Real Estate Law in Japan

Transfer of the title to a property is governed by the Civil Code. In addition, the Real Estate Registration Law applies to the conclusion of the title transfer.

Under the Civil Code, the title to the property may be legally transferred/conveyed by simply expressing the intent to transfer it. No formality is required (for example, no written sale and purchase agreement is required.). In addition, no instrument (separate from the contract) is required to transfer/convey title to the property (for example, no title deed is required to affect the conveyancing).

However, to assert such a transfer of title against a third party, confirmation is required under the Civil Code.

In case of real estate, registration is the way to confirm the title transfer. Such a registration is governed by the Real Estate Registration Law. More details about the registration are outlined below.

Under the Civil Code, the land and the building on it are regarded as separate real estate and independent from each other (while in some other countries such as the US, the building on the land is deemed as an “improvement” of the land and accordingly, the building is not regarded as the subject of ownership interest separate from the land). If the buyer wants to acquire the land and the building(s) on it, the sale and purchase agreement should specify that both the title to the land and the building(s) will be transferred to the buyer.

An outright sale and purchase agreement of real estate between the seller and buyer is usually used.

However, for commercial property, the real estate is occasionally put in a trust, and the beneficial interest representing such real estate is traded to save on registration tax as well as the real estate acquisition tax.

It is rare to use escrow in closing the transaction and hard to find an escrow agent or title insurance company.

While it is not legally required, a real estate broker is often used to find the property (for the buyer or lessee), a potential buyer (for the seller), or a potential lessee (for owner). Real estate brokers are legally regulated under the Real Estate Brokerage Act and must be licensed.

Japanese real estate brokers are unique in that they are allowed to represent both the seller and the buyer in the same transaction. The real estate broker may be paid fees by both the seller and the buyer. The maximum fee that a licensed real estate broker can charge is restricted under the act.

As discussed in the first section above, no formality is required to affect the title transfer/conveyancing. Accordingly, involvement of a notary is not required, for contracts or for registration.

The Japanese real estate registration system is governed by the Real Estate Registration Act.

Under this Act, the registration book is prepared for each piece of the real estate – as the land and the buildings on it are separate real estate, a book of registration is prepared for the land and building.

In case of land, the registration book is prepared for each parcel of the land. A parcel can be divided and merged with other parcel(s) and such a division and merger will be reflected in the front page of the book.

Conversely, for the building, the registration book is prepared for each building. Ancillary buildings (such as barns) are included in the book of the main building.

Each registration book is divided into two sections: one is the ownership section, and the other is the encumbrance section. The chain of title can be searched in the ownership section. In the encumbrance section, searches can be made on the mortgage, pledge, lease, superficies, easement, lien, judicial attachment, or other kind of encumbrance on the property. Anyone can access the registration book for a small fee. Title insurance is not common in the Japanese market. The registration book is usually in a digital format.

To file the registration documents, the filer must submit the documents/information showing the intent to transfer the title. The sale and purchase agreement is usually used for this purpose, but the filer can prepare separate documents strictly for filing purposes.

In practice, a judicial scrivener is often retained for filing purposes. The judicial scrivener must have a license to engage in this business under the Judicial Scriveners Act.

Under the default rule of the Civil Code, the seller of real estate owes warranties of non-conformity of transferred right to the terms of the contract. Under this warranty, the buyer may request to cure the unconformity, a reduction of price, indemnity for loss, and cancellation. If the real estate delivered by the seller does not conform to the terms of the contract with respect to the kind or quality, and the buyer fails to notify the seller of such non-conformity within one year from the time when the buyer becomes aware of it, the buyer may not exercise such a warranty, provided, however, that this does not apply if the seller knew or did not know due to gross negligence the non-conformity at the time of the delivery.

There is a statutory exception for this default rule under the Act on Promotion of Quality Control of Residence. Under this act, for newly built residences, the seller owes a warranty to cure and to reduce the price for 10 years from the delivery in respect of the substantial, structure-bearing part of the residence.

In commercial transactions, it is often seen that the seller does not owe any warranty (in other words, the sale is on an as-is basis) to eliminate the statutory warranty. In general, such an agreement is legal, valid, and biding on parties, but there are two major statutory exceptions for this.

The first is that even if the contract sets forth that the seller does not owe a statutory warranty, the seller is still liable for (i) the target real estate’s non-conformity to the terms of the contract that the seller is aware of but failed to tell the buyer, and (ii) any encumbrance that the seller has granted or created.

The second is that the seller – if a real estate broker – is still liable under the statutory warranty for at least two years, regardless of the language in the contract to the effect that the seller does not owe the statutory warranty.

If the seller insists on an as-is basis transaction, due diligence of the property is recommended. For this purpose, if a real estate broker is retained, the real estate broker is legally required to prepare a document explaining substantial matters on the target real estate. This document usually describes the concerns the buyer should have.

If all or part of the purchase price of real estate is financed by a bank, the bank usually requires a mortgage on the real estate. Banks usually require full recourse on their loans. Thus, in theory, all assets of the borrower/buyer will be subject to the attachment by the bank. If the borrower’s credit is not sufficient, the bank may also require a guarantee from other parties, such as the parent company.

For commercial property, the bank may accept the limited recourse loan that can be enforced on the limited assets relevant to the real estate to be purchased (e.g., lease contracts of the real estate, insurance payment on the real estate, bank account into which the rent will be paid by the lessee). However, in case of limited recourse loans, the monitoring by the bank will be more stringent than full recourse loans, such as monitoring of financial tests (e.g., LTV test, DSCR test) and the periodical submission of an appraisal report.

As discussed in the above sections, unless the mortgage is registered in the encumbrance section of the registration book of the relevant real estate, such a mortgage cannot be asserted against third parties.

In addition, since the land and the buildings on it are regarded as separate real estate, the mortgage should be created on both the land and the building (and registered in each of the registration books).

For leased real estate, the rights of the lessee are well protected by the Act on Land and Building Leases in addition to the Civil Code.

For land leases, the Act is applicable if the purpose of the lease is to own buildings on it, not for temporary use.

Under this Act, the minimum period for the lease is 30 years, and at the expiration of the lease term, the contract is renewed at the request of the lessee for another 10 years (in case of the first renewal, 20 years) as long as the building is standing. The lessor may refuse the renewal if they have justifiable cause, such as the need to use the land themselves. However, the court will seldom grant such a justifiable cause.

The leasehold on land cannot be asserted against third parties unless it is registered in the registration book (encumbrance section) of the relevant land. However, under this Act, such a registration is deemed to be made if the lessee owns the building on it and such ownership is registered in the registration book of the building on the land.

In addition, when the leasehold on the land is terminated, the lessee may request to buy the building from the lessor at the market price under such Act. In other words, the lessee has put option of the building.

In this Act, a fixed-term land lease (not less than 50 years but not subject to renewal) and the land lease for owing commercial property (not less than 30 years but less than 50 years and not subject to both renewal and putting an option on the building) are stipulated as well. If the intended lease falls within these types of leases, the provisions of this Act should be investigated.

As for the building lease, the Act is applicable if the purpose of the lease is not temporary.

Under this Act, there is no minimum period of lease; however, at the expiration of the lease term, the contract is renewed with the same terms and conditions. The lessor may refuse the renewal if they have justifiable cause, such as the need to use the building. However, the court will seldom grant such a justifiable cause.

The leasehold on a building cannot be asserted against third parties unless it is registered in the registration book (encumbrance section) of the relevant building. However, under this Act, such a registration is deemed made if the lessee occupies the building.

In addition, when the leasehold on the building is terminated, the lessee may request from the lessor to purchase the fixtures on such a building at the market price under the Act. In other words, the lessee has put an option on the fixtures.

In this Act, a fixed-term building lease (i.e., building lease without renewal) is also stipulated. Since this is unfavorable to the lessee, the contract must be notarized.

The main permit for construction is the building certification under the Building Standard Act. Through this certification, compliance with various legislations such as the City Planning Law, is checked. The application for this certification is usually filed by specialists such as a construction company or an architect on behalf of the owner.

The main relevant laws are the Soil Contamination Countermeasures Act (under this act, the owner is responsible for cleaning the contaminated soil), the Act on Special Measures Concerning Promotion of Appropriate Treatment of Polychlorinated Biphenyl Waste (under this act, the holder of polychlorinated biphenyl waste must report to the government and properly dispose of it), and the Industrial Safety and Health Act (only provisions relevant to asbestos), the Landscape Law, and local regulations relating to the environment.

Compliance with these laws is often provided as representations and warranties in the sale and purchase agreement, and the seller must indemnify the buyer for the losses incurred by its breach. In addition, if the purchase price of real estate is financed by a bank, the bank usually requires the same representations and warranties as the buyer/borrower.

In commercial property transactions, a service provider for environmental due diligence is often retained, and satisfaction of the buyer to the environmental due diligence report is one of the conditions precedent to closing. In some cases, an engineering report on the building may include some of the environmental issues (such as asbestos), and in some transactions, the engineering report satisfies such a contract requirement.

The study of environmental research consists of two phases. Phase one is only documentary and phase two includes an onsite study.

The main taxes for real estate transactions are: (i) capital gains tax (both national and local) for the seller; (ii) real estate acquisition tax for the buyer; (iii) registration tax (in respect of the registration of ownership or mortgage) for the buyer; (iv) stamp duty on the sale and purchase agreement of real estate for both the seller and buyer (stamp duty will be also imposed on the loan agreement to finance the purchase price, usually borne by buyer/borrower); and (v) consumption tax on the building for the buyer.

Download: Handbook for Real Estate Transactions