Foreign Relations of the United States Diplomatic Papers, 1936, The Far East, Volume IV

894.52/42

The Secretary of State to the Ambassador in Japan (Grew)

No. 1018

Washington, April 30, 1936.

Sir: Reference is made to your despatch No. 1269, dated May 1, 1935,¹⁵ in which there is discussed the question of properties in the former foreign settlements in Japan held under perpetual leasehold. It is noted that effort is being made by the British Embassy at Tokyo to devise an arrangement whereby perpetual leaseholders will abandon their claim to exemption from certain taxation and accept deeds in fee simple for their properties in return for sums of money to be paid them by the Japanese Government. It is noted further that the British Ambassador expressed the hope that no definite steps be taken by the Embassy, “as complications might arise should representations be made by the two Embassies along different lines”.

The observations hereinafter submitted are based on an examination of the information in the Department’s possession on the subject of perpetual leases in Japan, most of which is derived from a pamphlet entitled, A Survey of the Perpetual Lease Question, printed by the Japan Chronicle, Kobe, Japan, in 1932. This pamphlet will be cited hereinafter simply as Survey.

It is the understanding of the Department that in 1894 when agreement was reached between the British and Japanese Governments in regard to the abolition of the extraterritorial rights of British subjects in Japan, it was proposed by the Japanese Government that simultaneously with the abolition of such rights the leaseholds in Japan of British subjects be converted into freeholds; but that the British Government indicated unwillingness to enter into any such arrangement unless provision were made to compensate leaseholders for the loss of exemption from taxation of leasehold property. The Treaty of Commerce and Navigation concluded on July 16, 1894, between Great Britain and Japan,¹⁶ provided that the leaseholds were to be confirmed at the time of the abolition of extraterritorial rights and that “no conditions whatsoever other than those contained in such existing leases shall be imposed in respect of such property”. The treaty concluded on April 3, 1911, between Great Britain and Japan¹⁷ contained no analogous provision, but the British and Japanese Governments agreed, as set forth in an annex to that treaty, that

“the contention of either Government regarding the position of the holders of leases in perpetuity in the former foreign settlements, which it was agreed between the two Governments should form the subject of a separate negotiation, was not in any way prejudiced by the omission of reference to that question in the Treaty.”

The Treaty of Commerce and Navigation concluded on November 22, 1894, between the United States and Japan¹⁸ contained a clause corresponding to the clause above described of the Anglo-Japanese treaty of 1894. In 1910, the Japanese Government proposed to the American Government the conclusion of a new treaty of commerce and navigation, and on October 19, 1910, the Japanese Embassy at Washington presented to the Department a draft of a suggested treaty¹⁹ which contained no reference to perpetual leaseholds. On January 23, 1911, the Department informed the Japanese Embassy¹⁹ that the American Government would be prepared to enter upon negotiations for a new treaty of commerce and navigation, but it pointed out that there were “certain…²⁰ matters of prime importance which in the opinion of the Department of State should likewise be considered and settled in principle at the outset of the negotiations”. In regard to properties held under perpetual lease, it was proposed that “the present status of the perpetual leasehold property in the former foreign settlements, which have now acquired an established character, will be confirmed and maintained until a mutually satisfactory settlement of the various questions involved be arranged by the parties concerned”. At the earnest solicitation of the Japanese Government, however, the American Government did not insist upon insertion in the draft treaty of any clause defining or preserving the rights in regard to leasehold property of American citizens, but there was given by the Japanese Government an undertaking that American leaseholders would be given the benefit of the “superior position” of leaseholders of other than American nationality. Your attention is directed in this connection to the telegram dated February 19, 11 p.m. (1911), from Mr. O’Brien²¹ to the Department.²² (No record can be found of the receipt from the Embassy of a copy of the form which was reported by Mr. O’Brien to have been received by him on February 19, 1911, from the Minister for Foreign Affairs, and it is requested that a copy of that form be furnished to the Department at your early convenience.) At the further solicitation of the Japanese Government, the American Government agreed, as set forth in Article 16 of the Treaty of 1911,²³ that the Treaty of 1894 “shall cease to be binding” upon the coming into effect of the new treaty.

It appears, therefore, that while the existing treaty between the United States and Japan contains no provision relating to the status of perpetual leases in Japan held by American citizens, such a provision was omitted in consideration of the agreement of the Japanese Minister for Foreign Affairs to give American leaseholders any benefits which might be granted to other foreign leaseholders (see telegram from Embassy, February 19, 1911, 11 p.m. and Department’s reply of February 21, 1911, 3 p.m.²⁴). This Government accordingly has the right to insist that American holders of perpetual leases in Japan shall receive treatment in no respect less favorable than the treatment accorded to other foreign leaseholders in respect of such leases.

The essence of the contentions of the leaseholders appears to be that the land covered by the leases was, in fact, bought outright by the leaseholders from the Japanese Government and that, therefore, “…²⁵ the so-called ground rent is equivalent to nothing more or less than a sum paid as commutation of all present and future taxes” (Survey, page 54). The contention that the perpetual leases were, in fact, title deeds conveying the properties to the leaseholders is supported by the language of a sample document covering a certain property in the foreign settlement of Yokohama (Survey, page 44). The document is entitled “Title Deed for Lot No.…”. While the preamble recites that the property is leased in consideration of a stipulated sum of money plus an annual payment of rental, the second, third and fourth paragraphs of the document clearly establish that the so-called leaseholder takes full title to the property with the right of sale subject to certain express conditions. The second paragraph of the document provides “That any transfer of said lot or any portion thereof shall be made to no other person than a subject or citizen of a Power having a treaty with Japan and shall be executed before the Consul of the parties concerned and shall be registered at the Kanagawa Ken-Cho”. The third paragraph even more definitely establishes the document as a deed of sale and not a lease. That paragraph provides “That no portion of said lot or any building which may be erected thereon shall be sold or leased to any Japanese subject, unless both the Japanese and Consular Authorities grant an official act of authorization under their seals of office legalizing such transfer or lease …”.²⁶ (Underscoring added.) The fourth paragraph provides in part that “The non-performance of any of the aforesaid conditions will render this Title Deed null and void, and the said lot shall revert to the Japanese Government and the buildings thereon shall become their property”.

Assuming that the sample copy is authentic and that it is substantially similar to all the other agreements under reference, there can be no reasonable doubt that the leaseholders are in fact the owners and not merely the lessees of the properties in question. Additional support for this conclusion is found in the wording of the receipts given by the Government Land Office at Yokohama for the “consideration” named in the so-called leases. A sample receipt issued by the office mentioned reads as follows:

“Government Land Office,

Yokohama, . . . . . . . 186 . .

Received this . . . . . day of . . . . . . . 186 . . from . . . . . . . . . . . . Subject . . . . . . . the sum of Mexican Dollars . . . . . . . in full of Purchase money of Bluff Lot No. . . .

$ . . . . . .

Seal of the Land Office.” (Survey, page 55)

Inasmuch as the so-called leasehold properties were actually sold to the leaseholders and since the record discloses that the “purchase money” was considerably in excess of the sale value of similar lands in Japan at that time, it would appear reasonable to assume that the “annual rental” was not intended as additional compensation for the property which had apparently already been paid for in full. The questions are therefore presented why the annual rental was stipulated in the leases; on what basis was it computed; and for what purpose or purposes was it intended to be applied.

The agreements concluded in 1867 and 1868 between the leaseholders of Hyogo and Osaka and the Japanese authorities in respect of lands in those foreign settlements are cited by the leaseholders in support of their contention that the annual rental was intended to be in commutation of all municipal charges. Article 7 of the agreement of May, 1867, reads as follows:

“All the ground leased to foreigners at Osaka and Hyogo will be subject to a payment of an annual rent calculated at a rate that will be considered sufficient to meet the expenses of keeping in repair the roads and drains, cleansing and lighting of and maintaining orders in the Settlement, and the ordinary land tax payable at the present date to the Japanese Government.” (Survey, page 20)

Article 5 of the agreement of August 7, 1868, relating to the same settlements, reads as follows:

“The annual rent of the said ground at Osaka and Hyogo shall be 1 bu per tsubo, which shall be paid in advance into the municipal fund of each place and shall be appropriated to the repairs of roads and drains, lighting the streets or other municipal purpose, subject however to a first charge of 1,524 bu at Osaka and 1,641 bu at Hyogo, which sums shall be paid annually to the Japanese Government as the ordinary land tax due on the said ground.” (Survey, page 20)

The earlier arrangement respecting the foreign settlement of Yokohama is not so explicit as those relating to Hyogo and Osaka. The arrangement concluded between the leaseholders of Yokohama and the Japanese authorities and recorded in a memorandum of December 19, 1864, contains the following provision:

“…²⁷ Finally, in order to avoid all further discussion about the keeping of roads, drainage, cleaning of streets and other municipal objects for which hitherto the Japanese local authorities have been held responsible in view of the high rental paid by all foreign leaseholders, it has been agreed that these objects shall henceforth be secured by the foreign land-renters themselves, and towards the expenses that must be incurred anually there shall be a deduction of 20 percent from the yearly rent paid by all land leased to foreigners, to be paid into a municipal fund.” (Survey, pages 7 and 8)

For three years following this agreement the leaseholders of Yokohama administered the foreign settlement but their only revenue was the 20 percent of the annual rentals remitted by the Japanese Government, plus license fees for publicans (afterwards declared illegal and discontinued), which proved inadequate to cover municipal expenses; and the administration of this settlement was again taken over by the Japanese in 1867 and continued to be administered by them until the settlements were incorporated in the Japanese municipal system in 1899. It also appears that the inadequacy of the 20 percent of the annual rental remitted to the leaseholders of Yokohama was recognized in arrangements made in 1868 for the administration of the foreign settlements of Osaka and Hyogo by which 75 percent of the rental was remitted by the Japanese Government for municipal expenses. It further appears that an additional sum of 25 percent of the proceeds of sales of leases of settlement lots was paid into a municipal fund for the three foreign settlements mentioned. At a meeting of the leaseholders held in Yokohama in April, 1909, a committee report contained the following statement:

“It is noteworthy that the Settlement of Kobe, which was by far the most efficiently maintained of the foreign quarters in Japan, was able to pay its way out of the 75 per cent of the ground rents retained for municipal purposes.” (Survey, page 12)

It appears therefore that the agreements relating to Hyogo and Osaka expressly declare that the annual rental was intended to cover the cost of municipal services and the agreement respecting Yokohama and the actual administration of that settlement impliedly warrants the conclusion that the rental collected from the Yokohama leaseholders was computed on substantially the same basis and intended to be applied for the same purposes as the rentals collected from leaseholders in Hyogo and Osaka. It also appears clear that the Japanese authorities recognized exemption of the leaseholders and refrained for a long period of years from imposing any charges or taxes on the leaseholders other than the rental stipulated in the leases, thereby confirming in practice the right of the leaseholders to be exempt from the payment of such charges or such taxes. Evidence of the recognition by the Japanese authorities of the leaseholders right of exemption is contained in the Hague Award in the House Tax Case given on May 22, 1905, holding that buildings on leasehold ground, as well as the land itself, were entitled to the exemptions provided by the treaty of 1894 abrogating extraterritoriality.²⁸ A pertinent excerpt from the Hague Award mentioned reads as follows:

“Whereas the will of the parties consequently formed the law in the matter, and in order to ascertain how the documents have really been interpreted, one must look at the treatment to which the holders of the lands have in fact been subjected, as regards the taxes in the various localities;

“Whereas, with regard to this, it is an ascertained fact that, following a practice which has not varied, and which has existed for a long series of years, not only the lands in question but also buildings erected on such lands have been exempted from all imposts, taxes, charges, contributions or conditions other than those expressly stipulated in the leases in perpetuity;

“Whereas the Government of Japan contends, it is true, that this state of affairs, as well as the fiscal immunity which foreigners enjoyed in general in the country was only due to the fact that the Consular Courts refused to give the necessary sanction to the fiscal laws of the country;

“Whereas, however, this contention is devoid of proof, and it is not even alleged that the Japanese Government ever made any protests to the Governments of Germany, France or Great Britain, in order to uphold the rights which it says were violated;

“Whereas, although it has been alleged that the immunity which foreigners in fact enjoyed as regards taxes under the governance of the old Treaties was general and extended also to foreigners residing outside the Settlements in question, it nevertheless appears from information furnished with regard to the holders of immovable property, lands and houses, at Hyogo, that the said rule was not universally applied;

“Whereas, in any case, the state of affairs de facto is not doubtful in whatever manner it may be explained.” (Survey, pages 19 and 20)

The treaties concluded between the several powers and Japan in 1894 which provided for the abrogation of extraterritoriality and the incorporation of the foreign settlements in the Japanese municipal system expressly provided that the perpetual leases in question should be confirmed and that “no conditions whatsoever other than those contained in such existing leases shall be imposed in respect of such property”. (American-Japanese Treaty of 1894, Article XVII; British-Japanese Treaty of 1894, Article 18.) The provisions of the Franco-Japanese Treaty²⁹ were even more specific and provided that “no imposts, taxes, charges, contributions, or conditions whatsoever other than those expressly stipulated in the leases in question shall be imposed in respect of such property”. (Article 21, Franco-Japanese Treaty)

These treaty provisions raise the question, therefore, whether after the incorporation of the foreign settlements in the municipal system of Japan, the leaseholders retained the right to enjoy the complete exemption from municipal taxes which they enjoyed prior to the incorporation of the foreign settlements in the Japanese municipal system. While the leaseholders contend that the status which they enjoyed prior to the effective date of the treaties abrogating extraterritoriality was intended to be confirmed and continued by the treaty provisions above quoted and that they were, therefore, entitled upon payment of the rental stipulated in their leases to continued exemption from charges or taxes of any kind by the municipalities in which the respective foreign settlements were merged, the Department is inclined to believe that their situation was materially changed by the incorporation of the foreign settlements in the municipal system of Japan and that it would be unreasonable to insist that the immunity which they enjoyed in the former foreign settlements was intended to be perpetual without regard to the changed conditions under which the foreign settlements were administered after the abrogation of extraterritoriality.

This conclusion is based on the following considerations:

(1) There is no express agreement between the Japanese Government and the leaseholders by which the latter are declared perpetually exempt from the payment of every tax or charge except the rental stipulated in the leases.

(2) The fact that such exemption was granted them prior to 1899 may reasonably be explained by the peculiar status of the foreign settlements as isolated communities entirely separate from the Japanese communities and by the fact that the annual rental stipulated in the leases was, for a long period at least, adequate to cover the necessary expenditures by the Japanese authorities in connection with the administration of the settlements.

(3) After the settlements were incorporated in the Japanese municipal system the cost of all municipal services to the foreign settlements areas was considerably in excess of the amount of the annual rental stipulated in the leases and unless it could reasonably be held that the leaseholders were entitled by the treaty provisions of 1894 to continue indefinitely to enjoy the complete exemption from any taxes or charges which they had enjoyed prior to 1899 they should be required to pay their equitable share of the cost of municipal administration.

In point of area and of population each of the former settlements comprises but a small part of the Japanese municipalities into which it was incorporated in 1899. In these circumstances, the contention that the leaseholders, having commuted taxes for the maintenance of the former foreign settlements, have thereby divested themselves of the obligation resting upon them as members of the various municipalities to contribute toward the cost of maintaining municipal services in parts of the municipality other than the former settlements, appears to be inconclusive and unconvincing.

(4) In the Department’s opinion the treaties of 1894 do not support the contention of the leaseholders that they are entitled to the complete exemption from municipal taxes or charges which they enjoyed prior to 1899. The treaty provision which is most specific on the question of the exemption granted to leaseholders after 1899 is Article 21 of the Franco-Japanese Treaty, the pertinent part of which reads in translation as follows:

“When said incorporation takes place existing leases in perpetuity under which property is now held in the said settlements shall be confirmed and no imposts, taxes, charges, contributions, or conditions whatsoever other than those expressly stipulated in the leases in question shall be imposed in respect of such property.” (Underscoring Added.)

The quoted treaty provision, particularly the underscored portion thereof, seems clearly to establish that the only exemption to which the leaseholders were entitled by virtue of the treaties of 1894 relates solely to taxes or charges “imposed in respect of” the leasehold properties. It is obvious that many modern municipal taxes or charges have no reasonable relation to lands or buildings and it seems clear, therefore, that the leaseholders are not entitled by the treaty provisions in question to exemption from such charges or taxes of this category as are levied against all other residents of the municipalities.

The Department is, therefore, of the opinion that the exemptions expressly admitted by the Japanese Government as applicable to leasehold properties in the former foreign settlements should be regarded by the leaseholders as a reasonable recognition of their rights under the leases and that the taxes and charges which the Japanese Government contend should be paid by the leaseholders who now are residents of the Japanese municipalities should be paid without further opposition. It is believed that an agreement to this effect might reasonably be made with the appropriate Japanese authorities by having the existing lease agreements cancelled and fee simple titles substituted in their stead, on the express condition that the holders of these titles will in the future on the one hand be exempt from the payment of any tax which might be regarded as a direct or indirect charge on the property formerly held under lease and on the other hand be subject to all other municipal charges and taxes on a basis of equality with native or other foreign residents of the municipalities of Japan.

The Department is impressed by the fact that, notwithstanding the efforts made over an extended period of time to find some adjustment which would mutually satisfy the legal rights of all concerned, the emphasis placed in the process of the making of such efforts upon arguments of a legal character has tended to impair the reaching of any such adjustment. It seems to the Department that consideration of the issue from the point of view of equity, there being given thought at the same time to the intent of those party to instruments providing for the establishment of the concessions, to the rights and vested interests of the present leaseholders, and to the rights of the Japanese Government and municipalities, offers at the present time the only reasonable basis of expectation that the issue can be conclusively and satisfactorily disposed of.

The Department has noted with concern reference in your despatch under acknowledgment to the possibility that the Japanese authorities may unilaterally denounce the various agreements and treaty provisions which govern perpetual leaseholds in Japan. It would view with regret the taking by the Japanese Government of any such action, which would in all probability result in arbitrary disposition of the rights of the American leaseholders on a basis less favorable to the American leaseholders than might perhaps be obtained under negotiation by the leaseholders with the Japanese Government.

If the Embassy has received no communication in regard to the matter under reference from the British Embassy subsequently to information conveyed in the course of the conversation on April 14, 1935, between the British Ambassador and Mr. Grew, it would seem to be in order for the Embassy to inquire of the British Embassy whether any progress has been made toward settlement of the matter. With reference to the opinion expressed by the British Embassy “that the British Government would gladly welcome any backing which the American Government may care to give them in regard to this question”, you may say to the British Ambassador that the American Government would be prepared to give consideration to any plan which the British Government has formulated looking toward amicable adjustment of the question of leaseholds, but that the American Government is not in position to intervene at the present conjuncture in the issue lying between the Japanese Government and the leaseholders.

The Department desires that after giving careful consideration to statements of fact and of opinion set forth in the present instruction you inform the Department whether or not you concur in them. The Department will expect to communicate further with the Embassy in regard to this matter upon receipt of the Embassy’s reply to this instruction.

Very truly yours,

For the Secretary of State:

William Phillips

15. Not printed.
16. British and Foreign State Papers, vol. lxxxvi, p. 39.
17. Ibid., vol. civ, p. 159.
18. William M. Malloy (ed.), Treaties, Conventions, etc., Between the United States of America and Other Powers, 1776–1909 (Washington, Government Printing Office, 1910) vol. i, p. 1028.
19. Not printed.
19. Not printed.
20. Omission indicated in the original instruction.
21. T. J. O’Brien, then Ambassador in Japan.
22. Not printed.
23. Signed at Washington, February 21, 1911, Foreign Relations, 1911, p. 315.
24. Neither printed.
25. Omission indicated in the original instruction.
26. Omission indicated in the original instruction.
27. Omission indicated in the original instruction.
28. See despatch No. 886, May 25, 1905, from the Chargé in the Netherlands, Foreign Relations, 1905, p. 692.
29. Signed at Paris, August 4, 1896, British and Foreign State Papers, vol. lxxxviii, p. 530.