Japan Business Law: The Civil Code will be revised with regard to lease contracts.
In the revised Civil Code (also known as a revision of the Law of Obligations, hereinafter referred to as “This Revision”), established in May 2017 and scheduled to come into effect in April 2020, one of the major changes is guarantee contracts.
In order to enhance the protection measures for individuals, the basic rules have been changed. The changes influence the guarantee contracts that are often concluded alongside lease contracts. Therefore, this will be a matter for real estate agents, guarantor companies, and real estate owners.
This article will explain the important changes to the Civil Code regarding the guarantee contract, its outline and handling.
Personal Guarantee Protection is further strengthened
In the 2005 Civil Code revision, protections for individuals who become guarantors were included when individuals make guarantee contracts (most contracts are joint guarantee contracts) at the time of taking a loan. In This Revision, protections will be also included for individuals who enter into guarantee contracts for contracts other than loans.
“Basic guarantee” refers to a contract that guarantees the debtor’s future obligations (which may fluctuate), which arise from certain ongoing transactions.
A comprehensive basic guarantee refers to a basic guarantee with no limitations such as deadline, amount of money, type of transaction, etc. A basic guarantee with those limitations is called limited basic guarantee.
A basic guarantee is often used to provide a guarantee of the debtor regarding a transaction with a financial institution or to provide a guarantee of the lessee in a leasing contract.
Even with the limited basic guarantee, guarantors may not know what kind of obligation will be borne in the future.
For example, after the lessor and the guarantor conclude a joint guarantee contract, due to various circumstances such as a long-term rent unpaid by the lessee, the lessor may overcharge the guarantor (the call of duty based on the guarantee contract).
As a result of those cases, in This Revision, it was decided that the guarantee contract will not take effect unless the “maximum amount (upper limit of amount)” is stipulated in order to protect guarantor when individuals take out a basic guarantee.
In the past, what was stipulated only for “money lending”, after the revision this restriction will be applied to all the guarantee contracts, and it can be said that joint guarantor protection has become stronger.
The Ministry of Land, Infrastructure and Transport revised the Standard Contract (form)
Based on This Revision and the recent increase in contracts using rent debt guarantee companies, Ministry of Land, Infrastructure and Transport revised the “Rental Housing Standard Contract (form)” in 2018 as follows.
(1) In recent years, with regard to housing lease contracts, based on the fact that about 60% of new contracts use institutional guarantees, we are creating a new “rent obligation guarantor type” for the standard contracts that previously stipulated only the guarantor’s obligation guarantee by a joint guarantor
(2) Based on the mandatory establishment of the maximum amount for individual basic guarantee contracts under This Revision, the former standard agreement is set as the “joint guarantor type” and the detailed column of the amount is specified. For references to set the specific maximum amount, reference materials that summarize the guaranteed amount for guarantee companies and the period concerning the transfer are prepared and published.
(3) Both standard contracts include the content of other Civil Code revisions, such as the basic rules for restoring the original state and returning the security deposit.
It is recommended to refer the revision of “rental housing standard contract (form)”, because it includes not only information about the maximum amount but also updates of other Civil Code revisions etc.
Necessary to determine the practical maximum amount.
As mentioned above, because of This Revision, the guarantee contract will not take effect unless a “maximum amount (upper limit amount)” is stipulated on a joint guarantee contract between the lessor and the guarantor.
So, for example, in the case of a guarantee contract for guaranteeing the lessee’s debt of a lease contract with a monthly rent of 100,000 yen, how about setting the maximum amount to 100 million yen?
The lessor may think that the guarantor can guarantee the damage no matter how much the damage as the maximum amount stipulated is 100 million yen
However, in the above example, the guarantee contract is practically deemed a guarantee contract without a maximum amount. It is highly probable that such extreme amounts are to be determined invalid as they are contrary to public order and morals, and if the ultimate amount to be provided becomes invalid, the guarantee contract will be also invalid.
Therefore, the lessor needs to set a maximum amount that will not be ruled invalid due to a public order and morality violation.
Ultimately, a fair price for a guaranteed amount will be formed through the rulings of accumulated court cases, but at the present moment, reference material on the “maximum amount” announced in March 2018 by the Ministry of Land, Infrastructure, Transport and Tourism is helpful.
Since survey results regarding the guaranteed amount on the damage amount of rent debt guarantee companies and the burden amount of the joint guarantor in the court judgment have been published, it can serve as reference material for determining “how high to set the maximum”.
For the owner, first of all, it will be necessary to determine the practical maximum amount with consideration for rent amount, original condition restoration cost, amount of damages etc.
This Revision is to prevent various trouble related to leasing contracts and to ensure smooth contract execution.
It is recommended that you deepen your understanding of the changes in preparation for the enforcement in 2020.