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Once settled in, chances are you’ll have to pay to stay

In Japan, property rental renewal fees can cost around one month's rent per year. The question is: What is it tenants are paying for?

by Philip Brasor and Masako Tsubuku

In 1946, Japan was in ruins. The housing shortage was severe and inflation was high, so the government issued a directive to freeze rental fees. To make up for the perceived loss of income, property owners came up with supplemental fees — renewal fees, called koshinryō, and “gift money” or reikin, a mandatory gratuity that new renters paid to landlords for the privilege of moving in.

Though the purpose of these fees may have been obvious at the time, they became arbitrary once owners were allowed to set rents freely again. Yet many landlords continued to demand them simply because they could, and they still can.

On July 15, the Supreme Court of Japan ruled that it is legal for property owners to demand supplemental fees when tenants renew their rental agreements. The ruling was made in conjunction with three lawsuits that tenants had brought against their landlords claiming that koshinryō should be considered invalid in accordance with the Consumer Contracts Law. In all three cases the tenants had paid the renewal fees and were suing to get the money back. The landlords argued that the renewal fees were stipulated in the rental agreements the tenants signed.

The Osaka High Court previously agreed with the plaintiffs in two of the cases, ruling that the renewal fees did violate the Consumer Contract Law, which states that a contract can be voided if its conditions are deemed inherently disadvantageous to the consumer. The Supreme Court, however, found that a renewal fee is reasonable “unless it is too high in comparison with rent or rental agreement periods.” The consumers in these cases, it said, did not suffer any damage.

Those consumers obviously felt otherwise. In most instances when koshinryō is charged, the tenant pays the equivalent of one month’s rent to renew a two-year contract. In two of the disputed cases, the plantiffs paid fees equivalent to at least two months rent for a one-year contract. The Consumers Organization of Japan (COJ) commented afterward that the court’s decision did not address the tenants’ complaints, only the landlords’ argument. The COJ sees renewal fees as a bait-and-switch scheme: The landlord sets the monthly rent low in order to attract a tenant, and then makes up for it by demanding a renewal fee later.

The question the Supreme Court didn’t answer satisfactorily is: What is the purpose of a renewal fee? One of the landlords’ arguments is that it is a “business custom” that has been used for more than 40 years.

But this seems a weak argument when one realizes that koshinryō is a regional custom, applied mainly in the Kanto region. In the Tohoku region it’s virtually non-existent. Even in Kansai, which is where the Supreme Court lawsuits originated, the practice is limited to Kyoto.

That isn’t to say landlords in the rest of Kansai don’t charge supplemental fees. In Osaka, it’s customary for tenants to pay a large security deposit from which the landlord takes a fixed, nonrefundable chunk called shikibiki. Then, when the tenant moves out, the landlord withholds more of the deposit, usually to compensate for normal wear-and-tear on the rental unit. Yet in principle, the landlord is liable for normal wear-and-tear, and security deposits are only supposed to be withheld when the tenant fails to pay rent on time.

However, the law is vague on this point and many landlords routinely withhold some or all of the deposit (shikikin) for cleaning and repairs. Rental agreements commonly include a term (genjō kaifuku), which says that tenants must leave the property in the exact same condition as it was when they moved in. The Ministry of Land, Infrastructure, Transport and Tourism, in fact, will release a new set of guidelines this month so that landlords better understand what kind of wear-and-tear they can charge tenants for.

As these guidelines and the Supreme Court ruling suggest, renters who object to supplemental fees cannot count on the authorities for support. Those who have had success in fighting these fees usually received assistance from nonprofit and nongovernmental organizations. The Asahi Shimbun recently reported the case of a 60-year-old man in Chiba Prefecture who refused to pay his renewal fee (as did his guarantor) and took his complaint to the prefectural tenants union, which negotiated with the landlord. The union cited the Rental Property Law, which states that a rental agreement is automatically renewed if the tenant wishes to stay there and that a tenant cannot be evicted without reason. Eventually, the landlord waived the fee.

Many industry people think that the Supreme Court decision will embolden landlords, and the realtors who serve them, to charge more koshinryō — or that it will encourage those who were not charging koshinryō to get on the bandwagon.

Landlords, however, are on the defensive. Though they claimed victory, it’s a tenants’ market. In 2008, the Ministry for Internal Affairs reported the nationwide vacancy rate for rental properties at 23 percent (as reference, Tokyo’s was 16 percent) and rising. Rental management companies increasingly provide greater transparency in rental agreements and fewer landlords are asking for gift money so as to attract potential tenants. Some realtors now advertise properties with the “adjusted” monthly rent, meaning the monthly rent plus the added fees pro-rated on a monthly basis. It doesn’t make those fees any less arbitrary, but at least it makes the transaction more open.

What to check before signing a contract

• Be sure to ask real-estate agents to show you properties that don’t require gift money or renewal fees.

• For those that do require supplemental fees, ask if they are negotiable.

• Make sure the terms regarding fees are explained clearly.

• To make comparisons easier, ask realtors to quote rents for properties with supplemental fees in terms of minashi yachin (monthly rent adjusted for fees).

• If you object to the renewal fee after you enter into the agreement, consult a local tenants union (in Tokyo, this would be the Tokyo Shakuchi Shakuyanin Kumiai Rengokai). Once you have paid the renewal fee, you will have to go to court to get it back.

• Even if the rental agreement doesn’t clearly state that the security deposit will be used for cleaning and repairs, take photographs of any damage that already exists when you move in, and have the images dated.

• Rent from UR (Urban Renaissance agency), Japan’s semi-public housing corporation, which does not impose gift money and renewal fees. UR also does not require guarantors/co-signers.

Some realtors will have UR properties on their books. For more information, visit www.ur-net.go.jp (Japanese only).

UR services will also be reviewed in detail in a future Home Truths column.