In June 2020, the National Diet of Japan promulgated a law that regulates operators of residential sub-leasing businesses and residential property management businesses through newly established rules. This new law is intended to address certain problematic practices that exist in Japan’s residential leasing market.
Background: Growth in disputes
In recent years, disputes between apartment owners and sub-leasing companies stemming from misunderstandings concerning their contractual arrangements and risks associated with residential leasing arrangements have increased and become a social problem in Japan. The typical scenario underlying these disputes involves a sub-leasing company convincing a landowner to construct a new apartment building (generally funded with a bank loan) with assurances that the sub-leasing company would lease the entire building on a long-term, fixed rent basis.
Through this arrangement, the landowner (i.e. the future owner of the apartment building) would expect to receive lease payments under its master lease agreement with the sub-leasing company and avoid the risks associated with leasing the apartment building’s units (which would be the sub-leasing company’s responsibility). However, problems arise when the sub-leasing company encounters difficulties in leasing the apartment building’s units, and consequently either requests a reduction in the lease fees payable under its master lease agreement with the owner of apartment building, or seeks to cancel the master lease agreement.
While a non-mandatory registration system for residential lease property managers was established by the government in December 2011, prior to the new law, there was no mandatory license or registration obligation for residential lease property managers in Japan.
A closer look at the new rules
The new law established rules focusing on two aspects of residential sub-leasing arrangements: sub-leasing activities and property management activities.
Regarding sub-leasing activities, the rules require all sub-leasing companies (i.e. master lessees under master lease agreements with apartment owners) to comply with a newly-created code of conduct. Under the code of conduct, sub-leasing companies must explain to apartment owners the important points of the master lease agreements and other relevant matters in advance of signing and provide the owners with stipulated categories of information in writing at the time of signing. This disclosure of information can provide owners with important information that they need to make informed decisions considering the relevant risks. Additionally, the code prohibits sub-leasing companies from making misleading advertisements and engaging in improper solicitations.
Regarding property management activities, under the rules, each ‘residential lease property manager’ (i.e. a person entrusted by the owner to perform comprehensive management of the owner’s residential property) is required to be registered in a compulsory official registration system operated by the Ministry of Land, Infrastructure, Transport and Tourism and must adhere to a code of conduct established under the rules. The new code of conduct for residential lease property managers includes obligations of explanation and delivery of documents similar to those for sub-licensing companies described above.
Confusion about the scope of the new rules
The new rules should help to address the social problem mentioned above; however, critics point out that the rules, when interpreted literally, are overly broad and this will result in confusion. Amendments to related ordinances and guidelines that were recently made public by the government and are to take effect on June 15 2021, provide new details of the registration system with additional official interpretations of the new rules, and this information will clarify the rules and resolve some of the confusion.
Interested parties should keep a watch out for changes to sub-leasing and property management practices resulting from implementation of the new rules.
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