1 Legal framework
1.1 What legislation governs real estate in your jurisdiction?
The key pieces of legislation which govern real estate transactions in Japan are:
- the Civil Code (89/1896);
- the Act on Land and Building Leases (90/1991);
- the Real Estate Brokerage Act (176/1952); and
- the Real Property Registration Act (123/2004).
1.2 What special regimes apply to different types of real estate?
- Matters pertaining to land lease rights to own buildings and pertaining to lease of buildings are regulated by the Act on Land and Building Leases;
- Matters pertaining to cropland are regulated by the Cropland Act (229/1952);
- Matters pertaining to forest are regulated by the Forest Act (249/1951); and
- Matters pertaining to a single building consisting of several structurally sectioned units which are available to be used as residence, shop, office, warehouse or similar, independently from each other (an apartment building is the typical one), are regulated by the Act on Building Unit Ownership, Etc (69/1962).
2.1 What types of ownership rights exist in your jurisdiction?
- The most common type of real estate ownership right is the sole ownership right. When there are two or more owners of real estate, each owner holds a co-ownership interest in the real estate in proportion to its ownership ratio, except for the case of the unit ownership, as described below.
- In the case of a single building subject to the Act on Building Unit Ownership, Etc, such as an apartment building or an office building, each owner of a unit is referred to as a 'unit owner' and holds a unit ownership in its proprietary part (ie, each room of an apartment building or each section of an office building). The common use spaces of a building (ie, parts of the building available for the owners' shared use, such as corridors and stairs) are essentially co-owned by all unit owners. The unit owners also share the right to use the grounds of building (eg, ownership and leasehold rights) in proportion to the floor area of their respective proprietary parts, as a general rule.
2.2 What ownership structures are commonly used in your jurisdiction?
- Commercial real estate is owned directly by companies to use for their business operations, while residential real estate is owned directly by individuals to live in.
- If an investor chooses not to directly acquire ownership of real estate, the investor may use, for instance, a trust under the Trust Act (108/2006). Under such trust, an owner of real estate entrusts its real estate to a trustee (generally, a trust bank) and the trustee becomes the owner thereof. The investor earns gains from the real estate indirectly by holding beneficial interests in the trust and receiving trust dividends funded out of income from the real estate.
- The investor may also earn gains from real estate by investing in a special purpose company which owns the real estate as if the investor owns the real estate from an economical perspective. Several types of structures are used for such real estate investment (please see question 7.2).
2.3 Are there any restrictions on real estate ownership in your jurisdiction?
There are no restrictions on real estate ownership in Japan. However, in some cases, methods to develop land or construct buildings are restricted by the following laws, among others:
- City Planning Act (100/1968): In specified zones, the intended use, size and other matters of land or architecture are restricted.
- Building Standards Act (201/1950): With regard to the construction, extension or renovation of a building, the owner of the building must have the building constructed, extended or renovated in compliance with the standards set forth in the restrictions under the Building Standards Act.
- Fire Service Act (186/1948): With regard to the construction, extension or renovation of a building, the owner of the building must have the building constructed, extended or renovated in compliance with the standards set forth in the Fire Service Act (eg, having fire defence equipment installed in the building) from the perspective of fire prevention.
- Landscape Act (110/2004): The form, colour and other matters of architecture in specified zones are restricted.
Also, under the Act on the Review and Regulation of the Use of Real Estate Surrounding Important Facilities and on Remote Territorial Islands (84/2021), which came fully into force in September 2022, areas surrounding important facilities such as national defence-related facilities and islands located on the national border will be designated as 'monitored areas' or 'special monitored areas'. Any land designated as a monitored area or a special monitored area may be subject to a recommendation or order issued by the government not to use the land in ways that impair the functions assigned to the land. Any sale and purchase of land in a special monitored area which exceeds a certain square footage is subject to a requirement to file a prior notification with the government. As of September 2022, no specific land had been designated as a monitored area or a special monitored area.
2.4 Is ownership of land and buildings constructed thereon legally separable?
The ownership of land and the ownership of buildings constructed thereon are legally separate from each other and it is possible to own land and the buildings constructed thereon separately. Also, under the Real Property Registration Act, land and the buildings constructed thereon are registered separately from each other.
However, under the Act on Building Unit Ownership, Etc:
- any proprietary part of a building (eg, one room of an apartment building) and the right to use the grounds of the building in order to own the proprietary part are legally connected to each other; and
- no disposal such as a sale of the proprietary part of a building separately from the right to use the grounds of the building is permitted.
2.5 What security interests can attach to real estate? How are they prioritised?
Typically, a mortgage is attached to real estate.
The mortgage is attached through a contract executed between the owner of the real estate and the security interest holder. The security interest holder may claim (perfect) its security interest and priority against third parties by having the claim amount secured by the mortgage and its priority registered in the real estate's registration record.
3.1 What body administers the land register in your jurisdiction?
The Ministry of Justice and its legal affairs bureaux have jurisdiction over land and building registration.
3.2 Is registration of real estate rights, transactions and encumbrances mandatory? What are the consequences of failure to register?
A registration record is prepared for each land or building and is divided into two parts: a heading section and a rights section.
In the heading section, matters registered concerning the indication of the land or building are recorded, such as:
- in the case of land, its location, use and square footage; and
- in the case of a building, its location, the house number, the type of house, the structure and the floor area.
In the rights section, matters registered concerning rights to or in land or buildings are recorded.
In case of a change to registered matters concerning the indication of real estate – such as a change in square footage or the construction of a new building – it is necessary to apply to reflect this change in the registration record. In case of failure to do so, the party that is obliged to apply for registration may be subject to a small administrative penalty (up to JPY 100,000).
No obligation to apply for registration applies to matters concerning real estate rights. Under the Civil Code, however, if the transfer of, or a change to, real estate rights is not registered, such transferred or changed rights may not be claimed against third parties. Accordingly, in general, in real estate transactions, the person that is entitled to register and the person that is obliged to register (under the relevant agreements) apply jointly for registration of the change to the real estate rights and have this change reflected in the registration record:
- on the ownership transfer date, in the case of a transfer of ownership based on a real estate sale and purchase contract; or
- on the mortgage creation date, in the case of mortgage created on real estate.
On the other hand, in the case of land lease rights, a tenant that owns a registered building on the land may claim its land lease rights against third parties pursuant to the Act on Land and Building Leases, even if the land lease rights are unregistered. In the case of building leasehold rights, if the building has been already delivered to the tenant, the tenant may claim its leasehold rights against the owner of the building pursuant to the act, even if the rights are unregistered. Therefore, leasehold rights of real estate are not necessarily recorded in the register.
3.3 What are the formal and documentary requirements for registration?
The application for registration is made by submitting an application form to the legal affairs bureau, including information such as:
- the applicant's name;
- the purpose and cause of registration (eg, sale and purchase or the creation of a mortgage); and
- any other application information prescribed in laws and regulations.
The application can also be submitted through an online application system.
For real estate rights, in the case of an application for registration to confirm the applicant as the registered rights holder, it is necessary to provide the identification information of the registered rights holder together with the application information listed above. This information is notified exclusively to the registered rights holder (an alphanumeric password) and may be used by the registered rights holder in the next application for registration.
It is also necessary to provide information certifying the purpose of registration (typically, a sale and purchase contract in the case of a sale and purchase of real estate), together with the application information listed above.
Where a foreign person with no address in Japan seeks real estate registration, an affidavit notarised in that person's country of nationality and photocopies of his or her passport and ID card must generally be submitted. Where a foreign person with an address in Japan seeks registration, it is necessary to submit only a photocopy of his or her resident card, instead of an affidavit.
3.4 What is the process for registration?
An applicant should submit a completed registration application form to the legal affairs bureau with jurisdiction over where the real estate is located. A registrar at the legal affairs bureau will check whether the matters in the application match those recorded in the registry and all necessary documents have been submitted. In case of any deficiencies in the documents submitted, a correction may be requested by the legal affairs bureau. Upon completion of the checks, the registrar will enter the new information in the registration record based on the matters in the application. Finally, the applicant receives the information for registration of its identification and the certificate of registration from the legal affairs bureau. These procedures may take place online, but in many cases an applicant engages a judicial scrivener who is legally qualified to conduct the procedures on its behalf.
3.5 Is registered information publicly accessible?
At the legal affairs bureau with jurisdiction over the real estate, books and drawings in the registration records are available for inspection. Anyone can obtain photocopies of these records for a charge and also obtain photocopies of such records by post or online.
4 Commercial leases
4.1 What types of commercial leases exist in your jurisdiction?
Leases of land are broadly classified into two categories:
- leases for the purpose of owning a building; and
- all other leases, such as a lease to use land as a parking area with no building constructed.
Rights to use land owned by others are also classified into two categories:
- superficies rights; and
- land leasehold rights, which are more commonly used.
Hereinafter, these rights are collectively referred to as 'land lease rights'. Land lease rights for the purpose of owning a building are subject to the Act on Land and Building Leases and are broadly classified into the following categories:
- ordinary land leases;
- fixed-term land leases;
- fixed-term land leases for business purposes; and
- land leases for temporary use.
For leases of buildings, unless it is obvious that the building is being leased for temporary use, the Act on Land and Building Leases will apply. Leases of buildings are broadly classified into:
- ordinary building leases; and
- fixed-term building leases.
4.2 Are the terms of a commercial lease regulated or freely negotiable? What do they typically cover (eg, duration; security deposit; rent; sub-letting; termination)?
Land lease: The terms of a land lease are as follows:
- In the case of an ordinary land lease, the term is 30 years or longer. Even if this term expires, where the land lease rights holder demands renewal of the lease contract or continues using the land once the term has expired, and the building still exists on the land, the landlord (ie, the owner of the land) may not refuse to renew the lease contract without justifiable grounds. Where the land lease contract is renewed, the renewed term is at least 10 years (or 20 years in case of first renewal) at least. When the lease contract terminates upon the expiry of the term, the land lease rights holder may demand that the landlord purchase the building owned by the land lease rights holder on the leased land. If the land lease rights holder demolishes the existing building and constructs a new building on the leased land with the approval of the landlord, the land lease rights will remain in effect for 20 years from the date on which such approval is given or such new building is constructed, whichever comes earlier. If any contract that is disadvantageous to the land lease rights holder contrary to the above is executed, the disadvantageous clauses will be deemed invalid pursuant to the Act on Land and Building Leases.
- In the case of a fixed-term land lease, the term must be at least 50 years. However, the lease contract may set forth special provisions:
- to terminate the contract upon expiration of the term without renewing the contract;
- not to extend the term even if a new building is constructed; and
- not to permit the land lease rights holder to demand the purchase of the building upon termination of the contract.
- In the case of a fixed-term land lease for business purposes, where the term is between 30 and 50 years, the lease contract may set forth special provisions:
- to terminate the contract upon the expiration of the term without renewing the contract;
- not to extend the term even if a new building is constructed; and
- not to permit the land lease rights holder to demand the purchase of the building upon termination of the contract.
- Where the term is between 10 and 30 years, even if no special provisions are set forth in the contract
- no renewal of the contract is made pursuant to the Act on Land and Building Leases is made;
- the term is not extended even if a new building is constructed; and
- the land lease rights holder may not demand the purchase of the building upon termination of the contract.
- However, in order to use a fixed-term leased land for business purposes, the land lease rights holder needs to lease the land only for the purpose of owning a building made available exclusively for business operations.
- Where it is obvious that the land is leased for temporary use, such as when impromptu facilities are used to hold an event, the term is not subject to any statutory restrictions. However:
- no renewal of the contract under the Act on Land and Building Leases is made;
- the term is not extended even if a new building is constructed; and
- the land lease rights holder may not demand the purchase of the building upon termination of the contract.
If the land lease rights holder sub-leases the land leased as outlined above to a third party, the approval of the landlord (ie, the owner of the land) is generally required. While not legally necessary, it is general practice for the land lease rights holder to deliver a deposit to the landlord to secure the rent payment obligations.
Building lease: The terms of a building lease are as follows:
- In the case of an ordinary building lease, the term needs to be one year or longer pursuant to the Act on Land and Building Leases. In addition, unless either the landlord (ie, the owner of the building) or the tenant gives notice not to renew the contract to the other party between one year and six months before the expiry of the term, the contract will be renewed based on the same conditions as the previous one and the renewed contract is deemed indefinite. The landlord needs 'justifiable grounds' to provide notification of non-renewal of the contract or propose early termination of the contract before its expiry; and unless the landlord is deemed to have such justifiable grounds, it may not terminate the contract. However, where for any reason the relationship of trust between the landlord and the tenant may be deemed destroyed – such as the tenant's breach of contract, including non-payment of rent – the landlord may terminate the contract.
- In the case of a fixed-term building lease, the lease contract may include special provisions allowing for termination of the contract upon the expiry of its term without renewing the contract. However, the landlord must explain to the tenant in advance that the contract will not be renewed and the lease of the building will terminate upon expiry of the term by:
- delivering a document to the tenant to this effect; and
- providing notification to the tenant of termination of the building lease upon the expiry of between one year and six months before the expiry date (pursuant to the revisions to the Act on Land and Building Leases, which took effect in May 2022, electronic means such as email may be used to provide such notice).
If the tenant sub-leases the building leased as outlined above, the approval of the landlord (ie, the owner of the building) is generally required. While not legally necessary, it is general practice for the land lease rights holder to deliver a deposit to the landlord to secure the rent payment obligations.
4.3 What are the formal and documentary requirements for conclusion of a commercial lease?
Land lease: The formal and documentary requirements for a land lease are as follows:
- Ordinary land lease: The form of a lease contract is not subject to statutory restrictions.
- Fixed-term land lease: The Act on Land and Building Leases requires that fixed-term land lease contracts be executed through a written contract (but pursuant to the revisions to the Act on Land and Building Leases, enforced in May 2022, an electronic contracting process may be used).
- Fixed-term land lease for business purposes: The Act on Land and Building Leases requires that contracts for a fixed-term land lease for business purposes must be executed in the form of a notarial deed.
- Land lease for temporary use: There are no statutory restrictions on the form of contract for a land lease for temporary use.
Building lease: The formal and documentary requirements for a building lease are as follows:
- Ordinary building lease: The form of lease contract is subject to no statutory restrictions.
- Fixed-term building lease: The Act on Land and Building Leases requires that a fixed-term building lease be executed as a written contract (but pursuant to the revisions to the Act on Land and Building Leases, which took effect in May 2022, an electronic contracting process may be used for this purpose).
A notarial deed is a document prepared by a notary public appointed by the minister of justice upon the request of a party to the deed. In Japan, there are about 300 notary public offices through which notaries public provide their services.
Even if the form is not subject to statutory restrictions, it is the general practice to execute a written lease contract. An authorised signatory where a corporation is a party to the contract or the individual where they are a party to the contract will affix their signature and seal thereto.
4.4 What is the process for concluding a commercial lease?
Once the contractual terms and conditions of the real estate lease have been agreed, the landlord and tenant will execute the lease contract.
Where a real estate broker acts as an intermediary between the landlord and the tenant, the broker explains important matters pertaining to the real estate to the tenant by delivering an important matter explanation document setting out information on the real estate and the contract detail. In order to engage in business involving the sale, purchase or exchange of residential land or buildings, or to act as an agent or intermediary for the sale, purchase, exchange or lease of residential land or buildings, a licence granted by the government is required and only licensed real estate brokers may act as intermediaries for real estate lease contracts.
Further, as outlined in question 4.3, where a lease contract is to be executed in the form of a notarial deed, a draft contract must be submitted to a notary public before the contract is executed. To this end, the parties to the contract or their agents will visit the office of the notary public and affix their signatures and seals to a notarial deed reflecting the contract details as at the execution date. A notarial fee in proportion to the rent amount must be paid.
4.5 What are the respective obligations and liabilities of landlord and tenant under a commercial lease, and what are the consequences of any breach?
Essentially, the obligations and liabilities of landlord and tenant under a commercial lease are decided by and between the parties through negotiation; however, as outlined in question 4.2, what is set forth in a commercial lease contract is subject to certain restrictions.
Generally, a landlord will assume the following obligations:
- to repair the real estate (excluding repairs caused by an event imputable to the tenant);
- to refund the deposit delivered by the tenant when the vacant building is returned after termination of the contract; and
- to provide information about rent paid and so on to a guarantor (if appointed for the tenant) in accordance with certain requirements.
Generally, a tenant assumes the following obligations:
- to pay rent;
- to deliver a deposit;
- to use the real estate in accordance with the contractual requirements, such as no subleasing or no expansion or renovation of the real estate; and
- to restore the real estate to its original condition and return it to the landlord upon termination of the contract.
Generally, a tenant is not obliged to repair wear and tear caused by the normal use of and profiting from the real estate and ageing degradation. In the case of commercial real estate, detailed rules to allocate the costs of managing and repairing the real estate are generally decided through negotiations between the landlord and tenant.
4.6 How are rent variations typically effected throughout the term of the lease?
The parties to a lease contract may freely decide on the rent for the land or building by mutual agreement. In the case of a lease of land or building that is subject to the Act on Land and Building Leases, if the rent is no longer reasonable in light of economic changes or similar, the landlord or the tenant may demand an increase or reduction in rent for the coming months or years without regard to the contract's terms and conditions. If the parties fail to reach agreement on the revision of rent, the party that has requested the revision may petition for mediation in a court. If no agreement is reached through the mediation, the party requesting the revision may bring an action before the court to seek its decision on the rent amount. However, in the case of a fixed-term building lease, the landlord and tenant may set forth special provisions relating to the revision of the rent (including a provision which excludes any right to claim for an increase or decrease in the rent), by mutual agreement.
4.7 What taxes are levied on rental income?
Japanese resident companies are generally subject to Japanese corporate tax together with relevant local taxes on their worldwide taxable income, including lease income, at the effective corporate tax rate, which is approximately between 30% and 35% depending on the size of the taxpayer (eg, capital amount). Non-resident companies are subject to corporate tax on certain types of Japan source income, including lease income derived from real estate located in Japan, at approximately 26%, assuming that the non-resident company does not have a permanent establishment in Japan. Non-resident companies are also subject to Japanese withholding income tax at a rate of 20.42% upon payment on lease fees derived from real estate located in Japan, which can subsequently be credited against corporate taxes by filing a tax return in Japan.
In principle, Japanese consumption tax is also imposed at a rate of 10% on lease transactions of real estate located in Japan, except for leases of land or residential property.
Stamp duty may be payable on certain types of documents executed in Japan, with the scope and tax amount varying depending on the nature of each document. As an example, land lease agreements are subject to stamp duty in principle, while building lease agreements are not.
4.8 Can a commercial lease be triple net?
The parties to a lease contract may decide freely by mutual agreement on the rent for the land or building. Therefore, if the parties agree, it is possible:
- to fix this amount plus taxes and insurance premiums payable by the owner as rent; and
- to decide freely whether the landlord or the tenant bears the repair costs of the real estate.
4.9 How are landlord and tenant disputes typically resolved?
In the event of a dispute over an increase in or revision of the rent, either the landlord or the tenant may petition for mediation in court and then file for litigation if the mediation fails.
For any other dispute – such as where the landlord demands that the tenant surrender the real estate due to termination of the lease contract terminated – the demanding party will file for litigation and the dispute will be settled through the court, as a general rule.
4.10 What types of guarantees are market practice and required by landlords to secure the tenant's obligations
In some cases, a tenant who is an individual will:
- deliver a deposit to the landlord; and/or
- ask a guarantor (eg, a family member or friend) or use a guaranty company to secure its obligations.
In many cases, a tenant which is a corporation will deliver a deposit to secure its obligations.
5 Real estate transactions
5.1 What form do real estate transactions typically take in your jurisdiction?
Generally, the seller and buyer of real estate will negotiate and decide on the sale and purchase conditions, and will then prepare a draft sale and purchase contract stating the conditions. The seller and a buyer will execute the sale and purchase contract and then complete preparations to conclude the sale and purchase transaction. For instance:
- a seller that intends to sell a building on leased land will obtain the land owner's permission; and
- the buyer will make arrangements for the procurement of funds to pay the purchase price and for use of the building.
Where a real estate broker acts as intermediary, the real estate broker will explain important matters to the buyer by delivering an important matter explanation document setting out information on the real estate and the details of the contract.
In some cases of a real estate transaction between corporations, before preparing a draft sale and purchase contract, the seller and buyer will confirm with each other the most important sale and purchase conditions or conditions precedent for execution of the sale and purchase contract by exchanging:
- a letter of intent for sale from the seller; and
- a letter of intent for purchase from the buyer.
In addition, many buyers conduct due diligence on the real estate that they expect to purchase.
5.2 Which players are typically involved in a real estate transaction in your jurisdiction?
In addition to the buyer and seller, the following parties are typically involved in a real estate transaction:
- a real estate broker (see question 5.1);
- the professionals who conduct the due diligence;
- lawyers who advise on the contract conditions; and
- a judicial scrivener who undertakes the registration procedures.
Where a buyer or a seller is a special purpose company (SPC), the following parties will likely be involved in the real estate transaction;
- investors that make contributions to the SPC;
- asset managers that provide asset management services to the SPC;
- tax accountants; and
- financial institutions making loans to the SPC.
5.3 Is the seller bound by a duty to disclose? What representations and warranties will it typically make?
Where a real estate broker acts as the seller of real estate or as an intermediary for the sale and purchase of real estate, the real estate broker must explain the important matters set forth in the Real Estate Brokerage Act to the buyer by delivering an important matter explanation document. Where the seller is not a real estate broker, the seller is not legally obliged to explain the important matters to the buyer.
However, even in the case of a real estate sale and purchase transaction in which no real estate broker is involved, the seller will generally provide information and materials about the real estate to be sold and the buyer will conduct due diligence thereon.
In Japan, while in many sale and purchase transactions the seller makes no representations or warranties, in the case of a transaction where a sales company or development company of real estate acts as the seller or an institutional investor invests in real estate, the seller will make representations and warranties.
In such case, the following matters are typically addressed by the seller in the representations and warranties:
- seller-related matters – for example, that:
- the seller has the legal capacity to execute a sale and purchase contract and has taken internal procedures as needed;
- the legality of execution of a sale and purchase contract by the seller; and
- the seller's financial condition;
- that the seller has valid ownership of, or title to, the real property to be sold;
- that no security interest such as a mortgage has been created on the real estate to be sold (or, if any security interest has been created, that such security interest is expected to be removed upon the sale and purchase);
- that there are no disputes over the real estate to be sold – for example, that no litigation has been filed with a court;
- compliance with the laws and regulations applicable to the real estate to be sold, such as those related to the environment and building codes;
- the characteristics and condition of the real estate to be sold; and
- matters relating to the boundary of the real estate to be sold.
In addition to the responsibility or liability arising from the representations and warranties, the seller may assume liability for non-conformity with a contract under the Civil Code.
If the quality or another feature of the real estate to be sold fails to conform to the contract, the buyer may generally demand, within a certain period:
- a price reduction;
- supplemental performance such as repair;
- payment of damages; or
- termination of the contract.
The seller and the buyer will negotiate to decide whether:
- a clause of liability for non-conformity with the contract similar that set out in the Civil Code should be included in the sale and purchase contract; or
- amendments to shorten the period in which to exercise the right should be added to the contract.
5.4 What due diligence is typically conducted in a real estate transaction?
For a real estate sale and purchase contract, typical items subject to due diligence include the following:
- ownership of, or title to, the real estate;
- whether any security interest or third party's title of use has been created on the real estate and, if so, details thereof;
- whether any public regulations (eg, environmental or building regulations or those concerning development activity) are applied to the real estate and, if so, the details thereof;
- the details of any contract with a tenant leasing the real estate (if any) and the character of such tenants;
- the characteristics and condition of the land (eg, nature, soil contamination, items buried underground and boundaries);
- the characteristics and condition of the building (eg, age, earthquake resistance); and
- any violation of laws and regulations (eg, those concerning building or environmental regulations).
5.5 What are the formal and documentary requirements for conclusion of a real estate transaction?
The seller and buyer will execute the sale and purchase contract by affixing their seals or signatures thereto. The seller and buyer will also attach a revenue stamp to the contract. If the seller or buyer is a corporation, the corporation will affix its seal registered with the competent legal affairs bureau. Also, in many cases where the seller or buyer is an individual, the individual will use his or her seal registered with the competent local government.
Upon the conclusion of the sale and purchase transaction, the seller and buyer will conduct procedures to apply to register the transfer of ownership in the real estate registration records.
5.6 What is the process for concluding a real estate transaction? How long does this take? What costs are incurred?
Once the documents setting out the agreed conditions precedent in the sale and purchase contract have been prepared and the other conditions precedent have been satisfied, the real estate sale and purchase transaction concludes. In some cases, a sale and purchase contract is executed once the conditions precedent for the sale and purchase transaction have been satisfied and the transaction is concluded on the execution date. The time it takes to conclude the transaction will vary depending on the transaction; the seller and buyer will decide on the time schedule based on the type of transaction. Generally, the seller and buyer will appoint a judicial scrivener to undertake the procedures to register the transfer of ownership on the transaction conclusion date. It takes between two and three weeks to complete the registration.
Necessary costs, other than the sale and purchase price, include the following:
- the fees payable to external professionals, such as:
- the real estate appraiser;
- tax accountants;
- lawyers; and
- the broker's commission, where a real estate broker has been appointed as an intermediary for sale and purchase transactions;
- registration fees (eg, registration licence tax and fees payable to the judicial scrivener);
- the revenue stamp fee (stamp duty); and
- the costs of any loan which the buyer has obtained to pay the purchase price;
- the costs of obtaining the landowner's approval (approval fee) where a building on leased land is to be transferred; and
- real estate acquisition tax and consumption tax (where a building is acquired).
5.7 What are the respective obligations and liabilities of buyer and seller, and what are the consequences of any breach?
Upon execution of a sale and purchase contract, the seller and the buyer will perform their respective obligations in accordance with the provisions of the contract. If either party breaches its obligations, the breaching party must deal with the breach, such as compensation for damage incurred by the other party in accordance with the contract. It is possible that the other party will terminate the contract in accordance therewith.
5.8 What taxes are payable on a real estate transaction?
Real estate acquisition tax is payable upon the acquisition, which is levied by the local prefectural government at the place where the acquired real estate is located. The tax rate is 4% of the assessed value of the acquired assets in principle. However, various preferential treatments are available under the temporary legislation that is currently in force.
Another local tax – fixed asset tax – is payable on land, buildings and other depreciable assets by its registered owner as of 1 January each year, which is levied by one or more local governmental bodies at the place where the acquired asset is located. The standard tax rate is 1.4% of the assessed value of the acquired assets in principle; an additional urban planning tax is also levied on land and buildings located in certain designated areas, at a rate of up to 0.3%.
Registration tax is also imposed on the registration of certain items defined under the relevant tax law. As an example, registration of the new ownership of transferred real estate is taxed at 2% of the assessed value of the transferred asset in principle, which may be reduced by the temporary tax legislation (eg, a tax rate of 1.5% is currently applied for ownership transfers of land).
Stamp duty is due on various documents executed in Japan, normally including purchase agreements for real estate. The tax amount ultimately depends on the nature of the agreement and the contractual amount (eg, a purchase agreement of real estate with a contractual amount of more than JPY 5 billion is subject to JPY 600,000 in stamp duty, which has been reduced to JPY 480,000 under the temporary tax legislation).
Japanese consumption tax is normally imposed at a rate of 10% on the acquisition of real estate located in Japan, except for land.
In relation to capital gains derived from the disposal of real estate, Japanese resident companies are subject to Japanese corporate tax and relevant local taxes at the effective corporate tax rate, which is approximately between 30% and 35%, depending on the size of the taxpayer (eg, capital amount). Non-resident companies are subject to corporate tax on capital gains derived from the disposal of real estate located in Japan at a rate of approximately 26%, assuming that they do not have a permanent establishment in Japan. Non-resident companies are also subject to Japanese withholding income tax at a rate of 10.21% on the consideration received for a disposal of real estate located in Japan. The withheld income can subsequently be credited against corporate taxes by filing a tax return in Japan.
6 Real estate finance
6.1 Who are the most common providers of real estate finance in your jurisdiction? Do any restrictions apply in this regard?
The most common providers of real estate finance in Japan are banks and money lending business operators. Banks are regulated by the Banking Act (59/1981) and require a licence to operate under this act. Money lending business operators are regulated by the Money Lending Business Act (32/1983) and must be registered to operate under this act.
6.2 What forms of real estate finance are available in your jurisdiction?
The lender will first provide the borrower with a loan contract form, and the lender and borrower will then amend the clauses of the contract form based on the transaction details.
In the case of a syndicated loan, the contract form provided by the lender will be similar to the syndicated loan contract form of the Japan Syndication and Loan Trading Association, which is publicly available on its website.
For real estate finance, in almost all cases, a mortgage or revolving mortgage is created on the real estate to be sold.
6.3 What formal, documentary and other requirements do lenders typically require of borrowers?
The typical documents (including photocopies) required by the lender as conditions precedent for a loan include the following:
- the borrower's articles of incorporation and other documents such as a certificate of its full registry records issued by the competent legal affairs bureau;
- documents indicating that the borrower has taken all necessary internal procedures to execute a loan contract or security contract (eg, a written resolution of the board of directors);
- a certificate of all matters stating the registration records of the real estate issued by the competent legal affairs bureau;
- a real estate appraisal report;
- reports on the real estate prepared by surveyors (eg, reports on earthquake resistance, the environment or soil);
- the sale and purchase contract for the real estate and any other contracts executed by the borrower for the real estate;
- an insurance certificate and other paperwork concerning the insurance over the real estate;
- notice of verification of building construction and a certificate of inspection indicating that the building has been constructed in compliance with the Building Standards Act, in the case of a building;
- written agreements and so on executed with the owners of adjacent land with respect to the boundary of the land;
- written approval from the owner of leased land (landlord) in the case of the sale and purchase of a building on leased land; and
- documents indicating that the necessary permits and licences have been obtained if any business requiring such permits and licences is to be run on the real estate.
6.4 What type of security interests are typically required by lenders?
As outlined in question 6.2, in almost all cases, a lender creates a mortgage or revolving mortgage on the real estate to be purchased.
In the case of a mortgage, the claim to be secured and the principal amount of the secured claim are specified in the mortgage creation contract.
In the case of a revolving mortgage, the upper limit amount (maximum amount) of the secured claim is fixed, but which claim is secured is not specified in the revolving mortgage creation contract. Therefore, a revolving mortgage is used when, for instance, a borrower delivers real estate as collateral to a lender and refinances a loan more than once which is not more than the maximum amount.
6.5 What is the process for obtaining real estate finance? What costs are payable?
Once the lender and borrower have agreed to the conditions of the loan contract and each security contract, the parties will execute the contract and the lender will provide the loan upon confirming satisfaction of the conditions precedent by the borrower.
Several other costs are incurred with respect to the loan other than interest and the loan handling commission. In many cases, the necessary costs – including fees payable to lawyers engaged by the lender – are borne by the borrower. They might include:
- the fees payable to external professionals such as lawyers;
- the registration costs (eg, registration licence tax and commission payable to the judicial scrivener) if any registrable security interest such as a mortgage is created; and
- the revenue stamp fee (stamp duty).
6.6 How is security enforced in case of any breach?
If a borrower falls behind in its payments to the lender or if its monetary obligations to the lender become immediately due and payable, the lender will collect the loaned amount from the collateral by taking judicial or extra-judicial procedures.
In the case of a mortgage on real estate, a lender may generally take the following measures:
- Petition the court for the commencement of auction proceedings, in which case the real estate on which the mortgage has been created will be sold under orders from the court. The lender then collects the loaned amount from the sales proceeds, minus enforcement costs;
- Dispose of the real estate by a method chosen at its discretion (not through a court auction) and collect the loaned amount from the proceeds; or
- Petition the court for an order of seizure for its claims for rent payment or similar with respect to the real estate and collect the loaned amount by directly receiving the rent.
7 Real estate investment
7.1 Who are the most common investors in real estate in your jurisdiction? Do any restrictions apply in this regard?
Other than domestic investors, many foreign investors invest in real estate in Japan. Although, in principle, there are no restrictions on foreign investors acquiring real estate in Japan, in certain cases investors must report to the minister of finance via the Bank of Japan under the Foreign Exchange and Foreign Trade Act (228/1949) within 20 days of the acquisition.
7.2 What investment vehicles are typically used in your jurisdiction? What are the benefits and drawbacks of each?
Where a foreign investor establishes a special purpose company as an investment vehicle in Japan to invest in real estate, the 'GK-TK scheme' or the 'TMK scheme' is often used. A foreign investor can also invest in real estate investment trusts (REITs) managed in Japan. These schemes are designed to avoid double taxation through the imposition of income tax both on the investment vehicle and on the investor.
GK-TK scheme: 'GK' is an abbreviation for 'godo kaisha' (limited liability company) and 'TK' is an abbreviation for 'tokumei kuniai' (silent partnership), which is similar to a limited partner. An investor enters into a limited partnership agreement with a GK which plays a similar to a general partner and makes a contribution to the partnership. In general, the GK as general partner conducts real estate business through the acquisition of the beneficial interests in the trust, where the trusted assets are real estate, and distributes income from the real estate business to the investors as limited partners.
TMK scheme: 'TMK' is an abbreviation of 'tokutei mokuteki kaisha' (specific purpose company). A TMK is a corporation established under the Act on Securitisation of Assets (105/1998) for the purpose of asset securitisation and business incidental thereto. In general, investors acquire preferred equities of the TMK and become preferred equity members. The TMK acquires real estate or beneficial interests in the trust, where the trusted assets are real estate, pursuant to the asset securitisation plan prepared in accordance with the Act on Securitisation of Assets and distributes profits to the preferred equity members from the revenues from the real estate or the trust beneficial interests. When using the TMK scheme, the registration licence tax and real estate acquisition tax may be reduced where the TMK acquires specific real estate under certain conditions.
REIT: With regard to real estate investments, an investment corporation is often used as a vehicle. An 'investment corporation' is an association incorporated under the Act on Investment Trusts and Investment Corporations (198/1951) for the purpose of investing its assets in specified assets such as real estate and trust beneficial interests. Investors acquire investment equities issued by the investment corporation and become investors thereof. The investment corporation conducts real estate business in accordance with its certificate of incorporation, which is equivalent to the articles of incorporation of a stock company, and distributes the profits to the investors. Other than investment equities issued by way of private placement, some investment equities are listed and investors can acquire or dispose of listed investment equities in the market.
7.3 How are these vehicles established and administered in your jurisdiction?
GK-TK scheme: A GK is incorporated in accordance with the Companies Act (86/2005). A person who intends to become a member of the GK prepares the articles of incorporation, pays its contribution and then undertakes application procedures for the registration of incorporation with a legal affairs bureau. The GK then enters into a limited partnership agreement with investors and raises capital from the investors. In principle, the solicitation of investors and management of funds contributed by investors are subject to the Financial Instruments and Exchange Act (25/1948). Therefore, the GK entrusts such acts to a registered financial instruments business operator or uses a special scheme in which types of investors are restricted (specially permitted services for qualified institutional investors as defined in the Financial Instruments and Exchange Act), and files a notification with the authorities by itself.
TMK scheme: A TMK is incorporated in accordance with the Act on Securitisation of Assets. An incorporator prepares the articles of incorporation and obtains authentication from a notary public. Once the incorporator has subscribed for specified equity and paid its contribution, the incorporator will appoint directors, company auditors, accounting auditors and so on, and undertake application procedures for the registration of incorporation with the legal affairs bureau. Before the solicitation of subscriptions for preferred equity and the acquisition of real estate, the TMK must file notification of the commencement of business with the competent finance bureau and submit the asset securitisation plan together with the notification. The TMK's business must be conducted in accordance with the asset securitisation plan.
REIT scheme: An investment corporation is incorporated in accordance with the Act on Investment Trusts and Investment Corporations. The organiser will prepare a certificate of incorporation and notify the prime minister that it will incorporate an investment corporation, providing the names, addresses and so on of the candidates for the position of executive managing officer upon incorporation. After the organiser has filed the notification, it is incorporated through procedures for the registration of incorporation. The investment corporation must apply for registration with the prime minister following the registration of incorporation and must be registered before commencing asset investment.
8 Planning and zoning
8.1 How is land use regulated in your jurisdiction?
The City Planning Act is a typical law that regulates land use. Under the City Planning Act, prefectural governors designate city planning areas in principle. City planning areas are classified into:
- urbanisation promotion areas to be developed as urban areas through the construction of buildings; and
- urbanisation control areas where development activities and the construction of buildings are restricted.
Furthermore, with regard to city planning areas, use districts such as exclusive residential districts, commercial districts, industrial districts and the like are designated. Depending on the classification of use district (there are 12 different types), the use, building coverage ratio, floor area ratio, height restrictions and so on of buildings which can be built in the respective use district will vary.
Land use and construction may further be restricted by:
- special acts such as the Landscape Act (110/2004) and the Act on Regulation of Residential Land Development (191/1961);
- prefectural or municipal ordinances; and
- other laws established by the national government.
The answers discussed throughout question 8 mainly explain the provisions of City Planning Act; but with respect to land development and building construction, the owners of land and buildings must also bear in mind the acts and ordinances discussed above.
8.2 What is the process for obtaining planning permission? How long does this take? What costs are incurred?
A party that intends to alter the zoning, shape or quality of land that exceeds a certain size (or to conduct development work) in a city planning area must obtain development permission from the relevant prefectural governor.
There are no clear guidelines on the timeframe and costs required to obtain such permission, as these vary depending on:
- the area in which the land is located;
- the development activities; and
- the details of the buildings.
In addition to the fees to be paid to the relevant prefecture, other fees that may be payable include those of:
- any consultant for land development who is retained; or
- an administrative scrivener who is engaged to prepare the application for permission.
If permission for land development is not required, such as for the construction of a building on land which has already been developed, it is necessary to obtain confirmation from a building official appointed by a city, town, village, prefecture or a designated private confirmation and inspection body as to whether the building to be constructed satisfies statutory standards such as those of the use districts. If the building conforms to the Building Standards Act and other relevant laws and regulations, confirmation will be granted; if it does not, confirmation will be refused. The building official or the designated confirmation and inspection body will not make its own judgement at its discretion.
However, in urbanisation control areas, permission from the prefectural governor must be obtained for the construction of a building.
In addition, when constructing a building in an area where a project for the construction of city planning facilities (eg, roads) or an urban development project (collectively, 'city planning projects') is implemented, permission from the prefectural governor must be obtained in principle.
8.3 Can a planning decision be appealed?
Any party which is refused permission for land development or the construction of a building in an urbanisation control areas as described in question 8.2 may apply for administrative review to the Development Investigation Committee or the relevant prefectural governor. Where an administrative review is conducted, a public oral proceeding is held in principle. However, since prefectural governors generally enjoy broad discretion as to whether to grant permission, it is not easy to reverse a refusal.
With respect to building restrictions in scheduled areas for city planning projects, if the construction of a building is not permitted within the area, the landowner may demand that the relevant prefectural governor purchase the land under certain conditions.
8.4 What are the consequences of failure to obtain planning permission or to comply with a planning condition?
Regardless of whether development permission is required for the land, if a person conducts land development without permission, violates the conditions attached to the permission or otherwise breaches laws and regulations, the prefectural governor may take measures such as:
- revoking the permission;
- changing the conditions to the permission; and
- ordering such person to rebuild, move or remove structures.
8.5 Is expropriation of land possible in your jurisdiction?
Yes. For the purpose of undertakings for a public purpose (eg, construction of a road or dam) set forth in the Expropriation of Land Act (219/1951), if a business operator conducting public works cannot acquire the land by voluntary agreement, the operator may acquire the land compulsorily from the landowner. The landowner receives compensation in return for expropriation of the land. The Expropriation of Land Act stipulates the procedures and compensation for losses relating to the expropriation of land.
In addition, land may be expropriated for the implementation of city planning projects and expropriation procedures are subject to the Expropriation of Land Act.
8.6 Is confiscation of land possible in your jurisdiction?
Other than expropriation of land described in question 8.5, land may not be confiscated in Japan in general.
9.1 What main environmental legal provisions apply to the development, use and occupation of real estate?
The main environmental legal provisions that apply to the development, use and occupation of real estate are as follows:
- the Soil Contamination Countermeasures Act (53/2002);
- the Act on Regulation of Residential Land Development (191/1961);
- the Erosion Control Act (29/1897);
- the Waste Management and Public Cleansing Act (137/1970);
- the River Act (167/1964);
- the Forest Act (249/1951); and
- the Natural Parks Act (161/1957).
In addition to the laws established by the national government, matters concerning the environment are regulated by the prefectural or municipal ordinances.
9.2 Who can be held liable for environmental contamination and how are clean-ups effected?
Basically, a person that generates environmental contamination is liable for the clean-up. However, an owner that has acquired environmentally contaminated land may be responsible for investigating the existence of soil contamination if it satisfies the statutory criteria under the Soil Contamination Countermeasures Act, even if the owner did not generate the environmental contamination itself. A prefectural governor will designate an area containing soil contamination as:
- land that requires immediate clean-up measures; or
- land for which, although the contamination is unlikely to cause harm to human health, notification will be required if the land is excavated or its form or nature is otherwise changed.
An owner whose land is designated as requiring immediate clean-up measures is liable to take such measures according to the prefectural governor's instructions.
9.3 What environmental provisions and considerations should be factored into real estate transactions?
A buyer will carry out investigations and due diligence on the existence of soil contamination, waste regulated by law and other violations of environmental laws before purchasing land. In many cases, buyers entrust these investigations to companies that specialise in the investigation of environmental compliance.
In a sale and purchase contract, the buyer will demand that the seller represent and warrant that there is:
- no soil contamination or waste regulated by law on the land to be purchased; and
- no violation of environmental laws and regulations.
If any environmental issue such as soil contamination is revealed in breach of such representations and warranties, the buyer will:
- demand that the seller resolve the issue or pay compensation; or
- if the issue is significant, terminate the sale and purchase contract.
The seller will negotiate the terms and conditions of the contract to waive or reduce such environmental responsibilities.
Even if the seller's representations and warranties are not expressly stipulated in the sale and purchase contract, it may be liable for environmental issues under the Civil Code if the nature of the land does not conform to the contract. The details of liability for non-conformity with the contract are also negotiated between the buyer and the seller prior to execution thereof.
9.4 What initiatives are in place to promote green buildings and energy efficiency in your jurisdiction?
With respect to green buildings, for example, increasing numbers of owners of commercial real estate have acquired environmental certifications as specified in question 9.5. Furthermore, the Building Standards Act and other laws are scheduled to be amended to promote the use of wood as structural material in large-scale buildings.
Energy efficiency is governed by:
- the Act on Rationalising Energy Use (49/1979); and
- the Act on Improvement of Energy Consumption Performance of Buildings (Act 53/2015).
A business operator that owns a factory or workplace (eg, an office building) using a certain amount of energy must report on its energy usage to the authorities in accordance with the Act on Rationalising Energy Use. In the case of new buildings, the owner must ensure that the energy consumption for air conditioning, lighting, hot water and similar in the building is at or below the thresholds set out in the Act on Improvement of the Energy Consumption Performance of Buildings. Currently, only buildings of a certain size are subject to the regulation; but further to an amendment to the act in June 2022, all new buildings will be required to conform to the energy consumption criteria prescribed by laws and regulations in principle within the next few years.
9.5 What types of environmental certifications apply in your jurisdiction?
Examples of comprehensive environmental certification systems in Japan include the following:
- CASBEE: CASBEE is a system for the comprehensive evaluation of the quality of buildings, including:
- indoor comfort;
- consideration for the surrounding scenery; and
- consideration for the environment, such as use of energy-saving and environment-friendly materials and equipment.
- Evaluation and certification services are conducted by a certifying organisation accredited by the Institute for Built Environment and Carbon Neutral for SDGs.
- DBJ Green Building Certification: This is a certification system established by the Development Bank of Japan to support the environmentally and socially conscious management of real estate. Evaluation and certification services are conducted by the Japan Real Estate Institute based on a comprehensive evaluation of the environmental performance of the real estate, including disaster prevention and responses to various stakeholders, such as consideration for communities.
10 Trends and predictions
10.1 How would you describe the current real estate market and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The COVID-19 pandemic has had a negative impact on office lease transactions due to the increased number of companies introducing remote working. In lease contracts for commercial facilities and restaurants, some owners and tenants have negotiated temporary rent reductions due to the declining revenues of the tenants leasing real estate. On the other hand, COVID-19 has had a less negative impact on residential sale and purchase transactions and lease transactions.
In the next 12 months, an amendment to the Civil Code is expected to facilitate the management of land whose owner or co-owners are now unknown.
11 Tips and traps
11.1 What are your top tips for the smooth conclusion of a real estate transaction and what potential sticking points would you highlight?
Good communication between all parties – including the seller, the buyer and the landlord and tenant where a lease of land or buildings is involved – is key to the smooth conclusion of a real estate transaction. Local ordinances and regulations at the place where the real estate is located may also be a key issue. It is advisable to consult with specialists such as a real estate investigation company, a real estate appraiser, lawyers, certified tax accountants and a judicial scrivener to ensure the smooth conclusion of the transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.