Real Estate Laws in Japan
By Kohtaro Tamura, Ushijima & Partners
Posted: 25th July 2016 07:57Overview of Japanese Property Law
Japan is a civil law country tracing its roots to the German Civil Code of the late 19thCentury. Readers used to doing business in Europe will find much that is familiar in the Japanese Civil Code provisions dealing with real property. Those used to doing business in common law jurisdictions will encounter some foreign concepts, such as the ability to alienate land and buildings separately, the fact that ownership of real property is transferred immediately upon the signing of a purchase and sale contract, and the non-existence of deeds for, or future interests in, real property.
B. Structure of Japanese Property Law
In addition to the Civil Code, many specific laws and regulations exist to govern real estate transactions and to promote the revitalisation of major urban centers at both the national and the local level. Among these are the Urban Planning Law, Urban Redevelopment Law, Land Rezoning Law, Building Standard Law, and the 2002 Special Measures Act for Urban Renaissance. Japan has very strict environmental and recycling laws and regulations. Since local municipalities are also empowered to enact rules and regulations regarding the use of real property, it is prudent to seek advice and assistance from professionals with knowledge of local regulations and practices in the geographical area where the real estate investment is contemplated.
C. Acquisition of Ownership or Leasehold Right
Anyone is entitled to use property and/or obtain profits by purchasing property or by leasing property owned by a third party. There are no generally applicable restrictions on foreign ownership or leases for the use of property.
Ownership is similar to a freehold interest and lease is similar to a leasehold interest under Anglo-American law. Under Japanese legal terminology, however, there are only ownership rights and lease rights for obtaining effective control of property. Japanese law does not use terms such as “fee simple,” “freehold” and “leasehold.” The Land and Building Lease Act is a very important source of law governing lease rights, in addition to the Civil Code.
The Process of Buying and Selling Real Property
A. The Role of Real Estate Brokers and Agents
A real estate broker is usually involved in the sale and purchase of commercial property. Brokers are licensed and regulated by the Law on the Business Concerning Land and Building Transaction (the “Brokerage Law”). Real estate brokers have various information on available properties, potential buyers and sellers and other practical aspects of transactions. The Brokerage Law allows a broker to act as an intermediary and brokers are permitted to obtain fees from both the seller and the buyer. The maximum fee is about 3% of the sales price from each party (in total 6% if appointed by both the seller and the buyer). In case a broker is acting as an agent, rather than as an intermediary, the broker is not permitted to act for both parties and may charge up to 6% as a maximum fee.
One important role for the broker is to prepare a disclosure statement called an Explanation of Important Matters (jusetsu) and to explain the contents of the Explanation of Important Matters to the purchaser prior to execution of the final Purchase and Sale Agreement. This disclosure statement is highly informative and includes very detailed information such as the main terms of the transaction, the particulars of the property and available public services.
Matters regarding consumer protection, privacy, aspects of contracting, compensation restrictions and other aspects of the business are regulated.
C. Due Diligence
In practice, due diligence on the property is usually conducted prior to the buyer’s issuance of a Certificate of Purchase, or during some specified period of time between the issuance date and the signing date of a final Purchase and Sale Agreement. The disclosure statements referred to above are an important part of the due diligence process; however, the final versions of the disclosure statements are not provided to the buyer until the signing date for the final Purchase and Sales Agreement. Therefore, the buyer usually relies upon the information provided in reports such as an engineering report, environmental report, survey, and real estate appraisal.
D. The Purchase and Sale Agreement
Japan is a freedom of contract jurisdiction and parties are permitted, within certain broad limits (such as considerations of public policy not usually applicable to commercial real property transactions), to agree to terms and conditions they deem appropriate. The ability to negotiate a favorable Purchase and Sale Agreement will depend on the relative bargaining power of the parties. Experienced brokers and lawyers will advise parties on local practices and standard industry risk allocations.
Unlike in common law, it is important to note that Japanese law does not require real property contracts (buying, selling or leasing) to be in writing. Oral agreements are enforceable, although the practice is certainly to conclude written contracts.
F. The Closing
Although Japan has the concept of a closing date following the date of execution of the Purchase and Sale Agreement, the date of execution and the closing date are often the same. The only purpose of any period between the date of the execution of the Purchase and Sale Agreement and the “closing date” is for the seller to prepare any necessary documents for the buyer that have not been provided by the time of the signing of the final Purchase and Sale Agreement or to resolve any pending issues. The U.S. practice of having a formal due diligence period between the date of execution of the Purchase and Sale Agreement and the closing date so that both parties can comply with any conditions stated in the Purchase and Sale Agreement does not generally existexcepted for cases between sophisticated parties.
The most important part of the closing ceremony is the passing of title to the property from the seller to the buyer. Receiving a document of title transfer is critical for the buyer to be able to register the change of ownership of the property from the seller to the buyer.
In addition to the parties and their various representatives (lawyers, brokers, agents, etc.), the Closing will usually be attended by a licensed legal scrivener (shihoshoshi) who will make sure all of the documents are in order so that the buyer will be able to affect registration of the transfer. Legal scrivener charges are based on a published fee schedule basis, but can sometimes be negotiated. If a loan is involved because the seller has an outstanding balance on a mortgage and/or the buyer is borrowing to pay the purchase price, a representative of the lender(s) will also be present at the signing of the Purchase and Sale Agreement.
Various documents will be exchanged, and the purchase price paid, at the Closing. The seller formally delivers various original documents to the buyer, such as a Certificate of Boundary, an Official Map, etc. Payment of the purchase price, and the payment of any outstanding mortgages, will be done electronically through bank transfers and receipt will be confirmed at the Closing. There is no escrow system and no title insurance system in Japan.
The government maintains a property registration system at each local legal affairs bureau (an arm of the Ministry of Justice) located throughout the country. The registration system is similar to the Torrens system. There is no deed as such.
While there is no obligation to register property transfers, the transfer of immoveable property cannot be asserted against a third party unless and until it has been registered. This effectively creates a “race to the registrar” system since the transferee cannot assert rights against a third party buyer who wins the race to the legal affairs bureau even if the third party knew of the prior sale by the transferor. The first transferee will, of course, be able to sue the transferor for damages.
Land and buildings can be alienated separately, and a separate registry exists for each. Every parcel of land in Japan has a land registry (tochi tokibo), and, if a building exists on the parcel, a building registry (tatemono tokibo). Buyers must be alert to third parties having either an ownership interest in a building attached to the land or a possessory right such as a lease with the right to continuous renewal. Prudent buyers carefully check for all legal encumbrances on the land and get appropriate representation and warranties in the Purchase and Sale Agreement.
Environmental protection and disaster prevention rank high in terms of government regulation. A number of revisions to the Building Standard Law, the Architects Law, the Construction Business Act, and the Brokerage Law were enacted in 2006. These revisions were aimed at ensuring the safety of new and older properties both commercial and residential. Other examples are sunlight restrictions that require new buildings to be designed in a manner that reduces the degree of shadow cast onto surrounding properties, set back requirements from roadways, handicap access, and strict building size to land ratios. These regulations are highly technical. Recently, financial institutions with real estate assets in their portfolios have been scrutinised by regulators looking for properties under management that are not in strict compliance with all applicable laws and regulations.
Laws and regulations have also been passed in recent years to rid the construction and real estate market of so-called “anti-social forces.” Organised crime has traditionally operated on the fringes of the industry. It is strictly prohibited to knowingly engage in business transactions with these anti-social forces. Industry groups have promulgated codes of conduct and business principles designed to drive organised criminal elements from the industry. These efforts have been largely effective in achieving their objectives. Foreign investors should obtain local advice and assistance to ensure adequate due diligence standards for regulatory compliance and “know your counterparty” requirements are met.
Real estate securitisation has been around in a fairly primitive form since the early days of the 20thcentury. However, the passage of the Real Estate Syndication Act of 1994 and the Law on Securitisation of Specified Assets by Special Purpose Companies of 1998 caused the securitisation market to boom. This trend was further propelled by revisions to the Investment Trusts and Investments Corporations Law of 2000, which made real estate an asset eligible for management under an investment trust. This led to an explosion in J-Reits that continues to this day.
An explanation of the detailed structure of syndication, securitisation and real estate asset management is beyond the scope of this brief introduction. It will suffice to say that the structures are highly complex and require professional legal and tax advice.
Leasing is primarily a matter of contract. Landlords can be very inflexible in times of short supply regarding the negotiation of rent and other lease contract terms and conditions.However, in recent years, supply has been abundant and lessees of both commercial and residential property have been able to negotiate deals that include a specified period of free rent and other favorable terms.
A lease is not a “real right” but may nevertheless be perfected by registration. A perfected lease is valid against a third party purchaser of the property and other holders of interests in the property. However, unlike a real property ownership transfer, the landlord is not required to participate in the registration of a lease and, therefore, very few leases are registered in practice.
A tenant may not assign a lease or sublet the leased property under Article 612 of the Civil Code unless the landlord consents either in the original lease or at the time of assignment or sublease. In practice, landlords are reluctant to give their consent.
Residential lessees, and to a lesser extent commercial lessees, enjoy a fair measure of protection in the courts against termination or refusal to renew without reasonable cause. This can be traced to the immediate post-WWII era when housing was in short supply. The courts developed legal doctrines making eviction very difficult and rare. There are many cases where owners or developers end up paying large sums to tenants to induce them to move so that the development can proceed without the cost and delays of using the legal process.
The difficulty of clearing existing buildings of tenants so that properties could be renovated or redeveloped (and rents raised as a result) was a disincentive to owners to keep up their properties. To address this problem and to support urban renewal, the government introduced the concept of a fixed term tenancy in 2000. The fixed term tenancy requires a written contract and some specific provisions such as a specific term and the provision that there shall be no renewal of the lease should be written in the lease agreement. This type of the fixed term tenancy does not allow both parties to renew the lease (the both parties can enter into a new lease agreement).
Disclaimer and Contact for Additional Information
This Guide to Real Estate Transactions in Japan is intended to give readers a brief overview. It is not intended as specific legal advice and may not be relied on for any other purpose. Readers interested in pursuing real estate opportunities in Japan should seek advice from a qualified Japanese lawyer before proceeding and are invited to contact Kohtaro Tamura, senior partner and head of the real estate group.
Kohtaro Tamura is the head of the real estate group in Ushijima & Partners that advises some of the largest real estate owners, trust banks, lending institutions, developers, investment funds and private investorson a wide variety of matters; Chair ofgovernmental committees organised under the Ministry of Land, Infrastructure, Transport and Tourism (most recent committee is the "Committee Discussing the Real Estate Investment Markets" starting from September 2015 ); published several books on real estate securitisation.
Kohtaro can be contacted on +81-3-5511-3200 or by email at email@example.com