Mortgage Foreclosure in Japan: A Step-by-Step Overview

When a borrower defaults on a loan secured by a mortgage on Japanese real estate, the mortgagee's ultimate remedy is to enforce their security interest. In Japan, this primarily involves a court-administered auction process (競売 - keibai) governed by the Civil Execution Act (民事執行法 - Minji Shikkō Hō). This process, known as the execution of a mortgage (抵当権の実行 - teitōken no jikkō), allows the mortgagee to have the property sold and to receive preferential payment from the proceeds. Understanding the steps involved is crucial for any lender, including US businesses, holding mortgage security in Japan.

Initiating Mortgage Foreclosure: The Auction Petition (競売の申立て - Keibai no Mōshitate)

The right to foreclose is an inherent part of a registered mortgage in Japan. Unlike unsecured creditors who typically need a separate court judgment or other "title of debt" (債務名義 - saimu meigi) to force a sale, a mortgagee can initiate auction proceedings based directly on their registered mortgage rights.

• The Petitioner: The action is initiated by the mortgagee (抵当権者 - teitōkensha).
• Key Documentation for Petition (Civil Execution Act, Article 181):
  The petition, which must be in writing, needs to be accompanied by several crucial documents:
  1. Evidence of the Mortgage: Primarily, a current Certificate of Registered Matters (登記事項証明書 - tōki jikō shōmeisho) for the mortgaged property, clearly showing the registered mortgage that is being enforced. This is usually obtained from the Legal Affairs Bureau.
  2. Proof of Succession (if applicable): If the current mortgagee is not the original mortgagee (e.g., due to assignment of the loan and mortgage, or inheritance), documents evidencing this succession of rights must be submitted. For an assignment, this would be the assignment agreement and its registration; for inheritance, certificates proving heirship.
  3. Corporate/Individual Details: If the parties are corporations, their commercial registration certificates (or corporate numbers) are needed. For individuals, certificates of residence may be required.
  4. Property Valuation for Tax: Often, a certificate of property valuation (公課証明書 - kōka shōmeisho or 評価証明書 - hyōka shōmeisho) is needed to calculate the registration tax for the seizure.
  5. Other Court-Specific Requirements: The specific court may have additional requirements for forms or supporting documents, such as property location maps or detailed lists of claims.
• Jurisdiction: The petition must be filed with the Japanese district court that has jurisdiction over the geographical area where the real property is located (Civil Execution Act, Article 44). This jurisdictional rule cannot be altered by agreement.
• Potential Initial Hurdles: Before a court accepts a petition and proceeds, certain issues can arise:
  • "No Surplus" (無剰余 - mujoyo) Auctions: If the court anticipates that the proceeds from the auction are unlikely to cover the costs of the auction proceedings and the claims of any creditors with priority over the petitioning mortgagee (thus leaving no surplus for the petitioner), the auction may be cancelled unless the petitioner can demonstrate a likelihood of surplus or agrees to purchase the property at a price that guarantees such a surplus (Civil Execution Act, Article 63).
  • Debtor Deceased: If the property owner/debtor has passed away and inheritance procedures (including registration of heirs as owners) are not yet completed, this can complicate or delay the auction. The creditor may need to take steps, possibly through subrogation, to have the inheritance registered.
  • Conflicts with Prior Seizures: If the property has already been seized by tax authorities for public auction (公売 - kōbai), specific rules under the Act on Adjustment of Procedures between Tax Collection and Civil Execution (滞納処分と強制執行等との手続の調整に関する法律) govern the coordination and potential suspension or continuation of the mortgage auction.

Key Stages in the Court-Administered Auction Process

Once a valid petition is filed and accepted, the court-administered auction follows a series of legally defined steps:

Step 1: Commencement Order for Auction (競売開始決定 - Keibai Kaishi Kettei)
The court reviews the petition and, if satisfied, issues a formal Commencement Order for Auction (Civil Execution Act, Article 45). This order officially initiates the foreclosure process.

Step 2: Registration of Seizure (差押登記の嘱託 - Sashiosae Tōki no Shokutaku)
Upon issuing the commencement order, the court clerk promptly commissions (嘱託 - shokutaku) the relevant Legal Affairs Bureau to register a seizure (差押え - sashiosae) on the title of the mortgaged property (Civil Execution Act, Article 48). This registration serves as a public notice that the property is subject to forced sale and restricts the owner's ability to dispose of it. The commencement order is also formally served on the debtor and the current property owner (if different).

Step 3: Property Investigation and Valuation (現況調査・評価 - Genkyō Chōsa, Hyōka)
The court takes steps to understand the property's condition and value:

• Current Condition Investigation (現況調査 - genkyō chōsa): The court orders a court execution officer (執行官 - shikkōkan) to physically inspect the property, investigate its current occupancy status (e.g., by tenants, the owner), identify any leases or other existing rights affecting it, and prepare a report (Civil Execution Act, Article 57).
• Valuation (評価 - hyōka): The court appoints an independent, qualified real estate appraiser (評価人 - hyōkanin) to assess the property's market value (Civil Execution Act, Article 58). This appraisal report, which details the appraiser's valuation methodology and conclusion, is crucial as it forms the basis for setting the minimum bid price for the auction.

Step 4: Public Notice of Sale (売却の公告 - Baikyaku no Kōkoku)
The court clerk is responsible for publicly announcing the upcoming sale (Civil Execution Act, Article 64). This public notice includes:

• A detailed description of the property.
• The minimum bid price (売却基準価額 - baikyaku kijun kagaku), which is derived from the appraiser's valuation.
• The date, time, and location of the auction (or the period for submitting sealed bids).
  Comprehensive information files, including the execution officer's investigation report (現況調査報告書 - genkyō chōsa hōkokusho), the appraiser's valuation report (評価書 - hyōkasho), and property diagrams/maps (物件明細書 - bukken meisaisyo), are made available for inspection by potential bidders at the court.

Step 5: The Auction Sale (入札・競り売り - Nyūsatsu, Seriuri)
The actual sale of the property is typically conducted by one of the following methods (Civil Execution Act, Article 64; Civil Execution Rules, Articles 34, 51):

• Sealed Bidding (入札 - nyūsatsu): Interested parties submit confidential written bids by a deadline. The highest valid bid above the minimum price wins.
• Open Outcry Auction (競り売り - seriuri): Bidders publicly announce their bids, with the property going to the highest bidder.
  If these methods fail to produce a successful buyer, the court has the discretion to employ other sale methods.

Step 6: Sale Permission Decision (売却許可決定 - Baikyaku Kyoka Kettei)
Following the bidding process, the court holds a session to identify the highest valid bidder. If all legal requirements are met and there are no grounds for disallowing the sale (売却不許可事由 - baikyaku fukyoka jiyū, as specified in Article 71 of the Civil Execution Act), the court issues a Sale Permission Decision (売却許可決定 - baikyaku kyoka kettei) formally awarding the property to that bidder (Article 69).

Step 7: Payment of Purchase Price by the Highest Bidder (買受人の代金納付 - Kaiukenin no Daikin Nōfu)
Once the Sale Permission Decision becomes final and unappealable, the successful bidder (買受人 - kaiukenin) is required to pay the full purchase price to the court by a deadline set by the court clerk (Civil Execution Act, Article 78). Critically, under Japanese law, the purchaser legally acquires ownership of the property at the moment they make this full payment (Article 79). Interestingly, Article 184 notes that the purchaser's acquisition of the property is not impeded even if it later turns out that the mortgaged property described in the proceedings was non-existent or had already been extinguished.

Step 8: Distribution of Proceeds (配当 - Haitō)
After the court receives the full purchase price, it initiates the process of distributing these funds to the creditors. The court prepares a distribution plan (配当表 - haitōhyō) which outlines how the proceeds will be allocated (Civil Execution Act, Article 84). This plan details:

• The principal amount of each creditor's claim.
• Accrued interest and any default damages.
• The costs of the execution proceedings (which are typically paid first).
• The priority ranking of each claim and the amount to be distributed to each creditor.
  The petitioning mortgagee and other lienholders (e.g., junior mortgagees, certain tax authorities) receive payment according to their legally established priorities, which are primarily determined by the order of registration of their rights.

Step 9: Registration of Ownership Transfer and Cancellation of Encumbrances (所有権移転登記等の嘱託 - Shoyūken Iten Tōki tō no Shokutaku)
Upon the purchaser's payment, the court clerk takes several important registration actions by commissioning the Legal Affairs Bureau (Civil Execution Act, Article 82):

1. Registration of the transfer of ownership to the purchaser.
2. Cancellation of the registration of the foreclosed mortgage.
3. Cancellation of any junior mortgages and other encumbrances that were extinguished by the sale (e.g., certain leasehold rights that do not survive foreclosure).
4. Cancellation of the court's seizure registration and any related provisional seizure registrations.
   If the purchaser is financing their acquisition with a new loan and wishes to grant a new mortgage on the property simultaneously with acquiring title, they (or their lender) can request the court to provide the necessary commission documents to their designated judicial scrivener (shihōshoshi). This allows the judicial scrivener to file the ownership transfer registration and the new mortgage registration sequentially and promptly.

Step 10: Order for Delivery of Possession (引渡命令 - Hikiwatashi Meirei)
If the former owner, debtor, or other occupants do not voluntarily vacate the property after the sale, the new purchaser can, within a specified period (typically six months from the date of payment, or nine months if certain protected short-term leases were in place), petition the execution court for an Order for Delivery of Possession (引渡命令 - hikiwatashi meirei) (Civil Execution Act, Article 83). This order, if granted, provides a legal basis for forcibly evicting occupants who refuse to leave.

Specific Issues Encountered in Mortgage Foreclosures

• Multiple Auction Petitions (二重競売の申立て - Nijū Keibai no Mōshitate): Even if one auction proceeding is already underway for a property, another creditor (e.g., a different mortgagee) can file a separate auction petition against the same property. The court will typically prioritize the earlier-filed case, but the subsequent petition can proceed if the first one is withdrawn or dismissed.
• Foreclosure when Debtor is Deceased (債務者死亡の場合 - Saimusha Shibō no Baai): If the property owner or debtor has died, foreclosure can still proceed against their heirs. If inheritance and the registration of the heirs as new owners have not been completed, the petitioning mortgagee may need to initiate procedures, potentially through a subrogation action (代位 - dai'i), to have the inheritance formally registered before the auction can be fully concluded. The court may require proof of heirship (e.g., family register excerpts - 戸籍謄本 - koseki tōhon) to identify the relevant parties.
• Mortgage Co-owned by Multiple Parties (抵当権の準共有 - Teitōken no Junkyōyū): If a single mortgage right is co-owned by several parties (e.g., after a loan participation was assigned to multiple entities, or heirs jointly inherited a mortgage), each co-owner of a divisible claim (like a monetary debt) can generally initiate foreclosure proceedings with respect to their share of the claim.
• Foreclosure by a Sub-mortgagee (転抵当権者の申立て - Ten-teitōkensha no Mōshitate): A mortgage itself can be pledged as security for another debt, creating a sub-mortgage (転抵当 - ten-teitō). If both the debt secured by the original mortgage and the debt secured by the sub-mortgage are in default, the sub-mortgagee can initiate foreclosure proceedings against the underlying real property. In such cases, the original mortgagee's right to initiate foreclosure is generally restricted unless the sub-mortgagee consents, or if the debt secured by the sub-mortgage is less than the debt secured by the original mortgage.

Conclusion

The court-administered auction is the primary mechanism for mortgage foreclosure in Japan. It is a structured process governed by the Civil Execution Act, designed to balance the mortgagee's right to realize their security with procedural fairness for the debtor and other interested parties. While the system provides a clear pathway for enforcement, it involves multiple steps, specific documentation, and adherence to strict timelines. Understanding these procedures, along with potential complexities such as "no surplus" rules, deceased debtors, or conflicting seizures, is crucial for any lender, including US businesses, when evaluating their enforcement options and managing secured loan portfolios in Japan.