By David Imme, Tokyu Housing Lease
If you are thinking about investing in property in Japan (or already own property here), imagine this scenario.
You have bought a property in Japan for investment purposes and want to rent it out for monthly rental income. Most likely this will happen through a property management company with a so-called sublease agreement, which means that there is a first contract between you as the owner and the property manager (PM), and a second contract between the PM and the tenant.
Let’s say that after a few years of renting out your property, you decide that now would be a good time to think about selling the property. The agreement with your PM will be renewed in half a year, and the market price for your property is quite high.
All you’ve got to do is terminate the contract with the PM, and you should be able to sell the apartment at a good price, right?
But wait…what about the tenant? Well, you chose to terminate the contract, so won’t the tenant be moving out after contract termination?
Actually that is not the case. Remember the before mentioned second contract? Although this agreement is between the PM and tenant, ultimately the relation between you as the owner and the tenant as lessee remains.
From the tenant’s perspective, it doesn’t matter if they pay their rent directly to the owner or through a company. All that matters to the tenant is the contract they have signed.
The typical lease agreement in Japan and tenant rights
A tenancy contract (regular lease agreement) in Japan is usually for a period of two years. The tenant has the right to renew or terminate the contract after the initial two-year term. That is the important point here.
Once you have moved in as a tenant, Japanese law is in favor of you regarding the period of tenancy, as long as you maintain the apartment properly and pay your rent on time. Considering the remarkably high moving costs in Japan with key money, deposit, fees for agents, guarantors, insurances etc., this only seems fair.
Your rights and options as a property owner
Back to the owner’s perspective: What does this mean for you? A regular lease agreement can be terminated by the tenant with prior notice of one month, but it cannot be easily terminated by you, even if you wish to use the apartment for your own use in the future. You can make a request to the tenant (such as, “Please move out xx months from now and I’ll cover your moving costs plus an extra amount,” but it is entirely up to the tenant as to whether or not he or she agrees to these terms.
So what other options do you have? You can discuss with your PM the possibility of setting up a fixed-term lease agreement before the start of a new tenancy. Conditions for a fixed-term contract (teikishakuyakeiyaku or teishaku for short, in Japanese) are open to discussion, e.g. with a lease period of three years or even one. The tenant will have to move out at the end of the contract period, based on whatever is stated in the contract (rather than the tenant having the right to renew, as is the case with a regular lease agreement).
However, as you can imagine this makes your apartment less attractive for a potential tenant. The number of people who would agree to such terms is limited, so your PM might advise you to lower the rent in order to be competitive in the market.
That leaves one question open: Can you still sell the property? You have two options now: either you wait until the current tenant vacates the apartment and sell after he or she leaves, or you sell your property tenanted.
This is possible and usually called owner-change. The new owner will buy the property “including” the tenant. This might sound like a good deal for him or her, because there would be no need for tenant search, but on the other hand the new owner inherits the current tenant contract with the previously agreed upon rent. Regarding rental increase, again the law is on the tenant’s side. The owner can only make a proposal, and the tenant may refuse this increased amount.
With respect to selling a tenanted property, this usually results in a lower selling price compared to a property which is not tenanted, because the price will be calculated based on the actual rent.
To summarize, before renting out your property it is best to plan ahead and consider your options depending on what future plans you might have for your apartment.
Tokyu Housing Lease Corporation is one of Japan’s leading property management companies.
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