This content is from: Local Insights

Japan

On August 1 2003 the Japanese government promulgated certain amendments to the Civil Code of Japan and the Civil Execution Law in connection with the foreclosure of mortgaged properties.

Compulsory management

Before the amendments, upon a mortgage-borrower's default, a mortgage-lender could apply to the court for the sale of the mortgaged property by way of auction and for the right to collect rents from specific tenant(s) after an attachment procedure. However, under a mortgage foreclosure, a mortgage-lender had no authority to manage mortgaged properties and, as a result, certain properties were not properly maintained and rental income fell.

The amendments create a compulsory management procedure, where a mortgage-lender may apply to the court to appoint a manager to manage property and collect rental income. The court appointed manager is required to distribute proceeds it receives to the mortgage-lender in accordance with the Civil Execution Law.

Vacate suspension

Before the amendments, where the mortgage-lender had registered the mortgage before the perfection of a lease, after the sale of a mortgaged property, a tenant, so long as the lease was of a short term, had a right to occupy for the remainder of the leased term. However, in many cases tenants abused this right by requesting unreasonable compensation from mortgage-lenders to vacate the premises.

The amendments abolished this provision and created the right of vacate suspension. Under the amendments, where a mortgage-lender has registered the mortgage prior to the perfection of a lease, after the sale of the mortgaged property, a tenant typically has a right to occupy for six months.

Mortgage extinguishment offer

Before the amendments, a third party that acquired a mortgaged property was generally able to make a mortgage extinguishment offer to the mortgage-lender to release the mortgage. The mortgage-lender was required to accept the offer for the amount set out in the offer and release its mortgage on the property or sell the mortgaged property by way of auction. If the mortgage-lender decided to sell the mortgaged property and was able to sell it for at least 110% of the offered amount, the mortgage-lender applied the proceeds of sale in satisfaction of the mortgage and paid to the third party any remaining amount. If, however, the mortgage-lender could not sell the mortgaged property for at least 110% of the offered amount, the mortgage-lender was required to purchase the property itself. The mortgage-lender was required to provide at least one month's notice to the third party before commencing the mortgage foreclosure, and mortgage extinguishment offers could be given within one month thereafter. In many cases, a mortgage-lender was forced to accept the mortgage extinguishment offer because it was difficult to sell the property at the 10% premium to the offered amount.

Following the amendments, mortgage extinguishment offers may only be given prior to the time when the mortgaged property is attached by an order of the court pursuant to a mortgage foreclosure procedure. A mortgage-lender may also reject the mortgage extinguishment offer if it sells the property by way of auction within two months.

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