Points to Check When Concluding a Sales Contract
Since a real estate sales contract is a major transaction involving high-value assets, a written contract is generally prepared and exchanged. The Real Estate Brokerage Act also obliges real estate companies (real estate agents) to deliver a document describing the contents of the contract without delay after the contract is concluded, with the real estate agent's name and seal affixed.
The revised part of the Real Estate Brokerage Act of the Digital Improvement Act took effect on May 18, 2022, making the seal of a real estate transaction agent unnecessary when a paper document is delivered upon conclusion of this contract, and also making it possible to provide the document digitally.
This section describes the main points that should be confirmed in a sales contract. There are, of course, other points that should be confirmed, so if you have any questions, be sure to check with your real estate agent until there is no uncertain points left.
Point 1: What to check in a sales contract
The following is a list of common items in a sales contract and points to be checked. However, keep in mind that the details of the contract and the points to be checked will vary depending on the individual contract.
(1) Description of the property for sale
Check for any errors in the description of the property to be purchased. Generally, the property is indicated in the contract based on the registration record (registry). It is a prerequisite of the sales contract that the property to be sold or purchased is clearly defined.
(2) Sales price, amount of deposit, and payment date
Confirm the amount of the sales price, deposit, etc. and the date of payment. Note that failure to pay by the due date may constitute a breach of contract. Also, carefully check the handling of the deposit. Confirm what kind of deposit (cancellation deposit, deed of promise, or penalty deposit) it is and whether the amount is appropriate (approximately what percentage of the purchase price it is). If the deposit is a cancellation deposit, check how long it is possible to cancel the contract. If there are any concerns about the seller's credibility, the buyer should proceed with caution when paying a large deposit or other such payment.
(3) Actual measurement of land and settlement of land price
The area of land may differ from the area indicated in the registration record (registry) to the actual area. Therefore, the seller often measures the actual area of the land before delivery. If, as a result of the actual measurement, the area of the registration record (registry) differs from the area actually measured, the sales price may be settled according to the difference in area. (It is also possible to only take the actual measurement and not to settle the price.) Generally, the settlement of the sales price is made using the unit price per square meter based on the original sales price and the original sales area (the area on the registration record (registry)).
(4) Transfer of ownership and delivery
Confirm the timing of transfer of ownership and delivery. Check if there are any problems based on the schedule for moving, etc. While the transfer of ownership and delivery take place in exchange for payment of the price, in practice, real estate transactions are often completed when the documents necessary for the registration of transfer of ownership and the keys are handed over to the buyer at the place of payment.
(5) Transfer of auxiliary facilities, etc.
In the case of an existing house, it is necessary to clarify the transfer of facilities such as interior lighting and air conditioning, as well as garden trees and garden stones on the premises. Troubles surrounding the taking over of such auxiliary facilities and equipment are surprisingly common, so it is necessary to fully discuss with the seller what will be taken over and what will be removed prior to signing the contract.
It is also important to confirm in advance the condition of the equipment to be taken over, including whether it is in disrepair. When signing a contract, it is common to check each item of equipment one by one using a list of ancillary equipment, etc. (The list used confirm the conditions of the ancillary equipment is called a "notice" or "property condition report.)
(6) Discharge of Burdens
Confirm that the property to be purchased will be acquired with full title. For example, the property with any rights that would prevent the full exercise of ownership, such as mortgages or leasehold rights, will be delivered with the seller's responsibility to remove such rights. Note that if the property is delivered without such rights being removed, it may not be available for use as planned after purchase.
In the sale of investment properties, it is often the case that the property is occupied by tenants, in which case only the lease agreement with the tenants will be taken over by the buyer. In this case, it is necessary to clarify the rights to be taken over and the rights not to be taken over.
(7) Settlement of taxes and public dues, etc.
In a real estate sales contract, it is common for the seller and buyer to settle taxes and public dues such as fixed property tax and city planning tax. In addition, other expenses such as management fees may also be settled. Settlements are often made on a pro-rata basis based on the date of delivery. Settlement fees such as these are also required separately from the sales price, so it is important to confirm the details.
(8) Cancellation by forfeit
Since the contract may be cancelled due to some unforeseen circumstances, the parties concerned should confirm what kind of arrangements are in place for cancellation by forfeit. Of course, by agreement between the parties, it is possible to make a contract that does not allow for the release of a deposit, or to limit the period during which the deposit can be released.
The amount of the deposit is generally set within the range of up to 20% of the purchase price. If the deposit is small, the burden is small when you cancel the contract, but the risk of cancellation by the other party is high. On the other hand, if the deposit is large, the risk of cancellation by the other party is low, although the burden is greater when you terminate the contract. Be sure to check the amount of the cancellation deposit as well.
(9) Loss or damage to the property prior to delivery (burden of risk)
This is an arrangement in the event that the property to be purchased is lost or damaged after the conclusion of the sales contract for reasons for which neither the seller nor the buyer is responsible, such as the total destruction of the building due to a natural disaster.
In a real estate transaction, the seller generally restores the property before handing it over. However, if the restoration of the property will cost an excessive amount of money, or if the buyer cannot achieve the purpose of the contract because the property has been lost or damaged (for example, it cannot be restored to a livable condition), the contract can be terminated unconditionally. This is an arrangement in case of emergency, so be sure to check it carefully.
(10) Cancellation for breach of contract except for nonconformity
This is an arrangement for canceling a contract due to breach of contract (i.e., breach of promise, which is legally called "default"). If either the seller or the buyer is in default, the other party can cancel the contract. If the contract is cancelled due to a breach of contract, the party who breached the contract generally pays a penalty. In many cases, the penalty, etc. is generally set within the range of up to 20% of the sales price. Although a sales contract is not concluded on the assumption that the contract will be violated, there are contingencies, so be sure to check the contract carefully in advance.
(11) Exclusion of Anti-Social Forces
In order to "exclude antisocial forces" from real estate transactions, standard model clauses for exclusion of antisocial forces have been introduced. Confirm that the sales contract includes clauses assuring that "neither the seller nor the buyer is a crime syndicate or other anti-social force" and "the property will not be used as an office or other base of activities of anti-social forces. If any of these are violated, the contract can be terminated.
(12) Loan provisions
If the buyer is unable to obtain a mortgage loan despite the fact that he/she is not at fault, the buyer will not be able to pay the purchase price and will ultimately be in breach of the contract. Since the buyer should avoid such a situation, it is common for the buyer to attach a loan provision to the purchase agreement when purchasing a house with a mortgage loan. The buyer can unconditionally cancel the sales contract in the event that the mortgage loan review is unsuccessful.
However, this provision does not apply if the buyer is unable to obtain a loan due to the buyer's fault, for example, if the buyer fails to follow the necessary procedures for loan approval. Even if a loan provision is in place, it is important to fully consider the financial plan before signing the contract and to have a good prospect of obtaining a loan. Please note that in some cases, additional optional construction works or specification changes in newly built condominiums may not be covered by the loan provision.
(13) Liability for nonconformity to the contract
If there is a defect in the property sold or purchased, the buyer can make certain claims against the seller. The seller's liability in this case was previously referred to as "defect liability. However, due to an amendment to the Civil Code, the name has been changed to "liability for nonconformity to the contract" as of April 1, 2020, and its contents have also changed significantly.
The seller is obligated under the sales contract to deliver the property that conforms to the terms of the contract with respect to the type, quality, and quantity of the property. If the seller fails to fulfill this obligation and delivers the property, he or she is liable for nonconformity to the contract. In such a case, according to the provisions of the Civil Code, the buyer can demand repair of the property, reduction of the price, or compensation for damages, and can cancel the contract if the non-conformity is not minor. However, this provision of the Civil Code is a general rule when the parties have not made any agreement, and the parties may make other arrangements.
In actual contracts, special provisions are usually made regarding the extent to which the seller is liable for nonconformity and the period for which the seller is liable. Therefore, as a buyer, you should carefully check the contents of the contract regarding the extent to which the seller is liable and the period of time for which he/she can make a claim.
If a building condition survey has been conducted and a summary of the results is explained as an important matter before a contract is signed, the summary of the survey results will be included as "matters confirmed by both parties regarding the condition of the main structural members of the building, etc." (If a building condition survey has not been conducted, it will be indicated as "none.")
Point 2: Regulations when the seller is a real estate company (real estate agent)
When a real estate company is the seller, the Real Estate Brokerage Act sets restrictions on sales contracts. If applicable, please check the contents of the contract and make sure in advance that the contract does not violate any restrictions before signing the sales contract.
Point 3: Learn about the sales contract process
After receiving an explanation of important matters and being satisfied with the contents of the contract and the property, it is time to conclude the sales contract.
In principle, the buyer and seller will meet to read out the sales contract and make a final confirmation of the contents of the contract. The contract is then signed and sealed, and the deposit, etc. is paid. The deposit, etc. may be prepared in cash, by wire transfer to a designated account, or by deposit check.
If a real estate company acts as an intermediary, a brokerage fee is often paid at the time of contracting. If there is oversight in the contract procedures, a sales contract cannot be concluded, which will cause inconvenience to the seller and other parties involved, so be sure to be well prepared before signing the contract.
In real estate transactions, the Law for Prevention of Transfer of Criminal Proceeds requires the seller or the real estate company acting as an intermediary to present identification documents and to declare the seller's occupation and the purpose of the transaction.
Main items required at the time of signing
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Arrows International Realty Corp.