With major builders receiving consecutive business suspension orders, there is talk that next year some builders could be barred from preselling apartments for an extended period. The government bans presales by builders that receive a business suspension for up to two years. For a builder under suspension, this means it cannot receive down payments or interim payments after the suspension and must build homes with funds it raises on its own.
Until now, none of the large builders had been subject to this regulation, but serious accidents have continued to occur at construction sites recently and more builders have received suspension orders, increasing the likelihood that some will face these sanctions next year.
According to the Ministry of Land, Infrastructure and Transport and the construction industry on the 26th, the government is enforcing presale restrictions tied to business suspensions for builders. The Housing Act and the Rules on the Supply of dwellings under that law stipulate that a project entity (developer, redevelopment association, etc.) or contractor (builder) becomes subject to presale restrictions if it receives a business suspension under the Housing Act or the Framework Act on the Construction Industry, or demerit points under the Construction Technology Promotion Act.
Specifically, if a business suspension of six months or longer is imposed, presales are banned for two years from the end of the suspension. Accordingly, recruitment of occupants must take place after the use inspection. If the suspension is at least three months but less than six, the builder must complete two-thirds of the structural frame work after the suspension before recruiting occupants for one year. If the suspension is more than one month but less than three, sales must begin after completing half of the frame for six months, and if the suspension is one month or less, recruitment of occupants must begin after completing one-third of the frame for the next three months.
This rule applies to builders suspended for shoddy construction under the Framework Act on the Construction Industry. However, starting next year, the government plans to revise the Rules on the Supply of dwellings to apply it to serious accidents as well, including incidents with at least one death at a construction site, at least two injured workers requiring medical care for three months or longer, or at least 10 cases of occupational disease.
A construction industry official said, "So far some builders have received business suspensions, but they have responded with injunctions to stay execution and lawsuits challenging the orders, so there have been no actual cases where such restrictions were applied," adding, "However, the government has repeatedly signaled strong sanctions on builders involved in serious accidents, so we expect the first case of a presale ban next year."
If presales are banned, the initial funding supply for building dwellings is cut off. Lee Eun-hyung, a research fellow at the Construction & Economy Research Institute of Korea, said, "At most construction sites, it is customary to cover construction costs and build apartments with funds that come in midstream, such as down payments and interim payments," adding, "If presales are banned, the builder must self-fund all construction costs, and the financing expense for self-funding is quite substantial, significantly increasing the burden on builders."
Builders that could fall under a presale ban are mid- to large-sized companies. A representative case is Hanshin Engineering & Construction, which received a finalized two-month business suspension from the 18th to Feb. 17 next year. In June 2019, two workers were killed in an accident at a new apartment construction site in Ilgwang District, Gijang County, Busan.
After Gyeonggi Province imposed the suspension, Hanshin Engineering & Construction filed an administrative suit to overturn the order, but accepted the outcome when it lost on appeal, finalizing the sanction. If the government applies the presale restrictions tied to the suspension as is, Hanshin Engineering & Construction, which received a suspension longer than one month, must begin sales after completing half of the frame for six months starting Feb. 17. A Hanshin Engineering & Construction official said regarding this, "We have not received any notice from the government about presale restrictions."
Other builders that received suspension orders but are responding with suits to overturn the administrative sanctions could also face a presale ban. Looking at major builders that received suspension orders: HDC Hyundai Development Company was given suspensions of eight months and one year for the 2021 Gwangju Hak-dong demolition collapse and the 2022 Gwangju Hwajeong I-Park collapse, respectively. GS Engineering and Construction received an eight-month suspension from the Ministry of Land, Infrastructure and Transport (MOLIT) and a two-month suspension from the Seoul Metropolitan Government over the 2023 Gimpo Geomdan New Town apartment parking garage collapse, and is currently responding with suits challenging the orders. SK ecoplant and Kyeryong Construction (each six months) and Daewoo E&C (two months) have also been ordered suspended.
POSCO E&C, which saw multiple fatal accidents this year, and Hyundai Engineering, where 10 people were killed or injured in a bridge structure collapse on the Seoul-Sejong Expressway, are also awaiting administrative sanctions. Officials at Hyundai Engineering and POSCO E&C said, "It is still unclear when the sanctions will be finalized."
Lee Chang-mu, a professor at Hanyang University, said, "Blocking post-sale even after a business suspension can cause significant disruptions to projects by increasing builders' financing expense, so the government should consider easing the regulation."