The most common form of security over real estate is mortgage (teitoken), including without limitation, revolving mortgage (ne-teitoken). Mortgage in general is a fixed charge and it entitles the mortgagee to take possession of the asset and dispose of it with priority as against other unsecured creditors. Mortgage is perfected by registration in the land or building registries.
It is sometimes the case that security is granted over the rental income from a property by way of an assignment whereby the tenants are directed to pay the rental income to the lender, if necessary. Or, a lender (bank) sometimes requires the borrower to open its bank account with the lender and to have the tenants pay the rental income to such bank account so that the lender may set off its credits against the borrower, if necessary.
A corporate borrower can also create and perfect with registration, security by way of transfer (jyoto-tampo) over assets other than real estate. This security could be floating security over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender. Pledge over the same assets is possible and for pledge over claims, a registration system is available. However, for pledge over movable assets, a registration system is not available. It is sometimes the case that a lender takes both mortgage over real estate and security by way of transfer or pledge over other assets in or around the real estate.
Last modified 22 Mar 2024
Real estate includes the land, buildings erected on it and objects that are attached to the real estate and form an integral part thereof. It is also possible to take security over other assets, eg fittings, furniture and moveable objects that do not form an integral part of real estate.
Title to land can be either freehold, superficies, leasehold or emphyteusis (eikosakuken) (although the last is rarely encountered). Mortgage can be taken over freehold, superficies and emphyteusis, whereas pledge can be taken over leasehold which is not very popular though.
Last modified 22 Mar 2024
The key characteristic of a trust is that it allows legal ownership and beneficial interest to be separated. Trustees become the legal owners of the trusted property as far as third parties are concerned and beneficiaries can expect the trustees to manage the trust property for their benefit pursuant to the agreement with the trustee and statutory mandatory provisions. This is well recognized under Japanese law, and commonly used to enjoy tax benefits, to avoid real estate-related licence requirement, and the like.
Last modified 22 Mar 2024
Debt is commonly traded between lenders. Domestic loan transfers are commonly documented using standard form agreements made available by the Japan Syndicate and Loan-Trade Association which consist of a master agreement for all transactions between the parties and an individual agreement for a specific transaction between the parties. In the case of discrepancy between the two documents, the tailored individual agreement will prevail for the specific transaction. For more complex transactions, a more bespoke form of sale and purchase agreement is typically used. The ability of lenders to transfer debt to other lenders is a matter for negotiation on a transaction by transaction basis.
In addition, there are several ways of transferring debt:
Last modified 22 Mar 2024
There are no restrictions on granting security over real estate to foreign lenders or on payments made to foreign lenders under a security document or loan agreement, unless sanctioned persons or jurisdictions are involved. An ex-post-facto Bank of Japan filing is required for a non-Japanese resident taking security from a Japanese resident over real estate in Japan.
Last modified 22 Mar 2024
There is no stamp duty payable on mortgage agreements or pledge agreements. Depending on what is transferred, stamp duty is payable on security by way of transfer agreements, and stamp duty is payable on loan agreements, the amounts of which depend on the amount of the subject to be transferred or the amount of the loan, as applicable.
The tax rate for registration of mortgage over real estate is 0.4% of the secured amount (or the maximum secured amount for revolving mortgage).
Some notaries' fees are payable when preparing affidavits, and the like in the foreign lender's country, which will be used for registration of the mortgage for the benefit of the foreign lender.
Last modified 22 Mar 2024
Yes, there are both financial assistance rules and corporate benefit rules.
A company may not provide any benefit to its shareholders in relation to or in connection with the exercise of shareholder rights by a shareholder.
Directors must comply with the provisions of the Companies Act and other laws and regulations. A director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company's constitution. Whether or not a director's decision or act is lawful is determined by (i) the process taken to make such decision or act and (ii) the content of the decision or act.
There are other corporate law issues which include, without limitation, rules relating to capital maintenance (prohibition of certain distributions to shareholders), restriction on transactions between a company and interested parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process.
Last modified 22 Mar 2024
There are no restrictions on payments made to foreign lenders under a security document or loan agreement.
A borrower may be required to deduct withholding tax in respect of interest which is payable to a foreign lender depending on the jurisdiction of incorporation of the parties and the application of any relevant tax treaties. The allocation of any tax risk is dealt with on a transaction by transaction basis in the facility agreement.
Last modified 22 Mar 2024
A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement. The change of priority with regard to mortgage over real estate may be registered.
Last modified 22 Mar 2024
If a choice of law is a sensible choice made in good faith, the Japanese courts will generally give effect to it, subject to statutory mandatory provisions of Japanese law, eg with regard to perfection by registration of mortgage over real estate located in Japan. It would generally not be advisable to choose a law other than Japanese law to govern a security document under which a Japanese company creates security over assets situated in Japan.
Last modified 22 Mar 2024
Without valid perfection, a security right may not be asserted against a third party which is considered to include, without limitation, the security grantor's trustee in bankruptcy.
Last modified 22 Mar 2024
A holder of security over land is not liable for environmental damage unless it owns, manages or takes possession of the land.
Great care must be taken if the security is enforced because as mentioned above, owners of land, among others, can be responsible for investigating potential environmental damage on that land or coming from it and for taking necessary measures to prevent health hazard, even if it did not cause such damage (owners has the right to claim the expenses for such investigations and measures against the person who caused such environmental damage). A mortgagee should not go into possession of land without careful consideration of the implications of potential environmental liability.
Last modified 22 Mar 2024
A loan agreement and security agreement usually describe events of default which must have occurred before the lender can enforce its security. Typical events of default include non-payment of interest or principal, breach of representations or warranties, breach of covenant, material adverse change and insolvency.
Once the security has become enforceable, the lender can enforce its security immediately. Enforcement may be in a public auction (or execution against earnings from the collateral), private sale of the collateral or bulk sale (private sale of loan claims with security to another lender). In the case of private sale, the lender has certain duties to obtain a proper price for the assets.
Last modified 22 Mar 2024
Civil rehabilitation under the Civil Rehabilitation Act and corporate reorganization under the Corporate Reorganization Act are available. In the case of corporate reorganization, creditors are, in general, prevented from enforcing their security.
Out-of-court workout and corporate reorganization ADR are also available, both of which often involves debt waiver only by financial institutions so that the debtor can continue its business smoothly. For such debt waiver, consent from all the persons waiving their debts is required.
Last modified 22 Mar 2024
Generally, the onset of a borrower's insolvency does not affect security interests, although under corporate reorganization creditors are, in general, prevented from enforcing their security.
Security can be at risk of being set aside if they are:
Security may also be challenged on other grounds relating to insolvency.
Last modified 22 Mar 2024
The order of priorities of security interests is largely based upon the date of (perfection of) creation of the security, though such order of priorities can be exchanged by agreement.
In the case of a public auction, the order of priorities of payment is, in general:
As mentioned above, unsecured creditors rank behind secured creditors and rank equally among themselves (the pari passu principle).
Last modified 22 Mar 2024
Which assets and rights are considered to be real estate or real rights over which security can be granted to a lender?
Real estate includes the land, buildings erected on it and objects that are attached to the real estate and form an integral part thereof. It is also possible to take security over other assets, eg fittings, furniture and moveable objects that do not form an integral part of real estate.
Title to land can be either freehold, superficies, leasehold or emphyteusis (eikosakuken) (although the last is rarely encountered). Mortgage can be taken over freehold, superficies and emphyteusis, whereas pledge can be taken over leasehold which is not very popular though.
Last modified 22 Mar 2024