Japan Introduces Real Estate Legislation for National Security Purposes | Morgan Lewis

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

The Real Estate Identification and Regulation Act (Act No. 84 of 2021, REIRA)[1] was published on June 23, 2021 and should come into effect no later than one year and three months after publication. It has been reported in the media that REIRA specialties are being selected for naming.[2]

LEGAL PURPOSE AND BACKGROUND

REIRA is the first piece of legislation in Japan designed to ensure national security and defense, as well as the protection of essential infrastructure, with a focus on threats posed by the use of real estate. REIRA gives the government the authority 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 Extended Areas”). The passage of REIRA is the result of exacerbating global trends in real estate regulation aimed at preventing threats to national security, as seen in the expanded case law of the United States Foreign Investment Committee (CFIUS) of February 2020 .

Japan Government Committee Policy Paper[3] Issued prior to the adoption of REIRA, mentions prominent precedents for land acquisitions by non-residents near certain national defense facilities that may pose a threat to their proper functioning.[4] However, the REIRA applies to inbound investment as well as to domestic transactions and acts by domestic parties or Japanese citizens. The competent government body is the Cabinet Secretariat, which is responsible for planning material matters in the Cabinet’s area of ​​responsibility and assists the Prime Minister in doing so.

Currently, there is no law in Japan that requires disclosure of the status of use of land or buildings for national security purposes within the scope of REIRA.[5] The Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949) imposes post-release reporting requirements on non-residents who acquire real estate in Japan (but, if acquired in the form of securities, typically in the form of fiduciary rights on the domestic seller) However, usage status does not have to be disclosed in the reporting.[6]

MECHANISM OF THE REIRA REGULATION – BASIC CONCEPTS

The REIRA regulates land and buildings (real estate) that are located in areas that are identified in ministerial notices (kokuji). Such designated areas are divided into two categories: surveillance areas and extended surveillance areas.

The monitoring areas are areas that are designated as such. Surveillance areas may be designated as such if (1) the location of the area is within approximately 1,000 meters of the boundaries of the Sensitive Facilities location (defined below) or on the border islands (as defined below); or (2) it is deemed necessary to prevent any use of the property in such areas that might impair the functioning of the sensitive facilities or the border islands.

The enhanced monitoring areas are areas that are identified as such under the monitoring areas. The reinforced surveillance areas can be designated if it is difficult to find or set up alternatives to the functions of the sensitive facilities or the border islands and these functions are of considerable importance or can easily be impaired.

“Sensitive Facilities” means defense facilities, Japanese Coast Guard facilities and facilities to be identified in Ministerial Communications (kokuji). For the item to be reported, the Policy Paper cites nuclear power plants, cable landing stations for submarine communication cables and airports for private and military use as examples,[7] REIRA does not give an example, but provides the overriding requirement for the designation. This requirement is that the functions of such facilities are essential to the protection of the life and property of Japanese citizens. For the purposes of interpreting these requirements, the Policy Paper suggests referring to the entities identified in Article 102 (1) of the Act to Protect Japanese Citizens from Attack by Violence (Act No. 112 of 2004).[8] A higher-level list of designated facilities are power plants and substations, gas supply facilities, water supply facilities, railway facilities, telecommunication conversion facilities, transmission stations, docks, airports, dams and facilities for handling dangerous products.

The “boundary of the offshore islands” means offshore islands on which there is a state administrative line, on the basis of which the border is determined (essentially 12 nautical miles from this line).

For the sake of readability, the properties located in the monitoring areas and the extended monitoring areas are hereinafter referred to as “designated properties”.

COMMON RULES

The common regulation for surveillance areas and extended surveillance areas provides that both areas (ie designated properties) are subject to a review and investigation with regard to the usage status. To this end, the Japanese government is empowered to

  • Obtain information about the name, address and other information provided for in the Enabling Ordinance – from the state government (for example, information entered in the land register) or from the local government (for example, residential information registered with the local government) in relation to persons who own the Designated Real Estate use or are otherwise involved in such use;
  • soliciting individuals who use or are otherwise involved in such use of the Designated Real Estate to respond to questions and submit materials;
  • after consultation with the Council for Real Estate Use, make recommendations to the persons who use the designated real estate, to cease this use or to take other necessary measures if these persons prevent the fulfillment of the functions of the sensitive facilities or the border islands, or there are obvious threats to the foregoing; and
  • Issue an order to comply with the recommendation if the addressee does not comply with the recommendation for no good reason (violation of this point can result in criminal liability, imprisonment with an obligation to work) [two years at maximum,] and / or a two million yen fine.)

In view of the possible direct restriction on the use of real estate, which can result from the recommendation and the order described in the last two bullet points above, the REIRA offers a legal put option with owners of the real estate. Unless there are special circumstances to the contrary, the government must buy Designated Real Estate in accordance with the recommendation or the arrangement if its owner offers to sell this Designated Real Estate, because such a recommendation or arrangement calls for the use of such Designated Real Estate.

SPECIFIC RULES FOR THE EXTENDED SURVEILLANCE AREAS

The rules specific to the Enhanced Monitoring Areas are restrictions on transactions that involve prior reporting of transactions with subsequent review and investigation. Parties to a sales and purchase agreement for the designated properties within the Enhanced Monitoring Areas must provide the government in advance with (1) the name, address and representative (for companies) of the parties; (2) Location and areas of the Designated Real Estate; (3) the intended use after the transaction; and (4) other matters to be specified in the Enabling Ordinance (violation of the duty to report or false reports can have criminal consequences, imprisonment with duty to work [six months at maximum] or a fine of one million yen). The government will review the reported matters and, if necessary, carry out further investigations as described in points 1 and 2 above under “Common rules”.

IMPACT ON INBOUND INVESTMENT

While the background to this legislation is that inbound property purchases are questionable from a national security perspective, there are no REIRA provisions aimed at inbound investment or different treatment between non-residents and residents. In addition, the policy paper states that REIRA adopts the principle of non-discrimination against non-residents and explains the basic position of the Japanese government to welcome in-depth investments that would contribute to the growth of the Japanese economy in the future.

The authorizing ordinances and the corresponding designation of the monitoring areas and the enhanced monitoring areas are decisive for the final picture of REIRA. In addition, the way in which the government exercises its discretion in enforcing the REIRA would be an essential factor in determining how the REIRA will work in practice.[9]

Before the REIRA comes into force, the enabling ordinances will be published and a public comment procedure will be carried out on their conclusion. The REIRA entry into force date is no later than September 2022, that is, one year and three months after the date of publication. Nonresidents looking for real estate investment opportunities in Japan need to keep an eye on future developments.

[3] The policy paper on the proposed bill is dated December 24, 2020 and issued by the Advisory Committee on Assessing the Nation’s Land Use.

[4] The precedents mentioned are the foreign direct investment for the acquisition of neighboring land of the Japanese naval forces in Tsushima-shi, Nagasaki-ken, and the acquisition of neighboring land of the air defense forces in Chitose-shi. Hokkaido. See page 3 in the provisional English translation.

[5] The National Land Use Planning Act (Act No. 92 of 1974, NLUPA) prescribes pre- or post-notification requirements for real estate transactions of a certain size; However, disclosure of information under the NLUPA is limited according to its purpose in order to avoid negative effects on Japanese society due to speculative real estate transactions or a “real estate bubble”. The Forest Act (Act No. 249 of 1951) imposes certain restrictions on the management or development of forests for the purpose of safeguarding forest functions.

[6] The Agricultural Land Act (Act No. 249 of 1952, AAL) prescribes licensing requirements for trade in agricultural land for the purpose of maintaining the functions of these areas; However, the AAL has its own historical background supported by the agricultural system in Japan.

[9] Criticism of REIRA has been leveled in Japan because of concerns about privacy and inappropriately restricting private rights and transactions. One of the reasons for this criticism is the blanket delegation to the enabling ordinances, such as the concept of sensitive facilities.

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