What Key Representations and Warranties Should You Expect in a Japanese Real Estate Purchase Agreement?

Japanese Attorney at Law - Bengoshi L.L.

• 5 min read

The Representations and Warranties (R&W) section is the backbone of any sophisticated real estate purchase and sale agreement (PSA). It serves as a final, formal disclosure of facts from the seller to the buyer and functions as a critical mechanism for allocating risk. While the concept of a seller making binding statements about itself and the asset is universal, the specific R&W found in a Japanese real estate PSA are tailored to the country’s unique legal, regulatory, and commercial landscape.

For foreign investors and their legal advisors, scrutinizing these clauses—known in Japanese as Hyomei Hosho (表明保証)—is a vital part of the transaction process. They are not boilerplate. They form the basis for the buyer’s decision to close and provide the primary route for recourse if the disclosed facts turn out to be untrue. This article explores the key categories of R&W a buyer should expect to see, negotiate, and understand when acquiring real estate interests in Japan.

The Dual Focus of Japanese R&W

A well-drafted Japanese PSA organizes its R&W into two distinct categories:

  1. Representations concerning the Seller: These focus on the seller’s legal status, authority, and financial integrity as a corporate entity.
  2. Representations concerning the Asset: These focus on the physical, financial, and legal condition of the underlying real estate or Trust Beneficiary Interest (TBI) being sold.

Scrutinizing the Seller: Corporate and Financial Integrity

Before assessing the asset, a buyer must first be assured that the seller is a legitimate entity with the undisputed right and ability to transact. The R&W in this category are designed to provide this comfort and to support the crucial legal principle of bankruptcy remoteness.

1. Foundational Corporate Authority

This set of reps confirms the seller’s basic legal standing and capacity to enter into the agreement. A buyer should expect the seller to represent that:

  • It is a corporation duly organized and validly existing under the laws of Japan.
  • It has the full corporate power and authority to execute the PSA and perform its obligations.
  • The execution of the PSA has been properly authorized through all necessary internal corporate procedures (shanai tetsuzuki).
  • The agreement does not violate any laws, governmental orders, or the seller’s own articles of incorporation (teikan).

2. Assurances for Bankruptcy Remoteness

Several key representations are specifically designed to protect the buyer from the risk of the seller’s subsequent insolvency. These reps are fundamental to the "true sale" analysis, ensuring the transaction cannot be unwound by a bankruptcy trustee. The seller typically represents that:

  • It is not insolvent, nor are there any pending or threatened insolvency proceedings (tosan tetsuzuki) against it.
  • The execution of the PSA will not render it insolvent.
  • The transaction is a true and genuine sale (shinsei baibai) and not a disguised financing arrangement.
  • The transaction is not being made with the intent to defraud creditors and is therefore not subject to statutory clawback rights, such as the trustee’s Denial Rights (Hininken) under the Bankruptcy Act or a creditor’s Right to Rescind a Fraudulent Act (Sagoi Koi Torikeshi-ken) under the Civil Code.

These reps provide the buyer and its lender with critical assurance that the asset is being cleanly and finally severed from the seller’s financial fate.

3. The Anti-Social Forces Clause: A Japanese Imperative

One of the most important and uniquely Japanese representations is the clause concerning Anti-Social Forces (hanshakaiteki seiryoku). This term is a well-understood euphemism for organized crime syndicates (boryokudan) and their affiliates.

The seller must represent and warrant that it is not, and has no relationship whatsoever with, any anti-social forces. This is not a trivial matter. Driven by national policy and a series of prefectural ordinances (Boryokudan Haijo Jorei), there is a strong legal and social mandate for businesses to sever all ties with such groups. A breach of this representation is typically considered a material default, giving the buyer an immediate right to terminate the agreement and seek damages.

This second category of R&W drills down into the specifics of the property itself. These statements are often directly linked to the findings of the buyer’s due diligence.

1. Physical Condition and Environmental Integrity

The seller is asked to make statements about the physical state of the property, providing a baseline against which the buyer can assess risk. Key reps include:

  • Absence of Material Defects (Kashi): A representation that the property is free from material structural or other physical defects, except as disclosed.
  • Environmental Compliance: A crucial rep stating that the property is free from soil contamination (dojo osen) and hazardous materials like asbestos and PCBs, and is in compliance with all environmental laws, such as the Soil Contamination Countermeasures Act. A breach of this rep can expose a new owner to uncapped remediation liabilities.

This confirms that the building can be legally owned and operated. The seller will represent that:

  • The building is in compliance with all applicable laws, including Japan’s strict Building Standards Act (Kenchiku Kijun Ho) and Fire Service Act (Shobo Ho). This is closely tied to the due diligence finding of whether the building has a valid Inspection Certificate.
  • The seller has not received any notices of violation from governmental authorities.

3. Financial Underpinnings: The Leases

For an income-producing property, the R&W concerning the leases are paramount as they underpin the entire valuation. The seller will be asked to represent that:

  • A true, correct, and complete copy of all lease agreements has been provided to the buyer.
  • The provided rent roll is accurate in all material respects.
  • The leases are in full force and effect, and there are no material defaults by either the landlord or the tenants.

4. Title and Boundaries

This set of reps confirms the quality of the ownership interest being transferred.

  • Good Title: The seller represents it holds good and marketable beneficial interest (in the case of a TBI) or legal title (for physical property), free and clear of any liens or encumbrances other than those disclosed and agreed to be discharged at closing.
  • Boundaries (Kyokai): The seller warrants that the property’s boundaries are properly demarcated and that there are no ongoing disputes with neighboring owners.

The Art of the Deal: Negotiation, Disclosures, and Remedies

The R&W section is rarely accepted as-is; it is one of the most heavily negotiated parts of the PSA.

  • Knowledge Qualifiers: Sellers will almost always seek to limit the scope of their reps by inserting knowledge qualifiers, such as "to the best of the Seller’s knowledge" (shiru kagiri). The negotiation then often centers on the definition of "knowledge"—is it the actual knowledge of specific individuals, or does it include knowledge the seller should have had after reasonable inquiry?
  • Disclosure Schedules and Yonin Jiko: The seller will prepare detailed disclosure schedules that list specific exceptions to the general representations. For example, the environmental rep may be given, "except for the asbestos identified in Section X of the Engineering Report." The buyer's formal acceptance of these disclosed items is known as "Accepted Matters" (Yonin Jiko). This process effectively carves out disclosed risks from the seller's liability, placing the burden of those specific risks onto the buyer.
  • Remedies for Breach: The PSA will specify the buyer's recourse if a representation is found to be false. The primary remedy for a post-closing breach is indemnification for damages, often subject to a cap and a limited survival period (e.g., 12-24 months). It is worth noting that Japan’s Civil Code was amended in 2020 to replace the old concept of "latent defect liability" with a broader concept of "contract non-conformity" (keiyaku futekigo sekinin). While sophisticated commercial parties typically disclaim this statutory regime in favor of the specifically negotiated R&W and remedies in the PSA, its existence forms the default legal backdrop.

Conclusion

The Representations and Warranties in a Japanese real estate PSA are far more than legal boilerplate. They are a dynamic tool for risk allocation and a final, critical layer of due diligence. They codify the buyer's understanding of the asset and provide a contractual basis for recourse if that understanding proves incorrect. For any international investor, a thorough and disciplined approach to negotiating and scrutinizing these clauses—with a particular focus on the uniquely Japanese elements such as bankruptcy remoteness and anti-social forces—is an indispensable part of a secure and successful transaction.