INA&Associates has received numerous consultations on loan agreements through real estate transactions. This is an important topic especially in situations such as financing at the time of real estate purchase and exchanging security deposits and guarantees in rental management, so let's deepen your understanding from the basics.
A money loan contract is a form of contract stipulated in Article 587 of the Civil Code in which one party (borrower) receives money from the other party (lender) and promises to return the same type, amount, and kind of money. Simply put, it is a contract that stipulates a promise to lend or borrow money.
(Loan for Consumption)
Article 587 A loan for consumption shall become effective when one party receives money or other things from the other party with a promise to return the same kind, quality and quantity of things.
This contract is also very important in real estate transactions. For example, a mortgage contract at the time of real estate purchase is a loan contract between a financial institution (lender) and a purchaser (borrower). Also, the handling of security deposits and guarantees received from tenants in apartment management and the like also involves the concept of a loan for consumption contract.
The revision of the Civil Code that came into effect on April 1, 2020 resulted in important changes regarding money loan contracts. Before the amendment, it was considered to be a "contract of essentials" and to be effective only when money is given or received. After the amendment, however, it is considered to be a "contract of consent" and to be effective only by agreement of the parties if it is in writing or recorded in electromagnetic form.
(Reservation of loan for consumption)
Article 587-2 A reservation of loan for consumption shall not be effective unless it is made in writing.
2 If a reservation of loan for consumption is made by means of an electromagnetic record recording the contents thereof, such reservation of loan for consumption shall be deemed to have been made in writing and the preceding paragraph shall apply.
This is a major change in practice. Previously, the assumption was that "no contract has been formed at the stage prior to the actual delivery of money," but now the situation is such that "a contract is formed only by written agreement. In real estate financing as well, the parties to the contract must be careful because legal rights and obligations arise from the stage prior to the actual execution of the loan.
A loan agreement typically includes the following clauses
In the case of real estate financing, clauses that create a mortgage on the property and clauses regarding property management obligations are also important, etc. In INA & Associates' experience, loss of benefit clause is particularly important to prevent problems later on, so we recommend that you specifically and clearly specify such clauses.
A forfeiture of the benefit of time clause is a clause that states that if a borrower falls under certain circumstances, he or she loses the benefit of time for installment payments, etc., and must pay the remaining debt in a lump sum. Without this clause, for example, if the borrower fails to make monthly payments, the lender can only demand payment for each installment and cannot demand lump-sum repayment of the remaining balance.
Common grounds for forfeiture of the benefit of time include the following
In real estate transactions, change of use of the building, unauthorized transfer, breach of management obligations, etc. may also be stipulated as grounds for forfeiture of the benefit of time, and in INA&Associates' experience, having these provisions firmly in place will ensure smooth resolution in the event of any problems.
The setting of interest in a loan agreement must comply with the maximum interest rate under the Interest Rate Restriction Law. Under the Interest Rate Restriction Law, the maximum interest rate varies depending on the amount of the principal:
The interest portion exceeding these maximums will be invalid, so care must be taken when drafting the contract. In addition, if a business is engaged in the money lending business, it must also comply with the Money Lending Business Act and other related laws and regulations. The recipient of a loan from a real estate investment can protect himself/herself from unfair contracts by understanding these maximum interest rates.
With the advancement of technology, more and more loan agreements are being concluded electronically. INA&Associates is promoting DX in real estate transactions and has realized the following benefits from the introduction of electronic contracts:
However, even in the case of electronic contracts, it is necessary to meet requirements such as identification based on the Electronic Signature Law and measures to prevent tampering. It should also be noted that the contracts must be stored in accordance with the Electronic Bookkeeping Law.
There are cases where funds are loaned between individuals for real estate investment, etc. Special attention should be paid to loan agreements between individuals. The following points should be noted:
INA&Associates provides appropriate advice based on these points, especially for private loans related to real estate investment. Because of the relationship of trust, it is important to clearly state the details of the contract.
A mortgage contract is one of the most common loan contracts. It is important to understand the contents of the contract and prepare for future risks. In particular, pay attention to the following points:
INA&Associates' clients often ask us for advice on the detailed terms of their mortgage contracts. Especially in recent years, when interest rates have been rising, there has been an increase in the number of consultations regarding switching from floating interest rates to fixed interest rates and the timing of early repayment.
Loans for real estate investment have different characteristics from mortgage loans:
INA&Associates informs clients considering real estate investment of the characteristics and precautions of these types of loans, and also provides advice on financial planning with an eye to long-term profitability.
INA&Associates is actively promoting digital transformation (DX) in real estate transactions, and we are also promoting the use of electronic contract systems for loan agreements. The advantages of electronic contracts include the following
Especially in real estate transactions, multiple contracts are often required, and we feel that the efficiency gains from the introduction of electronic contracts are very significant.
In a loan agreement, preparing an easy-to-understand contract is more than just a formal requirement. The following points are particularly important
The following are points to check when checking a loan agreement:
Loan contracts are a very important form of contract in the transaction society. Especially in real estate transactions, they are used in many situations such as mortgage contracts and investment loans. Proper understanding and appropriate use of this contract can greatly contribute to the smooth progress of business and the building of relationships of trust.