Remaining ground lease term is short, what should we do?

In Japan, especially for the prime locations, landlords do not want to sell the property rights. Japanese historically and generally have strong emotional attachments towards the land. Thus, ground lease has been quite common in Japan.

If non-Japanese investors find a good property in Japan but the land tenure is a lease hold title, this point, the ground lease marketability, has to be considered.
The landlord attribute and intention may have to be checked beforehand.

Depending on the lease structure, points to be checked are different.

1 Standard lease -hard to be terminated-
1-1 Seek the possibility of renewing the contract

1-2 Deduct necessary renewal fee

1-3 Having the consent from the landlord

1-4 Early renewal

2 Fixed term leases-term extension possibility must be checked-

2-1 Extension of the lease term

2-2 Terminate and re-contract

1 Standard lease -hard to be terminated-

1-1 Seek the possibility of renewing the contract

Generally, the lessee’s position is strong, and the landlord cannot evacuate the tenant unless he/she demonstrates the convincing reasons to terminates the lease.

1-2 Deduct necessary renewal fee

Looking at the court arbitrate/ reconciliation cases, the renewal fee would be 3-5% of the value of the lease hold title, or 2-4 % of the value of the land free hold title.

https://www.hosyo.or.jp/realpartner/201704shijyo.pdf

This can be interpreted that if the new property owner (new lease hold title holder) pays that amount, unless the landlord provide the convincing reason, the lease will be renewed.

This is however subject to the land use, the past lease term, the lease hold value, and easiness to find the substitutes.

1-3 Having the consent from the landlord

If the owner has the pre-consent from the landlord to transfer the title and renew the term, the property with lease hold would be more marketable.

1-4 Early renewal

The lessee can renew the ground lease by paying the consent fee to the landlord when the remaining lease term gets shorter say 2-3 years. To make the lessee position more stable, early stage renewal or at least having pre-consent from the landlord would be effective.

2 Fixed term leases-term extension possibility must be checked-

2-1 Extension of the lease term

For instance, the total lease term is 25, within the allowance, the lease term can be extended if both parties agree. As to the lessee’s position, having pre-consent from the landlord would work to keep the property marketable.

2-2 Terminate and re-contract

If both parties agree, at the termination of existing contract, both party can get into the new contract. The format must comply with the laws and regulation. In other words, only the consent letter regarding the lease term extension may be taken as invalid.

To sum up, if the lease hold comes from the standard lease, the necessary action to be taken to maintain the marketability. In case the fixed term lease expires in a couple of years, investigating term legal extension or possibility of making new contract should be checked to keep the property marketable.