Q: The "Priority Preservation Effect": How Does Article 106 of Japan's Real Estate Registration Act Impact My Provisional Registration (Karitōki)?

When businesses engage with Japanese real estate, the provisional registration (karitōki, 仮登記) often emerges as a key instrument for safeguarding anticipated rights. We've previously discussed that a karitōki, by itself, does not grant the full third-party effect (taikōryoku, 対抗力) of a final registration (hon-tōki, 本登記). Yet, it is widely used and considered highly protective. The source of this protective power lies in a specific, crucial provision of Japanese law: Article 106 of the Real Estate Registration Act (不動産登記法第106条).

This article delves into the mechanics and significance of Article 106, explaining how its "priority preservation effect" (jun'i hozenkō, 順位保全効) is the linchpin that gives strategic value to a provisional registration, allowing an eventual final registration to effectively "jump the queue" and secure its intended rank against other claims.

Understanding Article 106 of the Real Estate Registration Act

Article 106 of the Real Estate Registration Act (which corresponds to Article 7, Paragraph 2 of the pre-2005 Old Act) states:

"Where a final registration (hon-tōki) is made based on a provisional registration (karitōki), the order of priority of said final registration shall be the order of priority of said provisional registration."

At its heart, this provision means that if a party (1) validly makes a provisional registration concerning a property right, and (2) subsequently fulfills all requirements to convert that karitōki into a hon-tōki, then the hon-tōki, for the purpose of determining its ranking against other registered rights on the same property, will be treated as if it were registered at the exact moment the karitōki was officially accepted by the registry office.

This is the essence of the "priority preservation effect." The karitōki acts like a placeholder, reserving a specific spot in the chronological order of registrations. The subsequent hon-tōki then steps into this reserved spot.

The Critical Distinction: Priority Preservation vs. Retroactive Third-Party Effect (Taikōryoku)

A common point of confusion is whether Article 106 implies that the hon-tōki's full legal effects, particularly its ability to be asserted against third parties (taikōryoku as per Civil Code Article 177), retroactively apply from the date the karitōki was made. The prevailing legal understanding in Japan is that it does not.

1. No Retroactive Taikōryoku:
   The taikōryoku of a real right variation (e.g., ownership transfer, mortgage establishment) arises only when the hon-tōki for that variation is actually completed and recorded in the register. Article 106 does not change this fundamental principle. The hon-tōki does not become effective against third parties as of the karitōki date; it becomes effective as of its own date. A party cannot, for instance, claim to have been the legal owner opposable to third parties during the period when only a karitōki for ownership existed.
2. Priority Preservation is About Ranking, Not Retroactive Efficacy:
   What Article 106 does is govern the order of priority (順位 - jun'i) of the hon-tōki when it is eventually made. The general rule for determining the priority of registered rights concerning the same real property is the chronological order of their registration (Real Estate Registration Act, Article 4). Article 106 clarifies how this rule applies when a hon-tōki is preceded by a karitōki. It effectively makes the "chronological order of registration" for the hon-tōki (for priority ranking purposes only) the time the karitōki was filed.

An Illustrative Example from Legal Commentary:
Consider a scenario:

• Seller (B) owns a property.
• Buyer 1 (A) enters into a purchase agreement with B and makes a provisional registration (Type 1 karitōki) for ownership transfer.
• Subsequently, B sells the same property to Buyer 2 (C), and C completes a final registration (hon-tōki) of ownership.
• After C's hon-tōki, C leases the property to Tenant (D).
• Later, A fulfills all requirements and converts their karitōki into a hon-tōki.

Under Article 106:

• A's hon-tōki, for priority purposes, is ranked as of the date of A's original karitōki. This makes A's ownership rank higher than C's ownership (which was registered after A's karitōki). Therefore, A's perfected ownership can defeat C's claim to title.
• However, during the period between C's hon-tōki and A's hon-tōki, C was the registered owner with taikōryoku. If D paid rent to C during this time, A cannot claim that rent from C as unjust enrichment on the basis that A was the "true" owner from the date of the karitōki. A's ability to assert ownership rights against third parties (like D, regarding who is the landlord) only commenced when A's hon-tōki was made. The karitōki did not retroactively make A the landlord for the interim period.

This example highlights that while priority is preserved, the full legal effects and enforceability of the right itself (the taikōryoku) only begin with the hon-tōki.

How Article 106 Protects: Defeating Intervening Dispositions (中間処分 - Chūkan Shobun)

The practical power of Article 106 comes from its ability to neutralize "intervening dispositions" (chūkan shobun). These are registrations of conflicting or incompatible rights made by or in favor of third parties that occur after a karitōki has been filed but before that karitōki is converted into a hon-tōki.

The Mechanism:

1. A karitōki is filed, establishing an initial priority date.
2. A third party registers a conflicting right (e.g., another ownership transfer from the same seller, a mortgage, an attachment). This is the intervening disposition.
3. The holder of the original karitōki subsequently fulfills the conditions for final registration and completes their hon-tōki.

The Consequence (due to Article 106):
The hon-tōki (stemming from the original karitōki) now has a priority that predates the intervening disposition. As a result, the hon-tōki will prevail over the intervening right to the extent they are legally incompatible. This can lead to:

• Expungement of the Intervening Right: If the intervening right is wholly incompatible with the right secured by the karitōki-based hon-tōki (e.g., a subsequent full ownership transfer when the karitōki was also for full ownership), the intervening registration may be cancelled from the register. This is particularly relevant for ownership-related karitōki; Article 109 of the Real Estate Registration Act outlines procedures where, upon making a hon-tōki for an ownership-related karitōki, the registrar may ex officio cancel intervening registrations if the hon-tōki applicant provides the consent of the intervening rights holder or a court judgment opposable to them.
• Subordination of the Intervening Right: If the intervening right is not wholly incompatible but would otherwise have had a higher priority (e.g., a mortgage that would have been a first mortgage), it may now be ranked lower (e.g., becoming a second mortgage) than the right secured by the karitōki-based hon-tōki.

This "power to exclude" or "power to establish superior rank" over intervening dispositions is the crucial protective function that makes karitōki a valuable tool. It ensures that the diligence of the karitōki holder in securing their initial priority is not undone by subsequent actions of the original obligor or third parties.

Interplay with General Principles of Registration Priority

Article 106 is not an isolated rule; it operates within the broader framework of how registration priority is determined in Japan. Article 4, Paragraph 1 of the Real Estate Registration Act establishes the general principle: "The order of priority of rights registered concerning the same real property shall, unless otherwise provided for by law, be according to the chronological order of registrations." Registrations made in the same section of the register (e.g., Section A or Kō-ku 甲区 for ownership rights) are prioritized by their sequential registration number, while rights registered in different sections (e.g., Section A vs. Section B or Otsu-ku 乙区 for rights other than ownership) are typically prioritized by their reception number and date.

Article 106 serves as a specific application of this chronological principle in the special case of a hon-tōki that is based on a prior karitōki. It clarifies that for such a hon-tōki, its effective "chronological order" for priority determination is deemed to be that of the earlier karitōki.

Practical Significance for Business Strategy and Risk Management

The priority preservation effect enshrined in Article 106 has profound implications for how businesses can strategically manage real estate transactions in Japan:

1. Confidence in Transactions with Delayed Finalization: Businesses often face situations where the substantive agreement for a property right is reached, but the final registration (hon-tōki) must be deferred (e.g., pending financing, regulatory approvals, or completion of due diligence). Article 106, by underpinning the karitōki system, allows a company to proceed with such agreements with greater confidence, knowing that an early karitōki can secure its priority against risks that might arise during the delay.
2. Protection Against Bad Faith or Subsequent Actions by the Counterparty: If a seller, after granting a karitōki for a sale to Company A, attempts to sell the same property to Company B (who then registers a hon-tōki), Article 106 ensures that if Company A subsequently completes its hon-tōki based on its prior karitōki, Company A's title will prevail. This mitigates the risk of a counterparty attempting to renege or engage in double dealing.
3. Securing Options and Conditional Rights: For options to purchase (baibai yoyaku) or contracts where the property right itself is conditional, a Type 2 karitōki or a conditional right karitōki respectively, becomes truly meaningful because of Article 106. It ensures that if the option is exercised or the condition is fulfilled, the resulting hon-tōki will benefit from the priority established when the future or conditional interest was first provisionally registered.
4. Enhanced Value in Due Diligence: When a company is acquiring property or lending against it, discovering a karitōki in favor of a third party during due diligence is a critical finding. Article 106 means that this karitōki represents a potent potential prior claim. If that karitōki is converted to a hon-tōki, it will take priority over any rights the company might subsequently attempt to register, significantly impacting the viability or security of the proposed transaction.

Necessary Preconditions for Article 106 to Operate

It is vital to remember that the protective effect of Article 106 is not automatic or unconditional merely upon the filing of a karitōki. Certain conditions must be met:

• Valid Karitōki: The initial provisional registration itself must be validly made in accordance with the Real Estate Registration Act.
• Valid Underlying Right/Claim: The karitōki must be based on a genuine, legally valid substantive right or claim that is capable of eventually leading to a hon-tōki. If the underlying basis for the karitōki is flawed (e.g., the contract is void, the condition for a conditional right never occurs), the karitōki (and thus Article 106) will ultimately provide no protection.
• Successful Conversion to Hon-tōki: The most crucial precondition is that the karitōki must actually be converted into a hon-tōki. If the karitōki holder fails to fulfill the requirements for final registration, or if the underlying claim lapses or is extinguished, the karitōki remains merely provisional, and Article 106 does not come into play to perfect any priority for a non-existent hon-tōki.

Conclusion: Article 106 – The Key to Karitōki's Protective Strength

Article 106 of the Japanese Real Estate Registration Act is the statutory heart of the provisional registration system's effectiveness. While a karitōki on its own does not grant the immediate third-party opposability of a hon-tōki, Article 106 provides the critical "priority preservation effect." This ensures that when a karitōki is legitimately converted into a hon-tōki, the perfected right will enjoy the priority ranking established at the time of the initial karitōki. This mechanism is what transforms the karitōki from a mere notice into a powerful strategic tool for securing future real estate rights, protecting against intervening adverse claims, and providing a vital measure of security in the often complex and sequential process of Japanese property transactions. Understanding its operation is indispensable for any business aiming to effectively manage risk and secure its interests in this market.