In Japan, every lease agreement explicitly defines the intended use of the property—whether for residential or commercial purposes. Typical wording includes statements such as “This property is to be used for residential purposes only” or “Office use permitted.” Misunderstanding or overlooking this distinction can lead to serious contractual violations and unexpected legal consequences.

This issue has become increasingly relevant in recent years, as more tenants work from home or launch small businesses from their residences. In such cases, the line between “living” and “using” becomes blurred. However, the legal rights and responsibilities associated with residential and commercial leases differ significantly, making it crucial to understand the distinction from the outset.

This article explains the fundamental differences between residential and commercial lease agreements, the risks of misusing a property contrary to its designated purpose, and key points to review before signing a contract.

What Is a Residential Lease Agreement?

A residential lease agreement is a contract in which a property is rented with the primary purpose of being used as a personal living space. It assumes that the tenant will reside in the property for day-to-day life. Any use beyond this scope—such as for business or commercial activities—is generally restricted.

Key features of a residential lease include:

• Strong legal protection under Japan’s Act on Land and Building Leases

• Favorable renewal terms, with eviction permitted only for just cause

• Clear standards for initial costs such as security deposits and key money

• Permission to register a resident address at the property

While this type of lease offers robust tenant protection, it is strictly intended for residential use. Business activities or retail operations are typically prohibited under such agreements.

What Is a Commercial Lease Agreement?

A commercial lease agreement is a contract for renting a property intended for profit-generating activities such as retail stores, offices, warehouses, or private classrooms. These agreements are commonly signed by corporations or sole proprietors, and the lease typically specifies the intended business use and type of operations allowed.

Key characteristics of a commercial lease include:

• Limited application of tenant protections under Japan’s Land and Building Lease Act

• Often structured as fixed-term leases, requiring re-contracting upon expiration

• Rental rates may be set higher than those for residential properties

• Restoration obligations tend to be broader than in residential leases

• Consumption tax is frequently added to the rent amount

Due to fewer statutory protections for the tenant, commercial leases often grant greater flexibility to landlords in terms of mid-term termination, renewal refusal, or usage conditions, depending on the contract terms.

What Happens When the Lease Terms and Actual Use Don’t Align?

It is not uncommon for tenants to enter into a residential lease but then begin engaging in business activities from the property—such as hosting client meetings, storing inventory, or operating a small business from home.

However, using a property in this manner carries significant risks, including:

Risk of Lease Termination Due to Breach of Contract
Many residential leases explicitly prohibit non-residential use, with clauses such as “The property shall not be used for any purpose other than residence” or “Business use is prohibited.” Violating these terms may legally justify a termination notice from the landlord.

Exclusion from Fire and Liability Insurance Coverage
Residential insurance policies are designed with personal use in mind. If an incident occurs due to commercial activity—such as an accident or damage—the insurance may be invalidated, leaving the tenant fully liable.

Violation of Management Rules and Resident Complaints
Properties designated for residential use often maintain strict rules regarding noise, guest traffic, and delivery frequency. Unauthorized business operations can disrupt the living environment, prompting complaints from neighbors and intervention by the management company—potentially leading to contract termination.

What’s the Difference Between “SOHO Use Permitted” and “Office Use Permitted”?

With the growing prevalence of telework and side businesses, properties labeled as “SOHO permitted” or “Office use permitted” are increasingly common. These allow for limited business activities within residential lease agreements, under certain conditions.

SOHO Use Permitted
“SOHO” stands for “Small Office / Home Office.” This type of lease allows the tenant to engage in low-impact, non-client-facing work such as graphic design, writing, or remote business operations. Corporate registration or business licensing is typically not permitted.

Office Use Permitted
While still classified as a residential lease, this arrangement allows for a limited number of client visits and may permit corporate registration. However, approval from the landlord is often required depending on the type of business. Restrictions may also apply to signage and direct commercial activity.

In both cases, clear terms must be agreed upon at the time of the lease. Unauthorized use discovered after move-in may be grounds for contract termination.

Key Points to Confirm Before Signing a Lease

To prevent discrepancies between the intended use and the lease terms, it is essential to verify the following details in advance:

• Is the lease designated as “residential” or “commercial”?

• Are there any special provisions related to usage purposes?

• What are the rules regarding visitors and receiving mail or deliveries?

• Is corporate registration or signage allowed?

• How are utilities, internet, and insurance contracts classified (residential vs. commercial)?

If business use is anticipated, it is safest to select a property that explicitly allows for commercial leasing or office use from the outset.

The Greatest Risk Lies in Signing a Lease Without Clarity

Proceeding with a lease without fully understanding the difference between residential and commercial use can lead to serious issues later—such as unexpected costs, contractual disputes, or even eviction. Regardless of how minor the business activity may seem, it is essential to be fully aware of the lease type under which you are renting.

Avoiding ambiguity is key. The most effective way to prevent future risk is to simply ask, before signing, “Is it acceptable to use the property in this manner?”