Sale and Purchase Transaction

Ownership of real estate of the seller is transferred to the buyer in accordance with the agreement. Such agreement is called sale and purchase agreement. Japanese law does not require any formality regarding sale and purchase agreement. However, as real estate is important property in general, sale and purchase agreement of real estate is made by document with few exceptions.

*Civil Code Article 555: A sale becomes effective when one of the parties promises to transfer certain property rights to the other party and the other party promises to pay the price for this.

Object of sale and purchase agreement is normally land and buildings. As land and buildings are both treated as independent real estates in Japan, ownership of a building can be transferred separately from that of land. Building unit ownership can also be an object of sale and purchase agreement.

*Civil Code Article 86 (1): Land and any fixtures thereto are immovables.
(2) Things other than immovables are movables.

*Act on Building Unit Ownership Article 1: When there are multiple portions into which a single building is structurally divided that are independent residences, stores, offices, warehouses, or any other spaces that can be used as if they were buildings, each of such portions may be made the subject of ownership, pursuant to the provisions of this Act.

Non-Japanese persons and non-Japanese companies can buy or sell real estate in Japan. Basically, there is no restriction on parties and objects. Non-residents have to report to the Minister of Finance when they acquire real estate in Japan. However, there are some exceptions: when non-residents acquire real estate for their family or their employees to live, when non-residents who carry out non-profit business acquire real estate for such business, when non-residents acquire real estate for their office and when non-residents acquire real estate from other non-residents.

*Foreign Exchange and Foreign Trade Act
(Definitions)
Article 6: (1) In this Act and any Order based on this Act, the meaning of each term set forth in one of the following items is as prescribed in that item:
(v) the term “resident” means a natural person with a domicile or residence in Japan or a corporation with a principal office in Japan. Regardless of whether the Japanese branch office, local office, or other office of a non-resident has the legal authority to represent that non-resident, the non-resident is deemed to be a resident even if its principal office is located in a foreign state;
(vi) the term “non-resident” means a natural person or corporation other than a resident;

(Definition of Capital Transactions)
Article 20: The term “capital transaction” means one of the following transactions or actions (other than one falling under the category of inward direct investment or an equivalent action as prescribed in Article 26, paragraph (2), which is undertaken by a person as set forth in the items of paragraph (1) of that Article):
(x) a resident’s acquisition of real estate or rights to real estate that is located in a foreign state, or a non-resident’s acquisition of real estate or rights to real estate that is located in Japan;

(Report of Capital Transactions)
Article 55-3: (1) Except in cases that Cabinet Order prescribes, on each occasion on which a resident or a non-resident becomes a party to a capital transaction as set forth in one of the following items (other than one falling under the category of a specified capital transaction; hereinafter the same applies in this Article), either the resident or the non-resident, as per the classification prescribed in the relevant item, must report the substance of the capital transaction, its timing, and any other information that Cabinet Order prescribes to the Minister of Finance, pursuant to Cabinet Order; provided, however, that this does not apply to a capital transaction as set forth in item (vi), if a notification must be filed for it pursuant to Article 23, paragraph (1):
(xii) a capital transaction as set forth in Article 20, item (x) constituting a non-resident’s acquisition of real estate in Japan or rights to real estate that is located in Japan:　the non-resident;

*Foreign Exchange Order
(Report of Capital Transactions)
Article 18-5: (1) The cases specified by Cabinet Order as prescribed in Article 55-3, paragraph (1) of the Act are cases where capital transactions to which a resident or a non-resident is a party fall under any of the following capital transactions:
(iii) capital transactions specified by Ministry of Finance Order as causing no particular obstruction to achieving the purpose of the Act even without a report pursuant to Article 55-3, paragraph (1) of the Act.

*Ministry of Finance Order No. 29 of 1998 Article 5 (2) (x) (a)-(d) lists four exceptions prescribed in Article 18-5 (1) (iii).

Brokers of real estate in Japan have to obtain a license granted by the authority (Minister of Land, Infrastructure, Transport and Tourism or the governor of the prefecture) under Real Estate Brokerage Act. However, anyone can provide consulting service to the extent not violating the provisions of Real Estate Brokerage Act.

*Real Estate Brokerage Act
(Definitions of terms)
Article 2: In this Act, the meanings of the terms set forth in the following items are as prescribed respectively in those items:
(ii) Real Estate Brokerage: The term “Real Estate Brokerage” means a business in which the buying, selling, or exchanging of Building Lots or buildings (including parts of buildings; the same applies hereinafter) or the provision of intermediary or agency services for the buying, selling, exchanging, or leasing of Building Lots or buildings is carried out in the course of business.
(iii) Real Estate Broker: The term “Real Estate Broker” means a person engaged in Real Estate Brokerage upon being granted a license as provided for in Article 3 paragraph (1).

(License)
Article 3 (1): If a person intends to engage in Real Estate Brokerage upon establishing business offices (head office, branch office, or any other business offices as specified by Cabinet Order; the same applies hereinafter) within zones in two or more prefectures, said person must obtain a license granted by the Minister of Land, Infrastructure, Transport and Tourism or, if the person intends to engage in said business upon establishing business offices within zones in a single prefecture only, obtain a license granted by the governor of the prefecture with jurisdiction over the locations of said business offices.

(Prohibition against unlicensed businesses)
Article 12 (1): A person who has not obtained a license as provided for in Article 3, paragraph (1), is not to engage in Real Estate Brokerage.

Real estates in Japan are basically registered. Buyers of real estates should register their title in order to assert its rights against third parties. The order of priority of rights in relation to real estate follow the chronological order of registration.

*Civil Code Article 177: Acquisitions of, losses of and changes in real rights on immovables may not be duly asserted against any third parties, unless the same are registered pursuant to the applicable provisions of the Real Property Registration Act (Act No. 123 of 2004) and other laws regarding registration.

*Real Property Registration Act
Article 3: A registration shall be made with regard to a description of real property or with regard to the preservation, etc. of the following rights relating to real property (the “preservation, etc.” means the preservation, establishment, transfer, change, restriction on disposition, or extinction of a right; the same shall apply in paragraph (2) of the following Article and Article 105, item (i)): (i)　ownership; (ii)　superficies; (iii)　farming right; (iv)　servitude; (v)　statutory lien; (vi)　pledge; (vii)　mortgage; (viii)　right of lease; and (ix)　right of quarrying (meaning a right of quarrying prescribed in the Quarrying Act (Act No. 291 of 1950); the same shall apply in Article 50 and Article 82).
Article 4 (1): The order of priority of rights registered in relation to the same real property shall, unless otherwise provided for in laws and regulations, follow the chronological order of registration.

The buyer of real estate has to pay the sale price by the timing prescribed by the sale and purchase agreement. The timing of payment is usually simultaneous with that of delivery of the property by the seller.

*Civil Code
(Defense of Simultaneous Performance)
Article 533 A party to a bilateral contract may refuse to perform that party’s own obligation until the other party tenders the performance of that other party’s obligation (including the performance of an obligation to compensate for loss or damage in lieu of the performance of an obligation); provided, however, that this does not apply if the obligation of the other party is not yet due.

As there is no restriction, the manners of payment of the sale price would be prescribed in the sale and purchase agreement. Although it is common in Japan to provide that the price may be paid by cash or by bank transfer, it is important for non-residents to restrict the way to bank transfer because large amount of money is difficult to deal with these days under regulations of anti-money laundering.

It is common that, simultaneously with entering into a sale and purchase agreement, the buyer would be required to pay earnest money of about 10% to 20% of the sale price. Basically, the buyer can cancel the contract by waiving the earnest money or the seller can cancel the contract by actually providing the buyer with twice its amount by the timing the counterparty commences performance of the contract except as otherwise set forth in the sale and purchase agreement.

*Civil Code Article 557 (1): If the buyer pays earnest money to the seller, the buyer may cancel the contract by waiving the earnest money, or the seller may cancel the contract by actually providing the buyer with twice its amount; provided, however, that this does not apply after the counterparty commences performance of the contract.

Unless the seller is a real estate broker, seller’s obligation of explanation in not prescribed in laws of Japan. However, it is considered that the seller of real estate is obliged to explain important matters which may affect buyer’s intention whether to contract or not under the principle of good faith. If the seller is a real estate broker, obligation of explaining important matters is prescribed in Real Estate Brokerage Act.

*Real Estate Brokerage Act
(Explaining important matters)
Article 35 (1) A Real Estate Broker must have a transaction specialist provide, through the issuance of a document in which the matters as listed below are stated (or drawing if required under item (v)), explanations, at the minimum these matters to a counterparty on the sale, exchange, or loan of a Building Lot or building or to parties for the sale, exchange, or loan of a Building Lot or building subject to mediation to be carried out by the Real Estate Broker (hereinafter referred to as “Real Estate Brokerage Operation Counterparty”) in connection with the Building Lot or building that said party intends to acquire or borrow during the period until the conclusion of an agreement for said sale, exchange, or loan.

If there are defects on real estate, the buyer may demand reduction of price, claim for damages or cancel the contract when requirements of Civil Code are satisfied; except as otherwise set forth in the sale and purchase agreement.

*Civil Code
(Buyer’s Right to Demand Cure)
Article 562: (1) If the subject matter delivered to the buyer does not conform to the terms of the contract with respect to the kind, quality or quantity, the buyer may demand that the seller cure the non-conformity of performance by repairing the subject matter, delivering the substitute or delivering the replenishment; provided, however, that the seller may cure the non-conformity of performance by a method that is different from the method demanded by the buyer if it does not impose any undue burden on the buyer.
(2) If the non-conformity referred to in the preceding paragraph is due to grounds attributable to the buyer, the buyer may not demand that the seller cure the non-conformity of performance under the provisions of that paragraph.

(Buyer’s Right to Demand Reduction of Price)
Article 563: (1) In the case prescribed in the main clause of paragraph (1) of the preceding Article, if the buyer demands that the seller cure the non-conformity of performance by specifying a reasonable period of time but the non-conformity of performance is not cured within that period, the buyer may request a reduction of the price in proportion to the degree of non-conformity.
(2) Notwithstanding the provisions of the preceding paragraph, in the following cases, a buyer in good faith may request a reduction of the price immediately without making demand referred to in that paragraph:
(i) if it is impossible to cure the non-conformity of performance;
(ii) if the seller unequivocally manifests the intention to refuse to cure the non-conformity of performance;
(iii) if, due to the nature of the contract or a manifestation of intention by the parties, the purpose of the contract is unable to be achieved unless the performance is carried out at a specific time on a specific date or within a certain period of time, and the seller fails to cure the non-conformity of the performance at the time or before the period expires; or
(iv) beyond the cases set forth in the preceding items, it is obvious that the seller is unlikely to cure the non-conformity of the performance even if the buyer makes the demand referred to in the preceding paragraph.
(3) If the non-conformity referred to in paragraph (1) is due to grounds attributable to the buyer, the buyer may not request a reduction of the price under the provisions of the preceding two paragraphs.

(Claim for Compensation for Loss or Damage and Exercise of Right to Cancel by Buyer)
Article 564: The provisions of the preceding two Articles do not preclude the buyer from claiming compensation for loss or damage pursuant to the provisions of Article 415 or exercising the right to cancel pursuant to the provisions of Articles 541 and 542.

(Compensation for Loss or Damage Due to Non-Performance)
Article 415: (1) If an obligor fails to perform consistent with the purpose of the obligation or the performance of an obligation is impossible, the obligee may claim compensation for loss or damage arising from the failure; provided, however, that this does not apply if the failure to perform the obligation is due to grounds not attributable to the obligor in light of the contract or other sources of obligation and the common sense in the transaction.
(2) If the obligee is entitled to claim compensation for loss or damage pursuant to the provisions of the preceding paragraph, and any of the following cases applies, the obligee may claim compensation for loss or damage in lieu of the performance of the obligation:
(i) the performance of the obligation is impossible;
(ii) the obligor manifests the intention to refuse to perform the obligation; or
(iii) the obligation has arisen from a contract, and the contract is cancelled or the obligee acquires the right to cancel the contract on the ground of the obligor’s failure to perform the obligation.

(Cancellation After Demand)
Article 541: If one of the parties does not perform that party’s obligation, and the other party demands performance of that obligation, specifying a reasonable period of time, but no performance is completed during that period, the other party may cancel the contract; provided, however, that this does not apply if the non-performance of the obligations upon the passage of the period is minor in light of the contract and the common sense in the transaction.

(Cancellation Without Demand)
Article 542: (1) In the following cases, the obligee may immediately cancel the contract without making the demand referred to in the preceding Article:
(i) if the performance of the whole of the obligation is impossible;
(ii) if the obligor unequivocally manifests the intention to refuse to perform the obligation in whole;
(iii) if the performance of part of the obligation is impossible, or if the obligor clearly manifests the intention to refuse to perform part of the obligation and the purpose of the contract cannot be achieved by the performance of the remaining part of the obligation;
(iv) if, due to the nature of the contract or a manifestation of intention by the parties, the purpose of the contract cannot be achieved unless the obligation is performed at a specific time on a specific date or within a certain period of time, and the obligor fails to perform the obligation at that time or before that period of time expires; or
(v) beyond the cases set forth in the preceding items, if the obligor does not perform the obligation and it is obvious that the obligor is unlikely to perform the obligation to the extent necessary to achieve the purpose of the contract even if the obligee makes the demand referred to in the preceding Article.
(2) In the following cases, the obligee may immediately cancel a part of the contract without making the demand referred to in the preceding Article:
(i) the performance of the part of the obligation is impossible; or
(ii) the obligor clearly manifests the intention to refuse to perform the part of the obligation.

It is basically possible to make a special agreement to disclaim the seller’s obligation regarding defects. However, the seller may not be released from the responsibility if the seller knew but did not disclose the defects to the buyer even if the seller makes a special agreement.

*Civil Code
(Special Agreement Disclaiming Warranty)
Article 572: Even if the seller makes a special agreement to the effect that the seller does not warrant in the case prescribed in the main clause of Article 562, paragraph (1) or Article 565, the seller may not be released from that responsibility with respect to any fact that the seller knew but did not disclose, and with respect to any right that the seller personally created for or assigned to a third party.

If the seller or the buyer breaches the sale and purchase agreement, the other party may claim for damages or cancel the contract. It is common to prescribe liquidated damages for violation of the agreement.

*Civil Code
(Compensation for Loss or Damage Due to Non-Performance)
Article 415: (1) If an obligor fails to perform consistent with the purpose of the obligation or the performance of an obligation is impossible, the obligee may claim compensation for loss or damage arising from the failure; provided, however, that this does not apply if the failure to perform the obligation is due to grounds not attributable to the obligor in light of the contract or other sources of obligation and the common sense in the transaction.
(2) If the obligee is entitled to claim compensation for loss or damage pursuant to the provisions of the preceding paragraph, and any of the following cases applies, the obligee may claim compensation for loss or damage in lieu of the performance of the obligation:
(i) the performance of the obligation is impossible;
(ii) the obligor manifests the intention to refuse to perform the obligation; or
(iii) the obligation has arisen from a contract, and the contract is cancelled or the obligee acquires the right to cancel the contract on the ground of the obligor’s failure to perform the obligation.

(Cancellation After Demand)
Article 541: If one of the parties does not perform that party’s obligation, and the other party demands performance of that obligation, specifying a reasonable period of time, but no performance is completed during that period, the other party may cancel the contract; provided, however, that this does not apply if the non-performance of the obligations upon the passage of the period is minor in light of the contract and the common sense in the transaction.

(Cancellation Without Demand)
Article 542: (1) In the following cases, the obligee may immediately cancel the contract without making the demand referred to in the preceding Article:
(i) if the performance of the whole of the obligation is impossible;
(ii) if the obligor unequivocally manifests the intention to refuse to perform the obligation in whole;
(iii) if the performance of part of the obligation is impossible, or if the obligor clearly manifests the intention to refuse to perform part of the obligation and the purpose of the contract cannot be achieved by the performance of the remaining part of the obligation;
(iv) if, due to the nature of the contract or a manifestation of intention by the parties, the purpose of the contract cannot be achieved unless the obligation is performed at a specific time on a specific date or within a certain period of time, and the obligor fails to perform the obligation at that time or before that period of time expires; or
(v) beyond the cases set forth in the preceding items, if the obligor does not perform the obligation and it is obvious that the obligor is unlikely to perform the obligation to the extent necessary to achieve the purpose of the contract even if the obligee makes the demand referred to in the preceding Article.
(2) In the following cases, the obligee may immediately cancel a part of the contract without making the demand referred to in the preceding Article:
(i) the performance of the part of the obligation is impossible; or
(ii) the obligor clearly manifests the intention to refuse to perform the part of the obligation.