Series Index
Part 1 | Unpaid Corporate Transactions: Liability Behind the Veil
Part 2 | Trade Name Continuity and the Liability of a Successor
Part 3 | Directors’ Liability for Damages
Part 4 | The Person Behind the Company Name
Part 5 | The Limits of Self-Defense in Assault Cases
Part 6 | Criminal Settlement Money: How Much Is Appropriate?
Part 7 | Can Quasi-Rape Be Established If One Has No Memory After Drinking?
Part 8 | Freelancers and Severance Pay: What Courts Really Examine
Part 9 | Assignment of Receivables for Business Financing
Part 10 | Can You Get Divorced If Your Foreign Spouse Disappears?
Part 11 | Can a Tenant Terminate a Lease if Repairs Are Refused?
Part 12 | Can a Subcontractor Recover Payment if the Main Contractor Disappears?
Part 13 | What You Must Know Before Your First Police Interview
Part 14 | Can a Real Estate Contract in a Land Transaction Permit Zone Be Cancelled Before Government Approval?
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
When land located within a designated Land Transaction Permit Zone is transferred for value, prior approval from the relevant local government authority—such as the mayor or county governor—is required under Article 11 of the Act on the Report of Real Estate Transactions. The statute further provides that a contract executed without such approval does not take legal effect. Read literally, the provision appears to mean that an unapproved contract is simply void.
The Supreme Court of Korea, however, has adopted a more nuanced legal doctrine known as "floating invalidity." Under this doctrine, a contract executed before government approval has neither real rights nor contractual effect at that stage. If approval is later granted, however, the contract becomes valid retroactively as though it had been effective from the outset. Until then, the agreement exists in an intermediate state—neither legally valid nor definitively void.
The practical difficulty arises when one of the parties wishes to withdraw from the transaction while the contract remains in this state of floating invalidity. A buyer may decide to forfeit the deposit and walk away from the deal, while a seller may prefer to repay double the deposit after finding a more favorable purchaser.
The Supreme Court has held that rescission through the contractual deposit remains available even during this period of floating invalidity. Article 565 of the Korean Civil Code provides that, unless otherwise agreed, the party who paid the deposit may rescind the contract by forfeiting it, while the recipient may rescind by returning double the deposit, provided neither party has commenced performance. Because this principle applies generally to contracts, the Court concluded that it also governs sales contracts awaiting governmental approval.
The issue becomes more complex because rescission by deposit is permitted only before either party has begun performance. Several recurring situations illustrate how the courts have interpreted this requirement.
One scenario arises when the parties exchange only the deposit, apply for government approval, and ultimately obtain the permit. Once approval is granted, the contract ordinarily becomes fully effective. Nevertheless, the Supreme Court has ruled that obtaining approval alone does not constitute commencement of performance. Accordingly, even after approval has been issued, the seller may still terminate the contract by returning double the deposit. In other words, while the contract has become legally effective, the opportunity to rescind remains if performance has not yet begun.
Another situation involves litigation to compel the opposing party to cooperate in obtaining governmental approval. Although it may seem that filing suit—and even prevailing at trial—should amount to commencement of performance, the Supreme Court has reached a different conclusion. A first-instance judgment ordering cooperation does not, by itself, constitute performance of the contract. Consequently, rescission based on the contractual deposit remains available.
A third situation occurs when the buyer hastily deposits the remaining purchase price with the court in an attempt to prevent the seller from rescinding the agreement. The Court has likewise held that such an action does not qualify as commencement of performance. While the contract remains subject to governmental approval, no legal obligation yet exists to pay the interim or final purchase price. Failure to make payment, therefore, does not constitute breach of contract, and conversely, making payment before it becomes due cannot be regarded as contractual performance.
In the author's experience, disputes of this nature most commonly arise when significant fluctuations in real estate prices prompt one party to reconsider the transaction. One practical solution is to include a contractual provision stating that rescission through the contractual deposit is no longer permitted after payment of the interim installment. Such a clause can substantially reduce uncertainty. In high-value transactions, the drafting of rescission provisions and special contractual terms often determines the ultimate outcome of the dispute. Careful legal review at the contract formation stage is therefore highly advisable.
About the Author
Hong Seung-kwon is an attorney at Law Firm PAN, where he represents clients in civil and criminal litigation while advising on a wide range of legal issues emerging in the digital era. His research focuses on the interaction between technological innovation, property rights, regulatory policy, and the evolving legal framework governing modern markets.
