Q: How Does Japanese Law Handle Latent Defects in Real Estate Sales?

Investing in or acquiring real estate in Japan involves navigating a legal landscape that has specific approaches to handling defects that are not apparent at the time of purchase. Historically, these were known as "latent defects" (隠れた瑕疵 – kakureta kashi). With the significant reforms to the Japanese Civil Code effective April 1, 2020, the framework shifted from a specific "defect warranty liability" (瑕疵担保責任 – kashi tanpo sekinin) to a more comprehensive "liability for non-conformity" (契約不適合責任 – keiyaku futekigō sekinin). This article explores how Japanese law addresses defects in real estate sales, particularly those not easily discoverable, considering the types of defects, buyer's remedies, time limitations, and the impact of disclaimer clauses.

I. From "Latent Defects" (Kakureta Kashi) to "Liability for Non-Conformity" (Keiyaku Futekigō)

Under the pre-2020 Civil Code, a seller was liable for kakureta kashi – defects that the buyer was unaware of at the time of the contract and could not have discovered by exercising the ordinary care expected in such a transaction. The seller was liable even if they themselves were unaware of the defect.

The 2020 Civil Code reform reframed this liability. Now, a seller is liable if the delivered property does not conform to the terms of the contract in relation to its kind, quality, or quantity. The explicit requirement that a defect be "latent" or "hidden" for the seller to be liable has been removed from the main statutory provisions. However, the buyer's knowledge of the non-conformity at the time of contracting will typically preclude them from claiming remedies for that specific issue. Therefore, the practical effect often remains similar: a buyer who knew, or with reasonable diligence should have known, about a particular issue generally cannot later claim it as a non-conformity for which the seller is liable. The emphasis is on what was agreed (explicitly or implicitly) versus what was delivered.

II. Types of Defects (Non-Conformities) in Real Estate Sales

Japanese law recognizes several categories of defects or non-conformities that can arise in real estate transactions:

A. Physical Defects (物理的瑕疵 - Butsuriteki Kashi)

These are the most straightforward types of defects, relating to the tangible condition of the land or building. Examples include:

• Structural deficiencies in a building (e.g., faulty foundations, non-compliant structural members).
• Water leakage from roofs, walls, or around windows.
• Termite infestation or significant wood rot.
• Soil contamination on the land.
• Presence of undisclosed underground obstructions (e.g., old foundations, industrial waste) that hinder the intended use of the land.

When dealing with used properties (中古物件 - chūko bukken), the assessment of physical defects takes into account expected age-related deterioration. A defect is generally found only if the condition is worse than what would ordinarily be expected for a property of similar age and type, or if it exceeds what was factored into the sales price. As the Tokyo District Court noted on September 28, 2005, for a used building sold "as is" (現状有姿 - genjō yūshi), ordinary age-related changes are presumed to be reflected in the price, and the seller is not liable for these. However, significant issues like extensive exterior tile delamination discovered shortly after purchase, posing a safety risk, were deemed defects beyond normal wear and tear by the Sapporo District Court on January 16, 2009.

B. Legal Defects (法律的瑕疵 - Hōritsuteki Kashi)

Legal defects arise when the property is subject to legal restrictions that were not disclosed to the buyer and which impede the buyer's intended use or diminish the property's value. Examples include:

• The property being situated on land designated for a future public road, requiring eventual demolition of any structures (Supreme Court, April 14, 1966 ).
• Land sold for residential development being part of a "protection forest" (保安林 - hoanrin) where such development is prohibited (Supreme Court, September 8, 1981, affirming Nagoya High Court, December 11, 1979 ).
• Violations of building codes, such as setback requirements or floor-area ratio restrictions, that could lead to administrative orders for rectification or demolition. The Osaka High Court, on December 16, 1999, found a building that violated eaves height restrictions and was unbuildable in a quasi-fire prevention district to be defective.

C. Psychological Defects (心理的瑕疵 - Shinriteki Kashi)

These are often referred to as "stigmatized properties" (事故物件 - jiko bukken). They involve situations where the property itself is physically sound, but an event occurred on the premises that would typically cause aversion or psychological discomfort to an ordinary person, thereby affecting its value and desirability. Common examples include:

• Suicides, murders, or other unnatural deaths occurring on the property.
• Fires resulting in fatalities.
• The property being located near facilities typically viewed as undesirable (e.g., organized crime offices).

The judgment of psychological defects often hinges on whether an ordinary person, in the buyer's position, would feel a significant aversion to residing in or using the property due to its history, and whether this aversion objectively diminishes its market value. The Osaka High Court, on December 19, 2006, articulated this standard, emphasizing that mere subjective dislike by the buyer is insufficient; the aversion must be reasonable from an ordinary person's perspective. The Fukuoka High Court, on March 8, 2011, found that a condominium unit previously used for an extended period for sex-trade businesses constituted a psychological defect, as it would cause psychological burden to an ordinary person and reduce its value.

Recognizing the ambiguity and potential for disputes surrounding psychological defects, Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT) issued "Guidelines on Notification of Psychological Stigma Related to Real Estate Transactions" in October 2021. These guidelines aim to clarify the scope of events that real estate agents should disclose to prospective buyers or tenants, such as the timeframe for disclosure of deaths (e.g., generally not required for natural deaths or accidental deaths not in common areas after a certain period, but required for murders or suicides for a longer, albeit not indefinite, period). While these are guidelines for real estate agents' disclosure duties, they inevitably influence the understanding of what might constitute a material psychological defect.

D. Environmental Defects (環境的瑕疵 - Kankyōteki Kashi)

These relate to adverse conditions in the surrounding environment that affect the property's use and enjoyment, such as excessive noise, vibration, offensive odors, or severe obstruction of sunlight. Whether these external factors constitute a "defect" of the property itself can be complex and depends on the severity, foreseeability, and contractual context.

III. Buyer's Remedies for Non-Conformity

If a property is found to be non-conforming to the contract, the buyer has several potential remedies under the reformed Civil Code:

A. Right to Demand Cure/Completion (追完請求権 – Tsuikan Seikyūken)

The buyer can demand that the seller rectify the non-conformity. In real estate, this most commonly translates to a demand for repair (修補 - shūho) of the defect (e.g., repairing a leaky roof, remediating soil contamination). The delivery of a substitute property is generally not feasible for real estate. The seller can refuse a cure if it is impossible or would entail disproportionate costs.

B. Right to Demand Price Reduction (代金減額請求権 – Daikin Gengaku Seikyūken)

If the seller fails to provide a cure within a reasonable period, or if a cure is impossible or refused, the buyer can demand a reduction in the purchase price. The amount of reduction should be proportionate to the diminished value due to the non-conformity.

C. Right to Claim Damages (損害賠償請求権 – Songai Baishō Seikyūken)

The buyer can claim damages for losses suffered due to the non-conformity.

• Scope of Damages: Under the old defect warranty liability for sales, damages were often considered limited to "reliance interest" (信頼利益 – shinrai rieki), i.e., losses incurred because the buyer believed the property was free from defects (e.g., wasted transaction costs if the contract was terminated, or the diminution in value if not terminated). This typically included:
  • Costs of investigating the defect.
  • The diminution in the property's value due to the defect.
  • Repair costs, if reasonable and necessary to restore the property to its expected condition. The Tokyo District Court on October 28, 1992, allowed a claim for the cost of removing underground obstructions necessary to build on the land.
  • In cases of severe defects requiring rebuilding of a new house, the Supreme Court (June 17, 2010) allowed rebuilding costs without deducting the buyer's benefit from prior occupancy if the house was deemed to have no socioeconomic value due to structural safety issues.
• The reformed Civil Code's general rules on damages for non-performance (which now encompass liability for non-conformity) may allow for a broader scope, potentially including performance interest in some cases, but this is an area where case law will continue to develop. Consequential damages, if foreseeable, may also be claimable.
• Claims for psychological distress (慰謝料 - isharyō) and attorney's fees have been awarded in some defect cases, though typically only in situations involving significant hardship or where such losses are considered directly attributable to the defect.

D. Right to Terminate the Contract (契約解除権 – Keiyaku Kaijoken)

The buyer can terminate the sales contract if the non-conformity is so significant that the purpose of the contract cannot be achieved (e.g., the property is uninhabitable or unusable for its intended purpose, and the defect cannot be reasonably cured). The Tokyo High Court, on May 25, 1994, allowed termination for extensive water leakage and other severe issues in a building. Minor or easily repairable defects generally do not give rise to a right of termination.

IV. Time Limitations and Notification Requirements

The buyer must act within certain timeframes to preserve their rights:

1. Notification of Non-Conformity: For non-conformities related to the kind or quality of the property, the buyer must notify the seller within one year from the time the buyer became aware of the non-conformity. Failure to do so can bar the buyer from exercising remedies like demanding a cure, price reduction, or damages, unless the seller was aware of or grossly negligent in not being aware of the non-conformity at the time of delivery.
2. Statute of Limitations (消滅時効 - Shōmetsu Jikō): The actual legal claims are subject to a general statute of limitations:
   • 5 years from the time the buyer becomes aware that they can exercise their right.
   • 10 years from the time the right could first be exercised (typically from the delivery of the property for non-conformities in kind or quality; or 10 years from delivery for non-conformities in quantity or transfer of rights).
     The Supreme Court, on November 27, 2001 (Minshu 55-6-1311), held that the statute of limitations for damage claims under the old defect warranty liability began to run from the time of delivery of the property.
3. Special Laws:
   • Act on the Promotion of Quality Assurance in Housing (Hinpyō Hō): For new residential properties, there is a mandatory 10-year liability period for sellers (including developers) concerning major structural parts and components preventing rainwater intrusion, running from the date of delivery. This cannot be shortened by contract to the buyer's detriment.
   • Real Estate Brokerage Act (宅地建物取引業法 - Takuchi Tatemono Torihikigyō Hō): If the seller is a licensed real estate trading business, this Act prohibits them from stipulating a notification period for non-conformity that is less than two years from the date of delivery, unless a longer period more favorable to the buyer is provided by the Civil Code. Any special agreement that is more disadvantageous to the buyer than what is prescribed by the Civil Code (regarding the one-year notification period from discovery) is void.

V. Disclaimer Clauses ("As Is" Clauses - 現状有姿条項 - Genjō Yūshi Jōkō)

Sellers often attempt to limit or exclude liability for defects through contractual clauses, commonly known as "as is" clauses or specific disclaimers.

• General Validity: Under the Civil Code, parties can agree to disclaim the seller's liability for non-conformity (similar to Article 572 of the old Civil Code).
• Limitations on Disclaimers:
  • Known and Undisclosed Defects: A disclaimer is ineffective if the seller knew about a non-conformity (or defect) and failed to disclose it to the buyer. This also applies if the seller actively created or transferred a right for a third party that encumbers the property and did not disclose it. Some lower court cases, like the Tokyo District Court on May 16, 2003 (Hanrei Jihō 1849-59), extended this to situations where the seller was grossly negligent in not knowing about a defect, effectively treating gross negligence as equivalent to knowledge for the purpose of invalidating a disclaimer, though this is not a universally established rule.
  • Consumer Contract Act: If the buyer is a consumer and the seller is a business, clauses that entirely exempt the business operator from liability for non-conformity are generally void.
  • Real Estate Brokerage Act: As mentioned, if the seller is a real estate business, their ability to disclaim liability for non-conformity is restricted. They cannot set a notification period shorter than two years from delivery.
  • Hinpyō Hō: The 10-year mandatory liability for new housing cannot be disclaimed or shortened.

VI. Seller's Duty of Disclosure and Buyer's Duty of Investigation

While the focus is often on the seller's liability, the buyer also has responsibilities.

• Seller's Duty of Disclosure: Sellers, particularly professional real estate businesses, have a duty to disclose material facts about the property, including known defects or circumstances that could affect the buyer's decision (e.g., under the Real Estate Brokerage Act's requirement for explaining important matters - 重要事項説明, jūyō jikō setsumei).
• Buyer's Duty of Ordinary Care: The buyer is expected to exercise ordinary care in inspecting the property before purchase. If a defect was obvious or would have been discovered through such ordinary inspection, the buyer might not be ableto later claim it as a "hidden" non-conformity for which they were unaware. The buyer's knowledge (悪意 - akui) or negligence (過失 - kashitsu) in not discovering the defect can be a defense for the seller. For example, the Tokyo District Court on January 27, 2011, found a buyer to be negligent where they were aware of oil contamination on the land exceeding local guidelines but proceeded with the purchase, thus denying their claim.

Conclusion

Dealing with latent defects or non-conformities in Japanese real estate sales requires a careful understanding of contractual terms, the nature of the defect, and the applicable legal framework, including the significant 2020 Civil Code reforms. While the seller bears liability for delivering a property that conforms to the contract, the buyer also has responsibilities regarding inspection and timely notification. The law attempts to balance the interests of both parties, with special protections in place for new housing and when dealing with professional real estate businesses. Due diligence, clear contractual drafting, and, if necessary, expert legal and technical advice are crucial for navigating these issues effectively.