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How Do Subleases Work?

Japan real estate sublease

A “sublease” is a situation in which the tenant who is leasing from the landlord signs a rental contract for the same property with a third party- another tenant. This third party, who will live or do business in the unit, is called the subtenant. In this situation, the original tenant now functions as more or less a landlord to the subtenant. Here is a table that explains the legal terms:

Japan real estate sublease lessor lessee sublessor sublessee

(note that, in the above explanation and table, words for people [“landlord,” “person,” etc.] are used for the sake of simplicity, but these entities could be organizations such as businesses, as well)

Japan real estate sublease lease let

Sublease vs. Sublet

One wonders: “What is the difference between a sublease and sublet? Are they synonymous?” In fact, this is a hot topic of debate on message boards across the Internet, in which posters call each other discourteous names and bring out their thick legal dictionaries (or so they claim) to support their arguments. However, the general consensus seems to be that:

  • Lease” means a formal rental contract for a fixed term
  • Let” has a broader meaning; it simply means “rent,” and may include “lease,” but is not limited to leases. It could be a more informal arrangement (no contract, pay-by-the-day, etc.).
    Therefore, just as a tuna is a type of fish, but not all fish are tunas, a sublease is a type of sublet, but not all sublets are subleases.

 

Sublets That Are Not Subleases

A few examples of sublets that are not subleases include informal, day-by-day or month-by-month arrangements, often without a contract such as renting to a friend or roommate, engaging in minpaku (民泊, “private residence temporarily taking lodgers”, e.g. Airbnb), etc. In all of these arrangements, there is no traditional lease contract.

A Note About Airbnb and Other Minpaku Services

Japan real estate subleaseAirbnb and other minpaku services are a type of short-term sublet, in which lodgers, typically foreign tourists, can stay in your private residence temporarily. The most well-known service is Airbnb. The lodgers save on expensive hotel fees (because minpaku is usually cheaper for them) and perhaps get an extra personal touch, and the owner receives income that is often much higher than if you rented the room out by the month.

However, before you start thinking about starting an Airbnb business, remember that sublets are very uncommon in Japan, and Japanese tend to value a quiet, harmonious neighborhood, and sublets, especially of the minpaku variety, are not well-received. In the late 2010s, many condominium complexes have banned condominium owners from taking lodgers through such a service. However, the regulation has not stopped there. Home owners as well as hotels who face competition from minpaku services (with lower operating costs and fewer licensing requirements than hotels) have lobbied extensively, and now, many local governments have also either prohibited minpaku outright, or strictly regulated and licensed it (for example, setting a limit on the number of days an Airbnb can take guests).

 

Therefore, if you are planning to invest in property in the hopes of turning it into a minpaku, be very careful to research the local laws and condo association rules. The vast majority of them prohibit minpaku, and even if the condo association in your prospective building does not, it might be just a matter of time before it does. You could buy the entire building and then not be beholden to any kind of association, but the same thing could happen in your municipality, with the force of law behind the ban rather than just an angry condo association.

How Subleases Work in Japan

Legality and Commonness

Japan real estate sublease house checklist
Subleases are legal in Japan, but instances in which an individual tenant leases to a subtenant without the awareness and permission of the owner are uncommon. Approximately 99% of rental contracts prohibit them unless the tenant consults the landlord and gets permission. However, subleases offered by a Japanese real estate agency  (which has leased the property from the owner and is officially “the tenant”) for the purpose of guaranteeing investment returns are more common.

 

In the case of an individual subtenants, even if the landlord grants permission to the tenant, unlike in the US, in which the tenant can rent out the space freely and receive money from the subtenants, in Japan, this is rare. Generally, if the landlord/landlady grants permission to the tenant to have a third party move in, the landlord/landlady wants to sign a lease contract directly with that person. There are not usually multiple layers like in certain Western countries, and violating a rental contract that states no subleases can result in calculation of the contract.

However, Agencies That Sublease Are Quite Common

Leasing a unit or units to a company, and then that company subleasing to subtenants, is very common. This is especially true in Tokyo, where laws about whether or not one can sublease are more liberal. This can be advantageous for both the owner and the subleasing company because it reduces risk and volatility for the investor, and generates profits for the subleasing company.

What is in it for the subleasing company?

Pros for the subleasing company/agent:

  • Profit: The subleasing company is essentially paying the owner slightly less for the unit per month than is possible to receive in the rental market. They can rent it out at its full market rate and keep the difference if the tenancy rate is what they had hoped for. They might not profit on every single property, but over hundreds or thousands of properties, they will.

Cons for the subleasing company/agent:

  • There might be a vacancy. A tenant might move out and another one might not come along for a while. Yet they would still have to pay the owner.

What is in it for the landlord?

Pros for the landlord:

  • Eliminate vacancy risk. If renting out to tenants directly, a landlord has to worry about periods of vacancy. The steady rent check from the subleasing company eliminates this risk and these worries.
  • Guaranteed income

Cons for the landlord:

  • Concessions against the market rent for that property
    He realises that, in the long run, he will probably make slightly less than if he had rented out directly to tenants at the full market rate.

Imagine that George decides to invest in Japanese real estate. George can rent the unit out for ¥300,000 a month, but he risks having it be vacant and making ¥0 in the vacant month(s).

Japan real estate subleasing company real estate agentGeorge, who is a retiree, is a conservative, risk-averse investor who does not like volatility, so instead of finding tenants using a real estate agency or a property manager, and risk having the unit be vacant between tenants, perhaps for an extended period of time, George instead decides to rent his unit to a subleasing company. George contacts the fictitious company Sakura Subleasing, Inc., and in no time, they have signed a contract and Sakura is renting the unit from George for a steady passive monthly income, maybe ¥250,000. Maybe the property sits vacant for a month, but that is not George’s problem. George continues to collect his ¥250,000 checks. Maybe the property is tenanted continuously for the next 20 years, in which case, Sakura comes out ahead, but in a way, George still wins because he gets ¥60 million in rental income with zero stress and worry about his financial future.

Conclusion

Japan real estate man with laptop conclusionThe type of situation commonly found in many cities in the US, as well as in other Western countries, in which an individual renter has virtually unlimited rights to sublease or sublet is not true of Japan. If you want to make passive income from real estate, it is much better to own than to rent, unless you have one of the rare landlords or landladies who will allow it. However, subleasing is legal, and very fortunately so, for you can entrust your property to a subleasing company, who will essentially lease the property from you and deal with the tenants as subtenants, generating a turnkey income for you and sparing you the stress or risk/volatility of wondering whether or not the unit is tenanted. You can sit on a beach in Puerto Rico and sip a Piña Colada while your turnkey income flows in.

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