The first revision of the Civil Code in 120 years has passed. How will it affect the real estate market?

The first revision of the Civil Code in 120 years has passed.
How will it affect the real estate market?

In May of this year a piece of legislation quietly passed through the Diet and was established. The amendment was one that regards stipulations related to company and consumer contracts. At the time, the Japanese media was focused on urgent state and military issues such as North Korean missile launches, or the "Moritomo Gakuen land sale issue", and the similar Kake Gakuen issue, meaning the Civil Code revision went largely unnoticed. It seems the majority of people are likely unaware of it.

This was the first time in 120 years that a fundamental revision was made regarding the “law of obligations”. 120 years ago being directly after the Sino-Japanese war (1894 - 1895), around the time of the first summer Olympics held in Athens (1896) and also the age when "King of inventors", Thomas Edison created the kinetoscope (1891). While it is in fact rather shocking that the law remained unchanged since such an age, it seems that before and after 2020 the relevant industries will need to respond practically to its enforcement.

So what exactly changed? In the Civil Code is the "law of obligations", which covers a wide range of things related to credit, such as contracts and management, collection and lease, etc. Below, we will be considering how this amendment will affect the real estate market.

First of all, the revised Civil Code clarifies the rules for return of security deposits in real estate leasing, and for restoration of properties by landlords. However, since this wasn't clarified before, there are many opposing precedents. Due to this, it seems unlikely there will be a big effect on the rental market itself. Although the owner of the real estate needs to raise awareness regarding rules for deposit returns and restoration, it seems unlikely to lead to different cases from the past.

What we want to pay attention to is the "Joint guarantor system" in real estate leasing contracts. "Joint guarantor" is system that assumes the same responsibilities as the obligor when an individual or small business takes a loan from a financial institution, or a similar institution. Essentially, in cases where the person borrowing money cannot repay it for some reason, their guarantor must shoulder the debt. This leads to the obvious question "What benefit is there to becoming a guarantor?". In the first place, the aim of the joint guarantor system is for to allow those who lend money (such as financial institutions) to reduce their risk of default. In other words, there is zero benefit to becoming a guarantor. Still, one is needed to raise funds, meaning that by hook or my crook someone must be made to work as a guarantor.

In fact, the new revision to the Civil Code has been discussed since 2009 by the Liberal Democratic Party's subcommittee, and at that time the idea of scrapping the individual joint guarantor system emerged. However, objections within the ruling party were present, and in the end the system was preserved. Watering things down is often said to be a specialty of Japanese politics. Incidentally, this "joint guarantor system" seems to be unique to Japan among developed countries.

Going back to the original topic, naturally this system is also used for loans and rental agreements for real estate. This means that there is no doubt there will be an impact on the real estate market due to the Civil Code amendment. The main change concerning the joint guarantor system is that there is an obligation to specify the limit of the amount the guarantor is liable for in writing (or some form of electronic record). Further, the guarantor must now be able to ask the borrower (the main obligor) to provide information regarding assets, and income and expenditure. If the provided information differs from the actual situation, they have the right to cancel their guarantor contract. Summing up the changes roughly, (1) The responsibilities of real estate owners have increased (2) guarantors have been protected. If it is necessary to disclose assets, and income and expenditure, then obligors may find it hard to find guarantors.

If this is the case, there may be doubts that an inability to insure real estate loans and rent will lead to stagnation of the real estate market. However, it could be said that this revision actually allows for increased fluidity. As individual guarantors decrease, rent and credit insurance companies will surely get their turn.

Insurance companies are in a way professional credit collection companies. It is possible they will be able to solve issues with unpaid rent and illegal occupation more smoothly than the property owner. As the revision didn't result in the abolition of the system, it is unlikely to cause any extreme action. However, it does appear to be a move in the direction of scrapping the system. This may be the "prologue" so to speak, and carefully examining a prologue usually gives one insight into the future.