Security Deposit Deductions & Renewal Fees in Japan: Supreme Court Navigates Consumer Protection and Lease Clauses

Judgment Dates: March 24, 2011, and July 15, 2011

Residential lease agreements in Japan often contain clauses that can be perplexing or financially burdensome for tenants, particularly concerning non-refundable portions of security deposits ("shikibiki") and fees payable upon lease renewal ("kōshinryō"). In 2011, the Supreme Court of Japan delivered two significant judgments that provided crucial interpretations of these common lease provisions, specifically examining their validity under Article 10 of the Consumer Contract Act (CCA). This Act aims to protect consumers from unfair contract terms. These rulings offer important guidance on when such clauses might be deemed to unilaterally harm consumer interests in violation of the principle of good faith.

Understanding Consumer Contract Act Article 10

Article 10 of Japan's Consumer Contract Act is a general provision that can invalidate consumer contract clauses (excluding those already regulated by other specific CCA articles like Article 9 on liquidated damages). For a clause to be voided under Article 10, two main conditions must typically be met:

1. The clause must restrict the rights of the consumer or aggravate the obligations of the consumer as compared with the application of non-mandatory provisions of the Civil Code or other relevant laws (this is often referred to as the "front-half requirement").
2. The clause must, in violation of the fundamental principle of good faith and fair dealing (enshrined in Article 1, Paragraph 2 of the Civil Code), unilaterally harm the interests of the consumer (the "latter-half requirement").

In the cases discussed below, the Supreme Court largely accepted that the clauses in question met the first requirement and focused its detailed analysis on the second requirement: whether they unilaterally harmed consumer interests in contravention of good faith.

Case Study ①: The "Shikibiki" (Security Deposit Deduction) Clause
(Supreme Court, First Petty Bench, Judgment of March 24, 2011; Heisei 21 (Ju) No. 1679)

This case concerned a "shikibiki" (敷引) clause, a common feature in leases particularly in Western Japan, where the landlord retains a predetermined, non-refundable portion of the security deposit (保証金 - hoshōkin or 敷金 - shikikin) when the tenant vacates, regardless of actual damages beyond normal wear and tear.

• The Facts:
  The plaintiff, X (a tenant), entered into a residential lease agreement with the defendant, Y (a landlord), on August 21, 2006, for an apartment in Kyoto City. The lease term was two years, with a monthly rent of ¥96,000. This was a "consumer contract" under the CCA. Upon signing, X paid Y a security deposit of ¥400,000.
  The lease agreement contained a shikibiki clause stipulating that upon X vacating the premises, Y would deduct a specific amount from the security deposit based on the duration of the tenancy, and return only the remainder. The deductions were tiered:
  • Less than 1 year: ¥180,000 deducted.
  • Less than 2 years: ¥210,000 deducted.
  • Less than 3 years: ¥240,000 deducted.
  • Less than 4 years: ¥270,000 deducted.
  • Less than 5 years: ¥300,000 deducted.
  • 5 years or more: ¥340,000 deducted.
    The lease agreement (Article 19, Paragraph 1) also clarified that while the tenant had a general duty to restore the premises to their original condition upon vacating, normal wear and tear (通常損耗等 - tsūjō sonmō-tō) would be covered by this shikibiki amount, and the tenant would not be separately responsible for restoring such normal wear and tear. The lease also included a clause requiring a renewal fee (kōshinryō) of ¥96,000 upon lease renewal.
    X terminated the lease on April 30, 2008 (after approximately 1 year and 8 months). Y deducted ¥210,000 as per the shikibiki clause and returned the remaining ¥190,000 to X. X sued for the return of the ¥210,000, arguing the shikibiki clause was void under CCA Article 10. The High Court had ruled against X, finding the clause not void. X appealed.
• The Supreme Court's Analysis and Ruling on Shikibiki:
  The Supreme Court dismissed X's appeal, upholding the validity of the shikibiki clause in this particular instance.
  1. Nature and Purpose of Shikibiki: The Court acknowledged that shikibiki clauses, particularly when explicitly stated to cover normal wear and tear (as Article 19(1) did here), serve a purpose. It means the tenant is relieved of the obligation to restore normal wear and tear, and the landlord receives a fixed sum for these anticipated costs.
  2. Addressing the "Double Burden" Argument: The Court reasoned that if a shikibiki clause clearly specifies that a certain sum will be deducted to cover costs like normal wear and tear, it implies that the agreed-upon monthly rent is set without factoring in these specific end-of-lease restoration costs for normal wear and tear. Therefore, the tenant is not necessarily bearing a "double burden" (i.e., paying for normal wear and tear through both rent and the shikibiki). The shikibiki essentially carves out these costs from the rent and deals with them via a fixed deduction.
  3. Rationality of a Fixed Sum: Fixing a specific, predetermined amount for such repair costs can be seen as a rational way to prevent disputes at the end of the lease regarding the necessity and actual cost of repairs for normal wear and tear. Thus, such a clause is not inherently contrary to the principle of good faith or unilaterally detrimental to the tenant.
  4. The Test for Invalidity under CCA Article 10: Despite the general acceptability, the Court laid down a crucial test: a shikibiki clause in a consumer residential lease contract can be void under CCA Article 10 if the amount of the shikibiki is "excessively high" (高額に過ぎる - kōgaku ni sugiru). This assessment should be made by considering:
     • (a) The amount typically anticipated for repairing normal wear and tear in a similar property.
     • (b) The amount of the monthly rent.
     • (c) The existence and amount of other non-refundable one-time payments made by the tenant (such as reikin/key money, though none was explicitly paid here beyond the shikibiki and a separate renewal fee provision).
       If the shikibiki amount is found to be excessively high based on these factors, it will be deemed void under CCA Article 10, unless there are "special circumstances" (特段の事情 - tokudan no jijō) justifying the high amount (for example, if the rent for the property was set at a rate substantially below the prevailing market rate for comparable properties). The rationale here is that an excessively high shikibiki, not justifiable by anticipated costs or lower rent, likely results from an exploitation of the typical information and bargaining power disparities between landlords and consumer tenants.
  5. Application to X's Case: The Supreme Court found that the shikibiki amounts in X's contract (ranging from ¥180,000 to ¥340,000, with ¥210,000 applicable to X's tenancy duration of less than two years) were not "excessively high" when considered in light of:
     • The likely costs of normal wear and tear for a property of that nature and location.
     • The monthly rent of ¥96,000 (the applicable shikibiki of ¥210,000 was roughly equivalent to 2.2 months' rent, and the maximum was about 3.5 months' rent).
     • The absence of other significant one-time payments like reikin (though a renewal fee clause did exist for future renewals).
       Therefore, the Court concluded that the shikibiki clause in X's lease was not void under CCA Article 10.

Case Study ②: The "Kōshinryō" (Lease Renewal Fee) Clause
(Supreme Court, Second Petty Bench, Judgment of July 15, 2011; Heisei 22 (O) No. 863, Heisei 22 (Ju) No. 1066)

This case dealt with the validity of a "kōshinryō" (更新料) clause, which requires tenants to pay a fee to the landlord upon renewing their lease.

• The Facts:
  The plaintiff, X1 (a tenant), entered into a lease agreement with the defendant, Y (a landlord and real estate leasing business), on April 1, 2003, for an apartment in Kyoto City. The initial lease term was one year, with a monthly rent of ¥38,000. The lease stipulated a renewal fee (kōshinryō) equivalent to two months' rent. X2 was the guarantor for X1's obligations. These agreements were also "consumer contracts" under the CCA.
  The kōshinryō clause specified:
  • ① X1 could renew the lease by giving 60 days' notice before the term expired.
  • ② Upon renewal, whether by agreement or by statutory renewal (where the tenant continues occupancy after the term ends without objection from the landlord), X1 was required to pay Y a renewal fee equal to two months' rent. The phrasing suggested this was payable every year upon each annual renewal.
  • ③ Y would not refund or adjust the renewal fee regardless of X1's actual period of occupancy during the renewed term.
    The lease was renewed by agreement three times (for fiscal years 2004, 2005, and 2006), and X1 paid the kōshinryō of ¥76,000 (2 x ¥38,000) on each occasion, totaling ¥228,000. After the 2006 term expired, X1 continued to occupy the apartment from April 1, 2007, resulting in a statutory renewal of the lease. However, X1 did not pay the ¥76,000 kōshinryō for this particular renewal.
    X1 sued Y, claiming the kōshinryō clause was void under CCA Article 10 and seeking the return of the ¥228,000 already paid, plus interest. Y counterclaimed against X1 for the unpaid renewal fee of ¥76,000 and also sued the guarantor, X2, for the same amount. The High Court had found the kōshinryō clause void under CCA Article 10, ruling in favor of X1. Y appealed.
• The Supreme Court's Analysis and Ruling on Kōshinryō:
  The Supreme Court partially reversed the High Court's decision, upholding the validity of the kōshinryō clause in this specific instance.
  1. Nature of Kōshinryō: The Court described kōshinryō as having a "composite nature." It generally serves as:
     • A supplement to, or a prepayment of, rent.
     • Consideration for the landlord agreeing to continue the lease, thereby allowing the tenant to maintain peaceful and continued use of the property.
       Given these aspects, the Court found that the payment of a renewal fee is not inherently devoid of economic rationality.
  2. Social Context and Initial Assessment under CCA Article 10:
     • The Court noted that the practice of tenants paying landlords a renewal fee upon lease expiration is "not uncommon" in certain regions of Japan (a matter of public knowledge).
     • Historically, court-mediated settlements and judicial practice had not automatically treated kōshinryō clauses as void against public policy.
     • Therefore, if a kōshinryō clause is "unequivocally and specifically stated" in the lease agreement and it is clear that a definite agreement on the payment of the renewal fee has been reached between the landlord and tenant, it cannot be assumed that there is an "unignorable disparity" in information or bargaining power between them merely because such a clause exists.
  3. The Test for Invalidity under CCA Article 10: A kōshinryō clause that is clearly stated and agreed upon is not void under CCA Article 10 unless "special circumstances" exist. Such circumstances would primarily arise if the amount of the renewal fee is "excessively high" (高額に過ぎる - kōgaku ni sugiru). This assessment should be made by considering:
     • (a) The amount of the monthly rent.
     • (b) The length of the lease period being renewed.
     • (c) Other relevant factors pertaining to the specific lease and local practices.
  4. Application to X1's Case: The Supreme Court found that the kōshinryō in X1's lease—an amount equivalent to two months' rent for each one-year renewal period, where the monthly rent was ¥38,000—was not "excessively high" in light of these factors.
     Therefore, the Court concluded that the kōshinryō clause was not void under CCA Article 10. X1's claim for a refund of past renewal fees was dismissed, and Y's counterclaims for the unpaid renewal fee against X1 and X2 were upheld.

Comparing the Rulings and Underlying Principles

These two Supreme Court decisions from 2011, while addressing different types of lease clauses (shikibiki and kōshinryō), share several common threads in their application of CCA Article 10:

• Emphasis on Clarity and Specificity: In both instances, the Supreme Court underscored the importance of the controversial clause being clearly and unequivocally stated in the lease agreement, with evidence of a definite agreement by the tenant. This aligns with the principle from an earlier Supreme Court case (December 16, 2005, concerning normal wear and tear deductions) which stressed that any deviation from default tenant rights must be "clearly agreed upon." Ambiguous or hidden terms are less likely to withstand scrutiny.
• The "Excessively High" Standard: Once clear agreement is established, the primary test for invalidity under CCA Article 10 for both shikibiki and kōshinryō hinges on whether the monetary amount demanded from the tenant is "excessively high" relative to relevant benchmarks (anticipated repair costs and rent for shikibiki; rent and renewal period for kōshinryō).
• Acknowledgment of Legitimate or Accepted Purposes: The Court acknowledged that these clauses could serve rational or historically accepted purposes – shikibiki for potentially preventing disputes over normal wear and tear costs, and kōshinryō as a form of rent supplementation or consideration for lease continuity.

However, there are also subtle differences. The justification for shikibiki often ties back to tangible (though pre-estimated) costs of property upkeep for normal wear and tear. The justification for kōshinryō, with its "composite nature" including aspects like "consideration for lease continuation," can appear more abstract, especially in a legal environment where tenants often have strong statutory rights to renewal unless the landlord has just cause for refusal.

Legal commentators, including the author of the provided PDF commentary (Professor Yoshio Shiomi), have expressed some skepticism regarding the Supreme Court's relatively positive assessment of kōshinryō's economic rationality and social acceptance. Some favor the more critical stance often taken by lower courts, which may question whether rents are genuinely lower to offset renewal fees, or whether the "benefit" of lease continuation truly warrants a substantial extra payment given existing tenant protection laws.

Conclusion

The Supreme Court's 2011 rulings on shikibiki and kōshinryō clauses provided significant, albeit not universally lauded, guidance on the application of Consumer Contract Act Article 10 to common Japanese residential lease provisions. The Court did not issue a blanket approval or disapproval of such clauses. Instead, it established a framework emphasizing that if these financial obligations are clearly and specifically agreed upon by the tenant, they will generally be upheld unless the monetary amount involved is "excessively high" when weighed against relevant factors like rent, the nature of the cost (for shikibiki), or the length of the renewal term (for kōshinryō). These decisions underscore the ongoing tension between freedom of contract, established market practices, and the overarching goal of consumer protection from unilaterally disadvantageous terms.