It’s against the law to evict tenants!? Things you should know about Japanese lease agreement.
Japanese lease agreement types are roughly divided into ordinary lease contract and fix-term lease contract. When a lessee falls behind rent, can I evict them? If I want to put my property on the market, can I evict the lessee?\ When purchasing a revenue-generating properties for residential use, you may encounter issues such as above.
Let’s get started with “What is an ordinary lease contract?”
Ordinary lease contract is a traditional month-to-month automatically renewing lease contract with a period more than 1 year. The term for the contract is generally a period of 2 years and available for a renewal every 2 years. A lessor is not able to refuse the renewal without a valid reason. Unless the lessee gives a moving out notice the contract will automatically renew. Depending on the region (Tokyo and east Japan), one month rent is collected from the lessee as a renewal fee.
“What is a fix-term lease contract?”
Fix-term lease contract does not have renewal. The contract will be terminated once the period ends. Fix-term lease contract can be concluded from 1 month period. Fix-term lease contract is recommended for those who have plans to use the property in the future, making it your home or putting it on the market.
Advantages and disadvantages between Ordinary lease contract and Fix-term lease contract
90% of residential contracts are ordinary lease contract. Since Fix-term lease contract came into action in the year of 2000, ordinary lease contract is still the most common contract in Japan. Many lessees prefer ordinary lease contract since its available to renew, unlike the fix-term lease contract where lessee will HAVE to move out once the contract period ends. Re-contracting could be possible when both lessor and lessee come to an agreement, however, nothing is guaranteed. If the lessor desires to end the contract, fix-term lease contract will terminate at the specified expiration date. Finding a tenant with a fix-term lease contract could be difficult, especially those with families that have kinds in school.
\
\
Anyhow, it is rather easy to conclude a 2-year fix-term lease contract for single or couple aimed properties in the metropolitan area. Especially for those who tend to only reside for couple years for work and have no intension of leasing a long-term home.
Form our firm’s experience, we can find tenants as easily as ordinary lease contract if it’s a 3-year fix-term lease contract. Disadvantage of ordinary lease contract is obviously that it’s almost impossible to terminate the contract from the lessor unless there is a valid reason.\ This valid reason is normally when the lessor plans to reside at the property.\ For those investors owning the property and reside overseas, terminating an ordinary lease is almost impossible. In the past there were cases taken to court, however, keep in mind that the lessee is protected by the Act on Land and Building Leases and terminating an ordinary lease contract without a valid reason is highly irregular.
\
SO……which contract should I choose?
If you plan to keep a property for a long term (over 10 years), find a lessee with an ordinary lease contract who will reside for a long term. If you plan to sell the property soon (about 5 years), go for the fix-term lease contract. Metropolitan 1LDK property average period of occupancy is about 4-6 years. Some lessees may live in the property for over 10 years. For those purchasing as an investment targeting a short-term capital gain (period of 5 years or less), fix-term lease contract is the way to go.
Lastly, what should I do when I plan to sell a change of ownership property I purchased, which already had a lessee residing who holds an ordinary lease contract? We have some experience in this situation, but in most of the case you will have to come to an agreement with the lessee. It all comes down to money at the end. Generally, a moving out fee of 6-month rent is paid to the lessee. Depending on the situation the amount can be less or more. The process is rather complicated, and it is best to seek an expertise advice.
Written by Tsuyoshi Hikichi
At Azuki Corporation, we offer case-by-case consultation.
For real estate advice please press HERE