In Japan, like in many other countries, ownership of property and the land on which it is built are separate rights. The land right of a property is either “freehold” or “leasehold.”

Freehold rights (Japanese: 所有権 / shoyuken) are the full ownership of the land and the structure(s) built on the land. In the case of apartment complexes and condominiums, each unit comes with the ownership of a portion of the land below the building.

Leasehold rights (Japanese: 借地権 / shakuchiken) allow the owner of a built structure (usually an apartment or condo, but in some cases a whole building) to rent the land on which the structure stands for a fixed term. So they own the building, but not the land on which it stands. The property is further subject to annual land rent.

Foreign residents can buy and own both property and land in Japan, regardless of their nationality or country of origin — there are no residency requirements for buying real estate in Japan. Both types of properties are available to anyone.

While leasehold is the most common form of apartment/condo ownership in some capitals around the world, e.g. London, freehold rights are the most prevalent in Tokyo and other parts of Japan.

Pros and cons of freehold and leasehold rights

Freehold

Freehold is usually considered the preferred form of ownership, as it gives absolute possession and control of both land and buildings. This directly translates into long-term residual land value, which historically has not diminished in Tokyo, while buildings, on the other hand, depreciate fast as they age. As it is the most common type of ownership, loan applications and the buying process are faster than those for a leasehold property.

A disadvantage is that freehold properties are more expensive than leasehold units, as they include the land price. The new owners also need to pay higher property taxes as the land is taxed (these rates can vary by ward), and other taxes that are not required for leasehold estates. However, land and property prices in Japan are undervalued by the ward office, and the annual property tax is usually not an obstacle for homeowners.

Leasehold

These properties also hold certain advantages, depending on the owner’s usage. Their price is approximately 30% lower than that of freehold estates on average. And the landowner, not the building owner, is responsible for paying land acquisition, fixed asset and potentially other taxes annually. This means that someone who buys a leasehold unit or building as an investment property can yield higher rates of return on rents.

But obvious disadvantages remain: the land does not belong to you, and a monthly or annual land rent needs to be paid to the lessor. Leasehold properties also tend to be less popular than freehold, which can make reselling difficult. Finally, banks are less likely to sign a mortgage for a leasehold estate due to the lower long-term property value, as buildings depreciate fast in Japan.

Different types of leasehold rights in Japan

If you do happen to be interested in a leasehold object, it is vital to make sure you understand the different types of leasehold rights that are applied in Japan.

Until 1992, only the old leasehold (Japanese: 旧借地権 / kyushakuchiken) was in place. It fixed the lease term to 30 years for concrete (often including Japanese apartment “mansions”) and 20 years for wooden structures (including Japanese flats). Most importantly, the landlord could refuse to renew a leaseholder’s lease.

In 1992, the new, “normal leasehold law” (Japanese: 普通借地権 / futsushakuchiken) was enacted. It stipulates that lease terms must be 30 years, regardless of property type, and that the first renewal term must be 20 years. Any following term is locked in at 10 years. Landowners still reserve the right to refuse the renewal of a lease, but at least they must now provide a justification that describes the intended use of the land.

Two different types of rights are given for the normal leasehold law: surface rights (Japanese: 地上権 / chijoken) and rights to lease (Japanese: 賃借権 / chinshakuken). The former is usually applied to leasehold apartments/condos and allows the leaseholder to freely sell or rent out the building property. The latter usually applies to detached houses built on leasehold land, and stipulates that the leaseholder must obtain the landlord’s permission before transferring, sub-leasing, rebuilding, or redeveloping any structures.

Furthermore, a fixed-term (Japanese: 定期借地権 / teikishakuchiken) leasehold exists. Here, the period is fixed to one term of 50 years, often requiring the building owner to demolish the structure at the end of the term, at their own expense.

Shrines, temples and other final considerations

A leasehold might be cheaper than a freehold, and suitable for buyers looking into holding an investment property for a short term. For most homebuyers who potentially want to pass on the property to the next generation though, a freehold would be the obvious choice.

However, special consideration might be given to temples, churches, and shrines as landlords. They sometimes own expansive areas of land on which they set plots for leasehold purposes aside. They are thought to be landowners that renew lease terms for tenants reliably, while on the other hand land leased from an individual might be passed on with an inheritance—making lease renewals less predictable.

By Mareike Dornhege

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