Under Japanese property law, there are two basic forms of commercial leases: (i) an ordinary lease, and (ii) a fixed-term lease.
Ordinary leases and fixed-term leases are distinguished by the parties' intentions regarding termination at the end of the lease term. In a fixed-term lease the parties terminate the lease at the end of the lease term, however in the case of an ordinary lease the lessee may continue the lease even after the end of the lease term. Under an ordinary lease, the lessee is provided more protection as the lessor may not demand that the lessee vacate the premises at the conclusion of the lease term unless specific ‘due reasons’ exist. Such due reasons are interpreted strictly by the court, and are discussed in further detail in the section regarding ‘Security of tenure’ below.
Last modified 22 Mar 2024
The lease term of a commercial lease depends on the nature and type of the lease.
The terms for office or retail leases typically range from two to five years. In most ordinary leases, we often see an automatic renewal clause for an additional term of the same or shorter length.
Last modified 22 Mar 2024
There are no specific regulations applicable to particular classes of leases. The Civil Code and the Act on Land and Building Leases (ALBL) are the main laws governing leases in Japan. These laws provide several mandatory provisions which the parties cannot contract away, such as:
For further details, please refer to the ‘Security of tenure’, ‘Early termination’ and ‘Changes in rent’ sections.
Last modified 22 Mar 2024
In principle, the lessee possesses the right to continue occupation of the premises after the expiry of the lease, provided that no ‘due reasons’ exist for the lessor to deny a renewal term for an ordinary lease. Where ‘due reasons’ exist for non-renewal, the lessor must provide the lessee with six months prior notice of non-renewal. When considering the existence and validity of any ‘due reasons’ for non-renewal, courts typically consider, including but not limited to, the following factors:
Where the lessee continues occupation of the premises after the expiry of the lease, the terms and conditions of the lease such as rent are the same as those under the original lease except that it is deemed a lease without a fixed term. In order for the lessee to terminate the lease, three months’ prior notice to the lessor is required. In order for the lessor to terminate the lease, six months’ prior notice to the lessee and ‘due reasons’ are required.
In the case of a fixed-term lease, the lessee does not possess the right to continue occupation of the premises after the expiry of the lease without the lessor's consent. The lessor is required (i) to explain in writing to the lessee the nature of the fixed-term lease prior to the commencement of the lease and (ii) to send non-renewal notice to the lessee six to twelve months prior to the expiry date of the lease term.
Last modified 22 Mar 2024
In order to ensure that a lessee leaves on the date originally agreed, a lessor must execute a fixed-term lease (as opposed to an ordinary lease) and fulfill the obligationsenumerated in the ‘Security of tenure’ section above concerning termination of a fixed-term lease. The parties often agree that should the lessee not vacate the premises at the end of the fixed lease term, the lessee shall pay to the lessor damages equivalent to twice the original rent amount.
Last modified 22 Mar 2024
If a lease does not specify the lessor's right to early termination without cause, the lessor may not terminate the lease early. Where the lease does contain such a clause, ‘due reasons’ must also be provided by the lessor in order to terminate the lease early. ‘Due reasons’ for purposes of early termination are difficult to establish. In addition, six months' prior notice of the early termination must be provided to the lessee by the lessor.
Where there exists cause for the lessor's early termination of the lease (eg due to the lessee's breach of the lease), the lessor may only terminate the lease early if the ‘trust relationship’ between the lessor and the lessee has been destroyed as a result of the cause. The destruction of the trust relationship can be classified as a ‘due reason’ for termination.
Last modified 22 Mar 2024
The national and local governments in Japan possess the right to acquire property (including, without limitation, properties under leasehold) for certain public projects on a compulsory basis pursuant to the Land Expropriation Act and/or other relevant acts. The lessor and the lessee are entitled to receive certain compensation for the expropriation. The process normally takes one to three years.
Under the Act on the Review and Regulation of the Use of Real Estate Surrounding Important Facilities and on Remote Territorial Islands, the authority may designate certain areas surrounding important facilities or on remote islands that need to be monitored for national security purposes as ‘Monitored Areas’ (chushi-kuiki) or ‘Special Monitored Areas’ (tokubetsu-chushi-kuiki). If leased premises are in such areas, the authority may recommend that the user (including the lessor and lessee) of the premises take necessary measures to prevent the premises from being used in a way that interferes with the functions of important facilities or remote territorial islands. If the user fails to comply with the recommendation without any justifiable reason, the authority may order that the user take such necessary measures (including termination of the lease). The user affected by the recommendation or order is entitled to receive certain compensation.
Last modified 22 Mar 2024
The parties are free to agree on the form of financial security to protect against a failure by the lessee to meet its obligations. The lessor usually requires from the lessee a security deposit (shikikin) in the amount of several months' rent and sometimes also requires a guaranty of the lessee's obligations by a third party, such as the parent company.
Last modified 22 Mar 2024
Restrictions can be imposed by the lessor on how the lessee makes use of the leased property. The underlying purpose for use of the premises is usually agreed between the lessor and the lessee and evidenced in the lease agreement. The lessee may not use the premises for any non-agreed purpose (eg if the agreed use purpose is as a ‘residence’, the lessee is prohibited from using the premises as an office or for other commercial purposes). In a commercial lease, it is often agreed that the lessee may only use the premises during the specified hours and that the lessee shall not cause nuisance to other tenants or the neighborhood, etc.
Under the Act on the Review and Regulation of the Use of Real Estate Surrounding Important Facilities and on Remote Territorial Islands, the authority may designate certain areas surrounding important facilities or on remote islands that need to be monitored for national security purposes as ‘Monitored Areas’ (chushi-kuiki) or ‘Special Monitored Areas’ (tokubetsu-chushi-kuiki). If leased premises are in such areas, the authority may impose restrictions on use of the premises to prevent them from being used in a way that interferes with the functions of important facilities or remote islands.
Last modified 22 Mar 2024
The lessee typically agrees not to alter or improve the premises without the lessor's consent except in the case of minor alterations or improvements, such as changing the wallpaper or partitioning the premises. In addition, many lessors require the lessee to use the lessor's contractor for alterations or improvements even where the lessor consents to such alterations or improvements. At the end of the lease term, the lessee is obligated to return the premises to the lessor in their original condition at its own expense upon expiration of the lease term.
Last modified 22 Mar 2024
Under Japanese law, a lessee is not entitled to transfer the lease or sublease the premises to a third party without the lessor's consent.
If the lessee wishes to transfer ownership of its own building located on a leased parcel of land but the lessor does not consent to the transfer of the lease or sublease of the land without ‘due reason’, the lessee may seek the court's permission to transfer ownership of its own building in lieu of the land parcel lessor's consent.
Last modified 22 Mar 2024
A fixed, variable (eg rent which is based on the sales revenue of the leased premises), or mixed rent amount may be agreed to by the parties in a lease agreement.
Under the ALBL, both a lessor and a lessee possess the right to increase or decrease the rent amount if the current rent has become ‘unreasonable’. In the case of an ordinary lease, the parties can contract away the lessor's right to an increase in rent, but cannot contract away the lessee's right to decrease the rent. In the case of a fixed-term lease, however, both of these rights may be contracted away.
Last modified 22 Mar 2024
Under the ALBL, if the current rent amount has become ‘unreasonable’ and the parties cannot reach an agreement regarding a new amount, the parties must first apply for mediation to resolve the dispute before turning to the courts for resolution.
Should the court become involved, it will take several factors into account when determining a new ‘reasonable’ rent amount:
Last modified 22 Mar 2024
Commercial leases of buildings are subject to Japanese consumption tax at a rate of 10%.
Residential leases and land leases (with the exception of parking leases) are exempt from Japanese consumption tax.
Last modified 22 Mar 2024
In most cases, a lessee is obliged to pay a security deposit when executing a new lease. The security deposit amount differs depending on the location of the premises and on the nature and type of lease involved (eg residential, office, restaurant or hotel). In the case of a residential lease, the amount is often equivalent to two to three months' rent.
For a residential lease, the lessee is sometimes required to pay the lessor key money in an amount often equivalent to one to two months' rent. Key money differs from the security deposit in that key money will not be returned to the lessee upon expiration of the lease.
Lessees are often required to purchase home insurance to protect their own personal property in the event of fire damage and/or to protect against claims by third parties.
In the case of a commercial building lease, stamp duty is not payable. However, in the case of a land lease, stamp duty is payable and the amount levied depends on the amount of the key money paid.
Last modified 22 Mar 2024
The lessor pays for the maintenance and repair of common areas used by several lessees. The amount of such charges is usually included in the charged rent or billed separately to the lessees as communal or management fees based on the areas maintained.
Last modified 22 Mar 2024
The lessor is responsible for the maintenance and repair of the building structure. Regarding maintenance and repair of ordinary wear and tear of the premises, the terms of the lease agreement will dictate responsibility. In many commercial leases, the lessees are responsible for such maintenance and repair.
Last modified 22 Mar 2024
Generally, lessees are responsible for their own utilities and telecommunications services and respective payments to such service providers.
The burden of utilities costs depends on the nature of the building and the lease in question. In some cases, a lessor enters into contracts with suppliers for utilities but the actual costs are then transferred to the lessees. In other cases, lessees enter into utilities contracts directly with suppliers.
Last modified 22 Mar 2024
Usually the lessor pays the cost of insuring the real estate, with coverage for fires and earthquakes typically included.
The lessee is often required to purchase supplemental home insurance to protect their personal property from fire damage and to protect against third party claims.
Last modified 22 Mar 2024
Is VAT charged on rent?
Commercial leases of buildings are subject to Japanese consumption tax at a rate of 10%.
Residential leases and land leases (with the exception of parking leases) are exempt from Japanese consumption tax.
Last modified 22 Mar 2024