Earnest Money (Tetsukekin) in Japan: What It Costs to Walk Away After Signing

The short answer: earnest money is the price of walking away, but only for a while

When you buy property in Japan, you usually pay earnest money (tetsukekin) when you sign the sales contract. Under the Civil Code, unless the parties agree otherwise, this payment is presumed to be a "cancellation deposit": the buyer can cancel by forfeiting it, and the seller can cancel by paying back double. Once the other party has started performing the contract, however, this route is closed ^[1][4]. When the seller is a licensed real estate company and the buyer is an ordinary individual, the Real Estate Brokerage Act adds further protections: caps on the deposit and on penalties, and mandatory protection of the money paid ^[2]. This article walks through these rules from the buyer's side and lists what to check before signing.

What earnest money is: the Civil Code rule

Article 557 of the Civil Code provides that once the buyer has paid earnest money, the buyer may cancel the contract by abandoning it, and the seller may cancel by actually tendering twice the amount to the buyer ^[1]. "Actually tendering" means the seller must really put the money in front of the buyer; simply saying that double will be refunded is not enough.

In theory, earnest money can serve several purposes: as evidence that a contract exists, as a penalty forfeited on breach, or as the cancellation deposit described above. The parties may decide which by agreement, but if nothing specific is agreed, the law presumes it is a cancellation deposit ^[4].

There is one critical limit. Once the other party has begun performing the contract, cancellation by earnest money is no longer available ^[1]. Whether the buyer can still walk away by forfeiting the deposit depends on whether the seller has begun performing; whether the seller can walk away by paying double depends on whether the buyer has. In addition, when a contract is cancelled this way, neither side can, in principle, claim further damages from the other ^[1].

When a real estate company is the seller: protections under the Brokerage Act

If you buy a newly built condominium, or buy a renovated resale unit directly from the company that bought and refurbished it, the seller is a licensed real estate business. In that case the Real Estate Brokerage Act imposes the mandatory rules below, and any special terms that contradict them to the buyer's disadvantage are void ^[2].

1. Earnest money is capped at 20% of the price. A licensed business selling its own property may not accept earnest money above 20% of the price. Whatever the contract says, that money works as a cancellation deposit, so the buyer may cancel by forfeiting it until the seller begins performing ^[2]. On a price of 50 million yen, the deposit can be at most 10 million yen.

2. Penalties are capped at 20% of the price in total. For cancellation due to breach, any agreed amount of damages and any penalty combined may not exceed 20% of the price; the excess is void ^[2]. On a 50-million-yen price, the cap is again 10 million yen.

3. Protection of deposits. Before a licensed seller accepts earnest money, interim payments or similar sums ahead of handover, it must arrange protection such as a bank guarantee or a guarantee insurance policy, so that the buyer can recover the money if the seller goes bankrupt ^[2]. Protection is not required once ownership has been registered in the buyer's name, or when the amount is small: for property still under construction, when the total received is no more than 5% of the price and no more than 10 million yen; for completed property, when it is no more than 10% of the price and no more than 10 million yen ^[2][3]. If the seller fails to arrange required protection, the buyer may refuse to pay the deposit ^[2].

For example, on a 50-million-yen condominium still under construction, protection is required once the deposit exceeds 2.5 million yen; for a completed unit at the same price, once it exceeds 5 million yen. For a completed property priced at 200 million yen, 10% of the price would be 20 million yen, but the separate 10-million-yen ceiling applies, so protection is required above 10 million yen ^[2][3].

4. Cooling-off. If the buyer applied to purchase or signed the contract somewhere other than the licensed seller's office or similar premises, the buyer may withdraw or cancel in writing within 8 days of being informed of this right in writing. The seller must promptly refund the deposit and may not claim any penalty. The right is lost once the buyer has received the property and paid the full price ^[2]. Contracts signed at the seller's office or model room are usually outside this rule, so where you applied and where you signed both matter.

Note that items 1 to 4 apply only when a licensed business is itself the seller. In a resale deal where an individual sells through a broker, the general Civil Code rules apply, and the deposit amount and cancellation terms are whatever the parties agree in the contract ^[1][2].

What "beginning performance" means: when the deposit route closes

In a judgment of 24 November 1965, the Supreme Court held that beginning performance means doing part of the performance in a way that can be objectively recognised from outside, or carrying out a preparatory act indispensable to performance ^[4]. Which specific acts qualify, however, is often hard to judge and frequently disputed ^[4]. Some examples:

• A seller who, as required by the contract, got the existing tenant to move out was held to have begun performance, so the buyer's later cancellation by forfeiting the deposit was invalid (Tokyo District Court, 16 October 2009) ^[4].
• Surveying carried out by a buyer about a year before the final performance date was held not to be performance of a contractual obligation, so it did not count (Supreme Court, 16 March 1993) ^[4].
• In a condominium sale, a seller handed the documents needed to discharge its mortgage to a judicial scrivener before closing. The Tokyo District Court (26 February 2020) treated this as beginning performance and invalidated the buyer's cancellation ^[5], while the Tokyo High Court (27 October 2021) reportedly reached the opposite view on a similar act ^[4].

Courts look at the nature of the act, the content of the obligation and the purpose of the performance date as a whole; there is no bright-line test ^[4]. For buyers, the closer the handover date, the less room there is to exit by forfeiting the deposit, and the more likely a dispute becomes.

What this means for buyers: checks before you sign

Read the cancellation terms carefully. The Brokerage Act requires that, before the contract is concluded, a licensed real estate transaction specialist explain the key terms with a written statement. These include the amount and purpose of money paid other than the price (such as earnest money), matters relating to cancellation, any agreed damages or penalties, an outline of deposit protection, and what happens if the mortgage is not approved ^[2]. All of these bear directly on whether you can exit after signing and at what cost, so ask on the spot about anything unclear.

Confirm how long the deposit route stays open. If the contract only says cancellation is possible "until the other party begins performance", the actual deadline can become a point of dispute ^[4]. When signing, check whether the contract sets a specific date for cancellation by earnest money, and note that date.

Keep the deposit at a level you can live with. The larger the deposit, the more it costs the buyer to walk away, and the more it costs the seller to exit by paying double. With a licensed seller, the cap is 20% of the price ^[2]; in a sale by an individual there is no statutory cap, so it is a matter for negotiation ^[2].

For off-plan purchases and large deposits, confirm protection. When buying a condominium still under construction, if the deposit exceeds 5% of the price or 10 million yen, make sure the seller has arranged protection and that you have received the supporting document ^[2][3].

A failed mortgage is a separate issue from cancellation by deposit. If you are borrowing, what happens when the loan is not approved is governed by the mortgage contingency clause in the contract, which must also be covered in the written statement of key terms ^[2]. We will cover mortgage contingency clauses in a separate article.

Buyers living abroad should leave extra time. If you need to raise funds and remit them from China or elsewhere, or if documents must be mailed or notarised, confirm the payment dates for the deposit and the balance before signing, so that a late payment is not treated as a breach.

Summary

Earnest money is both a sign of commitment and the price of cancellation: the buyer can exit by forfeiting it and the seller by paying double, but not after the other side has begun performing ^[1]. When a real estate company is the seller, the Brokerage Act caps both the deposit and penalties at 20% of the price, and requires protection of deposits in cases such as off-plan sales ^[2][3]. Checking the cancellation terms, the deposit deadline, deposit protection and the mortgage clause one by one before signing prevents many disputes. If you are considering buying a home in Osaka, please feel free to contact us; we can explain the contract and the statement of key terms item by item, in Chinese as well.