(2) Option contract

  • A separate contract
  • One or both parties may have the option to conclude the main contract.
  • Notice of the exercise of the option is sufficient to conclude the main contract. No separate acceptance is required. The discussion regarding the ‘obligation to accept’ is meaningless.

1. Duration of the option

  • Determined by the option contract. May not exceed 10 years from the date of option contract even if the parties so agree.
    • 99Da18725 Shops in a ‘department store’ were leased for 10 years. Parties agreed that lessees shall have an option to purchase the shops after 10 years or more of lease. Is this option valid?
    • 94Da22682 Parties agreed on 1 May 1980 that Plaintiff may have the option to purchase from 26 March 1985. The option must be exercise before the end of 1 May 1990. Even if the parties agreed that the option may only be exercisable after a period, the option expires upon lapse of 10 years from the date of the option contract.
  • If the duration is not specified, the counterpart may propose a reasonable period within which the option must be exercised. Upon lapse of the period, the option expires. Art. 564
  • If an option contract is used as a security, the security disappears in 10 years.

2. Multiple parties

  • Where several parties jointly hold an option, whether a party may separately exercise the option (in respect of his/her portion) must be determined by looking at the details of the option contract. 2010Da82530 overturning 83Daka2282 (which had ruled that the option must be jointly exercised without exception). Several buyers were to be co-owners upon exercise of the option. In the case, one buyer was allowed to exercise the option and acquire his portion of ownership. Each was treated as ‘solely’ holding the option for his/her portion of the ownership (thus, not a ‘jointly held’ option.)
  • Where a jointly held option (to purchase real estate) is registered, the party seeking cancellation of the registration may bring a lawsuit against some (not all) of the joint holders of the option. 2000Da26425

3. Option contract to secure a debt

  • Art. 607 Option contract to convey title of an asset in the event a loan is not repaid. If the asset’s value (at the time of the option contract) exceeds the principal and interest (until due date), the option contract is invalid (Art. 608). However, the contract may instead be interpreted as creating a ‘security right’ for the creditor (80Da998). See also 91Da11223 below.
  • Art. 607 inapplicable to option contract to secure a debt other than an obligation to repay a loan. 65Da1302, 68Da1468
  • Court is willing to interpret the main contract to convey the title as creating a ‘security right’ for the creditor. The creditor is thus required to return the surplus (in excess of the principal and interest) to the debtor.
  • 91Da11223. It was agreed that A shall convey the property worth 55 million KRW in satisfaction of an existing debt amounting to 42 million. It was also agreed that A shall have a buyback option within 3 years at a price equivalent to the principal and interest at the time of A’s exercise of the buyback option. After the lapse of 3 years, A offered to repay the debt with interest and demanded the property back. Court interpreted the parties’ agreement either i) as an agreement to provide a security for the repayment of debt; or ii) as an “option contract to carry out accord and satisfaction” in the future (after three years). The court held that A can recover the property either because the agreement was merely a security agreement or because the option to complete the accord and satisfaction is invalid because the property at the time of the option contract is worth more than the amount of debt (principal plus aggregate interest at the time of repayment). B shall be required to return the property to A when A offers the principal and interest (even after the expriry of 3 year buyback option).

4. Registration of an option

  • Applicable to an option to effect conveyance of real estate (as accord and satisfaction of an existing debt)
  • Act Regarding Registration of Option to Secure Debts 1983
  • Creditor must give a “two month” notice of settlement to the debtor after the repayment date. The notice must set out (Art. 3 of the 1983 Act):
    • the credit amount (including the amount of secured credit owed to other creditors who have priority)
    • the valuation amount of the property
    • the balance (if any)
  • Secured creditors having an inferior claim must also be notified. They may demand auction of the property before the balance (if any) is paid out to the debtor or before the expiry of the 2 month-settlement period (when there is no balance to be paid to the debtor). Art. 12(2) of the 1983 Act
  • Debtor or the guarantor/owner of the property may repay the debt before receiving the “correct amount” of the balance (i.e., the creditor’s calculation of the balance may be challenged). The option shall be cancelled(94Da3087) or the title transfer (if the title transfer had already taken place at the time of loan) shall be cancelled. In the latter case, the right of recovery must be excercised before the lapse of 10 years from the repayment date and before the property is conveyed to a third party in good faith. Art. 11 of 1983 Act