Among the contract forms related to real estate, a gratuitous loan for use agreement is an unpaid lending arrangement often seen between relatives and friends. Because it is treated very differently from a lease under the law, it is important for real estate professionals to have an accurate understanding of it.
What is a gratuitous loan for use agreement?
A gratuitous loan for use agreement is a contract for borrowing something without payment. Unlike a lease, where rent is paid, everyday acts such as borrowing an umbrella from a friend or using a parent’s car also fall under this type of arrangement.
| Comparison Item | Gratuitous Loan for Use | Lease |
| Consideration | Unpaid | Paid (with rent) |
| Application of the Lease and Land Lease Act | Not applicable | Applicable |
| Right enforceable against third parties | None | Yes |
| Upon the borrower’s death | Contract ends | Contract continues |
| Written agreement | Not mandatory | Usually required |
What are the legal differences between a gratuitous loan for use and a lease?
The biggest difference is whether the Lease and Land Lease Act applies. A gratuitous loan for use does not create a right enforceable against third parties, so if the property is transferred to a third party, the borrower cannot refuse to vacate.
Differences in eviction demands
In a lease, the landlord cannot terminate the agreement without just cause. In a gratuitous loan for use, however, if no period or purpose has been specified, the lender may terminate the agreement at any time.
How the borrower’s death is handled
As a rule, a gratuitous loan for use ends upon the borrower’s death (Article 597, Paragraph 3 of the Civil Code). However, when family members live together with the borrower, there are cases where the result does not follow the Civil Code exactly.
What are the main situations in which a gratuitous loan for use agreement is concluded?
In practice, it is often seen in the following cases.
When a child builds a house on a parent’s land
If the land remains in the parent’s name and is borrowed without paying a premium or ground rent, it is a gratuitous loan for use. One advantage is that inheritance tax and gift tax do not arise. However, care is needed because if the child pays ground rent, it may become subject to gift tax.
When a business owner and a corporation are involved
If a corporation builds on land owned in the business owner’s name, a family-owned corporation often does not pay a premium, and the arrangement may fall under a gratuitous loan for use. In that case, taxation based on the recognition of a leasehold right may arise.
What are examples of disputes involving a gratuitous loan for use agreement?
Because these arrangements are often based on verbal promises without a written agreement, they are prone to disputes.
A demand to return land that was lent free of charge for more than 20 years
In some cases, the borrower argues that “prescription has been completed.” However, if the borrower is aware that the land is being borrowed, acquisitive prescription will not be established, so a demand for return is still possible.
Selling a building on land borrowed free of charge
Because the right to use the land and the right to use the building are treated as a set, the building cannot be sold to a third party without the landowner’s permission.
Why should a written agreement be prepared, and what should it include?
A written gratuitous loan for use agreement is not mandatory, but it is strongly recommended to avoid disputes. The main items that should be included are as follows.
- Information on the building subject to the gratuitous loan for use (location, structure, and floor area)
- Purpose of use
- Period of use
- Restrictions on assignment and sublending
- Who bears taxes and utility charges
- Conditions for termination
- Scope of restoration to original condition
- Agreements concerning damages
Under the revised Civil Code that took effect in April 2020, the obligation to restore the property to its original condition in a gratuitous loan for use was explicitly codified. As a result, it has become even more important to define that scope clearly in the agreement.
Frequently Asked Questions (FAQ)
Is stamp tax imposed on a gratuitous loan for use agreement?
No. A gratuitous loan for use agreement is not treated as a taxable document under the Stamp Tax Act, so stamp tax does not apply.
What should be done when selling real estate that is being used under a gratuitous loan for use?
Before the sale, the parties should discuss the tenant’s move-out, and depending on the circumstances, it may be necessary to propose converting the arrangement into a lease. There is also a risk that the new owner may seek cancellation based on contractual nonconformity.
What should be noted in particular for gratuitous loans for use between relatives?
It is important to inform other relatives of the existence of the gratuitous loan for use and obtain their understanding. To prevent disputes when inheritance occurs, we recommend preparing and sharing a written agreement.
