While the most common form of land and property ownership in Japan is ‘freehold’ (所有権 shoyuken) it is also possible to negotiate a ‘leasehold’ (借地権 shakuchiken) agreement.
The main difference between ‘freehold’ and ‘leasehold’ is that, under a leasehold agreement, the owner of the land under which the property is build can be different to the owner of the property.
An example of this can be found close to Niseko’s Annupuri ski field. The group that owns the Annupuri resort ‘Chuo Bus Company’ also owns much of the surrounding land. Many of the pension houses, restaurants and bars that have been build close to the resort have all entered a leasehold agreement.
In urban areas such as Tokyo and Osaka you might find properties that are up to 35% cheaper than regular listings as the leasehold will usually last for a set period. It is worth noting that there are different types of leasehold categorized as either ‘Old Leasehold’ or ‘New Leasehold’.
1. Old Leasehold (旧借地権 kyushakuchiken)
These leaseholds are becoming less common as a new law introduced in 1992 changed the way the leaseholds are negotiated.
However under these laws, concrete or steel structures used to build apartment condominiums had an initial fixed lease term of thirty years. Wooden structures normally used for houses had a fixed term of twenty years.
The main disadvantage of this law and the reason it was changed was because the landowner had the right to refuse a renewal of the lease agreement. While now uncommon it is worth making sure that you are not entering this style of leasehold agreement.
2. New Leasehold (普通借地権 futsushakuchiken)
The introduction of the ‘New Leasehold’ law in 1992 scrapped the variable contract length based on the structural material that is used. Now all properties entering a leasehold agreement will have an initial period of thirty years. Renewals are possible with the next being twenty years taking you to a possible fifty years. After this point renewals are set at ten year intervals.
It is worth noting that despite the improved function of the New Leasehold renewal system, the landowner still has the right to deny renewals after the thirty year period. However, the landowner now has to present proof of how they will use the land after contract termination.
3. Types of New Leasehold
There are three mains times of leasehold agreements that can be made under the new laws. The first, less common, is called a ‘Fixed Term Leasehold (定期借地権 teikishakuchiken).
This contract sets a fixed period of fifty years and after which time the building owner may be required to demolish the property at their own expense.
More common are the two normal leasehold agreements called the ‘Surface Rights’ (地上権 chijoken) and ‘Rights to Lease’ (賃借権 chinshakuken) agreements.
Surface Rights (地上権 chijoken) agreement enables the leaseholder to either rent or sell the property that has been built on the landlord’s property. This type of agreement is generally used for leasehold apartments.
Right to Lease (賃借権 chinshakuken) agreement differs to the Surface Rights Agreement in that if the leaseholder wants to rent or sell the property they will have to obtain permission from the landowner first. The leaseholder will also have to be granted permission by the landowner if they want to rebuild an existing structure. This type of agreement is mainly used for villas or houses.
4. Advantages and Disadvantages of Leaseholds in Japan
Advantages:
- Prices can range from anywhere between 25% to 50% cheaper than a freehold property.
- The leaseholder does not have to pay annual taxes levied on the land, these include: land acquisition taxes, fixed asset tax or city planning tax.
- As the yearly prices for owning the land are much lower the rental yield on any property will be higher.
Disadvantages:
- Each month the leaseholder will have to pay a fixed amount to the landowner
- The leaseholder does not own the land
- Potential buyers might be put off by the agreement
- Historically, it is harder to secure a loan with a Japanese bank as the property value is lower
Entering Negotiations for a Leasehold Agreement
Negotiations for a leasehold agreement will generally go on for much longer than freehold agreement. It is important to use trusted real estate agents as you will be relying on them to assist with gaining approval from the landowner, negotiating all aspects of the contract including the period and price, and the final signing.
At the start of each leasehold agreement there is normally a ‘Transfer Approval Fee’ (譲渡承諾料 joto-shodakuryo) that is decided by the landlord. This will have to be paid by the leaseholder.
If you are interested in entering a leasehold agreement in Japan please get in touch.
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