Impact of Civil Code Revision on Joint Guarantor System in Real Estate

In recent years, the use of joint guarantors has once again gained attention in the rental housing market. the revision of the Civil Code, which came into effect in April 2020, has brought about major changes to the joint guarantor system, affecting the entire real estate industry.

As INA&Associates, we are constantly consulting with many of our clients regarding rental contracts, and we have firsthand experience of the impact that this system change will have on the actual contracting process. In particular, new challenges and opportunities have arisen, such as using the system in conjunction with guarantee companies and setting the maximum amount.

In this article, as an expert in the real estate industry, we will explain in detail the specific impact of the Civil Code revision on the joint guarantor system and the resulting changes in usage. We will provide useful information for those who are considering a lease contract, those who are considering real estate investment, and those who are involved in the industry.

Changes in the joint guarantor system due to the revision of the Civil Code

The core of the revision of the Civil Code in April 2020

The Civil Code amendment that came into effect on April 1, 2020 brought fundamental changes to the joint guarantor system. The most important change is that the setting of the maximum amount has become mandatory when an individual becomes a cosigner of a revolving guarantee contract.

The maximum amount refers to the upper limit of the amount for which the cosigner is liable for payment. Under the previous system, the cosigner could be liable for the borrower's debt without limitation. However, after the revision, the guarantee contract itself becomes invalid unless the concrete amount is set in writing.

By this change, the burden of the cosigner became foreseeable, and the risk of excessive responsibility was reduced. On the other hand, for the lender side, the scope of the guarantee is limited, and the necessity of new risk management has arisen.

Practical Impact of Setting Limit Amounts

Setting a maximum amount is not merely a matter of determining the amount. In a lease contract, various obligations may arise, such as rent, common service charges, renewal fees, restoration costs, and compensation for damages. All of these must be taken into account when setting an appropriate maximum amount.

In actual practice, the maximum amount is often set at around 12 to 24 months' rent. However, depending on the characteristics of the property and the attributes of the tenant, a higher amount may be necessary.

It is important to note that a relative maximum amount, such as "____ months' rent," may be invalid. It must be stated in a specific amount, such as "2 million yen" or "3 million yen.

Reinforcement of guarantor protection

Another important aspect of the revision of the Civil Code is the strengthening of guarantor protection. When becoming a guarantor of a business loan, confirmation of intent by a notary public is now required. In addition, the obligation to provide information to the guarantor has been strengthened, requiring the provision of more detailed information regarding the property and repayment status of the primary debtor.

These changes made the risk of becoming a guarantor more clear, and made it possible to conclude a guarantee contract after sufficient consideration. On the other hand, there have been an increasing number of cases where it has become difficult to find a guarantor due to the increased complexity of the procedure.

Current Situation and Statistics on the Use of Guarantors

Transition of the Guarantee System in the Rental Market

According to a survey by the Ministry of Land, Infrastructure, Transport and Tourism, some form of guarantee is required in approximately 97% of lease contracts, and the form of guarantees is changing significantly. Particularly noteworthy is the rapid increase in the use of rent obligation guarantee companies.

As of 2010, 17% of contracts used only a rent obligation guarantee company, but by 2014, this figure had increased to 37%, more than doubling in just four years. Today, the use of guarantee companies has reached approximately 80% and has become the mainstream in the rental market.

New Trends in the Use of Joint Guarantors

Interestingly, while the use of guarantee companies is increasing, the use of cosigners has not completely disappeared. Rather, a new pattern of using both a guarantor company and a cosigner is increasing.

The following factors are behind this combined pattern.

First, it is from the viewpoint of risk diversification. Considering the risk of bankruptcy of the guarantor company and the risk of incurring debts that are not included in the scope of the guarantee, there are more and more cases where a supplemental guarantee by a cosigner is required.

Second, it is a flexible response based on the borrower's creditworthiness. For borrowers with unstable incomes and borrowers with a history of past delinquent payments, the company is building a more reliable guarantee system by requiring the establishment of a joint guarantor in addition to the screening by the guarantee company.

In addition, the revision of the Civil Code to set a maximum amount has clarified the scope of the joint guarantor's responsibility and lowered the psychological hurdle to becoming a guarantor.

Usage status by region and property type

The use of joint guarantors varies greatly by region and property type. In urban areas, the use of a guarantor company is the norm, while in rural areas, guarantees by joint guarantors are still common.

In high-end rental properties and commercial properties, the use of a joint guarantor with a guarantee company is common. This is in consideration of the high rent and potentially high restoration costs.

In properties for students, relatives often serve as joint guarantors, and it is also common to use a guarantor in combination with a guarantee company. In particular, students coming from rural areas to urban areas are often required to set up a joint guarantor along with proof of income from their parents.

Management Company's Response

The response of property management companies has also diversified. According to a survey by the Ministry of Land, Infrastructure, Transport and Tourism, 76% of management companies use "rent obligation guarantors only," while the remaining 24% use joint guarantors or only joint guarantors.

In particular, management companies with a long track record of managing properties tend to adopt flexible guarantee schemes, emphasizing the importance of trust with tenants. On the other hand, newcomer management companies often emphasize risk management and require the use of a guarantee company.

Impact and New Issues in Practice

Changes in Contract Practice

The revision of the Civil Code has brought about significant changes in rental contract practice. The most noticeable change is the more detailed description of the contract. Previously, a comprehensive statement such as "The joint guarantor guarantees all debts of the lessee" was sufficient, but now it is necessary to specify the specific amount of the maximum amount.

In addition, the scope of the debt subject to the guarantee is now required to be stated more clearly. It is necessary to specifically list which debts are covered by the guarantee, such as rent, common service charges, renewal fees, restoration costs, and compensation for damages.

The obligation to explain at the time of contract conclusion has also been strengthened. It is important to explain the meaning of the maximum amount and the scope of the guarantee to the cosigners sufficiently, and to conclude the contract after obtaining their understanding.

Practical issues in setting the maximum amount

The setting of the maximum amount is a problem in which the interests of the lender, the borrower, and the cosigner are complicatedly intertwined. As a lender, the lender wants to set an amount that can adequately cover the assumed risk. On the other hand, as a cosigner, it is natural to think that the burden is minimized.

In actual setting, it is necessary to consider the following factors comprehensively.

The rent level of the property is the most basic factor. Generally, the standard is 12 to 24 months' worth of monthly rent, although higher-priced properties may be set at a relatively lower multiple.

Property characteristics are another important factor. Properties with extensive facilities or special uses may require a higher maximum amount, as restoration costs may be high.

Borrower attributes are another factor to consider. A borrower with a stable income may require a relatively low maximum amount, while a borrower with an unstable income will require a higher setting.

Change in relationship with guarantee companies

Due to the revision of the Civil Code, the relationship between guarantee companies and joint guarantors has also changed. It is often positioned as a complementary relationship now though they were both in an alternative relationship in the past.

Guarantee companies provide professional services, such as prompt handling of rent arrears and representation in legal proceedings. On the other hand, the joint guarantor provides guarantees for debts that exceed the scope of the guaranty company's guarantee or for special circumstances that the guaranty company cannot handle.

This complementary relationship allows for a more comprehensive and stable guarantee structure. However, for the borrower, there will be the double burden of the guarantee fee and the request to the cosigner.

Responding to an Aging Society

The aging of Japan's society has had a significant impact on the joint guarantor system. Traditionally, it was common for relatives to serve as joint guarantors, but the aging of the guarantors themselves has increased the number of cases where they are concerned about their ability to pay.

According to a survey by the Ministry of Land, Infrastructure, Transport and Tourism, approximately 60% of landlords have a sense of rejection toward the elderly, and the main reason for this is anxiety over nonpayment of rent. Under these circumstances, elderly co-signers are often required to provide additional security measures.

In addition, due to the increase in the number of single elderly people, there are more and more cases where it is difficult to find a cosigner in the first place. In such cases, the use of a guarantee company is mandatory, but the screening process by guarantee companies tends to be more difficult for elderly people.

Advancement of Digitalization and Streamlining

The progress of digitalization in the real estate industry is also affecting the operation of the joint guarantor system. With the spread of online contracting procedures, the confirmation of the cosigner's intention and the exchange of documents are also becoming increasingly digitalized.

The widespread use of electronic contracts has enabled smooth contracting procedures even when the cosigner lives far away. In addition, the submission of guarantor's income verification documents can now also be done online, thus streamlining the process.

However, many management companies place importance on face-to-face explanation and confirmation of joint and several guarantees, which are important contracts, and it is expected that it will take time to fully digitalize these contracts.

Future Prospects and Measures

Diversification of Guarantee Programs

Further diversification of guarantee systems is expected in the rental market in the future. In addition to the traditional combination of joint guarantors and guarantee companies, new guarantee instruments are being developed.

For example, the introduction of credit scoring systems utilizing AI technology is enabling more precise risk assessment. This makes it possible to provide tailor-made guarantee programs according to the attributes of the borrower.

Research is also underway on decentralized warranty systems utilizing blockchain technology, which could fundamentally change the conventional warranty system in the future.

Reinforcement of support for those who need to secure housing

It is an important issue for the future to deal with those who require special consideration for housing security, such as the elderly, the handicapped, foreigners, and households raising children. These people often have difficulty finding a guarantor and require special consideration.

The national and local governments are working to enhance guarantee programs for people who need help securing housing. Various efforts are being made, including the use of public guarantee systems and guarantee support by non-profit organizations.

From the perspective of social responsibility, the real estate industry is expected to actively participate in these efforts and contribute to the development of an environment in which everyone can secure housing with peace of mind.

Utilization of Technology

The widespread use of IoT technology is significantly changing the way rental properties are managed. Smart locks and sensor technologies are making it possible to monitor tenants' living conditions in real time, enabling early detection and prevention of problems.

The use of these technologies is expected to reduce warranty risks, which may result in lower warranty fees and relaxed warranty conditions.

In addition, the use of big data will enable more precise risk assessment and the provision of guarantee programs optimized for individual borrowers.

Continuous Review of the Legal System

Several years have passed since the revision of the Civil Code, and its effects and challenges are becoming clearer. It is expected that the legal system will continue to be reviewed on an ongoing basis in light of changes in social conditions and practical issues.

In particular, the criteria for setting maximum credit limit amounts and the way guarantor protection should be provided require further consideration in light of the practical situation.

It is important for industry participants to closely monitor these legal developments and take appropriate measures.

Conclusion

Major Impacts of the Civil Code Amendment

The April 2020 revision of the Civil Code brought fundamental changes to the joint guarantor system. The range of the guarantor's responsibility became clear by the obligatory setting of the extreme amount, and the mechanism to prevent excessive burden was prepared.

On the other hand, for the lender side, the scope of guarantee has become limited, and the need for new risk management has arisen. As a result, a new pattern of using both a guarantee company and a joint guarantor is increasing.

Changes in Usage

Statistical data reveals that while the use of guarantee companies is rapidly increasing, the use of joint guarantors has not completely disappeared. Rather, the complementary relationship between the two has created a more comprehensive guarantee structure.

Currently, about 37% of lease contracts use both a guarantee company and a joint guarantor, and this trend is expected to continue.

Future Issues and Responses

Many challenges and opportunities exist, such as the aging of the population, addressing the needs of those who need to secure housing, and the use of technology. The industry as a whole needs to proactively address these challenges and strive to create an environment where everyone can secure housing with peace of mind.

Recommendations for Practitioners

Practitioners in the real estate industry should be aware of the following points.

First, when setting the maximum amount, it is important to set an appropriate amount by fully considering the characteristics of the property and the attributes of the borrower. Also, please be sure to provide detailed information in the contract, taking into account the purpose of the amendment to the law.

Next, with regard to the selection of a guarantee system, it is important to take a flexible approach according to the borrower's situation. By proposing the most appropriate guarantee system for each individual case, rather than a one-size-fits-all approach, it will be possible to both increase tenant satisfaction and ensure stable rental management.

Finally, it is necessary to continuously collect information and respond to trends in the legal system. It is important to keep up-to-date with the latest information and take appropriate action by attending training sessions of industry associations and subscribing to specialized magazines.

Message to Clients

INA&Associates K.K. will propose the most suitable guarantee system for each customer's situation. If you are having trouble setting up a joint guarantor, considering using a guarantee company, or any other kind of consultation, please feel free to contact us.

Frequently Asked Questions

Q1:How do I determine the maximum credit line amount?

A1:The maximum amount is determined by comprehensively considering the rent level of the property, its characteristics, and the attributes of the tenant. Generally, the standard amount is about 12 to 24 months' worth of monthly rent, but the following factors should be considered.

First, in addition to monthly expenses such as rent and common service fees, one-time expenses such as renewal fees, restoration costs, and damages should be considered. In particular, properties with extensive facilities or special uses may require a higher maximum amount, as restoration costs may be high.

The stability of the tenant's income and past rental history are also factors to be considered. A tenant with a stable income may be able to get away with a relatively low maximum amount, but if the income is unstable, a higher setting is required.

It is important to note that the amount should be stated in concrete terms, such as "2 million yen" or "3 million yen," rather than in relative terms, such as "X months' rent.

Q2:Why are both a guarantor company and a joint guarantor required?

A2:The reason for the increasing use of both a guarantor company and a joint guarantor is to diversify risks by taking advantage of the characteristics of both.

Guarantee companies provide professional services, such as prompt response in the event of rent arrears and representation in legal proceedings. They also cover areas that are difficult for individual cosigners to deal with, such as 24 hours a day, 365 days a year response system and nationwide service provision.

On the other hand, cosigners provide guarantees against debts that exceed the scope of the guarantor's guarantee or against the risk of bankruptcy of the guarantor company. In addition, a psychological restraining effect based on the personal relationship with the borrower is also expected.

Especially in high-value properties and business properties, since the assumed risk is large, the combination of both is often required as a more reliable guarantee system.

However, it is important to be flexible according to the characteristics of the property and the borrower's situation, because the borrower will have to bear the double burden of the guarantee fee and the request to the cosigner.

Q3:What should I do if I cannot find a cosigner?

A3:Even if a joint guarantor cannot be found, there are several ways to conclude a lease contract.

The most common method is to use a rent obligation guarantee company.

In addition, some municipalities offer public guarantee programs for those who need to secure housing. The elderly, disabled persons, foreigners, and households raising children may be eligible for this program, and the conditions may be more relaxed than those of private guarantee companies.

In addition, there are also guarantee support programs provided by non-profit organizations. These programs are offered from the perspective of social support, and may be available even to those who have difficulty being screened by regular guarantee companies.

The important thing is to consult with a real estate company as early as possible and gather information about available systems. Many real estate agencies have information on a variety of warranty programs and can suggest the best method for the borrower's situation.

Q4:After the revision of the Civil Code, has the risk of becoming a joint guarantor been reduced?

A4:The revision of the Civil Code has reduced the risk of being a joint guarantor to a certain degree, but the risk has not completely disappeared.

The most significant change is that the upper limit of responsibility became clear by setting the maximum amount. Previously, there was the possibility of unlimited liability for the borrower's debt, but now liability cannot exceed the set maximum amount.

However, the maximum amount still remains a heavy liability. In addition, the joint guarantor's liability continues even if the borrower goes bankrupt.

Moreover, the joint guarantor's responsibility is not reduced even now that the use of the joint guarantor with the guarantee company is increasing. The cosigner will still be responsible for the part that the guarantee company cannot cope with.

Therefore, when becoming a cosigner, it is important to fully confirm the amount of the credit limit and the scope of the guarantee, and to carefully consider one's own solvency.

Q5:How is the joint guarantor system expected to change in the future?

A5:The cosigner system is expected to change continuously in the future in accordance with changes in social conditions and technological progress.

First, with the aging of society, it is expected that more and more cases will become difficult to be guaranteed by traditional relatives. In response to this, public guarantee systems will be enhanced and new guarantee methods will be developed.

The use of technology is also an important factor: the introduction of credit scoring systems utilizing AI technology will enable more precise risk assessment and the provision of guarantee programs optimized for individual borrowers.

In addition, decentralized guarantee systems utilizing blockchain technology are being researched, which could fundamentally change the conventional guarantee system in the future.

In terms of the legal system, it is expected that there will be ongoing revisions based on the state of practice. In particular, further study is needed on the criteria for setting the maximum amount and guarantor protection.

However, the essential value of the joint guarantor system of trust based on human relationships will continue to play an important role. Even though the system may change due to technological advances, its fundamental value will be maintained.

It is important for those in the industry to respond flexibly to these changes and always keep in mind the operation of the system that puts the interests of lenders and borrowers first.