Construction Association Faces Backlash Over 10 Billion Won Rental Fraud

"I thought it would be safe since it was a building owned by a government-related organization. I never doubted it."

A resident, referred to as A, signed a jeonse (long-term lease) contract for an officetel in Samseong-dong, Gangnam, based on trust in the 'credibility' of the property owner, the Construction Technology Association, a legal entity under the Ministry of Land, Infrastructure and Transport. Association staff held seminars in the building's basement, and the property manager personally addressed any issues that arose. A extended the contract and lived peacefully for five years based on this trust.

However, in September 2023, A received a sudden notice demanding immediate eviction. The rental company had failed to pay rent to the association for several months, leading to the termination of the lease. The tenants had received confirmed dates and completed their residency registrations. At the time of signing, the real estate agent assured them it was a "safe property." Yet, none of the tenants received their jeonse deposits back. A total of 28 households were affected, with losses amounting to 10 billion won. The main culprit was a company with a mere 10 million won in capital.

This company, Sovereign State, primarily engaged in leasing and management, had leased the entire annex from the Construction Technology Association and then re-leased it to individual tenants through a master lease arrangement. The tenants' contracts were with Sovereign, not the association, and their deposits were paid into Sovereign's corporate account. In this structure, even if Sovereign defaulted on rent and the contract with the association was terminated, the tenants had no legal basis to claim their deposits back from the original landlord, the association.

Moreover, the original contract between the association and Sovereign included a confidentiality clause, preventing most tenants from realizing they were in a sublease agreement. This effectively blocked tenants from identifying the structural risks beforehand. The special terms in the contracts stated that the agreement was "approved by the association" and included a clause absolving the association of any responsibility. While the association's credibility lured tenants into trusting them, it also meant the association bore no responsibility in case of disputes.

The problem was that the total deposit amount of 10 billion won was significantly understated in the sublease contract submitted by Sovereign to the association. For seven years, the association did not verify whether the rental payments were being made or the actual size of the deposits. It was only five months after the rent was overdue that the association notified tenants to vacate in September 2023.

From young professionals to three foreign nationals, those who trusted the 'credibility' found themselves in a deeper trap. In a civil trial, the court recognized Sovereign's liability for damages, but the company had already lost its ability to repay, making it virtually impossible for tenants to recover their deposits. The deceptive sublease structure that amassed 10 billion won using the association's credibility remains in a regulatory blind spot.

"All my savings are gone"... Only a 3 million won bill remains

In January 2024, the association filed an eviction lawsuit against the tenants of the annex and carried out forced evictions with court bailiffs. Subsequently, the association billed the households that exceeded the eviction deadline for usage fees amounting to 3 million won per month.

The tenants' lives were shattered. Tenant B lost their entire deposit and had to move back in with their parents. B lamented, "I lost my savings, and now options like applying for housing or rental properties are gone." Tenant C, during the ongoing lawsuit, suffered a relapse of a previously cured illness due to extreme stress and passed away in 2024. Currently, C's husband is continuing the legal battle. Tenant D moved in using an inheritance from their mother, who passed away after battling cancer, but fell victim to the rental fraud just a month and a half later.

While the tenants continue their deposit recovery lawsuits, the association's annex officetel is still accepting new tenants and operating normally. The current management company, Genstar Mate, was selected for asset management services in January 2025. According to the Public Procurement Service, the association posted a bid notice for "Construction Technology Association Asset Management Services" on December 31, 2024, and selected Genstar Mate as the winning bidder after a restricted competition bidding process.

The investigative team from Aju Economy conducted tenant consultations for the officetel on the 23rd and 24th of last month. Genstar Mate stated that the previous rental fraud and forced eviction issues were "problems of the former company and are currently being resolved," asserting that they were appointed as the asset management company by the association. However, they also claimed, "Since the association is a public institution, there are no issues with the deposits," using the term 'public' to leverage the association's credibility.

At a real estate agency in Gangnam, a representative stated, "The association cannot lease directly, so they delegated it to an external company," providing misleading information. The Construction Technology Association, which started as a private organization in 1987 and became a legal entity in 1995, has provisions in Article 5, Section 12 of its bylaws regarding the leasing and management of properties and facilities. Despite having no legal issues in acting as a direct party to lease contracts, incorrect explanations continue to be given.

In the past, brokers and Sovereign leveraged the association's high credibility while failing to adequately inform tenants of the risks associated with sublease agreements. Recently, some improvements have been noted, with management companies and brokers providing prior information about past incidents or contract structures. Nevertheless, key information affecting contract safety, such as the association's actual legal status and ability to lease directly, continues to be misrepresented. While some risk factors are disclosed, the issue of information asymmetry, making it difficult for tenants to accurately assess contract safety, remains unresolved.

Meanwhile, documents obtained by the investigative team reveal that Sovereign's business scope was not limited to the annex. Notices were sent to tenants in the main building, indicating that they would take over sublease contracts due to the termination of the lease with Sovereign. This has led tenants to strongly suspect collusion between the association and Sovereign regarding the transfer of leasing rights for the two buildings.

In response, an association official stated, "It is difficult to provide specific answers as civil and criminal lawsuits are ongoing. We will explain after the trial concludes," adding that the forced evictions were a "legitimate action based on a court order."

Newly Established Company Secures 10-Year Lease Rights in 57 Days

Sovereign State, a newly established company with only 10 million won in capital, was selected as a long-term tenant for the Construction Technology Association's annex in April 2014. Despite the large-scale damages incurred, the association has yet to clarify the initial leasing process that led to the incident.

During the civil lawsuit, the tenants requested the court to order the submission of all documents related to the tenant selection announcement, evaluation criteria, and board meeting minutes. However, the court dismissed this request, leaving the allegations of collusion in the selection process unverified.

The reasons for the dismissal are disputed. Tenants argue that the association had no evaluation process and that no related documents or minutes exist, effectively blocking proof of existence. Conversely, the association claims it was dismissed on the grounds that it was unrelated to the sublease contract dispute. If the tenants' claims are true, the absence of such documents would directly contradict the association's own bylaws, which state in Article 39 that "leasing of significant assets must be approved by the board of directors," and that minutes must be kept and stored.

While other service contract announcements issued around the same time remain available on the Public Procurement Service and association websites, the specific lease announcement for the annex cannot be found. The association stated, "We believe it was selected through a competitive bidding process," but has not provided any supporting documentation.

The rapid acquisition of a 10-year lease by a newly established company within two months recalls the notorious 'Whimoon High School Foundation incident,' where a foundation pre-selected a specific company, established a corporation, and entered into a contract, leading to revelations of collusion and deposit misappropriation during the trial.

Particularly, the association's history of opaque contracting practices amplifies suspicions. In a comprehensive audit by the Ministry of Land, Infrastructure and Transport in 2016, the association received a warning for entering into a private contract with a specific company despite receiving multiple proposals. In a 2021 audit, it was found that the association had proceeded with a private contract without a competitive bidding process, solely based on board approval. This raises concerns that the current lease agreement for the annex may have been handled in a similarly opaque manner.

Tracking Accounts Reveals Misappropriation of Tenant Deposits for Electric Vehicle Charging Stations

It has been confirmed that a significant portion of the approximately 10 billion won in jeonse deposits paid by tenants into Sovereign State's corporate account was funneled through the personal account of CEO Choi or directly transferred to a related company, Sovereign EPS. The misappropriated deposits were reportedly used for real estate purchases in the Songdo area.

When the investigative team visited the parking lot of the Rich Central Building in Songdo on the 24th of last month, they found that the electric vehicle charging station, once promoted as the largest in the country by Sovereign EPS, had been dismantled without a trace. The charging facilities, which included rapid chargers for a total of 60 vehicles, were completely removed, leaving only a crumpled opening ceremony banner behind.

Sovereign EPS purchased the parking lot and car wash within the Rich Central Building for 3.689 billion won in the summer of 2022. As the company aggressively expanded, its debts spiraled out of control. An insider familiar with the situation stated, "At that time, total liabilities exceeded 30 billion won," adding that the structure involved using tenant deposits and external investments to cover debts. According to the first-instance ruling, Choi was aware of the liquidity crisis as early as April 2023, when rent payments began to fall behind. Nevertheless, he continued to sign contracts with new tenants and collect deposits.

In April, the Seoul Central District Prosecutors' Office charged CEO Choi with fraud and forgery of documents, while director Yoo was charged with fraud and auditor Lee with forgery of documents, all without detention. Sovereign EPS was declared bankrupt in November of the previous year and is now in the liquidation phase, with related properties being auctioned off.

Winning a Lawsuit but Unable to Recover 10 Billion Won: Ongoing Appeals

In November of last year, the Seoul Central District Court ruled partially in favor of 25 tenants who filed a damages claim against Sovereign. The court accepted all claims against Sovereign State and most claims against Choi and Yoo, excluding some interest on delayed damages. While the ruling opened a path for recovering deposits, the company's inability to repay makes actual recovery nearly impossible.

The victims also sought legal accountability from the association, the primary landlord, arguing that the association had completed the establishment of the jeonse rights with Sovereign and neglected management and oversight despite being aware of the tenants' actual residency. However, the first-instance court ruled that the association had no legal obligation to manage or oversee the total amount of the sublease deposits, dismissing the claims. The court also rejected the victims' assertion that the association should have known about Sovereign's fraudulent activities, citing that Sovereign submitted forged contracts, making it impossible to ascertain the actual deposit amounts.

Instead, the court imposed varying degrees of liability on the real estate agents who brokered the fraudulent leases, assigning them 20-40% of the compensation responsibility based on their negligence. Additionally, the Korea Association of Realtors and Seoul Guarantee Insurance, which had contracts with these agents, were also held jointly liable within the limits of each agent's guarantee. As a result, victims can now seek compensation not only from Sovereign and the brokers but also from the real estate association and the insurance company.

The Korea Association of Realtors stated that "an appeal is ongoing, and once the ruling is finalized, claimants can request payment from the guarantee fund." Regarding the agents found liable, they added, "Members whose qualifications and registrations are canceled will lose all rights against the association." Seoul Guarantee Insurance (SGI) stated, "As individual contract conditions vary and involve financial transaction information, we cannot provide specific details at this time," but assured that they would comprehensively verify the occurrence of an insurance incident and related facts if a claim is filed.

Need for Systematic Reforms: Caution Advised in Sublease Contracts

This incident highlights the legal and systemic blind spots associated with sublease agreements. Attorney Kim Dae-jin, head of the Housing Tenant Legal Support Center, pointed out the limitations faced by subtenants who cannot directly assert rights against landlords and must rely on tenants to exercise their rights on their behalf. The financial structure of leasing companies is also a concern. Kim explained, "Companies contract with landlords on 'high rent and low deposit' terms, while with subtenants, they use 'low rent and high deposit' terms to secure initial funds. This discrepancy often leads to financial difficulties."

Attorney Woo Won-sang emphasized the issue of 'information asymmetry' that can arise before contracts are signed. Unlike landlords, sublessors do not appear in property registration documents, making it challenging for subtenants to verify whether the other party is the true rights holder.

To address these issues, it has been suggested that public institutions, such as legal entities, should mandate minimum requirements like capital or insurance for subleasing companies when selecting them. Attorney Eom Jeong-sook noted that "without legislative changes, it can be realistically implemented through supervisory guidelines or amendments to bylaws and internal regulations of the relevant departments."

Attorney Seok Seung-il pointed out that while requirements like capital or operational history may serve as minimal thresholds, they are unlikely to provide fundamental solutions. He stated, "Considering that the capital is not necessarily retained within the company, such requirements may not be effective in resolving the issues."

He proposed a system that disperses risk externally, suggesting that a portion of the deposit be held by the landlord or a third party (such as a trust company) or that a guarantee insurance certificate for the deposit be issued and submitted, or that contract details be reported to the relevant authority. Implementing such measures could significantly prevent potential damages. Attorney Woo Won-sang also suggested utilizing subtenants' rights registration orders through tripartite contracts or specifying the original landlord's joint liability as part of specific systematic reforms.

Conversely, there are calls for caution regarding increasing the original landlord's liability. Professor Seo Jin-hyung of Kwangwoon University expressed concern that imposing excessive responsibility on landlords could lead to moral hazard among intermediate tenants. If an intermediate tenant disappears after leasing at a high deposit, the original landlord could paradoxically bear the responsibility. Professor Seo cautioned, "Legally, it is difficult to completely prevent such damages," urging tenants to thoroughly verify their contractual counterparties and rights relationships.

Experts unanimously warned against the inherent risks associated with sublease agreements. Kim In-man, head of the Real Estate Economic Research Institute, stated, "Given the nature of subleases, there are often no adequate means of recourse when issues arise, making it advisable to avoid such contracts altogether." Attorney Kim Dae-jin also advised that subtenants, who may not receive even minimal tenant protections, should avoid subleases above a certain amount. He emphasized, "If a contract is unavoidable, ensure thorough verification of ownership, landlord consent, and the amount of any prior deposits, and reconsider the contract if such information is not transparently provided."

Meanwhile, the criminal trial for Sovereign's CEO Choi and director Yoo is scheduled to take place on the 21st.