What is the Scope of a Japanese Mortgage? Understanding "Appurtenant Objects" (Fuka Ittai Butsu) and "Real Subrogation" (Butsujo Dai'i)

When a creditor takes a mortgage (抵当権 - Teito-ken) over real estate in Japan, a fundamental question arises: precisely what assets and values does this security interest encompass? The answer is not always limited to the bare land or building initially described in the mortgage agreement. Japanese law extends the reach of a mortgage to certain associated items and, under specific circumstances, to monetary or other substitutes for the original collateral.

Understanding this scope is critical. For the mortgagee (creditor), it defines the extent of their security. For the mortgagor (debtor/property owner) and any third parties, it clarifies what is encumbered. Two key legal concepts govern this expansive reach: "appurtenant and integrated objects" (付加一体物 - fuka ittai butsu) and the principle of "real subrogation" (物上代位 - butsujō dai'i), along with the related concept of "fruits" (果実 - kajitsu) of the property.

The Physical Scope: What Property Does the Mortgage Cover? (目的物の範囲)

The starting point for determining the physical extent of a mortgage is Article 370 of the Japanese Civil Code. This provision establishes the general rule that a mortgage over an immovable property extends its effect to objects that are "attached to and form a single unit with" that immovable (付加一体物 - fuka ittai butsu). This rule is generally seen as reflecting the presumed intention of the contracting parties and aims to preserve the economic value of the mortgaged asset as a functioning whole.

Deciphering "Fuka Ittai Butsu" (Attached and Integrated Objects)

The term fuka ittai butsu is a legal concept encompassing items that are closely connected to the principal mortgaged immovable. Its interpretation involves considering its relationship with more general property law concepts of "accessions" (付合物 - fugōbutsu) and "appurtenances" (従物 - jūbutsu).

1. Accessions (付合物 - Fugōbutsu): These are items that have become physically integrated into the principal immovable to such an extent that they have lost their separate legal identity (e.g., bricks, cement, and timber incorporated into a mortgaged building). A mortgage unequivocally covers such accessions, regardless of whether they were attached before or after the mortgage was created.
2. Appurtenances (従物 - Jūbutsu): These are items that, while retaining their distinct physical identity, are continuously used to serve the primary economic utility and purpose of the principal immovable. Examples include tatami mats in a traditional Japanese house, a custom-fitted kitchen unit, or a stone lantern specifically placed to enhance a mortgaged garden. The prevailing legal view in Japan is that a mortgage also extends to such appurtenances, whether they were present at the time the mortgage was created or were added subsequently by the mortgagor. While there has been some academic discussion on whether Article 370 itself is the direct basis for including appurtenances or if it stems from the general rule in Article 87(2) of the Civil Code (which states that the disposition of a principal thing extends to its appurtenances), the practical outcome is their broad inclusion within the mortgage's scope, with Article 370 often cited as the primary justification in the mortgage context.

Synthesized Criteria for "Fuka Ittai Butsu" (as suggested by commentators):
To be considered a fuka ittai butsu subject to the mortgage, an item generally needs to satisfy conditions related to:

• Location and Physical Connection: Typically, the item must be located on or be physically connected to the mortgaged immovable. An exception might be an ancillary structure (like an outbuilding specifically serving a main mortgaged building) that is functionally indispensable, even if slightly detached. This general requirement helps prevent issues with third-party reliance, as items far removed and lacking separate registration might not reasonably be expected to be covered by the mortgage on the principal property.
• Intended and Foreseeable Inclusion: The item should be one that the parties would normally intend the mortgage to cover, and this intention should be reasonably foreseeable by third parties even without specific registration of the item itself. This usually covers standard accessions and appurtenances, and can even include items temporarily separated (e.g., machinery removed for repair) but clearly intended for re-integration with the principal property. For instance, a water pump specifically installed for a well on mortgaged land would likely be covered.
• Consistency with Execution Principles: The scope should align with what would ordinarily be seized and sold as part of the immovable in a general execution process. This ensures consistency and avoids undue complexities in distributing proceeds if multiple mortgagees or other creditors are involved.

If an item qualifying as a fuka ittai butsu is permanently removed from the mortgaged property and relocated elsewhere, it generally ceases to be part of the fuka ittai butsu for the purpose of a foreclosure sale of the original immovable, although the mortgagee may have rights to demand its return or seek damages if the removal constituted an impairment of the security.

Specific Exclusions and Inclusions:

• Buildings on Mortgaged Land: As a cardinal rule stemming from Article 370, a mortgage granted solely on land does not automatically extend to any buildings situated on that land. In Japan, land and buildings are treated as separate, independently registrable items of real estate. For a building to be covered, it must be explicitly included in the mortgage, or a separate mortgage must be taken over the building itself.
• Appurtenant Rights (従たる権利 - Jūtaru Kenri): When a right itself is mortgaged (e.g., a mortgage on a building, which is an ownership right), the mortgage also extends to ancillary rights that are essential for the utility and value of that principal right. A crucial example is a mortgage over a building: this mortgage will generally also cover the building owner's land-use rights, such as a leasehold of the land (chinshakuken) or a superficies (chijōken) on which the building stands. Without this, the building mortgage would be of little value. The Supreme Court affirmed this principle in a judgment on May 4, 1965.
• No Separate Perfection Generally Needed for Fuka Ittai Butsu: If the mortgage on the principal immovable (e.g., the land or the main structure) is duly registered, no separate registration or perfection is typically required for the mortgage's effect to extend to items that qualify as fuka ittai butsu. The registration of the mortgage on the principal property is considered to provide sufficient public notice. A Supreme Court judgment of March 28, 1969, supported this for appurtenances existing at the time of mortgage creation. A practical exception might arise if an ancillary item, like a detached storage shed, is itself separately registered as an independent immovable and is not explicitly mentioned in the mortgage of the main property; in such cases, it might be deemed excluded from the main property's mortgage.
• Property Not Owned by the Mortgagor: If an item that would otherwise be considered a fuka ittai butsu (e.g., a piece of machinery affixed to a mortgaged factory) is actually owned by a third party (e.g., under a lease agreement with the mortgagor), the mortgage on the factory generally does not extend to encumber that third party's ownership of the machinery. This aligns with general principles: a mortgagor cannot encumber property they do not own or have insufficient rights over. (See Civil Code Art. 242 proviso concerning accessions where another person retains title by agreement).
• Exceptions to Scope by Agreement or Law (Article 370 proviso): The default rule that the mortgage extends to fuka ittai butsu can be modified:
  • Agreement to Exclude: The mortgagor and mortgagee can agree to exclude specific attached items from the mortgage's scope. However, this is generally only feasible for items that can be considered separable property (true appurtenances) rather than items that have become such integral components that their removal would fundamentally alter or destroy the principal mortgaged property. To be effective against third parties, such an agreement to exclude must be registered (Immovables Registration Act Art. 88(1)(iv)).
  • Fraudulent Attachment: If the mortgagor attaches an item to the mortgaged property with the intent to defraud other creditors (as understood under the principles of Civil Code Art. 424), and the mortgagee was aware of or complicit in this fraudulent intent, those other prejudiced creditors may have grounds to treat the item as excluded from the scope of the mortgage.

The Mortgage's Reach Over Value Substitutes and Income

Beyond the physical property, a mortgage can, under certain conditions, extend its reach to monetary values or income streams derived from or substituting for the collateral.

A. Fruits (果実 - Kajitsu) of the Mortgaged Property

Article 371 of the Civil Code addresses the mortgage's effect on "fruits." Fruits can be:

• Natural Fruits (天然果実 - tennen kajitsu): E.g., agricultural produce from mortgaged farmland, minerals extracted.
• Legal Fruits (法定果実 - hōtei kajitsu): E.g., rental income generated from a mortgaged building.

The rule is that a mortgage extends to the fruits of the mortgaged property only after the secured obligation has become due and the debtor is in default.

• Before Default: The mortgagor, who normally retains possession and use of the property, is entitled to collect and benefit from the fruits.
• After Default: The mortgagee gains the right to claim the fruits arising thereafter. This legal basis is crucial for:
  • The mortgagee's ability to exercise real subrogation against rental income (discussed below).
  • The availability of a formal enforcement procedure known as "Enforcement by Realizing Profits from Secured Immovables" (担保不動産収益執行 - tanpo fudōsan shūeki shikkō). This court-supervised process involves appointing an administrator to manage the mortgaged property and collect its income for the benefit of the mortgagee.
    The 2003 revision to Article 371 clarified that "fruits" for this purpose includes both natural and legal fruits, and unequivocally established that the mortgagee's right to them attaches upon the debtor's default.

B. Real Subrogation (物上代位 - Butsujō Dai'i)

Real subrogation, provided for by Article 372 of the Civil Code (which applies Article 304 mutatis mutandis), allows a mortgagee to pursue their claim against certain monetary or other proceeds that the property owner becomes entitled to receive if the original collateral is transformed, lost, or generates specific types of income. It's useful to distinguish between two functional types of real subrogation in the mortgage context:

1. Alternative Real Subrogation (代替的物上代位 - Daitaiteki Butsujō Dai'i): This applies when the original physical collateral is lost or its value is replaced by a different asset, typically a monetary claim. The mortgagee's security interest shifts from the original (now lost or diminished) collateral to these substitute proceeds because the original object of security is no longer fully available.
   • Rationale: This serves two main purposes: (a) It prevents the unjust enrichment of the mortgagor who might receive compensation (e.g., insurance) for lost or damaged collateral while the secured debt remains unpaid. (b) Other creditors are generally not unduly prejudiced, as their claims were already subordinate with respect to the original collateral's value.
   • Common Scenarios:
     • Insurance Proceeds for Destruction or Damage: If the mortgaged property is destroyed (e.g., by fire) or damaged, and an insurance policy covers the loss, the mortgage attaches to the insurance claim payable to the property owner. This is a well-established application.
     • Compensation for Expropriation (土地収用 - Tochi Shūyō): If the mortgaged property is compulsorily acquired for public use (eminent domain), the mortgage attaches to the monetary compensation paid to the owner. Similar principles apply to compensation paid under land readjustment schemes.
     • Generally Not Applicable to Standard Sales Proceeds: If the mortgaged property is sold by the mortgagor in an ordinary transaction, the registered mortgage typically continues to encumber the property in the hands of the new buyer. Since the mortgagee can still foreclose on the physical property, real subrogation over the sales proceeds received by the mortgagor is usually denied in this scenario. The Civil Code provides a specific mechanism called daika bensai (代価弁済 - Article 378), where a third-party acquirer can pay the purchase price (or an agreed amount) directly to the mortgagee(s) to extinguish the mortgage, which is the preferred way to handle this situation.
     • No Subrogation to Mortgagor's Claim for Refund upon Rescission of their Own Purchase: If the mortgagor's title to the property is retroactively nullified because the contract under which they originally acquired the property is rescinded (e.g., due to a defect in their seller's title), and the mortgagor becomes entitled to a refund of the purchase price they paid, the mortgage created by this mortgagor generally does not attach to this refund claim. The mortgage was on the property, which they are now deemed never to have effectively owned for security purposes.
2. Additive Real Subrogation (付加的物上代位 - Fukateki Butsujō Dai'i): This is perhaps better understood not as a claim over a substitute for lost collateral, but as an extension of the mortgage's effect to income streams generated by the existing collateral. It is closely linked to the mortgagee's right to fruits after default under Article 371.
   • Rental Income: After the debtor has defaulted on the secured obligation, the mortgagee can exercise real subrogation against rental income due to the mortgagor from tenants of the mortgaged property. This allows the mortgagee to capture the property's earning capacity to satisfy the debt.
   • Consideration for Granting Subordinate Rights: If the mortgagor, after creating the mortgage, grants a subordinate right over the property (e.g., a new lease or a superficies) for consideration, the mortgagee's primary remedy is typically to foreclose on the property free from that subordinate right (if their mortgage has priority). Direct real subrogation over the monetary consideration received by the mortgagor for granting such a subordinate right is generally not permitted. The mortgagee's security lies in the unimpaired value of their original, superior right over the property itself.

Procedural Requirement for Real Subrogation: Attachment Before Payout (民法304条1項ただし書)
A crucial procedural step for the effective exercise of real subrogation, particularly over monetary claims like insurance proceeds or rent, is that the mortgagee must typically "attach" (差し押え - sashiosae) that claim before the funds are paid out by the third-party obligor (e.g., the insurer or the tenant) to the mortgagor/property owner.

• This "attachment" is usually effected by obtaining a court order directing the third-party obligor to pay the funds to the mortgagee or as the court directs, rather than to the mortgagor.
• Rationale (per a Supreme Court judgment of January 30, 1998): This requirement primarily serves to protect the third-party obligor. Before receiving official notice of such an attachment, the third-party obligor (e.g., a tenant paying rent) can safely make payment to their contractual counterparty (the mortgagor). Once properly notified of the attachment, however, payment to the mortgagor will no longer discharge their obligation vis-à-vis the subrogating mortgagee; they must then pay the mortgagee to get a valid discharge.
• This pre-payout attachment also serves to "fix" or crystallize the mortgagee's claim on the specific proceeds, giving them priority over those funds against other general creditors of the mortgagor or against a party to whom the mortgagor might subsequently attempt to assign those proceeds.
• Interaction with Third-Party Debtor's Right of Set-Off: If the third-party obligor (e.g., a tenant) also has a monetary claim against the mortgagor (e.g., for repairs the landlord failed to make), their ability to set off this claim against the subrogated claim (e.g., rent owed) is complex. A Supreme Court judgment of March 13, 2001, indicated that the timing of when the third-party obligor's claim against the mortgagor arose, relative to the mortgage registration and the attachment of the proceeds, is critical in determining the validity of such a set-off against the subrogating mortgagee.
• Interaction with Assignment of the Proceeds Claim: If the mortgagor assigns the right to the proceeds (e.g., assigns future rental income) to another party, a mortgagee whose mortgage was registered before that assignment was perfected against third parties can generally still exercise real subrogation by attaching the claim. The publicity afforded by the mortgage registration is considered to put potential assignees of such income streams on notice of the mortgagee's potential superior claim via subrogation (Supreme Court, January 30, 1998).

The Special Case: Collective Auction of After-Built Buildings (一括競売権 - Ikkatsu Kyōbai-ken)

As a general rule, a mortgage on land does not cover buildings later constructed on that land. However, Article 389 of the Civil Code provides a special right to the land mortgagee known as the "right of collective auction" (一括競売権 - ikkatsu kyōbai-ken).

• If a building is constructed on the land after the mortgage was created, and the owner of that building does not possess a right to occupy the land (e.g., a lease or superficies) that is enforceable against the land mortgagee, Article 389 grants the land mortgagee the option to request the court to auction the land together with the building as a single package.
• Rationale: Selling land that is encumbered by an "unauthorized" building (from the mortgagee's perspective) can be practically difficult or may result in a significantly lower sale price for the land. A collective auction allows a single purchaser to acquire both the land and the building, which may simplify matters for the purchaser (e.g., regarding demolition or regularizing the building's status) and potentially enhance the sale proceeds attributable to the land, thereby benefiting the mortgagee.
• Mortgagee's Discretion: This is a right, not an obligation. The land mortgagee can choose to foreclose only on the land, leaving the building owner to deal with the consequences of lacking a land-use right against the new landowner.
• No Priority Over Building Proceeds: Crucially, even if a collective auction of land and building is held under Article 389, the land mortgagee's priority right extends only to the proceeds attributable to the land value. They have no priority claim over the portion of the auction proceeds derived from the value of the building itself (Article 389(1) proviso). The building was never subject to their mortgage.

Conclusion: A Broad but Defined Reach

The scope of a Japanese mortgage (Teito-ken) is a carefully calibrated legal construct. It extends beyond the initially described immovable to encompass "appurtenant objects" that are economically integral to it, reflecting the practical realities of property use and value. Furthermore, through the doctrines relating to "fruits" and, more significantly, "real subrogation," the mortgage's security can attach to certain income streams or substitute monetary values arising from the collateral, especially after the debtor's default. These extensions are, however, subject to important legal principles and procedural requirements, such as the need for attachment before payout in cases of real subrogation. The special right of collective auction for after-built buildings further illustrates the law's attempt to balance the mortgagee's interest in effective value realization with the distinct legal status of land and buildings.

For all parties involved in mortgage transactions in Japan—be they lenders, borrowers, property owners, or prospective purchasers—a thorough understanding of these rules defining the mortgage's expansive but not unlimited reach is essential for accurately assessing security value, managing risks, and navigating enforcement scenarios.