In the lifecycle of a business and its assets, circumstances can change significantly. A property initially financed with a standard real estate mortgage under the Japanese Civil Code might later be developed or repurposed into a fully operational factory, complete with specialized machinery and equipment. This raises a crucial question for lenders and borrowers: can the existing, ordinary mortgage adapt to this new reality and extend its protective reach to cover these valuable new factory assets? Japanese law, through the Factory Mortgage Act (Act No. 54 of 1905), provides a mechanism for such a transformation, allowing a standard mortgage to evolve into a more comprehensive "factory mortgage" (Kojo Teito). However, this is not an automatic process concerning the ancillary machinery; it requires specific legal steps and registrations.

The Initial State: An Ordinary Real Estate Mortgage

An ordinary real estate mortgage (futsū teitōken) in Japan, governed by the Civil Code (Act No. 89 of 1896), primarily encumbers the specified land and/or buildings. Its scope, as per Article 370 of the Civil Code, also extends to items that are "attached to and form an integral part of such immovable" (fuka shite ittai to natteiru mono), which are akin to permanent fixtures. While it may also cover appurtenances (jūbutsu) under certain conditions, its ability to clearly and securely encompass subsequently installed, complex factory machinery and equipment—especially items that aren't unequivocally integral fixtures—can be limited or ambiguous. If a property later becomes a factory with significant operational equipment, the original ordinary mortgage might not adequately reflect or secure the property's enhanced value and new operational components against all third-party claims related to those components.

The Transformation: When a Property's Use Evolves into a "Factory"

The Factory Mortgage Act defines a "factory" broadly, including not just manufacturing plants but also facilities for processing, printing, photography, and certain utility or telecommunications services (Article 1, Factory Mortgage Act). If a property, initially subject to an ordinary mortgage, is developed or its use changes to meet this definition, and significant machinery and equipment are installed for its operational purposes, the legal landscape of the existing mortgage can potentially shift.

Japanese legal interpretation generally supports the idea that an existing ordinary mortgage can transition to take on the characteristics and expanded scope of a factory mortgage. This is seen as consistent with the overarching purpose of the Factory Mortgage Act, which is to facilitate the financing of industrial enterprises by allowing their operational assets to be treated as an integrated whole for collateral purposes. Such a transformation helps maintain the socio-economic value of the factory facility and can even assist the owner in securing further financing based on the enhanced collateral value. This is analogous to the general principle that a mortgage can extend to items that become fixtures or appurtenances after the mortgage is initially established.

Why Passive Reliance on the Original Mortgage is Insufficient for New Factory Machinery

Simply because the property's use has changed to that of a factory does not mean the original ordinary mortgage automatically and perfectly extends its full, secured, and third-party-opposable lien to all newly installed, non-fixture machinery. While the mortgage certainly remains valid over the land and buildings, its reach and priority concerning the newly added specialized equipment under general Civil Code principles alone would be uncertain. Key issues include:

• Lack of Specificity: The original mortgage documents would not have contemplated or described this specific factory machinery.
• Perfection Issues: There would be no specific public notice or registration perfecting the mortgage lien over these particular pieces of machinery against third-party claims specifically under the factory mortgage regime.

The Solution: Formal "Registration of Change of Mortgage" (Henkō Tōki)

To formally recognize the mortgage as a factory mortgage and to ensure its expanded scope over the newly installed factory machinery and equipment is effective and opposable to third parties, a "registration of change of the mortgage" (teitōken no henkō tōki) is necessary. This is not merely an update of factual circumstances but a formal alteration of the registered mortgage's character and scope.

The Central Element: Creation and Registration of an Article 3 Inventory (Dai-san-jō Mokuroku)

The cornerstone of transforming an ordinary mortgage into a factory mortgage is the creation and submission of an Article 3 Inventory.

• This inventory meticulously lists all the specific machinery, instruments, and other operational assets (kyōyō bukken) now present in the factory that are intended to be covered by the transformed mortgage.
• The registration of this inventory, alongside the registration of change to the mortgage itself, is what perfects the security interest over these ancillary assets against third parties, in line with the principles established by the Supreme Court ruling of July 14, 1994 (Heisei 6-nen (o) dai 1239-go) regarding the Article 3 Inventory.

Nature of the Change Registration

This registration formally amends the existing mortgage record in the Real Property Register. It acknowledges that the mortgage now operates under the special provisions of the Factory Mortgage Act, with its scope explicitly including the assets detailed in the newly filed Article 3 Inventory. The record of the mortgage will be updated to show that an Article 3 Inventory has been created for it.

It's worth noting that if the parties (mortgagor and mortgagee) specifically agree not to extend the existing mortgage to the newly installed factory equipment even after the property becomes a factory, this agreement to limit the scope can also potentially be registered, effectively preventing the transformation. However, in the absence of such a limiting agreement, if the property qualifies as a factory and the procedural steps (including filing an inventory) are taken to register the change, the mortgage can indeed transform.

Procedural Steps for Transforming an Ordinary Mortgage into a Factory Mortgage

The process of formally changing an ordinary mortgage to a factory mortgage involves several key steps:

1. Agreement or Decision: While the law allows for the possibility, this transformation typically occurs with the agreement and cooperation of both the mortgagor (property owner) and the mortgagee (lender). The lender would usually require this change to ensure their security covers the new, valuable operational assets.
2. Preparation of Article 3 Inventory: A detailed inventory of all the relevant factory machinery, equipment, and other kyōyō bukken must be prepared, meeting the descriptive requirements of the Factory Mortgage Registration Rules.
3. Application for Registration of Change (Henkō Tōki) to the Legal Affairs Bureau:
   • Applicants: This is generally a joint application by the mortgagor (as the owner of the property and the new factory assets) and the mortgagee (as the beneficiary of the enhanced security).
   • Purpose of Registration (Tōki no Mokuteki): Stated as "Change of [Xth rank] mortgage" (e.g., 「壱番抵当権変更」- Ichiban teitōken henkō).
   • Cause of Registration (Tōki Gen'in) and Date: The cause is typically registered as "Change" (Henkō), with the date being when the agreement to change was made or when the conditions for transformation (property becoming a factory, machinery installed, and intent to include them under the mortgage) were fulfilled. For example, 「平成年月日変更」 (Heisei X nen Y gatsu Z nichi henkō).
   • Matters to be Changed/Registered (Henkō Go no Jikō): The crucial addition to the registration is a statement indicating that it is now a factory mortgage and that an Article 3 Inventory has been created/submitted. Common phrasing is 「工場抵当法第三条目録作成」 (Kōjō Teitōhō Dai-san-jō Mokuroku sakusei - Article 3 Inventory under the Factory Mortgage Act created).
4. Attached Documents (Tempu Jōhō):
   • Information identifying the original mortgage registration.
   • The newly prepared Article 3 Inventory.
   • An agreement for change, if one was formally executed, or a report-style document prepared by the applicants detailing the basis for the change.
   • Consent/co-application documents from both the mortgagor and mortgagee.
   • Standard supporting documents such as corporate registration certificates (if parties are companies), powers of attorney (if agents are used), and personal seal certificates of the representatives.
   • Proof of payment of the registration and license tax (a fee is payable for amendment registrations, typically calculated per property).
5. Consideration of Interested Third Parties (Rigai Kankei o yūsuru Daisansha):
   • The manner in which this change is registered (as an ancillary/supplementary registration - fuki tōki - to the original mortgage, or as a new main registration - shu tōki) can depend on the existence of interested third parties whose rights might be affected.
   • An ancillary registration generally allows the transformed mortgage (including its effect on the newly inventoried machinery) to retain the original mortgage's priority. This is usually possible if there are no such interested third parties, or if their consent is obtained.
   • "Interested third parties" could include junior mortgagees on the same property or creditors who have levied attachments.
     • If junior mortgages are also ordinary mortgages, their holders might not be considered "interested" in a way that prevents the senior mortgage's transformation via ancillary registration, as the change doesn't inherently worsen their position regarding the land/building.
     • However, if a junior mortgagee has already established their own factory mortgage (with an Article 3 Inventory) on the same property, or has already converted their ordinary mortgage to a factory mortgage, they would be an interested third party. Without their consent, the senior mortgage's transformation concerning the newly covered machinery might need to be done by a main registration, potentially affecting its priority vis-à-vis that junior factory mortgage specifically for the machinery.
     • The specifics of how intervening rights are handled would require careful legal analysis based on the timing and nature of all registrations.

Execution and Legal Effect of the Change Registration

Once the application is approved by the Legal Affairs Bureau:

1. The existing mortgage registration record is amended. This usually involves adding a note to the original mortgage entry indicating its transformation into a factory mortgage and that an Article 3 Inventory has been established, along with the date and registration number of this change. Record Example 3 in the reference PDF (page 104) illustrates this with an ancillary registration noting "Cause: [Date] Change; Factory Mortgage Act Article 3 Inventory Created."
2. Effect on Land and Buildings: The original priority of the mortgage concerning the land and buildings generally remains unaffected.
3. Effect on Machinery and Equipment: The factory mortgage is now formally recognized and perfected over the machinery and equipment listed in the newly registered Article 3 Inventory. This perfected security interest over the ancillary assets is generally effective against third parties from the date of the change registration (for the machinery component).

Conclusion

Japanese law provides a clear pathway for a standard real estate mortgage to adapt and transform into a more comprehensive factory mortgage when the underlying property's use changes to that of an industrial facility with operational machinery. This transformation is not merely a factual occurrence but requires a formal "registration of change of mortgage," the centerpiece of which is the creation and registration of an Article 3 Inventory detailing the specific machinery and equipment to be covered.

This mechanism allows the security interest to align with the new economic reality of the property, offering lenders enhanced collateral coverage that includes essential operational assets, and reflecting the integrated value of the factory as a whole. For both borrowers and lenders, understanding this process is vital for ensuring that their security arrangements remain robust and enforceable as business operations evolve. Due to the potential complexities, particularly concerning the rights of third parties and registration formalities, seeking specialized legal advice is highly recommended when contemplating such a transformation.