Key Checkpoints for Purchase Contracts and Property Disclosures: What to Verify Before Signing

Why Reviewing Contracts Is Critical

Purchasing an income property is one of the largest transactions most people will ever make. Discovering unfavorable terms after signing is not an option.

Japanese law requires that a licensed real estate transaction specialist provide a "Property Disclosure" (Important Matters Explanation) before the contract. However, simply listening to the explanation does not guarantee full understanding. First-time buyers of income properties, in particular, may sign without fully grasping the numerous technical terms and their significance.

This article explains the key points to verify in both the purchase contract and the property disclosure document from an investor's perspective.

Key Items in the Property Disclosure Document

The property disclosure document details the property's characteristics and transaction terms. A licensed specialist is legally required to explain it to the buyer before signing.

Property Rights

Ownership verification

Confirm that the registered owner matches the seller. For co-owned properties, verify that all co-owners have consented to the sale and that ownership shares are clearly stated.

Mortgages and liens

If a mortgage exists on the property, confirm it will be discharged before handover. Receiving a property with an outstanding mortgage exposes you to the risk of foreclosure if the seller defaults on their loan.

Leasehold rights

If the land is leased, review the lease terms in detail (ground rent, contract period, renewal conditions). Investing in leasehold properties carries different risks than freehold properties.

Legal Restrictions

Zoning and building coverage/floor area ratios

Zoning designations restrict building use and scale. Check whether the current building is "legally non-conforming" (a building that does not meet current standards but is legally permitted to remain). If so, rebuilding to the same scale may not be possible.

Road access requirements

Verify that the property has at least 2 meters of frontage on a road at least 4 meters wide. Properties that do not meet this requirement cannot be rebuilt. Also review risks of non-rebuildable properties.

Other legal restrictions

• Whether the property falls within a planned city road zone
• Whether it is in a landslide warning area or flood risk zone
• Whether Cultural Properties Protection Act restrictions apply

Building Condition

Building inspection (home inspection) status

Since the 2018 legal revision, the property disclosure must state whether a building inspection was conducted and its results. If an inspection was performed, be sure to review the findings.

Asbestos and seismic assessment information

Asbestos presence and seismic assessment status are also required disclosure items. See also investment decisions for pre-1981 vs. post-1981 earthquake standards.

Utilities and Infrastructure

Verify the status of water, sewage, electricity, and gas. Pay particular attention to:

• Whether private pipes (running through others' land) exist
• If a septic system is used, what the maintenance costs are
• If propane gas is used, whether there are binding terms with the supplier

Management Details (for Condominiums)

When purchasing a condominium unit, also verify:

• Management fee and repair reserve amounts, and any arrears
• Major repair history and future plans
• HOA meeting minutes (check for repair reserve increase resolutions)
• Management rules (restrictions on short-term rentals, pets, etc.)

Key Items in the Purchase Contract

After the property disclosure, you sign the purchase contract. Items requiring particular attention include:

Purchase Price and Payment Terms

Earnest money amount and handling

Earnest money is typically 5-10% of the purchase price. Confirm that it is classified as "cancellation earnest money." This allows the buyer to cancel by forfeiting the deposit, while the seller can cancel by returning double the deposit.

Payment schedule

Verify the timing and method for the remaining balance payment, and the loan approval deadline if financing is involved.

Handover Conditions

Handover date and as-is delivery

Confirm the handover date is clearly stated. Income properties are typically delivered "as-is," but clarify exactly what this includes (remaining items, equipment, etc.).

Transfer of lease agreements

For income properties, existing tenant lease agreements transfer to the buyer. Review the terms being transferred (rent, security deposits, special provisions) in advance and cross-reference them with the rent roll.

Security deposit transfer

Security deposits held from tenants transfer with the property. Verify the total deposit amount is accurately stated. This amount is typically offset against the purchase price.

Contractual Non-Conformity Liability

The 2020 Civil Code revision replaced the former "defect liability" with "contractual non-conformity liability."

Key points to verify

• Liability period: How many months after handover the seller remains liable
• Scope of exemption: Whether a clause fully exempts the seller from liability
• Notification deadline: How many days after discovery you must notify the seller

If the seller is a licensed real estate business, they must bear liability for at least two years after handover by law. However, individual sellers may contractually exempt themselves. See also the basics of defect liability.

Special Provisions

Special provisions at the end of the contract are extremely important. They contain deal-specific terms not found in standard contract forms, and overlooking them can lead to major disputes.

Common special provisions

• Financing contingency (loan contingency): A clause allowing unconditional contract cancellation if financing is not approved. Always ensure this is included
• Survey requirements: Settlement method if actual measurements differ from registered area
• Demolition cost responsibility: Cost allocation if the land is to be delivered vacant
• Remaining items: Handling of equipment and furniture in the building

Penalties and Termination Conditions

Verify the penalty amount for contract violations and the conditions for termination. Penalties are typically set at 10-20% of the purchase price.

Essential Pre-Contract Steps

Obtain and Study Documents in Advance

Do not see the property disclosure and contract for the first time at the signing. Request copies in advance and study them thoroughly. The revised real estate transaction law encourages advance delivery of the disclosure document. List any unclear points and ask about them during the explanation.

Have Experts Review the Documents

Especially for first-time purchases, strongly consider having a lawyer or judicial scrivener experienced in real estate transactions review the contract. While this costs money, it is well worth it as insurance on a transaction worth tens of millions of yen.

Verify Consistency Between Documents and Property

Confirm that the registry, property disclosure, rent roll, and on-site conditions all align. Pay particular attention to:

• Discrepancies between registered and actual measured area
• Consistency between the rent roll and actual occupancy
• Consistency between building plans and current conditions

Summary

The purchase contract for an income property is, alongside property selection, a critical process that determines investment success. By correctly understanding the property disclosure and purchase contract and checking for unfavorable terms, you can significantly reduce post-purchase problems.

The four most critical items are: contractual non-conformity liability terms, financing contingency inclusion, special provision contents, and security deposit transfer details. These directly impact your investment returns and risks, so always verify them before signing.

"If something is unclear, do not sign" -- this is the cardinal rule of contract execution. Always ask questions and insist on explanations until you are satisfied. Proceed with confidence by leveraging professional support.