Lease Void Without Board Approval in South Korea
Table of Contents
- 1. What Makes a Director’s Self-Dealing Transaction Void in South Korea?
- 2. When Does a Lease Require Board Approval in South Korea?
- 3. Can a Company Void a Lease Against a Counterparty Who Did Not Know Board Approval Was Missing?
- 4. Director Liability for Unauthorized Lease Amendments Under South Korean Law
- 5. Unjust Enrichment: What Must a Tenant Repay When a South Korean Court Voids a Lease?
- 6. Joint Tort Liability of the Tenant in South Korea
- 7. FAQ
Case handled by Atlas Legal: A company operating a swimming facility discovered, after a management change, that its outgoing CEO had — without any board resolution — leased the company’s only office space to an organization he effectively controlled, at well below market rent, and had separately amended the swimming pool lease on terms heavily favorable to the tenant. Could the company reclaim its property? Were the contracts valid?
Board Approval, Self-Dealing, and Director Liability — A Case from South Korea
※ This case was handled by Atlas Legal. Party names and identifying details have been anonymized to protect client confidentiality.
Company X operated a swimming facility in South Korea. Its outgoing CEO, Y3, executed two sets of unauthorized transactions before the company’s ownership changed hands. First, he leased X’s sole office space — without board approval — to Y1, an organization in which he himself served as a director with representative authority. Second, he amended X’s swimming pool lease in favor of tenant Y2, again without board approval, cutting management fee obligations and extending the lease term by four years. After new management took over, X challenged both transactions in court. The Incheon District Court found both contracts void under Article 393(1) of the Commercial Act, recognized Y3’s breach of fiduciary duty under Article 399(1), and held Y2 jointly liable in tort. This ruling offers important guidance on how South Korean courts assess board approval requirements, director accountability, and tenant liability in corporate property disputes.
1. What Makes a Director’s Self-Dealing Transaction Void in South Korea?
Article 398 of the Korean Commercial Act requires board approval before a director engages in any “transaction” with the company. The purpose is to prevent directors from exploiting their position to benefit themselves or third parties at the company’s expense (Supreme Court Decision 2005Da4284, May 10, 2007).
The scope of “transaction” under Article 398
The term “transaction” is construed broadly. It covers not only bilateral contracts — sale agreements, leases — but also unilateral acts and quasi-legal acts that create, modify, or extinguish legal rights and obligations. This means that a company’s consent to a sublease can itself constitute a “transaction” requiring board approval, if the sublease involves a director and creates a conflict of interest.
How this played out in the case
In this case, the swimming pool tenant Y2 subleased the pool to Y3 — who was at that time X’s CEO. X’s consent to that sublease triggered Article 398, because once X consented, Y3 would become directly obligated to X under Civil Act Article 630(1), and X would lose its right to terminate the lease for unauthorized subletting under Civil Act Article 629(2). The court held that this consent was a quasi-legal act constituting a “transaction” between X and its director Y3, requiring prior board approval — which was never obtained. The sublease was therefore void as between X and Y3, and X’s notice of lease termination (delivered by service of the complaint on January 8, 2025) was effective.
Consequence: unauthorized subletting and lease termination
Because the board’s approval of the sublease was absent and could not be cured, Y2’s subletting of the swimming pool to Y3 constituted unauthorized subletting. X was entitled to terminate the lease on that ground, and both Y2 and Y3 were obligated to return the swimming pool.
2. When Does a Lease Require Board Approval in South Korea?
Article 393(1) of the Commercial Act requires board approval for the disposal or transfer of a company’s “important assets” and for borrowing on a large scale. The threshold question — whether a given asset is “important” — is fact-specific and turns on the following criteria, assessed in combination (Supreme Court Decision 2009Da47791, April 28, 2011):
| Factor | What courts examine |
|---|---|
| Monetary value of the asset | Absolute amount and relative size compared to total assets |
| Proportion of total assets | A low percentage share does not automatically exclude importance |
| Company size and financial condition | Smaller companies face a lower threshold for “important” |
| Purpose for which the asset is held | Assets essential to core operations weigh heavily |
| Relationship to day-to-day business | Indispensable operational assets are more likely to be “important” |
| Whether delegation to CEO is appropriate | Matters too significant for unilateral CEO discretion require board approval |
Importantly, the fact that an asset is not listed as a board agenda item under the company’s internal regulations does not exempt the transaction from the board approval requirement.
The office space
The court found the office lease to be a disposal of an important asset. X’s registered head office address was located at the subject property, meaning key business activities — document receipt, client consultations — had to be conducted there. The swimming pool and fitness facility had already been leased out to third parties, leaving the office as X’s only remaining operational space. The low floor area ratio of the office within the building did not diminish its importance to X as a company.
The swimming pool lease amendment
The lease amendment — which extended the term from one to five years, reduced management fee obligations from 100% to 75%, and eliminated the tenant’s cleaning cost obligations — was found to be a separate disposal act distinct from the original lease. Its content was unilaterally favorable to the tenant and unfavorable to X. It therefore qualified as a disposal of an important asset requiring board approval, which was never obtained.
3. Can a Company Void a Lease Against a Counterparty Who Did Not Know Board Approval Was Missing?
South Korean law protects good-faith third parties. A company cannot assert the invalidity of a transaction against a counterparty who neither knew nor was grossly negligent in not knowing that board approval was absent (Supreme Court Decision 2015Da45451, February 18, 2021). The burden of proving the counterparty’s bad faith or gross negligence falls on the company (Supreme Court Decision 2000Da20670, January 24, 2003).
The office space — Y1’s bad faith
Y3 represented both sides of the office lease: he was X’s CEO and simultaneously a director with representative authority at Y1. There was no practical possibility that Y1 was unaware of the absence of board approval — the same individual negotiated and signed the contract on behalf of both parties. The court found Y1 had actual knowledge, or at minimum gross negligence, as to the missing board resolution.
The swimming pool — Y2’s gross negligence
Y2 had been an employee of X and was closely involved in X’s operations. Immediately before the lease amendment was signed, Y2 acquired 5,000 shares of X from Y3. After the amendment, Y2 subleased the pool to Y3 without fixing a deposit or rent — a structure that only made sense if Y2 understood the broader scheme. The court found that Y2 knew, or was grossly negligent in not knowing, that the lease amendment lacked board approval.
4. Director Liability for Unauthorized Lease Amendments Under South Korean Law
Article 399(1) of the Commercial Act imposes joint and several liability on directors who, through intentional or negligent breach of statute, articles of incorporation, or their duties, cause loss to the company. The relevant standard is whether the director exercised the care of a prudent manager (Supreme Court Decision 2008Da7895, July 29, 2010).
When the business judgment rule does not apply
South Korean courts apply a business judgment rule: where a director made an informed decision through a reasonable process, and the outcome was not manifestly unreasonable, no liability arises (Supreme Court Decision 2019Da280481, March 30, 2023). However, this rule is applied cautiously when the company and the director have conflicting interests. In such cases, the fairness of both the substance and the process of the decision becomes the benchmark for liability.
Y3’s liability — the swimming pool amendment
The court found Y3 liable for breach of duty in connection with the swimming pool lease amendment. Three factors were decisive. First, the amendment eliminated Y2’s obligation to pay cleaning costs and reduced management fee obligations by 25%, directly causing X to absorb KRW 137,159,993 in costs (unpaid management fees of KRW 99,081,293 plus unpaid cleaning costs of KRW 38,078,700) from May 2024 through August 2025. Second, the amendment’s content was so unfavorable to X that X’s board, had it been convened, would almost certainly not have approved it. Third, Y3 executed the amendment at a time when he and the incoming shareholders were in conflict over the company’s direction — the amendment served to entrench Y2’s (and ultimately Y3’s) control over the swimming pool, not to advance X’s corporate interests.
No liability for the office lease
The court reached a different conclusion on the office lease. X and Y1 shared a common public-interest purpose — promoting swimming education — and it was consistent with that shared understanding for X to provide Y1 with minimal-cost office space. Y3 and Y1’s directors occupied overlapping roles, and the below-market rent alone was insufficient to establish that Y3 had breached his fiduciary duty or that Y1 had acted unlawfully.
5. Unjust Enrichment: What Must a Tenant Repay When a South Korean Court Voids a Lease?
When a lease is void, the tenant holds possession without legal basis and must return unjust enrichment to the landlord. The measure of unjust enrichment for occupation of real property is ordinarily the market rent for the period of occupation.
The office space — Y1
A court-appointed appraiser assessed the market rent for the office at KRW 1,580,000 per month for the period from June 2, 2024 through June 1, 2025. The court inferred the same rate applied thereafter. Y1 was ordered to return the office and to pay unjust enrichment at KRW 1,580,000 per month from September 10, 2025 until the date of actual handover.
The swimming pool — Y2
The contractual rent under the swimming pool lease was KRW 25,000,000 per month. The court used this figure as the measure of unjust enrichment. Y2 was ordered to return the swimming pool and to pay KRW 25,000,000 per month from September 10, 2025 until the date of actual handover.
6. Joint Tort Liability of the Tenant in South Korea
Under Article 760 of the Civil Act, joint tort liability arises when multiple actors are objectively connected in causing harm to a third party. No shared intention or conspiracy is required — objective causal connection is sufficient (Supreme Court Decision 2013Da31137, April 12, 2016).
Y2’s joint liability with Y3
The court found three grounds for Y2’s joint tort liability. First, looking at the transaction as a whole, Y2 (as tenant) and Y3 (as CEO) together structured the swimming pool lease amendment to benefit Y2 at X’s expense — the two actors were objectively linked in causing X’s loss. Second, on July 5, 2024, Y2 told X’s new management by phone: “As you know, I signed the contracts and I’m listed as the representative, but you know the situation. It’s not something I can decide on my own.” This statement showed Y2’s awareness that the amendment would harm X. Third, the timeline — Y2’s share acquisition from Y3, the lease amendment, and the sublease to Y3 all occurred in rapid succession — demonstrated Y2’s direct involvement in the overall scheme.
No liability for breach of contract
The court declined to find Y2 liable for breach of contract. Y2 was simply an employee of X, not an agent entrusted with management duties. A claim for breach of duty requires a prior undertaking to manage the company’s affairs on its behalf — a relationship that did not exist between X and Y2. Y2’s liability was therefore confined to joint tort under Article 760 of the Civil Act.
Practical note for foreign-invested companies in South Korea
Companies with foreign shareholders or management operating in South Korea are advised to implement clear internal governance policies that identify which assets are “important” within the meaning of Article 393(1) and require board-level approval for any lease, amendment, or disposal of such assets. This is particularly important during ownership transitions or shareholder disputes, when the risk of unauthorized transactions by outgoing management is elevated. Atlas Legal regularly advises foreign-invested companies on South Korean corporate governance and dispute resolution.
7. FAQ
This case illustrates how South Korean courts approach the intersection of corporate governance and property law. The board approval requirement under Article 393(1) is not a procedural formality — it is a substantive safeguard against unauthorized disposal of company assets. Directors who circumvent it, and counterparties who knowingly benefit from the circumvention, face significant legal consequences including contract voidance, damages, and joint tort liability. Our team has handled corporate disputes of this nature and advises clients on building governance frameworks that prevent these issues from arising.
※ The legal information in this post is provided for general informational purposes only and does not constitute legal advice. The outcome of any individual case depends on its specific facts and circumstances. Please consult a qualified attorney before taking action.