The Amendment of the Civil Code – Regarding the Guarantor of a Lease Contract

Poste date: Monday, January 27, 2020

The Civil Code has been greatly amended for the first time since its establishment around 120 years ago. Some of the new amendments will start being enforced as early as April 1st of 2020. Among the amendments made at this time, the rules regarding the protection of a guarantor have been reinforced. While there are various amendments that have been made, we are going to focus on those relating to a guarantee obligation, the scope of the obligation, and the obligation to provide information; which shall be performed by a guarantor, a lessor, or a lessee in a real estate transaction and a lease contract.

Amendment point 1. To set a limit for the Guarantee Amount (Maximum amount)

When concluding a lease contract, you may also make a contract with a guarantor. A guarantor is responsible for any payments which have not been paid by the lessee by the request of the lessor and has the same responsibility as the lessee for debt repayment. Under the current Civil Code (before amendments) a guarantor’s responsibility has no limits in a lease contract. This means that a guarantor may have to sign on a contract without knowing the amount of money they shall have to guarantee.

In the amended Civil Code, for the protection of an individual guarantor in a lease contract, when making a real estate lease contract with a guarantor you must set the limit of Guarantee Amount (Maximum amount of Guarantor’s responsibility) at the time the contract is concluded.

With this amendment point, any guarantor provisions which do not state the maximum amount a guarantor will be responsible for, shall be invalid. To be valid, one of the two following descriptions shall be necessary for the guarantor provisions in a lease contract after this Civil Code amendment is executed.

1. Guarantor shall be jointly and severally liable for the fulfillment of all the lessee’s obligation of payment to the lessor in accordance with the provisions of the Contract within the maximum amount of JPY________.

2. Guarantor shall be jointly and severally liable for the fulfillment of all the lessee’s obligation of payment to the lessor in accordance with the provisions of the Contract within the maximum amount equivalent to ______ monthly rent at the time the contract is concluded.

Amendment point 2. To establish the obligation of providing information to the Guarantor

In the amended Civil Code, a lease contract must describe the obligation of providing necessary information to guarantor. It is for the purpose of providing information necessary for a guarantor to properly judge whether the guarantor may guarantee a lessee.

1. Lessee’s obligation of providing the Guarantor with information

When a real estate property lease contract for business is concluded, a lessee is required to provide a certain amount of information to the individual guarantor such as the status of an asset. If by any chance the lessee neglects this obligation, a guarantor agreement may be cancelled. To prevent such a situation when a new lease contract for business is concluded, it is recommended that you add a description space in a lease contract for confirming whether the necessary information has been provided to a guarantor. In the case that a guarantor is a corporation, the obligation of providing information is not required.

2. Lessor’s obligation of providing the Guarantor with information

In the amended Civil Code, a lessor must provide information to a guarantor when a guarantor requests that the lessor disclose information, such as whether or not a lessee has been late on any payments of the monthly rent. Unlike in the aforementioned case ①, describing the lessee’s obligation of providing information to a Guarantor, a lessor’s obligation set forth herein shall be applied to all the cases regardless of the leased property being or not being for business and regardless of the guarantor being a corporation or individual. In short, the obligation set forth herein shall be applied to all the guarantors who make a guarantor agreement with a lessee by the request of the lessee.

Amendment point 3. To establish the provision of Grounds for the Fixing of Principal

In the amended Civil Code, the provision for the Fixing of Principal (fixing the limit of Guarantee Amount) has been established for the purpose of protecting an individual guarantor.

The following 4 cases shall be the grounds for the fixing of principal in the amended Civil Code:

  •     1. When a lessee who is the principal debtor has died.
  •     2. When a guarantor has died
  •     3. When a guarantor has become bankrupt
  •     4. When a forcible execution has been enforced to the assets of a guarantor

A detailed explanation of the above 4 cases are as follows:

1. When a lessee has died

When a lessee has died, the guarantee amount by an individual guarantor is fixed. In a lease contract a lessee is the principal debtor and is the person who originally must pay all the debts under the lease contract. But when a lessee has died, the principal of the guarantee amount by an individual guarantor is fixed, and so the guarantor will not be responsible for any rent or charge which may be incurred later on.

For example, even when lessee A has died, a lease contract cannot be terminated because an heir, such as A’s wife or child, can succeed to the position of lessee. On the other hand, a guarantor has trusted the financial solvency of lessee A enough to make a guarantor agreement with a lessee A, but has not established the same trust with A’s heir. So once lessee A has died, the guarantor is no longer responsible for any rent or charge under a lease contract which may be incurred after such an inheritance procedure is started.

*The new lessee (lessee’s heir) must find another guarantor or must make a guarantor agreement with a credit guarantee company.

2. When a guarantor has died

When a guarantor has died, the guarantee amount by an individual guarantor is also fixed. This rule was established to protect the heir of an individual guarantor. The heir of the individual guarantor will be responsible for the debt of the lessee incurred before the individual guarantor has died.

To prevent any trouble, whether it should be necessary to confirm if an individual guarantor is in good health or not, is under future consideration.

*Lessee must find another guarantor or must make a guarantor agreement with a credit guarantee company.

3. When a guarantor has become bankrupt

When a guarantor has become bankrupt, the guarantee amount by an individual guarantor is also fixed.

In this case fulfillment of a guarantee obligation by an individual guarantor may not be expected and the guarantee amount by the individual guarantor need to be fixed in the bankruptcy procedure.

*Lessee must find another guarantor or must make a guarantor agreement with a credit guarantee company.

4. When a forcible execution has been enforced to the assets of a guarantor

When a forcible execution has been enforced to the assets of a guarantor, the guarantee amount by an individual guarantor is also fixed.

In this case a guarantor has fallen into a considerable difficult economic situation. For the protection of an individual guarantor, the amended Civil Code shall not require the guarantor to guarantee the rent and other charges of a lessee which are incurred after such a forcible execution has been enforced.

*Lessee must find another guarantor or must make a guarantor agreement with a credit guarantee company.