Enforcing My Mortgage in Japan But Someone's Occupying the Property. How Do I Handle It?

Successfully enforcing a mortgage on real property can be a complex undertaking in any jurisdiction. In Japan, one of the significant hurdles a mortgagee might encounter is dealing with individuals or entities occupying the mortgaged property. These occupants could range from the debtor themselves, legitimate tenants, to those whose presence seems specifically designed to obstruct the foreclosure process (a phenomenon known as 占有型執行妨害 - sen'yūgata shikkō bōgai, or occupancy-based execution obstruction). Such situations can drastically delay enforcement, reduce the property's sale value, and increase costs for the creditor. This article explores the legal framework in Japan for addressing these challenges, outlining the substantive rights of mortgagees and the procedural remedies available under the Civil Execution Act, as well as considerations during formal insolvency proceedings.

Understanding "Occupancy-Based Execution Obstruction" (Sen'yūgata Shikkō Bōgai)

When a lender seeks to foreclose on a mortgage due to the borrower's default, the presence of occupants can complicate matters significantly. These occupants can generally be categorized as:

1. Unauthorized Occupants (無権原占有型 - muken'gen sen'yūgata): Individuals or entities with no legal right or title to occupy the property. This can include squatters or so-called "professional obstructers" (sen'yūya - 占有屋) who deliberately occupy properties slated for foreclosure to extort payments.
2. Occupants with Some (Potentially Questionable) Title (権原占有型 - ken'gen sen'yūgata): This category includes:
   • The debtor and their family.
   • Legitimate tenants with valid lease agreements.
   • Tenants under leases created by the debtor after the mortgage was registered, sometimes with excessively low rents or long terms, potentially for the purpose of hindering the foreclosure sale.

The nature of the occupancy is critical in determining the mortgagee's available remedies.

Your Rights as a Mortgagee Under Substantive Law

Japanese law provides mortgagees with certain substantive rights to protect their security interest against impairments caused by occupants. These rights have evolved significantly through case law.

The Evolving Direct Right to Eliminate Interference (Based on the Mortgage Itself)

A mortgage in Japan is a non-possessory security interest, meaning the mortgagee does not typically have the right to possess the property unless the debtor defaults and specific enforcement procedures are initiated. Historically, this limited a mortgagee's direct ability to deal with occupants.

• The Landmark Shift (Supreme Court, Grand Bench, November 24, 1999 (Heisei 11)): This pivotal judgment marked a significant departure from previous, more restrictive views (e.g., Supreme Court, March 22, 1991 (Heisei 3)). The 1999 decision recognized that a mortgagee has a direct right, based on the mortgage itself, to demand the elimination of interference from an unlawful occupant if their presence hinders the realization of the mortgaged property's value through a foreclosure sale and thereby obstructs the mortgagee's ability to recover their prioritized claim. The court reasoned that the mortgage grants a right to obtain satisfaction from the property's exchange value, and acts impairing this could be directly challenged.
  The 1999 ruling also acknowledged that the mortgagee could request the property owner (usually the debtor) to take appropriate measures to rectify any infringement on the mortgage (a "request for corrective action against infringement" - 侵害是正請求権 shingai zesei seikyūken, or a "request to maintain security value" - 担保価値維持請求権 tanpo kachi iji seikyūken), and potentially exercise this right on the owner's behalf through subrogation.
• Extension to Certain "Lawful" Occupants (Supreme Court, March 10, 2005 (Heisei 17)): This decision further broadened the mortgagee's direct rights. It held that a mortgagee could seek to eliminate interference even from an occupant who holds a possessory title (such as a lease) granted by the property owner, provided two key conditions are met:
  1. The possessory right was established after the mortgage was registered.
  2. The creation of that possessory right was for the purpose of obstructing the mortgage enforcement process, AND the occupation actually impairs the realization of the property's exchange value, making it difficult for the mortgagee to exercise their priority claim.
     This ruling introduced a subjective element (obstructive purpose) when dealing with occupants who have some form of title from the debtor created post-mortgage.
• The Mortgagee's Right to "Administrative Possession" (Kanri Sen'yū - 管理占有): In certain circumstances, particularly where the owner is failing to manage the property appropriately and prevent impairment of the mortgage, the aforementioned Supreme Court decisions (1999 and 2005) have supported the mortgagee's right to demand that the property be delivered directly to them. This "administrative possession" is not for the mortgagee's own use and enjoyment but for the purpose of managing and preserving the property's value pending foreclosure. The mortgagee acts, in a sense, on behalf of the owner to maintain the asset.

Dealing with Leases: A Changed Landscape Post-2003 Reforms

The treatment of leases created on mortgaged property has undergone significant legislative reform.

• Abolition of the Old "Short-Term Lease" System: Prior to 2003 amendments to the Civil Code, former Article 395 allowed certain short-term leases (e.g., for land up to five years, buildings up to three years) created even after a mortgage was registered to be asserted against the mortgagee and, consequently, against a foreclosure purchaser. This provision was widely abused by debtors creating sham short-term leases with complicit "tenants" to obstruct foreclosure sales. While mortgagees could petition a court to terminate such detrimental leases (under the proviso to former Article 395), the system was problematic. This entire short-term lease protection system was abolished in 2003.
• Current Rules for Leases Post-Mortgage:
  • General Non-Assertability: Leases entered into after a mortgage has been registered are generally not enforceable against the mortgagee or any subsequent purchaser at a foreclosure sale, unless the mortgagee has consented to the lease and that consent is also registered (Civil Code Article 387). This greatly strengthens the mortgagee's position against post-mortgage tenancies.
  • Six-Month Eviction Grace Period: For certain leases of residential buildings that were in existence at the time of the commencement of a foreclosure auction, even if subordinate to the mortgage, the tenant is granted a six-month period from the time of the foreclosure sale to vacate the premises (Civil Code Article 395). This provides a degree of protection for existing residential tenants while still allowing the purchaser to eventually gain possession.

Powerful Tools Under the Civil Execution Act

Beyond substantive law rights, the Japanese Civil Execution Act provides mortgagees and foreclosure purchasers with several procedural tools to deal with obstructive occupants.

Preservation Orders for Sale (Civil Execution Act Art. 55 - Baikyaku no Tame no Hozen Shobun)

This is a crucial pre-emptive remedy available to a creditor who has initiated real property execution proceedings (including a foreclosing mortgagee). Its purpose is to preserve the property's value and facilitate its sale before or during the auction process.

• Grounds: If the debtor or any current occupant of the property engages in acts that reduce or are likely to reduce the property's price (e.g., physical damage, waste, creating nuisance that deters bidders), or fails to take necessary actions for its preservation.
• Available Orders: The execution court can issue various orders upon the mortgagee's petition:
  • Prohibiting the debtor or occupant from committing specific price-reducing acts.
  • Ordering the debtor or occupant to take specific actions to preserve value.
  • Ordering a court execution officer to take custody of the property (shikkōkan hokan - 執行官保管). This is a powerful measure to physically remove control from an obstructive party.
• Evolution: This provision has been strengthened through several amendments (e.g., in 1996 and 2003) to address increasingly sophisticated obstruction tactics, such as making it easier to obtain orders against "any occupant" and dealing with situations where occupants rapidly change or their identities are initially concealed (see Civil Execution Act Art. 55-2, allowing orders against initially unidentified persons under specific circumstances).

Delivery Orders (Civil Execution Act Art. 83 - Hikiwatashi Meirei)

This remedy is for the purchaser at a foreclosure sale to obtain possession of the property after they have paid the purchase price and acquired title.

• Purpose: To provide a swift, summary court procedure for the purchaser to evict occupants who do not have a right of possession assertable against the purchaser.
• Scope: Effective against the former owner (the debtor) and any occupants whose rights (e.g., leases created after the mortgage without consent) are extinguished by the foreclosure sale.
• It provides an executable title for physical eviction without the need for a full-blown, separate lawsuit for possession.

Secured Real Property Earnings Execution (Civil Execution Act Arts. 180 ff. - Tanpo Fudōsan Shūeki Shikkō)

Introduced by the 2003 reforms, this procedure offers an alternative or supplementary method for mortgagees to realize their security.

• Mechanism: Instead of (or before) selling the property, the mortgagee can petition the court to appoint an administrator to manage the mortgaged property and collect rents and other income generated by it. These net earnings are then distributed to the mortgagee to satisfy the secured debt.
• Relevance to Occupancy Issues:
  • The court-appointed administrator takes over the management functions from the debtor.
  • This can be a way to deal with complex tenancy situations, ensure proper maintenance, and even enter into new, commercially reasonable leases (within limits, Civil Execution Act Art. 95) to maximize income, thereby indirectly addressing issues caused by obstructive or uneconomical existing tenancies. The administrator would generally be bound by existing leases assertable against the owner but could take steps to address breaches or negotiate changes.

Handling Obstructive Occupancy in Formal Insolvency Proceedings

If the debtor (mortgagor) enters formal insolvency proceedings, the approach to dealing with occupants and enforcing the mortgage changes.

1. Bankruptcy (Hasan - 破産):
   • Trustee's Role: Upon commencement of bankruptcy, a bankruptcy trustee is appointed and takes control of the debtor's assets, including mortgaged real property (Bankruptcy Act Art. 79).
   • Evicting Unlawful Occupants: The trustee has the power to take necessary actions to secure and preserve the estate's assets, which includes taking steps to evict unlawful occupants from estate property.
   • Treatment of Leases:
     • If a tenant has a leasehold right that is perfected and assertable against third parties (e.g., by registration or under landlord-tenant statutes), the trustee generally cannot unilaterally terminate the lease merely due to the bankruptcy (Bankruptcy Act Art. 56). The tenant's right to use the property continues, and the rent becomes payable to the estate.
     • However, if a lease was created by the debtor when insolvent with the intent to defraud creditors, or if it constitutes a preferential act, the trustee may have grounds to avoid (否認 - hinin) the lease agreement. A Tokyo High Court decision on May 31, 1961 (Showa 36), for example, affirmed the avoidance of a lease created after the debtor had suspended payments.
   • Mortgage Enforcement: The mortgage is typically treated as a "right of separation" (betsujo-ken), allowing the mortgagee to enforce it outside the main bankruptcy distribution process. However, the trustee has oversight and certain powers, such as the right to redeem the property or to sell it subject to the mortgage or free and clear (with the mortgage attaching to proceeds).
   • Interaction with Secured Real Property Earnings Execution: If such an earnings execution was already in progress, it generally continues, but the trustee can take steps like redeeming the property or proceeding with its sale, which would terminate the earnings execution.
2. Civil Rehabilitation (Minji Saisei - 民事再生) / Corporate Reorganization (Kaisha Kōsei - 会社更生):
   • Automatic Stay: Upon commencement of these rehabilitation-type proceedings, there is typically an automatic stay on individual creditor actions, including mortgage foreclosure.
   • Debtor/Trustee Manages Property: The debtor (in DIP-style civil rehabilitation) or the reorganization trustee manages the property as part of the rehabilitation effort.
   • Mortgagee as Secured Creditor: The mortgagee's claim is treated as a secured rehabilitation/reorganization claim, and its treatment (e.g., repayment terms, potential modification) is determined by the rehabilitation or reorganization plan approved by the creditors and the court.
   • The court has powers to authorize the use or disposition of mortgaged property if it is essential for the debtor's business continuation and rehabilitation, provided the mortgagee's interests are adequately protected.
3. Private Workouts (Shiteki Seiri - 私的整理):
   In informal, out-of-court workouts, there are no automatic stays or special trustee powers.
   • Mortgagees must rely on their substantive legal rights (e.g., the direct right to eliminate interference discussed earlier) and general procedural law.
   • A creditor committee or lead creditors may attempt to negotiate with obstructive occupants or coordinate legal action.
   • Challenging obstructive leases created by the debtor might involve using the Creditor's Revocatory Right (to annul fraudulent acts) or the Creditor's Subrogation Right (to exercise the owner's rights).
   • Initiating a Secured Real Property Earnings Execution could be a strategy to gain control over management and income, but it remains vulnerable if another creditor initiates a full foreclosure auction.

Strategic Approaches for Mortgagees

Effectively dealing with obstructive occupants when enforcing a mortgage in Japan requires a strategic approach:

• Early Due Diligence: Before and during the lending relationship, understanding the actual occupancy status and lease terms of mortgaged property is crucial.
• Prompt Assessment upon Default: If the borrower defaults, quickly assess who is occupying the property and under what purported rights.
• Choosing the Right Remedy:
  • For clear unlawful occupation or demonstrably obstructive post-mortgage leases, invoking the direct substantive rights established by the Supreme Court (Nov 24, 1999, and Mar 10, 2005) can be effective.
  • Utilizing the Civil Execution Act's preservation orders (Art. 55) can "prepare" the property for a more successful auction by addressing obstructions proactively.
  • The Secured Real Property Earnings Execution procedure offers a way to manage the property and its income stream while addressing tenant issues.
  • For the eventual purchaser, the Delivery Order (Art. 83) is the key tool for obtaining physical possession.
• Coordination: In situations involving multiple creditors or impending insolvency, coordinating with other stakeholders, including a potential insolvency trustee, is often necessary.

Conclusion

Japanese law provides a sophisticated and evolving toolkit for mortgagees to address the challenges posed by occupants hindering the enforcement of their security rights. While the non-possessory nature of a mortgage presents initial hurdles, landmark judicial decisions have significantly strengthened mortgagees' direct substantive rights to eliminate interference. Furthermore, the Civil Execution Act offers robust procedural remedies, including pre-emptive preservation orders and efficient post-auction delivery orders, complemented by the specialized Secured Real Property Earnings Execution. Understanding these legal avenues, and the strategic considerations for their use in various contexts – from individual enforcement to formal insolvency – is critical for any lender looking to effectively realize their security over real property in Japan.