Can We Assign Our Japanese Land Lease to a Subsidiary? Understanding Restrictions and Lessor Consent Requirements

Japanese Attorney at Law - Bengoshi L.L.

21 May 2025 • 10 min read

For multinational corporations operating in Japan, internal restructuring, mergers, acquisitions, or the establishment of new subsidiaries often involve the transfer of assets and contractual rights. One such critical asset can be a land lease right (shakuchiken 借地権), especially if the business operates from leased premises like factories, warehouses, or large office complexes. A common question that arises is whether a company can assign its Japanese land lease to a subsidiary or another group entity. While seemingly an internal matter, Japanese law imposes significant restrictions on the assignment and subleasing of lease rights, primarily requiring the lessor's consent. This article explores the legal framework governing land lease assignments in Japan, the enforceability of contractual clauses, the crucial "breach of trust" doctrine, and specific considerations for corporate reorganizations.

The default rule under Japanese law, as stipulated in Article 612 of the Civil Code (Minpō 民法), is that a lessee cannot assign their lease rights or sublet the leased property without the lessor's consent. If the lessee does so without consent, the lessor may terminate the lease. This principle is based on the idea that lease agreements, particularly long-term ones like land leases, are founded on a personal relationship of trust and confidence between the lessor and the specific lessee. The lessor has a legitimate interest in knowing and approving who occupies and uses their land.

Consequences of Unauthorized Assignment or Sublease:
Should a lessee assign the lease or sublet the property without the lessor's permission, the lessor generally has the right to:

Terminate the lease agreement with the original lessee.
Demand that the unauthorized assignee or sublessee vacate the property.

Special Provisions for Land Leases: Judicial Permission as an Alternative

Recognizing that a lessor might unreasonably withhold consent for a land lease assignment or sublease, especially when valuable buildings are situated on the land, the Act on Land and Building Leases (Shakuchi Shakka Hō) provides a potential remedy. Article 19 of this Act allows a lessee to petition the court for permission to assign the land lease right or sublet the leased land if the following conditions are met:

The third party acquiring the lease right or subletting the land is unlikely to cause any disadvantage to the lessor.
The lessor refuses to grant consent without a justifiable reason.

This judicial permission, granted through a non-contentious case procedure (shakuchi hishō jiken 借地非訟事件), effectively substitutes for the lessor's consent. The court will consider various factors, including the financial standing of the proposed assignee/sublessee and the nature of the intended land use. This provision aims to balance the lessor's property rights with the lessee's need to realize the economic value of their leasehold and the buildings thereon, particularly when transferring building ownership.

Most land lease agreements in Japan explicitly include a clause prohibiting the assignment of lease rights or subletting of the land without the lessor's prior written consent. Such clauses generally reaffirm the principle in Article 612 of the Civil Code and are considered valid.

However, the existence of such a clause does not automatically mean that any unconsented assignment will lead to immediate and unavoidable termination. The Japanese courts have developed a significant body of case law around the concept of "breach of trust" (shinrai kankei hakai no hōri 信頼関係破壊の法理).

The "Breach of Trust" Doctrine: A Key Exception

The "breach of trust" doctrine is a critical equitable principle in Japanese lease law. Even if a tenant technically breaches a lease term, such as assigning the lease without consent, the landlord cannot terminate the lease unless the breach is so severe that it destroys the relationship of mutual trust and confidence that forms the basis of the lease agreement.

A landmark Supreme Court judgment on January 31, 1969 (Shōwa 44), established that even if a lease agreement contains a special provision allowing the lessor to terminate the contract if the lessee assigns the lease right or sublets the property without consent, the lessor cannot exercise this termination right if the unconsented assignment or sublease is found, under "special circumstances" (tokudan no jijō 特段の事情), not to constitute a betrayal of trust that would destroy the lessor-lessee relationship.

This means that not every unauthorized assignment will justify termination. The courts will look at the specific facts of each case to determine if the act, despite being a technical breach, was serious enough to undermine the fundamental trust between the parties.

What Constitutes "Special Circumstances" Negating a Breach of Trust?

The courts have considered various factors in determining whether "special circumstances" exist. These often involve situations where:

The assignee is closely related to the original lessee, and the lessor's interests are not substantially harmed.
The actual use of the land does not change significantly.
The assignment is more of a formality without a substantive change in who controls the use of the property.

Illustrative Supreme Court cases include:

Supreme Court, September 25, 1953 (Shōwa 28): This early case laid the groundwork by stating that if an unconsented transfer to a third party does not amount to a "betrayal of trust" (haishin-teki kōi 背信的行為) against the lessor, the right to terminate under Article 612 of the Civil Code does not arise.
Supreme Court, June 30, 1964 (Shōwa 39): The Court found that even without the lessor's consent, if "special circumstances" exist such that the assignment is not a betrayal of trust, the lessor cannot terminate, and the assignee can assert the assignment against the lessor.
Supreme Court, September 21, 1965 (Shōwa 40): An assignment of a leasehold and building from a mother to her grandson, with whom she and her mentally challenged daughter lived, where the living situation and land use remained unchanged, was deemed not to be a breach of trust, even without the lessor's consent. The assignment was made to ensure care for the mother and daughter.
Supreme Court, April 24, 1969 (Shōwa 44): A transfer of a leasehold between spouses upon their divorce, where both had lived on the property and the lessor was aware of the true ownership of the building, was held not to be a breach of trust allowing termination, given that the land use did not change significantly.

Burden of Proof for "Special Circumstances":
It is generally the lessee (or the assignee) who bears the burden of proving the existence of these "special circumstances" that would negate a breach of trust. The Supreme Court on February 13, 1969 (Shōwa 44) and February 18, 1969 (Shōwa 44), clarified that if a lease requires the lessor's written consent for assignment, and the lessee assigns without it, the lessor can terminate unless the lessee proves either a subsequent agreement waiving written consent or "special circumstances" showing the assignment was not a betrayal of trust.

Corporate Restructuring and Land Lease Assignments: Specific Challenges

The principles above become particularly relevant in corporate contexts, such as assigning a lease to a subsidiary or as part of a broader M&A transaction.

Assignment to a Subsidiary:

Simply put, assigning a land lease from a parent company to its subsidiary, even a wholly-owned one, is generally considered an assignment to a distinct legal entity and thus requires the lessor's consent under Article 612 of the Civil Code or a specific contractual clause. The subsidiary is a separate legal person from the parent.

However, the "breach of trust" doctrine might apply if it can be demonstrated that the assignment is, in substance, not detrimental to the lessor and does not fundamentally alter the nature of the lessee or the use of the land. Factors that might be considered include:

The subsidiary's financial stability and ability to meet lease obligations.
Whether the parent company continues to guarantee the lease obligations.
Whether the actual business conducted on the land and its management remain substantially the same.
The lessor's prior dealings and relationship with the parent company and its group.

The "Identity of Corporate Personality" Argument:

A key Supreme Court judgment on October 14, 1996 (Heisei 8), addressed a related issue. The Court held that if the lessee is a corporation, changes in its shareholders or directors, even if leading to a change in de facto management, do not constitute an assignment of the lease right because the corporate personality (hōjinkaku 法人格) itself remains the same. The lease is with the corporation, not its individual shareholders or managers. This principle applies even to small, closely-held companies where one individual effectively controls the company.

While this case doesn't directly state that assigning a lease to a subsidiary with the same ultimate beneficial owner is not an assignment, it highlights the importance of separate legal personalities. A transfer from Parent Corp. to Subsidiary Corp. is a transfer between two distinct legal entities. The argument that the ultimate control remains the same might be a factor considered under "special circumstances" to argue against a breach of trust, but it doesn't negate the fact that an assignment, in legal terms, has occurred.

Mergers and Demergers (Company Splits):

Mergers (Gappei 合併): In a statutory merger where the lessee company is absorbed by another, or two companies merge to form a new entity, the lease rights are generally transferred to the surviving or newly formed company by way of "universal succession" (hōkatsu shōkei 包括承継). In such cases, the lessor's consent is typically not required, as the rights and obligations are transferred automatically by operation of law. However, the lease agreement itself might contain clauses attempting to restrict this (though their enforceability can be questionable against statutory universal succession).
Company Splits (Kaisha Bunkatsu 会社分割): If a company splits and transfers a business division that holds a land lease to a newly formed or existing company, whether this requires the lessor's consent depends on the structure of the split.
- If it's an "absorption-type split" (kyūshū bunkatsu 吸収分割) or "incorporation-type split" (shinsetsu bunkatsu 新設分割) that results in universal succession of the relevant rights and obligations to the successor company, consent may not be needed, similar to a merger.
- However, if the transfer is structured more like an asset sale or specific assignment, consent would likely be required.

Business Transfers (Jigyō Jōto 事業譲渡):

A business transfer (asset sale) involves the transfer of specific assets and liabilities to another entity. If a land lease is part of the transferred business, this is a "specific succession" (tokutei shōkei 特定承継) and requires the lessor's consent, just like any other assignment.

Transfer of Buildings on Leased Land

It's a common understanding in Japanese law that the ownership of a building on leased land and the right to lease the land itself are closely intertwined. If the building is sold, it's generally presumed that the land lease right is also transferred. A Supreme Court judgment on June 4, 1940 (Shōwa 15), noted that if ownership of a building on leased land is transferred to a third party, it's usually deemed that the land lease right has also been assigned or sublet, unless special circumstances indicate otherwise. Therefore, selling a building on leased land typically triggers the need for the lessor's consent regarding the land lease. Some lease agreements might even contain clauses stating that the lease terminates if the building on the land comes to be owned by a third party; the validity of such a clause was upheld by this Supreme Court decision, provided there are no "special circumstances" indicating the absence of a breach of trust by the original lessee.

Lessees should also be aware of other clauses that might indirectly restrict their ability to deal with the leasehold or buildings:

Clauses Prohibiting Mortgages on Buildings: Some leases attempt to prohibit the lessee from creating mortgages or other security interests on the buildings they own on the leased land without the lessor's consent. A Tokyo District Court case on March 27, 1969 (Shōwa 44), acknowledged that the purpose of such a clause is similar to a no-assignment clause (to prevent changes in building ownership and thus de facto lease assignment through foreclosure). However, it also noted that creating a mortgage doesn't always lead to an assignment. A Tokyo District Court judgment on August 8, 2013 (Heisei 25), upheld the validity of a special clause requiring lessor consent for creating security interests on buildings on the leased land, reasoning it was a reasonable measure to protect the lessor from potential adverse consequences of a forced sale of the building (such as dealing with a new, unknown lessee or facing building purchase requests).
Clauses Triggered by Insolvency or Enforcement Proceedings: Some older lease agreements might contain clauses allowing the lessor to terminate the lease without notice if the lessee faces enforcement actions (attachment, auction) or insolvency proceedings (bankruptcy). However, the enforceability of such clauses can be limited, especially if they undermine statutory protections or if the event does not genuinely jeopardize the lessor's position or constitute a breach of trust (e.g., Osaka District Court, February 8, 1985 (Shōwa 60)).

Risk Mitigation and Practical Advice for Businesses

For businesses planning corporate reorganizations or asset transfers involving Japanese land leases:

Due Diligence: Thoroughly review all land lease agreements. Pay close attention to assignment, subletting, change of control, and any related clauses (e.g., mortgage prohibitions).
Early Communication with Lessors: If consent is required, approach the lessor as early as possible. Explain the nature of the proposed transaction (e.g., assignment to a financially sound subsidiary for continued existing operations) and why it will not be detrimental to their interests.
Negotiate Consent: Lessors may request a "consent fee" (shōdaku-ryō 承諾料). The amount can be negotiable. Clearly document any consent obtained.
Consider "Breach of Trust" Factors: If consent is proving difficult to obtain, assess whether the planned transfer could fall under the "special circumstances" where a court might find no breach of trust. This is a high-risk strategy and should be a last resort.
Judicial Permission (Article 19): If the lessor unreasonably withholds consent for an assignment necessary for transferring building ownership, explore the possibility of petitioning the court for permission under Article 19 of the Act on Land and Building Leases.
Structure of Reorganization: The legal structure of an M&A transaction (e.g., statutory merger vs. asset sale) has significant implications for whether lessor consent is required for land leases. Plan the transaction structure with these requirements in mind.
Seek Expert Legal Advice: Given the complexities, the significant value often tied to land leases, and the nuances of the "breach of trust" doctrine and corporate reorganization laws in Japan, consulting with experienced Japanese legal counsel is indispensable.

Conclusion

Assigning a land lease in Japan, even to a subsidiary, is not a straightforward internal matter. The fundamental requirement for lessor consent, rooted in the personal trust underlying lease agreements, presents a significant hurdle. While the "breach of trust" doctrine offers a potential equitable exception, relying on it is uncertain and fact-dependent. For corporate reorganizations like M&A or the establishment of subsidiaries, the method of transferring the lease (e.g., via universal succession in a merger versus specific assignment in an asset sale) dictates whether consent is legally mandatory. Proactive communication with lessors, careful contractual review, and strategic planning with knowledgeable legal counsel are crucial for businesses to successfully navigate these restrictions and ensure their operational continuity in Japan.

The General Principle: Lessor's Consent Required