Fixed-Term (定期借家契約) vs. Ordinary Lease Contract (普通借家契約) in Japan

In Japan, lessees and property owners commonly choose between two primary types of lease contracts: the Ordinary Lease Contract (普通借家契約) and the Fixed-Term Lease (定期借家契約). The two contract types differ significantly, particularly in their renewal terms, contractual requirements, and protection for tenants. This guide, based on information from Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT), explains these differences, offering insights for both lessees and landlords to make informed decisions.

Key Differences Between Ordinary and Fixed-Term Lease Contracts

1. Contract Formation

Ordinary Lease Contract: This lease agreement can be established either verbally or in writing. However, written contracts are preferred and widely used to ensure clarity and legal validity.

Fixed-Term Lease: Unlike the ordinary contract, a fixed-term lease must be in writing. Additionally, the contract requires a separate contract stating that it will terminate at the expiration date and will not be renewed.

2. Contract Period

Ordinary Lease Contract: These contracts typically span a period of 2 years. If a contract specifies a duration of less than one year, it is automatically considered an indefinite-term agreement under the Act on Land and Building Leases.

Fixed-Term Lease: There are no restrictions on the contract term. Thus, fixed-term agreements can span less than 1 year or extend as long as agreed upon by both lessor and lessee.

3. Renewal Terms

Ordinary Lease Contract: Unless the property owner has valid reasons to terminate the contract, the agreement automatically renews at the end of each term.

Fixed-Term Lease: These contracts end definitively at the specified expiration date, with no automatic renewal rights for the tenant. Renewal is only possible if the agreement explicitly allows for a re-contracting option.

Important Characteristics of Each Agreement Type

1. Rent Adjustment Provisions

Ordinary Lease Contract: Both the tenant and the landlord have the right to request rent adjustments, even if the contract does not explicitly provide for this. Rent adjustments, however, must be based on reasonable grounds, such as significant economic changes.

Fixed-Term Lease: Rent adjustments are typically outlined within the contract. Therefore, unless a clause allows for it, rent remains fixed throughout the contract period.

2. Mid-term Cancellation Policies

Fixed-Term Leases for Residential Properties (under 200m²): Tenants have the right to terminate the contract with 1 month's notice if they face unavoidable circumstances, such as a job transfer or need for medical treatment.

Other Fixed-Term Contracts: Any cancellation terms must be clearly specified in the agreement. If no clause is included, the lessee must fulfill the entire term.

Ordinary Lease Contract: Tenants usually can terminate mid-term with one month's rent notice (as specified by the contract), providing flexibility for tenants. However, the property owner generally does not have similar mid-term cancellation rights unless specifically allowed by the contract.

3. Contract Termination Notice Requirements

For Fixed-Term Leases, landlords must give notice of termination between one year and six months before the expiration date. If this notice is not properly given, tenants retain the right to continue residing under the same terms for an additional six months after receiving notice.

Special Considerations and Options

1. Contract Conversion Limitations

• Residential Contracts Pre-March 2000: Existing residential leases signed before March 2000 cannot be converted from ordinary to fixed-term agreements, preserving tenant rights under older agreements.
• Commercial Property Contracts: Conversion from ordinary to fixed-term is allowed regardless of the original contract's start date.

2. Re-contracting Options for Fixed-Term Agreements

Fixed-term agreements offer three re-contracting arrangements:

• No Re-contract Type: The contract cannot be renewed under any circumstances.
• Undetermined Re-contract Type: Renewal depends on negotiation between the tenant and property owner at the end of the term.
• Re-contract Type: The lease is generally renewed unless there is a valid reason for non-renewal, such as a breach of contract terms by the tenant.

Practical Implications of Choosing a Fixed-Term vs. Ordinary Lease Contract

1. Cost Considerations

Fixed-term leases often have lower rental rates than ordinary contracts, as property owners may offer a discount due to the lack of renewal rights. Additionally, re-contracting fees typically involve fire insurance and real estate agent fees rather than traditional renewal fees found in ordinary agreements. Tenants may also be required to pay key money (礼金) as is common practice in Japan.

2. Legal Protection for Tenants

Fixed-term lease agreements require more formalized documentation to ensure tenants understand the temporary nature of the lease. These protections include:

• Written contracts
• Separate contract explaining non-renewal
• Mandatory termination notices from landlords before the contract's end

These requirements safeguard tenants, providing a clear understanding of their rights and limitations under a fixed-term arrangement.

Summary

Feature	Ordinary Lease Contract	Fixed-Term Lease
Formation	Verbal or written	Must be written
Duration	Typically 2 years; contracts under 1 year become indefinite	No restriction
Renewal	Automatic renewal unless landlord has valid grounds for refusal	No automatic renewal
Rent Adjustment	Both parties can request adjustments, even if not specified in the contract	Adjustments only as specified in the contract
Mid-term Cancellation	Tenants can typically cancel mid-term with one month's rent notice unless restricted by the contract	Possible for residential if <200m²; otherwise per contract
Termination Notice	Landlords required to provide valid reasons if not renewing; notice period generally applies only in case of refusal	1 year - 6 months before expiration
Re-contracting Options	Typically auto-renewed unless specified; tenants have re-contracting rights unless landlord provides a valid reason	No, Undetermined, or Standard re-contracting type options

Conclusion

Choosing between an ordinary and fixed-term lease contract in Japan depends on whether the tenant wishes to reside long-term and the property owner's preferences for occupancy terms. Ordinary lease agreements offer continuity with contract renewals and rent adjustment rights, making them ideal for long-term residency. Fixed-term leases, however, allow for more structured occupancy, providing landlords and tenants a predetermined contract term with no obligation to renew. For those seeking a lower rental fee and a set occupancy period, fixed-term agreements may be the more cost-effective choice. However, these come with more rigid legal requirements and a clear understanding of occupancy limitations.

Whether opting for an ordinary or fixed-term lease, both parties should carefully review the terms and conditions, including any requirements to pay key money or fire insurance, to ensure a contract that aligns with their respective needs and expectations. For expats and foreigners seeking rental properties in Tokyo or elsewhere in Japan, working with a reputable real estate agent like E-Housing is highly recommended.