When looking at luxury properties in Tokyo, one important decision often gets overlooked: choosing between freehold and leasehold ownership. This choice affects everything from your upfront costs to your long-term investment returns. Understanding these two types of property ownership will help you make the right decision for your situation.
What is Freehold Ownership? (所有権 shōyūken)
Freehold ownership means you own both the building and the land underneath it completely. This is the most straightforward type of property ownership. When you buy a freehold property, you get full control over your investment. With freehold ownership, you can renovate, rebuild, or sell your property whenever you want. You don’t need anyone else’s permission to make changes. The property is yours to keep forever, and you can pass it down to your children or sell it to anyone you choose. Most luxury developments in Tokyo’s prime areas like Minato-ku, Shibuya, and Shinjuku offer freehold ownership. These properties typically hold their value well over time because you own the valuable Tokyo land beneath your home.
Understanding Leasehold Properties (借地権 shakuchiken)
Leasehold ownership works differently. You own the building but rent the land underneath it from a landowner. When you buy a leasehold property, you get a long-term lease on the land. You can live in the property, renovate it, and even sell it to someone else. You may need the landowner’s permission for some changes and sales. There are two main types of leasehold, one can be renewed and the other cannot.
Types of Leasehold Rights
There are two main types of leasehold rights in Japan: surface rights and rental rights. Surface rights grant more robust control over the land, however you do still need the landowner’s permission to transfer the rights for all leasehold types, apart from Superficies (Property Rights Type). Rental rights offer less control and require landowner approval for changes such as transfers or some renovations. Fees, usually a percentage of the rights payment, are also necessary.
The Japanese “Land Lease and House Lease Law,” revised in 1992, governs these relationships to prevent disputes. It introduces ordinary leasehold rights, which offer a minimum lease period of 30 years with options for renewal. Fixed-term leasehold rights, which last for a set period, usually over 50 years, after which the property must be returned to the landowner.
| Fixed-Term Land Lease Rights (定期借地権) | Ordinary Land Lease Rights (普通借地権) | |
| Contract Renewal | Not Allowed | Allowed (Can be renewed at tenant’s request) |
| After Contract Expiry | Must Return the land as a vacant lot | Use can continue if a building exists |
| Right to request Purchase of Building | Not Allowed | Allowed (Tenant can request the landowner to purchase the building) |
| Contract Duration | In principle 50 years or more (10 years or more for business use) | 30 years or more |
| Contract Method | Must be in writing (e.g. notarized deed) | No restriction: oral agreement is also valid but written is best practice |
Cost Differences Between Freehold and Leasehold
One difference with Leasehold Properties is in the purchase price. Leasehold properties can have a lower price that makes high-end Tokyo properties more accessible to many buyers. However, leasehold comes with ongoing costs that freehold doesn’t have. You’ll pay monthly or annual ground rent to the landowner. This can change depending on the location and property size. Freehold properties have higher upfront costs but no ground rent. You will pay property taxes on both the building and land, which leasehold owners don’t pay on the land portion meaning for luxury properties, these tax savings can be significant.
Which Type Works Better for Luxury Buyers?
Your choice depends on your financial goals and how long you plan to stay in Japan. Freehold could make sense if you want complete control over your property and plan to live in Japan long-term or permanently. This option works well for buyers who see their home as a major investment, prefer not to deal with ground rent payments, and want to pass the property to their children. Leasehold might work better if you want to minimize upfront costs and are attracted to properties in prime locations. This choice suits buyers who don’t mind having some restrictions and are comfortable with ongoing rent payments.
Legal Protections for Buyers
Japan’s property laws protect both freehold and leasehold owners. If you buy a leasehold property and the landowner later sells the land, your lease rights transfer to the new owner. You keep all your rights to live in and use the property. Leasehold rights ‘can’ be inherited just like freehold properties. This includes both ordinary leasehold and fixed-term leasehold. The courts generally favor tenants in lease disputes, especially for residential properties. This gives leasehold owners good protection against unreasonable demands from landowners. The type of leasehold rights you have – whether surface rights or rental rights – will affect the level of control and protection you enjoy.
Ordinary Lease Rights Protection (普通借地権): If you have an ordinary leasehold right, you benefit from strong renewal protections. These leases start with a minimum 30-year term and can be renewed for 20 years on the first renewal, then 10 years thereafter. The landowner cannot refuse renewal without providing a justified reason for needing the land back. This gives you long-term security similar to owning the property outright.
Fixed-Term Lease Rights Considerations (定期借地権): Fixed-term leasehold rights offer less long-term security but come with clear expectations. These leases typically last 50 years or more for residential use and cannot be renewed. However, you know exactly when the lease ends from the beginning, which helps with financial planning. At the end of the term, you must return the land as vacant.
The 1992 Land Lease and House Lease Law strengthened tenant protections across both types of leasehold arrangements. This means that even if you’re dealing with a difficult landowner, the law provides clear procedures and protections for leasehold property owners.
There area also less common Leaseholds: Business Fixed-Term Leasehold, Fixed-Term Leasehold with Building Transfer, Temporary Use Leasehold, Superficies (Property Rights Type)
The Bottom Line
Both freehold and leasehold can work well for luxury property buyers in Tokyo. Freehold gives you complete ownership and control but costs more upfront. Leasehold can reduce your initial investment but comes with ongoing costs and some restrictions. The most important thing is to work with experienced professionals, such as the agents at Housing Japan, who understand both types of ownership. With 25 years of experience they are well equipped to help you find the right luxury property that fits your budget and goals, whether it’s freehold or leasehold. Tokyo’s luxury property market offers excellent options with both ownership types. By understanding the differences, you can make a confident decision that serves your needs for years to come.
Q&A: Common Questions About Freehold vs Leasehold
Can foreigners buy both freehold and leasehold properties in Japan?
Yes, foreigners can buy both types without restrictions, you don’t need to be a Japanese resident to purchase property.
How much less do leasehold properties cost in Japan?
While some leasehold properties can cost less than freehold properties in Japan, some Leasehold luxury properties in luxury areas can be comparable to freehold.
What happens when a leasehold expires in Japan?
Some leases can be renewed depending on the type, Ordinary Leasehold (Personal Rights) can be renewed while General Fixed-Term Leasehold has the be returned to the landowner at the end of the lease as vacant land.
How common are leasehold properties in Japan?
Leasehold properties take up a smaller portion of the market compared to freehold in Japan, but due to increased market interest more buyers are considering leasehold as an option.
