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Sunday, Sept. 6, 2009

MEDIA MIX

Media plays down landmark rent ruling


On July 23, the Kyoto District Court reached a verdict in a landlord-tenant dispute that found contract renewal fees common in rental agreements to be illegal. Kyodo News called it "a landmark ruling" with far-reaching implications.

Then, on Aug. 27, in an appeal of a verdict handed down in Kyoto District Court last year, the Osaka High Court found in favor of a man who was suing his landlord for the return of contract renewal fees he had paid when he rented a Kyoto apartment for ¥45,000 a month from 2000 to 2006. Though the ruling indicates that the earlier decision had set an important precedent, it received much less media coverage.

Kyoto landlords are infamous for gouging tenants, often demanding two or even three times the usual amounts charged for reikin (gift money) and shikikin (deposits). The tenant in the second case didn't understand why he had to pay ¥100,000 to renew his rental agreement every year. Koshinryo (contract renewal fees) are standard practice in metropolitan areas but not throughout Japan. They seem to be nonexistent in the Tohoku region. If they are a "custom," as many landlords insist, they are also arbitrary in that the amounts and contract periods change greatly from place to place. The land ministry, which oversees real estate matters, has no position on koshinryo.

These two rulings were based on a relatively new regulation that probably wasn't intended to be applied to rental properties. Both judges cited a consumer protection law that went into effect in 2001 when they said that contract renewal fees are not legally justifiable and place an unnecessary burden on tenants. Usually, when judges hear rent disputes, they follow laws that define the respective rights of landlords and tenants, and previously they ruled in favor of landlords as long as the extraneous fees being contended were explained in the contract. Two such cases were tried earlier this year in Osaka and both ended in the landlords' favor.

Not surprisingly, landlords, as well as the realtors and property management companies who serve them, are up in arms. The defendant plans to appeal, and a group called the Association to Consider the Rental Apartment Contract Renewal Fee Issue published on its Web site a point-by-point rebuttal of the ruling, saying that the judge demonstrated "unfair bias" toward "consumer protection" and did not consider the "position of the landlord"; that the fees were "explained clearly" in the rental agreement, which the tenant signed; and that koshinryo has a "40-year history" as a business practice.

In court, the defendant's lawyer argued that koshinryo is compensation to the landlord for waiving his right to "refuse to renew a contract." According to an expert interviewed by the Asahi Shimbun, this twisty logic refers to a law that prevents tenants from being thrown out of their homes without just cause. Because the landlord doesn't have the right to evict a tenant simply because it pleases him to do so, he expects to be compensated for giving up that right.

The landlord also said that koshinryo "supplements" the rent, which the judge rejected out of hand. What exactly is the fee paying for that the rent isn't? Such expenses should be incorporated into the monthly rent so that the tenant can understand exactly how much he's paying.

And that's where the arbitrariness of koshinryo becomes clear. As it happens, right now it's a tenants market, and landlords and realtors, who tend to split koshinryo, are desperate for renters. In the column "How to Determine Rent," the online rental real estate industry magazine Manetto states that the worst thing landlords can do is allow their properties to remain vacant. They should lower the rent to attract tenants, and if they need more revenue, "increase the rent at the time of the contract renewal."

Manetto doesn't mention koshinryo, but you don't have to be Gordon Gekko to draw the logical conclusion: Calculate your desired rate of return, set a rent that attracts tenants, and then make up for the shortfall with gratuitous fees like koshinryo. Once people are settled into a residence they are less inclined to move even if they think they're being ripped off.

An important aspect of this case that hasn't been discussed is why the plaintiff waited until after he'd paid koshinryo five times before he sued. The Asahi reported that the suit developed after he called a tenants hotline set up by a group of lawyers, who were obviously fishing for cases they could bring to court to test the consumer protection law and set a precedent that would effectively change rental practices. In the press conference following the ruling, one of the plaintiff's lawyers called koshinryo an "evil business custom."

The lawyers were doing what they're supposed to be doing, which is more than you can say for the land ministry. The government has never shown any interest in protecting renters from the imperious opportunism of the real estate industry. When it comes to housing, they're only interested in homeowners, but if the koshinryo precedent sticks they'll have to acknowledge that tenants are people, too.



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