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TOKYO
REAL ESTATE MARKET REPORT
VOL.9
Impact on the Real
Estate Investment Market
of Implementation of the
Limited-term Lease System
2. What is a Limited-term
Lease?
In order to discuss
the revised law, we must
first explain Japanese
lease contracts, which
are considered peculiar
by overseas investors.
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| Historical
Background and Problems |
Under Japan’s
Land and Housing Lease
Act, before the above
revision, the general
principle was protection
of tenants, and even when
a lease expired, the owner
could not demand that
the tenant vacate the
premises unless there
was “a just cause.”
This law was established
during World War II in
order to protect the homes
of soldiers at the front
and to ensure that their
families could stay in
their homes without fear
of being evicted. During
the housing shortage after
World War II, this law
also served to protect
people with low incomes.
However, the rules were
perhaps overprotective
of tenants, and in extreme
cases, owners had been
unable to have their buildings
vacated by tenants without
“a just cause.”
This caused problems for
redevelopment, because
most of the time the owners
had to spend long period
of time on lawsuits demanding
that the tenants vacate
the building, or had to
pay high fees to the tenants.
The following are some
of the reasons that have
made it difficult to invest
in real estate in Japan.
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| Problems
and Issues in Japanese
Lease Contracts |
1.Commercial
Practice of Short-term
Leases
2. Possibility
of Mid-term Cancellation
3. Difficulty
for Owners to Terminate
Leases
4. Right
to Demand Changes in Rent
1.Commercial
Practice of Short-term
Leases
Lease contracts on office
buildings in Japan have
normally been for periods
of two to three years,
and when the leases expired,
they become contracts
with no fixed expiration
date. The usual practice
has been to renew the
lease every two years,
based on the original
contract.
-->
It was difficult to obtain
stable tenants, and this
caused problems in predicting
income.
2.
Possibility of Mid-term
Cancellation
Even when a lease contract
of two or three years
was signed, the tenants
generally had the right
to cancel the contract
at any time by giving
advance notice of three
to six months. However,
the owner could not demand
cancellation of the contract
without “a just cause.”
(From the tenant’s point
of view, this was the
same as having a short-term
lease of six months.)
-->
Risk that the lease could
be canceled at any time.
Risk that the tenants
wouldn’t vacate the building.
3.
Difficulty for Owners
to Terminate Leases
When owners demanded that
the tenants vacate the
premises, in most cases
they had to pay high fees
to the tenants to voluntarily
vacate, find replacement
sites for the tenants
and so on. The fees were
determined on a case-by-case
basis, and these costs
could not be easily predicted
in advance.
-->
Risk of incurring high
unexpected costs.
4.
Right to Demand Changes
in Rent
In conventional leases,
both the tenant and the
owner had the right to
negotiate for a change
in the rent during the
lease period (generally
at the time of contract
renewal). This made it
difficult to predict a
stable income.
-->
Risk that the rent might
change at any time.
Problems in predicting
stable income.
Because of the above considerations,
real estate in Japan involved
unpredictable risks, making
investment difficult.
The present revision of
the law represents an
improvement in certain
areas.
Major changes under the
revision of the law, (only
for those contracts under
the limited-term lease
system)
1. Allows leases
for less than one year
and leases for over 20
years
-->Improvement
regarding Problem 1 above.
Under conventional leases,
it was not possible to
conclude a long-term contract
for more than 20 years
or a short-term lease
for less than one year.
(Such contracts were deemed
to have no fixed lease
period, and the tenant
could cancel the lease
at any time by giving
six months advance notice.)
With the present revision
of the law, it is possible
to conclude leases for
any period, including
short-term and long-term
leases.
2. Excludes the
right to demand changes
in rent
-->Improvement
regarding Problem 4 above.
Under conventional leases,
both the tenant and the
owner were able to demand
changes in rent. The present
revision of the law makes
it possible to reduce
the risk from such demands,
by including a provision
in the contract to the
effect that no changes
will be made in the rent,
or by determining at the
time of contract the timing
of future changes in the
rent and the rate of change.
3. Eliminates
contract renewals
-->Improvement
regarding Problem 3 above.
When a written provision
is included in the contract
to the effect that it
is a limited-term lease,
it cannot be renewed automatically.
(To continue the lease
of the building, a new
contract must be concluded.)
This places a limit on
the period of the lease,
eliminates the risk that
the building cannot be
vacated once it is leased,
or that it will be necessary
to pay high fees when
the owner wishes the tenant
to vacate the building.
Also, when the owner has
plans to replace the building,
he can conclude a short-term
lease to obtain income
up until the time that
the building is to be
demolished.
These changes have produced
the following effects:
A. It is easier to predict
stable income.
B. The risks peculiar
to Japanese lease contracts
have been reduced.
C. It is possible to develop
a flexible leasing strategy.
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| Comparison
of Conventional Leases
and Limited-term Leases |
Conventional Leases:
Limited-term Leases:
There will be a large
supply of office buildings
by 2002, and there is
a bearish tendency on
office rent. It is not
expected that the limited-term
lease will immediately
take root under the current
market situation, which
favors the tenant. (In
fact, some are predicting
that when owners ask tenants
to sign limited-term lease
contracts, the tenants
may demand concessions
such as lower rent, and
this will drive down rent
levels.)
Still, it can be concluded
that the introduction
of the limited-term lease
has laid the groundwork
for making Japanese real
estate a more practical
investment vehicle. The
problem of conventional
leases will continue for
some time in the future.
However, there will be
improvement in the problem
that tenants’ rights were
protected to a greater
extent than necessary.
Taking a long-term view
of the overall real estate
market, both owners and
tenants will benefit from
greater freedom in factors
such as lease periods
and establishment of rent
levels, as well as the
expanded range of options
based on the principle
of contract liberalization.
Also, the introduction
of the limited-term lease
is expected to lead to
expansion in business
opportunities as discussed
below, creating positive
business expectations
for stable real estate
investment. |
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