The Jeonse/Chonsei, or “Key money deposit” system is specific to Korea. Instead of paying monthly rent, the renter deposits a large sum of money (a percentage of the property value, usually 60%-80%) with the landlord for the duration of the lease (normally 2 years). The landlord must return the full amount to the leaser when the lease comes to an end. Indeed this system is closer to leasing than renting in Western terms: the renter will only have to pay the bills while staying in the property, no monthly rent is charged. If you can afford to raise the cash required for the deposit the system is clearly advantageous for the tenant. The landlord in turn has the possibility of investing the money over the period of the lease and at times when interest rates are high there is a big incentive for owners to opt for this system.
Although financially advantageous for the renter, there is clearly an element of risk involved here: the ownership of the building or apartment may change hands at some point during the lease which complicates matters, the landlord may not be able to find another tenant right away and so may not have the ready cash to pay back the full deposit, the possibility that the landlord becomes insolvent at some point during the lease, although rare, is also a possibility. Some landlords also try to manoeuvre their way out of paying if the lease was signed by an individual rather than by a corporation. Before entering such an arrangement, it is important to check the building’s register to make sure there are no loans on the property. The renter is expected to pay 10% of the total amount when the contract is signed and the balance when they move in. Should the tenant have to leave before the expiry of the lease, he/she may be expected to find another tenant who will pay the key money.
Registering the lease and jeonse payment at the local gu (local government) office offers some protection. If necessary, according to Korean law, a tenant can claim priority over lenders claiming the property in the case of bankruptcy or insolvency if the tenant can show proof that he/she has occupied the property and registered her/his relocation with the local government office.
Although this is improving note that Koreans don’t always view a contract or lease as absolutely binding.
The Wolse (Monthly Payment + Deposit) system is close to the Western practice whereby you pay a security deposit along with monthly rental payments on a fixed date. The deposits range from 4 to 20 times the monthly payment amount. It is usual to pay 10% of the deposit when the contract is signed and the balance plus one month’s rent when moving in. The deposit is returned to the renter at the end of the lease period. If the tenant is late with the rent that amount will be deducted from the deposit as will costs for damages, etc. It can be tricky to wrestle the full amount of the deposit from the landlord/landlady, especially if the lease was signed by a foreign individual about to leave the country. Wolse is becoming increasing popular with property owners. Monthly rents range from KRW 300,000 to around KRW 3 million a month or depending on location and quality.
Another option is to pay the full amount of the rent for the period of the lease up front, which clearly appeals to many property owners. Be aware that a pre-paid two or three-year lease may be what they’re pushing for but isn’t necessarily the only option, so be ready to negotiate. If you’re going for this system it is important to be very specific in the contract and include an opt-out clause in case problems are discovered after you move in.
The Lease period is usually for a minimum of one year and a maximum of three years. It is not unusual, especially for expats, to have to terminate the lease earlier than planned. To avoid having to pay a penalty or losing the entire pre-payment, it is important to clearly stipulate acceptable reasons for early termination as well as the notice and refund procedures in the lease agreement. The usual notice period for termination is 60 to 90 days.
One way to protect your deposit is to register a 'kuen mortgage'. A lawyer can help you with this (although it can be done without legal representation) and the legal fees will be about 1.5% of the total rental payment. A Kuen mortgage means you have registered your investment with the local government office and that you hold a first claim on the property for the total amount of your payment. This will ensure that you get your money back if the property owner goes bankrupt or becomes insolvent, and you will not be evicted should the property change hands.
For more information contact Korea Legal Aid.