Rent Guarantor Companies Replace Joint Sureties and Become Mainstream in Japan
In Japan, to protect the interests of property owners, tenants are required to provide rent guarantees. In the past, the common practice was for tenants to enter a joint suretyship with a parent or close relative who lives in Japan. When the tenants are unable to pay their rents on time, the joint surety will be asked to pay the rents on their behalf. However, nowadays the use of rent guarantor companies has become mainstream and joint sureties are rarely used.
What is a “Guarantor Company”?
“Guarantor Company”, also known as “Rent Guarantor Company”, is a company that provides property owners rent coverage when tenants fail to pay their rents on time. It can be treated as an insurance company that guarantees the rental payments are paid for tenants. While its role by nature is similar to the joint surety, its guarantee service is more certain and powerful. According to the revision of the Japanese Civil Law in April 2020, setting the upper limit of the amount that the joint surety can guarantee becomes an obligation, which significantly weakens the guarantee effect of the joint surety. Additionally, in many cases, even if there are joint sureties, the property owners have to bear the risk of being unable to recover the rent arrears from the joint guarantors.
Benefits of Using a Guarantor Company
Risk with a personal guarantee is reduced
In the case of using a joint surety, if the joint surety does not intend to pay or has no ability to pay the rent on behalf of the tenant, the property owner cannot recover the delinquent rents and have to bear huge investment losses. Meanwhile, in the case of using a guarantor company, not only will the guarantor company pay the rent on delinquency to the property owner, but in extreme cases such as when the tenant disappears or when the contact with the tenant is lost, it will also provide coverage for cleaning up the items left by the tenant and restoring the property to its original condition. In addition to that, the guarantor company conducts background and credit checks on the tenant before the lease begins. That greatly helps property owners avoid encountering dishonest tenants.
Guaranteed rent payments stabilize cash flow
In the event of a delay in rent payment, the guarantor company will pay the rent for the tenant to ensure a stable rental income for the property owner. The guarantee amount usually is 24 months of rent. The act of reminding tenants to pay rents is also the guarantor company’s responsibility. The property owner does not have to get involved.
Eviction cost is covered
When the tenant owes rent for a long time and refuses to move out, according to Japanese law, neither the property owner, the property manager nor the guarantor company can compel the eviction of the tenant. In most cases of evicting a tenant, it is necessary to hire a lawyer to start the legal process, and the cost is approximately JPY600,000 or more. With the use of the guarantor company, the guarantor company will assist in the legal process and cover partial legal fees and court costs incurred.
Generally speaking, as the “guarantee” is borne by the tenant, the guarantee fee is paid by the tenant, roughly equivalent to one month’s rent or half a month’s rent. However, we also often encounter a situation when an investor buys an occupied property that is not entitled to rent guarantee by a guarantor company. Can the investor add the guarantor company? The answer is yes. In this case, the guarantee fee will be paid by the investor instead of the tenant.
In Japan’s rental property market, it is getting more common to require tenants to join a guarantor company. Therefore, it is not a hurdle of finding tenants, but a protection for property owners against leasing risks, especially for overseas investors who cannot easily meet their tenants in Japan.
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