Subdomain and Subdirectory Leasing: Contract Checkpoints

The business of lending out a portion of the domains managed by a company, such as subdomains and subdirectories, to other companies to operate their media has been trending for several years.

Search engines, such as Google, have a basic policy of favorably treating pages with high domain authority and ratings for SEO. Therefore, for instance, if our firm’s domain were a highly authoritative and rated domain, the following process would be carried out (needless to say, our firm’s domain does not have such authority and rating, and we do not engage in this type of business).

1. The landlord (in this case, our firm) “lends” its subdomains or subdirectories to the tenant (for example, another law firm or company).
2. The tenant operates media within it.
3. The tenant pays a portion of the revenue from the media to the landlord, somewhat like “rent”.

This business (and SEO technique) is seen by search engines as a method that exploits the policy of evaluating authority and ratings on a domain-by-domain basis, and it is said that the business itself carries risks. However, such businesses do exist in reality, and there are cases where legal disputes arise due to deficiencies in their contracts.

From the perspective of “avoiding legal disputes”, we will explain the checkpoints for contracts used in such business scenarios.

Nature and Clauses of Subdomain and Directory Leasing

The essence of subdomain and directory leasing lies in granting the lessee the authority to operate a part of the domain owned by the lessor.

Article ● (Granting of Operational Authority)
The lessor agrees to allow the lessee to use the area within the domain managed by the lessor, specifically the hierarchy below the URL in question (hereinafter referred to as “the area in question”), for the production and operation (hereinafter referred to as “the use in question”) of information media related to the category in question (articles and other content on the web composed of text, images, videos, and other information, and their collections). In return, the lessee agrees to pay the lessor a fee. The term “hierarchy below the URL” includes all URLs that have been extended by any number of “/” at the end of the URL in question.
The domain in question: ●●●●
The URL in question: ●●●●
The category in question: Cosmetics

The “URL in question” may be a subdomain or a subdirectory as mentioned above. The part following “In addition” may seem redundant from a technical perspective, but it is added to ensure that there is no ambiguity in the event of a dispute arising from this contract and it ends up being handled in court.

Also, it is desirable to define the “category in question” in relation to the “lessee’s obligations” mentioned later. If we do not define it here, the clause on the “lessee’s obligations” is likely to become complicated as described later.

Clause on the Obligations of the Lessor

Disputes related to subdomain and directory leasing often arise from the tenant’s perspective when necessary account information for media operation is not sufficiently provided or is no longer provided.

Article ● (Obligations of the Lessor)
The lessor shall perform all acts necessary for granting operational authority (including but not limited to the following items).
(1) Granting of an account agreed upon between the lessor and the lessee as necessary for the lessee to produce information media in the subject domain.
(2) Provision of information on the web server and other matters used by the subject domain.
(3) Other acts separately agreed upon between the parties.

Therefore, in the first item, it can be said that it is easier to argue for the provision of an account clearly agreed upon in the contract in situations like the one mentioned above if you describe as specifically as possible, such as “WordPress account information”.

Clause on the Obligations of the Lessee

In such businesses, the friendly relationship between the lessor and the lessee can be disrupted depending on ‘how’ the lessee operates the media. For example, there may be cases where the lessee publishes risky articles that may violate administrative laws such as the Japanese Pharmaceuticals and Medical Devices Act, stating that “there is a certain legal risk, but it is unavoidable for profit,” and the lessor takes issue with this.

Article ● (Obligations of the Lessee)
The Lessee shall use this service in compliance with the following obligations based on the grant of operational authority:
(1) Not to impose excessive load on the web server used by this domain
(2) Not to infringe on copyrights, portrait rights, or other rights held by third parties
(3) Not to violate the Japanese Pharmaceuticals and Medical Devices Act, Medical Advertising Guidelines, or other laws and regulations
(4) Not to post articles outside of this category

Furthermore, item 4 is a clause to question the breach of obligation in cases such as when “adult goods product introductions start to be posted, even though it was lent out for a cosmetics media.”

If you set the above-mentioned “this category” narrowly, it will be possible to question the breach of obligation for such “unexpected genre articles.”

If you set “this category” broadly, item 4 of this clause will list the “prohibited categories” of articles that should not be posted. However, listing “genres to be wary of” is more laborious and difficult, and defining “publishable article genres” as “this category” from the beginning is often simpler and more effective.

Provisions Regarding Payment of Consideration

The consideration for subdomain and directory leasing is typically calculated as a certain percentage of the revenue generated by the media operated within the said domain.

Article ● (Consideration for the Use of the Subject Matter)
1. The lessee must report to the lessor the breakdown of all sales (hereinafter referred to as “Subject Matter Revenue”) arising from the use of the subject matter (including the URL of the article that generated the sales, the amount, and the date of occurrence) by the 10th of the following month. The following items are considered to be included in the Subject Matter Revenue:
(1) Affiliate rewards arising from articles within the subject domain or redirects and linked articles from such articles
(2) Advertising rewards from Google AdSense, pay-per-click ads, display ads, etc., installed in articles within the subject domain
2. If the lessor has any doubts about the report in the preceding paragraph, they must notify the lessee in writing (including electronic mail and other electromagnetic media, the same shall apply hereinafter) within 10 days of the report. If no such notification is made, the lessee’s report is deemed to be accurate.
3. The lessee must pay the lessor an amount equal to 10% of the Subject Matter Revenue for the current month plus consumption tax by transferring it to the lessor’s designated bank account by the end of the following month. The lessee bears the bank transfer fee.

The second paragraph is a clause to prevent the lessee from later claiming that the reported revenue was understated, and is a clause favorable to the lessee.

In the business of subdomain and directory leasing, it is often the case that the affiliate links and advertisements installed within the media are the lessee’s account, and thus, it is often difficult for the lessor to see the exact amount of revenue. In such cases, if the trust relationship breaks down for some reason, the lessor may claim that “the revenue distribution I have been receiving is based on the understated revenue, and it may have been understated.” This is a clause to prevent such troubles.

Clause Regarding 301 Redirect Processing After Contract Termination

In the business of subdomain and directory leasing, it is somewhat common to set up a clause at the time of contract that allows for the redirection of access to the leased area to another site managed by the lessee through a so-called 301 redirect, after the termination of the contractual relationship.

Article ● (Processing at the Time of Contract Termination)
1. When this contract is terminated due to expiration of the contract period, cancellation, dissolution, or other reasons, the lessor must redirect to the URL specified by the lessee for the subject area through 301 redirect processing.
2. The lessee shall carry out the redirect processing mentioned in the preceding paragraph, and the lessor must provide all necessary cooperation and information (including but not limited to the following items) for the lessee to carry out such redirect processing.
(1) Provision of account information necessary to change DNS settings
(2) Provision of FTP account information that can access the subject area
3. The period for the redirect processing based on this clause shall be one year from the termination of this contract.

While the redirect processing itself is typically carried out by the lessee, the provision of necessary information such as account information for DNS settings in the case of subdomain leasing and FTP server information must be done by the lessor.

Summary: Specialized Internet Business and Contracts

As discussed in this article, when dealing with a business that is highly specialized or can be considered ‘cutting-edge’, the tasks of creating and amending contracts require:

• An understanding of how to implement processes that facilitate the smooth operation of the business through specific clauses
• Knowledge on how to make ‘unambiguous’ descriptions from the perspective of a court or judge, in case a dispute arises and ends up in court

In this sense, it is necessary to have an understanding of the business in question and legal knowledge. It can be said that it is important to seek the services of a law firm with knowledge and expertise in IT and Internet business.

Introduction to Our Firm’s Measures

Monolith Law Office is a legal office with high expertise in both IT, particularly the Internet, and law. Our firm handles the creation and review of contracts for various cases, ranging from Tokyo Stock Exchange-listed companies to venture businesses.