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Lotte Duty Free submitted a report to the Fair Trade Commission regarding its rent feud with Incheon International Airport, according to the leading duty-free operator.
Korea’s largest duty-free operator and airport have gone through four unsuccessful discussions on the matter since mid-September, but this is the first time one of them has called in state officials.
Lotte’s assertion is that Incheon International Airport violated the Monopoly Regulation and Fair Trade Act by setting up contract conditions that were unfavorable to the duty-free operator. If the request goes through, the FTC will embark on an investigation of its own or set up a definite deadline for the two to reach an agreement.
In 2015, the two signed a five-year rent contract for Lotte’s operation there worth 4.1 trillion won (US$3.68 billion). The deal ran from September 2015 to August 2020.
The company pinpointed two terms in the contract that they thought were “unfair.” One is a clause that prohibited any adjustments to the rent or security deposit due to changing management conditions or a drop in sales.
“In nature, duty free businesses are vulnerable to international affairs and government policy changes,” said Lotte Duty Free in a statement. “The clause ignores the industry’s particular characteristic and rules out any possibility of renegotiation from situations that may be prompted from this.”
The second disputed term states that the operator cannot pull out of the deal before half of the contract period has passed. Even if Lotte requests a revocation after this halfway point, it has to continue operations for four months from the withdrawal date.
After the fourth discussion ended fruitlessly, Lotte discussed the possibility of closing down its operation in Incheon International Airport, which takes up about half the space allocated to duty free stores and generates 60 percent of the airport’s entire rent earnings from duty free.
The number of Chinese tourists in Korea plummeted since March after tensions rose over Korea’s deployment of a U.S.-led antimissile system. Lotte says this left a huge void of customers – the company used to generate 70 percent of its annual sales from Chinese consumers.
Under the current contract, Lotte Duty Free can pay a designated portion of its operating sales as rent. But there is also a minimum amount that the operator has to pay even if the sales figure falls below that threshold.
As Lotte’s sales are lower, the sales figure does not reach the minimum amount. Lotte says that it cannot afford to pay the minimum amount due to unfavorable market conditions.
Its counterpart Incheon International Airport rebutted the claims and remains firm that it will not alter the original contract conditions. The airport said the contract with Lotte was based on a mutual agreement that the market situation may change in the future.
“The contract was already screened by the FTC so we’re not expecting any problems based on relevant laws,” it said in a statement.