Securing Movables and Immovables with a Japanese "Pledge" (Shichi-ken): How Does It Work?

Japanese Attorney at Law - Bengoshi L.L.

30 May 2025 • 13 min read

In the diverse array of security interests available under Japanese law, the "pledge" (質権 - shichi-ken) stands as a foundational and historically significant consensual security device. Governed primarily by Articles 342 onwards of the Japanese Civil Code, a pledge is created when a creditor (the pledgee) takes possession of collateral—either movable property (動産質 - dōsan-jichi) or, less commonly today, immovable property (不動産質 - fudōsan-jichi)—provided by the debtor or a third-party security provider (the pledgor). This transfer of possession is the hallmark of the pledge, distinguishing it from non-possessory security interests like mortgages.

The pledge grants the creditor the right to retain the collateral until the secured debt is satisfied and, upon the debtor's default, to obtain preferential payment from the value of that collateral, typically through a court-supervised auction. This article will explore the mechanics of how pledges over movables and immovables are established in Japan, their legal effects before and during enforcement, their methods of extinction, and their evolving role in contemporary Japanese commercial practice.

The Nature and Creation of a Pledge

A pledge is an agreed-upon (consensual) security interest (約定担保物権 - yakujō tanpo bukken). It does not arise automatically by law but is established through a pledge agreement (質権設定契約 - shichiken settei keiyaku) between the pledgee (the creditor whose claim is being secured) and the pledgor. The pledgor can be the debtor themselves or a third party who offers their property as security for the debtor's obligation (a 物上保証人 - butsujō hoshōnin, or third-party security provider). In the case of a third-party pledgor, rules analogous to those for guarantors apply regarding their right to seek indemnification from the principal debtor if the pledge is enforced (Civil Code Art. 351).

The Cornerstone: Delivery of Possession (引渡し - Hikiwatashi)

The defining operational requirement for a pledge to take effect is the delivery of possession of the collateral from the pledgor to the pledgee (Civil Code Art. 344). This makes the pledge a "possessory" security interest.

Prohibition of Sen'yū Kaitei (Constructive Possession by Pledgor) for Movable Pledges: A crucial rule for pledges of movable property is found in Civil Code Article 345. This article prohibits the pledgor from continuing to possess the pledged movable as an agent for the pledgee. In other words, a purely constructive delivery known as sen'yū kaitei (where the pledgor retains physical control but notionally holds it on behalf of the pledgee) is not permitted for the establishment of a pledge over movables. This rule emphasizes the need for an actual transfer of physical control to the pledgee, which serves multiple purposes: it unequivocally establishes the pledgee's power to retain the item (留置的効力 - ryūchiteki kōryoku) and, historically, was seen as a rudimentary form of publicity for the pledge.
Other Forms of Delivery: While sen'yū kaitei is barred if the pledgor is to be the possessory agent, other simplified forms of delivery, such as "simplified delivery" (簡易の引渡し - kan'i no hikiwatashi, where the pledgee already possesses the item for another reason) or "delivery by direction" (指図による占有移転 - sashizu ni yoru sen'yū iten, where a third party possessing the item is instructed to hold it for the pledgee), are generally permissible for establishing a pledge, provided the pledgor does not thereby become the pledgee's direct possessory agent.
Rationale for Strict Delivery Rules: The precise rationale for these strict delivery requirements, particularly the exclusion of sen'yū kaitei by the pledgor, has been debated. While older theories emphasized the publicity aspect (alerting third parties to the encumbrance), the limited actual publicity afforded by mere possession has led to modern interpretations focusing more on ensuring the effectiveness of the pledgee's right to retain the collateral and prevent its easy disposal by the pledgor.

Subject Matter of a Pledge (目的物 - Mokutekibutsu)

A pledge can be created over:

Movable Property (動産 - Dōsan): A vast range of tangible movable items can serve as collateral for a pledge.
Immovable Property (不動産 - Fudōsan): Land and buildings can also be the subject of a pledge, though, as discussed later, this is now rare.

Restrictions:
Certain types of property cannot be pledged. Article 343 of the Civil Code states that property that cannot be assigned (transferred) also cannot be pledged. This would include, for example, items whose trade is illegal. Additionally, various special laws may prohibit the pledging of specific types of assets, particularly those for which alternative security regimes (like specialized mortgage systems) exist. For instance, registered ships or aircraft are typically subject to their own mortgage laws and are generally excluded from being pledged, partly to avoid the complexities of overlapping and potentially conflicting security rights.

Pledge of Goods Represented by Documents of Title:
It's also possible to pledge goods that are represented by documents of title, such as warehouse receipts (倉荷証券 - kurani shōken) or bills of lading (船荷証券 - funani shōken). In such cases, the pledge is typically effected by the delivery (and often endorsement) of these documents to the pledgee. This act of transferring the document is legally considered to transfer control over the underlying goods, thereby satisfying the possession requirement for the pledge (relevant provisions are found in the Commercial Code).

Perfection and Priority (対抗要件 - Taikō Yōken)

For a pledge to be effective not just between the pledgor and pledgee but also against third parties (e.g., other creditors, subsequent purchasers), certain requirements for perfection (opposability) must be met:

Movable Pledges: The continued possession of the pledged movable by the pledgee (or by a third party holding on the pledgee's behalf via delivery by direction) serves as the means of perfection against third parties (Civil Code Art. 352). If the pledgee loses possession of the movable (unless it was wrongfully taken and is promptly recovered through legal action), the pledge may be extinguished or, at a minimum, become unassertable against third parties who subsequently acquire rights without notice.
Immovable Pledges: For pledges over real estate, perfection against third parties requires registration (登記 - tōki) of the pledge in the official real estate registry (Civil Code Art. 177 applies). This registration allows the immovable pledge to be ranked against other registered rights affecting the same property, such as mortgages or other immovable pledges. The priority among such registered rights is generally determined by the chronological order of their registration (Civil Code Art. 373, applied to immovable pledges via Art. 361).

If multiple pledges are created over the same movable property, their priority is generally determined by the order in which each pledgee acquired effective possession that perfects their right (Civil Code Art. 355).

Effects of the Pledge Before Enforcement (実行前の効力 - Jikkō-mae no Kōryoku)

Once a pledge is validly established and perfected, it creates a set of rights and obligations for both the pledgee and the pledgor, even before any default on the secured debt occurs.

Pledgee's Rights and Duties:

Right of Retention (留置的効力 - Ryūchiteki Kōryoku): The most immediate effect is the pledgee's right to retain possession of the collateral until the secured debt is paid in full (Civil Code Art. 347). This right to hold the property serves as powerful leverage.
Duty of Care (善管注意義務 - Zenkan Chūi Gimu): The pledgee, being in possession, must keep and preserve the pledged property with the care of a "good manager" (Civil Code Art. 350, applying Art. 298(1) by analogy).
Right to Claim Expenses (費用償還請求権 - Hiyō Shōkan Seikyūken): The pledgee is entitled to claim reimbursement from the pledgor for necessary expenses (hitsuyōhi) incurred in preserving the collateral. They can also claim for beneficial expenses (yūekihi) that have demonstrably increased its value, to the extent that such increase still exists at the time of reimbursement (Civil Code Art. 350, applying Art. 299). Importantly, these claims for expenses themselves become part of the debt secured by the pledge.
Restrictions on Use of Collateral (Civil Code Art. 350, applying Art. 298(2)): As a general rule, the pledgee cannot use the pledged property, lease it to others, or further pledge it (sub-pledge, discussed later) without the pledgor's consent. An exception is made for use that is necessary for the preservation of the property.
- Significant Exception for Immovable Pledges: Unlike movable pledges, Article 356 of the Civil Code grants the pledgee of an immovable property the right to use and reap the profits (収益 - shūeki) from that property in accordance with its intended purpose, unless the pledge agreement stipulates otherwise. For example, if a pledged building is a rental property, the pledgee can collect the rents.
- Correspondingly, the pledgee of an immovable is generally responsible for paying administration expenses, property taxes, and other burdens associated with the property (Civil Code Art. 357). Furthermore, they are typically not entitled to claim interest on the secured debt, as the profits derived from the immovable are presumed to offset any interest (Civil Code Art. 358). However, these default rules can be modified by agreement between the parties (Civil Code Art. 359).
Extinction upon Pledgee's Breach of Duty: If the pledgee breaches their duties regarding the collateral (e.g., unauthorized use leading to damage, gross negligence in preservation), the pledgor can demand the extinction of the pledge (Civil Code Art. 350, applying Art. 298(3)).

Pledgor's Rights:

The pledgor, having transferred possession (and in the case of immovables, often the right to use and profit), generally loses the immediate right to use and possess the collateral. They retain ownership (or the underlying right pledged) subject to the pledgee's security interest. The pledgor can still sell or otherwise dispose of their underlying ownership interest in the collateral, but any new owner will acquire the property subject to the perfected pledge.

Effect Against Third Parties (Other Creditors of the Pledgor):

Movable Pledges: If other creditors of the pledgor attempt to seize the pledged movable property through civil execution, the pledgee, being in possession, can typically refuse to surrender it to the court execution officer. This effectively prevents seizure unless the pledgee's secured claim is satisfied first (see Civil Execution Act Art. 124). An exception exists if the seizing creditor holds a right that has priority over the pledge (e.g., a superior-ranking statutory lien); in such a case, the pledgee cannot refuse surrender to enforce that superior right (Civil Code Art. 347, proviso).
Immovable Pledges: Other creditors can initiate execution proceedings (e.g., a compulsory auction) against pledged immovable property. If the pledge is the paramount registered right on the property and the pledge agreement doesn't restrict the pledgee's right to use and profit from it, the auction purchaser acquires the property subject to the pledge (Civil Execution Act Art. 59(2) and 59(4)). This means the purchaser must satisfy the pledgee's claim to gain clear title and possession. If, however, there are registered rights (like a prior mortgage) that rank ahead of the immovable pledge, the pledge may be extinguished by the auction sale, and the pledgee will receive a distribution from the sale proceeds according to their registered priority.

Sub-Pledge (転質 - Tenshichi)

Article 348 of the Civil Code allows a pledgee, on their own responsibility and within the duration of their own pledge, to further pledge the collateral they hold to secure a debt of their own. This is known as a "sub-pledge" or tenshichi.

The original pledgee effectively becomes a pledgor in relation to the sub-pledgee, offering the originally pledged item as security.
The validity and scope of the sub-pledge are inherently dependent on the existence and terms of the original pledge; the sub-pledgee cannot acquire greater rights than the original pledgee possessed.
While the consent of the original pledgor (the ultimate owner of the property) is not required for the creation of a sub-pledge, the original pledgee remains responsible to the original pledgor for any loss or damage to the property caused by the sub-pledge that would not have occurred otherwise. For example, if the sub-pledgee fails to exercise the proper duty of care and the item is damaged, the original pledgee would be liable to the original pledgor.
The perfection and priority of sub-pledges, especially concerning the claim secured by the original pledge, can involve complex interactions with rules on assignment of claims if the sub-pledge is also intended to give the sub-pledgee rights over the debt owed to the original pledgee.

Enforcement of the Pledge (実行 - Jikkō)

If the debtor defaults on the secured obligation, the pledgee can enforce the pledge to obtain satisfaction. The primary methods are:

Collection from Fruits (果実からの優先弁済 - Kajitsu kara no Yūsen Bensai): As mentioned (Civil Code Art. 350 applying Art. 297), the pledgee can collect fruits (natural or legal) from the collateral and apply them towards the satisfaction of the secured debt. This right can typically be exercised even before the principal secured claim becomes due, especially for ongoing income like rent.
Public Auction (競売 - Kyōbai): This is the principal statutory method for realizing the value of the collateral for both movable and immovable pledges. The pledgee can apply to the competent court for a public auction of the pledged property. The proceeds from the auction are then used to satisfy the pledgee's secured claim (including principal, interest, and costs of enforcement), with any surplus being returned to the pledgor or distributed to other entitled parties (such as junior creditors).
- For movable pledges, the pledgee typically initiates the auction process by submitting the pledged movable to the court execution officer (Civil Execution Act Art. 190(1)(i)).
- For immovable pledges, the auction procedure is generally similar to that for mortgage foreclosure (Civil Execution Act Art. 181(1)(iii), applied via Art. 180(2), which lists pledge as a real right enforceable through these procedures).
Simple Satisfaction / Direct Appropriation by Court Order (簡易な弁済充当 - Kan'i na Bensai Jūtō) (for Movable Pledges only): Article 354 of the Civil Code provides a simplified enforcement method for movable pledges. If there is a "just reason" (正当な理由 - seitō na riyū)—for example, if the pledged movable has a very low value such that the costs of a public auction would be disproportionate, or if it has a readily ascertainable market price—the pledgee can apply to the court to be permitted to appropriate the collateral directly in satisfaction of the debt. This appropriation is based on a valuation of the property conducted by an expert appraiser appointed by the court. The pledgor must be given prior notification of this application. This method avoids the complexities and expenses of a full public auction.
Prohibition of Forfeiture Clauses (流質契約の禁止 - Ryūshichi Keiyaku no Kinshi): A crucial protection for pledgors is found in Article 349 of the Civil Code. This article voids any agreement, whether made at the time of creating the pledge or at any point before the secured debt becomes due, which stipulates that the pledgee will automatically acquire ownership of the pledged property (a forfeiture clause, or ryūshichi keiyaku), or will be entitled to dispose of it by means other than those prescribed by law, if the debtor fails to repay the debt. This provision is designed to protect debtors/pledgors, who might be in a weaker bargaining position at the time of obtaining a loan, from agreeing to oppressive terms that could result in the loss of collateral far exceeding the value of the debt.
- Exceptions: This prohibition does not apply to pledges made between merchants in the course of their commercial activities (Commercial Code Art. 515) or to pledges made to licensed pawnbrokers, who operate under a separate regulatory regime that includes its own safeguards. After the debt has become due and the debtor is in default, the parties are generally free to agree to a transfer of the collateral in satisfaction of the debt (a form of daibutsu bensai or accord and satisfaction).

Extinction of the Pledge (消滅 - Shōmetsu)

A pledge can be extinguished through various circumstances:

Extinction of the Secured Claim: Due to the principle of accessoriness, if the underlying debt is extinguished (e.g., by payment, prescription, set-off, or waiver), the pledge securing it also automatically ceases to exist.
Destruction of the Pledged Property: If the collateral is destroyed, the pledge over it naturally ends (though the pledgee might have rights of real subrogation over any insurance proceeds).
Merger (混同 - Kondō): If the pledgee acquires full ownership of the pledged property through other means (e.g., by purchasing it from the pledgor in a separate transaction), the pledge is extinguished by merger of rights.
Waiver by the Pledgee: The pledgee can voluntarily waive their pledge right.
Loss of Possession (for Movable Pledges): If the pledgee loses possession of a pledged movable, the pledge itself is generally extinguished, unless possession was wrongfully taken from the pledgee and they subsequently recover it through legal action (in which case the pledge is deemed to have continued).
Pledgor's Demand for Extinction due to Pledgee's Breach: As mentioned earlier, if the pledgee breaches their duties concerning the care or use of the collateral, the pledgor can request the court to extinguish the pledge (Art. 350 applying Art. 298(3)).
Immovable Pledges - Duration Limit: Pledges over immovable property have a maximum statutory duration of ten years (Civil Code Art. 360). Even if a longer period is agreed upon, it is legally shortened to ten years. This period can be renewed by agreement, but each renewal is also subject to the ten-year limit. This rule, primarily conceived with agricultural land in mind, was intended to prevent long-term encumbrances that might hinder the productive use or improvement of real estate due to the pledgee-occupant's potentially limited interest in long-term investment. This significantly limits the utility of immovable pledges for long-term financing.

The Diminishing Role of Immovable Pledges in Modern Practice

While the Civil Code provides for pledges over both movables and immovables, the immovable pledge (不動産質 - fudōsan-jichi) has seen a marked decline in practical use in modern Japan. Several factors contribute to this:

Inconvenience of Possession Transfer: The requirement for the pledgee to take possession of the real estate is often impractical for both parties. For institutional lenders like banks, managing and occupying various types of pledged real estate (e.g., a farm, a factory, a residence) is not a core business function and can be burdensome. For pledgors, relinquishing possession and use of their property, especially if it's their home or place of business, is a significant drawback.
Superiority of Mortgages for Real Estate: The non-possessory mortgage (抵当権 - teito-ken) offers a far more flexible and commercially viable means of securing debts with real estate, as it allows the debtor/owner to retain possession and continue using the property.
Ten-Year Duration Limit: The statutory ten-year maximum duration for immovable pledges (Art. 360) makes them unsuitable for long-term financing arrangements, which are common in real estate.

Despite its decline, legal scholars have occasionally discussed potential scenarios where immovable pledges could be revitalized, for example, for income-producing properties (like apartment buildings) where the pledgee's right to collect rents (as a form of use and profit under Art. 356) could provide a direct stream of funds to service the debt, with possession managed through existing lease arrangements.

Conclusion: A Possessory Security with Enduring Relevance for Movables

The pledge (shichi-ken) remains a fundamental and distinct form of consensual security in the Japanese legal system, characterized by the creditor's possession of the collateral. Its core features—the transfer of possession as an establishment requirement, the pledgee's right to retain the property, and the right to preferential payment upon default (typically through auction, or by court-approved direct appropriation for movables)—define its utility and its limitations.

While the immovable pledge has largely been eclipsed by the more adaptable mortgage for real estate financing, the pledge of movables continues to be a relevant security device. It offers a tangible and relatively straightforward way for creditors to secure obligations, especially where the creditor can conveniently take and maintain possession of valuable, identifiable movable assets. Its principles also inform the understanding of other related security concepts and the broader spectrum of secured transactions in Japan.