FSS urges real estate trust companies to manage litigation risks over 'limited-liability clauses'

[Financial News] The Financial Supervisory Service (FSS) has called on real estate trust companies to assess the possibility of fund outflows resulting from losses in lawsuits over the cancellation of presale contracts and to proactively manage their soundness and liquidity.
The FSS said it held a meeting on the 10th at the Korea Financial Investment Association in Yeouido, Seoul, with compliance officers and executives responsible for management at 14 real estate trust companies. They discussed litigation risks related to limited-liability clauses, the issuance of guarantee insurance certificates, and ways to improve fund management for regional housing cooperatives.
A limited-liability clause is an agreement under which, in connection with a presale contract, a trust company assumes responsibility for matters such as refunding the down payment only within the scope of the trust property.
Recently, some trust companies lost lawsuits over the cancellation of presale contracts because they had not sufficiently explained the limited-liability clause to buyers. Examples included cases in which the clause was not prominently displayed in the presale contract or there was no signature clearly confirming that the buyer had received an explanation.
The FSS instructed trust companies to carefully assess the possibility that their own funds could be depleted by, for example, down payment refunds if they lose lawsuits, and to manage their soundness and liquidity. It also urged them to fulfill their duty to explain the limited-liability clause fully, including by improving presale contracts, in order to protect buyers’ rights and interests.
The FSS also called for stronger internal controls over the issuance of guarantee insurance certificates for project financing (PF) projects. In some cases, trust companies have had to bear related costs after developers defaulted, having issued and submitted guarantee insurance certificates to permitting authorities on the developers’ behalf.
The FSS stressed that guarantee insurance certificates should be issued only within the scope of land trust agreements and that procedures for managing corporate digital certificates should be strengthened during the issuance process.
The industry will also draw up common guidelines for fund-management agency services for regional housing cooperatives. Legal disputes against trust companies over fund management are frequent, but there are no standardized work guidelines. The FSS plans to discuss drafting guidelines with the Korea Financial Investment Association and the real estate trust industry to prevent harm to cooperative members and manage trust companies’ reputational risks.
Participants at the meeting agreed to strengthen explanations of limited-liability clauses and financial risk management for related lawsuits, and to make adequate arrangements for recovering claims when issuing guarantee insurance certificates. They also expressed their intention to actively cooperate in drafting guidelines for fund-management agency services for regional housing cooperatives.
The FSS plans to continue communicating with and monitoring the real estate trust industry to support sound business practices.

[email protected] Lee Jeong-hwa Reporter