Series Index
Part 1 | Attorney Hong Seung-kwon: “AI Arrives in the Legal Profession”
Part 2 | How Should Lawyers Use AI?
Part 3 | Dividing Roles Between AI and Lawyers
Part 4 | AI Legal Advice Isn’t Enough—Here’s Why Lawyers Still Matter
Part 5 | Attorney Hong Seung-kwon: Korea’s AI Law—KRW 30 Million Fine Threshold
Part 7 | You Can’t Remove a Co-CEO Just Because You Want To
Part 8 | Why ₩10M Deposit May Not Qualify as Small Tenant
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
Situations in which tenants fail to recover their security deposits even after a lease has ended are more common than many people expect. In such cases, tenants often assume they will be protected under the legal category of a “small tenant.” Yet when a property enters a foreclosure auction, the outcome can differ significantly from those expectations.
In auction proceedings, one of the most decisive legal questions is whether the tenant qualifies as a “small tenant.” Even if a mortgage was registered earlier, tenants recognized as small tenants may exercise the right of priority repayment, allowing them to recover a certain portion of their deposit ahead of other secured creditors. The problem is that many people misunderstand the criteria used to determine this status.
The small-tenant system was created to protect economically vulnerable tenants. Under both the Housing Lease Protection Act and the Commercial Building Lease Protection Act, tenants whose deposits fall below a certain threshold may receive a portion of their deposit ahead of other creditors. This is known as the priority repayment right. In simple terms, even if a building has a bank loan secured against it, a tenant recognized as a small tenant may recover a specified amount before the lender. The system serves as a safety net for ordinary citizens and small business operators.
In commercial building leases, the eligibility criteria for small-tenant status and the amount eligible for priority repayment are defined in the Enforcement Decree of the Commercial Building Lease Protection Act, which sets different standards depending on the region.
For example, in Busan Metropolitan City, a tenant may qualify as a small tenant if the converted deposit of the leased property is ₩690 million or less, and the tenant’s own converted deposit does not exceed ₩38 million. In such cases, the tenant may receive up to ₩13 million of the deposit as a priority repayment.
One acquaintance of mine operated a small shop in Busan under a lease with a ₩10 million deposit and monthly rent of ₩600,000. At the time of signing the contract, the real estate agent told him, “Since your deposit is only ₩10 million, you qualify as a small tenant. Even if the property goes to auction, your deposit will be repaid first.”
However, when the building later went into foreclosure and the distribution process began, the outcome was very different. My acquaintance was not recognized as a small tenant. What went wrong?
The answer lies in the fact that the determining amount in commercial leases is not the nominal deposit, but rather the “converted deposit.” Surprisingly, few people understand this distinction accurately.
The converted deposit is calculated by adding the deposit to 100 times the monthly rent.
Applying this formula to the case above illustrates the issue clearly. With a ₩10 million deposit and ₩600,000 monthly rent, the converted deposit becomes:
₩10,000,000 + (₩600,000 × 100) = ₩70,000,000
This figure far exceeds Busan’s small-tenant threshold of ₩38 million. Although the nominal deposit was only ₩10 million, the tenant was effectively treated as a tenant with a ₩70 million converted deposit under the law.
Commercial leases often involve relatively small deposits combined with ongoing monthly rent. The concept of the converted deposit exists precisely to account for this structure, allowing the law to assess the real economic scale of the lease by converting monthly rent into a deposit equivalent.
Misunderstandings about this system frequently arise because the statutory provisions are complex. Article 2(2) of the Commercial Building Lease Protection Act states that when rent exists in addition to the deposit, the rent must be converted into a deposit equivalent according to a rate prescribed by Presidential Decree. That rate is specified in Article 2(3) of the Enforcement Decree.
Furthermore, the scope of tenants eligible for priority repayment is separately defined in Articles 6 and 7 of the Enforcement Decree, and the term “converted deposit” does not appear prominently in the statutory language itself. Because of this structure, it is not easy for the general public to clearly identify and understand the concept.
Most people rely on internet searches when trying to understand these rules. Unfortunately, many blog posts and informational articles simply explain that the small-tenant threshold depends on whether the deposit falls below a certain amount, omitting the concept of the converted deposit entirely.
Tenants planning to lease space in a commercial building usually sign contracts through licensed real estate agents, so there is no need for excessive anxiety. However, it is advisable to calculate the converted deposit independently before signing a contract and confirm whether you will be protected as a small tenant under the law.
After all, there is nothing wrong with being cautious—especially when your deposit is at stake.
