JEONSE FRAUD – HOW THE RENT-FREE HOUSING BECAME THE SCOURGE OF SOUTH KOREA’S YOUNGER GENERATION.

Kit Lee

Unlike to many Americans, rent-free rental is hardly an oxymoron to South Koreans. Jeonse has been a preferred system by providing a significantly cheaper rental option among the younger generations, who have not yet had the opportunity to purchase real estate.

            What is Jeonse?

Jeonse, though seemingly unique to South Korea, can be compared to Roman “Antichresis,” a legal agreement where a debtor transfers the right to an immovable property to a creditor. The lump-sum deposit made by the lessee to the lessor (the property owner) for “renting” the house may be seen as a personal loan between individuals, with interests paid to the lender (the lessee) in a form of right to occupancy for a designated period of time. The amount of deposit is directly proportional to the market price of the property, usually within 80% of the sale price.

            Why Jeonse was preferred.

Jeonse has been a preferred means of residential lease for the last few decades in South Korea. For the lessor, it is a way of loaning a lump sum without interest or inflation consideration. In addition, Jeonse system is the surest way of avoiding renter defaults. For the leases, Jeonse system allows rental much cheaper than monthly rents, as it is predicated upon the initial lump sum.[1] Even if the lessee has to secure a loan for the initial deposit, the interest rate for 100,000,000 KRW (equivalent to 75,000 USD) would yield 270,000 KRW (200 USD), whereas monthly rent would yield 460,000 (350 USD). The financial merit of Jeonse particularly appealed to home seekers of the Metropolitan Seoul area, in which the median price of a condo is formed around 1 million USD.

            Jeonse Frauds of 2022-24.

Starting in 2022, a series of Jeonse Frauds started to affect the real estate market of South Korea. Jeonse Frauds, as the name suggests, includes fraudulent Jeonse contracts that are made by the property owner (or the actual owner of the property who is using a borrowed name) either: (1) with the intent to deprive the leasee of the deposit, or (2) who engaged in imprudent investments and later lost the ability to return the deposits (by filing a bankruptcy). In many cases, the tenants defrauded were in their 20s and 30s, facing considerable debts even before the start of their career.

            Legislative Solution?

Individual precautions may be prerequisite in terms of avoiding Jeonse frauds, but many have been calling for a legislative change. In August, Anti-Jeonse Fraud Act passed the South Korean congress, granting further legal protection for the victims of Jeonse Fraud (such as providing government-subsidized housing free of rent for 10 years).[2] However, the question remains as to the legal deterrence (including punitive measures) of such frauds. Given the inter-personal formation of contract under the Jeonse system, as well as the difficulty in proving the fraudulent intent by the property owner at the time of the contract formation, centralized regulation of Jeonse market may be difficult to attain.

[1] Jihoon Lee, South Korea's 'Jeonse' Rent-Free Renters Hit by Property Downturn, Reuters (Feb 21, 2023), https://www.reuters.com/world/asia-pacific/south-koreas-jeonse-rent-free-renters-hit-by-property-downturn-2023-02-21/

[2] Wonju Yi, Parliament to Pass Livelihood-Related Bills at Plenary Session, Yonhap News Agency (Aug 28, 2024), https://en.yna.co.kr/view/AEN20240828003300315