Q&A: Real Estate Transactions in Japan: Key Legal Points for Foreign Businesses in Sales and "Kaimodoshi"

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

Engaging in real estate transactions in a foreign jurisdiction requires a keen understanding of local laws and customs. For foreign businesses looking to buy or sell property in Japan, several unique legal concepts and practices come into play. This Q&A will explore some key aspects of Japanese real estate sales contracts, focusing on their formation, the role of earnest money (tetsuke), and the distinct buy-back system known as kaimodoshi.

Q1: What are the fundamental requirements for forming a real estate sales contract in Japan?

Understanding the basics of contract formation is the first step. In Japan:

  • A. Essential Elements of the Agreement:
    Like any sales contract under Article 555 of the Japanese Civil Code, a contract for the sale of real estate requires mutual assent on its essential elements. These are primarily:
    1. Clear identification of the specific real estate being sold (the subject matter).
    2. The agreed-upon purchase price.
      Once these core terms are agreed upon, a binding sales contract can be formed.
  • B. The Principle of Consensualism (No Strict Formality Required for Validity):
    Japanese contract law is generally based on the principle of consensualism (諾成主義 - dakusei shugi), meaning a contract is formed by the mere agreement of the parties. Unlike some jurisdictions with a strict Statute of Frauds for land transactions, a formal written document, while standard practice and highly advisable for real estate, is not an absolute legal requirement for the validity of the sales agreement itself, provided mutual assent on the essential terms can be proven. However, for evidentiary purposes and to avoid future disputes, comprehensive written contracts are the norm and a matter of best practice.
  • C. Seller's Ownership Not a Prerequisite for Contract Formation:
    Interestingly, under Japanese law (Civil Code, Article 561), a contract for the sale of property (including real estate) is valid even if the seller does not actually own the property at the time the contract is made. This is known as a "sale of another's property" (他人の物の売買 - tagono-mono baibai). In such a case, the seller incurs a contractual obligation to acquire the title to the property and then transfer it to the buyer. Failure to do so would constitute a breach of contract.
  • D. Regulatory Approvals for Specific Land Types:
    It's important to note that for certain types of real estate, particularly agricultural land (農地 - nōchi), specific statutory permissions are required for the transfer of rights to be effective. For example, the Agricultural Land Act (農地法 - Nōchi Hō) generally mandates permission from an agricultural committee or prefectural governor for the sale or lease of agricultural land (Agricultural Land Act, Article 3, Paragraphs 1 and 4). Such permission acts as a statutory condition for the efficacy of the transaction.

"Earnest money," known as tetsuke (手付) in Japanese, is a common feature in real estate transactions. It's more than just a simple down payment.

  • A. Definition and Purpose:
    Tetsuke is a sum of money, or sometimes other valuables, paid by the buyer to the seller, typically at the time the sales contract is executed. It is legally distinct from a partial payment of the purchase price (uchikin - 内金), although it is very common for the contract to stipulate that the tetsuke will be credited towards the purchase price upon successful completion of the transaction. The payment of tetsuke is based on a separate, ancillary agreement to the main sales contract, known as a tetsuke agreement.
    In practice, tetsuke serves multiple functions: it provides evidence of the seriousness of the agreement (evidentiary tetsuke or 証約手付 - shōyaku tetsuke), and, most importantly, it typically grants both parties a right to cancel the contract under specific conditions.
  • B. Presumption as "Cancellation Earnest Money" (Kaiyaku Tetsuke):
    Article 557, Paragraph 1 of the Japanese Civil Code presumes that any tetsuke paid by a buyer to a seller functions as cancellation earnest money (kaiyaku tetsuke - 解約手付), unless otherwise agreed. This means:
    1. Buyer's Right to Cancel: The buyer can unilaterally cancel the sales contract by forfeiting the full amount of the tetsuke they have paid.
    2. Seller's Right to Cancel: The seller can unilaterally cancel the sales contract by refunding to the buyer double the amount of the tetsuke they received.
      No specific reason or justification is required for a party to exercise this right of cancellation. It provides a pre-agreed mechanism for withdrawing from the deal, with a defined financial consequence. If a contract is cancelled via this tetsuke mechanism, neither party can make further claims for damages for non-performance arising from this particular cancellation (Civil Code, Article 557, Paragraph 2).
  • C. Limitation on Cancellation: "Commencement of Performance" (Rikō no Chakushu):
    The right to cancel a contract by forfeiting or refunding double the tetsuke is not indefinite. It can only be exercised until the other party has "commenced performance" (履行の着手 - rikō no chakushu) of their main obligations under the sales contract (Civil Code, Article 557, Paragraph 1 proviso).
    "Commencement of performance" is an objective standard. It means that the other party has taken steps that are objectively recognizable as part of the fulfillment of their contractual duties or are essential preparatory actions that are inextricably linked to performance. Examples from Japanese case law include a buyer actually tendering the balance of the purchase price, or a seller of property they don't yet own taking concrete steps to acquire title for the purpose of transferring it to the buyer (e.g., Supreme Court, November 24, 1965, Minshū Vol. 19, No. 8, p. 2019).
    An important nuance is that the party who has themselves commenced performance is not thereby precluded from exercising their own right to cancel via tetsuke, provided the other party has not yet commenced performance. The restriction is on cancelling against a party who has already started to perform in reliance on the contract.
  • D. Regulatory Oversight on Tetsuke Amounts:
    For transactions where a licensed real estate broker is selling properties that the brokerage firm itself owns, the Building Lots and Buildings Transaction Business Act (宅地建物取引業法 - Takuchi Tatemono Torihiki Gyōhō, commonly known as Takken Gyōhō) imposes certain protections for buyers. One such protection is a cap on the amount of tetsuke: it cannot exceed 20% of the purchase price (Takken Gyōhō, Article 39, Paragraph 1). Furthermore, this Act mandates that any tetsuke received by such a seller must function as cancellation earnest money, reinforcing the buyer's right to cancel (Takken Gyōhō, Article 39, Paragraph 2).
  • E. Distinction from Non-Binding Preliminary Documents:
    In the course of real estate negotiations in Japan, parties may exchange documents such as a "purchase certificate" (買付証明書 - kaitsuke shōmeisho) from a prospective buyer or a "sale certificate" (売渡証明書 - uriwatashi shōmeisho) from a seller. It's generally understood in practice and by courts that these preliminary expressions of interest, unless very specifically worded to indicate otherwise, do not typically constitute binding sales contracts and thus do not involve tetsuke in its legal sense.

Q3: What is "Kaimodoshi" (Buy-Back) in Japanese Real Estate Sales, and when is it used?

Kaimodoshi (買戻し) is a special type of contractual arrangement unique to real estate sales in Japan, which can significantly impact property rights.

  • A. Definition and Legal Nature (Civil Code, Article 579):
    Kaimodoshi refers to a special agreement (特約 - tokuyaku), made simultaneously with a real estate sales contract, by which the seller reserves the right to terminate the original sale and reacquire the property. To exercise this right, the seller must return the purchase price paid by the buyer, plus any contract-related expenses incurred by the buyer (unless a different buy-back price is agreed upon).
    Effectively, it's a reserved right of termination for the seller. If an agreement to repurchase is made after the initial sales contract is concluded, it is not a kaimodoshi under these specific Civil Code rules but rather a separate agreement for resale or a preliminary agreement for resale.
  • B. Common Purposes of Kaimodoshi:
    While not as common in general residential sales today, kaimodoshi has historically been used and can still be relevant in specific contexts:
    1. As a Form of Security for a Loan: The transaction can be structured so that the "sale" is effectively a loan from the "buyer" to the "seller," with the real estate serving as security. The "seller" (borrower) receives funds (the purchase price) and can reclaim the property by "repaying" the funds (exercising the buy-back right). This is a form of title-transfer security.
    2. Ensuring Buyer Compliance with Land Use Conditions: A seller, particularly a developer or local authority, might use a kaimodoshi clause to ensure that the buyer uses the land in accordance with specific agreed-upon conditions (e.g., constructing a certain type of building within a certain timeframe). If the buyer breaches these conditions, the seller might have the right to buy back the property.
  • C. Strict Time Limits for Exercising the Kaimodoshi Right (Civil Code, Article 580):
    To prevent prolonged uncertainty over the property's ownership, the Civil Code imposes strict time limits on the kaimodoshi right:
    • The agreed buy-back period cannot exceed ten years. If a longer period is stipulated, it is automatically reduced to ten years.
    • Once an initial period is set within the ten-year limit, it cannot be extended later.
    • If no specific period is agreed upon in the kaimodoshi special agreement, the right must be exercised within five years from the date of the sale.
  • D. Registration and Effect Against Third Parties (Civil Code, Article 581):
    A very significant feature of the kaimodoshi is its potential effect against third parties. If the special agreement for buy-back (買戻しの特約 - kaimodoshi no tokuyaku) is registered (登記 - tōki) in the real estate registry simultaneously with the registration of the ownership transfer to the buyer, the seller's buy-back right can be asserted against third parties who subsequently acquire rights in the property from the initial buyer (e.g., subsequent purchasers, mortgagees, or creditors who attach the property).
    This registration is typically made as an ancillary notation (付記登記 - fukitōki) to the ownership transfer registration (see Real Property Registration Act (不動産登記法 - Fudōsan Tōki Hō), Article 96). A registered kaimodoshi right effectively creates a strong encumbrance on the property, allowing the original seller to reclaim clear title by exercising the right, even if the property has changed hands or been further encumbered.
    The Civil Code provides limited protection for lessees whose leases were perfected before the exercise of a registered buy-back right, allowing their leases to continue for up to one year under certain conditions (Article 581, Paragraph 2).
  • E. Exercising the Kaimodoshi Right:
    To exercise the right, the seller must tender the agreed-upon buy-back sum (typically the original purchase price plus the buyer's documented contract expenses, unless a different buy-back price was set in the kaimodoshi agreement). Unless otherwise stipulated, any fruits or profits derived from the property by the buyer during their ownership and any interest on the purchase price are deemed to offset each other (Civil Code, Article 579, latter part).

Q4: For foreign businesses investing in Japanese real estate, what are the key takeaways from these points?

Navigating Japanese real estate law requires attention to these local specifics:

  • Understanding "Binding Intent": Be extremely clear in communications and preliminary documents (like letters of intent or kaitsuke shōmeisho) whether they are intended to be binding or are merely expressions of interest to avoid inadvertently creating contractual obligations.
  • The Role of Tetsuke: Appreciate that tetsuke is not just a deposit but usually provides a contractual right to cancel with a defined financial cost. Understand the "commencement of performance" threshold, as it can cut off this cancellation right. Ensure the amount and terms related to tetsuke are clearly documented.
  • Identifying and Assessing Kaimodoshi Risks:
    • When purchasing property, due diligence must include a thorough check of the real estate registry for any registered kaimodoshi rights. A registered kaimodoshi makes the buyer's title defeasible for the stipulated period and can impact marketability and financing.
    • If a foreign entity is a seller and is offered a kaimodoshi arrangement (e.g., as a form of seller financing or to ensure development conditions), understand the strict time limits and the procedural requirements for validly exercising the right.
  • Importance of Registration: For kaimodoshi rights to be effective against third parties, simultaneous registration is essential. For buyers, ensuring their own ownership is promptly and correctly registered is always paramount to protect against third-party claims.
  • Formal Written Contracts are Essential: Despite the general principle of consensualism in Japanese contract law, all significant terms, conditions, and special agreements (like tetsuke details or kaimodoshi provisions) in real estate transactions should be meticulously documented in a formal, bilingual (if necessary) written contract. This contract should be drafted or thoroughly reviewed by legal counsel experienced in Japanese real estate law.
  • Local Legal Counsel: Given the unique features and potential complexities, engaging experienced Japanese legal counsel early in the process is crucial for foreign businesses involved in real estate transactions in Japan to ensure their interests are protected and all legal requirements are met.

Conclusion

Japanese real estate sales law, while sharing common contractual principles, incorporates distinctive concepts such as tetsuke (earnest money with cancellation rights) and the kaimodoshi (statutory buy-back system). Tetsuke provides a structured way for parties to withdraw from a deal, limited by the commencement of performance. Kaimodoshi, when registered, creates a powerful right for the seller to reacquire property, effective even against subsequent third parties, subject to strict time limitations. For foreign businesses, a thorough understanding of these rules, diligent title review, and the use of comprehensive written agreements are vital for successful and legally sound real estate transactions in Japan.