The Supreme Court ruled that a shopping center owner may have to pay damages if the owner blocked an existing tenant from receiving a key money premium by offering a prospective tenant rent and a deposit set so high that a lease could not be concluded.
The Supreme Court's First Division, presided over by Justice Chun Dae-yup, said on the 30th that on the 16th it overturned an appellate ruling that found no liability for damages on the part of landlord A in a building surrender and damages suit brought by A and the existing tenant, pharmacist B, and sent the case back to the Busan District Court.
Pharmacist B took possession of the shop in September 2001 and has run a pharmacy there. A came to own the shopping center solely in Oct. 2017, and in Jan. 2018 signed a two-year lease with a 100 million won deposit and 6 million won monthly rent. In Apr. 2023, A asked B to raise the monthly rent to 24 million won. The two sides failed to reach an agreement, and in Sept. the same year A notified B that the lease term would end at year's end.
In Oct. 2023, B signed a contract with C, who wanted to do business there, to transfer the pharmacy in exchange for 2.2 billion won in key money. But the owner, A, offered C terms of a 500 million won deposit and 20 million won monthly rent. Saying the rent was too high, C gave up on signing the lease, and B did not receive the key money.
Afterward, A filed a building surrender suit against B, who did not leave after the lease term ended. B countered that water leakage at the shop in Nov. 2019 required repairs costing 44 million won and argued B could retain possession until receiving that amount from the landlord. B also sued A for damages for the lost key money.
Under the Commercial Building Lease Protection Act, a landlord must not interfere with a tenant's receiving key money from a new tenant secured by the tenant. As an example of interference, the law lists a landlord demanding rent and a deposit from a new tenant that are markedly higher than those of nearby commercial properties.
In the first instance, the court ordered owner A to pay pharmacist B 44 million won for the leakage repairs, and ordered B to surrender the shop to A. It did not recognize the key money damages claim.
In the second instance, the court ruled that pharmacist B must surrender the shop to A unconditionally. Regarding the 44 million won leakage repair cost, the panel said, "The electronic tax invoice lists the item only as 'pharmacy remodeling work,' and it is impossible to verify how much expenditure was related to leakage repairs," and found B could not assert a lien.
On the key money issue, the appellate panel said, "This shop is near a hospital's main entrance, giving it a good location as a pharmacy," and, "Given that the monthly average dispensing fee income of B's pharmacy reaches 10.432 million won, it is hard to see the deposit or rent that A demanded as markedly high compared with market rates."
However, the Supreme Court said the monthly rent A offered to C, who intended to take over and run the pharmacy, amounted to 333% of the existing rent, adding, "There is strong reason to view such differences in rent and deposit as markedly high."
On the key money B was to receive, it said, "According to the lower court's commissioned appraisal, a pharmacy's key money forms at around 20 months' worth of monthly average dispensing fees," and found that "2.2 billion won appears to be a reasonable amount."
Under the lower court's commissioned appraisal, the location key money was valued at 0 won and the business key money at 2.015 billion won. Location key money compensates for the site value, including the shop's location and foot traffic, while business key money refers to the intangible sales value such as the established regular customers, suppliers, and operational know-how of the existing business.
The Supreme Court said, "B's dispensing fee income appears to include, beyond the building's location, a significant human factor attributable to effort, such as suppliers, credit, and business know-how," adding, "Without reflecting these circumstances, A's sharp increases to rent and deposit cannot readily be viewed as objectively justified."
It continued, "The lower court needs to examine appropriate rent and deposit and then determine, in line with the purpose of the Commercial Building Lease Protection Act, whether the requirements for a damages claim are met," and reversed and remanded.