seeking compensation from construction companies not directly party to the contract. In cases where insurance policies have been taken out, claims can also be made against insurance providers.

Importantly, even if you were not a direct party to the purchase contract, seeking compensation remains a viable option. It's worth noting that the court may exercise its discretion to limit the scope of damages based on various circumstances.

Kim Yong-woo

This column is the sixth installment in a series 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 a partner attorney at the firm. -- Ed.

For further inquiries, contact yongwoo.kim@barunlaw.com.