Foreclosure in Japan: A Step-by-Step Guide to Compulsory Sale of Real Property

When a creditor in Japan holds an enforceable title of obligation (such as a final court judgment or a notarized deed with an execution clause) and the debtor fails to satisfy the underlying monetary claim, one of the most significant enforcement mechanisms available is the compulsory auction of the debtor's real property. This process, known as kyōsei keibai (強制競売), is a court-supervised procedure designed to convert immovable assets into cash to satisfy creditors. It is distinct from auctions based on prior security rights like mortgages (tanpo fudōsan keibai, 担保不動産競売), though both involve the sale of real estate. This article provides a step-by-step guide to the kyōsei keibai process.

Step 1: Initiating the Compulsory Auction – The Petition (Mōshitate, 申立て)

The journey begins with the creditor filing a formal petition for a compulsory auction with the competent court.

• Who Petitions and What is Required? The petitioning creditor must possess a valid title of obligation and, in most cases, an execution clause (shikkōbun, 執行文) certifying its current enforceability. The petition must be accompanied by a suite of documents, including the title of obligation, certificates of service on the debtor, the real estate registration certificate (登記事項証明書 - tōki jikō shōmeisho), official property tax valuation certificates (公課証明書 - kōka shōmeisho), property maps, and other documents specified by court rules.
• Jurisdiction: The petition is filed with the District Court that has jurisdiction over the location of the real estate.
• Advance Costs and Taxes: The creditor is required to pay advance court costs (yonōkin, 予納金) to cover procedural expenses, as well as a registration and license tax for the seizure, which is typically a percentage of the claim amount. For example, the registration tax for seizure is often 0.4% of the secured claim amount. The amount of yonōkin can vary depending on the claim amount, with higher claims requiring larger deposits (e.g., a claim under JPY 20 million might require a JPY 600,000 deposit, while a claim over JPY 100 million could require JPY 2 million or more in major jurisdictions like Tokyo).
• The Commencement Order (Kaishi Kettei, 開始決定): If the court finds the petition and accompanying documents to be in order and the formal requirements for execution met, it will issue a commencement order. This order officially initiates the compulsory auction proceedings for the specified property.

Step 2: Seizure of the Property (Sashiosae, 差押え)

The commencement order triggers the seizure of the property, which has significant legal consequences.

• Effect of the Commencement Order: The order itself declares the seizure of the real estate to satisfy the creditor's claim.
• Registration of Seizure: Upon issuance of the commencement order, the court clerk promptly commissions the local Legal Affairs Bureau (法務局 - Hōmukyoku) to register the seizure in the real estate registry. This registration serves as a public notice to third parties that the property is subject to execution proceedings and restricts the debtor's ability to dispose of it freely.
• When Seizure Takes Effect: The seizure legally takes effect at the earlier of two moments: when the commencement order is served on the debtor, or when the seizure is registered in the real estate registry. In practice, to prevent the debtor from attempting last-minute dispositions, service on the debtor is often effected after the seizure registration is confirmed.
• Legal Consequences of Seizure: The primary effect of seizure is a prohibition on the debtor disposing of the property. This includes selling the property, creating new mortgages or other encumbrances, or granting long-term leases that could diminish its value or hinder the auction process. However, ordinary use and収益 (collection of profits/fruits) by the debtor may still be permitted.
  If the debtor attempts to dispose of the property after seizure, such disposition is generally considered void against the executing creditor and other participants in the auction process. This is based on the "relative effect" theory (sōtaikōsetsu, 相対効説), meaning the disposition might still be valid between the debtor and the third-party transferee if the auction is ultimately withdrawn or cancelled, but it cannot prejudice the auction sale if it proceeds.
• Multiple Seizures – Dual Commencement Orders (Nijū Kaishi Kettei, 二重開始決定): If another creditor, also holding a title of obligation, petitions for a compulsory auction against the same property that is already under seizure, the court will issue a "dual commencement order." This allows the subsequent creditor to secure their place in the queue for potential distribution without disrupting the ongoing initial auction process. The first proceeding continues, but if it is stayed or withdrawn, the subsequent creditor can request to proceed based on their order. This mechanism acts as a form of "insurance" for later creditors against the termination of the prior proceedings.

Step 3: Court-Ordered Investigation – Gathering Information for the Sale

Once the property is seized, the court initiates comprehensive investigations to prepare for its sale. This involves two main prongs: investigating claims against the debtor and investigating the property itself.

• A. Investigation of Claims (Saiken Chōsa Tetsuzuki, 債権調査手続):
  • Demand for Distribution (Haitō Yōkyū, 配当要求): The court sets a deadline by which other creditors holding titles of obligation against the same debtor (or those with certain statutory liens) can file a "demand for distribution." This allows them to participate in sharing any proceeds from the sale. Missing this deadline generally means losing the right to participate in that specific auction's distribution. The deadline is publicly announced, typically by posting at the courthouse.
  • Notice to File Claims (Saiken Todokede no Saikoku, 債権届出の催告): The court also sends notices to known secured creditors (e.g., mortgagees whose rights were registered before the seizure) and relevant public entities (for unpaid taxes or social security contributions) instructing them to formally file their claims by the same deadline. These entities often have statutory priority in distribution.
• B. Investigation of the Property and Attendant Rights (Kenri Kankei tō no Chōsa Tetsuzuki, 権利関係等の調査手続):
  • Current Condition Investigation (Genkyō Chōsa, 現況調査): This crucial investigation is conducted by a court execution officer (shikkōkan). The officer visits the property to assess its physical condition, current state of occupancy (e.g., by the debtor, a tenant, or an unlawful occupant), visible rights or encumbrances (like easements), and any other relevant circumstances. This may involve taking photographs, making diagrams, and interviewing occupants or neighbors. The findings are compiled into a "Current Condition Investigation Report" (genkyō chōsa hōkokusho, 現況調査報告書), which becomes a key document for potential bidders. The execution officer has the authority to enter the property, and if necessary, to open locked doors with the assistance of a locksmith, and can request police assistance if met with resistance.
  • Valuation (Hyōka, 評価): The court appoints an independent appraiser, typically a licensed real estate appraiser (fudōsan kanteishi, 不動産鑑定士), to determine the property's market value. The appraiser considers various factors, including the property's condition, location, comparable sales, and any specific limitations or advantages pertinent to an auction sale (e.g., difficulty of inspection by bidders, potential for post-sale disputes over possession). The appraiser's findings are presented in a "Valuation Report" (hyōkasho, 評価書). The valuation aims to set a fair starting point for the auction, recognizing that auction prices might differ from standard open-market transactions. The national network of appraisers involved in auctions (KB Net) has published standards to promote consistency in these valuations.

Step 4: Determining the Sale Conditions (Baikyaku Jōken no Kettei, 売却条件の決定)

Based on the investigations, the court finalizes the conditions under which the property will be sold.

• Confirmation of Rights to be Assumed by the Purchaser (or Extinguished): The court clarifies which existing rights or encumbrances on the property, if any, will pass to the purchaser and which will be extinguished by the sale. Japan generally follows a "principle of elimination" (shōjo shugi, 消除主義), meaning that most mortgages and other junior encumbrances are wiped out by the auction sale, allowing the purchaser to obtain clear title. However, certain superior rights, like some pre-existing leaseholds perfected against the seizing creditor, might be assumed by the purchaser.
• Statutory Superficies (Hōtei Chijōken, 法定地上権): This is a unique and complex Japanese legal doctrine. If land and a building on that land were owned by the same person at the time of seizure (or mortgage creation in secured auctions), and the auction results in the land and building having different owners, a "statutory superficies" is deemed to be established by law in favor of the building owner. This grants the building owner the legal right to use the land for the building, preventing its immediate demolition and preserving its value. The existence or non-existence of a statutory superficies significantly impacts the property's valuation and marketability.
• Property Particulars Statement (Bukken Meisaisyo, 物件明細書): This crucial document is prepared by the court clerk. It summarizes the property's key details, identifies any rights that the purchaser must assume (or that are extinguished), outlines the presence or absence of a statutory superficies, and notes any other important matters relevant to potential bidders (e.g., current occupancy status, known boundary issues). Any interested party can raise an objection if they believe the particulars statement is incorrect.
• Base Sale Price (Baikyaku Kijun Kagaku, 売却基準価額) and Minimum Purchase Price (Kaiuke Kanō Kagaku, 買受可能価額): The court sets the "base sale price" based on the appraiser's valuation. From this, a "minimum purchase price" is derived, typically 80% of the base sale price. Bids submitted in the auction must be at or above this minimum purchase price to be considered valid. This system aims to prevent the property from being sold at an unreasonably low price.
• Prohibition of Sale Without Surplus (Mujoryo Kanka no Kinshi, 無剰余換価の禁止): If the court determines that the expected proceeds from the sale at the minimum purchase price would not be sufficient to cover the execution costs and the claims of creditors who have priority over the petitioning creditor (i.e., the petitioning creditor would receive nothing), the court will notify the petitioning creditor. The creditor then has a short period (usually one week) to take specific actions, such as guaranteeing to purchase the property themselves at a price that would create a surplus, or proving that a surplus is indeed likely. If the creditor fails to do so, the auction proceedings are typically cancelled. This "principle of surplus" (jōyo shugi, 剰余主義) protects higher-ranking creditors' right to choose the timing of a sale that affects their interests.
• Collective Sale (Ikkatsu Baikyaku, 一括売却): If multiple properties (e.g., a parcel of land and the building on it, or several adjoining lots) are best utilized or would fetch a higher price if sold together, the court can order them to be sold as a single package. This is permissible unless the sale of just one property would suffice to cover all debts and costs, in which case the debtor's consent is needed for a collective sale that includes surplus assets.

Step 5: Protecting the Property's Value During the Auction Process (Mokuteki Fudōsan no Kachi no Iji, 目的不動産の価値の維持)

Between the seizure and the final sale, there's a risk that the debtor or occupants might damage the property or take other actions to reduce its value or obstruct the sale. To counter this:

• Provisional Dispositions for Sale (Baikyaku no tame no Hozen Shobun, 売却のための保全処分): The petitioning creditor can apply to the execution court for orders to prevent such detrimental acts. These can include orders prohibiting specific actions (like demolition or alteration), prohibiting the transfer of occupancy, or even placing the property under the custody of a court execution officer. These measures were strengthened by amendments in 2003 to combat increasingly sophisticated obstruction tactics.
• Permission for Substitute Payment of Ground Rent, etc. (Jidai tō no Daibarai no Kyoka, 地代等の代払の許可): If the auctioned property is a building on leased land, and the debtor fails to pay ground rent, risking lease termination, the creditor can petition the court for permission to pay the ground rent on the debtor's behalf. These payments are then treated as priority execution costs.

Step 6: Conducting the Sale (Baikyaku no Jisshi, 売却の実施)

With investigations complete and sale conditions set, the actual sale process begins.

• Sale Methods: The predominant method is "period bidding" (kikan nyūsatsu, 期間入札). In this system, bids are submitted in writing to the court execution officer over a specified period (e.g., one week to one month). This contrasts with live "on-day bidding" or outcry auctions, though other methods like a "special sale" (tokubetsu baikyaku, 特別売却) for properties that didn't sell in the initial bidding period are also available (often on a first-come, first-served basis above the minimum price). Period bidding was adopted to enhance transparency and reduce the influence of "auction specialists" (keibai-ya) who sometimes engaged in obstructive tactics in former live auction settings.
• Public Notice and Information Disclosure: Details of the upcoming sale, including the bidding period, minimum price, and the "three-piece set" (current condition report, valuation report, and property particulars statement), are made publicly available. This is done through postings at the courthouse and, significantly, via the nationwide BIT (Broadcast Information of Tri-set) system an online portal (bit.sikkou.jp) that allows anyone to search for and view auction properties across Japan. This has dramatically increased transparency and accessibility.
• The Bidding Process:
  • Potential bidders review the publicly available information. Some jurisdictions also have a system for pre-bid viewing (nairan seido, 内覧制度) of the property, though its utilization has been limited.
  • To participate, bidders must submit a sealed bid to the court execution officer within the designated period, either directly or by registered mail.
  • A bid deposit (買受申出の保証 - kaiuke mōshide no hoshō) is required, typically 20% of the base sale price. This is usually paid by bank transfer to the court's account or via a payment guarantee from a financial institution. The deposit is forfeited if the highest bidder later fails to pay the purchase price, deterring frivolous bids. The debtor themselves cannot bid.
  • On the bid opening date (kaisatsu kijitsu, 開札期日), the court execution officer opens all submitted bids publicly.
  • The person who submitted the highest valid bid at or above the minimum purchase price is declared the highest bidder (saikōka kaiuke mōshidenin, 最高価買受申出人).
  • There's also a system for a next-highest bidder (jijun'i kaiuke mōshidenin, 次順位買受申出人) to declare their intent to purchase if the highest bidder defaults, though this is infrequently used.
• Measures if No Bids are Received: If no valid bids are made, the court may schedule a new bidding period, often after lowering the base sale price (after consulting the appraiser). If, after several attempts (e.g., three, colloquially known as the "three strikes out" rule introduced in 1998), there are still no bids and no prospect of a sale, the proceedings may be stopped and eventually cancelled.

Step 7: Court Approval of Sale (Baikyaku no Kyoka, 売却の許可)

Being the highest bidder does not automatically mean the sale is finalized.

• The court designates a sale permission decision date (baikyaku kettei kijitsu, 売却決定期日), usually within a week of the bid opening. On this date, the execution court judge formally issues a decision either permitting or disallowing the sale to the highest bidder.
• Interested parties can voice opinions on this date concerning any statutory grounds for disallowing the sale (e.g., significant errors in the sale procedure, substantial damage to the property after bidding but before this decision, a drastically incorrect valuation).
• If the property is significantly damaged (e.g., by natural disaster) after the bid but before payment, and without the bidder's fault, the highest bidder can petition the court to disallow the sale or, if permission was already granted, to cancel that permission. This applies to legal defects as well as physical damage if they were hidden and not the bidder's fault.
• The sale permission decision can be appealed via an "execution appeal" (shikkō kōkoku, 執行抗告). The decision becomes final and effective once the appeal period expires or appeals are resolved. The highest bidder then officially becomes the purchaser (kaiukenin, 買受人).

Step 8: Payment of the Purchase Price (Daikin Nōfu, 代金納付)

Finalizing the acquisition involves the payment of the purchase price.

• Once the sale permission decision is final, the court sets a deadline for payment of the purchase price (daikin nōfu kigen, 代金納付期限), typically within one month (though often extended to around 40 days in practice to allow for financing).
• The purchaser pays the balance (bid price minus the initial deposit) to the court. Creditors who are also purchasers may, by application, offset their entitled distribution amount against the purchase price (sashihiki nōfu, 差引納付).
• Effect of Payment: Upon full payment by the deadline, ownership of the real estate legally transfers to the purchaser. This is the point at which most pre-existing encumbrances that do not survive the sale are extinguished.
• The court clerk then commissions the Legal Affairs Bureau to make the necessary registration changes: transferring title to the purchaser and cancelling the registration of the seizure and any extinguished mortgages or other rights. The registration license tax for these changes is borne by the purchaser.
• Consequences of Non-Payment: If the purchaser fails to pay by the deadline, the sale permission loses its effect, and the bid deposit is forfeited. The property may then be offered to a second-priority bidder, if any, or a new auction process will be initiated. The defaulting highest bidder is barred from participating in subsequent auctions for that property.
• Loan Utilization: Since a 1998 amendment, procedures are in place to facilitate purchasers using bank loans to finance their acquisition. This involves the court providing necessary documentation to the purchaser's designated legal representative (lawyer or judicial scrivener) to enable simultaneous registration of ownership transfer and the lender's mortgage, protecting the lender's security interest.

Step 9: Obtaining Possession – The Delivery Order (Hikiwatashi Meirei, 引渡命令)

Acquiring title does not always mean immediate vacant possession.

• If the debtor, former owner, or other occupants without rights enforceable against the purchaser refuse to vacate the property after the purchaser has paid the price, the purchaser can apply to the execution court for a delivery order (hikiwatashi meirei, 引渡命令) (Article 83, Civil Execution Act).
• This is a relatively swift and summary judicial order compelling the occupants to deliver possession to the purchaser. It is a separate title of obligation and can be enforced by a court execution officer if occupants still refuse to leave.
• The application for a delivery order must generally be made within six months of the payment of the purchase price (extendable to nine months if there was a tenant with a statutory move-out grace period). This is a commonly used and effective tool for purchasers.

Step 10: Distribution of Proceeds (Bensaishikin Kōfu oyobi Haitō, 弁済金交付および配当)

The final stage is the distribution of the collected purchase price to the creditors.

• Simple Payment (Bensaikin Kōfu, 弁済金交付): If there is only one executing creditor, or if the sale proceeds are sufficient to satisfy all participating creditors and execution costs in full, the court directly pays out the entitled amounts. Any surplus is returned to the debtor (former property owner).
• Formal Distribution (Haitō, 配当): If there are multiple creditors and the proceeds are insufficient to satisfy all ofthem fully, a more formal distribution procedure is undertaken.
  • The court clerk prepares a distribution schedule (haitōhyō, 配当表). This schedule meticulously lists all entitled creditors and calculates their respective shares of the proceeds based on a complex statutory order of priority. This order generally prioritizes: (1) execution costs (including expenses for the auction itself); (2) certain third-party claims for necessary or beneficial expenses on the property; (3) certain registered statutory liens (e.g., for construction work); (4) secured claims like mortgages, ranked by their registration date relative to public dues; (5) public dues (taxes, social insurance contributions, which themselves have internal priority rules); (6) general unsecured claims of creditors who properly demanded distribution.
  • A distribution date (haitō kijitsu, 配当期日) is set, and the proposed schedule is made available for inspection.
  • Creditors or the debtor who disagree with the amounts or priorities in the distribution schedule can file an objection to distribution (haitō igi no mōshide, 配当異議の申出) on the distribution date. If the objection cannot be resolved immediately, the objecting party may need to file a separate "distribution opposition action" (haitō igi soshō, 配当異議訴訟) in court to have the dispute adjudicated. If an objection is raised regarding a claim based on an existing title of obligation (e.g., a judgment creditor's claim), the debtor must use an Action Opposing Execution instead.
  • Once the distribution schedule is finalized (either because no objections were raised, or objections were resolved), payments are made to the creditors accordingly.

Conclusion

The compulsory real estate auction (kyōsei keibai) in Japan is a highly structured and regulated process. While it can be lengthy and involves numerous detailed steps, it is designed to ensure transparency, fairness to all parties involved (creditors, debtors, and purchasers), and the realization of creditors' legitimate claims through the orderly sale of a debtor's immovable property. The system relies heavily on the expertise of court officials, execution officers, and appointed appraisers, and incorporates various safeguards and informational tools, such as the BIT system, to make the market more accessible and reliable.