Q&A: Security Deposits (Shikikin), Key Money (Reikin), and Guarantee Deposits (Hoshokin) in Japanese Real Estate Leases: What's Their Legal Standing?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

When leasing real estate in Japan, particularly residential or commercial properties, tenants often encounter various upfront payments beyond the first month's rent. Among the most common are the shikikin (敷金 - security deposit), reikin (権利金 or 礼金 - key money/gratuity), and sometimes a hoshōkin (保証金 - guarantee deposit). Understanding the distinct legal nature, purpose, and treatment of these payments under Japanese law is crucial for both landlords and tenants, especially foreign businesses navigating this landscape. The Japanese Civil Code was notably amended effective April 1, 2020, to include specific provisions clarifying the handling of shikikin, largely codifying long-standing case law and commercial practices.

Shikikin is the Japanese equivalent of a security deposit and is a very common feature in lease agreements.

  • A. Definition and Purpose (Civil Code Art. 622-2(1)):
    Under Article 622-2, Paragraph 1 of the Japanese Civil Code, a shikikin is defined as any money, regardless of the name given to it (e.g., security deposit, bond), that is paid by the tenant to the landlord for the purpose of securing the tenant's monetary obligations arising from the lease agreement. These obligations primarily include unpaid rent, compensation for damages caused to the leased property by the tenant beyond normal wear and tear, and costs associated with restoring the premises upon termination of the lease. The shikikin is typically paid at the inception of the lease and is based on a security deposit agreement, which is considered ancillary to the main lease contract. Prevailing legal theory traditionally viewed this ancillary agreement as a "real contract" (yōbutsu keiyaku), meaning it was perfected by the actual delivery of the money, though the focus of the new Civil Code provision is more on its function and the rules governing its application and return.
  • B. Obligations Secured – The "Time of Vacating" Theory (Akewatashi-ji Setsu):
    The shikikin serves to secure all monetary obligations that the tenant owes to the landlord up until the point the tenant completely vacates and returns possession of the leased property to the landlord following the termination of the lease agreement. This is often referred to as the "time of vacating" theory (akewatashi-ji setsu). This means it covers not only rent arrears accrued during the lease term but also damages for unlawfully holding over the property after the lease has ended, and costs for any necessary repairs or cleaning due to the tenant's use beyond normal wear and tear identified upon vacation. The tenant's legal claim for the refund of the shikikin (less any valid deductions) arises only when two conditions are met: (1) the lease agreement has terminated, AND (2) the tenant has fully returned the leased property to the landlord (Civil Code Art. 622-2(1)(i)).
  • C. Return of Shikikin and Deductions:
    Upon the termination of the lease and the return of the property, the landlord is obligated to return the shikikin to the tenant. However, any outstanding monetary obligations owed by the tenant to the landlord at that point are automatically deducted from the shikikin balance before the refund is made. The Civil Code (Art. 622-2(1)) specifies that the landlord must return the amount remaining after deducting the sum of the tenant's monetary obligations. No separate formal declaration of set-off by the landlord is required for these deductions.
  • D. Tenant's Duty to Vacate vs. Landlord's Duty to Return Shikikin – Not Simultaneous:
    A critical point, long established by Japanese Supreme Court case law (e.g., Supreme Court, September 2, 1974, Minshū Vol. 28, No. 6, p. 1152) and consistent with the logic of Article 622-2, is that the tenant's obligation to vacate the leased premises and the landlord's obligation to return the shikikin are not in a relationship of simultaneous performance (dōji rikō no kōbenken). The tenant must first vacate and return the property. Only then does the landlord's obligation to assess any damages or arrears, make necessary deductions, and return the net shikikin balance mature. This is justified because the full extent of the tenant's obligations concerning the condition of the property can often only be determined after the tenant has vacated and the landlord can inspect the premises.
  • E. Landlord's Right to Apply Shikikin During Lease Term (Civil Code Art. 622-2(2)):
    If the tenant defaults on monetary obligations, such as failing to pay rent during the lease term, the landlord has the option to apply the shikikin towards these arrears or damages.
    However, the tenant cannot compel the landlord to use the shikikin to cover such current defaults. The tenant remains obligated to pay rent as it falls due, regardless of the shikikin amount held by the landlord. The landlord can still demand the overdue rent and, if it remains unpaid despite proper demands, can terminate the lease for breach, even if the shikikin amount held would be sufficient to cover the arrears. The shikikin is primarily security for the landlord's benefit, not a pre-payment fund for the tenant to draw upon at will during the tenancy.
  • F. Shikibiki (敷引き - Special Deduction Agreements) and Consumer Protection:
    In some regions of Japan, particularly in western parts, lease agreements may contain a shikibiki (敷引き) clause. This is a special agreement whereby a predetermined, fixed amount or percentage of the shikikin is deducted by the landlord upon termination of the lease and is not returned to the tenant, irrespective of the actual costs of repairs or restoration needed due to the tenant's use.
    Concerns about the fairness of shikibiki clauses arise, especially in residential leases where the tenant is a consumer, if the fixed deduction effectively makes the tenant bear the costs of normal wear and tear (通常損耗 - tsūjō sonmō) or depreciation due to the natural aging of the property. Under general Japanese lease principles and case law, tenants are typically only responsible for damages or deterioration caused by their negligence or misuse, not for normal wear and tear.
    The validity of shikibiki clauses in consumer leases has been tested against Article 10 of the Consumer Contract Act (消費者契約法 - Shōhisha Keiyaku Hō), which nullifies contractual clauses that unilaterally harm consumer interests in contravention of the principle of good faith. The Supreme Court of Japan (e.g., decision of March 24, 2011, Minshū Vol. 65, No. 2, p. 903) has held that shikibiki clauses are not automatically void under the Consumer Contract Act. If the amount of the shikibiki deduction is clearly stated in the lease agreement and is not found to be "excessively high" when compared to typical repair costs for damages beyond normal wear and tear for similar properties, considering the rent level and other payments like reikin, the clause may be upheld. The rationale sometimes offered is that the stated monthly rent might be lower to compensate for the shikibiki. However, if a shikibiki amount is deemed exorbitant or an unfair shifting of normal property maintenance costs to the consumer tenant, it could be invalidated.

Q2: What happens to the Shikikin if the Landlord sells the property (Transfer of Landlord's Status)?

When the landlord's status is transferred to a new owner (e.g., upon the sale of the leased property, assuming the lease itself is effective against the new owner through perfection mechanisms like property delivery for building leases), the rights and obligations concerning the shikikin are automatically succeeded to by the new landlord. This is stipulated in Article 605-2, Paragraph 4 of the Civil Code, which applies the shikikin rules of Article 622-2 to the successor landlord.
This means the new landlord assumes the responsibility for refunding the shikikin (less any valid deductions) to the tenant when the lease eventually terminates and the property is vacated.
It's important to note that any outstanding monetary obligations owed by the tenant to the old landlord at the time of the transfer of landlord status are typically considered to be settled from the shikikin first. Only the net balance of the shikikin is effectively deemed transferred to the new landlord's responsibility (reflecting principles from Japanese case law, e.g., Supreme Court, July 17, 1969, Minshū Vol. 23, No. 8, p. 1610).

Q3: What happens to the Shikikin if the Tenant changes (e.g., through lease assignment)?

If the original tenant validly assigns their lease rights to a new tenant (which generally requires the landlord's consent under Civil Code Art. 612), the shikikin agreement established between the landlord and the original tenant does not automatically transfer to secure the obligations of the new tenant.
The landlord is generally obligated to settle accounts with the original tenant by refunding the shikikin balance after deducting any amounts owed by that original tenant due to their tenancy (Civil Code Art. 622-2(1)(ii)). For the new tenant, a fresh shikikin arrangement would typically need to be made with the landlord.
Exceptions to this can occur if there is a specific tripartite agreement between the original tenant, the new tenant, and the landlord stipulating that the existing shikikin will secure the new tenant's obligations, or if the original tenant validly assigns their right to the shikikin refund to the new tenant and the landlord consents to this arrangement (see Supreme Court, December 22, 1978, Minshū Vol. 32, No. 9, p. 1768).

Q4: What is Reikin (権利金 or 礼金 - Key Money) and how does it differ from Shikikin?

Reikin (often written as 礼金, using characters that mean "gratitude money" or "gift money," but sometimes also referred to as 権利金 - kenrikin, meaning "rights money") is another common upfront payment in Japanese real estate leases, particularly residential ones.

  • Definition and Key Difference from Shikikin:
    Reikin is a non-refundable payment made by the tenant to the landlord at the beginning of the lease. Unlike shikikin, it is not returned to the tenant when the lease ends, regardless of the condition of the property or whether the tenant has fulfilled all their obligations.
  • Nature and Purpose:
    The precise legal nature and purpose of reikin can be somewhat ambiguous and often depend on regional customs and the specific context of the transaction. It can be characterized in various ways:
    1. Gratuity or Premium: Often considered a customary payment or "gift" to the landlord for granting the lease, especially in high-demand rental markets.
    2. Partial Advance Payment of Rent: In some older or commercial lease contexts, it might be viewed as a lump-sum advance portion of the overall rent due for the lease term.
    3. Consideration for Locational Advantage or Business Goodwill: For commercial properties, reikin might represent a payment for the favorable location or the established goodwill of the premises.
    4. Consideration for the Grant of a Valuable Leasehold Right: Given the strong tenant protections under the Land and Building Lease Act (LBLA), which can make leaseholds valuable, reikin is sometimes seen as consideration paid by the tenant for acquiring these protected rights.
      The amount of reikin is typically expressed as a multiple of the monthly rent (e.g., "one month's rent," "two months' rent"). Its prevalence and amount vary significantly by region in Japan and by property type.

Q5: What is a "Guarantee Deposit" (Hoshōkin - 保証金) and how does it relate to Shikikin and Reikin?

Hoshōkin is a broader and more versatile term than shikikin or reikin, and its specific legal nature and treatment depend heavily on the terms of the individual lease agreement. It can encompass various functions:

  • Similar to Shikikin: In many commercial lease agreements, a payment termed hoshōkin functions essentially as a larger-scale security deposit, securing the tenant's obligations under the lease and being refundable at the end of the term, less any deductions for defaults or damages.
  • Similar to Reikin: Sometimes, a portion or even all of a hoshōkin payment might be stipulated as non-refundable or subject to amortization over the lease term, making it functionally similar to reikin.
  • Construction Cooperation Fund (建設協力金 - Kensetsu Kyōryokukin): This is a specific type of hoshōkin sometimes encountered in the development of new commercial buildings. A prospective major tenant might provide a substantial sum to the landlord or developer, which is then used to help finance the construction of the building that the tenant will later occupy. This kensetsu kyōryokukin is typically structured as a long-term, often interest-free or very low-interest, loan from the tenant to the landlord, with repayments made over an extended period or offset against future rent payments. Crucially, such funds are generally considered separate loan obligations of the original landlord and do not automatically transfer as part of the lease security obligations to a new landlord if the property is sold (see Supreme Court, March 4, 1976, Minshū Vol. 30, No. 2, p. 25).
  • Penalty for Early Termination: A hoshōkin might also include provisions for forfeiture if the tenant terminates the lease prematurely, acting as a form of liquidated damages or penalty (sometimes referred to as 空室損料 - kūshitsu sonryō, or damages for vacancy loss).

Given this variability, the exact nature, refundability, and conditions for application or forfeiture of any payment labeled as hoshōkin must be meticulously defined in the lease agreement itself.

Conclusion

Navigating the financial aspects of real estate leases in Japan requires a clear understanding of the distinct legal characteristics and practical implications of shikikin (security deposit), reikin (key money/gratuity), and hoshōkin (guarantee deposit). The shikikin, now specifically addressed in the Civil Code, is a refundable security primarily covering tenant obligations up to the point of vacating the premises, with its return contingent on prior vacation and subject to automatic deductions for any defaults. Reikin, in contrast, is typically a non-refundable upfront payment, the purpose of which can vary from a customary gratuity to consideration for valuable leasehold rights. Hoshōkin is a more flexible term whose nature is highly dependent on the contract, potentially mirroring shikikin or reikin, or serving specialized functions like a construction cooperation fund. Special contractual deduction clauses from shikikin, such as shikibiki, also exist but are subject to fairness scrutiny, particularly in leases with consumers. For businesses entering into lease agreements in Japan, it is paramount to have these various payments and their terms explicitly and clearly defined in the contract and to understand their respective legal status and implications to avoid future misunderstandings or disputes.