Leasehold Rights in Japan: Advantages and Disadvantages

In Japan, in general, there are two types of land rights associated with residential properties: freehold and leasehold.

Freehold land title refers to a property in which the owner owns the land in perpetuity. There is no time limit on the ownership of the land.

In this article, we will discuss leasehold rights in Japan, including the advantages, disadvantages and the main points you need to know with respect to inheriting these rights and what happens in case the land associated with a leasehold property is sold.

What is a leasehold right?

A land leasehold right is the right to rent land from another person (the landowner) to build or own a building on that land.

In Japanese, a leasehold right is called 借地権 (しゃくちけん) — shakuchi-ken.

There are two types of land lease rights: leasehold rights and superficies.

In the case of a leasehold right, the consent of the landowner is required when selling the building to a third party. Parking lots and material storage areas without buildings are not included in leasehold rights.

In the case of superficies (地上権, chijou-ken, literally “above ground rights”) you can freely sell or sub-lease.

This article will focus on leasehold rights because these rights are the most relevant to buyers of residential properties.

Main characteristics

When you buy a building on land with a leasehold right,
  • The land rights belong to the landowner
  • You must pay rent to the landowner to lease the land
  • You cannot sell buildings on leased land without permission of the landowner
  • You must contact the landowner before re-building on the land
  • The leased land has a contract period
  • When the contract period expires, the land will be returned to the landowner unless you renew the lease
  • The right to the building belongs to you the borrower (the person who is leasing the land); the right to the land belongs to the landowner

Broadly speaking, there are two main types of leasehold rights: Old Land Lease and (New) Land Lease.

Old Land Lease

Japanese: 借地法 (旧法) — しゃくちほう (きゅうほう) — shakuchi-hou (kyuu-hou)

Land leased before August 1992 (Heisei 4) is governed by the Old Land Lease law.

The lease contract period under the Old Land Lease law is fixed, but the lease can be renewed almost in perpetuity.

The default contract periods are fixed by law, depending on the building material used for the structure.

For wooden buildings, the default lease period is 30 years, but can be a minimum of 20 years if agreed between the parties in the lease. The borrower has the right to renew the land lease every 20 years after the initial term.

For steel and reinforced concrete structures, the default lease period is 60 years, but can be a minimum of 30 years if agreed between the parties in the lease. The borrower has the right to renew the lease every 30 years after the initial term.

The Old Land Lease law was thought to be more advantageous to the person borrowing the land because the right to renew the lease was guaranteed, without any option to contractually change the lease terms. This made it difficult for the landowner to regain use of the land once it was leased out and from a public policy point of view was thought to prevent diversification in land use.

It’s important to note that it is not uncommon to see current listings for properties being sold with Old Land Lease rights.

Here is an example of a property currently for sale, as of the publication date of this article, with Old Leasehold rights. This is a spacious whole building holiday house in Rokkosancho, Kobe, with a 180 degree panoramic view overlooking Osaka Bay, Kobe Port, Awaji Island, and Wakayama from the deck. List price is ¥88 million. Please click on the image to see the full listing. Image: Community Lab

Land Lease

Japanese: 借地借家法 — しゃくちしゃっかほう — shakuchi shakka hou

Land leased after August 1992 (Heisei 4) is governed by the Land Lease law.

There are five types of land leases under the new Land Lease law, divided into ordinary lease rights and fixed-term lease rights.

The main difference to know between the Old Land Lease law and ordinary land lease rights under the (new) Land Lease law is the duration of the initial lease period, which in the case of the Old Land Lease law, depended on the building structure.

If you are buying residential property in Japan with leasehold rights, you are most likely to encounter leases under the

  • Old Land Lease law,
  • Ordinary land leases (under the new law), and
  • Fixed-term land leases (under the new law)

1. Ordinary Land Lease Right

Japanese: 普通借地権

With an ordinary land lease right, the lease contract period is fixed but in practice can be renewed almost in perpetuity. The initial period is 30 years, regardless of the building structure. The lease can then be renewed for 20 years at the first renewal, then ten years thereafter. This differs from the the Old Land Lease in that under the old law, the initial lease period is different depending on the building structure.

2. Fixed-term Land Lease Right (General Fixed-Term Land Lease Right)

Japanese: 定期借地権 (一般定期借地権)

Land leased out to be used for single-family homes and condominiums can be leased out with a fixed-term land lease. The contract period is 50 years or more. There is no right of renewal and once the contract ends, the land is returned to the owner as a vacant lot.

3.  Fixed-term Land Lease Right for Business

Japanese: 事業用定期借地権

This type of lease right is used to rent land out for business use (stores, commercial facilities, etc.). The lease contract period is ten years or more and less than 50 years. Before the revision of the new Land Lease law on January 1, 2008, the lease contract period was set at 10 years or more and 20 years or less. At the expiry of the lease period, the land is returned to the owner as a vacant lot.

4.  Land lease right with special contract for building transfer

Japanese: 建物譲渡特約付借地権

In this type of lease right, the landowner agrees to buy the building for a price determined in the lease contract. The lease period is 30 years or more.

5. Land lease right for temporary use

Japanese: 一時使用目的の借地権

This type of land lease is used to temporarily rent land at a temporary construction office or prefabricated warehouse.

Advantages of buying leasehold properties

The main advantages of buying a property with leasehold rights are with respect to price and convenience. With a leasehold right, you have less freedom as the owner of the property because you don’t own the land and must get the landowner’s consent before renovating it. However, there are a few advantages:

  • You do not have to pay property tax (fixed-asset tax) or city planning tax on land because you do not own the land. However, building(s) on the land will be taxed.
  • If your leasehold falls under the Old Land Lease law or is an ordinary land lease right (under the new law), you have the right to renew the lease almost indefinitely.
  • Leasehold properties tend to be situated in convenient locations.
  • Buildings sold with a leasehold tend to be priced lower than those with land ownership.

Disadvantages of buying leasehold properties

However, there are also significant disadvantages to properties built on land with leasehold rights.

  • You have to pay rent on the land because you do not own the land.
  • You may be required to pay a renewal fee when you renew the leasehold contract.
  • The landowner’s consent is required when selling the building and a transfer approval fee is usually required.
  • You must get the landowner’s consent before adding onto or renovating the property.
  • There can be a substantial fee associated with changing the name on the leasehold when you purchase the property.
  • Leasehold rights are difficult to sell to a third party.

Can you inherit a leasehold right?

An in depth discuss of this topic is beyond the scope of this article, but the short answer is yes, you can inherit a leasehold right.

Land lease rights can be inherited as property and the content of the land lease contract will be inherited as as. The consent of the landowner is not required; there is also no need to pay a consent fee or lease renewal fee. However, the inheritor should register the building in their name.

What if the owner of a leasehold property sells the land?

If you are registered as the owner of a property that is subject to a leasehold you retain all your rights to the property, even if the land is sold. You will continue to have the rights associated with your leasehold. This point highlights the importance of properly registering ownership of your property.

FAQs About Buying Property in Japan

Can a foreigner buy property in Japan?

Yes. You can buy property in Japan regardless of your nationality or country of origin. There are also no residency requirements for buying real estate in Japan. Securing financing as a resident foreigner is more complicated. For info on financing, please see Basic Requirements for Getting a Mortgage as a Foreigner in Japan

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Lead photo: A part of Nakasendo trail, the pathway connecting Kyoto and Tokyo via iStock 646596398