Owners who have just started investing in real estate often feel uneasy about the management operations of rental properties and related laws and regulations, wondering "where to start learning. This article explains the basic framework of rental property management operations performed by real estate companies (building contractors) and the key points of legal compliance in order to ease the concerns of such novice owners. The differences between two important laws , the Building Lots and Buildings Transaction Business Law (hereinafter referred to as "Building Lots and Buildings Business Law") and the Rental Housing Management Business Law, will be sorted out, and points to keep in mind when explaining important matters and making management consignment contracts will be presented. In addition, a specific checklist for strengthening compliance is also presented. We have carefully summarized the technical content in a respectful manner, breaking it down as much as possible to provide a practical viewpoint, so we hope you will find this information useful.
First, we will summarize the roles and differences between the two representative laws related to rental management: the Building Lots and Buildings Transaction Business Law (Takken Business Law) and the Rental Housing Management Business Law.
The Building Lots and Buildings Transaction Business Law regulates real estate builders who act as intermediaries (brokerage) or agents for the sale, purchase, and lease of real estate. It is intended to ensure that building contractors (real estate companies) conduct transactions of properties fairly and protect the interests of the parties to the transaction (purchasers and tenants). Specifically, the law requires that when introducing a property and finalizing a contract, the builder must explain important matters (prior explanation using the Important Matters Explanation Form), issue a document at the time the contract is concluded (issuance of a contract document known as an Article 37 document), and appoint a real estate transaction specialist (a nationally certified real estate transaction specialist). Under the Building Lots and Buildings Transaction Business Law, a real estate transaction is conducted by a licensed real estate agent who explains important matters and delivers the contract in writing, thereby preventing the tenant or buyer from later saying, "I didn't hear that" and ensuring that the transaction can be conducted with peace of mind.
On the other hand, the Rental Housing Management Business Law is a relatively new law that regulates rental property management companies that provide management services for rental properties (e.g., tenant relations, rent control, building maintenance, etc.) It was enacted in 2020 and went into effect in June 2021. The law aims to optimize the relationship between property owners and rental management companies and improve the quality of management services. In the background, there have been a number of troubles surrounding subleasing (so-called rent guarantees through lump-sum leasing). In the past, there have been cases in which a contract was concluded without fully explaining the risk of a decline in the rent market or the possibility of a reduction in rent, claiming that "the rent is guaranteed for the future at Fatima yen," which later resulted in disadvantages for the owner. In order to prevent such situations from occurring, the Rental Housing Management Business Law requires thorough prior explanation to owners andprohibits exaggerated advertisements and improper solicitation.
With the enforcement of the Rental Housing Management Business Law, a registration system with the Minister of Land, Infrastructure, Transport and Tourism was introduced for rental property management companies, and registration became mandatory especially for companies managing 200 or more units. After the transitional measures period ends in June 2022, companies that do not have a business manager are subject to severe penalties, including suspension of business operations. The Rental Housing Management Business Law has been revised to make it easier to manage rental housing. Thus, it can be said that the Rental Housing Management Business Law is a law that places emphasis on the development of systems on the part of management companies and the protection of owners.
To summarize the differences between the two laws, the Real Estate Trader Law regulates the work of real estate builders (such as the obligation to provide explanations at the time of contracting) to protect tenants and buyers, while the Rental Housing Management Business Law regulates the work of management companies (such as prior explanations and reporting obligations) to protect property owners and ensure proper management operations. The main difference is that the Rental Housing Management Business Law regulates the operations of management companies (such as prior explanations and reporting obligations) with the aim of protecting property owners and ensuring proper management. However, there are also similarities. Both laws require explanation of important matters prior to contracting and delivery of documents at the time of contracting, and both share the goal of ensuring transparency in transactions. In practice, many real estate companies are engaged in both rental brokerage (building construction business) and rental management, and it is common for building contractors to also serve as business managers. Therefore, it is good to understand that even though they may appear to be one company from the owner's perspective, behind the scenes, operations based on theBuilding Lots and Building Transaction Business Law (tenant solicitation and contracting) and operations based on the Rental Housing Management Business Law (rental management) are carried out in cooperation with each other.
Next, we will explain some points to keep in mind from the owner's perspective regarding the "explanation of important matters" and "management contract," which are important in actual rental management situations. There are points for each of the explanations given at the time of the lease contract with the tenant and the management contract between the owner and the management company.
When a tenant moves into a rental property, an explanation of important matters is always given before the contract is signed. In accordance with the Building Lots and Buildings Transaction Law, a real estate agent (real estate agent) explains to the tenant (prospective tenant) important information about the property and rental conditions. For example, the explanation will cover the facilities and conditions of the property, the contract term, renewal fees, prohibited items, the current state of the property, any defects, the condition of lifelines, and other matters that affect the contract. In principle, explanations of important matters are given in person using a written explanation of important matters, but in recent years, the Ministry of Land, Infrastructure, Transport and Tourism has lifted the ban on online explanations using information technology (IT explanation), making it possible to receive explanations in person even if you are far from the property. In both cases, the tenant is required to fully understand the contents of the explanation using a written explanation signed and sealed by a licensed real estate agent before proceeding to sign the contract.
As an owner, it is important to be aware of whether the management company or brokerage firm is properly explaining important matters to tenants. If the explanation of important matters is inadequate, there is a possibility of problems later on with tenants due to the discovery of matters that they were not told about. For example, if there are any rules (rules of use) or special agreements unique to the owner of the property, it is necessary to have these details provided separately from the Important Matters Explanation and the lease agreement. If the property is managed by the management company, they will know every detail, so there will be few omissions. However, if the management company acts as an intermediary for a property managed by another company, the explanation tends to be uniform. It is advisable to use a checklist to ensure that there are no omissions in the explanation, including rent payment methods (bank transfer and direct debit procedures) and detailed rules of use (garbage disposal, restrictions on use of facilities, etc.). It is advisable for the owner to meet with the management company in advance to confirm that matters that he/she wants to convey to tenants are properly reflected in the explanation of important matters and in the contract.
When property management is outsourced to a real estate company, a rental management contract (management consignment contract) is concluded between the owner and the management company. Under the Rental Housing Management Business Law, the management company is required to provide an explanation of important matters to the owner before concluding the management consignment contract. This is confusing with the aforementioned explanation of important matters for tenants, but the content and the parties involved are different. When a management company signs a contract with an owner, it is now required to explain in writing the details and conditions of the management services in detail, and to go through a procedure to obtain understanding and agreement. It is important that the owner read through the explanatory materials presented at this stage and do not hesitate to ask questions to clarify any points that are unclear.
The management agreement will specify all important agreements, including the scope of management services, costs, and contract terms. Below is a list of points you should particularly check when signing a contract with a management company.
Scope of management services: Confirm the extent to which the management company will be entrusted with the management of the property (e.g., tenant recruitment, contract procedures, rent collection, handling complaints, attending move-outs, cleaning and inspections, etc.). It is also important to check the possibility of the management company subcontracting the work to other companies. The contract will state whether or not and under what conditions the company may re-consign the work.
Management fee (commission) and payment method: Confirm the amount of the management fee to be paid to the management company (e.g., X% of rental income), as well as the method and timing of payment. In addition, be sure to understand the burden of fees in the event of services not included in the management fee (e.g., costs for arranging repairs in the event of equipment failure, costs for handling lawsuits, etc.).
How rent and security deposits are managed: Confirm how the management company will store and manage rent and security deposits paid by tenants and remit them to the owner. By law, the management company is obligated to manage the owner's property, such as rent and security deposits, separately from its own funds. Therefore, check that appropriate money management methods are in place, such as transferring funds to an account in the owner's name or using a trust account.
Method and frequency of periodic reports: Check how often and by what method you can receive reports on the income and expenditure of the property and the status of tenants. Generally, a remittance statement and management report are provided at the time of monthly rent remittance, but it is important to check whether you receive only a verbal report or whether you can receive a report in writing or in a form that keeps a record in data.
Tenant relations policy: Check how and by whom complaints and inquiries from tenants and emergency responses to equipment breakdowns are handled, including whether there is a 24-hour contact number and how problems are handled late at night or on holidays. As the management company acts as the owner's agent in dealing with tenants, it can be expected to respond quickly and courteously, but it is also helpful to understand their experience in this field and the manuals they have in place.
Contract Term and Cancellation Conditions: Make sure to confirm the validity period of the management contract (e.g., automatic renewal every year) and the conditions for cancellation in the event of mid-term cancellation. In particular, the method of cancellation and whether or not there is a penalty fee should not be overlooked. Some companies charge a hefty penalty fee to terminate the contract, while others have conditions in the sublease contract that do not allow the owner to terminate the contract before the end of the lease term. Check the termination clause carefully so that you do not find out about unfavorable terms later.
Disclaimer: If there is a disclaimer that states the extent to which the management company is not liable, make sure you understand its contents. For example, "The management company shall not be liable for damage to the building caused by natural disasters. It is a good idea to consider taking necessary measures such as purchasing insurance for the owner to prepare for such risks.
The above points will be described in detail in the explanation of important matters before the management contract is signed, and will also be included in the actual contract. At the time of signing the contract, each of these points will be confirmed one by one, and both parties will sign and seal the contract as proof of their agreement. After the contract is concluded, the management company will provide the owner with a copy of the contract (a document corresponding to Article 37 of the Building Lots and Buildings Transaction Business Law), which must be received and kept in a safe place. It is essential to keep the agreement in writing, not just a verbal explanation, to prevent problems and to comply with laws and regulations. If you sign a contract with any unclear points left unanswered, it may cause trouble later on. If you have any questions at all, you can ask for confirmation before signing the contract, and if necessary, you can ask for revisions or additions to the contract. A trustworthy management company will be able to carefully handle the contract to ensure that the owner fully understands and agrees to the contents of the contract.
Finally, here is a checklist to help owners strengthen legal compliance in their rental management operations and operate with peace of mind. Instead of leaving it up to the management company, owners themselves can help prevent violations and maintain a relationship of trust by regularly checking the following points.
Check the license and registration status of the management company: Make sure that the management company you are contracting with has a license for building construction business and that it is within the expiration date. In addition, if the company manages a large number of units, check the registration number of the rental housing management company (registration with the Minister of Land, Infrastructure, Transport and Tourism is mandatory for companies managing 200 units or more under the Rental Housing Management Business Law, which will take effect in 2021). License numbers and registration can be checked on the company's website, business cards, and signs posted in the office.
Whether important matters are properly explained to tenants: Check whether important matters are explained to tenants in writing by a licensed real estate agent prior to signing a contract. Although IT-based explanation is becoming popular these days, there is no problem as long as a written explanation of important matters is presented and explained in advance, which is equivalent to a face-to-face meeting. When the owner signs a management contract with the management company, review whether the owner was given a written explanation of important matters and whether it was fully explained. If you are considering a sublease contract (lump-sum lease), you are obligated by law to receive a detailed explanation (explanation of important matters) in advance regarding the risk of rent reduction, so make sure you have the risks and conditions presented in writing, not just orally.
Contents and retention of contracts: Make sure you understand all the contents of the lease contract and management agreement. In particular, make sure that there are no unclear points on important matters such as fees, contract terms, and cancellation conditions. The presence or absence of penalty fees upon cancellation of the contract is also an important point to check. It is a basic rule that both parties keep one copy of the contract documents after signing and sealing. The owner should also file the documents received and be able to review them immediately if necessary.
Appropriateness of money management: Check to see if the money belonging to the owner's property, such as rent and security deposit, is properly segregated and managed by the management company. Check the monthly remittance statements and account inquiries to see if the amounts paid by tenants are remitted to the owner as contracted. If there are any delays or shortfalls, inquire immediately and confirm the cause. A reliable management company will clearly separate the owner's funds from the company's operating funds, and will promptly report and settle any problems.
Receipt of periodic reports: Confirm that periodic reports from the management company are being provided according to the contract. Check to see if the monthly reports and rent remittance statements have been received at the scheduled time and if there are any unclear points. If there are any deficiencies or questions about the reports, do not leave them as they are, but ask the person in charge and get additional information if necessary. The owner's attitude of carefully checking the report will help the management company maintain a sense of urgency and strengthen compliance.
Confirmation of resident response: It is also important to understand how the management company responds to complaints and requests from residents. Ask the management company to share what kind of inquiries or problems occurred and how they were handled in periodic reports and other communications as needed. If necessary, it is also a good idea for the owner to conduct a tenant survey to confirm whether there are any problems with the management company's response, and if there is a contract with a 24-hour emergency response service, to understand its details (e.g., initial response to a water leak or lost key) so that the company can respond quickly in case of an emergency.
Internal system and response to changes in the law: It is also important to determine whether the management company's internal compliance system (e.g., checks by business managers) is functioning. A company that has a system in place to prevent mistakes and illegal activities by having multiple people involved within the company, rather than leaving it up to the person in charge, is a company that can provide peace of mind. Also, keep an eye out for information on legal changes in the real estate industry. For example, in recent years, there has been a series of major legal changes, such as the lifting of the ban on electronic contracts. The electronic delivery of important item explanations and contracts has made contracting more efficient, but it is still necessary to confirm that procedures are being followed in accordance with the law. Owners should be aware of the latest trends and take action to prevent compliance violations and ensure sound rental management, rather than leaving it up to the management company.
We have explained the basic framework and differences between the Building Lots and Building Transaction Business Law and theRental Housing Management Business Law, as well as points to keep in mind and checklists to follow when signing contracts and providing explanations. Although it may seem difficult at first, understanding each of these points will reduce your anxiety about rental management. Complying with laws and regulations is not just about avoiding government guidance; it is also directly related to protecting the owner's own assets and building a relationship of trust with tenants. In fact, the purpose of the Rental Housing Management Business Law is "to protect the interests of both landlords (owners) and tenants, aiming for a win-win relationship for both parties. By strengthening compliance, we can get closer to this kind of win-win rental management.
For novice owners, there is no problem if you take measures one by one while utilizing the checklist mentioned in this article and cooperating with a reliable real estate company or specialist. If you are unsure about something, consult with the person in charge of the property management company, a real estate business manager, or a real estate consultant to accumulate knowledge. Fortunately, the real estate industry has a well-developed legal system, and in most cases, if you operate in accordance with the rules, you can avoid major problems. If a good relationship between the owner, management company, and tenants can be built on a foundation of legal compliance, you will be closer to your goal of securing profits through stable rental management. We hope that you will have a good grasp of the basics of real estate management to realize a safe and secure life as a real estate owner.