In Japan’s real estate transactions, there used to be a procedure called “intermediate omission registration.” This procedure allowed the original owner to directly transfer the property ownership to the final buyer when the property was sold consecutively. However, intermediate omission registration did not reflect the complete history of the real estate transactions and was inconsistent with the actual changes in ownership. Therefore, Japan abolished this provision after amending the Real Estate Registration Act in 2005.
Currently, it has been replaced by methods such as “third party beneficiary contract” and “assignment of buyer’s position,” which are collectively referred to as “new intermediate omission registration.”
This article will explain the concept of “intermediate omission registration” and the related measures of “new intermediate omission registration,” and discuss the advantages and disadvantages of using these methods for transactions.
What is intermediate omission registration in real estate transactions?
Overview of Intermediate Omission Registration
In principle, the seller of real estate needs to perform an ownership transfer registration to transfer the property ownership to the buyer, allowing the buyer to assert their ownership to third parties. Typically, this ownership transfer registration should be carried out with each real estate transaction. However, real estate transactions incur significant costs such as real estate acquisition tax and registration license tax. To avoid the burden of intermediary fees and taxes generated during transactions, intermediate omission registration was introduced.
Intermediate omission registration, as the name suggests, omits certain registration procedures in real estate transactions. For example, if a property is sold from “A to B” and then from “B to C,” normally, there should be two ownership transfer registrations: “A transfers ownership to B” and “B transfers ownership to C.” However, through intermediate omission registration, the registration of transferring ownership to B is omitted, and the property is directly registered from “A to C.” When this registration method is adopted, the registration records do not fully reflect the history of ownership transfers, only showing the final property owner.
What is new intermediate omission registration?
After the amendment of the Real Estate Registration Act in 2005, Japan abolished the intermediate omission registration procedure. However, due to the demand for intermediate omission registration in the real estate industry, the Ministry of Justice’s “Regulatory Reform Promotion Council” proposed two alternative measures, collectively referred to as “new intermediate omission registration.”
Differences between “intermediate omission registration” and “new intermediate omission registration”
The following are the two new intermediate omission registration methods promoted by the Ministry of Justice’s “Regulatory Reform Promotion Council”:
● The seller directly transfers the ownership registration to a third party through a “third party beneficiary contract.”
● In the case of an assignment of the buyer’s position, the seller directly transfers the ownership registration to the assignee of the buyer’s position.
The reason why new intermediate omission registration is allowed is that in the above two cases, the ownership does not actually transfer to the intermediate buyer but directly from the seller to the final buyer.
In contrast, the problem with traditional intermediate omission registration is that ownership must first be transferred to the intermediate buyer before it can be transferred to the final buyer. However, the ownership transfer activities are not reflected in the ownership registration.
In the practice of new intermediate omission registration, ownership is directly transferred from the seller to the final buyer, and the registration information can accurately reflect the actual situation. This is the main difference from traditional intermediate omission registration.
Third Party Beneficiary Contract
A “third party beneficiary contract” refers to an agreement between A and B, where both parties agree and designate the final buyer as “C” in the contract. In this scenario, the third party “C,” designated by “B” as the final buyer, can directly request the transfer of ownership from “A.”
In this situation, the following two contracts will be signed:
1. Contract between A and B: A third party beneficiary contract, where the real estate ownership will be directly transferred to C.
2. Contract between B and C: According to the special agreement between A and B, C will directly obtain ownership.
By using these two contracts, the ownership transfer from A→B→C can be simplified to A→C.
Assignment of Buyer’s Position
The assignment of the buyer’s position refers to transferring the buyer’s position in a sales contract to another person. This method involves a situation where a sales contract has already been established between A and B, and a third party C succeeds to the contractual position of B, ultimately obtaining ownership of the property.
In this situation, the following two contracts will be signed:
1. Sales Contract: A sales contract is signed between A and B.
2. Assignment of Buyer’s Position Contract: An assignment of buyer’s position contract is signed between B and C, where C acquires the position of buyer B in the sales contract between A and B.
However, using this method will make C aware of the transaction amount between A and B. Therefore, most people prefer to use the “third party beneficiary contract” method.
Advantages and Disadvantages of New Intermediate Omission Registration
Merit
Advantage (1) Tax Savings
In real estate transactions, each time an ownership transfer registration is performed, registration license tax and other registration fees must be paid. For example, if ownership transfer registrations are performed for “A→B→C,” both the transfers from A to B and from B to C require registration fees. Therefore, through new intermediate omission registration, the parties only need to bear the ownership transfer registration fee between “A→C,” and the intermediate buyer B does not need to bear the real estate acquisition tax.
Advantage (2) Impact on Transaction Price
As mentioned in Advantage (1), since the intermediate buyer B does not need to bear the registration license tax and real estate acquisition tax, this may reduce the sales price of the real estate, allowing the final buyer to potentially acquire the property at a lower price.
Advantage (3) Contract Non-Conformity Liability
In real estate transactions, if the buyer discovers that the property does not conform to the contract (e.g. defects) after delivery, the seller must bear the “contract non-conformity liability.” For example, if there is a water leak in the room or a pipe burst after the ownership transfer, the seller must repair it within a certain period. However, in actual transactions, when the seller is an individual or a general corporation, a special agreement is usually added to exempt this liability. By involving an intermediate real estate trader “B” between “A and B,” forming a transaction pattern of “A→B→C,” “C” has the opportunity to sign a contract with the real estate trader that can pursue a two-year contract non-conformity liability, providing better protection for their rights.
Demerit: New intermediate omission registration has the following two main disadvantages. The following explains using the transaction “A→B→C” as an example.
Disadvantage 1: Seller A Needs to Wait Longer to Receive Payment
When signing a contract based on new intermediate omission registration, even if the sale between A and B is established, settlement between A and B cannot occur until the final buyer is determined, and seller A cannot receive the sale proceeds. Therefore, in the contract between A and B, the parties may agree that if the third-party buyer is not determined within a certain period, B must purchase the property.
Disadvantage 2: Transaction Process Not Fully Reflected in Register
When real estate is sold consecutively (A→B→C), the register should also show “A→B→C.” However, through new intermediate omission registration, the register will only show “A→C.” This omits the fact that the intermediate buyer B once purchased the property, leading to the actual transaction situation not being accurately reflected in the register. Others may mistakenly believe that A and C directly conducted the transaction based solely on the register, which can sometimes lead to disputes.
Summary
This article explains the old measures of intermediate omission registration and the new intermediate omission registration measures that can be legally adopted under the current Real Estate Registration Act, including the “third party beneficiary contract” and the “assignment of buyer’s position.”
New intermediate omission registration offers excellent tax-saving benefits, but using the “third party beneficiary contract” and the “assignment of buyer’s position” methods can make the transaction process more complex. When adopting these measures, attention should be paid to the relevant legal provisions.
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