Title Trust by Contract

However, under the 「Act on the Registration of Real Estate under Actual Titleholder's Name,」 such a title trust agreement is void as a general rule.

Accordingly, the registration made under the title trustee's name is also void.

This is because it runs counter to the principle of the real-name real estate system, and it is accompanied by legal sanctions such as criminal punishment and a penalty surcharge.

A title trust agreement is void as a general rule, but exceptionally, where the title trustee is the party to the contract and the counterparty is a good-faith third party who did not know of the existence of the title trust, the transfer of ownership may be recognized as effective(proviso to Article 4(2) of the 「Act on the Registration of Real Estate under Actual Titleholder's Name」).

In other words, if the counterparty to the real estate transaction entered into the contract without knowing that a title trust existed, the contract may be validly formed, and ownership of the relevant real estate may also be validly transferred.

While such legal exceptions exist, applying them requires meeting very strict requirements, and intentionally making use of a title trust still carries significant legal risk.

An actual rights holder who has entered into a title trust agreement must pay a penalty surcharge equal to the appraised value of the real estate multiplied by the penalty surcharge rate, according to the following standards.

An additional penalty surcharge based on the period during which the title trust state continued must also be added in the calculation.

For example, if real estate worth KRW 1 billion is held under a title trust and left unaddressed for more than 1 year, a penalty surcharge of 10% + 10% = 20% in total, that is, KRW 200 million, may be imposed.

Once a penalty surcharge is imposed, registration under the real name must be made without delay.

If registration is not converted to the real name even after the penalty surcharge is imposed, the following charge for compelling performance is imposed repeatedly (Article 6 of the 「Act on the Registration of Real Estate under Actual Titleholder's Name」).

Because the charge for compelling performance is a recurring burden separate from the penalty surcharge and can be substantial, conversion to the real name should not be delayed.

In a title trust by contract, the title truster and the title trustee may be subject to the following punishment (Article 7(1) and (2) of the 「Act on the Registration of Real Estate under Actual Titleholder's Name」).

If the title trust was carried out intentionally, the violation of the real-name real estate system is clear, so significant legal liability follows.

To seek mitigation of the penalty surcharge, an explanation of the circumstances of the violation should be prepared, and before the penalty surcharge is imposed, the opportunity for advance notice and submission of opinions may be used.

Depending on the case, sentencing materials and evidence of voluntary corrective efforts may be necessary to mitigate the level of criminal punishment.

If, during the contracting process, the parties were unaware that it was a title trust, or it was a mistake arising from a lack of understanding of the legal relationship, there may be room for leniency depending on the circumstances, but the title trust itself is void.

However, if the title trustee is the party to the contract and the counterparty acted in good faith, the validity of the contract may be recognized under the proviso to Article 4(2) of the 「Act on the Registration of Real Estate under Actual Titleholder's Name」.

Accordingly, preparing supporting materials is very important in order to avoid a penalty surcharge or punishment.

This law firm has a number of attorneys registered as real estate specialist attorneys with the Korean Bar Association, as well as attorneys with an average of 10 or more years of experience.

Through this, where a title trust becomes an issue and risks such as a penalty surcharge, criminal punishment, or nullity of registration arise, practical legal support is available, from filing an objection to administrative adjudication and responding to criminal proceedings.

If the actual owner and the registered titleholder are different, we recommend that you promptly establish a determination of whether a title trust exists and a response strategy with the assistance of a real estate attorney.