A significant rental fraud case has emerged involving a large-scale subleasing scheme that defrauded tenants of 10 billion won in deposits. Tenants believed they were safe because they were dealing with the Korea Construction Technology Association, a public institution, as assured by real estate agents. However, it was revealed that Sovereign State, the entity that leased the building, squandered the tenants' deposits on an electric vehicle charging station project. The court denied the association's liability for damages, leaving the tenants in a precarious situation without legal recourse. Our investigative team focused on the realities and structural risks of subleasing contracts that lack legal protection.
Choi Hwang-soo, a professor of real estate at Konkuk University, agreed with the first-instance ruling that it is difficult to recognize the association's legal responsibility, but he pointed out issues with the exemption clause included in the contract. He stated, "If the landlord approved the sublease, they should normally bear responsibility towards the final tenant as well," but the clause stating that the association is not liable for matters agreed upon between the landlord and tenant created a structure that absolved the association of responsibility. He added, "Tenants should not have signed if such exemption clauses were present in the contract."
The use of the term 'public' by Sovereign State and real estate agents also misled tenants. Eom Jeong-sook, a real estate attorney at a comprehensive law firm, noted, "The fact that the building owner is a legal entity under the Ministry of Land, Infrastructure and Transport likely served as a significant trust factor for tenants," emphasizing that it was not unreasonable for tenants to believe, 'Since it's an association's building, it must be safe.' However, she pointed out that the current legal principle, which states there is no direct contractual relationship between the original landlord and the subtenant, was reflected in this ruling, highlighting how this principle works against tenants.
Tenants claim that the association effectively facilitated Sovereign State's mismanagement. However, proving 'complicity' in a legal sense is expected to be challenging.
In other words, simply being aware of Sovereign State's business practices does not make the association liable; it would need to have actively participated in the mismanagement for complicity to be established. Seok added, "Unless there are special circumstances, such as the landlord knowingly providing space for criminal activities, it is hard to argue that the landlord had an obligation to verify the contents of the sublease contract," and he noted that the fact that the landlord is a public institution or association does not significantly influence the conclusion.
However, Seok acknowledged that there are cases where landlords can be held liable for complicity. He explained that case law indicates that merely approving a sublease is insufficient; two conditions must be met: the landlord must have known or should have known about the tenant's inability to return the deposit, and there must have been active actions that instilled trust in the tenant regarding the safe management of the deposit, such as receiving the deposit directly into the landlord's account.
Experts unanimously diagnosed that the fundamental vulnerability of subleasing contracts lies in the legal structure itself.
Kim Dae-jin, chair of the Tenant 114 Legal Support Center, pointed out the limitations of the rights that subtenants have against landlords. He explained that subtenants cannot directly assert rights against landlords under civil law and must instead exercise the rights of the original tenants. Additionally, he highlighted issues with the financial structures of subleasing companies. Kim noted, "When companies contract with landlords, they often lower the deposit and raise the monthly rent, but when contracting with subtenants, they frequently raise the deposit and lower the monthly rent to secure initial business funds." This creates a structure that must continually cover the difference over time, leading to financial difficulties.
Kim further pointed out that the rights of tenants recognized under the Housing Lease Protection Act, such as the right to counterclaims and priority claims, do not apply to subtenants, and there is no legal obligation to inform subtenants of the original lease conditions.
While Kim identified the legal protections lacking for subtenants after the contract, Woo Won-sang, a representative attorney at Jiyul Law Firm, highlighted the issue of 'information asymmetry' that can arise before the contract stage. He explained that subtenants do not appear in the real estate registration documents, making it difficult for them to verify whether the other party is the true rights holder. Woo advised, "If the sublessor refuses to provide the lease contract signed with the landlord, that is already a very dangerous signal," and emphasized that since subleasing is generally not allowed without the landlord's consent under Article 629, Paragraph 1 of the Civil Code, the consent must be explicitly stated in the contract's special provisions.
Experts' proposals to address these issues largely fell into two categories: raising the entry barriers for subleasing companies and enhancing information provision and sanctions, or restructuring the financial framework to prevent deposits from being misappropriated.
Eom Jeong-sook first suggested that public institutions, such as legal entities, should be required to establish minimum criteria, such as capital or insurance coverage, when selecting subleasing companies. She stated, "This could be realistically implemented through supervisory guidelines from the relevant department or amendments to the bylaws of each legal entity without requiring legislative changes."
Regarding the establishment of regulations requiring sublessors to disclose their financial status and the conditions of the original contract to tenants, she argued that the current obligations under the Real Estate Agents Act do not adequately reflect the status of subtenants or the sublessor's ability to repay in the event of contract termination, indicating a need for separate legislative supplements. However, she took a cautious stance on strengthening penalties for false or exaggerated claims, stating, "The issue is not the absence of regulations but the lack of effectiveness in detection and sanctions," emphasizing that it would be more effective to actively utilize existing administrative sanctions, such as suspension of qualifications or cancellation of registrations, rather than creating new penalty provisions.
Seok Seung-il argued that while requirements for capital or experience could serve as minimal barriers, they would not provide a fundamental solution. He pointed out, "Requiring sublessors to have capital or experience may act as a minimal hurdle, but considering that the capital may not actually be retained by the company, such requirements are unlikely to be effective solutions."
Instead, Seok proposed institutional measures to push the risk outside the financial structure. He suggested that in cases like this, a portion of the deposit should be deposited with the landlord or a third party (such as a trust company), or that a guarantee insurance certificate for the deposit should be obtained and submitted, or that the contract details should be reported to the relevant authority, which could significantly prevent subtenants from experiencing unexpected losses like in this case.
Woo Won-sang also offered specific alternatives from a similar perspective. He suggested that if subleasing is unavoidable, a tripartite contract should be drafted among the landlord, sublessor, and subtenant, allowing the subtenant to utilize the lease registration order, or that the landlord should jointly assume responsibility with the sublessor.
Conversely, there were cautious opinions regarding strengthening the original landlord's legal responsibilities. Seo Jin-hyung, a professor of real estate law at Kwangwoon University, expressed concern that imposing excessive responsibilities on the original landlord for subleasing could lead to moral hazard among intermediate tenants. He warned that if a tenant pays only a portion of the deposit and rents at a higher price, disappearing afterward, the original landlord could paradoxically bear the responsibility. Seo emphasized, "Legally, it is not easy to completely prevent such forms of damage, and ultimately, it is crucial for tenants to thoroughly verify who their contracting party is and how the rights are structured."
Ultimately, experts unanimously cautioned against the inherent risks associated with subleasing contracts. Kim In-man, head of the Real Estate Economic Research Institute, stated, "In direct contracts with landlords, there are legal remedies such as lawsuits, auctions, and seizures, but subleasing involves tenants bringing in another tenant, making it difficult to take action when problems arise. Therefore, avoiding such contracts is the best course of action."
Kim Dae-jin also reached the same conclusion in practice. He advised, "Subtenants often do not receive protection as small tenants, so I recommend avoiding subleases where the deposit amount exceeds a certain level." He added, "If a contract is unavoidable, it is essential to verify that the owner listed in the registration documents matches the contracting party and to confirm whether the landlord's consent for subleasing was obtained. In multi-family homes, it is also important to check if there are other priority tenants and the amount of their deposits." However, he warned, "Such information is rarely provided adequately," urging that if this information cannot be verified, the contract itself should be reconsidered.
The recent Sovereign State rental fraud case has highlighted the limitations of current legal principles that prevent subtenants from establishing direct legal relationships with original landlords. This incident, driven by unreasonable exemption clauses and systemic loopholes, underscores the need for heightened awareness among tenants regarding subleasing contracts and the necessity for improved safety measures across the board.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.