In Japan, due to historical reasons, tenants’ rights are strongly protected under the Act on Land and Building Leases (Shakuchi Shakka Hō). This column outlines the key tenant protections of building lease under the Act that investors in Japanese real estate should be aware of.

1. Key Protections for Building Tenants Under a “Normal Lease”

Under a normal lease (futsū chintaishaku) for a building, tenants’ rights are heavily protected in the following ways:

(1) Statutory Renewal and Valid Grounds for Non-Renewal

In a normal lease for building, it is difficult for the lessor to terminate the lease, even when the lease term specified in the contract expires.

Unless either party notifies the other of their intention not to renew the lease within one year to six months before the expiration date, the lease contract is automatically renewed (statutory renewal).

In addition, the lessor cannot refuse renewal without a “valid ground“.
Factors considered when determining valid grounds include:
– The necessity of use of the building for both the lessor and lessee (i.e., this is the primary factor).
– The history of the lease.
– The circumstance of the use of the building.
– The current condition of the building.
– Compensation for relocation proposed by the lessor.

In practice, it is challenging for a lessor to successfully terminate a lease based on “valid grounds”.

(2) Request for Rent Adjustment

If the rent for a building becomes inappropriate due to factors such as an increase or decrease in taxes and other financial burdens, fluctuation of real-estate price or other economic fluctuations, or differences from market rent for similar properties in the neighborhood, either party may request a rent adjustment.

However, if the parties have agreed to a fixed rent for a certain period, the right to request an increase may not be exercised. However, the right to request a decrease might be exercised even in such case.

If the parties cannot reach an agreement through negotiation, they may proceed with mediation and litigation process to determine the appropriate rent.

(3) Restriction on Lease Termination Under the “Doctrine of Destruction of Trust Relationship”

Even if the lessee breaches the lease contract and a contractual termination clause is triggered, Japanese case law may prevent lease termination unless the breach is deemed material and trust is destroyed.

Courts consider factors such as (i) the severity of the breach, (ii) the degree of detriment suffered by the lessee if the lease is terminated, and (iii) the actions of both parties following the breach.

If the breach is not substantial enough to destroy the trust relationship between the parties, the lease may not be terminated.

2. Treatment Under a “Fixed-Term Lease”

Due to the strong tenant protections under normal leases, some building owners are hesitant to lease their properties. To address this issue, the Act was amended (effective in March 2000) to introduce fixed-term leases (teiki chintaishaku).

Under a fixed-term lease, the statutory renewal provision does not apply.

The lease expires at the end of the contract period and it cannot be renewed even though the parties agree to do so. However, the parties may enter into a new lease agreement to continue using the property after the expiration.

Under the fixed-term lease, the parties may also agree to eliminate the right to request rent adjustments (both upward and downward).

Requirements for Fixed-Term Leases:

– The lease agreement must be in writing.
– The lessor must provide with the lessee, in advance of executing the lease contract, a document explaining that the lease will not be renewed, and will end on the expiration date, and provide such explanation to the lessee.
– For leases with a term of one year or more, the lessor must notify the lessee of the lease expiration six months to one year before the expiration date.

Restriction on Lease Termination Under the Doctrine of Destruction of Trust Relationship

Please note that the legal principle restricting lease termination under the doctrine of destruction of trust relationship applies regardless of whether it is a normal lease or fixed-term leases.

Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.