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Can I Cancel My Tenant’s Lease Early?

Japan real estate financial planning Cancel a Lease

broker tokyo house keyAs a landlord, there might be a time when you want to, or have to, discontinue (i.e. not renew or cancel) a tenant’s lease. It could either be non-renewal or cancellation. For example, maybe real estate prices have surged recently. Perhaps you want to take advantage of the current market and sell the property at its peak value. It would be much easier to show it to prospective buyers if it were vacant. That they could move in as soon as the transaction was complete would be a selling point for home buyers. Another possibility is that you want to redevelop the property. Maybe the building standing there right now is an old five-storey building. You know you could make more money with a new ten-storey building. Or perhaps you’re done renting it out and want to live there now.

An unlikely possibility, although a possibility nonetheless, is that the tenant has been causing trouble. For example, he or she has not been paying on time or in full. In Japan, only 1.6% of tenants are more than two months late with their rent payments. Even so, there is still a possibility that this could happen. Maybe he or she has not taken good care of the unit, or is noisy and disturbs the neighbours. Generally, Japanese tenants follow the rules. However, it’s good to be prepared, just in case.

What are your rights, as a landlord, to discontinue or cancel a lease? What are the tenant’s rights?

The Laws Of Japan Tend To Be On The Side Of the Tenant

First, a little bit of historical background is in order. Throughout most of the first half of the 20th century, tenants’ rights were weak in Japan. However, during and after World War II, there was a scarcity of units due to Allied bombing. This gave landlords enormous power, for example, to demand large amounts of key money. Some landlords abused this power. They would take key money then kick a tenant out, rinse and repeat. Often, the tenants were financially unstable because their sole breadwinner was, or had been, a soldier. Therefore, around that time, the government passed new legislation. The new laws were very pro-tenant. The new laws made it almost impossible for a landlord to unilaterally cancel a lease. They also protected a renter’s right to continue leasing the same unit.

It’s not just historical reasons. Moving costs the tenant lots of money. He/She’ll probably have to pay for a moving service, an expensive cleaning fee, a real estate agent’s fee, key money, a deposit which he/she might not get back, etc. Therefore, a law protects renters. It is “The Act On Land And Building Leases”.

The Act On Land And Building Leases Which Regulates When A Landlord May Non-Renew Or Cancel A Lease

“Article 27 (1) In cases where the building lessor has submitted a request for termination of the lease, the building lease shall be terminated by reason of the passage of six months from the day the request for termination was made.”

What This Means For Discontinuing (Not Renewing) A Lease Contract

This legalese passage means the landlord has to give six months’ notice when deciding not to renew. However, there is more beyond Article 27 (1). If it is a Regular Lease Agreement (the majority are), then there must be a justifiable reason. This is in addition to the six months’ notice. Without a justifiable reason, he/she must give notice at least six (preferably 12) months before the lease expires. The tenant can stay until the last day of the lease. If the lease has no expiration date, then six months’ notice and a justifiable reason are requirements.

Some landlords and tenants sign a Fixed-Term Contract (定期借家契約, teiki shakuya keiyaku) instead of a Regular Lease Agreement. It’s “定借”/”teishaku” for short. Unlike a Regular Lease Agreement, a Fixed-Term Contract does not require a justifiable reason. The landlord just has to let the renter know his/her intention not to renew 6~12 months beforehand.

Note that the 6~12 months starts at the time of notification. It cannot be retroactive. If the landlord says he forgot to notify the tenant, this will not stand up in a court of law.

This seems much more advantageous to the landlord, so why would a landlord ever draw up a Regular Lease Agreement? The answer is that it is much easier to find tenants willing to sign a Regular Lease Agreement. A Regular Lease Agreement commands higher average rent. Few tenants are willing to sign a Fixed-Term Contract, so rents are lower for them.

What Counts As A Justifiable Reason (E.g. To Cancel Or Not Renew A Lease)?

Basically, there are several justifiable reasons:housekey reit japan

  1. The landlord has an urgent, unavoidable need to live there. For example, an earthquake destroyed the landlord’s house. Note that claiming #1 is impossible for overseas investors; it only applies to those who live in Japan.
  2. The tenant has not met his or her financial obligations. For example, rent or other fees such as key money, the renewal fee, etc. were late or unpaid.
  3. The property is in bad condition. Either the renter has damaged it, or it is in danger for a reason beyond his/her control.
  4. The landlord has attempted to offer compensation. Note that this, on its own, is not a justifiable reason. However, in court, it works in combination with #1, #2, or #3 to strengthen the landlord’s case. There is no prescribed amount.
  5. The tenant has used the real estate for criminal activities.

How To Cancel A Lease

If you have a justifiable reason featured in the above list, it might be possible to cancel a lease. However, it may require going to court, and drag on for a long time.

It’s much easier just to pay your tenant off. Offer him or her a substantial amount of money to leave. It’s easy for a tenant to leave and it’s case closed.

Be Careful Not To Run Afoul Of The Law

Be careful about putting clauses in the contract such as “The landlord may cancel the lease at any time.” Such clauses are illegal and will not stand up in court. Remember, in Japan, the law often trumps the contract.

It is also illegal to enter the tenant’s leased property without permission. Doing so is a crime.

Any of these things can become ammunition for the renter to use if it goes to court. Tread carefully.

Owner-Changes And Sub-Leases

It is possible to sell a property with the tenant still inside! This is called “owner-change.” There may be no need to cancel the lease.

If using a subleasing company, one can cancel the contract with the subleasing company. However, this does not affect the tenancy rights of the renter. The renter still has the right to continue to live there. From his or her point of view, it doesn’t matter who the lessor is, you or the subleasing company. The law agrees.

Summary

To recap:

  • Tenants in Japan have strong rights protected by law.
  • It is very difficult to cancel a lease unilaterally.
  • It is much easier to wait until the end of the lease (especially if it is a Fixed-Term Contract).
  • Non-renewal: Without going through court, the minimum amount of notice the renter needs is 6~12 months.
  • If it’s a “Regular Lease Agreement,” you also need a justifiable reason. None is necessary for a Fixed-Term Contract.
  • Fixed-Term Contracts usually command lower rent.
  • To cancel a lease early: A justifiable reason, a notice period, a lengthy court process
  • It might be easier just to pay the tenant off if you want him/her to leave early.

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