[비즈한국] Amidst the reality of damages in the construction industry due to troubled real estate project financing (PF), DL E&C375500 recently filed for a court injunction to stop further price reductions in the public auction of a metropolitan housing complex in Gangnam-gu, Seoul, which had been put up for auction following a default on PF loans. The court, however, dismissed the request. As the builder of the facility, DL E&C argued that since stakeholders had previously agreed on a minimum auction price of 125 billion won, the property should not be sold for any less, even as the price plummeted due to repeated failed auctions.
On the 18th of last month, the Seoul Central District Court (Presiding Judge Park Sang-eon) dismissed the injunction filed by DL E&C against Shinhan Asset Trust to halt the real estate auction process. Previously, in February, when the minimum sale price for the 'Odette Ode Dogok' metropolitan housing complex in Gangnam-gu, Seoul, dropped due to failed auctions, DL E&C filed for an injunction to prevent the signing of private contracts for the property at a price below 125 billion won. The court ruled, "There is insufficient evidence to suggest that the creditor has a high degree of justification for seeking an injunction as requested. Therefore, the creditor's claims are not accepted."
The subject of the dispute, Odette Ode Dogok, is a metropolitan housing complex built in Dogok-dong, Gangnam-gu, Seoul. Completed in July 2023, the building consists of one unit spanning 6 basement levels and 20 floors above ground (84 households), located near the northwest side of Yangjae Station. The developer, Dogok Doctors, signed a construction contract with DL E&C in July 2020 to initiate the project. The developer and the special purpose vehicles (SPVs) established for project financing signed a land trust agreement with Shinhan Asset Trust on the same day, designating the SPVs as the first-priority beneficiaries and DL E&C as the second-priority beneficiary.
The dispute originated from a default on the project's PF loans. The SPVs had secured PF loans from financial institutions up to a limit of 95 billion won in July 2020. Under the trust agreement, the developer, Dogok Doctors, was required to pay the interest on these loans to the SPVs, which held the first-priority beneficiary rights, by the due dates, but failed to do so.
Sales, the primary source of revenue for the Odette Ode Dogok project, were sluggish. Between April 2021 and June 2022, sales contracts for only 7 units were signed, leaving the remaining units unsold. Even those initial contracts were canceled in August of last year due to failure to pay the installments (three or more intermediate payments and the balance). Effectively, the entire complex remained unsold for over a year since its completion.
Ultimately, Odette Ode Dogok was put up for public auction in its entirety. According to the trust agreement, if the SPVs do not receive the principal and interest payments from the developer, they can request the trust company to liquidate the unsold units. The SPVs for Odette Ode Dogok requested Shinhan Asset Trust to proceed with an auction in August of last year, and the trust company began the auction for the entire building (84 units and 24 auxiliary facilities) in September. The appraised value of Odette Ode Dogok prior to the auction was 140.7 billion won.
The auction for Odette Ode Dogok repeatedly failed last year. A total of five auctions were held, starting in September of last year, followed by two in November and two in December, but no buyers were found. The minimum bid price, initially set at 183 billion won (130% of the appraised value), was lowered to 125.5 billion won (89% of the appraised value) by the fifth auction. While private contracts were allowed at prices equal to or higher than the last minimum bid price following an auction failure, none were successfully concluded.
The auctions for Odette Ode Dogok continued to fail this year. Upon request from the SPVs, Shinhan Asset Trust proceeded with auctions last month with minimum prices set at 125.5 billion won (89%) and 113 billion won (80%), respectively, but failed to find bidders. On the 1st and 7th of this month, the minimum prices were further reduced to 113 billion won (80%) and 107.3 billion won (76%), but failed for the same reason. This marks four failed auctions this year alone, and a total of nine since the process began. The minimum auction price has fallen by 75.6 billion won (41%), from 183 billion won down to 107.3 billion won.
DL E&C filed for the injunction in February, when the first auction notice of this year was posted, with the intent to block the trust company from entering into any private contract below 125 billion won. DL E&C claimed that the parties to the trust agreement had agreed to set the minimum sale price at 125 billion won and had agreed not to proceed with the auction or sign private contracts below that amount. At the time of the court's decision, the second auction with a minimum price of 113 billion won had already failed, and a private contract was being pursued.
In fact, when the 7 unit sales contracts were canceled in July of last year, DL E&C sent an official letter to Shinhan Asset Trust and the trust agency stating, "We agree to the cancellation of these sales contracts only on the condition that the minimum liquidation price for the property in question is 125 billion won or more." In its application for the injunction, DL E&C argued that because Shinhan Asset Trust and the trust agency did not object to the letter sent at the time, an agreement to set the minimum auction price at 125 billion won had been established.
However, the court did not accept this argument. It concluded that it was difficult to see that an agreement had been reached between the parties not to sell Odette Ode Dogok for less than 125 billion won. The court stated, "The fact that no objection was raised to the letter sent by the creditor is not sufficient to establish a clear meeting of the minds between the parties," adding, "Based on the circumstances presented, the other points raised by the creditor, and the submitted evidence, it is difficult to find that the existence of the alleged agreement has been highly substantiated."
Losses are also expected for DL E&C due to the dismissal of the injunction and the decline in the minimum sale price. In its filing, DL E&C appealed, "If a private contract contrary to the agreement is signed, the priority beneficiary rights of DL E&C (as the second-priority beneficiary under the trust agreement, serving as collateral for construction costs and overdue interest) will be infringed upon, causing massive losses. Since private contracts can be signed at any time, there is an urgent need to prohibit their conclusion or execution."
A representative from Shinhan Asset Trust stated, "We are currently conducting consultations for a private contract following the failure of the Odette Ode Dogok auction. Many potential buyers are making inquiries, and we are in the process of negotiating prices and balance payment schedules. Since the property is in a good location, we expect to reach an agreement at a price higher than the last failed auction's minimum bid." A representative from DL E&C stated, "As the auction process is currently underway, there is nothing specific we can comment on."