HOME > CASES&JUDGMENTS > Judgments > Breach of obligation of explanation when soliciting purchase of investment condominium units; Claim for damages affirmed

[July 2020]

Breach of obligation of explanation when soliciting purchase of investment condominium units; Claim for damages affirmed

A real estate company was sued for damages on the ground that the company's employee had induced a consumer to buy investment condominium units emphasizing advantages without specifically explaining risks, which was regarded as a breach of obligation of explanation. The loss incurred by the consumer was determined to be the remaining balance after deducting resale prices from the total expenditure (purchase prices, miscellaneous expenses, real estate acquisition tax, etc.). Under the rule of comparative negligence, 40% negligence was apportioned to the consumer. Damages including legal fee were awarded to the claimant. The precedent serves as a useful reference for resolving consumer disputes related to solicitation for purchase of investment condominium units.

(Final judgement by the Tokyo High Court on September 26, 2019, published on page 178 of Sakimonotorihiki Hanreishu No.82)

Defendant in error & incidental appellant:
plaintiff in the first trial (consumer X)
Plaintiff in error & incidental defendant in error:
defendant in the first trial (real estate company Y)
Parties concerned:
A (Y's salesperson who solicited X)
B (bank who lent X money through the affiliated loan system)

Summary of the case

First solicitation and contract

X is a male salaried worker. At his workplace, X received a phone call soliciting to buy an investment condominium unit. Then X decided to meet a salesperson A in June 2011. The salesperson A showed X a calculated example for investing in condominium "unit H" and emphasized advantages of the investment, saying "Even if you get a loan to buy the condominium unit, your monthly payment will be less than 10,000 yen. If you file a tax return, you can reduce your tax burden." Then, X decided to buy the condominium "unit H" with use of B's affiliated loan which was introduced by Y.

X had only 1,500,000 yen. B's loan limit was 90% of the sale price of the real estate concerned. Then, A wrote the price as 24,000,000 yen on a contract. An agreement between X and A was made to change the price to about 22,000,000 yen. Then, X got a loan of about 22,000,000 yen from the bank B.

In late June 2011, X paid Y about 23,000,000 yen covering the price and miscellaneous expenses to purchase the condominium "unit H".

X used his money for part of the price and miscellaneous expenses and X's savings were depleted.

Second solicitation and contract

In early August 2011, A induced X to buy "unit I" in the same condominium. A suggested X a plan to eliminate X's debt at retirement. A said, "If you buy another condominium unit and sell it at your retirement, you can pay your debt by the gain from sale thereof." X continued, showing a handwritten sample calculation, "If the sale price of "unit I" will be more than 25,000,000 yen and your debt will be 13,000,000 yen after 20 years, the gain on sale will be 12,000,000 yen, which should be used for paying the expected debt of 13,000,000 yen." In this way, A emphasized advantages of investing in two condominium units and induced X to buy "unit I".

X accepted the A's offer, but X's own fund was only 10,000 yen. A used the same way as before so that X could borrow about 22,000,000 yen from B. In late August 2011, X purchased "unit I" at around 22,000,000 yen from Y.

What happened afterward

X and Y concluded a sublease contract under which X's rent income was guaranteed. X's monthly expenditure was just under 10,000 yen for a while. One day, however, Y told X that the rent income would be reduced by 10% after the renewal of the sublease contract. Then, X did not renew the sublease contract in October 2013 and switched to a contract for rent receiving agent. In March 2014, a tenant in "unit I" suddenly terminated the lease. Then X's rent income became zero for the first time.

X worried that the same thing might happen again and consulted local consumer affairs center. X also consulted X's proxy lawyer. In early June 2017, X sold the condominium units H and I at approximately 19,000,000 yen. In September 2017, X filed a suit against Y for damages (4,400,000 yen and delay damages concerning unit H; 3,540,000 yen and delay damages concerning unit I) under Article 715-1 of the Civil Code on the ground that X incurred loss in the investment due to A's illegal conducts (concealment of disadvantageous facts, fraudulent solicitation, provision of conclusive evaluations, breach of obligation of explanation)

Outline of original decision

Considering the fact that X had never purchased or invested in real estate and X had only 1,500,000 yen or so, the original court (reference precedent 1) construed that A had neglected A's duty of care to give X clear explanations on risk of no tenant, risk of delay in rent payment, risk of price decline, risk of interest rate increase, etc. when A had induced X to invest in the condominium unit costing over 20,000,000 yen with the aid of a large loan. Then, the original court affirmed A's breach of obligation of explanation and Y's negligence in employer's liability.

The loss incurred by X was determined to be over 4,000,000 yen concerning "unit H" and over 3,300,000 yen concerning "unit I", by deducting the sale amount from the total of purchase amount and expenses. Under the rule of comparative negligence, 40% negligence was apportioned to X. The original court awarded damages including legal fee to X.

Y insisted that X had purchased the units H and I in 2011, which was three years before and the right to seek damages became invalid by prescription. On the other hand, the court rejected the Y's argument on the ground that X had not recognized X's loss till X consulted X's proxy lawyer in March 2014 and that it was not past the statute of limitations.

Y appealed against the original decision, and X filed an incidental appeal.

Reason

Comparison with the original decision

The appeal court basically supported the original decision. There is not a big difference between facts and illegality recognized by the original court and those recognized by the appeal court. X's loss determined by the appeal court was about 100,000 yen more than that determined by the original court because the real estate acquisition tax was added to the loss. The percentage of negligence remained unchanged.

Factual finding

Concerning X's statement, Y alleged that A had fully explained risks to X and X had understood the risks based on the fact that X had signed a notification and confirmation stating that real estate prices might fluctuate and the values in the calculated example were not guaranteed. The court rejected Y's argument and recognized facts as X stated. The court found as follows: "X believed A's words and did not fully understand details in the document. X was unaware of signing the document."

Illegality

Concerning illegality, the appeal court construed as follows: "A's solicitation of X may not involve concealment of disadvantageous facts, fraudulent solicitation or provision of conclusive evaluations. On the other hand, X had never purchased or invested in real estate before and X's own fund was only 1,500,000 yen or so. When inducing X to buy condominium units costing over 20,000,000 yen for each with a large loan, A owed a duty of care to give clear explanations on risk of no tenant, risk of delay in rent payment, risk of price decline, risk of interest rate increase, etc."

The appeal court construed that A's solicitation involved illegal conduct (breach of obligation of explanation) on the ground that A had emphasized advantages in investment (complementing pension income, reducing taxes, etc.) without specifically explaining the aforementioned risks and had showed a simulation without risk effects to induce X to buy "unit H" and "unit I", knowing X's mistaken belief.

Loss

Concerning "unit H", the appeal court assessed X's loss as approximately 4,000,000 yen (the remaining balance after deducting the resale price 19 million yen from the total sum of purchase price 22 million yen, miscellaneous expenses 0.9 million yen including registration fee and real estate acquisition tax 0.1 million yen). Concerning "unit I", the appeal court assessed X's loss as approximately 3,400,000 yen by calculating in the same way.

Under the rule of comparative negligence, 40% negligence was apportioned to X. The legal fee was assessed as 250,000 yen concerning "unit H" and 200,000 yen concerning "unit I". The appeal court ordered Y to pay approximately 4,900,000 yen and delay damages to X.

Comment

Solicitation for purchase of investment condominium units

In this type of solicitation, real estate dealers induce consumers to buy investment condominium units, saying "You can earn a profit margin if you buy a condominium unit and sell it when the price increases," or "You can get rent out of a condominium unit." There have been not a few complaints about investment in condominium units (e.g. "Hard-sell solicitation," "My rent income is not enough to pay a loan, which is different from what I was told," "My rent income is low," etc.). 1

Condominium unit prices may not necessarily increase after purchase. Prices may go down due to aging and fluctuate in the market place. Owners have to pay maintenance fee, service charge, fixed property tax, etc. Even if a management company leases a condominium unit from an owner under a sublease contract, the rent may be reduced or the sublease contract may be terminated. There have been numerous troubles related to condominium sublease. The Financial Services Agency, the Consumer Affairs Agency and the Ministry of Land, Infrastructure, Transport and Tourism have issued alerts on this problem.2 In order to prevent this kind of trouble and to protect contract signatories, the Act for Proper Management of Rental Housing was enacted on June 12, 2020.

  1. 1 "Caution! Consumers in their 20s are vulnerable to forceful solicitation for purchase of investment condominium units. Investment in real estate poses some risks and is not always profitable" (Japanese page) released by NCAC on March 28, 2019
  2. 2 "Reminders related to apartment sublease, etc." (Japanese page) released by the Financial Services Agency on October 26, 2018

Cases of solicitation for purchase of investment condominium units, and applicable laws

In a typical case, solicitation for purchase of investment condominium units starts with telemarketing like the above case and a contract is signed at home or a coffee shop, which falls under the category of telemarketing sales or door-to-door sales in the Act on Specified Commercial Transactions.

However, real estate transactions with real estate dealers are exempt from the Act on Specified Commercial Transactions. Real estate transactions with authorized real estate dealers are subject to the Real Estate Brokerage Act. Therefore, the cooling-off rule and the right of rescission under the Act on Specified Commercial Transactions are not applicable to cases of solicitation for purchase of investment condominium units by real estate dealers. The cooling-off rule specified in the Real Estate Brokerage Act has some restrictions different from those in the Act on Specified Commercial Transactions, to which requires attention. For instance, when a consumer places an order or signs a contract at home, the transaction is exempt from the Act on Specified Commercial Transactions. On the other hand, when a consumer asks for an explanation on a sales contract at home or workplace, the cooling-off rule is not applicable under the Real Estate Brokerage Act. The Real Estate Brokerage Act does not have any article to extend the cooling-off period when a dealer has obstructed the exercise of the cooling-off right. When it's not possible to exercise the cooling-off right under the Real Estate Brokerage Act, it may be possible to resolve a consumer dispute with use of the Civil Code or the Consumer Basic Act. Under the Civil Code, it may be possible to claim damages based on tort liability. There are other factors to consider such as mistake of facts. In case of trouble with a malicious business, fraudulence, intimidation, and breach of public order and morals should be also taken into account as factors.

Tort liability

The above precedent is an important high court decision where the court recognized the company's tort liability on the ground that solicitation for purchase of investment condominium units involved breach of obligation of explanation.

What and how should be explained is controversial in cases of solicitation for purchase of investment condominium units. The above judgment shows a view that "At least the dealer should give clear explanations on risks in investing in condominium units: risk of no tenant, risk of delay in rent payment, risk of price decline, risk of interest rate increase, etc.", which clearly illustrates what and how should be explained and serves as a practical reference.

Furthermore, the appeal court construed that the explanation had been insufficient on the ground that the notification and confirmation abstractly indicated that real estate prices might fluctuate and the values in the calculated example were not guaranteed, which X did not fully understand. There have been many cases involving this kind of document, so the precedent serves as a useful reference.

Consumer Contract Act

In the reference precedent 2 below, cancellation of purchase was affirmed under the Consumer Contract Act.

After being solicited to buy a condominium unit, a consumer signed a contract. Later, the consumer noticed a price decline and requested cancellation of the contract on the ground that the solicitation involved misrepresentation, provision of conclusive evaluations, and concealment of disadvantageous facts. When concluding the contract, the dealer did not tell an objective market value of the real estate concerned and showed an unrealistic simulation indicating that the rent income would be stable for more than 30 years, which misled the consumer into believing that monthly payment would be covered by pocket money. The dealer intentionally concealed disadvantageous facts which correspond to important matters under the Act on Specified Commercial Transactions. Then, the consumer misunderstood that there weren't disadvantageous facts and signed a contract. Therefore, rescission of the manifested intention under Article 4-2 of the Consumer Contract Act was affirmed. The appeal court affirmed the claim for damages of approximately 47,000,000 yen, the remaining balance after deducting the total income including rental income from total expenses of approximately 50,000,000 yen.

Relation to bank loan

In relation to a bank, the key point is whether or not a consumer may refuse to pay back loan in light of the principle of good faith. In general, a loan contract is independent of a sales contract, so it is not possible to refuse to pay back a loan unless the circumstances are exceptional. The reference precedent 3 below is a case of solicitation for purchase of condominium unit with use of a marriage matching site. The court found that a lease contract between a consumer and a financial institution could be void if the circumstances are exceptional when a sales contract was void due to breach of public order and morals, although this was not in the case of the reference precedent 3.

Those are generalities. Concerning loans for investment real estate, the Financial Services Agency released a report on cases where some real estate dealers had falsified loan documents when introducing customers to financial institutions3, and the Agency took administrative measures4 against the real estate dealers. Therefore, it is necessary to consider whether or not a financial institution shall be liable case by case, based on generalities.

  1. 3 "Results of questionnaire survey on loans for investment real estate" (Japanese page) released by the Financial Services Agency on March 28, 2019
  2. 4 "Administrative measures against SURUGA bank" (Japanese page) released by the Financial Services Agency on October 5, 2018

Reference precedents

  1. Judgment by the Tokyo District Court on April 17, 2019
    (page 165 of Sakimonotorihiki Hanreishu No.82), original decision in the above case
  2. Judgment by the Tokyo District Court on March 27, 2012
    (Westlaw)
  3. Judgment by the Tokyo District Court on October 30, 2014
    (page 52 of Kinyu Shoji Hanrei No.1459)