Commercial Lease and Change of Use in Korea: Can the Lease Be Terminated If Business Operations Are Not Permitted?
A tenant may sign a commercial lease intending to operate a restaurant, café, convenience store, academy, or other specific business, only to later discover that the premises cannot legally be used for that purpose.
This may occur because the building’s registered use does not permit the intended business, the required change of use cannot be approved, or separate business licensing requirements cannot be satisfied.
In such cases, the landlord is not automatically liable simply because the change of use is unsuccessful.
Whether the tenant may terminate the lease, recover the security deposit, or claim damages depends on factors such as the agreed purpose of the lease, the reason the intended business cannot operate, any contractual allocation of responsibility for permits and change-of-use procedures, and the representations made by the landlord before the lease was signed.
Contents
- When a Change of Use Is Required
- What to Check Before Signing a Commercial Lease
- Landlord Liability When a Change of Use Is Not Possible
- Lease Termination and Return of the Security Deposit
- Damages for Interior and Business Preparation Costs
- Recommended Commercial Lease Clauses
- Frequently Asked Questions
- Key Takeaways on Commercial Leases and Change of Use
1. When Is a Change of Use Required for Commercial Premises?
If the current registered use of a building differs from the tenant’s intended use, it is necessary to determine whether a change-of-use procedure is required under the Korean Building Act.
Article 19 of the Building Act requires a building whose use is changed to comply with the building standards applicable to the intended new use.
Depending on the type of change, approval, reporting, or an application to amend the building register may be required.
[Article 19 of the Building Act – Change of Use]
However, a change of use under the Building Act and a business-specific license or registration are separate legal issues.
Even if the registered building use can be changed, the premises may still fail to satisfy requirements applicable to a restaurant, academy, or other regulated business.
A prospective tenant should therefore confirm not only the current use shown on the building register but also whether the intended business can legally operate at the premises.
2. What Should Be Checked Before Signing a Commercial Lease?
Before signing a commercial lease, the tenant should verify the registered use of the premises, whether the intended business can operate there, and who will bear responsibility for any change of use or licensing process.
🔹Key Checks Before Signing a Commercial Lease
| Item | What to Check |
|---|---|
| Building Register | Current registered use of the premises |
| Intended Business | The specific business to be operated |
| Change of Use | Whether the required change can legally be made |
| Building Standards | Parking, fire safety, structural, and other requirements |
| Business Licenses | Whether permits, registrations, or reports required for the business are available |
| Lease Agreement | Who is responsible for permits, change of use, and related costs |
| Special Clauses | What happens if the tenant cannot obtain the required approval or operate the intended business |
Where a tenant is leasing premises for a specific business, it is generally preferable to state that purpose expressly rather than describing the premises only as a “commercial unit” or “store.”
The purpose stated in the agreement may become an important factor if a dispute later arises over whether the premises were suitable for the intended use.
3. Is the Landlord Liable If the Change of Use Is Not Possible?
If the premises cannot be used for the purpose agreed under the lease, the landlord’s contractual obligation to enable the tenant to use and benefit from the premises may become an issue.
Article 623 of the Korean Civil Act requires a landlord to deliver the leased property and maintain it in a condition necessary for the tenant’s use and enjoyment during the lease term.
[Article 623 of the Civil Act – Obligations of the Lessor]
In Supreme Court Decision 2021Da202309, dated April 29, 2021, the lease expressly stated that the premises would be used as a convenience store, but issues relating to the building’s registered use interfered with normal business operations.
The Supreme Court held that the condition in which leased premises must be provided should be determined in light of the agreed purpose and terms of the lease, and that the landlord’s obligation to maintain the premises in a usable condition does not automatically disappear merely because the landlord was unaware of the relevant defect.
[Supreme Court Decision 2021Da202309, April 29, 2021]
However, the landlord is not automatically liable whenever a change of use is denied.
Relevant factors may include:
- the business purpose stated in the lease;
- whether the landlord knew the tenant’s intended business;
- whether the landlord represented that the business could operate at the premises;
- whether the problem arises from the building itself; and
- whether responsibility for permits or change-of-use procedures was allocated to a particular party.
The central issue is whether the premises were leased for a specifically agreed business purpose and why that purpose became impossible to achieve.
4. Can the Lease Be Terminated If the Change of Use Is Not Permitted?
If the inability to change the building use prevents the tenant from carrying out the business contemplated by the lease, termination of the lease may be considered.
Where the tenant has already taken possession and used the premises, however, Korean law may treat the issue as termination with prospective effect rather than cancellation that retroactively unwinds the entire contractual relationship.
In Supreme Court Decision 93Da61321, dated November 22, 1994, the tenant had taken possession of the premises but could not achieve the purpose of the lease because a legal restriction prevented the necessary change of use.
The Supreme Court considered the continuing nature of the lease relationship and addressed the matter as one of termination rather than retroactive cancellation.
[Supreme Court Decision 93Da61321, November 22, 1994]
If the lease is validly terminated, the tenant may also seek the return of the lease security deposit upon returning the premises.
Disputes may nevertheless arise over unpaid rent, restoration costs, or other amounts the landlord claims should be deducted from the deposit.
5. Can the Tenant Claim Interior and Business Preparation Costs as Damages?
Where the landlord has breached a contractual obligation and the required elements for liability are satisfied, the tenant may consider claiming damages for losses such as interior construction costs.
Article 390 of the Civil Act provides for damages where a party fails to perform its contractual obligations in accordance with the terms of the contract.
[Article 390 of the Civil Act – Damages for Non-performance]
Potential losses in a commercial lease dispute may include:
- interior construction costs;
- fixtures and equipment;
- demolition and restoration expenses; and
- expenses actually incurred in preparing permits or business registrations.
However, not every expense incurred by the tenant will automatically be recoverable.
The tenant must generally establish the connection between the landlord’s breach and the claimed loss, as well as the amount actually incurred.
Construction agreements, tax invoices, bank transfer records, receipts, and similar documentation may therefore become important evidence.
Claims for anticipated profits or lost business revenue generally require additional proof and should be considered separately from actual out-of-pocket expenses.
6. What Clauses Should Be Included in a Commercial Lease?
Where the premises are being leased for a specific business, the lease should clearly address what happens if the required change of use or business license cannot be obtained.
Relevant provisions may address:
- the specific business to be operated;
- whether a change of use is required;
- which party will handle the change-of-use procedure;
- allocation of related costs;
- the landlord’s obligation to provide documents or cooperation;
- termination rights if approvals are not obtained within a specified period;
- return of the deposit or other payments; and
- treatment of interior construction and restoration obligations.
In particular, a general provision stating that “all permits and licenses are the tenant’s responsibility” may not adequately distinguish between regulatory issues relating to the tenant’s individual business and legal restrictions arising from the building itself.
Where the ability to operate the intended business remains uncertain, the parties may consider expressly addressing termination and payment-return arrangements if the necessary approvals cannot be obtained.
7. Frequently Asked Questions
Q1. If the lease says the premises will be used as a restaurant, must restaurant operations necessarily be permitted?
The stated business purpose is an important factor, but it does not by itself determine liability.
It is also necessary to consider whether the landlord knew the intended use, why the business cannot legally operate, and how the lease allocated responsibility for regulatory approvals.
Q2. Is the landlord free from liability if the landlord did not know that the change of use was impossible?
Not necessarily.
A landlord’s lack of knowledge does not automatically eliminate the obligation to maintain the leased premises in a condition suitable for the agreed use.
Whether damages may also be claimed requires a separate review of the requirements for contractual liability.
Q3. What happens if neither the landlord nor the tenant is responsible for the inability to operate the business?
If the contractual purpose becomes impossible to achieve for reasons attributable to neither party, Korean rules on risk allocation in bilateral contracts may become relevant.
The result will depend on why the business became impossible and on the specific terms of the lease.
Q4. What should a tenant do if interior construction has already been completed but the business license cannot be obtained?
Before incurring additional expenses, the tenant should determine the exact reason the license cannot be issued and whether the problem can be corrected.
The tenant should also preserve the building register, lease agreement, licensing documents, interior construction agreements, invoices, receipts, and communications with the landlord before assessing termination, deposit recovery, or damages.
8. Commercial Lease and Change of Use: Key Takeaways
In a Korean commercial lease dispute involving a change of use, the registered use of the building is only one part of the analysis. The business purpose agreed between the landlord and tenant is also critical.
If the parties entered into the lease for a specific business but a problem inherent in the building prevents that business from operating, issues such as lease termination, return of the security deposit, and damages may arise.
However, the landlord is not automatically liable simply because a change of use cannot be completed.
The lease agreement, special provisions, building register, reason for the licensing failure, representations made before signing, and records of actual expenditure should be reviewed together.
