Has your favorite restaurant or bar changed slightly, but you just can’t put your finger on how or why? The reason may be a combination of economics and law, and if you are thinking about leasing commercial property to start a business, this column will warn you of a danger you may not have anticipated.
The gwalligum issue arises when a commercial tenant operating a successful business is forced out of a lease, owing to short commercial leases with large deposits. Though the same term is used to refer to apartment control costs (such as the maintenance of public areas and security), it has a much broader meaning in a commercial context, almost the same as “goodwill.” Essentially, it’s the value of the business beyond what can be tangibly valued — the value of reputation, customer loyalty, and other similar intangibles.
So what’s the problem?
Commercial leases are typically for a very short term, one to two years. But remodeling the interior, advertising, and building a client base all cost tremendous sums of money and time, and involve substantial risk. Hence, by law, even when a lease term is less than five years, the tenant can elect to extend the lease up to a maximum of five years. This is still much shorter than the 10, 20 or even 100-year commercial year leases often seen in other nations.
So what happens after five years?
Well, if the landlord so chooses, the tenant has to leave, which would then allow the landlord (or a new tenant) to take over the business. And while customers may know the location, they will probably not notice if the owner of the business changes hands. Though it’s true the original business owner may hold some trademarks or other IP (rarely is that IP registered, and even if it is, the new storefront could be “just different enough” to avoid liability), the business under new ownership will often appear almost the same to customers.
At this point in time, the goodwill, the reputation of the business, essentially transfers to the landlord (or the new tenant, likely a close friend or relative) for free. So maybe what you, the customer, notice is that the chairs seem a bit different, the menu is a bit different, the staff are new, but what has happened is much more sinister.
Some assert this theft of goodwill was a major factor propelling the growth of Sangsu as a café and art area. Some business owners who helped build reputations in Hongdae were forced out and went around the corner to try again, while previous landlords enjoyed the windfall. Of course, from the landlord’s perspective, the tenant got what they bargained for — five years in one place, and any other guarantees (non-competition, etc.) should have been negotiated separately.
But this fails to consider the reality of a commercial tenant. Are leases really negotiable? Will a tenant who insists on adding clauses protecting their name be given those clauses or just be passed over? And what more can the tenant be expected to pay? The market already sees deposits exceeding a year’s rent and jeonsae at nearly 80 percent of purchase price — were tenants to pay more, they would expect to be owners. It seems like economically there is no room to inject extra money into a commercial lease.
There are numerous other issues in commercial tenancy as well, including the ability to transfer a lease when needed. While legislation offers some certainty, more recent proposals to the legislature have suggested a specialized mediation committee for resolving these disputes without the expense of suit. Whether this committee is created and what powers it would have are not certain. In the meantime, remember that leases aren’t forever, but expenditures are.
Yuna Lee is a Korean attorney practicing in Seoul. In 2015, working with the Ministry of Justice, Professor Kim Jae Hwan (Korea University, and the Korean Federation of Small and Medium Businesses), she researched and published legal and economic analysis of the gwalligum and other commercial tenancy issues and suggested revisions to applicable Korean law.
Darren Bean is a California attorney living in Seoul who lectures in international law and practices international IP and international commercial transaction law.