TOKYO OFFICE LEASING
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OFFICE LEASING GUIDELINES
Two types of lease structures exist in Japan: traditional and fixed-term leases
A traditional Japanese lease is usually for two years, is perpetually renewable, and offers security of tenure to occupiers. As long as a tenant is not in breach of the lease, the tenant can retain occupancy.
Fixed Term Leases:
Fixed term leases, which were introduced to the market in 2000, are most commonly for five years, and sometimes as short as three years, and are not renewed automatically. Fixed term leases are becoming more popular amongst large scale buildings.
Landlords of large scale buildings prefer fixed-term leases, but the traditional lease prevails in the market overall.
In a traditional lease, the tenant has the right to renew in perpetuity. Under the traditional lease, there is typically no valuation formula to establish the market rent upon renewal – generally the renewal rental is a blend of the existing contract rate and the market rate. Recourse is limited in a dispute.
Renewal Fee: Some small-sized buildings require a renewal fee; usually one month’s rent at the rate stipulated in the new rental contract.
Fixed Term Leases:
A fixed term lease does not include an automatic right to renew. At the end of the stated fixed lease term, a new contract must be negotiated (i.e. a ‘re-contract’ and not a renewal is negotiated).
Under a traditional lease, rent review provisions take place at renewals, typically every two years. No official formula exists for rent re-calculations. Generally, the new rent on renewal is the midway point between the tenant’s existing rent and the market rent for new leases.
Rent is normally quoted in Japanese yen (JPY) per tsubo per month; rarely in square meters. Some landlords quote gross rent with common area maintenance (CAM) fees included. Other landlords quote net rent and CAM separately.
Free rent is negotiable and typically is three to six months. The amount of free rent also depends on conditions, such as whether the leasing structure is traditional or fixed-term. Landlords generally give more free rent with fixed-term leases because they tend to be longer than two years.
Common Area Maintenance (CAM) Fees):
- Costs included in CAM fees: These fees cover operating costs to maintain the common areas of the building. Large scale buildings generally include air conditioning in the common expense fee for prescribed office hours, with an additional fee for usage outside of those hours. The cost of standard security services is also included.
- Typical Monthly CAM fees for a Grade A building in Tokyo is JPY5,000–6,000 per tsubo.
- Adjustments: CAM fees are usually not adjusted unless significant changes occur in the economic environment.
- Negotiability: CAM fees are usually not negotiable because they are considered direct cost recoveries.
- Landlords in Japan are not required to itemize and disclose CAM fees.
Security Deposit and Guarantees
Tenants leasing office space in Japan pay the landlord a non-interest-bearing security deposit before occupancy. The landlord returns it when the tenant vacates after deducting unpaid rent or damages.
The security deposit is typically 12 months rent. It is possible for companies with a good covenant to negotiate reductions to the standard security deposit, although zero deposit and bank guarantees are highly unusual.
Some small and medium scale buildings deduct exit fees on their security deposit.
Fixed Asset Tax:
The fixed asset tax is levied on fixed assets including land, building and other depreciable assets for business purposes. Both the building owners and tenants pay fixed asset taxes. The building owners pay tax on the property (skeleton) and the tenants pay tax on the additional improvements. The standard tax rate of 1.4% is levied on the additional improvements (depreciable assets) every year until the end of depreciation when the value is more than JPY 200,000. A tenant that remodels their occupied space may incur a fixed asset tax.
Business Office Tax:
The business office tax is payable by users of offices and corporations that occupy over 1,000 square meters in floor space and/or having more than 100 employees in the subject property.
8% consumption tax is charged on all outgoings including rent, improvements, and utility charges, but not on the security deposit. This tax is levied on rental payments.
Tenants pay for electricity for occupied space based on a meter unless otherwise noted. The cost of electricity is typically JPY20-25 per kwh. Water usage in tenant occupied space is usually charged by a meter. Water in the common areas is covered in CAM fees.
In Tokyo, both the landlord and the tenant usually buy insurance to cover property damage and personal injury. The tenant’s or landlord’s insurance company pays, depending on which party is at fault.
In central Tokyo, the charge for parking spaces is negotiable, but is generally JPY50,000–80,000 per month. Parking within the building is usually not allocated based on the floor area occupied.
Option to Expand & Right of First Refusal
Right to Sublet
Subleases and assignments are rarely allowed, in either traditional or fixed leases. Co-occupation with the tenant’s group companies are usually allowed with the landlord’s prior approval.
Termination or Break
The tenant commonly has the right to terminate the lease at any time upon six months’ written notice without penalty. This six-month termination provision is highly valued by tenants and allows occupiers maximum flexibility to hedge against market volatility and a changing business climate. Under the traditional lease, the landlord does not have the freedom to terminate the lease unless the tenant is in breach or the landlord has justifiable grounds, such as self-occupation or redevelopment.
Fixed Term Leases
In a fixed-term lease, an option to terminate needs to be negotiated before the lease is signed. However, a termination provision may be negotiated after a lock-in period beyond a certain point in the lease term.
At the end of the lease, the tenant, at its own expense, restores the premises to its original condition.
Signage and Naming of Building
Large scale buildings rarely offer external dedicated building signage.
Tenants that occupy an entire building may be able to negotiate naming rights.
Capital contributions for fit-outs are generally not open for negotiation.
Laws & Practices
The Land Lease and House Lease Act govern office leases.
- Overseas buyers commonly appoint a buy-side advisor/agent
- Only J-REITs are required to announce transactions. Many transactions are not reported.
- Properties are marketed in a closed process.
- The landlord normally provides a drop ceiling with lighting, common area restrooms, HVAC and carpeting.
- The tenant normally pays for all other improvements, including restrooms within the occupied space. Most large scale buildings have designated contractors that tenants must use. The landlord often charges for the review of design documents and for supervision.
- Fit-out costs for large scale buildings in major cities normally range from JPY 280,000–700,000 per tsubo including construction, furniture, wiring, and design fees. General cost estimates by requirement are below:
High: JPY 560,000 - 700,000/tsubo
Medium: JPY 410,000 - 510,000/tsubo
Basic: JPY 280,000 - 350,000/tsubo
At the end of the lease, the tenant, at its own expense, restores the premises to its original condition, which estimates about JPY100,000 - 210,000 per tsubo. Such restoration usually includes, at a minimum, restoration of all walls, floors and ceilings and removal of tenant-installed fixtures. General cost estimates by building grade are below:
High: JPY 160,000 - 210,000/tsubo
Medium: JPY 140,000 - 180,000/tsubo
Basic: JPY 100,000 - 140,000/tsubo
Most tenants retain and pay for their own legal counsel.
Landlords usually use their own lease agreement templates.
A ‘standard’ Japanese lease is typically 5-6 pages and only biding in Japanese language.
Typical advisor/agency fees are as follows:
The tenant pays 1 month’s rent as the standard market fee based on the newly acquired/expanded area.
The standard market rate is 50% of one month’s rent based on the renewed/re-contracted area or a portion thereof, or a percentage of savings over the new lease term based on the landlord’s initial quote, or the current rent, whichever is higher.
Grade A Standard: In principle, buildings located in prime business areas* that fulfil all of the following conditions:
- Typical floor plate of 350 tsubo or more (500 tsubo or more in Tokyo)
- Net Leasable Area of 6,500 tsubo or more
- Gross Floor Area of 10,000 tsubo or more
- Age of less than 11 years
*Areas: Tokyo (mainly in the Central 5 Wards); Osaka (mainly in Kita, Chuo and Yodogawa Wards); Nagoya (mainly in Nakamura, Naka Higashi and Nishi Wards)
Floor space is usually measured in tsubo or square meters.1 tsubo = 3.3057 square meters = 35.58 square feet.
Contracted space is normally exclusive tenant space, so efficiency is almost 100%.
Most large scale buildings in prime locations adopt net measurement, with the lease including only the pure office area and columns, excluding common areas such as toilets, pantries, elevator halls and electrical closets.