The relationship between tenant and landlord in Japan
■ Security deposit and key money
■ Free rent and advertising fees
■ Rental guarantee company
■ Traditional and fixed-term lease agreements
■ Renewal fee
■ Rent negotiation
■ When the rent is not paid
■ Original state restoration when leaving the property
Security deposit and key money
Among the expenses necessary for entering into a lease agreement are the security deposit and key money. The security deposit from the tenant is kept by the landlord for the purpose of securing payments including rent and repair costs. This is generally refunded in full when the tenant leaves if there are no delinquent rent payments and no repair costs. But in some regions, it is agreed that a certain part of the security deposit will not be refunded as terms of the agreement. The key money system is common in Japan. This is paid to the landlord as a gratuity and is not refunded when leaving. Different regions in Japan have different key money systems. In some cases, the key money is paid only when the agreement is entered into. In other cases, it is also paid at the time of renewal. There are even cases where no key money is required. The amount of the security deposit and key money depends upon the local custom and market trends, but both of them are mostly equivalent to one to two months of rent.
Free rent and advertising fees
With a free rent system, the rent for one to three months after moving in need not to be paid. This system benefits the landlord since it can decrease the number of vacant rooms at a fast pace. In cases of investment properties, the free rent system can be effective because the drop of monthly rent is not preferable to maintain investment yields. This system also benefits the tenant by reducing initial costs of the lease agreement, which tend to reach significant levels. However, contracts of free-rent properties include clauses pertaining to payment of a penalty or rent payment for the free-rent term in case of cancellation during a certain period, and thus details of the contracts need to be carefully examined.
When the lease agreement is entered into, the tenant pays a brokerage commission to the real estate company that introduced the property. The amount of the commission is generally equivalent to the rent for one month. A declaration of the Ministry of Land, Infrastructure, Transport and Tourism also determines that the total remuneration received from the tenant (brokerage commission) should not exceed the sum of the rent of one month plus consumption tax. It also allows the real estate company to receive an advertising fee, apart from the commission, from the landlord for advertisements performed on the request of the landlord, only if the requirements set under the law are met. The amount of advertising fees is generally equivalent to the rent for half to one month, but there are no specific regulations concerning it.
Rental Guarantee Company
Recently, rental guarantee companies are widely used to conduct tenant screening after receiving rental applications. The potential tenant’s financial position will be accessed if he/she is able to pay rents throughout the agreement period. If the rental application is approved and the applicant pays the guarantee company to be his/her guarantor for the lease agreement, the guarantee company shall then be obliged to pay the tenant’s unpaid rent to the owner when the tenant is unable to do so. That reduces risk to the owner who has been assured to receive guaranteed rent. The guarantee period will have to be renewed according to the terms of the guarantee company and a renewal fee is required. The rent payment made by the guaranteeing company on behalf of the tenant does not exempt the tenant from rent payment, and the tenant shall pay the guaranteeing company the amount the company invoices the tenant.
Traditional and fixed-term lease agreements
There are two types of lease agreements: traditional and fixed-term. For the traditional type, the agreement period is one year or more (usually two years). If the tenant requests a renewal, the landlord may not refuse it without any justifiable grounds. As for the tenant’s cancellation before expiry of the agreement, special provisions concerning issues such as the period of advance notice and the amount of cancellation fee are often prescribed, and cancellation is possible based on such provisions. On the other hand, fixed-term lease agreements cannot be renewed, and the property is evacuated at the end of the agreement period. These need to be written agreements using notarized documents, etc. As for the tenant’s cancellation before expiry in unavoidable circumstances, cancellation is possible based on the law without any special provision on cancellation (limited to residential property of an area less than 200 m2). By mutual agreement of both the tenant and the landlord, a new agreement can be made after the termination of the previous one.
For renewal of the lease agreement, the tenant pays a renewal fee to the landlord, although in some cases this fee may not be required, depending on provision of the agreement. The amount of the fee is stated in the agreement, but the standard amount is equivalent to the renewed amount of rent for one month.
The Act on Land and Building Leases, which is applied to lease agreements, recognizes the right to request an increase or decrease in rent to both the tenant and the landlord. If there are no special provisions in the lease agreement that limit increase or decrease requests for a certain period, the rent is negotiable even during the agreement period. In most actual cases, the rent is negotiated at the point of time the lease agreement is renewed. In negotiations on rent, the tenant requests a lower rent based on real estate information including the roadside land price, official land price, benchmark land price, road traffic census, and average rents in the area. On the other hand, the landlord requires a higher rent based on factors such as the increase of fixed assets tax, changes in economic situations such as rising land values, and comparison with the land value etc. of other similar properties in the same area. In either case of request, the rent is determined through consultations between the parties about whether the legal requirements are fulfilled and the amount of rent objectively considered to be reasonable. In cases where negotiations have failed, an appropriate rent shall be determined through a conciliation or a judicial decision.
As for rent revisions, the Act on Land and Building Leases recognizes the right of both the landlord and the tenant to request an increase or decrease in rent in the following cases:
- The rent becomes unreasonable owing to an increase or decrease of tax or other burdens related to the land or buildings.
- The rent becomes unreasonable owing to a rising or declining price of the land or buildings or other economic situations.
- The rent becomes unreasonable compared to other similar properties in the same area.
(However, the right to request changes in rent may be denied in such cases where a special provision in the lease agreement limits requests for a certain period.)
When the rent is not paid
In the case of short-term delinquent rent payments, the landlord demands the tenant to pay by telephone or in writing. In the case of a long-term or recurrent delinquency, payment requests are made through content-certified postal mail, and if this still does not resolve the problem, payment requests to the joint guarantor or legal actions are to be considered. When delinquencies of rent payments continue, cancellation of the lease agreement can be requested, only if there are reasonable reasons for cancellation such that the tenant does not pay in spite of request or demand for rent payment.
Original state restoration when leaving the property
It is important that agreements on issues concerning original state restoration when leaving the property are clearly stated in the lease agreement. In “Common issues and guidelines on original state restoration” published by the Ministry of Land, Infrastructure, Transport and Tourism, the landlord owes the obligation of repairs, etc. for “loss and damage of the property due to the tenant’s habitation and usage in a normal way,” whereas the tenant owes the obligation for “loss and damage of the property due to the tenant’s willful intention and negligence.” The scope of original state restoration obligation needs to be in line with the guidelines when the lease agreement is entered into. The guidelines do not prohibit setting up of special provisions on original state restoration but state requirements for special provisions as below. They also state that if these requirements are not fulfilled, the special provision may become invalid.
(1) Objective and reasonable reasons exist, such as a necessity for a special provision that does not make excessive profits.
(2) The tenant is aware of his/her obligation for repairs, etc. that exceed the normal obligation due to the special provision.
(3) The tenant indicates his/her intention to owe the obligation due to the special provision.