The Hanam 2 district housing redevelopment maintenance business association attempted to replace the construction company Daewoo E&C and received a warning letter from the real estate project financing (PF) lenders. The lenders expressed their "serious regret" over the termination of the construction contract just one month after executing the bridge loan based on Daewoo E&C's credit facilities, stating that "they may claim damages."
In response, some members of the Hanam 2 district have strongly opposed the fact that the construction company has completely failed to fulfill its promises, shifting all responsibilities, including expenses related to the change of contractors, onto the association members.
According to the maintenance industry on the 3rd, the lenders in the area recently sent an official document to the Hanam 2 district maintenance association containing their opinions on promoting a review meeting for the termination of the construction contract. The Hanam 2 district is a redevelopment project that involves constructing 30 apartment buildings, totaling 1,537 units, with 6 underground floors and 14 above ground floors on an 11,000 square meter site at 272-3 Bogwang-dong, Yongsan-gu, Seoul. The goal for beginning construction and sales is 2027.
The Hanam 2 district maintenance association executed a loan from the lenders worth 178 billion won in early last month to purchase national and public land. Daewoo E&C provided a joint guarantee during the bridge loan execution process.
However, the association plans to hold a general meeting on the 27th, just over a month after raising funds, to re-examine whether to maintain Daewoo E&C's status as the contractor. This is due to the reason that Daewoo E&C violated its promise to lower the building height to 118 meters and raise the maximum height of the apartments to 21 floors upon receiving the order. In this area, building heights are restricted to below 90 meters to protect the Namsan view. Subsequently, the association and Daewoo E&C pursued an alternative of eliminating roads passing through the maintenance district to integrate blocks, but this was also thwarted by opposition from the Seoul city government.
The lenders expressed their "serious regret" over the association's attempt to replace the contractor, stating, "It is regrettable that this situation has arisen just one month after the loan agreement was made, and we hope to resolve it quickly to prevent such a situation from occurring."
The lenders emphasized that, "The loan was handled through the credit facilities of the contractor, Daewoo E&C," adding, "If the borrowing association terminates the contract with the joint guarantor (Daewoo E&C), it constitutes a significant matter that would inflict considerable damage on the expected revenue and the company's financial plans, making it likely that damage claims will become unavoidable."
The lenders stated that if a contractor change occurs, they may demand the establishment of a collateral mortgage on the national and public land acquired with the loan.
The lenders noted that "The termination of the construction contract requires the consent of all lenders, so opinions on the termination of the contractor’s contract should be solicited," adding, "This falls under the reasons for default, and if the situation is not remedied within 60 days of its occurrence, the loss of benefits deadline (EOD) will be declared." They continued, "At the time when the default reasons occur, the lenders can demand the establishment of a collateral mortgage on the national and public land purchased by the borrower with the loan."
In addition to the lenders' stance, there are negative opinions within the association regarding the contractor change, making it seem difficult for the Hanam 2 district contractor change to actually occur. If the contractor is changed, financial costs are expected to increase, and construction costs due to project delays will also be inevitable.
We inquired about future plans regarding the contractor change, but the association refused to comment, stating, "We have nothing to say separately."
Inside the Hanam 2 district association, there is strong opposition to the issues surrounding this contractor change. They argue that Daewoo E&C is pushing the responsibility for losses and damages resulting from project delays onto the association, failing to keep the promises made when they secured the construction rights.
According to some association members, Daewoo E&C pledged to carry out the Project 118 and submitted a letter of guarantee of surrendering construction rights in the event the project fails. After the project became difficult to implement, Daewoo E&C proposed new conditions to the association, stating they would bear the expenses for design, service costs, financial costs, etc., that arise if the project fails and would provide related deliverables to the association.
One member of the Hanam 2 district stated, "If Daewoo E&C does not receive re-approval, project delays will last at least 1 year and 6 months, leading to losses of up to 270 billion won," adding that, "The loan for acquiring national and public land will also be disrupted in case of a contractor change, causing damage of 100 million won per day and 30 billion won annually."