How to Recover Purchase Price After Real Estate Contract Termination in South Korea? | Atlas Legal

1. What Happens When a Real Estate Contract Is Terminated Due to Impossibility of Performance?

Key Answer

When a sales contract becomes impossible to perform due to the seller’s fault, the buyer can terminate the contract under Article 546 of the Korean Civil Act. Upon termination, each party bears the obligation to restore the other party to their original state under Article 548(1) of the Civil Act, so the seller must return the full purchase price already received.

Meaning of Impossibility of Performance

Impossibility of performance means a situation where it has become impossible, in terms of social norms, for the debtor to perform their obligation. In real estate sales contracts, typical examples include cases where the property is sold at foreclosure auction to a third party, expropriated, or destroyed, making it impossible for the seller to transfer ownership.

In this case, a mortgage was set on most of the land that was the subject of the sale, and subsequently, the mortgage on some of the land was foreclosed, with a third party winning the auction. As a result, the seller could no longer perform the obligation to transfer ownership of the land, which clearly constituted impossibility of performance.

Contract Termination and Restitution

The client company, as the buyer, expressed its intention to terminate the contract to the defendant sellers around July 2021, citing impossibility of performance as the reason. Once the contract termination takes effect, each party bears the obligation of restitution under Article 548(1) of the Civil Act. Accordingly, the seller became obligated to return the down payment of KRW 183 million + KRW 161 million, and interim payment of KRW 274 million + KRW 242 million, totaling KRW 860 million that had already been received.

2. Can You Claim Return of Purchase Price from a Spin-Off Company in South Korea?

Key Answer

Under Article 530-9(1) of the Korean Commercial Act, in a spin-off, the splitting company bears joint and several liability for debts transferred to the newly established company. Therefore, A Country Club, the pre-split company, also bears joint and several liability together with Company B, the post-split company, for the purchase price return obligation.

What Is a Spin-Off?

A spin-off is a form of corporate division where a company separates part of its business to establish a new company, and the splitting company acquires all shares of the new company. Unlike a split-off, in a spin-off, the shareholders of the splitting company do not become shareholders of the new company; instead, the splitting company itself becomes the 100% shareholder of the new company.

In this case, on December 11, 2018, defendant A Country Club established defendant Company B through a spin-off and completed the registration of ownership transfer for the first parcel of land under Company B’s name. This is a typical spin-off case.

Joint Liability of the Splitting Company

Article 530-9(1) of the Korean Commercial Act provides that “a company established or surviving as a result of a spin-off or spin-off merger shall be jointly and severally liable for the debts of the splitting company.” This provision is designed to prevent corporate divisions from disadvantaging creditors.

Based on this provision, the court found that defendant A Country Club, as the seller of the first parcel of land, bears joint and several liability for Company B’s obligation to return the purchase price of the first parcel following contract termination. Specifically, joint liability was recognized for KRW 457 million, which was received as the purchase price for the first parcel out of the total KRW 860 million.

3. What Is the Legal Meaning of the Return Date in a Settlement Agreement?

Key Answer

When a settlement agreement specifies a return date, the legal effect differs significantly depending on whether it is a “suspensive condition” or a “deadline.” In this case, the court interpreted the return date clause in the settlement agreement as a deadline rather than a condition, finding that since the agreed deadline had passed, the defendants could no longer refuse to return the money.

Contents of the Settlement Agreement

The settlement agreement concluded between the plaintiff and defendant Company B on July 18, 2021 contained the following provisions:

“The return of down payment and interim payment due to contract cancellation shall be as follows: ① First return payment of KRW 600 million: After completion of 9 buildings under construction on the contract property and execution of financial institution loans against the transferee’s share, the joint sellers shall receive the above amount from the transferee and immediately pay it to the buyer (by August 30, 2021). ② Second return payment of KRW 260 million: On the date of execution of financial institution loans against the transferee’s share after completion of an additional 5 buildings under construction on the contract property, the joint sellers shall receive the above amount from the transferee and immediately pay it to the buyer (by December 30, 2021).”

Distinction Between Conditions and Deadlines

A condition is an accessory provision of a legal act that makes the occurrence or extinction of the legal effect dependent on a future uncertain event. On the other hand, a deadline is an accessory provision that makes the occurrence or extinction of legal effect, or the performance of an obligation, dependent on a future event that is certain to occur.

The defendants argued that the settlement agreement clause was a suspensive condition because the return obligation would only arise “when receiving payment from the transferee.” However, the court did not accept this argument.

4. Why Was the Defendants’ Defense of Non-Arrival of Performance Date Rejected?

Key Answer

The court found that the right to restitution arising from contract termination arises immediately upon termination in principle, and the return date clause in the settlement agreement merely granted the defendants a grace period. Therefore, since the agreed deadlines of August 30, 2021 and December 30, 2021 had already passed, the defendants’ defense of non-arrival of performance date was groundless.

Defendants’ Arguments

The defendants argued as follows: “According to the settlement agreement, the performance date for the return of purchase price arrives when the transferee completes the buildings on the contract property, provides them as collateral to financial institutions, and pays the land purchase price to the sellers with the loan proceeds. Until the defendants receive the land purchase price from the transferee, the performance date for the restitution obligation has not arrived, so we cannot comply with the plaintiff’s claim for return of purchase price.”

Court’s Decision

The court comprehensively considered the circumstances of the settlement agreement, the purpose of Article 2 of the settlement agreement, and the legal nature of the right to restitution arising from contract termination, and made the following determination:

First, the right to restitution arising from contract termination arises immediately upon termination in principle, and there is no reason for the plaintiff to leave the return date of the purchase price to the defendants’ circumstances without any deadline.

Second, Article 3 of the settlement agreement, considering the defendants’ financial circumstances, granted a grace period to return the KRW 860 million already received in two installments, provided that if the defendants receive the land purchase price from their debtor Company D, they shall immediately return it to the plaintiff, and furthermore, set August 30, 2021 and December 30, 2021 as the final dates for the first and second return payments to prevent the deadline from being extended to the extent that it would harm the plaintiff’s interests.

Therefore, even if the defendants did not receive the land purchase price from the transferee, this cannot be interpreted as meaning the deadline under the settlement agreement had not arrived, and since the agreed dates of August 30, 2021 and December 30, 2021 had passed, they could no longer refuse to return the purchase price.

5. What Are the Key Strategies in Purchase Price Recovery Litigation in South Korea?

Key Answer

In real estate purchase price recovery litigation, the key elements are proving the existence of impossibility of performance and the seller’s fault, confirming the validity of the contract termination notice, and identifying joint liability in complex legal relationships such as corporate divisions. It is also important to construct arguments favorable to the plaintiff in interpreting written documents such as settlement agreements.

Proving Impossibility of Performance and Fault

For a buyer to terminate a contract and claim return of the purchase price, they must first prove that impossibility of performance has occurred. In this case, the registration of mortgage and foreclosure auction sale were proven through certified copies of the registry. Additionally, it must be shown that the impossibility of performance occurred due to the seller’s fault, and the seller’s act of setting a mortgage on the land or allowing it constitutes fault.

Identifying Joint Liability

In cases involving corporate division, the debt attribution relationship between the pre-split company and the newly established company must be clearly understood. For joint liability under Article 530-9 of the Commercial Act to be recognized, it must be proven that the relevant debt is a debt transferred to the company established through the split. In this case, since the purchase price return obligation for the first parcel was transferred to Company B through the spin-off, we successfully argued that A Country Club also bears joint liability.

Importance of Settlement Agreement Interpretation

When a settlement agreement has been concluded between disputing parties, its interpretation can determine the outcome of the litigation. In this case, the defendants interpreted the return clause in the settlement agreement as a suspensive condition, arguing that the performance date had not arrived. However, our legal team strongly argued that the clause merely granted a grace period and the agreed deadline had already passed, leading to the court’s acceptance of our position.

Based on our extensive experience handling numerous real estate dispute cases, it is important to use clear language from the time of drafting a settlement agreement with potential future disputes in mind. For settlement agreements that have already been concluded, favorable interpretation arguments must be prepared by comprehensively understanding the circumstances of the agreement and the parties’ true intentions.

6. FAQ

Atlas Legal provides legal services in the construction and real estate field from Songdo, Incheon. We have extensive experience winning cases involving complex corporate structures and settlement agreement interpretations like this one, and we are committed to protecting our clients’ rights.

※ The case introduced in this article is based on a judgment from Incheon District Court Bucheon Branch handled by attorneys at Atlas Legal, with some facts modified to aid understanding and client confidentiality protected.