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Japan Introduces Real Estate Legislation for National Security Purposes

September 09, 2021

The National Diet of Japan recently passed the Real Estate Investigation and Regulation Act, which is in line with tightening global trends in real estate regulations in order to prevent threats to national security.

The Real Estate Investigation and Regulation Act (Act No. 84 of 2021, REIRA)[1] was published on June 23, 2021, and is to become effective no later than one year and three months from the date of publication. It has been reported in the media that REIRA subject areas are being selected for designation.[2]

Legislative Purpose and Background

The REIRA is the first legislation in Japan designed to ensure national security and defense, as well as the protection of essential infrastructure, with a focus on threats resulting from real estate usage. The REIRA grants the government powers to review and investigate real estate transactions and the status of real estate use (as described below under “Common Regulations” and “Regulations Specific to the Enhanced Monitoring Areas”). The enactment of the REIRA is a result of tightening global trends in real estate regulations, seeking to prevent threats to national security, as seen in the increased Committee on Foreign Investment in the United States (CFIUS) jurisdiction from February 2020.

The Japanese governmental committee policy paper (Policy Paper)[3] issued ahead of the enactment of the REIRA mentions prominent precedents of land acquisition by non-residents near certain national defense facilities, potentially posing threats to their sound operations.[4] However, the REIRA applies to inbound investment as well as domestic transactions and actions by domestic parties or Japanese citizens. The responsible governmental body is the Cabinet Secretariat, which is responsible for planning material matters within the jurisdiction of the Cabinet, thereby supporting the Prime Minister.

Currently, there is no statute in Japan that mandates disclosure of the status of use of land or buildings for national security purposes to the extent of the REIRA.[5] The Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949) imposes post-facto reporting obligations on non-residents who acquire real estate in Japan (but on the resident seller, if acquired in a form of securities, typically, in the form of trust beneficiary rights) but the status of use is not required to be disclosed in the reporting.[6]

Mechanism of the REIRA Regulation – Basic Concepts

The REIRA regulates land and buildings (Real Estate) located in areas designated to be in ministerial notices (kokuji). Such designated areas are in two categories: Monitoring Areas and Enhanced Monitoring Areas.

The Monitoring Areas are areas that are designated as such. Monitoring Areas can be designated as such if (1) the area’s location is within approximately 1,000 meters from the boundaries of the site of the Sensitive Facilities (defined below) or in the Border Outlying Islands (defined below); or (2) it is deemed necessary to prevent any use of the Real Estate in such areas that may adversely affect the functions of the Sensitive Facilities or the Border Outlying Islands.

The Enhanced Monitoring Areas are areas that are designated as such among the Monitoring Areas. The Enhanced Monitoring Areas can be designated if it is difficult to find or put in place alternatives to the functions of the Sensitive Facilities or the Border Outlying Islands and such functions are significantly important or easily harmed.

“Sensitive Facilities” means defense facilities, the facilities of the Japan Coast Guard, and facilities to be designated in ministerial notices (kokuji). For the item for designation, although the Policy Paper provides, as examples, nuclear power plants, cable landing stations of submarine communication cable, and airports for private and defense use,[7] the REIRA does not specify any example but provides the high-level requirement of the designation. Such requirement is that the functions of such facilities are essential for protecting the life and property of Japanese citizens. With respect to the interpretation of these requirements, the Policy Paper suggests referring to the facilities designated under Article 102, Paragraph 1 of the Act on Protection of Japanese Citizen in the Case of Attack by Exercise of Force (Act No. 112 of 2004).[8] A high-level list of designated facilities are power plants and power substations, gas-supply facilities, water-supply facilities, railway facilities, telecommunication conversion facilities, broadcasting stations, mooring facilities, airports, dams, and hazardous product handling facilities.

The “Border Outlying Islands” means outlying islands in which there is a governmental administrative line, based on which the border is set (basically, 12 nautical miles line from such line).

For readability, the Real Estate located in the Monitoring Areas and the Enhanced Monitoring Areas shall be referenced as “Designated Real Estate” below.

Common Regulations

The common regulations for Monitoring Areas and Enhanced Monitoring Areas are that both such areas (i.e., Designated Real Estate) will be subject to review and investigation as to the status of use. For this purpose, the Japanese government is authorized to

  • collect information—within the national government (for example, information registered in the real estate registry) or from the local government (for example, residence information registered with the local government)—on the name, address and other information designated by the enabling ordinance concerning persons using the Designated Real Estate or otherwise involved in such usage;
  • require persons using the Designated Real Estate or otherwise involved in such usage to respond to questions and submit materials;
  • after consultation with the Council of Real Estate Usage, issue recommendations to the persons using the Designated Real Estate to cease such usage or take other necessary measures, if such persons are preventing performance of the functions of the Sensitive Facilities or the Border Outlying Islands, or there is evident threats to the foregoing; and
  • issue an order to comply with the recommendation if the addressee of the recommendation does not follow it without due reason (violation of this item may result in criminal liabilities, imprisonment with work duty [two years at maximum,] and/or a fine of two million yen.)

Given the potential direct restriction on the usage of Real Estate that may result from the recommendation and the order described in the last two bulleted items above, the REIRA provides a statutory put option with owners of the Real Estate. Namely, the government must, unless there is particular circumstances to the contrary, purchase Designated Real Estate subject to the recommendation or the order if its owner offers to sell such Designated Real Estate because of the reason that such recommendation or order significantly disturbs the usage of such Designated Real Estate.

Regulations Specific to the Enhanced Monitoring Areas

The regulation specific to the Enhanced Monitoring Areas is restrictions on transactions, which are prior notifications of transactions followed by review and investigation. Parties to a sale and purchase agreement on the Designated Real Estate within the Enhanced Monitoring Areas must notify the government in advance of (1) name, address, and representative (for entities) of the parties; (2) location and areas of the Designated Real Estate; (3) the purpose of use after the transaction; and (4) other matters to be designated in the enabling ordinance (violation of notification obligation or false notification may result in criminal liabilities, imprisonment with work duty [six months at maximum] or a fine of one million yen). The government will review the notified matters and further investigate as necessary, as described in the first and second bulleted items above under “Common Regulations”.

Impact on Inbound Investment

Although the background of this legislation is inbound real estate acquisition is questionable from a national security viewpoint, there are no REIRA provisions that target inbound investment or set forth different treatment between non-resident and resident. In addition, the Policy Paper explains that the REIRA adopts the principle of no discrimination against non-residents and declares the basic position of the Japanese government as welcoming inbound investments, which would help grow the Japan economy going forward.

The enabling ordinances and relevant designation of the Monitoring Areas and the Enhanced Monitoring Areas will be decisive to define the final picture of the REIRA. Furthermore, how the government exercises its discretion in enforcing the REIRA would be a significant factor in determining how the REIRA will operate in practice.[9]

The enabling ordinances will be released and a public comment procedure for their finalization will take place prior to the effective date of the REIRA. The effective date of the REIRA will be no later than September 2022, being a year and three months from the date of publication. Non-residents seeking opportunities in real estate investment in Japan would need to look at the developments going forward.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Carl Valenstein

Tokyo
Tadao Horibe
Kyoko Nagano

CFIUS Contacts

Washington, DC
Giovanna Cinelli
Kenneth Nunnenkamp
Ulises Pin
Heather C. Sears
Christian Kozlowski
Katelyn Hilferty
Charles Rush
Roland Backhaus



[2] Nikkei Digital version dated August 12, 2021. Japanese version (members only).

[3] The Policy Paper on the proposed legislation is dated December 24, 2020 and issued by the Advisory Committee on Assessment of Nation Land Use.

[4] The precedents referenced are the foreign direct investments made for the acquisition of neighboring land of the Japan Maritime Self-Defense Force in Tsushima-shi, Nagasaki-ken, and the acquisition of neighboring land of the Air Self-Defense Force in Chitose-shi, Hokkaido. Please refer to p.3 in the provisional English translation.

[5] The National Land Use Planning Act (Act No. 92 of 1974, NLUPA) imposes prior or post-facto notification requirements for real estate transactions of certain scale; however, the information disclosure made under the NLUPA is limited as per its purpose to avoid adverse effect on Japanese society resulting from speculative real estate transactions or a “real estate bubble.” The Forest Act (Act No. 249 of 1951) imposes certain restrictions on management or development activities on forests for the purpose of securing forest functions.

[6] The Act on Agricultural Land (Act No. 249 of 1952, AAL) imposes permission requirements for agricultural land transaction for the purpose of preserving functions of such land; however, the AAL has its own historical background supported by the agricultural system in Japan.

[8] P. 10 of the original document (p. 11 of the provisional English translation).

[9] Criticism to the REIRA has been raised in Japan due to concern for privacy and undue restriction on private rights as well as private transactions. One of the reasons for this criticism is blanket delegation to the enabling ordinances, such as the concept of the Sensitive Facilities.