Hello, this is Attorney Baek Gi-hyung from Cheongchul Law Firm.

The Commercial Building Lease Protection Act (hereinafter referred to as the ‘Commercial Lease Act’) has established a substantial number of systems to protect tenants, from priority rights over lease deposits to the right to demand contract renewal and key money.

In particular, the right to demand contract renewal, which allows for contract renewal up to a limit of 10 years, and the protection of key money recovery opportunities, which holds landlords liable for damages if they obstruct the recovery of key money, are very powerful systems. These two provisions serve to prevent landlords from expelling tenants under the pretext of the so-called ‘gentrification’ phenomenon when a tenant's efforts lead to enhanced business activity.

This law applies to the lease of ‘commercial buildings’ as suggested by its name, so it is generally difficult to apply to leases of ‘manufacturing factories’ that are not intended for profit.

However, in actual trade situations, small companies often lease a single building without distinguishing between factories, sales stores, and offices, raising the question of whether it is justifiable to consider that ‘factories’ cannot uniformly be subjected to the Commercial Lease Act.

Can the Commercial Lease Act be applied to factory lease contracts?

[Question]

Can the Commercial Lease Act be applied to the lease contract of a ‘factory’?

[Answer]

First, the Supreme Court’s ruling on July 28, 2011, case number 2009Da40967 stated, “Whether it falls under a commercial building to which the Commercial Lease Act applies should be substantially judged based on whether it is used for commercial purposes in light of the status and purpose of the building rather than the official records, and a factory or warehouse where only facts such as storing, producing, and processing goods occurs is not deemed to be used for commercial purposes; however, if profit-oriented activities are carried out together with such factual acts, it will be comprehensive as a commercial building subject to the Commercial Lease Act.”

It is not a matter of whether it is a ‘factory’ or a ‘warehouse’, but whether ‘profit-oriented activities are performed together’ that should be substantially evaluated.

In fact, in the Supreme Court ruling on November 14, 2024, case number 2024Da264865, it was determined that a “manufacturing site utilizing a welding workshop and an office in an 8:1 ratio” could also fall under ‘commercial buildings’.

The above Supreme Court ruling specifically relied on two main grounds: ① that the tenant did not have a separate operational office aside from the manufacturing site, and ② that there were facts supporting payment through issuing tax invoices and transaction specifications in the internal office, thus viewing it as ‘profit activities occurred’.

Another important point is that the ruling of the Supreme Court on November 14, 2024, case number 2024Da264865 stated, “The operations conducted in the manufacturing site and office are all considered as part of a series of commercial activities, and the entire building in question should be regarded as a business site used for commercial purposes.”

This means that if a ‘factory’ is recognized as a ‘commercial building’, the application of the Commercial Lease Act is not limited to just the portion designated as ‘office’ where transactions occur, but applies to all areas, including the ‘workshop’ and ‘office’.

In small factories, it is common to conduct manufacturing and processing within the factory without having a separate operational site, so it seems likely that the Commercial Lease Act will be applied to ‘small factories’ in the future. If landlords also use the building as a factory to engage in manufacturing, they are highly likely to perceive that the factory can be used for commercial purposes, which also increases the likelihood of the Commercial Lease Act being applied.

However, since disputes regarding the applicability of the Commercial Lease Act may take a considerable amount of time to get judicial determinations, it is essential to verify whether only factual acts such as manufacturing and processing occur in the factory or whether commercial activities, including payment transactions, are carried out from the outset of the lease agreement and to review and decide on the applicability of the Commercial Lease Act in advance.

Attorney Baek Gi-hyung has gained extensive experience in civil litigation and enforcement while working with the Defense Ministry and a major law firm’s construction/real estate team, thereby excelling in exploring various possibilities and strategies in debt recovery even from the pre-litigation stage.

Cheongchul Law Firm consists solely of attorneys from Korea’s top five large law firms, such as Kim & Chang, Gwangjang, Taepyeongyang, Sejong, and Yulchon, as well as in-house legal teams from large corporations, and not only one lawyer but rather specialists in relevant fields come together as a team to respond to matters. Cheongchul provides legal consulting that goes beyond resolving specific issues to offer comprehensive solutions for the entire business, focusing on ultimately achieving what our clients desire. If you need help achieving your goals, please do not hesitate to contact Cheongchul.