Japan
Answer ... Generally, the seller and buyer of real estate will negotiate and decide on the sale and purchase conditions, and will then prepare a draft sale and purchase contract stating the conditions. The seller and a buyer will execute the sale and purchase contract and then complete preparations to conclude the sale and purchase transaction. For instance:
- a seller that intends to sell a building on leased land will obtain the land owner’s permission; and
- the buyer will make arrangements for the procurement of funds to pay the purchase price and for use of the building.
Where a real estate broker acts as intermediary, the real estate broker will explain important matters to the buyer by delivering an important matter explanation document setting out information on the real estate and the details of the contract.
In some cases of a real estate transaction between corporations, before preparing a draft sale and purchase contract, the seller and buyer will confirm with each other the most important sale and purchase conditions or conditions precedent for execution of the sale and purchase contract by exchanging:
- a letter of intent for sale from the seller; and
- a letter of intent for purchase from the buyer.
In addition, many buyers conduct due diligence on the real estate that they expect to purchase.
Japan
Answer ... In addition to the buyer and seller, the following parties are typically involved in a real estate transaction:
- a real estate broker (see question 5.1);
- the professionals who conduct the due diligence;
- lawyers who advise on the contract conditions; and
- a judicial scrivener who undertakes the registration procedures.
Where a buyer or a seller is a special purpose company (SPC), the following parties will likely be involved in the real estate transaction;
- investors that make contributions to the SPC;
- asset managers that provide asset management services to the SPC;
- accountants;
- tax accountants; and
- financial institutions making loans to the SPC.
Japan
Answer ... Where a real estate broker acts as the seller of real estate or as an intermediary for the sale and purchase of real estate, the real estate broker must explain the important matters set forth in the Real Estate Brokerage Act to the buyer by delivering an important matter explanation document. Where the seller is not a real estate broker, the seller is not legally obliged to explain the important matters to the buyer.
However, even in the case of a real estate sale and purchase transaction in which no real estate broker is involved, the seller will generally provide information and materials about the real estate to be sold and the buyer will conduct due diligence thereon.
In Japan, while in many sale and purchase transactions the seller makes no representations or warranties, in the case of a transaction where a sales company or development company of real estate acts as the seller or an institutional investor invests in real estate, the seller will make representations and warranties.
In such case, the following matters are typically addressed by the seller in the representations and warranties:
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seller-related matters – for example, that:
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- the seller has the legal capacity to execute a sale and purchase contract and has taken internal procedures as needed;
- the legality of execution of a sale and purchase contract by the seller; and
- the seller’s financial condition;
- that the seller has valid ownership of, or title to, the real property to be sold;
- that no security interest such as a mortgage has been created on the real estate to be sold (or, if any security interest has been created, that such security interest is expected to be removed upon the sale and purchase);
- that there are no disputes over the real estate to be sold – for example, that no litigation has been filed with a court;
- compliance with the laws and regulations applicable to the real estate to be sold, such as those related to the environment and building codes;
- the characteristics and condition of the real estate to be sold; and
- matters relating to the boundary of the real estate to be sold.
In addition to the responsibility or liability arising from the representations and warranties, the seller may assume liability for non-conformity with a contract under the Civil Code.
If the quality or another feature of the real estate to be sold fails to conform to the contract, the buyer may generally demand, within a certain period:
- a price reduction;
- supplemental performance such as repair;
- payment of damages; or
- termination of the contract.
The seller and the buyer will negotiate to decide whether:
- a clause of liability for non-conformity with the contract similar that set out in the Civil Code should be included in the sale and purchase contract; or
- amendments to shorten the period in which to exercise the right should be added to the contract.
Japan
Answer ... For a real estate sale and purchase contract, typical items subject to due diligence include the following:
- ownership of, or title to, the real estate;
- whether any security interest or third party’s title of use has been created on the real estate and, if so, details thereof;
- whether any public regulations (eg, environmental or building regulations or those concerning development activity) are applied to the real estate and, if so, the details thereof;
- the details of any contract with a tenant leasing the real estate (if any) and the character of such tenants;
- the characteristics and condition of the land (eg, nature, soil contamination, items buried underground and boundaries);
- the characteristics and condition of the building (eg, age, earthquake resistance); and
- any violation of laws and regulations (eg, those concerning building or environmental regulations).
Japan
Answer ... The seller and buyer will execute the sale and purchase contract by affixing their seals or signatures thereto. The seller and buyer will also attach a revenue stamp to the contract. If the seller or buyer is a corporation, the corporation will affix its seal registered with the competent legal affairs bureau. Also, in many cases where the seller or buyer is an individual, the individual will use his or her seal registered with the competent local government.
Upon the conclusion of the sale and purchase transaction, the seller and buyer will conduct procedures to apply to register the transfer of ownership in the real estate registration records.
Japan
Answer ... Once the documents setting out the agreed conditions precedent in the sale and purchase contract have been prepared and the other conditions precedent have been satisfied, the real estate sale and purchase transaction concludes. In some cases, a sale and purchase contract is executed once the conditions precedent for the sale and purchase transaction have been satisfied and the transaction is concluded on the execution date. The time it takes to conclude the transaction will vary depending on the transaction; the seller and buyer will decide on the time schedule based on the type of transaction. Generally, the seller and buyer will appoint a judicial scrivener to undertake the procedures to register the transfer of ownership on the transaction conclusion date. It takes between two and three weeks to complete the registration.
Necessary costs, other than the sale and purchase price, include the following:
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the fees payable to external professionals, such as:
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- the real estate appraiser;
- tax accountants;
- accountants;
- lawyers; and
- surveyors;
- the broker’s commission, where a real estate broker has been appointed as an intermediary for sale and purchase transactions;
- registration fees (eg, registration licence tax and fees payable to the judicial scrivener);
- the revenue stamp fee (stamp duty); and
- the costs of any loan which the buyer has obtained to pay the purchase price;
- the costs of obtaining the landowner’s approval (approval fee) where a building on leased land is to be transferred; and
- real estate acquisition tax and consumption tax (where a building is acquired).
Japan
Answer ... Upon execution of a sale and purchase contract, the seller and the buyer will perform their respective obligations in accordance with the provisions of the contract. If either party breaches its obligations, the breaching party must deal with the breach, such as compensation for damage incurred by the other party in accordance with the contract. It is possible that the other party will terminate the contract in accordance therewith.
Japan
Answer ... Real estate acquisition tax is payable upon the acquisition, which is levied by the local prefectural government at the place where the acquired real estate is located. The tax rate is 4% of the assessed value of the acquired assets in principle. However, various preferential treatments are available under the temporary legislation that is currently in force.
Another local tax – fixed asset tax – is payable on land, buildings and other depreciable assets by its registered owner as of 1 January each year, which is levied by one or more local governmental bodies at the place where the acquired asset is located. The standard tax rate is 1.4% of the assessed value of the acquired assets in principle; an additional urban planning tax is also levied on land and buildings located in certain designated areas, at a rate of up to 0.3%.
Registration tax is also imposed on the registration of certain items defined under the relevant tax law. As an example, registration of the new ownership of transferred real estate is taxed at 2% of the assessed value of the transferred asset in principle, which may be reduced by the temporary tax legislation (eg, a tax rate of 1.5% is currently applied for ownership transfers of land).
Stamp duty is due on various documents executed in Japan, normally including purchase agreements for real estate. The tax amount ultimately depends on the nature of the agreement and the contractual amount (eg, a purchase agreement of real estate with a contractual amount of more than JPY 5 billion is subject to JPY 600,000 in stamp duty, which has been reduced to JPY 480,000 under the temporary tax legislation).
Japanese consumption tax is normally imposed at a rate of 10% on the acquisition of real estate located in Japan, except for land.
In relation to capital gains derived from the disposal of real estate, Japanese resident companies are subject to Japanese corporate tax and relevant local taxes at the effective corporate tax rate, which is approximately between 30% and 35%, depending on the size of the taxpayer (eg, capital amount). Non-resident companies are subject to corporate tax on capital gains derived from the disposal of real estate located in Japan at a rate of approximately 26%, assuming that they do not have a permanent establishment in Japan. Non-resident companies are also subject to Japanese withholding income tax at a rate of 10.21% on the consideration received for a disposal of real estate located in Japan. The withheld income can subsequently be credited against corporate taxes by filing a tax return in Japan.