Lease Agreements and Dispute Resolution in Japan: What Should Landlords and Tenants Know About Rent, Eviction, and Security Deposits?

Japanese Attorney at Law - Bengoshi L.L.

• 10 min read

For foreign businesses establishing or expanding operations in Japan, securing appropriate commercial or residential premises through lease agreements is a fundamental step. However, the Japanese legal landscape governing landlord-tenant relationships, particularly the Act on Land and Building Leases (Shakuchi Shakka Hō), presents a unique framework that often provides robust protections for tenants. Understanding the nuances of lease agreements, rent issues, eviction procedures, and the handling of security deposits is crucial for both foreign landlords and tenants to navigate potential disputes effectively. This article explores these key aspects of Japanese lease law and practice.

I. Formation and Nature of Lease Agreements in Japan

Lease agreements in Japan, known as chintaishaku keiyaku (賃貸借契約), establish the rights and obligations of landlords (kashinushi or 貸主) and tenants (karinushi or 借主). While general principles of contract law apply, real property leases are significantly shaped by the Act on Land and Building Leases.

A. Key Elements of a Lease Contract

A standard lease agreement will specify:

  • The Leased Property: A clear identification of the premises.
  • Rent (賃料 - Chinryō): The amount and payment terms.
  • Lease Term (期間 - Kikan): The duration of the lease.

It's important to distinguish between two main types of building lease agreements in Japan:

  1. Ordinary Building Lease Agreements (普通建物賃貸借契約 - Futsū Tatemono Chintaishaku Keiyaku): These are the traditional form of lease. A key characteristic is that the landlord cannot refuse to renew the lease upon its expiration without "just cause" (seitō jiyū), even if the contract has a fixed term. This often results in long-term tenancies.
  2. Fixed-Term Building Lease Agreements (定期建物賃貸借契約 - Teiki Tatemono Chintaishaku Keiyaku): Introduced to provide more flexibility, these leases terminate upon the expiration of the agreed term, and there is no automatic right of renewal for the tenant. For a fixed-term lease to be valid, it must be in writing, and the landlord must provide the tenant with a separate written explanation, prior to or at the time of contracting, stating that the lease will not be renewed and will terminate upon expiry of the term. If these formalities are not strictly followed, the lease may be treated as an ordinary lease.

Foreign businesses, particularly those seeking flexibility, might find fixed-term leases more aligned with their needs, but they must ensure all statutory requirements for their creation are met.

B. Tenant Protection under the Act on Land and Building Leases (Shakuchi Shakka Hō)

The Act on Land and Building Leases is a cornerstone of Japanese real estate law and generally leans towards protecting tenants. As mentioned, a significant aspect of this protection in ordinary leases is the "just cause" requirement for a landlord to refuse renewal or to terminate a lease mid-term. What constitutes "just cause" is determined by considering various factors, including the landlord's and tenant's need for the property, the history of the lease, the condition and use of the property, and, in some cases, the landlord's offer of monetary compensation to the tenant to vacate. This makes evicting tenants in ordinary leases more challenging than in many other jurisdictions.

II. Common Disputes and Resolution Mechanisms

Several types of disputes commonly arise in landlord-tenant relationships in Japan.

A. Unpaid Rent (未払賃料 - Mibarai Chinryō)

When a tenant fails to pay rent, the landlord has several recourse options.

  1. Landlord's Rights and Procedures:
    • Demand for Payment: Initially, this may be an oral request. However, to create a clear evidentiary record, it is advisable to send a formal written demand, preferably via content-certified mail with a certificate of delivery (内容証明郵便、配達証明付 - naiyō shōmei yūbin, haitatsu shōmei tsuki). This establishes a clear record of the demand.
    • Evidence Collection: The landlord should gather the lease agreement and records of rent payments (or non-payments), such as bank passbook entries.
    • Legal Action: If the tenant fails to pay after a demand, the landlord can pursue legal action. Options include:
      • Mediation (調停 - Chōtei): A court-facilitated process to reach an amicable resolution.
      • Lawsuit (訴訟 - Soshō): A formal court action to claim the unpaid rent. For smaller claims (typically up to ¥600,000 for the principal amount, though this can vary by specific court procedure), a simplified "small claims action" (少額訴訟 - shōgaku soshō) might be available.
      • Demand for Payment (支払督促 - Shiharai Tokusoku): An ex-parte court procedure where the court issues a payment order based on the creditor's application if the claim appears valid on its face. If the debtor does not object, the order becomes enforceable.
    • Claim against Guarantor: If there is a joint and several guarantor (連帯保証人 - rentai hoshōnin) for the lease, the landlord can also claim the unpaid rent from the guarantor.
  2. Tenant's Defenses: A tenant might have defenses such as a claim of set-off if the landlord owes them money, or disputes regarding the condition of the property that might justify withholding rent (though this is a complex area with strict requirements).

B. Eviction (建物明渡し請求 - Tatemono Akewatashi Seikyū)

Evicting a tenant in Japan, especially from an ordinary lease, can be a complex process due to tenant protection laws.

  1. Grounds for Termination and Eviction:
    • A lease can typically be terminated if there is a material breach by the tenant that leads to a breakdown of the "relationship of mutual trust" (信頼関係破壊の法理 - shinrai kankei hakai no hōri) between the landlord and tenant.
    • Common grounds include:
      • Persistent non-payment of rent (generally, several months of arrears may be considered sufficient, though case-by-case).
      • Unauthorized subletting or assignment of the lease.
      • Use of the premises for illegal purposes or in a manner contrary to the lease terms.
      • Significant nuisance or disruptive behavior affecting other tenants or the property.
    • Even with such grounds, if it's an ordinary lease, the landlord may still need to demonstrate "just cause" for termination, especially if the breach is not considered severe enough on its own to irrevocably destroy the trust relationship.
    • A formal notice of termination (解除通知 - kaijo tsūchi) specifying the grounds is essential.
  2. Legal Procedures for Eviction:
    • Evidence Collection: The landlord must gather evidence supporting the grounds for termination, such as the lease agreement, records of rent arrears, witness statements from other tenants regarding nuisance, photographs of damage, medical reports if violence was involved, and copies of termination notices.
    • Mediation or Lawsuit: If the tenant does not vacate after termination, the landlord must initiate legal proceedings, typically starting with a lawsuit for eviction. Mediation can also be attempted.
    • Provisional Disposition to Prohibit Transfer of Possession (占有移転禁止の仮処分 - Sen'yū Iten Kinshi no Karishobun): To prevent the tenant from transferring possession to a third party during the eviction lawsuit (which would require the landlord to start new proceedings against the new occupant), the landlord may seek a provisional disposition from the court prohibiting such transfer.
    • Claim for Rent Equivalents: After lawful termination, if the tenant remains in possession, the landlord can claim damages equivalent to the rent for the period of unlawful occupation.
  3. Tenant's Counterarguments and Protections: Tenants can raise various defenses, such as disputing the grounds for termination, arguing the lack of "just cause" in an ordinary lease, or claiming procedural irregularities by the landlord.

C. Security Deposits (敷金 - Shikikin)

Security deposits (shikikin) are a common feature of Japanese lease agreements, paid by the tenant to the landlord at the inception of the lease.

  1. Purpose and Nature: The primary purpose of a security deposit is to secure the tenant's obligations under the lease, such as unpaid rent and costs for restoring the property to its original condition (excluding normal wear and tear) upon termination of the lease.
  2. Return of Security Deposits and Deductions:
    • Upon termination of the lease and vacation of the premises, the tenant has the right to the return of the security deposit, less any valid deductions.
    • Allowable Deductions: These typically include:
      • Unpaid rent.
      • Costs for repairing damage to the property caused by the tenant's intentional acts or negligence (beyond normal wear and tear).
    • Restoration Obligations (原状回復義務 - Genjō Kaifuku Gimu): Disputes often arise over the scope of the tenant's obligation to restore the premises. The general principle, supported by guidelines from the Ministry of Land, Infrastructure, Transport and Tourism ("Guidelines on Problems Concerning Restoration to Original Condition"), is that tenants are not responsible for deterioration due to "normal wear and tear" (通常損耗 - tsūjō sonmō) or "aging" (経年変化 - keinen henka). Landlords can only deduct for damages caused by the tenant's misuse or negligence. Unfair clauses imposing excessive restoration burdens on tenants may also be challenged under Article 10 of the Consumer Contract Act if the tenant is a consumer.
    • Proof of Deposit: The tenant should retain evidence of the security deposit payment, such as a receipt (敷金預り証 - shikikin azukarishō).
  3. Dispute Resolution:
    • Disputes over the return of security deposits can be resolved through negotiation, formal demand letters (content-certified mail), mediation, or litigation. Small claims actions (shōgaku soshō) are often suitable for such disputes given the amounts typically involved.
    • Evidence such as the lease agreement, proof of security deposit payment, and photographs of the property's condition at the time of move-out are important.

D. Rent Modification (Rent Increase/Decrease Claims - 賃料増減額請求 Chinryō Zōgengaku Seikyū)

Under certain conditions, both landlords and tenants have the right to request an adjustment of the rent, even during the lease term, if the existing rent becomes unreasonable.

  1. Legal Basis:
    • The Act on Land and Building Leases provides the basis for rent modification claims (Article 32 for building rent increases, Article 11 for land rent increases; similar principles apply to decreases).
    • Grounds for modification include:
      • Increases or decreases in taxes or other public charges on the land or building.
      • Changes in the economic value of the land or building.
      • The rent becoming inappropriate when compared to rents for similar properties in the vicinity.
    • Such claims cannot be made if the lease contains a valid special provision prohibiting rent increases (or decreases) for a certain period, though such "no-increase" clauses for ordinary building leases have limitations on their enforceability against tenants for decreases.
  2. Procedure for Claiming Rent Modification:
    • Negotiation: The party seeking modification should first attempt to negotiate with the other party.
    • Formal Notice: If negotiations fail, the party can make a unilateral declaration of rent modification (e.g., a rent increase notice sent by content-certified mail).
    • Mediation First (調停前置主義 - Chōtei Zenchi Shugi): If the other party does not agree to the modified rent, the party seeking modification must first file for mediation (specifically, "conciliation on land and building matters" - 宅地建物調停 takuchi tatemono chōtei) at a summary court or district court before initiating a lawsuit (Civil Conciliation Act, Article 24-2).
    • Lawsuit: If mediation is unsuccessful, a lawsuit can be filed to have the court determine the appropriate rent.
  3. Rent Valuation Methods: Courts often rely on expert appraisers and consider various valuation methods, including:
    • Cost Approach (積算法 - Sekisan Hō, or Slide Method): Adjusting the original rent based on changes in economic indices.
    • Income Approach (収益分析法 - Shūeki Bunseki Hō, or Yield Method): Based on the property's value and expected rate of return.
    • Sales Comparison Approach (取引事例比較法 - Torihiki Jirei Hikaku Hō): Comparing with rents of similar nearby properties, adjusting for differences.
    • Evidence: Lease agreement, property tax notices, property valuation certificates, data on comparable rents, official land price publications (公示地価 - kōji chika, 路線価 - rosenka), and various economic statistics.

E. Tenant's Request for Permission for Building Alterations/Improvements (建物増築等の許可申立て - Tatemono Zōchiku tō no Kyoka Mōshitate) (Primarily for Leased Land - 借地 Shakuchi)

This scenario typically arises when a tenant who has leased land (shakuchi) and constructed a building on it wishes to alter, extend, or rebuild that building, and the land lease agreement prohibits such actions without the landlord's consent.

  1. Context: Land lease agreements often contain clauses restricting the tenant's ability to make significant alterations to buildings on the leased land without the landlord's permission.
  2. Landlord's Consent and Non-Contentious Case Procedure (借地非訟 - Shakuchi Hishō):
    • If the landlord refuses to consent to reasonable alterations or rebuilding, the Act on Land and Building Leases (Article 17, Paragraph 2) provides a special non-contentious court procedure (shakuchi hishō) through which the tenant can petition the court for permission in lieu of the landlord's consent.
    • The tenant must demonstrate to the court that the proposed alteration or rebuilding is "reasonable for the normal use of the leased land."
    • If the court grants permission, it often imposes conditions, such as the payment of a "consent fee" (承諾料 - shōdakuryō) to the landlord or an increase in the land rent.
    • This procedure is distinct from a formal lawsuit and is designed for more expedited resolution of specific lease-related issues.
    • Required Documents: Land lease agreement, property assessment certificates, current building plans, and proposed alteration/rebuilding plans.

III. Special Considerations for Foreign Businesses as Landlords or Tenants

Foreign businesses operating in Japan should be mindful of several additional factors:

  • Language and Cultural Nuances: Lease agreements are typically in Japanese. Accurate translation and understanding of all terms, including implied customs or standard practices, are essential. Engaging bilingual legal counsel is highly recommended.
  • Long-Term Tenancy Rights: The strong tenant protections under ordinary leases mean that terminating a lease or recovering possession can be more difficult and time-consuming than in jurisdictions with more landlord-friendly laws. This is a key consideration for foreign landlords.
  • Due Diligence: Before entering into a lease, particularly for significant commercial properties, thorough due diligence is necessary. This includes verifying the landlord's ownership, checking for any encumbrances on the property (e.g., mortgages, existing leases), and understanding zoning regulations.
  • Specific Contractual Clauses: Foreign businesses should pay close attention to, and negotiate where possible, clauses relating to:
    • Governing Law and Dispute Resolution: While Japanese law will generally apply to leases of property in Japan, parties can sometimes agree on arbitration or specific court jurisdictions for disputes, though this is less common for standard leases.
    • Early Termination: Ordinary leases typically do not allow for unilateral early termination by the landlord without just cause, and tenant's rights to early termination may also be restricted or involve penalties. Fixed-term leases offer more certainty regarding the end date.
    • Security Deposit Amortization (敷引 - Shikibiki or 保証金償却 - Hoshōkin Shōkyaku): Some lease agreements, particularly in western Japan, may include a non-refundable portion of the security deposit or guarantee money. This should be clearly understood.
    • Renewal Fees (更新料 - Kōshinryō): In some regions and for some ordinary leases, a renewal fee payable by the tenant to the landlord upon renewal is customary, though its legal enforceability can be contentious if not clearly agreed upon.
    • Assignment and Subletting: Restrictions on assigning the lease or subletting the premises are common and require careful review.

Conclusion

Real property lease relationships in Japan are heavily influenced by the Act on Land and Building Leases, which provides significant protections for tenants. For both landlords and tenants, particularly foreign businesses unfamiliar with these specific legal norms, a clear understanding of their rights and obligations under the lease agreement and applicable law is paramount. When disputes arise concerning unpaid rent, eviction, security deposits, or rent modifications, navigating the available resolution mechanisms—from negotiation and mediation to formal court proceedings like lawsuits or non-contentious case procedures—requires careful preparation, appropriate evidence, and often, expert legal guidance. Proactive legal counsel from the contract negotiation stage through to dispute resolution can help foreign entities mitigate risks and protect their interests in the Japanese real estate market.