How can I request rent increase to the tenant in Japan?
I bought a building for business lease in Japan. My agent said that the rate of rent has been risen in the environs of that building; however, the rent has not been changed for many years. How can I request increase in rent to the tenant of the building?
You can request increase in rent by written notice and negotiate with the tenant. If you could not agree with the tenant on rent increase by negotiation, you can take legal procedures in the court. It is desirable to consult a real estate appraiser and estimate reasonable rent before starting legal procedures.
The rate of rent changes by various reasons; e.g., change of economic circumstances. Therefore, it is common for a lender and a lessee to discuss reasonable rent and change it on a regular basis. However, in some cases, a lender and a tenant does not discuss rent change for a long time and the rent becomes far apart from the rate. If the rent becomes unreasonably low for such reasons, the lender may request increase in the amount of the rent to the tenant (Act on Land and Building Leases Article 32 (1)).
If the lender intends to increase the rent, the lender should send a written notice to the tenant. In the notice, the amount of the increased rent and the timing of change should be contained. The timing of renewing the contract may be a good opportunity to change the rent. The lender should send the notice by special postal delivery called content-certified mail with delivery certificate so that Japan Post will prove the content and the delivery date of the notice.
After sending written notice, the lender should negotiate with the tenant on rent increase. It is desirable if they can reach an agreement by negotiation; they can save costs and time for legal procedure. Even if the increased rent is not just the same amount as the lender wishes, it may be reasonable for the lender to settle by negotiation considering costs of legal procedure and probability of wining the case. However, negotiation never settles without consent of both; both parties have unconditional veto at the stage of negotiation. If the lender could not achieve rent increase, the lender should decide whether to take legal action or not.
If the lender takes legal action, the lender should first file a petition for conciliation with a summary court (Civil Conciliation Act Article 24-2 (1)). In the conciliation process, a judge and two conciliation commissioners mediate between the lender and the tenant. One of the conciliation commissioners is often a real estate appraiser. When an agreement is reached between the parties during conciliation, a record of the conciliation will have the same effect as a judicial settlement (Civil Conciliation Act Article 16). If the parties could not reach agreement, the conciliation committee will decide the conciliation to be unsuccessful and close the case (Civil Conciliation Act Article 14). If a case is closed, the lender may file an action regarding rent increase.
If the lender decides to file a lawsuit, the lender should submit a complaint to a district court. Although the lender should submit written opinion by real estate appraiser as an evidence of its claim, it is common that the court orders other real estate appraiser registered to the court to make another written opinion. A judge will render judgement after several court dates. If the lender is not satisfied with the judgement, the lender may appeal to a high court. The lender may also appeal to the Supreme Court against the judgement by the high court; however, grounds for final appeal is strictly restricted and such appeal is rarely accepted. Regardless of the phase of litigation, resolution by settlement is available if both parties reach an agreement.
Costs of the legal procedure seeking rent increase mainly consist of fee of a real estate appraiser, fee of a lawyer and fee of courts. Regarding fee of a real estate appraiser, the lender would have to pay twice if the case does not reach settlement before lawsuit; fee of a real estate appraiser whom the lender consults before starting negotiation and that of a real estate appraiser that a district court assigns. Winning the case is not guaranteed, as it can be said to any lawsuit. In addition, even if the lender wins the case, costs may exceed the benefit of increasing the rent if the amount of rent increase is not enough. Therefore, the lender should consult experts like real estate appraiser and make business judgement carefully.
*1: rent of new lease and continued lease
A rent which is decided when you newly lend your property is different from a rent of continued lease. Generally speaking, rate of the latter changes more slowly than that of the former. Even if the rent of new lease is increasing, the rent of continued lease does not necessarily increase at the same rate.
*2: most recent timing of rent agreement
It is free for a lender and a lessee to agree on a rent which is far apart from the rate of rent. If such agreement is made, the agreed rent becomes the standard of future rent of the property. Therefore, even if the rent is apart from rate, the lender cannot request rent increase failing change of rate after the most recent timing of rent agreement.
*3: agreement not to increase the rent
A lender and a tenant can agree not to increase the rent for some period. If there are special provisions exist to the effect that building rent shall not be increased for a fixed period, those provisions shall apply and the lender cannot request rent increase (Act on Land and Building Leases, provisory clause of Article 32 (1)).
*Act on Land and Building Leases
(Right to Request Increase or Decrease in Rent)
Article 32: (1) When the building rent becomes unreasonable, as a result of the increase or decrease in tax and other burden relating to the land or the buildings, as a result of the rise or fall of land or building prices or fluctuations in other economic circumstances, or in comparison to the rents on similar buildings in the vicinity, the parties may, notwithstanding the contract conditions, request future increases or decreases in the amount of the building rent; provided, however, when special provisions exist to the effect that building rent shall not be increased for a fixed period, those provisions shall apply.
(2) If no agreement may be reached between the parties regarding the increase in the amount of the building rent, until the judicial decision on establishing the increased amount as valid becomes final and binding, it shall be sufficient for the party which has received that request to pay the building rent in an amount that is deemed to be reasonable; provided, however, that when said judicial decision becomes final and binding, if the amount that has already been paid is insufficient, the amount of the shortfall shall be paid with the addition of interest on late payments at the rate of ten percent per year.
(3) If no agreement may be reached between the parties regarding the decrease in the amount of the building rent, until the judicial decision on establishing the decreased amount as valid becomes final and binding, it shall be sufficient for the party which has received that request to request payment of the building rent in an amount that is deemed to be reasonable; provided, however, that when said judicial decision becomes final and binding, if the amount that has already been paid exceeds the building rent amount found to be valid, the amount of the excess shall be returned with the addition of interest at the rate of ten percent per year from the time the payment was received.
*Civil Conciliation Act
(Conciliation Prior to Litigation in Cases in which an Increase or Decrease in Rent is Claimed)
Article 24-2: (1) A person who intends to file an action to claim an increase or decrease in the amount of rent for land as set forth in Article 11 of the Act on Land and Building Leases (Act No. 90 of 1991) or to claim an increase or decrease in the amount of rent for a building as set forth in Article 32 of said Act shall first file a petition for conciliation.
Article 14 If there is no likelihood of the parties reaching any agreement or if the conciliation committee finds that the agreement reached is inappropriate, and the court does not issue an order set forth in Article 17, the conciliation committee may decide the conciliation to be unsuccessful and close the case.
(Successful Conciliation and Effect Thereof)
Article 16 When an agreement is reached between the parties during conciliation and it is entered in a record, the conciliation is deemed successful, and such entry shall have the same effect as a judicial settlement.