Enforcing a Mortgage in Japan: Scope, Infringement, and Priority Issues

Mortgages (抵当権 - teitōken) are a cornerstone of secured lending in Japan, particularly for high-value assets like real estate. They provide creditors with a powerful tool to secure repayment of loans by granting them a preferential right over the mortgaged property in the event of the debtor's default. However, the effectiveness of a mortgage hinges on a clear understanding of its scope, how to protect it from impairment, and how it ranks against other claims. This article delves into these critical aspects of Japanese mortgage law, offering insights for businesses and financiers involved in secured transactions in Japan.

1. What is a Mortgage (Teitōken) in Japan?

Under the Japanese Civil Code (Articles 369 et seq.), a mortgage is a type of security real right (tanpo bukken) that allows a creditor (mortgagee) to receive performance of their claim in preference to other creditors from immovable property (or certain other specified rights like superficies or emphyteusis) that the obligor (debtor) or a third party has provided as security without transferring possession.

Key characteristics include:

• Creation: A mortgage is created by an agreement (mortgage agreement) between the creditor and the property owner (mortgagor).
• Non-Possessory: Unlike a pledge, the mortgagor retains possession and use of the mortgaged property. This is a significant practical advantage, allowing the owner to continue utilizing the asset (e.g., living in a mortgaged house or operating a factory on mortgaged land).
• Registration: For a mortgage on immovable property to be effective against third parties (i.e., to be perfected), it must be registered in the official real property register. Registration also establishes priority among multiple mortgagees or other competing rights.

2. The Reach of a Mortgage: What Property is Covered? (Scope - Kōryoku no Han'i)

Understanding the scope of a mortgage—what exactly the mortgagee's security interest extends to—is fundamental.

• The Mortgaged Immovable Itself: The primary subject is the land or building explicitly described in the mortgage agreement and registration.
• Integrally Attached Items (付加一体物 - fuka ittaibutsu) (Article 370): A mortgage extends to anything that is "integrally attached" to the mortgaged immovable, unless otherwise specifically provided by law or in the mortgage contract. This includes:
  • Natural Accessions: Such as trees or unharvested crops growing on mortgaged land. Once planted, trees, for example, are generally considered part of the land and thus subject to a mortgage on that land.
  • Fixtures: Items that have been affixed to the land or building in such a way that they have become legally part of it.
• Appurtenances (従物 - jūbutsu) (Article 87, applied via Article 370): An appurtenance is a thing that, while remaining legally distinct, is owned by the same person as the principal thing and is continuously used to serve the economic purpose of that principal thing. A mortgage on the principal thing also extends its effect to its appurtenances. The Supreme Court judgment of March 28, 1969 (Minshū Vol. 23, No. 3, p. 699), for example, confirmed this principle, and it applies even if the appurtenance was installed after the mortgage was created. Examples could include specific machinery essential for the operation of a mortgaged factory if it qualifies as an appurtenance of the factory building, or stone lanterns and garden stones in a mortgaged residential property (as per the Great Court of Cassation, March 15, 1919, Minroku Vol. 25, Shū 473). The registration of the mortgage on the principal immovable is generally sufficient to assert its effect over appurtenances against third parties (Tokyo High Court, December 26, 1978, Kakyū Minshū Vol. 29, Nos. 9-12, p. 397).
• Fruits (果実 - kajitsu) (Article 371): "Fruits" can be natural (e.g., agricultural produce) or legal (e.g., rental income). Article 371 stipulates that a mortgage generally does not extend to the fruits of the mortgaged immovable unless the underlying secured obligation is in default and the mortgagee has commenced foreclosure proceedings or taken steps to seize the property. Before such default and action, the mortgagor is entitled to the fruits.
• Exclusion by Agreement (Article 370 proviso): The parties can agree to exclude certain attached items or appurtenances from the scope of the mortgage.

If an appurtenance covered by the mortgage is later detached and removed from the principal property, the mortgage may still, in principle, follow that separated item. However, asserting the mortgage against a bona fide third-party acquirer of the separated appurtenance can become problematic, especially if the public notification principle tied to the main property's registration is considered weakened.

3. Protecting the Security: Mortgagee's Rights Upon Infringement (Teitōken Shingai)

Since a mortgage is non-possessory, the mortgagee is not directly in control of the collateral. This creates a risk that the mortgagor or a third party might act in a way that diminishes the value of the collateral, thereby impairing the mortgagee's security. Such acts constitute an infringement of the mortgage.

An infringement of a mortgage occurs if acts by the mortgagor or a third party obstruct the realization of the immovable's exchange value or make the exercise of the mortgagee's preferential right to satisfaction difficult (Supreme Court, November 24, 1999, Minshū Vol. 53, No. 8, p. 1899).

When the mortgage is infringed, the mortgagee has several remedies:

• Claim for Removal of Obstruction (妨害排除請求 - bōgai haijo seikyū): The mortgagee can demand the cessation of the infringing act and the restoration of the property to its proper state. For example, if a third party is unlawfully occupying the mortgaged property in a way that would hinder a foreclosure sale, the mortgagee can demand their eviction. If the owner (mortgagor) fails to take appropriate action to maintain the property's value or remove an obstruction, the mortgagee may, in certain circumstances, demand that the property be delivered to the mortgagee themselves for preservation or management (Supreme Court, March 10, 2005, Minshū Vol. 59, No. 2, p. 356).
• Claim for Damages (損害賠償請求 - songai baishō seikyū): If the infringement causes a quantifiable loss in the value of the collateral, and this loss results in the mortgagee being unable to fully satisfy their claim from the proceeds of a foreclosure sale, the mortgagee can claim damages in tort against the infringing party (including the mortgagor if they are at fault). However, since the mortgagee does not have the right to use the property, they typically cannot claim damages for loss of use.
• Injunctions / Provisional Remedies: To prevent imminent or ongoing harm to the collateral that could jeopardize the security, the mortgagee can seek provisional remedies from the court, such as an injunction to stop destructive activities (e.g., under Civil Execution Act Article 187, which allows for protective measures before a formal auction process begins).

4. Following the Value: Real Subrogation (Butsujō Daii - 物上代位)

A crucial feature that preserves the mortgagee's security in the face of changes to the collateral is the right of real subrogation (butsujō daii). Article 372 of the Civil Code applies Article 304 (which governs statutory liens) mutatis mutandis to mortgages. This means that if the mortgaged property is sold, leased, lost, or damaged, the mortgage extends to any monetary or other consideration received by the mortgagor as a substitute for the property, such as:

• Insurance proceeds payable due to destruction or damage.
• Compensation money payable if the property is expropriated for public use.
• The sale price if the property is sold by the mortgagor (though this is complex, as the mortgage typically follows the property itself via the right of pursuit).
• Rental income derived from leasing the mortgaged property.

To effectively exercise this right of real subrogation, the mortgagee must typically attach (seize) these proceeds before they are paid to the mortgagor. If the mortgagor receives the funds, they become mixed with their general assets, and the mortgagee's preferential claim over those specific funds is usually lost.

When it comes to rental income, the situation can be particularly complex, especially if the mortgagor has assigned the right to future rent to a third party, or if the tenant has claims against the mortgagor that they wish to set off against rent payments. Generally, the priority between the mortgagee's right of subrogation to rent and the rights of such third parties (assignees of rent, tenants with set-off rights) will depend on the timing of the mortgage registration versus the perfection of the rent assignment (e.g., by notice with a certified date) or the acquisition of the tenant's right of set-off (see, e.g., Supreme Court, January 30, 1998, Minshū Vol. 52, No. 1, p. 1; Supreme Court, March 13, 2001, Minshū Vol. 55, No. 2, p. 363; Supreme Court, March 28, 2002, Minshū Vol. 56, No. 3, p. 689).

5. Priority and Inter-Creditor Issues

When multiple creditors have claims against the same property, or when various rights coexist, rules of priority become paramount.

• General Principle: For mortgages on real estate, priority is determined by the order of registration. A mortgage registered earlier will generally take precedence over one registered later.
• Disposition of Mortgage and Priority (Article 376): A mortgagee has certain powers to dispose of their mortgage or its priority, which can affect the ranking:
  • Transfer of Mortgage (抵当権の譲渡 - teitōken no jōto): The mortgagee can assign their mortgage (along with the secured claim) to another party.
  • Waiver of Mortgage (抵当権の放棄 - teitōken no hōki): The mortgagee can waive their mortgage, effectively extinguishing it.
  • Transfer or Waiver of Priority (順位の譲渡・放棄 - jun'i no jōto/hōki): A senior mortgagee can agree to subordinate their priority to a junior mortgagee, or transfer their senior position to them.
  • Sub-mortgage (転抵当 - tenteitō): A mortgagee can use their own mortgage as security to borrow from another lender, creating a mortgage on the mortgage.
    These dispositions generally require a supplementary registration (fukitōki - 付記登記) to be effective against third parties and to clearly reflect the altered priority structure.
• Joint Mortgages (共同抵当 - kyōdō teitō) (Article 392):
  This involves securing a single debt with mortgages over multiple properties. Special rules apply to the distribution of proceeds if these properties are foreclosed:
  • If all properties are auctioned simultaneously (dōji haitō), the debt is allocated among them proportionally to their respective values.
  • If they are auctioned sequentially (iji haitō), a junior mortgagee on one of the properties that was sold first may have a right to subrogate to the senior joint mortgagee's rights against the remaining properties. This is to ensure a fair distribution and protect the interests of junior lienholders on individual properties. (See Supreme Court, July 3, 1969, Minshū Vol. 23, No. 8, p. 1297; Supreme Court, July 4, 1978, Minshū Vol. 32, No. 5, p. 785). The rules become more intricate if property owned by a third-party surety is part of the joint mortgage (Supreme Court, May 23, 1985, Minshū Vol. 39, No. 4, p. 940).

6. Enforcing the Mortgage: The Foreclosure Process (Keibai - 競売)

If the debtor defaults on the secured obligation, the mortgagee can initiate enforcement proceedings. The primary method is a compulsory auction (競売 - keibai) of the mortgaged property, conducted through the courts under the Civil Execution Act. The proceeds from the sale are then distributed to creditors according to their legal priorities, with the foreclosing mortgagee receiving satisfaction of their claim before junior mortgagees and unsecured creditors.

A related complex issue that can arise during foreclosure is statutory superficies (法定地上権 - hōtei chijōken). If land and the building on it are owned by the same person, and a mortgage is placed on either the land or the building (or both), and foreclosure results in the land and building coming under different ownership, Article 388 of the Civil Code may grant a statutory right of superficies to the owner of the building to allow them to continue using the land. This topic is nuanced and often subject to specific conditions.

Conclusion: The Power and Complexity of Japanese Mortgages

Mortgages are a potent and widely used security device in Japan, offering lenders significant protection. However, their effectiveness depends on a thorough understanding of their scope (what property and proceeds they cover), the available remedies against infringement or impairment of the collateral's value, their rights to follow the economic value of the collateral through real subrogation, and the intricate rules governing priority in relation to other claimants. For businesses and financial institutions, meticulous attention to the creation and registration of mortgages, coupled with vigilant monitoring and timely action in the event of default or impairment, is essential for successfully leveraging this key security instrument in the Japanese legal landscape.