The First Straw

The Kyoto District Court ruling on July 23 was a bombshell, and if it sets some sort of precedent could change the situation for Japanese renters forever. After the jump, the Kyodo report from Japan Times

In what experts termed a landmark ruling, the well-established practice of landlords collecting renewal fees in the housing rental industry was judged illegal Thursday and a violation of tenants’ rights.

The point of contention in the Kyoto District Court ruling Thursday was the “contract renewal fees” for renting houses and apartments, which tenants are obliged to pay their landlords every time their contracts are renewed.

In many cases, the fees are equal to two months’ rent and must be paid by lump sum, putting a heavy financial burden on tenants every few years, in addition to the “key money” that is required when a tenant first enters into a contract.

In the lawsuit, a Kyoto man had demanded that his landlord return ¥460,000, comprising ¥110,000 in contract renewal fees and ¥350,000 in key money, based on the law to protect consumers in business deals.

Calling the fees a “unilateral infringement on consumer benefits,” presiding Judge Toshio Tsujimoto ruled that the practice has no legally justifiable grounds and ordered the landlord to return the full amount.

Legal experts said the ruling is rare in that it is based on the consumer protection law rather than the law to define the rights of landlords and tenants in house deals. The ruling is expected to affect similar lawsuits pending nationwide.

In April 2006, the man made a two-year contract to rent an apartment in the city and paid about ¥110,000 — the equivalent of two months’ rent — to his landlord in January 2008, when the initial contract approached renewal. But he terminated the contract four months later and vacated, the court said.

“Reasons for charging contract renewal fees must be clearly explained to tenants and agreed upon between the two sides,” the judge said.

Praising Thursday’s ruling, lawyers for the plaintiff told reporters later Thursday that the Kyoto case would become a significant step forward to reform the country’s housing rental industry, which they said has many traditional unwritten codes and rules not accompanied by clear explanations.

“Renewal fees are charged in a lump sum regardless of the span of contracts. In reality, landlords rarely give advance notice until a renewal approaches in a few months, and tenants are effectively forced to pay the fees,” they said in a statement.

People in the housing rental industry, which has already been forced to lower rents because of the recession and land price falls, were quick to slam the Kyoto court ruling.

“This case will surely affect our business,” one industry official said.

A spokesman at a Tokyo-based industry group supporting landlords justified the practice, saying renewal fees are part of funds for long-term repair of properties.

It should be noted that this is the third trial related to complaints by renters held this year in Japan. Two earlier trials that also dealt with renewal fees ended in favor of landlords. A fourth is set to be decided in August in Osaka, so it will be interesting to see whether or not the Kyoto ruling has any effect.

Though the renewal fee portion of the ruling has received the most attention in the media, the deposit (shikikin) portion merits closer scrutiny. Usually, the explanation for deposits is that they are meant to pay for any damage the tenant has caused to the property while residing in it. Some are even called “cleaning deposits.” In most municipalities in the US, such deposits would be illegal because landlords are compelled by law to maintain the buildings they own, and that includes repairs and touch-ups for what is referred to as “normal wear-and-tear.” In other words, the rent that the landlord charges should take these costs into consideration (along with things like property taxes, insurance, etc.); they cannot be added on indiscriminately.

Deposits, renewal fees, and “key money” are all arbitrarily imposed fees by the landlord that have become entrenched in the system by sheer force of habit because of the imperial status of landlords in Japan, which, until the Kyoto ruling, was upheld by the legal system even though, as the Kyoto District Court pointed out, it has no basis in the law.

The bogusness of the landlords’ position is revealed by the semantic confusion of their defense. In the Kyoto case, the defense team said that the renewal fee was a form of “rent,” which it obviously thought the judge would buy. The judge, to his credit, didn’t. If it was “rent,” then why wasn’t it divided up and spread out in the actual monthly payments? Why was it imposed in this arbitrary manner? The only possible reason is that the landlord simply thought he could impose it because it’s what everyone does.

Then, in a ludicrously ironic turn, landlords interviewed in various media have said that if this ruling is upheld they will have to increase rents. Is that a threat? What’s the difference between paying a renewal fee and having that fee distributed in the rent? Of course, the main difference is that rental vacancies are way up. Landlords are being forced to reduce rents just to attract tenants, so this threat is totally meaningless. Right now, it’s a renters market, and a lot of landlords are not asking for key money or even deposits in order to get bodies in their properties. That’s another reason why the Kyoto ruling is important–it happened in western Japan, where these rental add-ons are notoriously, traditionally much higher. Sometimes it requires as much as six months rent to move into an apartment in western Japan.

The ruling could also make people wonder about real estate fees. Normally, when a renter signs a contract, he/she also has to pay one month’s worth of rent to the realtor as a fee. This is, again, a completely arbitrary amount based only on tradition. Though it will entail the exact same amount of work on the realtor’s part, he will receive ¥200,000 if he rents out a ¥200,000/month apartment and ¥50,000 if he rents out a ¥50,000/month apartment. Logically, it should be the landlord who pays the realtor’s fee, since the realtor is in theory contracted by the landlord to find tenants.

And that’s what it comes down to. Renters are consumers, but they aren’t treated as such. In Japan, the customer is supposed to be king, but centuries of a feudal mentality have made tenants believe that they are second class citizens, and that a landlord can do anything he/she wants. If the new consumer affairs ministry were truly serious about its mission, it would propose actual laws that protect renters. I wouldn’t hold my breath, though.

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