Ordinary Mortgage vs. Revolving Mortgage in Japan: Which Is Right for Your Transaction?

When securing debt with Japanese real estate, one of the fundamental decisions a lender faces is choosing the appropriate type of mortgage. Japanese law offers two primary forms: the ordinary mortgage (普通抵当権 - futsū teitōken) and the revolving mortgage (根抵当権 - ne-teitōken). While both serve to secure obligations, they differ significantly in their structure, flexibility, and the types of claims they can cover. Understanding these distinctions is paramount for US businesses and lenders to effectively protect their interests in Japan.

A Quick Refresher: The Mortgage in Japan

Before diving into the specifics, it's worth recalling that a mortgage (teitōken) in Japan is a non-possessory security interest in real property. It grants the mortgagee (creditor) the right to have the mortgaged property sold through a court auction and to receive preferential payment from the proceeds if the mortgagor (debtor or a third-party property provider) defaults on the secured obligation. Crucially, for a mortgage to be enforceable against third parties—such as other creditors, subsequent purchasers, or a bankruptcy trustee—it must be formally registered in the Japanese real property register.

The Ordinary Mortgage (普通抵当権 - Futsū Teitōken)

The ordinary mortgage, or futsū teitōken, is the simpler and more traditional form of mortgage in Japan. Its defining characteristic is that it secures one or more specific, identified claims that exist at the time the mortgage is created or are certain to arise from a specific, existing legal relationship.

Core Concepts and Key Characteristics:

• Specificity of Secured Claim: The ordinary mortgage is tied to a particular debt or set of debts. For example, it could secure a JPY 100 million loan made on a specific date under a particular loan agreement. The details of this underlying claim, including its cause (e.g., "Monetary Loan Agreement dated YYYY/MM/DD"), are typically recorded in the mortgage registration.
• Strong Accessory Nature (付従性 - Fujūsei): The ordinary mortgage is highly dependent on the existence and status of the specific secured claim.
  • If the underlying debt is fully repaid, the mortgage is extinguished.
  • If the underlying debt is invalid or unenforceable, the mortgage generally cannot stand.
  • When the secured claim is assigned to another party, the mortgage typically transfers with it (随伴性 - zuihansei or accessory nature in transfer).
• Scope of Security: An ordinary mortgage secures the principal amount of the specified claim, plus agreed-upon interest and default damages (損害金 - songaikin). However, against junior mortgagees and other third parties, the security for interest and default damages is often limited to the amounts accruing in the last two years before enforcement, unless a special registration is made to capitalize overdue interest.
• Registration Details: The application for an ordinary mortgage registration will specify the "Claim Amount" (債権額 - saikengaku), which is the principal of the specific debt being secured. The registration will also typically note the cause of the debt.
• Limited Flexibility for Future Advances: A significant limitation is that an ordinary mortgage, once registered for a specific claim, generally cannot be used to secure new, unrelated loans or advances made at a later date under the same registration. Each new loan would typically require a new mortgage agreement and registration.
• Changes to Secured Amount: Increasing the principal amount of an existing ordinary mortgage is generally not possible through a simple amendment to the existing registration. It would usually necessitate a new mortgage registration for the additional amount, or a full refinancing. Naturally, as the secured debt is paid down, the outstanding obligation decreases, but the registered "Claim Amount" remains until the mortgage is released.

Common Use Cases for Ordinary Mortgages:

• Single, specific loans: Financing for the purchase of a particular piece of real estate or equipment.
• Term loans: Where the loan amount is fixed and disbursed in one go or in pre-determined tranches related to a specific project.
• Securing non-recurring obligations.

The Revolving Mortgage (根抵当権 - Ne-teitōken)

The revolving mortgage, or ne-teitōken, offers significantly more flexibility, designed for situations involving ongoing business relationships where debts may fluctuate, be repaid, and then re-borrowed over time.

Core Concepts and Key Characteristics:

• Securing a Range of Unspecified Claims: Instead of securing a specific debt, a ne-teitōken secures a range of unspecified current and future claims that arise from certain defined types of continuous transactions between the creditor and debtor, up to a pre-agreed maximum amount (極度額 - kyokudogaku).
• Weakened Accessory Nature (Before Principal Fixation): Prior to an event known as "principal fixation" (元本確定 - ganpon kakutei), the ne-teitōken's link to individual claims is looser than that of an ordinary mortgage.
  • The ne-teitōken can remain valid even if, at a particular moment, there are no outstanding debts covered by its scope.
  • Individual debts within the scope can be repaid, and new debts can be incurred and secured under the same ne-teitōken without needing a new registration each time, provided the total outstanding amount does not exceed the kyokudogaku.
• Essential Registered Elements: To define this "revolving" security, three key elements must be established in the revolving mortgage agreement and recorded in the registration:
  1. Maximum Amount (極度額 - Kyokudogaku): This is the absolute ceiling of the total debt (including principal, interest, and damages) that can be secured by the ne-teitōken at any given time. This amount must be stated in Japanese Yen, even if the underlying transactions are in a foreign currency.
  2. Scope of Secured Claims (債権の範囲 - Saiken no Han'i): This defines the types of transactions that will give rise to claims secured by the ne-teitōken. Examples include "claims arising from banking transactions," "claims arising from continuous sales agreements," or "claims arising from [specific named] contract dated YYYY/MM/DD." Overly broad or vague scopes, such as "all claims," are not permitted; the scope must achieve a certain level of specificity.
  3. Debtor (債務者 - Saimusha): The specific debtor whose obligations (falling within the defined scope) are to be secured must be clearly identified.
• Registration Details: Unlike an ordinary mortgage, the registration for a ne-teitōken does not list individual loan amounts. Instead, it records the kyokudogaku and the saiken no han'i. The cause of registration is typically just the "Revolving Mortgage Agreement" and its date.
• Flexibility and Changes:
  • The kyokudogaku can be increased or decreased by subsequent agreement and registration (though increases may require the consent of interested third parties like junior mortgagees).
  • The saiken no han'i can be altered (e.g., expanded or reduced) by agreement and registration, provided this occurs before the principal is fixed.
  • The saimusha can also be changed by agreement and registration, but this is a significant alteration, as it changes the fundamental basis of the secured obligations. It generally requires the consent of the property owner (settlor) via their registered seal.
• Principal Fixation (元本確定 - Ganpon Kakutei): The "revolving" nature of a ne-teitōken does not last indefinitely. Certain events will cause the secured principal to become "fixed" or "determined." After this point, the ne-teitōken will only secure the debts that fall within its scope and were outstanding at the time of fixation (plus subsequent interest and damages on that fixed amount, up to the kyokudogaku). No new claims arising after fixation will be secured by it. Events leading to principal fixation include:
  • The arrival of a pre-agreed "date for determination of principal" (確定期日 - kakutei kijitsu), if one was set.
  • Agreement between the parties to fix the principal.
  • A request by the settlor (property owner) or the ne-teitōkensha (creditor) under certain conditions (e.g., after a certain period from creation if no determination date was set).
  • The initiation of bankruptcy proceedings against the debtor or the property owner.
  • The initiation of an auction of the mortgaged property by the ne-teitōkensha itself.
  • When a third party initiates an auction or tax seizure of the property, and the ne-teitōkensha becomes aware of it (fixation occurs after a two-week period from such awareness).
    Once fixed, the ne-teitōken's accessory nature becomes more pronounced, and it behaves more like an ordinary mortgage, albeit one securing a specific, now crystallized, sum.

Common Use Cases for Revolving Mortgages:

• Working capital facilities and overdraft accounts: Where the amount borrowed fluctuates based on business needs.
• Securing ongoing trade relationships: For example, a supplier securing payment for a continuous stream of goods delivered to a buyer.
• Long-term banking relationships: Where multiple types of credit products might be offered over time.

Ordinary Mortgage vs. Revolving Mortgage: A Summary of Key Differences

Choosing the Right Mortgage for Your Transaction

The decision between an ordinary and a revolving mortgage hinges on the nature of the underlying financial arrangement and the anticipated future relationship between the creditor and debtor.

Choose an Ordinary Mortgage if:

• The financing involves a single, clearly defined loan amount that is not expected to change.
• There is no expectation of further lending to the same debtor under the same security.
• Simplicity for a one-off transaction is preferred.

Choose a Revolving Mortgage if:

• The financing involves an ongoing credit line with fluctuating balances.
• The parties anticipate a continuing series of transactions that will need to be secured.
• Flexibility to draw down, repay, and redraw funds is required without repeatedly creating new security interests.
• You wish to secure various types of claims (e.g., loans, guarantees) arising from a general business relationship, all under one umbrella security, up to the maximum amount.

Consequences of an Incorrect Choice:
Using the wrong type of mortgage can lead to inefficiencies or even invalidity:

• Using a ne-teitōken for a single, fixed loan: If a revolving mortgage is established solely to secure one specific, non-recurring debt with no genuine intention of future dealings within a defined "scope of claims," there's a risk it could be considered an improper use of the ne-teitōken structure. At least one court case has held such a ne-teitōken to be invalid, necessitating its cancellation and the re-registration of an ordinary mortgage (which would lose original priority). The rationale is that a ne-teitōken is designed for a pool of unspecified claims.
• Using a futsū teitōken for an ongoing credit facility: This would require the creditor to take out a new ordinary mortgage (with associated costs and administrative effort) for each new advance or loan, which is highly impractical for a revolving credit line.

The Fixed Revolving Mortgage (確定根抵当権 - Kakutei Ne-teitōken) vs. Ordinary Mortgage

It's important to note that once the principal of a ne-teitōken is fixed (元本確定 - ganpon kakutei), it becomes a 確定根抵当権 (kakutei ne-teitōken). While it then secures a specific, crystallized amount of debt and its accessory nature strengthens, it is still not entirely identical to an ordinary mortgage:

1. Interest and Damages: A kakutei ne-teitōken continues to secure interest and damages that accrue on the fixed principal, up to the limit of the originally registered kyokudogaku. This can potentially cover more than the "last two years" of interest/damages that an ordinary mortgage might be limited to against junior creditors.
2. Changes to Maximum Amount: The kyokudogaku of a kakutei ne-teitōken can, by agreement, still be changed (e.g., reduced, or even increased with consents). An ordinary mortgage's registered "Claim Amount" generally cannot be increased to cover new principal.
3. Joint Security Additions: A kakutei ne-teitōken generally cannot be treated as an ordinary mortgage for the purpose of adding it to a joint mortgage (共同抵当) structure with other ordinary mortgages using the simplified additional registration procedures.

Conclusion

The choice between an ordinary mortgage and a revolving mortgage in Japan is a strategic one, driven by the commercial realities of the transaction and the nature of the relationship between the lender and borrower. Ordinary mortgages are suited for specific, one-time obligations, while revolving mortgages offer the flexibility needed for ongoing credit relationships with fluctuating debt levels. Understanding their distinct features, registration requirements, and the implications of principal fixation for revolving mortgages is crucial for any US business looking to effectively secure obligations with Japanese real estate. Given the nuances involved, consultation with experienced Japanese legal counsel and judicial scriveners is always recommended to ensure the chosen security structure aligns with the business objectives and is validly perfected under Japanese law.