Security deposits, known as shikikin (敷金) in Japan, are a near-universal feature of real estate lease agreements, whether for commercial or residential properties. Tenants typically pay a sum of money to the landlord at the inception of the lease, which the landlord holds as security against potential unpaid rent, damages to the property, or other monetary obligations arising from the tenancy. While this practice has been deeply embedded in Japanese leasing customs for a long time, the Japanese Civil Code, prior to its major amendments effective April 1, 2020, lacked specific statutory provisions comprehensively governing shikikin. Their treatment was largely dictated by case law and contractual practice. The amended Civil Code now formally addresses security deposits, primarily in the newly introduced Article 622-2, bringing much-needed clarity and codifying many established principles.

Defining "Security Deposit" (Shikikin) in the Amended Civil Code

Article 622-2, Paragraph 1 of the amended Civil Code provides a broad and functional definition of a security deposit:
"A security deposit... means any money, regardless of its name (e.g., deposit, guarantee money, etc.), that the lessee delivers to the lessor for the purpose of securing monetary obligations of the lessee to the lessor that arise based on the lease, such as rent obligations or others."

This definition emphasizes the purpose of the payment—to secure the tenant's monetary obligations under the lease—rather than the specific label given to it in the contract. This approach aligns with long-standing judicial precedent (e.g., a judgment from July 12, 1926 (Taisho 15.7.12)) which looked to the substance of the payment rather than its name. So, even if a payment is called something else, if its function is to secure the tenant's lease-related monetary debts to the landlord, it will likely be treated as a security deposit under these rules.

The Landlord's Obligation to Return the Security Deposit

One of the most critical aspects for tenants is the return of their security deposit at the end of the lease. Article 622-2, Paragraph 1 clearly outlines the landlord's obligation and the conditions for return:

The landlord, having received a security deposit, must return to the lessee the balance remaining after deducting from the amount of the security deposit received, the amount of the lessee's monetary obligations to the lessor that have arisen based on the lease, under the following circumstances:

1. Upon Termination of Lease AND Return of Leased Property: This is the most common scenario. The obligation to return the net security deposit arises when:
   • (a) The lease agreement has terminated; AND
   • (b) The lessee has returned the leased property to the lessor.
     Both conditions must generally be met. This codifies a key principle established by the Supreme Court in a judgment dated February 2, 1973 (Showa 48.2.2). It is important for tenants to note that simply ending the lease term is not enough; the property must also be vacated and returned to the landlord.
2. Upon Lawful Assignment of Leasehold by Tenant: The obligation to return the security deposit (to the original tenant) also arises when the lessee lawfully assigns their leasehold right to a new tenant, provided this assignment results in the original lessee being released from their lease obligations. This principle was also recognized by the Supreme Court (judgment of December 22, 1978 (Showa 53.12.22)). In such cases, the security deposit relationship with the original tenant is concluded, and the new tenant would typically establish a new security deposit arrangement with the landlord.

Permissible Deductions from the Security Deposit

The security deposit serves as security for the tenant's monetary obligations. Therefore, before returning it, the landlord is entitled to deduct amounts covering:

• Unpaid Rent: Any rent arrears.
• Damages to the Property: Costs to repair damage caused by the tenant that goes beyond "ordinary wear and tear" (tsūjō sonmō; 通常損耗) or "changes due to aging" (keinen henka; 経年変化). (The tenant's obligation to restore is now detailed in Article 621, which excludes ordinary wear and tear and aging from the tenant's responsibility unless caused by the tenant's fault).
• Other Monetary Obligations: Any other outstanding monetary debts of the tenant to the landlord arising from the lease agreement (e.g., unpaid utility charges if contractually the tenant's responsibility to the landlord, or contractually agreed penalties).

The final accounting and determination of the amount to be returned typically occur once the property has been returned and the landlord has had an opportunity to inspect it for any damages or outstanding issues. The Supreme Court judgment of February 2, 1973 (Showa 48.2.2) supports the idea that the claim for the return of the deposit (after deductions) crystallizes upon the return of the property after lease termination.

Landlord's Right to Apply the Security Deposit During the Lease Term

Article 622-2, Paragraph 2 addresses the landlord's ability to use the security deposit during the currency of the lease:

• Landlord's Discretion to Apply: If the tenant fails to perform a monetary obligation due under the lease (most commonly, fails to pay rent) during the lease term, the landlord may (but is not obliged to) apply the security deposit to satisfy that outstanding obligation.
• Tenant Cannot Demand Application: Critically, the tenant does not have the right to demand that the landlord apply the security deposit to cover, for example, overdue rent instead of the tenant making a direct payment of that overdue rent. The primary obligation to pay rent as it falls due remains with the tenant. This codifies case law, such as a judgment from March 10, 1930 (Showa 5.3.10), which denied a guarantor's right to demand such application. The decision to apply the deposit during the term rests solely with the landlord. If the landlord does choose to apply part of the deposit to cover arrears, the lease agreement may (and often does) require the tenant to replenish the deposit to its original amount.

Transfer of Security Deposit Obligations When the Landlord Changes

A common concern for tenants is what happens to their security deposit if the landlord sells the leased property to a new owner. This is now clearly addressed by Article 605-2, Paragraph 4, in conjunction with Article 622-2.

• General Rule of Succession: When the landlord's status is validly transferred to a new owner (e.g., automatically upon the sale of a property with a perfected lease, as per Article 605-2, Paragraph 1), the obligation to return the security deposit (as defined and governed by Article 622-2) is succeeded to by the new owner (or their successor in title).
• Codification of Case Law: This largely codifies the position established by prior case law, notably a Supreme Court judgment from July 17, 1969 (Showa 44.7.17), which held that the rights and obligations concerning the security deposit typically transfer with the landlord's status when the property is sold.
• Accounting for Pre-Transfer Arrears: The Supreme Court judgment of Showa 44.7.17 suggested that if there were tenant arrears owed to the original landlord before the property transfer, these would be naturally offset against the security deposit, and only the net remaining security deposit obligation would transfer to the new landlord. While the wording of the amended Article 605-2, Paragraph 4 broadly refers to the succession of the security deposit obligation under Article 622-2(1) (which itself involves deduction of tenant's debts), legal commentary notes that there can be some practical variations in how this accounting is handled between the old and new landlords. The key outcome for the tenant is that the new landlord is ultimately responsible for returning the correctly calculated balance.
• Exception if Original Landlord Retains Status: If, under the special provisions of Article 605-2, Paragraph 2 (allowing the original landlord to sell the property but retain landlord status via a lease-back arrangement), the original landlord validly retains their landlord status, then the obligation to return the security deposit also remains with that original landlord and does not immediately pass to the new property owner (it would typically pass to the new property owner only when that retention arrangement eventually terminates).

Practical Steps for Tenants and Landlords

For Tenants:

• Lease Agreement Clarity: Ensure the lease agreement clearly specifies the amount of the security deposit, its purpose, and the conditions for its return.
• Property Condition Documentation: To avoid disputes over deductions for damages, it is highly advisable to conduct a joint inspection with the landlord at the beginning of the lease to document the property's initial condition (using photos, videos, and a checklist). A similar joint inspection should be done at the end of the lease.
• Timely Rent Payments: Do not assume the security deposit can be used to cover current rent. Fulfill all monetary obligations as they fall due.
• Notification of Change of Landlord: If the property is sold, obtain clear confirmation from the new landlord that they acknowledge the transfer of the security deposit obligation.

For Landlords:

• Accurate Record-Keeping: Maintain clear records of the security deposit received and any legitimate deductions made (e.g., for unpaid rent, or for repairing tenant-caused damage beyond ordinary wear and tear, supported by invoices).
• Prompt Return: After the lease terminates and the property has been returned and duly inspected, return the correct balance of the security deposit to the tenant without undue delay.
• Property Sale: If selling the leased property, ensure that the security deposit obligations are clearly addressed in the sale and purchase agreement with the new owner to ensure a smooth transition of responsibilities.

Conclusion

The codification of rules governing security deposits (shikikin) in the amended Japanese Civil Code, particularly through Article 622-2 and related provisions like Article 605-2 for transfers of landlord status, represents a significant step towards greater legal clarity and predictability in Japanese real estate leasing. These provisions largely affirm and give statutory backing to established case law and common practices regarding the definition, purpose, application during the lease, and conditions for the return of security deposits. Both tenants and landlords benefit from this increased legal certainty, which should help in managing expectations and reducing potential disputes related to this very common and important aspect of lease agreements in Japan. Nevertheless, clear contractual terms and meticulous record-keeping remain essential for both parties.