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Legal Issue 3. |
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Real Estate & Construction Issue Update |
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The Development Project in Jeju involving Foreign Investments under Threat of Suspension |
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| In 2001, the Korean government devised a plan to develop Jeju Island as a free international city geared towards the tourism, resort and service industry, and in relation to such plan, the Korean government selected and approved seven large size development projects in Jeju Island. One of such development projects is Yerae Resort-type Residential Complex development project (such complex, the "Residential Complex", and such project, the "Project") and even though approximately KRW200 billion has already been committed to the Project to complete 55% of the construction works for Project, the Project has come under threat of suspension due to the Korean Supreme Court's ruling confirming a lower court's decision that one of the governmental permits and licenses granted in connection with the Project was not valid. |
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| Since the aforementioned case is a clear example showing how important it is to confirm the validity of governmental permits and licenses granted with respect to a development project, we will briefly describe below the current status of the Project and its implications for foreign investors. |
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I. Factual Background |
| In 2005, after obtaining required governmental permits and licenses for the Project which included a governmental license for establishment of an amusement park (such license for establishment of an amusement park, the "Governmental License") from Seogwipo City Government in Jeju Special Self-governing Province, Company A proceeded with the Project. In 2008, Company A attracted foreign investment from Company B with respect to the Project. Company A and Company B incorporated Company C as a joint venture company, and Company A transferred its status as the project developer and rights and obligations related thereto to Company C. Consequently, Company C is currently in charge of the Project as the developer of the Project. |
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| Although Company A attempted to purchase land sites for the Project, it failed to reach mutual agreement with certain land owners (the "Land Owners"). Around the end of 2006, Company A purchased the land sites owned by the Land Owners compulsorily pursuant to the land expropriation decision of the Local Land Tribunal of Jeju Special Self-governing Province in accordance with the Korean laws relating to land expropriation (the "Expropriation Decision"). However, in 2007, the Land Owners filed a formal objection against the Expropriation Decision in the Central Land Tribunal, but the Central Land Tribunal dismissed such objection. After the dismissal, the Land Owners filed a claim in the local court against Company A and the Local Land Tribunal of Jeju Special Self-governing Province requesting nullification of the Expropriation Decision. In 2009, the trial court ruled against the Land Owners, but in 2011, at the appellate level, the appellate court ruled in favor of the Land Owners. In 2015, the Supreme Court of Korea rendered a final judgment in favor of the Land Owners confirming the appellate court's decision (the "Final Decision"). |
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| Pursuant to the Final Decision, the Expropriation Decision was invalidated and the ownership of the relevant land sites was returned to the Land Owners. Under the current circumstances, Company C cannot proceed with the Project further unless Company C successfully purchases the concerned land sites from the Land Owners. |
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II. Summary of Final Decision |
| Under the Final Decision, the Supreme Court of Korea held that the Government License is invalid and, thus, the Expropriation Decision based thereon is also invalid. |
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| The grounds for the Supreme Court's decision were as follows: |
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| The Governmental License was granted to establish an "amusement park" as set forth in the National Land Planning and Utilization Act (the "Act"). Under the Act, an amusement park is defined as "a facility to be established mostly for the amusement and rest of citizens contributing to the improvement of citizens' welfare." However, the Supreme Court found that the Residential Complex was being developed as a facility not for general citizens but for domestic and foreign tourists, particularly wealthy elderly people to stay for mid-to-long-term periods, and that such development concept was not consistent with the concept of an "amusement park" under the Act. The Supreme Court deemed that there was an error in granting the Governmental License for the development of the Residential Complex, which is not an amusement park, and that such erroneous grant of the Governmental License was in violation of the Act. Consequently, the Supreme Court held that, since such error was material and unquestionable, the Governmental License was invalid and accordingly, the Expropriation Decision based thereon was also invalid. |
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III. Other Issues |
| With respect to the Final Decision, the following legal issues are currently being discussed in the relevant industry and legal community: |
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Impact of the Final Decision on Other Governmental Permits and Licenses Granted with respect to the Project |
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With respect to the Project, there were other governmental permits and licenses that were granted other than the Governmental License (such permits and licenses, the "Other Licenses"); as such, whether the invalidation of the Governmental License should affect the validity of the Other Licenses is currently being discussed.
In order to examine this issue more closely, it is necessary to look into the details of the relationship between the Governmental License and the Other Licenses. If the Other Licenses were granted based on the Governmental License, it is highly likely that the Other Licenses will also be invalidated, and even if the Other Licenses were granted not based on the Governmental License, if the Other Licenses were granted erroneously as in the case of the Governmental License, it is also likely that the Other Licenses will be invalidated.
In any case, regardless of the validity of the Other Licenses, it has become practically difficult for Company C to proceed with the Project further without the Governmental License. |
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Whether or not Any Event of Default Occurred under the Loan Agreement related to the Project |
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Also at issue is whether, upon the invalidation of the Governmental License, any event of default occurred under the loan agreement entered into to finance the Project.
This issue is dependent on the relevant default provisions of the loan agreement. If invalidation of any governmental permits and licenses is set forth as an event of default under the loan agreement, it would seem that an event of default has occurred. However, in the event there is no such explicit provision in the loan agreement, the determination of whether an event of default has occurred may need to be made on the basis of whether it is possible to continue to carry out the Project. |
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Whether the Construction Company Should Remain Obligated to Complete the Construction Works |
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In connection with the construction works for the Project, another legal issue is whether the construction company which undertook to complete the construction works for the Project is required to complete the construction works regardless of the invalidation of the Governmental License, or whether such construction company will be exempted from its obligation to complete the construction works since such circumstances constitute a force majeure under the relevant construction contract.
This issue will be determined based on the details of the relevant provisions concerning the construction company's covenants regarding completion of the construction works under the relevant construction agreement; i.e, whether or not Company C agreed on the construction company's covenants regarding completion of the construction works with the intent that Company C as the developer will bear the risk relating to governmental permits and licenses. |
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IV. Implication of the Final Decision and Matters to be Considered for Future Investment in Development Project in Korea |
| It appears that Company B (which is a foreign entity) invested in the Project based on its trust in the Korean government, since the Project was actively carried forward by the Korean government and local government. However, this case shows that even if the relevant project is promoted by the government agency or local government, if the relevant developer fails to fully comply with the relevant laws and procedures in carrying out the project, the governmental permits and licenses in connection with the project may be invalidated through court proceedings and other proceedings and that such project can be suspended. |
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| We note from this case that a significant loss may be incurred to the relevant parties if they implement a project without conducting a thorough review of the project from a legal perspective. |
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| In this regard, it is strongly advisable for foreign investors that are interested in investing in a real estate development project in Korea to carefully check and confirm whether the relevant governmental permits and licenses fully satisfy the requirements set forth in the applicable laws and regulations, and to ensure that it is clearly specified in the relevant agreements which party shall be liable for matters relating to governmental permits and licenses. |
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