Leasehold Property in Japan: What to Check Before Buying
Owning the building does not always mean owning the land
Tokyo has many properties where the purchaser owns a building or condominium interest while the underlying land is leased from a landowner. Such properties may appear cheaper than freehold alternatives, but the price difference alone does not determine value. Leasehold property introduces additional issues including ground rent, remaining term, renewal provisions, consent requirements and financing.
The termination structure matters for fixed-term leaseholds
According to MLIT’s explanation of Japan’s Act on Land and Building Leases, a general fixed-term land lease can be established for 50 years or longer with provisions eliminating renewal, extension resulting from reconstruction and the building owner’s right to demand purchase of the building. Separate rules apply to fixed-term business land leases used for buildings devoted to business purposes. The label “leasehold” therefore does not tell a buyer enough about the underlying rights.
Key due-diligence questions
- Is the right an ordinary or fixed-term land lease?
- What is the original and remaining term?
- How much is the ground rent and how can it be revised?
- Are renewal, transfer or consent fees payable?
- Is landowner consent required for sale or reconstruction?
- What happens to the building when the term expires?
- Will lenders finance the property?
For a used condominium on a fixed-term lease, the remaining land term can become particularly important to resale value. Investors should consider not only their own intended holding period but also how many years will remain when a future purchaser enters the market.
Separate land value from building-use value
A freehold owner retains an interest in the underlying land even as a building ages. A fixed-term leasehold must instead be valued with eventual expiration in mind. On the other hand, it can provide access to a valuable central Tokyo location without paying the full freehold land price.
Before purchasing, review the land lease itself, registry information, important-matters disclosure, supplementary agreements with the landowner and the history of ground-rent revisions. Leasehold property should be treated as a distinct combination of contractual land-use rights and building ownership rather than simply a discounted freehold property.