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Notes on court auctions of real estate

Auction

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Bidding

Upon selecting an asset, one goes to the court that has the jurisdiction, receives the paper and envelope for bidding from the enforcement officer. There may be several court auctions going on at the same time, so bidder must be careful to which property to bid; which must be the minimum bid price or above. One may directly submit the bid to the enforcement officer, or mail it; on the envelop that contains the bid one writes the bid opening date. The mail must arrive before the due. Once submitted bid cannot be revised or cancelled. Bidder must also provide the earnest money deposit, usually 20% of the base bid price, but sometimes more or less; check with the announcement. The highest bidder wins. Others except the second best bidder get the deposits back.

Earnest money deposit

A guarantee deposit is required for all bidders. It is usually 20% of the base bid price, but not necessarily; the amount is on the announcement. There are two ways to pay the deposit. One is to make the payment to the court account at a financial institution, take the receipt and other necessary documents to the court. The transfer must settle and be verifiable by the court within the bid period; so an electric transfer may be preferred. Another is to engage in a payment guarantee agreement with a financial institution and submit a certificate to the court.

Inside viewing

An enforcement officer allows prospective bidders to enter and see the inside of building, based on an order given only when the creditor files a motion for it. It cannot be held, when the possessor does not agree to it, the creditor withdraws the motion, or the order is cancelled. It may be cancelled midway when another viewer disrupts the proceedings, or in similar circumstances.

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Base bid price

A court sets the price from the value evaluated by an appraiser upon inspecting the appraisal report, the on-site inspection report, the real estate registry, facts and interests around the property, the appraisal method and calculations.

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Minimum bid price

The minimum price to bid is 80% of the base bid price. The court inspects the appraisal, and on-site inspection reports, and the registry, analyzes the interests involved and facts around the property to insure that the method of appraisal and calculations are proper so that the price level is appropriate.

Price adjustment

A base bid price is adjusted from the market price of regular market for discount factors associated with an auctioned property, such as un-cooperative seller, not seeing the inside, and the need for eviction order.

Marketability adjustment

There may be a particular condition of the property that may affect its marketability; for example, a building may stand on the land leased to a particular party, in which case, the prospective buyer probably is restricted to the land lessee. And the price is adjusted accordingly.

Decision to approve the sale

On the date to decide on the sale previously announced, the court decides whether or not to sell the auctioned property to the highest bidder. Even though in a rare case where the highest bidder does not have the necessary qualifications or there is some impediment in the procedure and the sale is denied, the court usually approves the sale to the highest bidder. One week after the decision is announced, if stakeholders do not appeal, the decision becomes final and the buyer has an obligation to pay for the sale. The buyer may, however, forfeit the deposit and decide not to buy the property. The right to buy the property cannot be assigned, except in some inheritance cases.

Certificate for appropriate buyer

To bid on farm, one must have the certification qualifying one to buy farm from the agricultural committee or the prefectural governor.

Payment for the property

The buyer makes the payment for the property to the court, deducting the earnest money deposit from the bid price. Unless the buyer makes the payment before the due date, she or he loses the right to buy the property and the deposit. The buyer must also pay for registration of ownership conveyance, stamps, filing of eviction order, carryover liabilities, disposal of leftover matters and other necessary fees. Within a month after a sale decision by the court, a court clerk sets the due date for payment, and notifies the buyer via special mail. The actual payment may be made from a financial institution to the deposit account of the court, take the receipt document to the court, in cash directly delivered to the court, or to a branch of Bank of Japan the court designates and take the receipt certificate to the court. When the buyer is also the creditor, the balance of payment, after deducting the deposit and the distribution to be received by the buyer, may be made; but the buyer must seek the approval from the court before the sale decision finalizes.

Ownership conveyance to the buyer

The buyer obtains the ownership of the property upon completely paying for the property. The court sends to the buyer a notice for payment due and a fund transfer form. Using the form, the buyer makes the payment to the designated bank account. Submitting the necessary documents to the court, the buyer obtains the receipt from the court, which makes the buyer the legally rightful owner of the property. The court clerk asks the legal affairs bureau to register the conveyance of property, from the previous owner to the buyer, and to eliminate registration of seizure or mortgage; the registration may require a payment of registration charge.

Registration tax

Registration tax for a transfer of property ownership may be eased for an individual buyer of a residential asset in court auction. Requirements are that; the buyer is to live in the building, the floor area is 50 sq. meters or more, and it is relatively new.

Opening bids

After the bid period, on the predetermined date, an enforcement officer opens the bid envelopes at the court. The court keeps the deposit of the highest bidder and returns deposits for all others.

Case number

A court assigns a case number to each case; to make an inquiry to a court one should have this number. For example, you may see something like this: 事件番号 東京地方裁判所立川支部 平成26年(ヶ)第1234号; which translates to; 事件=case, event, 番号=number, 東京=Tokyo, 地方=district, local area, 裁判所=court, 立川=Tachikawa, a city in western Tokyo, 支部=branch, 平成=Heisei (the actual number starts here), 年=year (平成26年 is 2014, convert any year from this; 昭和 Showa 60年 is 1985), ヶ=is just one Katakana character, read as “ke”, as a court code for classification, signifying the case is one of mortgage foreclosure, shown (M) for mortgage on 981.jp; another relevant to court auctions is ヌ=”nu” for other enforcement cases such for tax default, court decisions and notarized deed, shown (O) for others on 981.jp, 第 and 号 together means Number which may not appear on 981.jp; so in total, Case number Tokyo District Court Tachikawa 2014(M)1234.

Tri-set court documents

On-site inspection report of current conditions, appraisal report, and property descriptions are important court documents that describes relevant facts for a bidder, and are available in a single file at the court, and online in Japanese at BIT, of the Supreme Court of Japan, and at 981.jp. 1. Research report indicates current conditions of the property such as current land classification, type and structure of the building, names and rights of possessors, if any, and has some photographs of the property. 2. Appraisal report describes the neighborhood or surrounding conditions, and diagrams of the property as well as the appraisal value. 3. Property descriptions indicate any interests on the property, such as lease that the buyer must carry on or superficies when land or building is sold separately.

On-site inspection

As ordered by the court, an enforcement officer investigates the physical condition, possession of the property, rights of possessor, prepares the inspection report, and submits it to the court. The report contains the current land classification, type and structure of building, other current condition of the property, names and rights of current possessors, and photographs of the property.

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Appraisal report

A court-appointed real estate appraiser prepares the report containing the appraisal value of the property, an outline of the surrounding conditions, and a diagram of the property. Bases for the evaluation, current conditions of the property, legal relationship and regulations involved are described.

Property descriptions

A court clerk outlines pertinent information about interests in the property including those that the buyer must take over. The clerk prepares the document based on records. When a building and land are sold separately, it may describe whether the statutory superficies may be established. It carries little force, however, and it does not define nor fix any rights, nor determine the court’s position. After the document is prepared, interests on the property may change. It has the name of court clerk who prepared it, the court, the case number, the date it was prepared, the summary description, information about the statutory superficies if applicable, rights of others to the buyer, the property occupancy, and other relevant matters.

Property summary

It describes what is on sale; for example, only a building, all or part of ownership. Each property has a number assigned.

Court decision to initiate the auction process and the property seizure

When a court receives a filing for judicial foreclosure or compulsory auction, upon finding the filing to be proper, it makes a decision to initiate the auction process and announces a seizure of the property. With the decision, a court clerk asks the Legal Affairs Bureau for the property to register the fact of seizure on the property registry, and notifies the debtor and the owner of the property of the decision.

Silent auction

After accepting bids for a certain period set by a court clerk, the winner is picked upon opening all of the bids.

Announcement of silent auction

An announcement is made on an announcement board at the court two weeks before the start of bid period. It contains important information such as the property to be auctioned, the bid period, the date, time and place of bid opening, the base bid price, the minimum bid price, the amount and the payment method of the earnest money deposit. A prospective bidder first looks at this announcement to see if he or she wants to bid on the property. A copy of the announcement is attached on the Tri-set provided in the BIT system of the Supreme Court of Japan, linked to the 981.jp. Many courts also inform the public through newspaper and real estate magazines.

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Special sale

Special sale applies only after the silent auction fails. An enforcement officer also conducts a special sale based on actions by a court clerk. Special sale may be held along with a silent auction on condition that no legally proper bid is filed in the silent auction, or upon a filing by the creditor when there is no bid even in conditional special sale. The first bidder within the period of special sale obtains the right to buy the property. When more than one bidder tender for the same property at the same time, the buyer is chosen by lottery. Prospective buyer in special sale also must go to the enforcement officer’s room in the court, providing an evidence of qualification to be a buyer, and the deposit. The bid must be at least the minimum bid price.

Highest bidder, buyer

The highest bidder is one so affirmed by the enforcement officer upon legally submitting a bid within the bid period. The buyer is one so affirmed by the enforcement officer in a special sale submitting legal tender to purchase the property in the sale period at or above the minimum bid price before anyone else.

Mortgage

To draw a mortgage loan for a property in an auction process, the bidder must file for it to the court before making the payment for the property. A copy of mortgage agreement with the lender, and a designation of judicial scrivener or attorney who would register the property signed by the bidder and the lender are required. The filing should be made about a week before the payment due. And for some of you residing in Japan, there may be a low-rate loan available from the Japan Housing Finance Agency; to apply you need the documents from the court.

Formal auction

All of court auctions based on lien of retention, provisions of civil and commercial codes. They are to be carried out as in a foreclosure auction unless inappropriate.

Withdrawing a motion for auction

A creditor who filed for auction withdraws the motion; which is allowed until the payment for the property is made; however, to withdraw after the enforcement officer picks the bid winner, the bid winner or the buyer and the second best bidder must agree to it. To withdraw for certain, the creditor must do so before the bid opening.

Creditor paying for land lease

When only a building on leased land is to be sold, the debtor as owner of the building may fail to pay for the land lease, in which case the land lessor may terminate the lease. Then the building seized to satisfy the credit loses its value. Thus, the creditor may upon obtaining the court permit make the payment as a third party on behalf of the debtor.

Assignment of lease

After a bidder buys a building on leased land in court auction, the land lessor may refuse to assign the lease to the new owner despite lack of any disadvantage for doing so. In such a case, upon a filing by the buyer, the court can provide a permit in place of the lessor’s approval.

Post-auction

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Vacant house or apartment but with some articles left inside

When there are things inside which are not yours, you must ask an enforcement officer for an order paying the advance for costs. Even if the premise was not occupied when the enforcement officer inspected the property, and thus the court documents say it is vacant, it may not actually be so when you buy it and try to move in.

Urging the possessor to move out

In carrying out an eviction order, the enforcement officer verifies that the possessor is the debtor on the enforceable title of obligation, and urges the possessor to vacate the premise specifying an appropriate date by which to move out voluntarily. By making this request public, even if a different person came to occupy the premise by the date, the buyer needs not start the process all over again, and can promptly have the eviction order executed.

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Eviction order

After the buyer makes the payment for the property, upon a motion filed by the buyer within six months and in some cases nine months of the payment, the court orders an eviction of the possessor who does not have any right to occupy it from the building, when it finds the motion to be proper. There is an additional cost for enforcing the order. The order becomes enforceable one week after the order is delivered to the possessor without an appeal. The buyer asks an enforcement officer to execute the order upon filing the necessary papers obtained from a court clerk; also paying for the cost, including for removing furniture and for fees, in advance.

Grace period for eviction

Tenants whose rights are subordinate to those of the mortgagee may continue to live in the building for six months from the date of sale. Tenants of course must pay the rent to the new owner

Possessor's right

If there is a possessor, not an owner, occupying a property, there may be rights of the possessor that may justify the possession.

Possessor's credit

The possessor might have paid for future renovation of the building or for some improvement, which is a viable credit against the buyer. If it is not paid, the possessor may exercise the lien of retention and rightfully keep possession of the building. When a dispute over the amount exists even after negotiations, it must be resolved through legal process. And the amount on the property description may not be accurate.

Carryover liabilities

There may be an accumulation of obligations defaulted by the previous owner, such in monthly service and maintenance fees and renovation reserves, for an apartment, which the auction buyer must pay. Defaulted obligations might have increased from the amount listed on the property description or appraisal report.

Lease right

On property descriptions, there may be listed among the rights that the buyer must take over, the lease right of existing lessee. The buyer must honor the lease, and cannot live in the property oneself; albeit able to receive the rental income. If some rent has been paid in advance, the buyer cannot receive the rent for the corresponding period. And at the termination, the buyer must pay the key deposit, after deducting unpaid rent and undue damage, to the renter. For a lease without specific term, the buyer may negotiate the termination at any time with the renter; or after the term for a term lease; but the buyer must have a justifiable cause for termination such as a need to use the building, and payment for moving out.

Court

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Title of enforceable obligation

An official document expresses the existence of a civil claim that is to be realized by a compulsory enforcement, and defines the range of the claim, and the parties involved, the creditor and the debtor. To have a compulsory enforcement, one must have this document, which can be in various forms; court decision and court order for payment are examples.

Execution deed

A deed prepared by a notary public expresses a claim for a certain amount of pecuniary payment, payment in kind, or a certain quantity of negotiable instruments, and a fact that the debtor must face a compulsory enforcement.

Certificate of execution

Compulsory enforcement requires a certificate of execution and a title of enforceable obligation. Even with such a title, a further investigation may be in order to verify the actual effect of the title, and parties to which the title has the effect. The certificate of execution is provided only after such verifications. A court clerk investigates and certifies the validity of the enforcement at the bottom of the title of enforceable obligation other than an execution deed; the notary public who has the execution deed performs the similar function.

Compulsory enforcement

The government enforces the claim to the debtor, based on the creditor with the title of enforceable obligation, when the debtor fails to perform the obligation, such as to make a pecuniary payment or vacate a house, even though the creditor has obtained a court or arbitrage decision for the performance.

Attachment of credit

A creditor tries to collect the credit directly from the third-party obligor of the debtor, such as the employer or the bank. The court that has jurisdiction over the residence of the debtor handles this process. When the address cannot be known, the creditor files a motion to the court of the employer for garnishment, or of the bank, for example. There may be some restrictions to ensure humane livelihood of the debtor. In the filing, the creditor may also ask the court to seek disclosure from third-party obligors about existence or amount of obligations.

Small claim enforcement

When a creditor obtains a title of enforceable obligation, such as a decision of a small claims court, in a small claim procedure of a small claims court, she or he may file for a compulsory execution of the small claim for pecuniary credit, against a salary, deposit and others, to the small claims court, other than to a district court. Basic procedures are the same with those for regular attachment of credit.

Exercising security interest

Two ways to exercise security interest on real estate are court auction of collateral property and seizure of income from the collateral property. Court auction is a way to sell the property and allocate the proceeds to the credit. Seizure of income is to seize the collateral property, have a custodian manage it, and allocate the income from the property to the credit. Security interests must be those with legal claims for payment ahead of other interests, such as mortgage, pledge lien, and preferential liens; and not those only function as security such as mortgage by demise (not set in letters on Japanese laws) and ownership retention, as well as those without priority such as civil retention lien in general. Unlike compulsory enforcement, a creditor does not need a title of enforceable obligation, but only need to provide the registry showing the security interests and other similar evidence; other steps are similar.

Arbitrage decision

Enforcing an arbitrage decision requires obtaining a court decision to allow the compulsory enforcement.

Enforcing a decision of non-japanese court

Enforcing a decision of non-Japanese court: Enforcing a decision of non-Japanese court requires obtaining a court decision to allow the compulsory enforcement.

Final decision

An appeal is no longer allowed. Among different kinds of decisions, the one that a compulsory execution or enforcement is allowed is one that orders a certain kind of payment, pecuniary or otherwise; and not those that require an action or inaction, for example, that from their nature are not proper for court enforcement.

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Legal documents that allow enforcement

Other than a final court decision, there are several legal documents that allow court enforcement. They include a record of in-court arbitrage decision, a public record of debtor agreeing to a claim, a record of family arbitrage, a list of bankruptcy creditors in a court bankruptcy procedure, a rehabilitation creditor list in a court civil rehabilitation procedure, a list of reorganization creditor and security holders in a court corporate reorganization procedure, a record of out-of-court arbitrage that has same effect as an in-court arbitrage decision; consult a qualified attorney for details.

Court order for payment, court ordered debt

Upon a motion by creditor, a court clerk orders the debtor to make a payment. If the debtor does not appeal within two weeks of the order delivery, for thirty days from the two week expiry, the creditor may seek the court to declare a provisional execution. After the declaration, the creditor may seek a compulsory execution.

Decision with a declaration for provisional execution

A court decision allowing a provisional execution may allow a compulsory execution before its finalizing.

Decision requiring a certain form to appeal

ust as with a decision with a declaration for provisional execution, a decision that requires a certain form of appeal to file a complaint against the decision can be a title of enforceable obligation that allows a compulsory execution before finalizing, except when the decision is such that it becomes effective only after finalizing, such as the delivery order of the Civil Execution Act Article 83.

Distribution

The court distributes the proceeds from auction sale to the creditors according to preferential orders determined by legal provisions. In general, secured creditors such as those with mortgages have higher priory over general creditors with only titles of enforceable obligations. And mortgagees with earlier date of registration have priorities over those with later dates. General creditors with titles of enforceable obligations are usually treated equally. Creditors must file their rights to the court and be accepted by the court beforehand to receive distributions.

Prerequisites for compulsory enforcement

To initiate and sustain a compulsory enforcement, a creditor must file with a title of enforceable obligation and have following conditions fulfilled:
i) the original of the title of enforceable obligation and other necessary documents have been delivered to the debtor;
ii) if the credit matures after a certain period, the period has passed, so the claim exists;
iii) if the credit depends on performance of an obligation in return, it has been performed;
iv) if the claim is to replace another main claim, the main claim could not be executed; and
v) if the claim depends on the creditor providing collateral, the creditor has provided the collateral.
Enforcement cannot be initiated or sustained, when a procedure for bankruptcy, civil rehabilitation, corporate reorganization, liquidation or special liquidation starts for the debtor.

Asset disclosure

Procedure requires a debtor who fails to oblige a court decision or order to disclose his or her assets. Motion can be filed only by a creditor who has a final court decision or arbitrage decision for a pecuniary payment; and not those with only a court order for payment or a notarized deed. A creditor may seek the disclosure only when she or he could not collect all of the credit in the compulsory execution or other measures to the debtor, or likely not be able to collect the entire credit by enforcing decision to the known assets.

Enforcement on ship

Compulsory enforcement on a ship is mostly as one for real estate.

Property

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Vacant lot

Land is vacant without any building, structure or fixture, and without any encumbrance.

Zoning change

An area may be in a process of being designated to a different category: among residential, commercial, industrial zones, and various subcategories.

Urban restricted district

In an urban planning, constructions and developments of residences in the district are restricted to prevent chaotic urban development. To construct a structure, other than for agriculture and fishery, and public facilities, one must obtain a permit from the prefecture governor, although there may be an exception so one should check with the urban planning section of the municipality.

Provisional re-plotting

When a local government is in a process of revising zoning, it may designate a residential plot to other zone, and allocate a different lot provisionally to the interest-holder in replacement. There may be a day set to start using the land.

Reallocated land

Residential land is allocated to an owner of a different plot of land taken for a public project.

Residential land

It is land for residential, retail shop, factory and other buildings. Registry may not accurately reflect the current state. On residential land, there are various restrictions on urban planning, building code, and other laws and regulations, so one should confirm with a government agency beforehand. There are also farm and forest land that is to be converted to residential land.

Residential zone Class 1

Area protects residential environment. There are also a height restricted residential zone and a mid-to-high rise residential zone. Class 1 in general is more restricted, or more protective of the designation than Class 2.

Semi-residential zone

Residential district along roads promotes development of road network as well as living environment.

Commercial zone

In an area principally for commerce such as retail and consumer services businesses, there may be some residential land as well.

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Semi-commercial zone

Residential area has some commercial entities that serve the residents including supermarkets and providers of other daily services.

Industrial zone

There is a special zone to promote industry. And there is a zone mostly for industry. Residential land may be in an industrial area as well.

Semi-industrial zone

Area has industrial facilities that are not likely to damage the environment much.

Farm

There is a law governing farm land that restricts conversions of the land to other uses, requiring an approval or application, and one who can buy farm is restricted by this law.

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Scenic zone

In an urban planning, a district is designated to preserve natural views. Building a structure that may affect the aim of the zone requires an approval of the prefectural governor. And the height, the building-to-land ratio, the position of walls and other factors are regulated by ordinances.

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Building-to-land ratio

Ratio of area building takes on the surface to the land area must be under the level set for each zoning under the urban planning law. Thus, one must check under the urban planning diagram of each municipality. A ratio may be set higher for a corner plot or a fire-resistant building. And ratios may differ among plots even in the same area.

Floor area ratio

Floor space ratio, plot ratio is total floor area of the building to the land on which it stands. Under the urban planning law, there are various requirements for each zone, as well as for the width of street the building faces.

Discounting

Replacement cost is discounted to arrive at an appropriate value. For a building, the discount rate is usually determined by combining three methods, straight line, fixed rate, and on-site inspection.

Replacement cost

A property is evaluated with its replacement cost at the time of appraisal; such as the vacant land value and the cost of rebuilding. And it is adjusted for the condition of building.

Valuation from the income approach

Applied to a rent-earning asset, it appraised the market value from expected income from the property.

Sales comparison approach

Often used in evaluating apartments, the approach is applied to estimate the value of property by adjusting prices in a number of sales cases in the same or similar region for circumstance, time, location, and asset characteristics.

Specific adjustment

Land is priced by making adjustments to the standard price according to characteristics specific to the particular land.

Current land classification

Actual land classification may differ from that on the registry.

Statutory superficies

When a building and land on which it stands are owned by a single party first, then after an assignment by different parties, under certain conditions, the statutory superficies may established so that the owner of the building may lease the land. In general the lease is for 30 years, and may be only a part of a plot or over two plots necessary and sufficient for the reasonable use of the building. In evaluation, land without the usage right is discounted accordingly; and the discounted value is added to the building.

MLIT land price

It may be aka government, official, public, announced land price or value. The land appraisal committee of the Ministry of Land, Infrastructure, Transport and Tourism based on the law on making land price public, selects standard plots of land in urban and suburban areas, determines regular values as of January 1st each year, and makes them public.

Disclaimer:
Information above is intended for your benefit. While FKR and the 981.jp strive to be accurate and fair, we might not be. And we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability. Any reliance you place on such information is therefore strictly at your own risk. So please consult qualified professionals.

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