Experts Propose Changes to Housing Lease System After 46 Years

1981's Housing Lease Protection Act has undergone 29 amendments. Changes have included the right of priority for small deposits, priority rights based on confirmed dates, orders for registration of lease rights, and the right to request contract renewal. The consistent aim has been to secure tenants' claims more firmly to the property or to increase the information available to tenants. However, none of the amendments have challenged the premise that "the landlord holds and manages the deposit." The 'Jeonse Safety Trust' program, launched by the Korea Housing and Urban Guarantee Corporation (HUG) with a recruitment announcement on the 22nd of this month, marks the first time in 46 years that this premise is being addressed.

The structure is as follows: HUG will establish a stabilization organization within its framework, where tenants will deposit their security deposits, not with the landlord, but with this organization. The landlord will receive monthly returns of around 4% from the operational profits. At the end of the contract, the organization will return the deposit directly to the tenant. The deposits will be invested in housing construction project financing (PF) projects guaranteed by HUG. The program aims to secure 15 trillion won in deposits to support the supply of approximately 93,000 units, with a long-term goal of increasing the public rental stock rate from 8.9% to 20% through a 100 trillion won fund. Following the recruitment announcement on the 22nd, verification of rental prices and contract signing is scheduled for November, with deposit payments and move-ins planned for December.
 Currently, the only collateral for the deposit is the single property. There are no multiple collaterals or guarantors. Tenants cannot control this sole collateral. If the landlord takes on additional mortgages, defaults on taxes, or sells the property, the tenant has no recourse until the next day. Financial institutions assess borrowers and regulate collateral recognition ratios, requiring additional collateral if the value decreases. Tenants, however, are left to lend millions of won interest-free to individuals without any oversight. This is why deposits can be lost even without fraud. Rental fraud is a consequence of this structure, not its cause.

It may seem reasonable to entrust the deposit to the landlord, allowing them to use it freely, but this is quite unusual in comparison. In Germany, deposits are limited to three months' rent and must be held separately from the landlord's assets, with interest accruing to the tenant. Any unfavorable agreements for tenants are deemed invalid. In the UK, deposits are typically held in government-approved protection schemes, while in Australia and New Zealand, they are entrusted to state agencies. In New York, USA, deposits are held in trust but cannot be mixed with the landlord's assets. We do neither; there are no limits or restrictions on deposits that can reach 60-70% of the property sale price. This is an anomaly even within our legal framework. Investor deposits are required to be held separately or in trust, retirement benefits must be accumulated externally, and advance payments for funeral services must be partially secured. While the law states that rental deposits secure all tenant debts, landlords are allowed to use the entire amount freely.

In HUG's safety trust, if a landlord goes bankrupt, creditors can only claim the landlord's profit rights. Tenants are unaffected by tax defaults, property sales, or auctions, regardless of the priority mortgage amount, because the deposit is not secured by the property. This approach prevents issues before they arise, rather than addressing them after the fact.

At a forum held by HUG on the 16th, the president presented the initiative. He outlined various factors for landlords to consider, such as monthly income compared to pure rent, guaranteed income for up to two months even with vacancies, exemption from guarantee obligations, and proposed tax reductions on rental income. He also addressed concerns about side agreements. I participated as a discussant and emphasized the significance of this attempt to change the premise of the housing lease system after 46 years.

Let's look at the immediate changes. Tenants will no longer need to check the priority collateral and rankings in the registration records, worry about unpaid taxes not appearing in the records, or predict auction prices. There is no longer a need to match the timing of confirmed dates and residency registration down to the day, nor to check if ownership has changed during their stay. Since the deposit does not go to the landlord, gap investments are structurally blocked.
 Concerns that the inability of landlords to use deposits will lead to the disappearance of jeonse are unfounded. The supply of jeonse could actually increase. For a property in Seoul with a median sale price of 300 million won and a jeonse price of 200 million won, if the deposit is set at 10 million won for monthly rent, the landlord's monthly income would be 740,000 won, while participation in the safety trust would yield 730,000 won. The difference is only 10,000 won, but the risk of unpaid rent is eliminated, and HUG guarantees income for up to two months even with vacancies. A property with a priority mortgage of 200 million won valued at 300 million won cannot currently be offered as jeonse, as tenants would not want it. If the auction price is 240 million won, the tenant would only receive 40 million won. However, under the safety trust, the same property could be offered for jeonse at 200 million won. There is no reason to reduce the priority right, so landlords can fully utilize the collateral value. Properties that were previously only available for monthly rent due to priority mortgages could now be offered as jeonse. With the proportion of monthly rents rising to 68.4%, the difference between the jeonse conversion rate of 6.7% and the jeonse loan interest rate of 3.97% could lower housing costs.

Tenants also have concerns. They wonder if they must relinquish their priority rights and trust the organization, and what would happen if the funds invested in PF become insolvent. It is essential to accurately compare the current situation, where deposits are not securely held. The entire amount currently goes to the landlord without any assessment or oversight. The comparison should not be against a risk-free state but against the current state. The investment target is PF loans guaranteed by HUG, and the returns to landlords are designed to be stable regardless of investment performance.

There are questions about whether landlords will participate, fearing it may become like the 2016 bank escrow for jeonse. The failure in 2016 was due to landlords receiving no operational profits. This time, there is a profit, and for landlords who struggled to find tenants due to mortgages, the returns hold more significance than just the yield. Concerns have also been raised that this may start as an option and eventually become mandatory. Ultimately, I believe it should be fully implemented, but that requires a separate legislative process, and what is needed now is market validation.
 In the long term, the direction of funds will change. Deposits entering the safety trust will return to housing supply. Currently, this money flows to landlords, becoming seed money for gap investments and multiple property acquisitions, driving up housing prices, which in turn raises jeonse prices and deposits. If this system is fully established and expanded, the total amount of rental deposits in South Korea, currently at 1,058 trillion won, will change direction. It can break free from the vicious cycle that has fueled housing price increases through gap investments and redirect deposits into industrial capital, leading to a positive cycle for the national economy.

There are also points to improve for successful implementation. First is the legal nature. While it is called a 'trust,' the presentation materials and press releases use the term 'deposit.' If it is merely a deposit, its legal nature remains as a simple deposit under Article 702 of the Civil Act. The ownership of the deposited money would transfer to the organization, and tenants would become general creditors with a right to repayment. If issues arise with the organization, tenants would have to compete for dividends again. In contrast, Article 22, Paragraph 1 of the Trust Act prohibits enforcement, execution of security rights, preservation measures, and tax enforcement on trust property. Bankruptcy isolation is a legal effect granted by law, not a contractual agreement. The legal nature of the deposit and whether it is subject to bankruptcy isolation must be clarified by law.

Landlords' expected income must also be predictable. Their primary concern is how much and when they will receive payments. The recruitment announcement should specify the formula for calculating returns, minimum payment levels, and payment dates. It is also important to ensure that the safety trust properties are clearly indicated during the tenant's search process. If platforms and brokerage systems display this information, tenants will seek them out first, creating an incentive for landlords to participate. Attempts to inflate jeonse prices through side agreements pose the most realistic risk to this system, so thorough verification of jeonse prices is essential. Publicizing initial incident numbers is also crucial. There is no stronger persuasion than the fact that there has been not a single case of non-return in safety trust properties.

Once the safety trust is established, the next step should be to reform our lease system itself. If financial institutions guarantee deposit returns, the need for priority rights will disappear, along with the mechanisms built up to protect those rights, such as confirmed dates, residency registration, lease rights registration orders, and return guarantee insurance. The ownership and usage rights of housing will finally be completely separated. The number of trust entities should also be increased to encourage market competition. Landlords should be allowed to designate banks and securities companies as trust entities, while the state supervises their soundness and the range of operational products. This will ensure that even as the deposit scale increases, it can be managed effectively, and adjustments can be made to direct the flow of funds. Starting with high-risk properties with high jeonse rates, the program should expand to all rental housing, ultimately necessitating a comprehensive revision of the Housing Lease Protection Act. Tax incentives for deposit operational profits should be part of the system design, not just temporary incentives. Administrative personnel dealing with confirmed dates in local governments can be redirected to areas where they are more needed, such as caregiving.

Renting a home is not just a contractual issue; it is a matter of housing rights. Housing rights are fundamental rights that support the realization of other basic rights. If the place to live is unstable, no other rights can be built upon it. Yet, for 46 years, we have left the realization of that right to individuals' knowledge and luck. Complex and difficult systems inherently create inequality. Those who can read registration records, estimate auction prices, and assess rankings can avoid risks, while those who cannot bear those risks. The government's role is not to leave citizens to navigate a difficult, complex, and risky system on their own but to create a safe system. Finding a home should be as easy and safe as choosing ice cream at a convenience store. The Jeonse Safety Trust is the beginning of that process. I sincerely hope that this first step, taken after 46 years, will be firmly established.



* This article has been translated by AI.

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