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JIPYONG Obtained Supreme Court Decision Establishing New Legal Principles on Sectional Ownership of Open Retail Space Without Visible Borders

2022.12.29

JIPYONG obtained a supreme court decision to quash and remand the decision to the lower court in which the Supreme Court established new legal principles on the sectional ownership of open retail space without visible borders (Supreme Court Decision 2019Ma5500 dated December 29, 2022). 
 
The Supreme Court issued a decision to quash and remand the lower court’s decision containing a new legal principle that held, “for the sectioned stores for which the registration with the condominium building ledger was completed and, accordingly, the sectional registration was also completed, after January 19, 2004, the effective date of Article 1-2 of the Act on the Ownership and Management of Condominium Buildings (the “Condominium Buildings Act”) on, it can be accordingly presumed that the sectioned stores met the requirements for sectional ownership set forth in Article 1-2 of the Condominium Buildings Act, such as installation of a sign for borders at the time of completion of its registration (at the time of construction completion); and thus, the other circumstances that could reverse the presumption must be asserted and proved by the contesting party. 
 
As a result of the Supreme Court decision to quash and remand the lower court’s decision, it became relatively easy to recognize the sectional ownership of the open retail space without visible borders for which the registration with the condominium building ledger was completed and, accordingly, the sectional registration store was also completed, after January 19, 2004. In particular, it is expected to have a major impact in the real estate practice, such as facilitating the auction process for open retail space without visible borders. 
 
1. Case Summary 
 
“Construction Company A” owned claims for reimbursement and loan receivables against “Project Owner B”. When Project Owner B failed to repay the debt, Construction Company A applied for a voluntary auction of the store sections of open retail space without borders (hereinafter referred to as "Store") that Project Owner B had provided as collateral, and the court issued a decision to commence the auction. However, Project Owner B appealed the decision to commence the auction, arguing that "each Store on which Project Owner B established keun-mortgage in favor of Construction Company A is a so-called “Open retail space” and is not separated from the other parts of the store in terms of structure or actual use, so its independence is not recognized and it does not qualify as an object of separate ownership".   
 
The court of first instance (the “First Instance Court”) accepted Project Owner B's argument and canceled the decision to commence a voluntary auction. In particular, the First Instance Court reasoned that “Article 1 (2) of the Condominium Building Act and Articles 1 to 3 of the Enforcement Decree of the same Act mitigate the requirements for recognizing the independence for sectioned stores, but each Store fails to meet those Mitigated independence requirement”.   
 
In response, Construction Company A appealed. In its appeal, Construction Company A pointed out that ■ the Supreme Court has ruled, “even if each separate building has lost its independence in structure and use as a separate building due to the removal of the boundary wall between adjacent separate buildings, if the location and area of each separate building can be specified, if the social norm is that such loss of boundary is only temporary and will be restored as separate building, and if it is easy to restore the buildings as a separate building, it cannot be easily concluded that each separate building has lost its substance as a separate building, and the registration should still be interpreted as valid as a registration representing a separate building”, ■ the location of the boundary and the area of each store in this case can be easily identified from the condominium building registry and the building status map attached to it, so it is easy to restore the structure; ■ when applying for a registration of initial ownership of real estate for a separate building, a floor plan must be submitted in accordance with the Registration of Real Estate Act, and the registrar permanently preserves it in a drawing book, so the location and area of each separate building can be specified; and ■ each store in this case has facilities that can serve as a distinguishing point, such as pillars, glass walls, and entrance doors, so the scope of physical control can be clearly understood. 
 
However, the Court of Appeal dismissed the appeal, upholding the lower court’s decision. In particular, the Court of Appeal also cited “Construction Company A, as the mortgagee, failed to submit data that could verify whether there were boundary markers in the past” as a reason for dismissing the appeal. Against this decision, Construction Company A appealed to the Supreme Court. 
 
2. Summary of Supreme Court Decision 
 
In its decision, the Supreme Court pointed out that the court of appeal’s decision to blame Construction Company A as the mortgagee for “failure to submit data that could verify whether there were boundary markers in the past” was wrong. It held that the court of appeal misjudged the burden of proof. In this regard, the Supreme Court established a new legal principle by saying, “even if a sectioned store is not equipped with a boundary wall or a boundary sign prescribed by Article 1-2 of the Condominium Buildings Act at the time of the auction, the Condominium Buildings Act stipulates that a sectioned store must be registered in the Condominium Buildings Registry only when it is recognized as having structural independence through a status survey by the competent authority and the separate registration is completed accordingly. This means that when it comes to the sectioned store where the registration in the Condominium Buildings Registry is made and the separate registration is completed accordingly after Article 1-2 of the Condominium Buildings Act came into effect on January 19, 2004, it can be presumed that it was equipped with the requirements of separate ownership set forth in Article 1-2 of the  Condominium Buildings Act, such as boundary markers, at the time of registration (at the time of construction completion), and therefore, any other circumstances that may overturn the presumption must be claimed and proved by the party contesting the presumption”. 
 
Furthermore, the Supreme Court reaffirmed the existing legal principle that “even if each separate building loses its independence in structure and use as a separate building due to the removal of the boundary wall between adjacent separate buildings, if the location and area of each separate building can be specified and the social conception is that it is not only temporary but also easy to restore as a separate building, it cannot be easily concluded that each separate building loses its substance as a separate building, and the registration should still be interpreted as valid as a registration representing a separate building”.  Based on this existing legal principle, the court concluded that “the floor plans and building status maps attached to the condominium building registry of each store in this case clearly show the location and area of each store, and based on this, the boundaries of each store in this case can be identified and easily restored as separate buildings by installing boundary signs, etc.”. 
 
3. Significance of Decision 
 
If a mortgagee of a sectioned store that constitutes a so-called “open retail space” apply for a voluntary auction, the debtor/mortgagor who established the keun-mortage on the sectioned store often argue to the effect that “each Store on which I established keun-mortgage in favor of mortgagee is not separated from the other parts of the retail space as there is no boundary markers, so its independence is not recognized and it does not qualify as an object of separate ownership". In this case, the debtor often cite the Supreme Court decision held a decision to the similar effect (Supreme Court Decision 2011Ma1420 dated December 31, 2011), and the court often revokes the decision to commence the auction accordingly. In particular, the court often demand the creditor to verify “whether there was originally a boundary wall or boundary markers.” If the creditor fails to do so, the court says it has no choice but to cancel the auction. This is a harsh requirement for a creditor who has no way of knowing what the sectioned store used to look like. The Supreme Court's decision is significant in that it declares that such demands to creditors are unreasonable. 
 
Meanwhile, the Supreme Court's decision reaffirmed the existing legal principle that “even if each separate building loses its independence in structure and use as a separate building due to the removal of the boundary wall between adjacent separate buildings, if the location and area of each separate building can be specified and the social conception is that it is not only temporary but also easy to restore as a separate building, it cannot be easily concluded that each separate building loses its substance as a separate building, and the registration should still be interpreted as valid as a registration representing a separate building”. Based on this existing legal principle, the court concluded that “the floor plans and building status maps attached to the condominium building registry of each store in this case clearly show the location and area of each store, and based on this, the boundaries of each store in this case can be identified and easily restored as separate buildings by installing boundary signs, etc.” In particular, based on the reaffirmed legal principle, it is of great significance for auction practice that the court ruled that “if the boundaries of a separate store can be identified by the floor plan and building status map attached to the collective building register and boundary signs can be installed, even if there are currently no boundary signs, structural independence can be recognized”. 
 
If the newly established and reaffirmed legal principles are combined in this decision, it is expected that there will be a major change in real estate practice, including a much faster auction process for open shopping centers.

Awards & Commissions Jipyong and Duroo were Honored with “Public Interest Award” at the 6th Korea Legal Awards 2023.12.12

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