Sublease lawsuits on the rise

Disputes on sublease agreements for rental properties are on the increase across Japan.

A sublease or rental guarantee agreement is where a company, often a real estate agency, leases an apartment building or block of flats from the property owner to sublease out to tenants. The owner is guaranteed a fixed rent each month and does not have to worry about any vacancies, although the rent they receive will be lower than market rates. These sublease agreements are often long-term with periods ranging from 10 to 30 years. While landlords may be promised secure and stable rental income, the contracts often contain clauses allowing the sublessor to reduce the rent or even to cancel the agreement.

Another tactic employed by some sublease companies is to require property owners to pay for expensive building repairs and maintenance as a condition of the sublease agreement. Repairs and renovations can sometimes be unnecessary and above market rates, and property owners may be forced to only use a contractor affiliated with the sublessor. For example, requiring exterior repainting to be done every 5 years when it is normally only needed every 15 years or so.

Landowners are often persuaded to build apartment blocks by real estate companies and home builders offering attractive rental guarantees only to find the rents reduced or the agreements cancelled several years later, leaving landlords with heavy loans. In some cases, these apartment buildings have been built in areas with almost no rental demand, causing vacancy rates to climb to over 30% in some areas. In Kanagawa Prefecture the vacancy rate on wood-frame or light weight steel-frame apartment blocks is as high as 37%.

To help counter a growing number of consumer complaints, in September 2016 the Ministry of Land, Infrastructure, Transport and Tourism made it mandatory for sublease companies to explain the risk of rent potentially decreasing in the future to property owners at the time of signing a sublease agreement.

On February 22, an 80 year old landlord in Aichi Prefecture filed a lawsuit seeking 810,000 Yen in back rent from LeoPalace21 Corporation after the company reduced the rent mid-contract. According to the complaint, the property owner entered into a long-term sublease agreement with LeoPalace in 2005. LeoPalace rented the block of 20 apartments for 777,800 Yen per month and explained to the owner that they would not reduce the rent for the 30 year term of the lease. The contract, however, stated that the rent for the first 10 years would not change. In 2011, six years after the sublease agreement began, LeoPalace requested a 100,000 reduction in the rent citing operating difficulties and the owner agreed. When operating conditions improved, the owner sought for the rent to be increased back to its original level but the sublessor objected to the increase.

According to the Leo Palace Owners Association of Nagoya City, over 100 members and property owners are considering taking similar legal action.

The Toyo Keizai Shimbun, February 22, 2017.
The Asahi Shimbun, February 22, 2017.

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