What Makes a Verbal Real Estate Contract Valid in South Korea?
Table of Contents
- 1. What is the difference between a preliminary deposit and a contract deposit in South Korea?
- 2. What terms must be agreed upon for a verbal real estate contract to be valid?
- 3. When is an earnest money penalty agreement recognized for a preliminary deposit?
- 4. Can a unilateral bank transfer count as a contract deposit?
- 5. What evidence matters most in a contract formation dispute?
- 6. FAQ
Case Study: A tenant called the landlord about a repair issue — and then abruptly transferred approximately KRW 8 million to the landlord’s account. The landlord immediately replied: “We have no contract. Please send me your account number so I can return the funds.” The tenant refused, filed a lawsuit, and demanded double the amount as a contract cancellation penalty. How did the court rule?
Why the Court Dismissed the Claim in Full
※ The following case is based on an actual dispute. Certain facts have been modified and all identifying information has been removed to protect client confidentiality.
The court ruled in favor of the property owner. A detailed analysis of the call recordings submitted by the plaintiff revealed that the buyer had offered KRW 40 million, while the seller had responded by asking for KRW 41 million — a counteroffer the buyer declined. No agreement on price was ever reached. The buyer then transferred KRW 8 million unilaterally, without the seller’s consent. The seller immediately communicated an intent to return the funds and did so in full. The legal team reconstructed the full sequence of events through written submissions, demonstrating step by step that no contract had been formed. The court found the plaintiff’s claim to be without merit.
1. What is the difference between a preliminary deposit and a contract deposit in South Korea?
In Korean real estate practice, the term “preliminary deposit” (가계약금, gagyeyakgeum) is widely used, but there is no separate statutory provision governing it under the Korean Civil Act. Legally, a preliminary deposit is simply funds transferred before a formal contract is signed, typically as a gesture of intent. Its mere receipt does not constitute contract formation.
Legal Character of a Contract Deposit
Article 565 of the Korean Civil Act provides that where one party to a sale delivers a deposit, security, or similar payment at the time of contracting, either party may rescind the contract — unless performance has begun — by forfeiting the deposit (if the deliverer rescinds) or by returning double the deposit (if the recipient rescinds), unless otherwise agreed.
For this provision to apply, two conditions must first be met: a valid sales contract must already exist, and the payment must have been made in performance of that contract. For a preliminary deposit to be treated as a statutory contract deposit, it must either be paid pursuant to a binding agreement or be shown that the parties clearly agreed to treat it as such.
| Category | Preliminary Deposit (가계약금) | Contract Deposit (계약금) |
|---|---|---|
| Statutory basis | No specific provision | Korean Civil Act, Article 565 |
| Contract formation | Does not necessarily indicate a concluded contract | Presupposes a valid contract |
| Penalty refund (배액 상환) | Requires separate, clearly established agreement | Applies automatically absent other agreement |
| Refund on non-formation | Full refund if no contract formed | Double refund on rescission by recipient |
2. What terms must be agreed upon for a verbal real estate contract to be valid?
Under the Korean Civil Act, a contract is formed when an offer and acceptance coincide (Article 527). Real estate sales contracts in South Korea do not require a written document to be enforceable. However, a verbal contract is only binding if the parties have reached a clear and mutual agreement on all essential terms.
Essential Terms of a Real Estate Sales Contract
When evaluating whether a real estate contract has been formed, Korean courts examine the following essential terms:
- Identification of the subject property: The property being sold must be specifically identified.
- Agreement on the purchase price: The parties must have agreed on the same price. Where each party proposed a different amount, no agreement exists.
- Amount and payment method of the deposit: While market practice in South Korea is commonly to set the deposit at 10% of the purchase price, a deposit transferred unilaterally without prior agreement is not recognized as a contract deposit.
- Amount and timing of the balance payment: There must be agreement on when the remaining purchase price is to be paid.
- Timing of property handover: Agreement on the date of title transfer and physical delivery is also considered essential.
The Supreme Court of Korea has held that where the subject property and purchase price are specified and there is agreement on the method of intermediate payment at the time of a preliminary agreement, a sales contract may be found to have been formed (Supreme Court Decision 2021Da248312, September 30, 2021; see also Supreme Court Decision 2005Da39594, November 24, 2006). Conversely, where these terms remain unresolved, no binding contract is established.
Effect of a Counteroffer Under Korean Law
Where a buyer offers KRW 40 million and the seller counters at KRW 41 million, the seller’s response constitutes a rejection of the original offer and a new offer under Article 534 of the Korean Civil Act. Until the buyer accepts the counteroffer at the same terms, no contract is formed. A transfer of funds made in this gap — before any agreement is reached — cannot be treated as a contract deposit.
3. When is an earnest money penalty agreement recognized for a preliminary deposit?
To claim double the preliminary deposit as a cancellation penalty, the claimant must prove that there was a specific agreement to treat the deposit as earnest money subject to the penalty mechanism. Korean courts apply a stringent standard to this inquiry.
The Supreme Court Standard
The Supreme Court of Korea has held that in order to recognize an earnest money penalty agreement with respect to a preliminary deposit, it must be clearly established — based on the content of the agreement, the circumstances leading to and surrounding the transaction, the parties’ true intentions, and trade practice — that the parties agreed the deliverer would forfeit the funds and the recipient would return double if either party chose not to proceed to formal contract (Supreme Court Decision 2021Da248312, September 30, 2021).
The phrase “clearly established” sets a high evidentiary bar. The mere fact that money changed hands, or that one party subjectively expected a penalty mechanism, is insufficient. The specific terms of the agreement must be verifiable.
Factors That Determine Whether an Earnest Money Agreement Is Recognized
| Factor | Favors Recognition | Weighs Against Recognition |
|---|---|---|
| Clarity of agreement terms | Penalty clause expressly stated in writing or message | Only verbal discussion; no specific agreement recorded |
| Contract formation | Full agreement on essential terms | No agreement even on the purchase price |
| Circumstances of the transfer | Mutually agreed payment made after reaching a deal | Unilateral transfer without recipient’s consent |
| Recipient’s immediate response | Received without objection and retained | Immediate refusal and stated intent to return |
| Consistency with market practice | Amount consistent with standard deposit ratio | Amount significantly diverges from standard practice |
4. Can a unilateral bank transfer count as a contract deposit?
No. A contract deposit in South Korea requires prior agreement between the parties as to the amount and character of the deposit. A transfer made without the recipient’s consent does not qualify as a contract deposit.
Legal Characterization of a Unilateral Transfer
Where a seller has rejected a buyer’s offer and no agreement on the purchase price has been reached, funds transferred by the prospective buyer without the seller’s consent have no legal basis and may constitute unjust enrichment. The recipient is obligated to return such funds. Once returned, there is no remaining basis for a damages claim by the transferor.
Significance of the Seller’s Immediate Response
Where the recipient communicates an immediate refusal — stating “we have no contract; please provide your account number so I can return the funds” — and follows through with a full refund, this conduct strongly supports the conclusion that no contract deposit was ever received. A seller who had legitimately accepted a deposit would have no reason to offer an immediate return. For a damages claim to succeed under Korean law, the claimant must establish both that the transferred amount was a contract deposit and that there was a separate agreement to treat the deposit as a penalty. Courts in South Korea require clear and specific evidence of both elements.
5. What evidence matters most in a contract formation dispute?
In real estate contract formation disputes in South Korea, the outcome often turns on how precisely the actual sequence of communications can be reconstructed. Where the existence of a verbal contract is contested, the following categories of evidence are particularly significant.
Key Evidence Types and How They Are Used
- Phone call recordings: Recordings are a double-edged tool. When the opposing party presents only selected excerpts, it is essential to analyze the full conversation in context — including the speaker identities, grammatical subjects, and the preceding and following exchanges — to reveal what was actually said.
- Text messages and KakaoTalk: Communications immediately before and after the transfer are critical. A written message from the seller stating an intent to return the funds shortly after receiving them is strong evidence that no deposit agreement existed.
- Bank transfer timestamps: Comparing the time of the transfer against the timeline of negotiations can demonstrate whether the funds were sent before any agreement was reached — supporting a finding of unilateral action.
- Real estate agent records and statements: The agent’s visit logs, communications with the seller about other prospective buyers, and any contemporaneous instructions are relevant circumstantial evidence.
- Return transaction records: Evidence that the funds were actually returned to the transferor reinforces the argument that they were never accepted as a contract deposit.
Presenting Evidence Effectively in Korean Court Submissions
When the opposing party relies on partial evidence, the most effective approach is to restore the full context and explicitly identify what has been omitted. Korean courts look carefully at whether the overall sequence of events is internally consistent. In practice, submissions that reconstruct the timeline chronologically — showing what each party did at each moment and why — tend to be the most persuasive. This is the approach taken in successfully defending against claims where the full factual picture, once laid out clearly, revealed that no contract had ever been formed.
6. FAQ
Real estate and construction disputes often hinge on details that are easy to overlook — the sequence of a few messages, the exact wording of a single sentence in a call recording, the time stamp of a bank transfer. Handling a range of cases involving contested contract formation has reinforced how much turns on precisely reconstructing what actually happened, rather than relying on either party’s characterization of events.
※ The legal information provided in this article is intended for general informational purposes only. The applicable legal analysis may vary significantly depending on the specific facts of each case. Please consult a qualified attorney before taking any legal action.