Q.1: Real Property Law and Transaction in Japan
Q.1-1: Is there any restriction for foreign people or company to purchase or lease Japanese real properties?
Q.1-2: How to confirm the ownership of seller or lessor?
Q.1-3: How to confirm if there is any mortgage on the real property?
Q.1-4: Is my lease right registered?
Q.1-5: Is any license required to purchase, sell, or lease real properties in Japan?
Q.1-6: Is an earnest money required for a purchase? Is a security deposit required for a lease?
Q.1-7: Can a buyer unilaterally cancel a purchase and sale agreement without cause?
Q.1-8: Can a lessee unilaterally terminate a lease agreement without cause?
Q.1-9: Can a lease be renewed? Can a lessee unilaterally renew a lease?
Q.1-10: Is the amount of rent increased or decreased during the lease period?
Q.2: TK-GK
Q.2-1: What is "TK-GK"?
Q.2-2: What rights does a TK investor have?
Q.2-3: What risk does a TK investor undertake?
Q.2-4: Why TK-GK involves a real estate trust beneficiary interest?
Q.3: TMK
Q.3-1: What is "TMK"?
Q.3-2: What rights does a TMK investor have?
Q.3-3: What risk does a TMK investor undertake?
Q.3-4: Can TMK acuire a hard asset as well as a real estate trust beneficiary interest?
A.1-1: Is there any restriction for foreign people or companies to purchase or lease Japanese real properties?
No, there is no restriction that is specifically applicable to foreign individuals or companies, in connection with acquisition or lease of real properties.
There is the Foreigners Land Act and the Foreign Exchange and Foreign Trade Act, each under which the Japanese government may prohibit or restrict a foreign individual or company to acquire real properties in Japan. Such prohibition or restriction is supposed to be issued by a government ordinance. At the moment, there is no such government ordinance. Therefore, any foreign individual or company may acquire (and lease) real properties in Japan as same as Japanese individuals and companies do.
However, please note that a notification is to be made by foreign buyer or lessee of real properties to the Ministry of Finance within certain period of time after its acquisition of the ownership or lease right of real properties if the ownership or lease right of real property acquired is for commercial use, such as for leasing business purpose (but excluding the purpose to use it as its office to conduct any business in Japan), except that it was acquired from other foreign individuals or companies.
A.1-2: How to confirm the ownership of seller or lessor?
Japan has a reliable real property registration system. Basically, any real property transaction, i.e., transfer of ownership or creation of mortgage, etc., is registered. However, legally and strictly speaking, a person searching a register is not entitled to rely on the information contained therein since Japan employs a "public notice" system rather than "public reliance" with respect to registration.
For example, in general, if Person A is the registered owner of land but Person C is the real owner, and Person A fraudulently sells the land to Person B or gives Person B a security interest in the land, Person C will be able to defeat Person B's assertions as to its ownership or possession of a security interest over the land, except that Person C is responsible for the fraud, too (for example, Person C provided Person A with documents necessary for Person A to falsely register its ownership).
A.1-3: How to confirm if there is any mortgage over the real property?
A mortgage is supposed to be registered. Although it is legally possible that there is unregistered mortgage as registration is not required for creation of a mortgage, an unregistered mortgage cannot be asserted against a new owner if the transfer of ownership to the new owner is properly registered.
A.1-4: Is my lease right registered?
Unlike a transfer of ownership or creation of mortgage, a lease right is registered only when the lessor and the lessee agree so. If registered, a lessee will have priority over the interests of a subsequent assignee of the leased land or building. As a matter of practice, however, lessors usually do not consent to the registration of a lease by a lessee.
The Act on Land and Building Leases ("Lease Act") protects a building lease and a land lease for the purpose of building ownership so that an unregistered building lease and unregistered land lease for the purpose of building ownership can be asserted against any third party. Such protection applies when (i) in the case of building lease, the lessee occupies the building before a third party acquires ownership or mortgage, etc. over the building and register it, and (ii) in the case of land lease, the purpose of the land lease is to own a building on the land, and lessee's ownership of the building is registered before a third party acquires ownership or mortgage, etc. over the land and register it.
A.1-5: Is any license required to purchase, sell, or lease real properties in Japan?
A real estate business license must be obtained to conduct any of following business in Japan:
(i) doing the purchase and sale of real property located in Japan; or
(ii) acting as an intermediate or agent for a purchase or sale, or lease.
As to (i) above, if you intend to do selling and buying business as a seller and buyer, even if you retain a licensed real estate intermediate or agent, you must obtain a real estate business license.
No real estate business license is required if you purchase real properties to conduct leasing business. Even if you eventually sell real properties after conducting leasing business, no license is required. However, there is no clear threshold between a buy-sell business and a leasing business that is followed by sales of real properties.
A.1-6: Is an earnest money required for a purchase? Is a security deposit required for a lease?
Although it is not mandatory, it is market standard that an earnest money (tetsuke-kin) and a security deposit (shiki-kin) is delivered from the buyer or lessee to the seller or lessor at the time of execution of the purchase and sale agreement or lease agreement.
In most cases, an earnest money is up to 20% of the purchase price. The earnest money is applied as a part of purchase price at the closing, i.e., at the closing date, the buyer will pay the remaining purchase price after deduction of the earnest money.
Typically, a security deposit is (i) for individual use lease, equivalent to two-month rent, and (ii) for office lease, equivalent to six to twelve-month rent.
A.1-7: Can a buyer unilaterally cancel a purchase and sale agreement without cause?
A buyer may cancel the purchase and sale agreement by waiving the earnest money without cause. A seller may cancel the purchase and sale agreement by providing the buyer with twice amount of earnest money without cause. The available period for the cancel is usually specified in the purchase and sale agreement.
A.1-8: Can a lessee unilaterally terminate a lease agreement without cause?
Unless agreed in the lease agreement, a lessee cannot terminate the lease agreement without cause before the lease term is expired.
In most cases of office building lease or any other commercial building lease and any land lease, if a lessee wants to terminate the lease, it is to pay rent for remaining lease term or one or more years. It is case-by-case.
In most cases of residential building lease, a lessee may terminate the lease by giving a prior notice to the lessor two or three months before the termination date, and no penalty is required.
A.1-9: Can a lease be renewed? Can a lessee unilaterally renew a lease?
Yes, a lease can be renewed.
In general, a lessee may unilaterally renew a land lease or building lease, except for a land lease that is not for the purpose of owning a building on the land (such as a land lease for the purpose of owning solar power facilities on the land). It is mandatory lessee's right, and therefore even if the lease agreement prescribes that the lease will not be renewed or the lease will be renewed only when both parties agree, such provisions are not effective, and the lessor cannot reject a renewal of lease if the lessee requests the renewal.
The lessor may reject the request of renewal only when there is a "justifiable ground" for doing so. Whether there is a justifiable ground or not is determined, taking into account of, including, but not limited, the circumstances in which the degree of necessity of lessor and the lessee to use the land or building, the history of the lease and the state of use of the land or building, and the offer made by the lessor to provide monetary considerations to the lessee.
Please note that if the lease is a "Fixed Term Lease" as defined under Article 22 and Article 38.1 of the Act on Land and Building Leases (shaku-chi syakka-hou), the principle above does not apply, and the lease is not renewed.
A.1-10: Is the amount of rent increased or decreased during the lease period?
Yes, if the Act on Land and Building Leases applies, i.e., (i) a land lease for the purpose of building ownership and (ii) a building lease, there is statutory right of a lessor and lessee to demand an increase or decrease of rent. The demand may be made only if the amount of rent becomes unreasonable due to:
(i) the increase or decrease in tax and other public charges related to the land or building;
(ii) the rise or fall of land or building prices or changes in other economic conditions; or
(iii) in comparison to the rent, etc. of similar land or building in the vicinity.
The statutory right of lessee is mandatory, and therefore even if a lease agreement prescribes that the lessee cannot demand decrease of rent, such provision is not effective or binding, and the lessee may make the demand. On the other hand, the statutory right of lessor is not mandatory, and therefore a provision that the lessor may not demand any increase of rent is effective and binding.
Please note that if the lease is a "Fixed Term Lease" as defined under Article 22 or Article 38.1 of the Act on Land and Building Leases (shakuchi syakka-hou), the statutory right of lessee is not mandatory, and therefore a provision that does not allow a lessee to make the demand is effective and binding.
A.2-1: What is "TK-GK"?
The "TK-GK" structure has been frequently used by foreign real estate investors in the Japanese real estate market. It is largely popular with foreign investors due to the potential tax advantages that it brings. Among others, it is possible that no corporate tax is imposed except for the withholding tax that is imposed on the profit distributions to the foreign investor. The withholding tax rate can be reduced depending on the applicable tax treaty.
"TK" represents a "tokumei kumiai", which is a contractual agreement ("TK Agreement") between a business operator, either an individual or a company ("TK Operator"), and an investor ("TK Investor") pursuant to which the TK Investor makes an investment, usually cash contribution, in the TK Operator's business ("TK Business") in exchange for which the TK Operator agrees to allocate to the TK Investor a certain portion of the profits and losses derived from such business and to make cash distributions to the TK Investor.
The TK Business is conducted under the name of the TK Operator and as its own business, and therefore, unlike an ordinary partnership, the TK Investor does not have any legal title in the assets of TK Business nor the cash that was contributed by the TK Investor to the TK Operator. Those assets or cash are solely owned by the TK Operator. In this sense, the TK Investor is "silent" or "passive" investor.
"GK" represents a "godo kaisha", a form of companies available under Japanese laws. It is similar with LLC (limited liability company) in the U.S. While the most common form in Japan is "kabushiki kaisha" or "KK", a stock company, GK is preferred by investors due to its flexibility. For example, profits are not required to be shared pro rata to shareholders' investments but a divided up differently pursuant to the GK's articles of incorporation. All of GK members, i.e., equity holders of GK, have limited liability. GK is especially preferred for non-recourse financing as enforcement of a security interests held by lenders is not limited during an insolvency procedure.
A.2-2: What rights does a TK investor have?
A TK Investor has (i) the right to receive a distribution of profits from the TK Business, (b) the right to receive a return on its investment at the end of the TK Business or the TK Agreement, (c) the right to access to financial statements and/or accounting records of the TK Business at the end of each financial year (a TK Agreement commonly stipulates that the TK Operator is to prepare financial statements and provide the TK Investor with it every quarter or semi-annually).
It is to be aware that, because of the nature of TK as "silent" and "passive" investment, it is commonly interpreted that a TK Investor is not allowed to control the TK Operator or the TK Business, and therefore, a TK Investor cannot have any voting right, veto right, or consent right over any matters of the TK Operator or TK Business. If a TK Investor is viewed that it controls the TK Operator or TK Business, the TK Agreement may be re-characterized as an ordinary partnership, and therefore the TK Investor owes unlimited liability against creditors of the TK Business. In addition, the TK Investor may lose the tax advantage and may be subject to Japanese corporate tax on its profits arising from the TK Business.
A.2-3: What risk does a TK investor undertake?
A TK Investor undertakes limited liability up to the amount of TK investment. It does not owe any liability against any third party, including creditors of the TK Business. Such creditors can claim against only the TK Operator for payment.
It is to be aware that, as all assets of the TK Business, including cash or other properties that was contributed by the TK Investor, legally belong to the TK Operator, the assets are subject to the claims of the TK Operator's creditors, even if those claims have no connection with the TK Business. This risk can be mitigated if the TK Operator is a newly incorporated for the TK Business and the TK Operator only run the TK Business.
A.2-4: Why TK-GK involves a real estate trust beneficiary interest?
TK-GK typically purchases real properties in the form of real estate trust beneficiary interest, instead of as hard assets. It is to avoid the applicability of the Act on Specified Joint Real Estate Ventures (fudosan tokutei kyodo jigyo-hou)(or it is also called as the Real Estate Syndication Law)("RESL"). The RESL requires a TK Operator to have a license ("RESL License") if it conducts a real estate business, i.e., purchase and sale, lease, or exchange of real properties, using funds procured by TK investment. The RESL requires an applicant of the RESL License to be a real estate business company with adequate personnel and capital requirements. It would not be practically possible for a bankruptcy-remote SPV such as the GK to obtain an RESL License. Furthermore, in the non-recourse financings in Japan, the lenders strictly require the GK, a borrower, to be a bankruptcy remoteness company without any employees, which will not meet the license standard of the RESL.
An exemption is the "Special Ventures" as defined under the RESL. If a TK-GK meets certain requirements and falls within the definition of the Special Ventures, no RESL License is required for the TK-GK even if the TK-GK acquires real properties as hard assets. If you need details, please contact us.
A.3-1: What is "TMK"?
In addition to the TK-GK structure, the "TMK" structure has been frequently used by foreign real estate investors in the Japanese real estate market. It is largely popular with foreign investors due to the potential tax advantages that it brings. Among others, it is possible that no corporate tax is imposed except for the withholding tax that is imposed on the profit distributions to the foreign investor. The withholding tax rate can be reduced depending on the applicable tax treaty. These features are same or similar to the TK-GK structure.
The most significant difference from the TK-GK structure is: (i) a TMK investor has the voting right, and (ii) a TMK may acquire a hard asset as well as a trust beneficiary interest.
"TMK" represents a "tokutei mokuteki kaisha", which is a Japanese corporation to be established under the Act on the Securitization of Assets ("TMK Law"), which is designed for asset securitization transactions.
There are two types of TMK investors: (i) a "specified equity member (tokutei shain)" or common shareholder, and (ii) "preferred equity member (yu-sen shusshi shain)" or preferred shareholder. A common shareholder has voting right over every matters of TMK, including appointment of TMK director. A preferred shareholder basically does not have voting right unless TMK's articles of incorporation provides a preferred shareholder with voting right.
For the purpose of non-recourse finance, it is typical that a common shareholder is a bankruptcy remote SPV and no profit distribution is made to the common shareholder, and all profit distribution is made to preferred shareholders. In some jurisdictions, under an applicable tax treaty or any other applicable rules, it is required for an investor to have voting rights over the entity that the investor makes investment, i.e., TMK in this case. It is not possible under the TK-GK structure, but it is possible under the TMK structure by giving voting rights to the preferred shareholders under TMK's articles of incorporation. Even if it is not mandatory requirement, there are many investors that need to have voting rights and/or consent rights over material matters under their internal policy. In such cases, a TMK structure is more preferred choice than a TK-GK structure where an investor does not have voting rights nor consent rights.
A.3-2: What rights does a TMK investor have?
Both a common shareholder and a preferred shareholder have (i) the right to receive a distribution of profits from TMK, (b) the right to receive a return on its investment at the winding-up of TMK, and (c) the right to access to financial statements of TMK at the end of each financial year. However, it is common that a common shareholder waives the right of (i) and (ii) above. Please refer to "A. 3-1" above for details.
A common shareholder has the right to vote over any matters of TMK, including appointment of TMK director. As mentioned in "A. 3-1" above, a preferred shareholder may have voting rights if so prescribed under TMK's articles of incorporation.
A.3-3: What risk does a TMK investor undertake?
Both a common shareholder and preferred shareholder undertakes limited liability up to the amount of its equity contributions. It does not owe any liability against any third party, including creditors of TMK. Such creditors can claim against only TMK for payment. However, it is common that certain direct agreement is entered into between a lender of TMK and TMK shareholders, under which TMK shareholders are to indemnify the lender for any loss or damage that arises from any material breach of TMK's willful or gross-negligent misrepresentation or bad-boy act.
A.3-4: Can TMK acquire a hard asset as well as a real estate trust beneficiary interest?
Yes. The Act on Specified Joint Real Estate Ventures (fudosan tokutei kyodo jigyo-hou)(or it is also called as the Real Estate Syndication Law)("RESL") does not apply to a TMK (please refer to "Q. 2-4" for further details of the RESL). A TMK is preferred if an investor is going to invest into a hard asset or both of hard asset and trust beneficiary interest.