The fixed-term lease system is a relatively new framework that was established in March 2000, so many people are not familiar with its details.
In fact, only about 2% of private rental housing has adopted the fixed-term lease system.
That said, by thoroughly understanding fixed-term lease contracts, you can rent a home at a great price or make effective use of vacant properties.
Fixed-term lease contracts are also one of the common rental agreements used overseas, so it is likely that they will become even more prevalent in the future.
With that in mind, this article introduces fixed-term leases in comparison with standard rental properties.
We will also explain the merits and demerits for both tenants and landlords, so please read to the end.
What Is a Fixed-Term Lease?
Let's start by taking a closer look at fixed-term leases.
Here we introduce the characteristics of fixed-term leases and the reasons they were created.
Characteristics of Fixed-Term Leases
A fixed-term lease refers to a rental property where the lease agreement terminates upon expiration without renewal.
With a standard rental property, the contract can be renewed when it expires, allowing the tenant to continue living there.
Although the form of the contract differs, even with a fixed-term lease, both the landlord and tenant can re-contract if they mutually agree.
Why Was the "Fixed-Term Lease" Created?
The fixed-term lease was created because the burden had been falling disproportionately on landlords.
With standard rental properties, even when the contract expires, landlords cannot easily refuse a tenant's request for renewal.
This led to an increase in cases where tenants with poor conduct continued to live there, causing significant psychological distress to landlords.
To have such tenants vacate, landlords had to prepare a large sum for relocation fees.
By introducing the fixed-term lease system, landlords can refuse renewal, or at least be assured that the tenant will vacate once the contract period expires, providing peace of mind.
Fixed-Term Lease vs. Standard Lease: What's the Difference?
So where do the differences lie between a fixed-term lease and a standard rental property (ordinary lease)?
In addition to renewal and contract duration, we will explain mid-term cancellation and notification methods in detail.
Renewal and Contract Duration
As mentioned earlier, with an ordinary lease, the contract can be renewed at the tenant's request when it expires.
With a fixed-term lease, on the other hand, the contract cannot be renewed even if the tenant wishes to do so when it expires.
If both landlord and tenant agree, the tenant may continue to live there, but this takes the form of a "re-contract" rather than a renewal.
Regarding contract duration, an ordinary lease is generally set at one to two years, and contracts of less than one year are not permitted.
In contrast, a fixed-term lease allows contracts of less than one year, such as a "6-month fixed-term lease."
When a building is scheduled for demolition, the contract period may be set to less than one year.
Contract Method
An ordinary lease allows an "oral contract" — a verbal agreement without a written contract or other documentation.
In practice, a formal contract is drawn up, but legally there is no problem even without a written contract.
For a fixed-term lease, a written contract must always be drawn up.
In addition to the contract, there is also an obligation to clearly explain that the lease is a fixed-term lease.
If this explanation is not properly given, the contract may be treated as an ordinary lease, so landlords must be careful.
The reason it must be in writing is that, unlike an ordinary lease, the burden on the tenant is relatively greater.
It is necessary to understand the fixed-term lease through the contract and explanation, so that one is prepared for when the contract period ends.
Mid-Term Cancellation
With an ordinary lease, mid-term cancellation is permitted only when stipulated in the contract.
With a fixed-term lease, however, mid-term cancellation is not permitted, so please be careful.
There are cases, however, where the tenant may cancel mid-term.
Mid-term cancellation is possible when certain conditions are met (a residential building under 200㎡ where there are unavoidable circumstances that make it impossible to continue living there).
Notification Method
With an ordinary lease, the contract is automatically renewed when it expires without any procedures being required.
If the landlord requests the tenant to vacate due to legitimate reasons such as demolition, it is common to give notice one year to six months in advance.
With a fixed-term lease, the contract automatically terminates when it expires, so the tenant must prepare to vacate by that time.
If there is more than one year remaining until the contract expires, the landlord must notify the tenant six months to one year before the expiration date so that the tenant can keep track of when the contract ends.
[Tenant's Perspective] Merits of a Fixed-Term Lease
When using a fixed-term lease, there are many merits for both tenants and landlords.
Let's first introduce the merits for tenants using a fixed-term lease.
Ability to Live There for a Short Period
Among fixed-term leases, there are properties that allow contracts for short periods such as three months or six months.
This is very convenient when the time until the next move is short, such as "a job transfer has been decided" or "I only want to live somewhere while my home is being rebuilt or renovated."
Even with an ordinary lease, mid-term cancellation is possible if there is a cancellation clause, but depending on the contract, a penalty fee may be required.
Properties with Long Contract Periods Also Exist
Among fixed-term leases, there are also properties with long contract periods set.
Some fixed-term leases have durations as long as 5 to 10 years.
With an ordinary lease contract, renewal procedures may be required, and some people find it cumbersome even if it's only every one to two years.
With a fixed-term lease, no renewal procedures arise, so during the contract period you can live without worrying about any procedures.
You May Be Able to Live in a High-Quality Property
Among fixed-term lease landlords, there are quite a few who say "I only want to rent it out while I'm on a job transfer" or "I want to rent out my vacation home or second home only during the off-season."
Such properties are called "relocation properties."
Since these are properties where the landlord themselves lives, there is a high possibility of finding high-quality properties.
These include new builds and detached houses as well as condominiums, and may have facilities not found in apartments.
However, since there are also cases where a parent's detached house is being rented out, if you care about the age of the building, it is recommended to check carefully even for short-term residency.
Rent May Be Lower Than the Market Rate
With fixed-term leases where the period is limited, the rent may be set lower than the market rate to attract tenants.
While long-term residence is not possible, if the location and surrounding environment are good, there are many properties that are favorable when considered together.
Especially if you have plans to move, the costs of consecutive moves can add up, so it can also be a merit for tenants in terms of saving money.
Tenant Quality Tends to Be High
When living in an apartment, disputes with neighboring residents can sometimes occur.
The presence of residents with poor manners or those who do not follow the rules can make peaceful living difficult.
With a fixed-term lease, since the contract cannot be renewed solely at the tenant's request, residents who repeatedly cause nuisances find it difficult to continue living there.
If a re-contract is not made at the landlord's discretion, only high-quality tenants remain, resulting in a superior living environment.
Can Also Be Used as a Vacation Home or Second Home
Since the contract period is short, it can also be used as a vacation home or second home.
As mentioned earlier, there are many cases where landlords rent out buildings they own as vacation homes or second homes only during the off-season.
However, if the landlord cannot use it even during the season, they may also rent it out during that time.
Of course, even if it was not built as a vacation home or second home, it is possible to use it as such.
By contracting only during trips or extended vacations, there may be cases where it is cheaper than staying at a hotel.
[Tenant's Perspective] Demerits of a Fixed-Term Lease
Next, let's introduce the demerits of a fixed-term lease that arise for tenants.
By thoroughly understanding the demerits, you can devise ways to mitigate them and take countermeasures, so please use this as a reference.
Cannot Cancel Mid-Term
While mid-term cancellation is permitted depending on the contract terms in an ordinary lease, a fixed-term lease does not allow mid-term cancellation.
Since the contract period is clearly defined and the rent that should have been collected can no longer be received, the burden on the landlord increases.
To prevent the landlord's position from becoming unstable, there are strict rules regarding mid-term cancellation.
If you cancel mid-term, you may be charged for the remaining contract period's rent, requiring considerable expense.
However, if certain conditions are met, the tenant can cancel mid-term.
The conditions are: a residential building under 200㎡ where there are unavoidable circumstances that make it impossible to continue living there.
For example, job transfer, medical treatment, or caring for a family member are examples of legitimate reasons.
Must Vacate Immediately When the Contract Period Ends
Even if the period until a job transfer is extended or renovation work is delayed, the contract period cannot be extended.
When the contract expires, you must vacate immediately.
If the period for job transfer or renovation work is unclear, it is recommended to also consider renting an ordinary lease rather than a fixed-term lease.
Regarding when the contract ends, the landlord will notify you in advance.
Once you receive the notice of contract termination from the landlord, start looking for your next place to live.
Re-Contract Is Generally Difficult
While re-contracting is possible if both landlord and tenant agree, it is generally said to be difficult.
This is because fixed-term leases are often rented out under conditions such as "only for the period until demolition" or "only while on a job transfer."
It is especially difficult if there has been rent delinquency or disputes with neighbors.
Also, since it is a re-contract rather than a renewal, security deposits, key money, and guaranty deposits may be charged again, so costs can add up considerably.
Furthermore, the terms may differ from the first contract.
In particular, the rent may increase, so be sure to carefully check the details when re-contracting.
Points Tenants Should Be Careful About in Fixed-Term Lease Contracts
Since fixed-term lease contracts differ from ordinary lease contracts in many ways, the points to be careful about also differ.
Those who are considering renting a fixed-term lease should proceed with the contract while paying attention to the following points.
Beware of Bait-and-Switch Properties
A bait-and-switch property refers to the practice of posting information about contracted or fictitious properties online in order to attract customers.
They use favorable fixed-term lease properties to lure customers in, then explain the demerits of the fixed-term lease to visiting customers.
Once the customer is convinced of the demerits, they introduce another property they want the customer to contract — a malicious tactic.
If the rent is considerably lower than the market rate or the property conditions are surprisingly favorable, be careful as it may be a bait-and-switch property.
Always Confirm the Type and Duration of the Contract
Cases such as "I thought it was a fixed-term lease contract but it turned out to be an ordinary lease" are not uncommon.
It can be especially problematic if you mistakenly sign an ordinary lease contract thinking it was something else.
When signing a contract, always check the contract documents and important matter explanations carefully, even if you have been told verbally.
For a fixed-term lease contract, confirming the contract period is also essential.
Fixed-term leases require prompt vacating when the contract expires.
Considering your moving plans, please confirm whether you will be able to move when the contract period ends.
Understanding the "No Rent Reduction Clause"
A no rent reduction clause refers to a contract provision stipulating that "the tenant cannot request a rent reduction."
In an ordinary lease contract, even if a no rent reduction clause is stipulated, it has no effect, and the tenant can request a rent reduction.
In other words, rent reduction negotiations can be made at any time.
With a fixed-term lease contract, however, if a no rent reduction clause is stipulated, rent reduction requests cannot be made.
Be careful, as you will have to pay the set rent even if it is far from the market rate in the surrounding area.
That said, rent reduction negotiations are often conducted when one has lived there for a long time, so they are not often carried out with short fixed-term leases.
If renting a fixed-term lease for a long period, it is necessary to check this carefully.
[Landlord's Perspective] Merits of a Fixed-Term Lease
Next, let's take a closer look at the merits that landlords gain by using a fixed-term lease.
Can Determine the Occupancy Period
One of the greatest merits for landlords is the freedom to set the occupancy period.
Since there is no renewal and the tenant will vacate as scheduled once the initially contracted occupancy period ends, landlords are freed from the anxiety of "when will the tenant vacate the property I rented out."
Also, even without renewal, by repeatedly re-contracting, you can continue to rent to the same person, so it is possible to intentionally set the initial contract period short and decide after observing the tenant's behavior.
However, with a fixed-term lease, mid-term cancellation is not permitted in principle.
Therefore, if there is a possibility of wanting to return home earlier than planned due to a reason such as "the job transfer ended early," you must wait until the contract period ends.
If there is a possibility of ending the contract period earlier than planned, it is necessary to set mid-term cancellation conditions in a special clause.
Can Definitively Terminate the Contract
Another merit of a fixed-term lease contract is that the contract can be definitively terminated.
With a standard ordinary lease contract, even if the original contract period has ended, if the tenant requests renewal, you cannot refuse without legitimate reason.
However, with a fixed-term lease contract, you can set the period yourself, and the contract terminates once that period passes.
Even if the tenant desires re-contracting, the landlord can refuse, so if the tenant was someone who caused rent delinquency or disputes, a fixed-term lease contract allows you to definitively terminate the contract.
Also, since there is no renewal, it is possible to rent out only for a limited period such as "only while on a job transfer."
[Landlord's Perspective] Demerits of a Fixed-Term Lease
Fixed-term leases have both merits and demerits.
Here we explain the demerits for landlords, which you can use as a reference when deciding on the contract method.
Separate Document Delivery and Explanation Required
Unlike ordinary lease contracts, fixed-term lease contracts require the delivery of documents and an explanation.
Therefore, in addition to the contract, a separate document must be delivered, and the fact that "it is a fixed-term lease with a contract period" and "the contract will not be renewed" must be explained in advance.
If the separate document delivery and explanation are neglected, please be aware that the contract may not be recognized as a fixed-term lease and may be deemed an ordinary lease.
Rent Tends to Be Lower Than Market Rate
One demerit of a fixed-term lease contract is that the rent tends to be lower than the market rate.
Many people want to live in one place for a long time once they move in.
However, since the rental period is fixed in a fixed-term lease contract, it may be difficult to find people who wish to move in.
If it becomes difficult to find people who wish to move in, measures such as lowering the rent must be taken.
Points Landlords Should Be Careful About in Fixed-Term Lease Contracts
When entering into a fixed-term lease contract, landlords must pay attention to different points not only at the time of contracting, but also at re-contracting, when switching from an ordinary lease, and at the time of contract expiration.
Here we explain in detail the points landlords should be careful about in fixed-term lease contracts, so please use this as a reference.
Points to Note When Concluding a Contract
For a fixed-term lease contract to be considered valid, four requirements must be met.
· Designation of a contract period
· Statement that the contract will not be renewed
· Execution of the contract in writing
· Advance written explanation that the contract will not be renewed
Simply writing "fixed-term lease contract" and "no renewal" in the contract is considered insufficient regardless of whether the parties are aware of or understand this, and the contract will become an ordinary lease, so caution is required.
Points to Note When Re-Contracting
Renewal and re-contracting are entirely different things.
In a fixed-term lease contract, cancellation within the contract period is strictly restricted compared to an ordinary lease contract.
Therefore, in a fixed-term lease contract, the contract period may be set relatively short at one or two years with a re-contract clause included, and after the contract period ends, re-contracting may be done, treating it the same as a renewal.
However, since it is actually a re-contract, unlike a renewal, procedures such as preparing a new contract, delivering documents, and providing explanations are required.
Furthermore, the guarantor, security deposit, and guaranty deposit that would be carried over in a renewal must be started from scratch in a re-contract.
If you want to avoid moving money by having it returned once and then re-deposited, it is necessary to include a clause in the re-contract stating that the previously entrusted funds will be carried over.
Also, regarding restoration to original condition at re-contracting, it must not be forgotten to include in the special provisions that the original condition refers to the state when the property was first rented out, not at the time of re-contracting.
Points to Note When Switching from an Ordinary Lease to a Fixed-Term Lease
Some people may be considering switching after learning about the merits of a fixed-term lease contract.
However, what is important here is that there are some properties that cannot be switched.
The law concerning fixed-term leases came into effect on March 1, 2000.
Therefore, switching a standard lease contract concluded before that date to a fixed-term lease contract has restrictions and will be invalid even if both parties agree.
For contracts concluded on or after March 1, 2000, switching is possible with the mutual agreement of both parties.
Points to Note at Contract Expiration
Even though the contract can be definitively terminated, the property will not be vacated without any action just because the contract period has ended.
When the end of the contract period approaches, the landlord needs to send a termination notice to the tenant.
There is no strict rule that the termination notice must be in writing.
However, if the contract states that notification will be made in writing, please be aware that oral notification may not satisfy the requirements.
The termination notice should be sent six months to one year before the contract period expires.
Main Cases Where Fixed-Term Leases Are Utilized
In what kinds of situations are fixed-term lease contracts utilized?
Here we introduce the main cases.
During the Period Until Rebuilding
When a building is scheduled for rebuilding due to deterioration, fixed-term lease contracts may be utilized.
This is because with an ordinary lease contract, cancellation is not permitted without legitimate reason, and there is a possibility that relocation fees must be paid to get the tenant to vacate.
For this reason, when rebuilding is still several years away, there are many cases where landlords refrain from recruiting new tenants out of concern that vacating will not proceed smoothly even if a vacancy arises.
However, by setting the contract end date to coincide with the scheduled rebuilding date in a fixed-term lease contract, it is possible to effectively utilize vacant spaces without disputes over vacating.
During Tenant Turnover for Large-Scale Renovation
Regular large-scale renovation is essential for maintaining the market value of a building, but carrying out renovation work with tenants in place is both procedurally complex and costly.
Furthermore, if an accident were to occur injuring a tenant, it would be a major problem, so it is desirable to proceed with the work in line with tenant turnover as much as possible.
However, tenant turnover may not proceed as planned.
Therefore, as one way to proceed with renovation work smoothly, it is also effective to utilize a fixed-term lease contract and set the contract expiration date.
When a Job Transfer Leaves an Owned Home Vacant
In cases where a job transfer has been decided and one must pay both housing loan repayments and rent at the new location, utilizing a fixed-term lease contract is effective.
By renting out the owned home left vacant during the job transfer period, the rental income received can be used to repay the housing loan, reducing the monthly financial burden.
Also, by setting an end date through a fixed-term lease contract, you can be assured of being able to live in your home when you return from the job transfer.
When Elderly People Move from a Detached House to a Condominium
After children become independent, many elderly people consider moving from a detached house that is difficult to manage to a condominium, and in such cases a fixed-term lease contract is also effective.
This is because they can earn rental income by renting out the detached house.
Furthermore, even if the condominium doesn't suit them, knowing that they have a home to return to once the contract period ends is a source of reassurance.
Also, with a fixed-term lease contract, after the landlord passes away and the property is inherited, when the contract period ends, the heirs can decide whether to rent it out, sell it, or live in it themselves — which is also an appealing feature.
When Renting Out Commercial Tenant Space
Fixed-term lease contracts are also frequently utilized for commercial tenant rental agreements.
With an ordinary lease contract, relocation fees are required to get a tenant to vacate.
For storefronts, additional business compensation is also required, which places a heavy burden and high risk on the landlord.
However, with a fixed-term lease contract that sets a contract end date in advance, neither relocation fees nor business compensation are required, which helps reduce the burden on the landlord.
Thinking of Switching to a Fixed-Term Lease? Review Your Real Estate Company Too
Those considering switching to a fixed-term lease should also review their real estate company.
Here we introduce points to consider when choosing a real estate company.
Does the Company Have Experience with Fixed-Term Lease Contracts?
First, confirm whether the company has experience with fixed-term lease contracts.
There are mainly two methods of rental contracts: ordinary lease contracts and fixed-term lease contracts.
The majority of general rental properties use ordinary lease contracts.
Since fixed-term lease contracts require the advance delivery of documents and an explanation, a real estate company that only handles ordinary lease contracts may have deficiencies in contract procedures and management.
Inexperience can lead to disputes, so if you are going to enter into a fixed-term lease contract, it is important to choose a real estate company with solid experience.
Also, when confirming experience, check the number of managed properties at the same time.
A real estate company with a large number of managed properties has been chosen by that many landlords.
It can also be considered that they have know-how regarding vacancy countermeasures and building management, so it is reassuring to confirm this in advance.
Note that the forms of entrustment to real estate companies include the management consignment method and the sublease method.
The management consignment method involves entrusting overall management and paying management consignment fees from rental income.
The sublease method involves the real estate company purchasing the property in bulk, with rent guaranteed even when there are vacancies.
Which is better varies by individual, so it is important to choose the method that suits you.
What Vacancy Countermeasures Are Being Taken?
When there are vacancies, no rental income comes in during that period.
The longer vacancies continue, the greater the loss, so it is important to choose a real estate company that properly implements vacancy countermeasures.
If you want to confirm vacancy countermeasures, try asking "how do you recruit tenants?"
Recently, many people search for rooms using smartphones or computers, so check whether property information is listed on search sites and whether photos that convey the appeal of the property are included.
It is best to avoid real estate companies that simply post photos taken without care.
We recommend choosing a real estate company that shows intent to present the property attractively by paying attention to composition and image quality.
Can Tenant Screening and Management Be Entrusted?
Having the know-how to handle tenant screening and management is also an important checkpoint.
If a tenant falls behind on rent, the real estate company is required to respond promptly.
When choosing a real estate company, check the rate of delinquencies of two months or more.
If it is 1.5 to 1.7% or more, be careful as the collection capability may be low.
To prevent such problems in advance, tenant screening is also important.
Rather than allowing anyone who applies to move in, confirm in advance what criteria are used for judgment and what the screening standards are.
Can the Company Handle Disputes?
Neglecting to address disputes such as noise or water leaks can cause tenants to lose trust, leading to vacating and vacancies.
When choosing a real estate company, confirm what kind of response they provide when a dispute occurs and check their support system.
The operating hours of the inquiry desk that responds to tenant inquiries and the number of staff are also important factors in judging whether the company can be trusted.
In this article, we explained in detail about fixed-term leases, including their characteristics, differences from ordinary lease contracts, and the merits and demerits for both tenants and landlords.
Fixed-term lease contracts, which have no renewal and can definitively terminate the contract when the contract period expires, have merits not only for landlords but also for tenants.
However, that is not to say there are no demerits.
When using a fixed-term lease contract, it is important to confirm whether it suits your situation.
Frequently Asked Questions About Fixed-Term Lease Contracts
Q1. Can a fixed-term lease contract be renewed?
A fixed-term lease contract cannot be renewed. The contract terminates upon expiration of the contract period. However, if both the landlord and tenant agree, it is possible to continue living there in the form of a "re-contract."
Q2. Is the rent for a fixed-term lease cheap?
Since fixed-term leases cannot be renewed, the rent tends to be set lower than an ordinary lease in general. In many cases, it is about 10 to 20% lower than the market rate.
Q3. Can a fixed-term lease contract be cancelled mid-term?
For a residential property with a floor area of less than 200㎡, mid-term cancellation by the tenant is possible if there are unavoidable circumstances. The contract terminates one month after the cancellation notice is submitted.
