How Are Mortgagee's Rights Protected Against Infringement Before Foreclosure in Japan?

A Japanese mortgage (抵当権 - Teito-ken) provides a creditor (mortgagee) with a powerful security interest over real estate. However, a defining characteristic of the mortgage is that the debtor (mortgagor) or the property owner retains possession and the right to use the mortgaged property. This non-possessory nature, while commercially convenient, exposes the mortgagee to the risk that the value of their collateral could be diminished or their security otherwise impaired by the actions of the mortgagor or third parties before any default occurs and formal foreclosure proceedings are initiated.

Recognizing this vulnerability, Japanese law equips mortgagees with a range of legal protections and remedies designed to safeguard their security interest during this pre-foreclosure period. These measures aim to preserve the "exchange value" (交換価値 - kōkan kachi) of the mortgaged property, ensuring that the mortgagee's ultimate right to obtain preferential payment from that value remains intact. This article will explore these protective mechanisms, examining the mortgagee's rights against both third-party infringers and the mortgagor or property owner themselves.

The Mortgagee's Pre-Foreclosure Vulnerability

Since the mortgagee is not in direct physical control of the collateral, they are reliant on the mortgagor or property owner to maintain its condition and value. Several types of pre-foreclosure threats can arise:

• Physical damage or destruction of the mortgaged property.
• Improper use or waste that diminishes its value.
• The creation of conflicting subordinate rights or encumbrances by the mortgagor.
• Unlawful occupation by third parties that could hinder a future sale.
• Separation and removal of fixtures or appurtenances that are considered part of the mortgaged collateral.

Japanese law provides remedies for mortgagees to counteract these potential impairments to their "right to obtain preferential payment from the value of the collateral."

Protecting Mortgagee's Rights Against Third-Party Infringement (第三者に対する請求)

When a third party's actions infringe upon the mortgaged property in a way that threatens the mortgagee's security, several avenues of redress are available.

A. Real Rights-Based Claims (物権的請求権 - Bukken-teki Seikyūken)

As the holder of a mortgage—a type of real right (bukken)—the mortgagee can assert real rights-based claims to stop ongoing infringements or rectify past ones that impair the collateral's value.

1. Physical Damage, Separation, or Removal of Appurtenant Objects (損傷ないし一部の分離・搬出):
   If a third party damages the mortgaged property (e.g., a building or land) or removes items that are considered "appurtenant and integrated objects" (fuka ittai butsu) covered by the mortgage's scope (such as fixtures, essential machinery, or key landscape elements ), the mortgagee's security is directly affected. The value from which they expect to recover their debt is diminished.
   • In such cases, the mortgagee can demand that the third party cease such detrimental acts (this is a form of 妨害予防請求権 - bōgai yobō seikyūken, or claim for prevention of disturbance).
   • If items have already been improperly removed, the mortgagee can often demand their restoration to the mortgaged property, effectively a 妨害排除請求権 - bōgai haijo seikyūken, or claim for removal of disturbance. The legal theory here is nuanced: while the mortgage's perfected effect over a specific item might technically be lost if it's removed from the mortgaged premises and dealt with by new third parties unaware of its prior status, the mortgagee generally retains the right to demand its return to the mortgaged property's location from the person who wrongfully removed it, or even from a third party who acquired it on-site aware of its connection to the mortgage, in order to restore the integrity of the collateral. The aim is to return the item to the locus of the mortgage, not into the mortgagee's own possession.
   • This right to demand restoration or cessation of damage generally exists even if the remaining value of the property might still appear sufficient to cover the secured debt. This is because the mortgage encumbers the entire collateral as a unit, and the mortgagee has a right to the preservation of that whole unit's value.
2. Unlawful Occupation (不法占有 - Fuhō Sen'yū) of the Mortgaged Property:
   The unlawful occupation of mortgaged property by a third party, even if not causing direct physical damage, can severely impair the mortgagee's security by making the property difficult or impossible to sell at a fair price during foreclosure.
   • Historically, Japanese courts were somewhat hesitant to grant mortgagees a direct right to evict unlawful occupants, reasoning that the mortgagee is not entitled to possession themselves and could, in theory, foreclose subject to the occupation (see, e.g., an old Supreme Court (Daishin'in) judgment of June 15, 1934).
   • However, this stance has evolved significantly. Recognizing the practical reality that such occupation directly undermines the realizable "exchange value" of the property, the Supreme Court has moved to empower mortgagees:
     • A landmark Supreme Court (Grand Bench) judgment of November 24, 1999, established that a mortgagee could, by way of subrogation (代位行使 - daii kōshi), exercise the owner's right to demand the eviction of unlawful occupants if their presence hinders the realization of the collateral's value and obstructs the mortgagee's preferential payment right. This judgment also importantly suggested, in obiter dictum, that a direct claim by the mortgagee based on their mortgage right itself might also be permissible.
     • This was subsequently confirmed by a Supreme Court judgment of March 10, 2005, which explicitly recognized a mortgagee's direct right, based on the mortgage itself, to demand the removal of an unlawful occupant.
   • Conditions for Demanding Removal of Occupants:
     • The occupant must lack a right of occupation that is valid and opposable to the mortgagee (e.g., a mere trespasser, or a lessee whose lease was created after the mortgage was registered and is therefore subordinate to it).
     • Even if an occupant has a right of occupation that is valid against the owner (e.g., a lessee under a lease created by the owner after mortgage registration), the mortgagee can still demand their removal if the lease was established with the clear intent to obstruct the mortgage execution and the occupation actually impairs the realization of the property's fair market value (Supreme Court, March 10, 2005). This rule balances the owner's general right to use and lease their property against attempts to abusively undermine a pre-existing mortgage.
   • Who Can Demand Removal? Generally, any mortgagee whose security interest is being impaired by the unlawful occupation, meaning their potential recovery from a foreclosure sale is likely to be reduced.
   • To Whom is Possession Restored? The primary demand is for the unlawful occupant to vacate the premises and restore possession to the property owner. However, if the owner refuses to accept possession, is unable to properly manage the property to prevent further infringements, or if returning possession to the owner is impractical, the Supreme Court (March 10, 2005) has indicated that the mortgagee may, in such exceptional circumstances, demand that possession be delivered directly to themselves. This delivery to the mortgagee is not for their own use and enjoyment, but strictly for the purpose of preserving the property and facilitating its orderly sale in foreclosure.

B. Tort Claims for Damages (不法行為に基づく損害賠償請求)

If a third party's tortious act (e.g., negligence causing damage to a mortgaged building) diminishes the value of the mortgaged property to the extent that the mortgagee can no longer fully recover their secured claim from the remaining value, the question of a direct tort claim arises.

• While some older case law (e.g., a Supreme Court (Daishin'in) judgment of May 27, 1932) appeared to allow a mortgagee to sue the tortfeasor directly for damages, the prevailing modern academic view, and one that finds more consistent support in the overall structure of security rights, is that the primary right to claim damages for harm to the property itself lies with the property owner.
• The mortgagee's principal remedy in such situations is generally to exercise their right of real subrogation (物上代位 - butsujō dai'i) over the owner's damage claim against the tortfeasor (as per Civil Code Art. 372, which applies Art. 304). This means the mortgage attaches to the owner's claim for damages, and the mortgagee can seek to have those damages paid to them (up to the amount of their secured debt) in preference to the owner or the owner's general creditors. This approach avoids potential issues of double recovery and aligns with the principle that a mortgage is a right over the value of the property.
• An exception where a direct tort claim by the mortgagee might be more appropriate is if the third party's tortious act directly targets the mortgage right itself, rather than just the physical property. Examples could include the unlawful cancellation of the mortgage registration from the public records or actions specifically intended to obstruct a lawful mortgage execution, where the loss to the mortgagee is distinct from the mere diminution of the property's physical value.

C. Demand for Cancellation of Invalid Registrations (無効登記の抹消)

If the real estate registry contains invalid registrations that appear to have priority over, or otherwise conflict with, the mortgagee's validly registered mortgage (e.g., a registration of a supposedly senior mortgage that has actually been extinguished but not yet formally cancelled from the register), these can create significant impediments to the mortgagee's ability to enforce their security or realize its full value. In such situations, the mortgagee has the right to demand the cancellation of such invalid registrations to clarify the title and protect their priority (a principle supported by prevailing legal opinion and case law, such as a Supreme Court (Daishin'in) judgment of May 14, 1940).

D. Against Execution on the Collateral by Other Creditors

Generally, other creditors of the mortgagor are entitled to initiate compulsory execution proceedings (e.g., a forced auction) against the mortgaged property to satisfy their own claims. In such cases, the mortgagee's primary protection is their priority right in the distribution of proceeds from that execution.

• However, to protect senior mortgagees from futile or value-destroying executions initiated by junior creditors, the Civil Execution Act (Art. 63) includes provisions for "no-surplus" auctions (無剰余 - mujōyo). If it appears that the anticipated sale price from an auction initiated by a junior creditor will be insufficient to even cover the claims of prior-ranking mortgagees (like the senior mortgagee) and the execution costs, the court can halt such proceedings unless the junior creditor provides a financial guarantee to cover any potential shortfall. This prevents the collateral from being sold off for a nominal sum in a poorly timed or managed sale that only harms the senior interests.
• If another creditor attempts to seize and execute only against an appurtenant object (fuka ittai butsu) that is covered by the mortgage (e.g., a valuable piece of machinery in a mortgaged factory), separately from the principal mortgaged property itself, the mortgagee can generally block this separate execution by filing a third-party objection suit (第三者異議の訴え - daisansha igi no uttae; Civil Execution Act Art. 38). The rationale is that such items are considered part of the unitary collateral securing the mortgage, and their piecemeal seizure would improperly diminish the mortgagee's security over the whole economic unit. (This view is supported by prevailing legal opinion and a Supreme Court judgment of March 28, 1969).

Protecting Mortgagee's Rights Against the Mortgagor or Property Owner (債務者・設定者・抵当不動産所有者に対する請求)

The mortgagee also has rights against the mortgagor or current owner of the mortgaged property if their actions impair the security.

A. Limitations on Owner's Use and Acts of Impairment

While the mortgagor or property owner retains the right to use, derive profit from, and even dispose of the mortgaged property, this right is not absolute. They must not engage in acts that diminish the value of the property to such an extent that it jeopardizes the mortgagee's security—that is, their ability to recover the secured claim upon foreclosure.

• Ordinary Use vs. Impairment: Normal, reasonable use of the property and minor wear and tear are generally permissible and do not constitute an infringement of the mortgage. For example, residing in a mortgaged house and causing it to undergo typical depreciation, or conducting normal, sustainable forestry operations on mortgaged woodland, would usually be acceptable.
• However, acts that exceed the scope of ordinary use and constitute significant damage, waste, or unauthorized alteration (e.g., demolishing a substantial part of a mortgaged building without the mortgagee's consent, or clear-cutting a mortgaged forest in a way that drastically reduces its value) can be considered an infringement. In such instances, the mortgagee can exercise real rights-based claims (demanding cessation of the harmful activity, or restoration of the property) against the owner, similar to the claims they might have against a third-party infringer.

B. Claims for Damages Against the Owner

• If the debtor (who is also the owner) impairs the security, the mortgagee's primary recourse is often to accelerate the debt and initiate foreclosure (see below). A separate claim for damages may be less critical in this scenario.
• If a third-party security provider (butsujō hoshōnin) or a subsequent acquirer of the property (daisan shutokusha) (who is not the principal debtor) wrongfully damages the property, the mortgagee may have a direct tort claim against them for the diminution in the security's value.
• There is some debate on precisely when the "damage" to the mortgagee arises for such a claim: is it only when the property's value falls below the outstanding secured debt, or is any reduction in value actionable? One view is that any tortious reduction in value by the owner constitutes an immediate actionable loss for the mortgagee (up to the lesser of the secured claim amount or the actual diminution), without needing to wait for foreclosure to determine an actual shortfall. This is because the mortgagee has a right over the entire value of the property up to their claim. If the owner pays such damages, they might then be able to claim a corresponding reduction in the secured debt, by analogy to Civil Code Article 422 (which deals with subrogation when a third party pays compensation for damage to collateral).
• If the owner is the original mortgagor, a claim for breach of the mortgage agreement (which usually contains covenants to maintain the property) may also be available.

C. Acceleration of the Secured Debt (期限の利益の喪失 - Kigen no Rieki no Sōshitsu)

Under Article 137(2) of the Civil Code, if the debtor "destroys, damages, or diminishes" the security provided, they lose the "benefit of time" (期限の利益 - kigen no rieki) for the repayment of the secured debt.

• This means the mortgagee can declare the entire outstanding debt immediately due and payable, even if the original repayment schedule had future installments. Once the debt is accelerated, the mortgagee can proceed to initiate foreclosure proceedings on the (remaining) collateral.
• The underlying rationale is that such acts of impairment by the debtor undermine the foundation of the credit extended by the mortgagee, who relied on the existence and value of that security.
• The prevailing legal view is that this loss of the benefit of time occurs if the debtor's act caused the impairment, irrespective of the debtor's intent or negligence.
• Case law has also applied this principle when, for example, a senior security interest on the same property is foreclosed, which results in the extinguishment of a junior mortgage before the junior mortgagee's claim can be fully satisfied from that collateral. In such a case, the debt secured by the now-extinguished junior mortgage may also be considered accelerated (see Supreme Court (Daishin'in) judgment of May 22, 1934).

D. Demand for Additional Security (増担保請求 - Zōtanpo Seikyū)

If the debtor impairs the existing security, the mortgagee can often demand that the debtor provide additional security (増担保 - zōtanpo) to restore the original level of security.

• If the debtor fails to meet this demand, it can also serve as a ground for the mortgagee to accelerate the debt. This might be based on specific contractual clauses in the loan or mortgage agreement, or by applying Article 137(3) of the Civil Code if there was an unfulfilled obligation to provide or maintain security.
• Many modern loan agreements contractually broaden this right, allowing the mortgagee to demand additional security even when the impairment of the original collateral is not due to the debtor's act (e.g., a significant decline in market value of the mortgaged property). Failure to comply with such a contractual demand for additional security typically also triggers an event of default and allows for acceleration.

E. Mortgagee's Duty to Preserve Security (担保保存義務 - Tanpo Hozon Gimu)

While the focus is often on the mortgagee's rights, there's a converse consideration. If there are other parties with an interest in the security, such as guarantors of the secured debt or junior mortgagees who would be entitled to subrogate to the senior mortgagee's rights upon paying the senior debt, the senior mortgagee has a duty not to improperly release or diminish the value of the security to the detriment of these other parties (this principle is reflected in Civil Code Article 504 concerning guarantors). If a mortgagee breaches this duty to preserve security, a guarantor, for instance, may be discharged from their guarantee obligation to the extent they were prejudiced by the loss or impairment of the security they would have otherwise been able to subrogate to. Loan agreements, particularly in banking practice, often contain clauses that attempt to waive or limit this duty of the mortgagee, and the validity and scope of such waivers have been a subject of legal discussion and judicial scrutiny. (Anticipated reforms to the Civil Code, such as a draft Article 504(2), aim to provide clarity by stating that the duty is not breached if the mortgagee's actions are found to be reasonable in light of prevailing commercial customs and practices).

Conclusion: Safeguarding Security Before Default

Japanese law, through a combination of real rights-based claims, tort principles, and specific contractual and statutory provisions, provides mortgagees with a significant toolkit to protect their security interests before the debtor defaults and formal foreclosure becomes necessary. These pre-foreclosure remedies—ranging from demanding the cessation of damaging activities and the removal of unlawful occupants to accelerating the debt upon impairment of collateral—are vital for ensuring that the "exchange value" of the mortgaged property, which forms the core of the mortgagee's security, is not unduly eroded. While the mortgagee does not have the right to possess the property prior to enforcement, these protective powers are crucial for maintaining the integrity of their security and safeguarding their ultimate right to preferential payment.